As late as the autumn of 2008, just months before Bernard Madoff would be arrested, the Fairfield Greenwich Group was touting its “far-reaching and rigorous” diligence process. As the fraud complaint filed today makes clear, this was completely misleading.
But the FGG marketing material do make for fascinating reading. You can instantly see that there’s no way an investor reading the material would know that FGG simply handed almost all the investment funds they collected over to Madoff with no idea how his strategy supposedly was executed, who he was trading with or any other basic information about his business.
Take a read of this excerpt from the marketing brochure:
FGG accepts onto its platform only those managers who have passed through a far-reaching and rigorous selection and due diligence process. Monitoring and managing our carefully chosen and structured products is the ongoing duty of FGG’s investment, risk, and operational professionals. Sourcing and Initial Assessment In the course of each year, FGG assesses hundreds of potential managers who come to our attention through our extensive network of colleagues, direct contacts, and referrals, as well as through reverse inquiry. The 25+ year history of our firm, the experience and relationships built up by our team in the industry, our large and “Ideas are a capital that bears interest steadily growing asset and client base, and our global presence only in the hands of talent.” make FGG an increasingly attractive partner for many top hedge fund managers.
FGG begins qualitative and quantitative reviews of a manager’s past performance as well as a series of manager interviews, questionnaires, and reference calls. Through this process, a preliminary assessment is made of a manager’s business and investment practices. Particular attention is paid to the extent to which each manager’s controls are reasonably suited to maintain operational, market, and credit risks at an appropriate level and as represented by the manager. During this period, FGG personnel also have an opportunity to evaluate a manager’s professional attitudes and instincts, and to evaluate the team’s investment “thought processes.” A small number of managers who pass through this basic screening process are considered for further, significant investigation. Some do not progress beyond this stage; some are placed on a watch list for further monitoring. Data covering all reviewed managers are maintained in FGG’s proprietary database.
Once a manager has passed FGG’s initial review phase, a more detailed investigation begins. The qualitative and quantitative reviews cover people, processes, portfolios and procedures. A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Analysis of portfolio composition, portfolio stress testing, risk management, asset verification, peer group comparison, operational and compliance procedures, information technology, and a review of offering documents and financial statements are among the areas of examination. This detailed due diligence phase is extremely labour intensive for both internal FGG resources and the external consultants we may retain to assist in a technical aspect of due diligence. Typically, a manager may be investigated and monitored for many months before that firm is accepted onto the FGG platform. A long analysis period reduces the risk of miscommunication and enables FGG to be more confident of its decisions before proceeding with a manager.
This is what FGG was promising to do for clients. In reality, they did none of this with respect to Bernie Madoff. None the less, at least some of the FGG employees seemed to have actually believed they were running an important international business that was handling client money in a responsible manner. Which just goes to show that they had an enormous capacity for self-deception.
Here’s the entire marketing brochure: