Fairfield Greenwich sued in wake of Madoff scandal
Investors seek more than $1 billion in fees paid to feeder fund
By Alistair Barr, MarketWatch
Last update: 7:28 p.m. EST Jan. 9, 2009Comments: 23
SAN FRANCISCO (MarketWatch) -- An investor has sued Fairfield Greenwich Group to try to recoup more than $1 billion the investment firm collected for funneling client money into funds run by Bernard Madoff.
Madoff was arrested last month and accused of running a Ponzi scheme that could result in investor losses of as much as $50 billion.
Fairfield Greenwich, founded by Walter Noel, ran some of the largest so-called feeder funds that gave investors access to Madoff for more than a decade. The firm had almost $7 billion invested with Bernard L. Madoff Investment Securities at the start of November, out of a total of $14.1 billion in assets under management.
Pacific West Health Medical Center Inc. Employees Retirement Trust sued Fairfield this week after investing in Fairfield Sentry Ltd., a Fairfield fund that put all its money with Madoff.
The suit claims Los Angeles-based Pacific West Health Medical Center paid fees to Fairfield to do due diligence on Madoff, but says that the firm failed to do enough homework to spot warning signs.
"As we've said from the outset, Fairfield Greenwich Group engaged in extensive due diligence," a Fairfield spokesman said Friday.
Fairfield also has said that it's a victim of Madoff's alleged fraud. However, the fee arrangement between the two raises questions, according to Robert Finkel, the lawyer who's representing Pacific West.
One red flag was that Madoff didn't charge any fees to feeder funds like Fairfield Sentry. Instead, his market-making unit earned commissions from doing all the trades for his investment operations. Read more about Madoff's fee arrangements.
Fairfield "failed to identify inherent conflicts of interest in the transaction execution model used by Madoff and the potential for distorting records," the suit said.
While Madoff didn't charge fees, Fairfield Sentry charges its investors a 1% annual management fee and 20% of any profit each year. Earlier this decade, there was no management fee and a 20% performance fee.
With Madoff reporting annual returns of roughly 10% for more than a decade, Fairfield generated hundreds of millions of dollars from the fees it charged investors. That may have been an incentive for Fairfield to turn a blind eye to potential problems, said Finkel.
"People making a lot of money have a tendency to look the other way," he commented in an interview Friday.
The suit estimates that Fairfield may have collected more than $1 billion in fees from its relationship with Madoff over the years.
Based on Madoff's reported returns and a 20% fee off profit, a principal amount invested in a feeder fund at the end of 1990 would be wiped out by 2005, assuming Madoff didn't do any investing in that period, Bloomberg News estimated in a Friday report.
Finkel said he's focusing on trying to recoup fees that were paid to Fairfield in 2008.
"The problem with older fees is that they were paid out to partners and probably invested in other assets," he added. "That would be more difficult to recoup."
Alistair Barr is a reporter for MarketWatch in San Francisco.