Madoff 'feeder' funds targeted by suits,
Fairfield Greenwich was 'blinded' by fees, Massachusetts alleges
By Alistair Barr, MarketWatch
Last update: 4:28 p.m. EDT April 1, 2009
SAN FRANCISCO (MarketWatch) -- So-called "feeder" funds, which funneled more than $10 billion of investors' money into Bernard Madoff's Ponzi scheme, have been hit by another lawsuit claiming they didn't do enough to spot problems, while one judge has ordered a temporary freeze on their assets.
Fairfield Greenwich Group, which ran one of the main Madoff feeder funds, was sued Wednesday by the Secretary of the Commonwealth of Massachusetts William Galvin.
The Massachusetts regulator said the complaint is based on "a profound disparity" between the due diligence Fairfield Greenwich told its investors it would do on Madoff's investment firm and the due diligence it actually conducted.
The suit alleges that Fairfield Greenwich earned hundreds of millions of dollars from its relationship with Madoff, making it less likely the firm would try to root out potential problems.
Galvin's investigation tried to find out "how Fairfield possibly could not have discovered the fraud during their eighteen-year relationship," the complaint said. "The answer, quite simply, is that they were blinded by the fees they were earning, did not engage in meaningful due diligence and turned a blind eye to any fact that would have burst their lucrative bubble."
Fairfield Greenwich said it will "vigorously" contest the allegations in the suit, which the firm called "false and misleading."
The complaint "is based on nothing more than 20-20 hindsight that supposes that anyone familiar with Madoff's operations should have determined that it was a Ponzi scheme," Fairfield Greenwich added in a statement. "The SEC, other regulatory agencies and every other investor in Madoff failed to detect his sophisticated fraud."
The suit also alleges misrepresentations to investors in Fairfield's Sentry funds about the firm's knowledge of and comfort with Madoff's operations. The Sentry funds invested almost all of their $7.2 billion in assets with Madoff.
The complaint is also based on what it called the lack of an arms-length relationship between Fairfield Greenwich and Madoff's firm, and the failure of Fairfield Greenwich to disclose the relationship.
"Fairfield's complete disregard of its fiduciary duties to its investors and its flagrant and recurring misrepresentations to investors rises to the level of fraud," according to the complaint.
Fairfield Greenwich said it conducted "vigorous and robust" monitoring on an ongoing basis of the Madoff investments.
"This monitoring was consistent with the representations made to investors in the Sentry funds," the firm added.
Madoff pleaded guilty to multiple criminal charges last month related to a Ponzi scheme which he ran for at least a decade and which grew to more than $50 billion.
A lot of the money Madoff controlled came from feeder funds like those run by Fairfield Greenwich and Tremont Group. Other firms which allocate client money to a range of underlying hedge fund managers were also involved, including Union Bancaire Privee, Banco Santander, Ascot Partners, Maxam Capital and Fix Asset Management.
Earlier this week, Connecticut Superior Court Judge Arthur Hiller temporarily froze the assets of Fairfield Greenwich, Tremont and Maxam.
The order, in effect until April 13, also applies to Fairfield Greenwich executives Walter Noel, Jeffrey Tucker and Andres Piedrahita; Sandra Manzke from Maxam and Robert Schulman, who used to run Tremont with Manzke.
The asset freeze was ordered as part of a suit filed by the town of Fairfield, Conn., which lost a pension fund worth more than $40 million to Madoff's Ponzi scheme. The pension initially invested roughly $22 million with Madoff through Maxam, according to the Stanford Advocate newspaper.
"Tremont believes the claims in this complaint are wholly without merit and will vigorously defend itself," a spokesman for Tremont said.
A Fairfield Greenwich spokesman said the firm had no business relationship with the town of Fairfield, its pension funds or employees.
"Contrary to allegations in the Connecticut lawsuit filed on Monday, Fairfield Greenwich conducted extensive monitoring of its clients' investments with Bernard L. Madoff Investment Securities but, like others, was victimized by a sophisticated fraud," the spokesman added. "It is regrettable that the Connecticut lawsuit has been brought based on erroneous speculation."
Alistair Barr is a reporter for MarketWatch in San Francisco.