Madoff Fooled Clients by Silence, Lies When Asked About Methods

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Madoff Fooled Clients by Silence, Lies When Asked About Methods


By David Glovin

April 4 (Bloomberg) -- Bernard Madoff used a simple tactic to deceive even the most sophisticated of clients, such as Fairfield Greenwich Group: He refused to answer or he lied whenever he was asked probing questions.

Madoff, who prosecutors say lied to all his clients, dodged questions about how he delivered steady returns on money raised by Fairfield Greenwich, his largest feeder fund, according to a complaint filed April 1 by Massachusetts Secretary of the Commonwealth William F. Galvin.

In October, when Fairfield Greenwich sought the names of key personnel and asked how Madoff monitored trades, he just ducked the query, according to Galvin’s civil suit.

“Secrecy as to information is a key issue for everybody,” Madoff told Fairfield Greenwich executives on Dec. 19, 2005, according to a transcript of a taped call included with the complaint. Madoff advised them on how to fend off federal regulators’ queries. “Just say I -- you know, don’t answer,” said Madoff, who began the call with: “Obviously, this conversation never took place.”

The complaint, which seeks restitution for Madoff’s Massachusetts investors, says Fairfield Greenwich tolerated the money manager’s evasions and failed to catch his massive fraud scheme while making hundreds of millions of dollars in fees on money sent to Madoff’s firm, Bernard L. Madoff Investment Securities LLC. Fairfield’s Sentry Funds lost about $7 billion invested with Madoff.

‘Blinded by the Fees’

“They were blinded by the fees they were earning” in placing their own clients’ money with Madoff, Galvin said of Fairfield Greenwich. The firm ignored “any fact that would have burst their lucrative bubble,” he said in the complaint.

Madoff pleaded guilty March 12 to defrauding investors by using money from new ones to pay off old ones in the largest Ponzi scheme in U.S. history. Before his Dec. 11 arrest, he had told his thousands of clients that they had about $65 billion in accounts with him, prosecutors said.

Fairfield, like other Madoff feeder funds, has been sued by its own investors. The New York-based firm is under scrutiny by the Massachusetts Securities Division. In an April 1 statement, Fairfield said Galvin’s claim that it failed to exercise due diligence on behalf of investors is “false and misleading.”

‘Vigorous and Robust’

Fairfield “conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments,” the statement said. “This monitoring was consistent with the representations made to investors in the Sentry funds.”

The 110-page complaint offers new detail on how Madoff orchestrated his scheme and managed to dupe what Galvin says was a willing, gullible investor. The regulator bores in on an Oct. 2 meeting that Fairfield had with Madoff after one of its investors withdrew $75 million because the firm couldn’t answer Madoff-related questions.

There were “gaps in our knowledge,” complained Fairfield Chief Risk Officer Amit Vijayverjiya, according to Galvin.

Joining Madoff at his headquarters in midtown Manhattan’s so-called Lipstick Building that day were his aide Frank DiPascali and Fairfield executives Walter Noel, Jeffrey Tucker, and Mark McKeefry. Noel and Tucker are founding partners of the firm, which began investing with Madoff in 1989. Vijayverjiya listened in by phone, according to the complaint.

Let it Be Known

From the start, Madoff let it be known that he wouldn’t be forthcoming about his business, according to an internal Fairfield report included in Galvin’s filing. The money manager recounted how a friend at JPMorgan Chase & Co. asked Madoff to meet with colleagues who had questions about Madoff’s operation.

“BLM refused,” according to the Fairfield report, whose author isn’t identified, referring to Madoff’s firm.

The Fairfield investors sought answers to 42 questions they’d previously given to Madoff, including the identities of “key personnel” overseeing his secretive “split-strike conversion” investment strategy, his procedures for trade processing and his compliance practices.

The Fairfield team was satisfied with Madoff’s evasions, Galvin said in his lawsuit.

“Have there been any changes to these models/algorithms in the past 3 years? If yes, please describe,” the Fairfield executives asked, according to the report.

“Yes,” Madoff replied, adding that he’s “always looking at the models and fine-tuning them,” the report says.

Dual Signatures

Did Madoff require dual signatories on documents and, if so, who were they? the Fairfield Greenwich investors asked. “Yes. Names not provided,” they wrote, summarizing Madoff’s response.

“Who is responsible for actually placing the trade order of the SSC?” the Fairfield Greenwich Group queried, referring to the split-strike strategy. “Traders,” Madoff replied, “under the direction of supervisors.”

Madoff, 70, was asked about his successor. He said it involved “family,” the report says. “No one has a right to know,” Madoff said, according to the report.

At other times Madoff or his staff may have simply misled investors. “I spoke with Frank DiPascali this morning,” Vijayverjiya wrote in a Sept. 15 e-mail to colleagues about “counterparty exposure” at Madoff’s firm. “BLM/Frank do not want to sell into weakness today and are looking for an exit opportunity tomorrow morning.”

No Trades

Irving Picard, the bankruptcy trustee liquidating Madoff’s firm, said he’s found no evidence Madoff made any trades for decades.

DiPascali hasn’t been accused of wrongdoing. His lawyer, Marc Mukasey, didn’t return a call seeking comment.

In its statement, Fairfield Greenwich said its executives provided “entirely accurate” information to the Securities and Exchange Commission and reported the conversation with Madoff to the agency.

“FGG is appalled by the Madoff losses suffered by its investors, including its employees and the three investors who reside in Massachusetts,” the statement said. The firm’s spokesman, Thomas Mulligan, said the three investors lost a total of $1.7 million.

Though he told his investors little, Madoff ended his Oct. 2 meeting with Fairfield Greenwich on the same note with which he began, according to the report: “BLM and Frank were sensitive that the topics discussed during this meeting be kept confidential.”

The lies and evasions worked, according to the complaint. On the day before Madoff’s arrest, Fairfield’s Tucker wrote a letter to Madoff outlining his firm’s strategy for its Madoff- invested “capital to be replenished,” following large redemptions. “Our firm is very dependent on its relationship with your firm,” he wrote.

The case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in federal court in Manhattan at dglovin@bloomberg.net.

Last Updated: April 4, 2009 00:01 EDT

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