We’re a little late to this, thanks to some developments in other areas, but Fairfield Greenwich, the feeder fund that placed much of its assets with Bernie Madoff, was sued Tuesday by the state of Massachusetts, for defrauding its customers.
Secretary of State William Galvin claims that Fairfield, the largest of several feeder funds that funnelled investors to Madoff, failed to conduct due diligence as it promised. For instance, Galvin alleges, Fairfield didn’t question Madoff about his unusual trading strategy, or about the fact that he hadn’t hired an outside firm to handle record-keeping.
But the juiciest parts relate to evidence that Madoff coached Fairfield staff on what to say to the SEC when they came calling in 2005, after being tipped off to problems with Madoff’s operation by whistle-blower Harry Markopolos.
According to a transcript of a telephone conversation between Madoff and two Fairfield executives, Madoff at the outset of the conversation said, “Obviously, first of all, this conversation never took place, Mark, OK?”
A Fairfield Greenwich executive agreed. Madoff then went on to discuss matters related to the relationship between the feeder fund and Madoff’s firm, apparently to make sure Fairfield’s story was the same as his own.
Later in the discussion, he tells them to be vague in responding to the SEC on certain interactions: ” … You don’t have to be exact on this stuff because it’s not - you know, no one pays attention to these types of things or who calls or who doesn’t or who remembers who calls.”
Mark, by the way, is Fairfield general counsel Mark McKeefrey.
New York magazine has also picked out another good tidbit along similar lines.
Madoff: So, you know, the secrecy as to information is a key issue for everybody from our standpoint yours should basically [be] I don’t know about — I don’t know about the trades until after they’re executed and my job is then just to monitor and see what the performance of it is and to make sure that the securities that we — that was — that are supposed to be in the model are in the model.
Fairfield chief risk officer Amit Vijayvergiya: Understood, that makes sense.
Madoff: The less you know about how we execute, and so on and so forth, the better you are, other than, yes, you could — you know, you could, if they asked do you know that Madoff, do you know if Madoff has Chinese walls, and you could say, yes, look — you know, your position is, say, listen, Madoff has been in business for 45 years, you know, he executes, you know, a huge percentage of the industry’s orders, he’s — you know, a well-known broker.
Fairfield calls the complaint “fasle and misleading.” But the charges are perhaps no surprise. The SEC’s 2006 much-maligned inquiry into Madoff, which also looked at Fairfield. The agency found that the fund hadn’t properly disclosed to customers that Madoff oversaw its investment decisions, though it found no evidence of fraud.
But then, it didn’t find any in Madoff’s case either.