Hedge Funds Could Be A Source of Recovery for Victims of Madoff’s Swindle

Hedge Funds Could Be A Source of Recovery for Victims of Madoff’s Swindle
Fund-of-Funds Earned 20 Percent Commission on Madoff’s Bogus Investments

By Ivy Schmerken
December 18, 2008
An attorney at a Long Island firm representing victims of Bernard Madoff's investment swindle, filed a class-action lawsuit against Madoff last Friday, but he is looking to hedge fund managers as the next source of recovery, according to an interview this morning with WOR710 radio.
Attorney Mark Mulholland, head of the litigation department at Ruskin Moscou Faltischek in Uniondale, New York, says he is now getting access to what the agreements were between those hedge funds managers and their clients.

These hedge funds (fund-of-fund managers) were making over 20 percent in commissions on the bogus investment they were getting from Madoff, said Mulholland.

For example, if a hedge fund had a $1 billion invested with Madoff, and in a given year, Madoff's fraud earned 10 percent, that's $100 million in commissions and the hedge fund received $20 million.

According to articles in the WSJ and NYT, Madoff had relationships with a vast network of asset management firms (such as Fairfield Greenwich Group) and fund-of-fund managers (like Ascot Partners and Tremont Capital Management) that steered wealthy client assets to Madoff. In some cases, these firms had offices in Europe that marketed the investment strategy to banks in Switzerland, Spain, Austria and Italy.

Initially, victims of the alleged Madoff securities fraud will need to look to the Securities Investment Protection Corp. or SIPC, which has $1.5 billion total in reserves. SIPC will pay up to $500,000 per account. SIPIC also can tap a consortium of banks for another $1 billion and potentially get $1 billion from the SEC, according to Mulholland's interview. Altogether, SIPC has access to $3.5 billion, said the attorney, but the next in line are the hedge funds.

While these hedge fund managers are trying to portray themselves as victims by staying under the radar, says Mulholland, the attorney is looking at them as a recovery source.

"Frankly these fat cats up in Connecticut, they should know that all the victims of Madoff are going to come looking for them," said Mulholland, whose firms has interviewed 100 individuals who lost money in the fraud. For the full interview, here's podcast of the WOR710 interview with the attorney and John Gambling.