Monday, December 22, 2008

Madoff boilerplate: He can walk with your money!

One of the biggest investors in Bernard Madoff’s alleged $50bn fraud explicitly warned its clients of the danger that his brokerage “could abscond with those assets”, but still attracted $2.75bn, according to documents sent to investors.

Kingate Global, which channelled its money to Bernard L Madoff Investment Securities to manage, highlighted the risk of giving custody of its assets to its investment manager – Mr Madoff, although he was not named in the documents – and said they would not check the accuracy of statements he provided.

The alert is the most explicit in a series of warnings put into marketing material by “feeder” funds that put almost all their cash with Mr Madoff’s firm, and highlights how he was allegedly able to pull off what could be the biggest financial fraud ever.

Few of the funds named Mr Madoff or his brokerage in their documents, while others went out of their way to claim they were monitoring the performance of their manager to ensure trades were executed as claimed.

The question of what investors were told about the feeder funds’ links to Madoff has become a key element of the first court case to be filed by an investor, and lawyers say they are examining documents of other funds to establish whom to sue.

In its action against Ascot Partners, a Madoff feeder fund run by Ezra Merkin, chairman of GMAC, the New York Law School says it would never have invested $3m if documents had disclosed that “virtually all of Ascot’s assets” were invested with Madoff.

Some funds openly boasted of their links to Madoff and many investors were keen to invest.

Fairfield Greenwich, which operated the biggest feeder fund, said in marketing documents that Madoff’s services were “essential to the continued operation of the fund”. Fairfield declined to comment.

The marketing documents for the $7.3bn Fairfield Sentry fund said it would “maintain full transparency to BLM [Madoff Securities] accounts” with “independent verification of prices and account values”.

All the funds reported similar returns – steady positive returns with an occasional monthly loss. Defender, a fund from British Virgin Islands-based Reliance, claimed the strategy had lost money only 11 times since 1992, with a maximum monthly loss of 1.64 per cent. 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.

No comments: