Investment advisory firms that channeled client money into Bernie Madoff’s Ponzi scheme appear to have been aware of the greater-than-normal risk that the whole thing was a fraud. Otherwise, why would Kingate, et al, have included risk factors like this?
FT: Kingate warned in its fund prospectus “there was always the risk that the assets with the investment adviser could be misappropriated”.
“In addition, information supplied by the investment adviser may be inaccurate or even fraudulent. The co-managers [Kingate and Tremont] are entitled to rely on such information (provided they do so in good faith) and are not required to undertake any due diligence to confirm the accuracy thereof,” it said.
Note that this language explicitly absolves Kingate and Tremont of liability (at least in theory). The investment advisor could be, well, Bernie Madoff, and they would have the right to tell clients to that this wasn’t their problem.
Not so Fairfield Greenwich Group, which bragged in its marketing details about how amazingly rigorous its due diligence was. FGG wouldn’t be caught dead saying it was “not required to undertake any due diligence.” Too bad, given that it doesn’t appear to have undertaken much.