Funds Tied to Madoff in Legal Vise

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Funds Tied to Madoff in Legal Vise
DIANA B. HENRIQUES
Published: April 1, 2009
As Bernard L. Madoff waits in jail to be sentenced, legal problems are accumulating for some of the hedge fund managers who helped him raise billions of dollars from around the world for what he now admits was a vast Ponzi scheme.

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Times Topics: Bernard L. MadoffMassachusetts regulators have sued the Fairfield Greenwich Group, one of the earliest of these so-called feeder fund managers, for fraud, saying it had repeatedly misled investors about how diligently it checked out Mr. Madoff’s operations over the years.

“Fairfield’s complete disregard of its fiduciary duties to its investors and its flagrant and recurring misrepresentations to its investors rises to the level of fraud,” said lawyers for William F. Galvin, secretary of state for Massachusetts and its top securities regulator, in an administrative complaint filed Wednesday.

Walter M. Noel Jr., a founder of the Fairfield Greenwich Group, his partner Jeffrey H. Tucker and his son-in-law Andres Piedrahita were also among the fund managers hit with a temporary asset freeze imposed on Tuesday by a state judge in Connecticut.

The freeze was ordered by Judge Arthur Hiller of Connecticut Superior Court in response to a civil lawsuit filed on Monday by the town of Fairfield and two of its pension plans, which lost money in several feeder-fund investments. That lawsuit claims that Fairfield Greenwich and two other feeder fund managers had long been aware that Mr. Madoff was enhancing his track record through illegal activity — although they mistakenly thought he was front-running, a form of insider trading, not that he was operating a Ponzi scheme.

The defendants in that case also include Tremont Partners, which sponsored the Rye Select funds, and Maxam Capital Management, whose founder, Sandra Manzke, worked at Tremont before starting her own Madoff-invested account, the Maxam Absolute Return fund.

Ms. Manzke denounced the lawsuit as “an outrageous publicity stunt” and denied knowledge of any wrongdoing by Mr. Madoff, as did a spokesman for Tremont Partners.

Seth Faison, a spokesman for Fairfield Greenwich, said that the firm had no dealings with the Fairfield pension funds, but had been dragged into the case on the theory that its failure to scrutinize Mr. Madoff carefully allowed him to continue the fraud, which trapped the pension funds.

Mr. Faison called the complaint filed by Mr. Galvin “false and misleading,” saying it would be fought vigorously by the firm.

The complaint, he added, “is based on nothing more than 20-20 hindsight that supposes that anyone familiar with Madoff’s operations should have determined that it was a Ponzi scheme.”

Taken together, though, the new complaints spotlight how Fairfield Greenwich helped expand Mr. Madoff’s reach and enhance his credibility.

Mr. Noel had a gilded résumé and a family linked by marriage to wealthy investors in Europe and Latin America, and his partner Mr. Tucker had been a respected regulator with the Securities and Exchange Commission.

By contrast, Mr. Madoff built his reputation in the scrappy world of wholesale stock trading and had never worked for anyone more prominent than himself.

Yet the documents Mr. Galvin obtained reveal how highly Fairfield Greenwich prized its Madoff connection, a link, Mr. Galvin said, that generated hundreds of millions of dollars in fees for the firm over the years.

In a letter hand-delivered to Mr. Madoff on Dec. 10, the day before his arrest brought the Ponzi scheme crashing down, Mr. Tucker referred to a telephone conversation the two men had two days earlier about the rising volume of redemptions by Fairfield Greenwich investors and apologized for “failing to keep you informed of pending redemptions in a timely fashion.”

Mr. Tucker said, “Our firm is very dependent on its relationship with your firm. You are our most important business partner and an immensely respected friend.” He added a few lines later, “Our mission is to remain in business with you and to keep your trust.”

Documents released by Mr. Galvin included e-mail messages indicating that Fairfield Greenwich had relied on reassurances provided by Frank DiPascali, who worked for Mr. Madoff, rather than checking with outside sources.

Lawyers for Mr. DiPascali have declined to comment on any aspect of the case.

These new cases citing the feeder funds follow on the heels of a temporary restraining order obtained last week in a state court in New York, freezing the assets of Mr. Madoff’s brother, Peter, who was trustee of a college fund set up for an old friend’s grandson.

And in a move to checkmate these efforts, lawyers for some of Mr. Madoff’s victims filed a motion in federal court on Wednesday asking that Mr. Madoff be allowed to file for personal bankruptcy to protect his personal assets from claims arising in these lawsuits in the state courts.