The supposedly sophisticated fund-of-fund firms that just vaporized tens of billions of dollars in the Madoff ponzi scheme–Fairfield Greenwich Group, Tremont, et al–are violently protesting their innocence: There was no way they could have known.
That this defence is patently false (other people knew, or suspected) obviously won’t stop them from using it, because it’s the only defence they have. They were either complicit, incompetent, or duped, so it’s no surprise they’re choosing “duped” (the truth, we expect, is No. 2: incompetence).
Regardless of the legal merits of this defence, however, the firms are all probably toast.
FFG, for one, had more than 50% of its assets with Madoff, and we’d be shocked if FFG’s surviving clients waited around to see what other colossal talents the firm’s research and due-diligence arm has produced.
And there’s another concern for these firms: Will they be forced to return the (humongous) fees they earned for placing client money with Madoff?
There is precedent in Ponzi schemes in which those who were fortunate enough to get their money out early are forced to give it back to compensate those who did not. The logic here is that it wasn’t really their money for the Ponzi firm to give to them: It belonged to other investors.
So is it unreasonable to think that the hundreds of millions of fees FGG et al earned off of the Madoff scheme should not ALSO be returned? After all, the gains that the fees were paid on never really existed (and the assets they were paid on soon ceased to exist).
So why should FGG clients be robbed by both Madoff and (presumably unknowingly) by FGG? One way to begin to make the clients whole would be to at least recoup the fees.