Corporate & Securities Law

By Jim Hamilton

Madoff Feeder Fund Settles Mass. Action; Charged with Misleading Investors on Due Diligence

A major feeder fund to the Madoff firm has settled an enforcement action by the Massachusetts securities regulator charging it with a failure to conduct due diligence and misrepresenting to
investors that it had conducted rigorous due diligence on its executing broker and sub-adviser Bernard Madoff Investment Securities. Without either admitting or denying the allegations, the fund was censured and agreed to pay restitution to investors. In the Matter of Fairfield Greenwich Advisors LLC and Fairfield Greenwich (Bermuda) Ltd., Secretary of the Commonwealth of Massachusetts, Securities Division, Docket No. 2009-0028.

The fund published a plethora of marketing materials over the years geared towards giving investors comfort with the level of due diligence it performed on its asset managers In contrast to the robust due diligence it promised, alleged the state securities division, the fund never even took basic steps to ensure that Madoff was making the trades he said that he was making or holding the assets that he said he was holding. The fund sought no independent verifications of Madoff?s purported transactions. Indeed, the fund acquiesced to an unusual relationship under which the Madoff firm served as both the sub-custodian of the assets and the executing broker.

Thus, when the fund checked the custodian?s records against the broker?s records, it was checking information received from Madoff against other information received from Madoff.
The regulator also said that the fund?s reliance on SEC oversight was unfounded because the fund, at Madoff?s request, tailored its story to the SEC to Madoff?s needs. Having received detailed instructions from Madoff on what to tell SEC examiners, said the securities division, the fund could not possibly have relied in good faith on the SEC?s oversight of the Madoff firm.

Similarly, the feeder fund?s reliance on reviews by a Big Four auditing firm were also unfounded. The audit firm made two visits to the Madoff firm, one of which consisted of nothing more than an interview with Madoff. In its report to the feeder fund, the audit firm cautioned that the procedures it performed were not directed to the providing of assurance regarding internal controls at the Madoff firm or the detection of fraud.

Full post as published by Jim Hamilton's World of Securities Regulation on September 11, 2009 (boomark / email).