Madoff Feeder Fund Charged with FraudApr 1, 2009 | Parker Waichman LLP
Fairfield Greenwich Group, a hedge fund that invested with admitted Ponzi schemer Bernard Madoff, has been charged with fraud. According to The Wall Street Journal, the charges filed by the Massachusetts Secretary of State allege the company breached its fiduciary duty to clients by failing to provide promised due diligence on its investments. The complaint accuses Fairfield Greenwich of failing to verify the investment strategy that Madoff claimed allowed him to generate steady returns year after year.
The civil charges are the first to be filed against a Madoff "feeder" fund, the Journal said. Fairfield invested about $7 billion in Madoff's fraudulent funds.
Bernard Madoff pleaded guilty to 11 fraud counts on March 12. The former chairman of the Nasdaq stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Last November, Madoff told his investors that his fund held more than $64 million, but in reality, he only had a fraction of that amount.
According to an administrative complaint filed by the Massachusetts Secretary of State, Fairfield Greenwich allegedly misrepresented to investors its "lack of knowledge' about Madoff's operation. The complaint also claims Madoff “coached” Fairfield officials to duck regulatory inquiries concerning his investment practices. Partly because of information Fairfield Greenwich provided to the Securities and Exchange Commission (SEC), the commission's 2007 probe of Madoff closed without any findings, the complaint said.
The complaint also claims that Fairfield insiders sunk $14.8 million into Madoff's business only days before his arrest on securities fraud charges in December.
"The allegations against Fairfield in this complaint outline a total disregard for such (fiduciary) responsibility which helped the Madoff scheme to stay afloat for so long," Massachusetts Secretary of State William Galvin said in a statement.
The complaint seeks restitution to Massachusetts investors for losses and disgorgement of performance fees paid to Fairfield by those investors, as well as an administrative fine. According to the complaint, Fairfield charged investors 1 percent of their assets as a management fee and then collected 20 percent of any investment returns.
Meanwhile, Fairfield Greenwich is facing Madoff-related legal action on another front. According to Bloomberg.com, assets belonging to Fairfield Greenwich and other feeder funds, as well as those belonging to Madoff's family, have been frozen by a Connecticut Superior Court Judge. The assets were frozen as part of a lawsuit brought by the town of Fairfield, Connecticut over the loss of $42 million of local government pension money in Madoff's Ponzi scheme. According to The Associated Press, the town claims Fairfield and other defendants charged the pension fund huge fees while knowing that Madoff was engaged in illegal conduct.
Fairfield Greenwich partner, Walter Noel Jr., Bernard Madoff's wife Ruth, and his brother Peter, are among the individuals whose assets were frozen as a result of the Connecticut lawsuit.