Fairfield Greenwich Had Madoff Red Flags Back In 2004

This morning, it was reported that Fairfield Greenwich shopped shares in itself in early 2008, but that prospective buyers were immediately scared off. We have since learned of an earlier attempt to buy Fairfield Greenwich back in 2004.

The results were similar. The prospective buyer, a private equity group that was looking to roll up various funds (a fund of funds of funds) had major concerns with the money that was placed with Madoff. When they presented their findings to Fairfield Greenwich, says a tipster, the talks were immediately shut down. Put another way: If for some reason Fairfield Greenwich didn’t have concerns before these talks, they certainly had reason to be concerned afterwords.

What were the red flags?

  • Madoff’s claimed volume in the options market was way too big based on the actual size of those markets (something Harry Markopolos told the SEC).
  • The split-strike strategy could not have produced those results (again, same).
  • Nobody at Fairfield Greenwich had actually observed Madoff’s trading operations.

Another thing peculiar about Fairfield Greenwich is its clientelle, consisting of rich individuals and European private banks. Notice no university endowments? That’s because these endowments have their own set of advisors who would’ve immediately noticed problems with the firms. Rich folks and the European banks don’t necessarily have that extra set of filters.

Says our tipster: Fairfield Greenwich “Stonewalled like you couldn’t believe.” Judging from everything that’s been made public, now, however, we can believe it. He’s also confident that there are memos inside Fairfield Greenwich that will prove a fatal dagger to them, once uncovered by the FBI.

So why were private equity groups interested in this particular firm? In addition to their fantastic results, Fairfield Greenwich had outstanding client loyalty. Its own investors weren’t likely to shift their money away from them (a theme we’ve seen with other Madoff clients) so that level of stickiness was extremely attractive. At the time, Fairfield Greenwich had 94% of its $6+ billion AUM with Bernie Madoff. Although that was troublesome to the buyers, it wasn’t necessarily a dealbreaker, as long as cash could be shifted away from Madoff without alienating the clients. In all likelihood, that would’ve been impossible.

Another question for Fairfield Greenwich: Seeing as they had access to this amazing money tree (Madoff), why did they try on multiple occasions to sell out?

Bottom line: Given the questions raised during multiple due diligence examinations, at least dating back to 2004, there’s no way Fairfield Greenwhich, when presented with direct concerns about their investments, didn’t know of something highly suspect going on with their star work horse Bernie Madoff.

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