The more we learn about the Bernie Madoff affair, the more clear it becomes that many extremely well-compensated advisers and firms who steered money to Madoff failed their clients by not examining his returns and strategy more carefully. Specifically, firms such as Tremont, Fairfield Greenwich, Banco Santander and others that exist solely to evaluate and select third-party fund managers like Madoff apparently took way too much on faith.
Madoff himself has presumably been wiped out, so investors looking to recoup losses probably won’t get much there. The funds-of-funds and other firms that sent client money to Madoff, however, are a different story. These firms are still in business, and, in most cases, Madoff was just one of many third-party managers they used. So there are likely plenty of assets remaining for lawyers and victims to go after.
The defence of firms and advisers who sent client money to Madoff will presumably be that they are as shocked as those who got swindled directly. But there’s a big difference. Funds of funds and other professional asset allocators are paid enormous sums to evaluate managers like Madoff, and there were enough red flags here that they have a lot to answer for.
Remember: The Madoff bust did not come as a shock to many on Wall Street. What came as a shock was that he was running a Ponzi scheme (most people who suspected he was a crook–and there were many–thought he was front-running. Presumably advisors wouldn’t want to invest their clients’ money to someone who was front-running, either, so this was yet another reason to give Madoff a proctology exam).
Given the concerns raised about Madoff’s returns over the years (see this Barrons’ article, for example, and this note from an advisor who steered clients away from Madoff), firms like Tremont should have gone the extra mile to be certain they knew exactly what Madoff was doing and how he was generating his claimed returns. This will create fertile opportunities for clients to claw back capital.
We have seen a “fact sheet” and private placement memorandum for a Tremont fund that invested with Madoff. In the PPM, Tremont brags about its own management and lists its own (big name) auditors and attorneys, without ever once mentioning Madoff (it simply says it allocates all of its assets to “one manager who uses a ‘split-strike’ strategy” and then provides a cursory description of this strategy). Needless to say, Tremont doesn’t mention that Madoff itself was audited by a tiny auditor in Rockland Country, New York, that no one had ever heard of (did it even know this?).
If a fund-of-funds or other professional asset allocator isn’t supposed to do the type of detailed research that caused other advisers to steer clients away from Madoff, what exactly is it supposed to do? That’s the question we expect that more than a few client attorneys will be asking in the coming months.