Funds fear clawback by Madoff trustee

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Funds fear clawback by Madoff trustee
By Henny Sender in New York
Published: January 19 2009 02:00 | Last updated: January 19 2009 02:00
Fund of funds managers who invested with Bernard Madoff are bracing themselves for clashes with their investors, even if they reduced or redeemed their positions before authorities were informed he was running an alleged $50bn Ponzi scheme.

Not only could the funds be forced by the courts to return all but their initial investment in the Madoff scheme - even if that money has already been returned to their own investors - but they will also have to substantially restate their results going back years.

Over the years, a range of investment funds have received money back from Mr Madoff, often far more than they had put in, because he told them he had such steady annual returns.

Now they are squarely in the cross-hairs of Irving Picard, the trustee appointed by the Securities Investor Protection Corp to recover money for Mr Madoff's current investors.

A source close to Mr Picard's team of lawyers said they are looking back to the legal precedents from the 2005 collapse of the $450m Bayou hedge fund.

In that case, authorities were able to recover investors' profits going back six years because they were all illusory.

Mr Madoff's investment operation dates back decades but prosecutors have not said at what point they believe it became a pyramid scheme in which early investors were paid out of money from new investors. The complaint filed against Mr Madoff says he told his sons that he was struggling to meet requests for $7bn in redemptions.

"They will reach back into every entity that ever invested with Mr Madoff," forecast the head of one of the largest fund of hedge funds, which has never invested with Mr Madoff.

Two lawyers who have worked on similar cases said many of the early redeemers have already distributed their Madoff proceeds, so they may in turn have to go after their investors. So far, though, virtually none of the funds have set aside reserves or warned investors that they may face such claims.

For example, Arden Asset Management, a New York-based fund of hedge funds, pulled its investment from Mr Madoff in 2002. People familiar with the group say it has not set aside money and does not expect Mr Picard to make such demands. Arden declined to comment on how much money it had got back from Mr Madoff.

EIM, a London-based fund of hedge funds also pulled money from Mr Madoff before his December 11 arrest. EIM declined to comment.

Union Bancaire Privé, which said it had $700m invested with Mr Madoff after his arrest, had much more money invested earlier in the year, according to people familiar with the matter. Indeed, one person says UBP received $200m shortly before the collapse of Mr Madoff's fund. An official declined comment.

Man Group's RMF fund of funds had $360m invested in two funds that funnelled money to Mr Madoff, one managed by Tremont Group's Rye Investment Management division and the other by Gibraltar-based Reliance Management's British Virgin Islands operation.

But Man is not making any provisions for claims by the Madoff trustee. "That awaits the outcome of the legal process," said Peter Clarke, chief executive.

Funds that funnelled money to Mr Madoff also face marketing problems in gathering new investor money. In many cases, the alleged fraud at his operation means these funds' performance was overstated and volatility understated.

Additional reporting by James Mackintosh

Copyright The Financial Times Limited 2009