Massachusetts charges Fairfield Greenwich for "profound" due diligence failings

The Commonwealth of Massachusetts has charged New York-based hedge fund Fairfield Greenwich Group over allegations of a "profound disparity" between the due diligence the firm told investors it had conducted into Bernard Madoff, and the actual checks it carried out.

The complaint - made by the Massachusetts Securities Division (MSD) of the Office of the Secretary of the Commonwealth - is based upon the failure of Fairfield management to disclose its "interconnected relationship" with Bernard L. Madoff Investment Securities (BMIS) and the firm's "complete disregard of its fiduciary duties to its investors, [which] rise to the level of fraud".

The $7.2 billion Greenwich Sentry Partners fund accounted for approximately half of Greenwich Fairfield's $14.1 billion in assets under management (AUM). Investors paid the firm of AUM and a 20% performance fee to have their money managed by the firm, but over 95% of the Sentry fund was simply invested with Madoff, Massachusetts alleges. These fees were paid not only to allow investors to gain access to BMIS but on the basis that Fairfield conducted "supposed due diligence on Madoff to make sure it was a safe investment [and] ongoing monitoring of Madoff's execution of the split-strike conversion strategy".

Fairfield Greenwich, which confirmed an exposure of $6.9 billion to BMIS in January is the largest feeder fund victim of Madoff and is already facing several lawsuit from investors over due diligence failings.

The MSD charges Fairfield's failure to detect the fraud over the course of its 18 year relationship with BMIS was due to the fact the firm was "quite simply, blinded by the fees they were earning, did not engage in any meaningful due diligence and turned a blind eye to any fact that would have burst their lucrative bubble".

Among other allegations, the MSD claims Fairfield management discovered in September 2005 that BMIS' auditor Friehling and Horowitz appeared to have only one employee, but continued to present the firm's audits as evidence that Madoff's operations were legitimate.

Fairfield hit back at the accusations yesterday, calling the allegations "false and misleading" and insisting the firm "conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments. Massachusetts has leapt to erroneous conclusions without completing its investigation and without even granting a meeting with Fairfield Greenwich in an attempt to arrive at an accurate understanding of the facts".

The firm added "many misleading aspects of the complaint suppose that anyone familiar with Madoff's operations should have determined that it was a Ponzi scheme. The Securities and Exchange Commission, other regulatory agencies and every other investor in Madoff failed to detect his sophisticated fraud. Fairfield Greenwich intends to vigorously contest the allegations in the complaint". The MSD is seeking an order to bar Fairfield from future violations of the Massachusetts Uniform Securities Act and seeks both restitution for investors and the leveling of fines against the firm.

See also: Fund due diligence attacked as Madoff lawsuits mount
Speculation over regulation mounts as Madoff lawsuits rack up
SEC incompetence and secrecy over Madoff enrages Congress