Bernie Madoff’s biggest sales operation, Fairfield Greenwich Group, made more than $500 million over the past 5 years channeling investors to Madoff, the NYT says. We continue to believe the firm’s days are numbered, and we would be surprised if it made it through January.
We also expect that client lawsuits will end up clawing back a good portion of that $500 million. Why? Because the results that attracted the assets and earned performance fees were fictitious.
Since Madoff revealed his Ponzi scheme, FGG has adopted the familiar “shocked and appalled” defence and also announced that FGG its partners had their own money with Madoff. This exposure, it turns out, was only $60 million. This, in turn, was:
- less than 1% of the $7.3 billion of client money the firm had with Madoff,
- about 10% of the fees the firm earned off of Madoff over the past five years, and
- only 20% of the profit the firm made last year.
The confidence and trust the firm’s partners placed in Madoff when investing other people’s money, therefore, does not appear to have applied to their own. FGG also appears to have done less due diligence on Madoff than it claims:
NYT: As it raised money all over the world, Fairfield also made detailed pledges about how it would monitor and track Mr. Madoff’s investments, the documents show…
Fairfield promised its investors that money could not be moved from its accounts with Bernard L. Madoff Investment Securities without two signatures. It said that it would independently calculate the value of the funds it invested at Mr. Madoff’s firm at least once a week. It promised to reconcile statements from individual trades with Mr. Madoff’s custodial records.
It is not clear what Fairfield did to make good on those pledges.
And then there was FGG’s apparent unwillingness to discuss how Madoff actually generated his returns–even to prospective buyers of the firm. This reticence suggests either that FGG didn’t understand how Madoff’s strategy supposedly worked (bad) or knew that it couldn’t be explained (worse).
NYT: In early 2008, several private equity and investment firms were approached by Fairfield about purchasing a share of the company. A partner of one that considered buying a stake that he estimated was between one-third and one-half of Fairfield — the firm was valuing itself somewhere between $1 billion and $1.5 billion — said that he was scared off about 20 minutes into his initial meeting with a team of Fairfield managers.
“They were just incredibly squishy and vague even during the warm-up,” said the prospective buyer, who spoke on condition of anonymity because of a non-disclosure agreement with Fairfield. “I asked them to tell me about the manager of the fund Sentry feeds into, and I was told, ‘We don’t really talk about him.’ “