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US charges Madoff 'feeder fund' with fraud

Massachusetts' top securities regulator accused a major feeder fund for Bernard Madoff's fraudulent investment scheme of misrepresenting its lack of knowledge about Madoff's operations.

business Updated: Apr 02, 2009 10:58 IST

Massachusetts' top securities regulator accused a major feeder fund for Bernard Madoff's fraudulent investment scheme of misrepresenting its lack of knowledge about Madoff's operations. Secretary of State William Galvin accused Fairfield Greenwich Group of Connecticut of civil fraud charges on Wednesday, saying company officials were coached by Madoff on how to answer federal investigator's questions about his investment practices and misrepresented how much they really knew.Galvin said as far back as April 2008, Fairfield Greenwich principals began discussing the risk that Madoff would "blow up" but didn't disclose that risk to investors.

"Even if you believe their assertion that they were somehow naive and innocent and they didn't know, at that point they could no longer profess innocence," Galvin said. "We think there's ample evidence that their misconduct went beyond simple failing to do due diligence. It went to the point where certain things came to their attention that were inescapable."The administrative complaint seeks restitution for Massachusetts investors for losses from Fairfield Greenwich.

Fairfield Greenwich said in a statement the allegations are false and misleading and it intends to "vigorously" contest them. The company said 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." "FGG is appalled by the Madoff losses suffered by its investors, including its employees and the three investors who reside in Massachusetts," the statement said. Company spokesman Thomas Mulligan said the three Massachusetts residents' combined investments with Madoff totaled $1.7 million.Galvin says Fairfield Greenwich invested over 95 percent of its Sentry Funds' $7.2 billion in assets in Bernard L. Madoff Investment Securities.

Madoff is in jail awaiting sentencing after pleading guilty to swindling thousands of investors of billions of dollars in what could be the biggest scam in Wall Street history. He faces a maximum sentence of 150 years behind bars.Meanwhile, U.S. Marshalls in Florida seized Madoff's 55-foot (17-meter) luxury yacht and a 24-foot (7.3-meter) motor boat on Wednesday from two different marinas. The boats could be sold to help reimburse investors.In the Massachusetts case, Galvin said that Madoff helped Fairfield Greenwich officials in 2005 with how to respond to questions from Securities and Exchange Commission attorneys, who were exploring fraud investigator Harry Markopolos's concerns about Madoff.

Fairfield Greenwich denied that its employee based his communications with the SEC in 2005 on a discussion with Madoff. The company said the information its employee gave the SEC was "entirely accurate" and that he specifically reported his telephone conversation with Madoff to the SEC at that time. Fairfield Greenwich also kept a database of standardized responses to investors' questions, the complaint alleged, designed to reassure them that the firm had adequate controls to supervise assets at Madoff's company.

The company said it conducted "vigorous and robust" ongoing monitoring of the Madoff investments, consistent with its representations to Sentry investors, and notified the Sentry investors that Madoff was serving as sub-custodian of the assets. In addition to restitution, the complaint calls for an administrative fine and return of performance fees paid to Fairfield Greenwich by Massachusetts investors.Fairfield earned a fee of one percent of assets under management for what was invested in Sentry Funds, plus a 20 percent performance fee based on the funds' returns, according to the complaint, with the bulk of those performance fees from Madoff's purported returns. The complaint also said Fairfield Greenwich officials estimated those fees were about $100 million a year in 2006, 2007 and 2008. Galvin said in the complaint that Fairfield Greenwich was blinded by the fees it was earning from Madoff's purported returns and did not engage in meaningful due diligence, ignoring "any fact that would have burst their lucrative bubble."

"Investment advisers have a fiduciary responsibility to their clients under law," Galvin said. "The allegations against Fairfield in this complaint outline a total disregard for such responsibility which helped the Madoff scheme to stay afloat for so long."Fairfield Greenwich founder Walter Noel had once testified to the Massachusetts Securities Division that "we were not involved in executing any part of the strategy or doing anything but turning money over to (Madoff)."

First Published: Apr 02, 2009 10:54 IST