Hedge Funds Face Lawsuit over Madoff Investment Fraud

Fairfield Greenwich Group,  a hedge fund firm that reportedly invested more than $7 billion with Bernard Madoff, has been sued by angry investors.  The lawsuit alleges that the firm failed to protect investors’ funds.

The 70-year-old Madoff was arrested on one count of securities fraud earlier this month.  Madoff – once a chairman of the Nasdaq stock exchange – is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.  According to the FBI complaint against Madoff, that business was largely a Ponzi scheme. The FBI said Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.

According to Bloomberg.com, Fairfield Greenwich Group’s Greenwich Sentry fund invested $220 million and its Fairfield Sentry fund invested $7.3 billion solely in Madoff.  According to the investor lawsuit, which was filed in New York State Supreme Court in Manhattan last Friday, Fairfield Greenwich jeopardized investors’ interests while collecting “millions of dollars in fees.”  The suit is seeking class action status.

The lawsuit accuses Fairfield Greenwich Group founding partners Walter Noel, Andres Piedrahita and Jeffrey Tucker with breach of fiduciary duty, negligence and unjust enrichment.  The complaint makes the same charges against Brian Francouer and Amit Vijayvergiya of FG Bermuda,  an affiliate, Bloomberg said.

It is expected that many hedge fund investors will file similar complaints against funds that made large Madoff investments.  According to the Associated Press, hedge funds, which usually have minimum investment amounts of above $250,000, typically employ aggressive investing strategies.  In return hedge fund managers are supposed to employ “exceptional due diligence” when it comes to choosing investments, the Associated Press said.

But in many cases, that may not have happened when hedge funds put their money with Madoff.  Madoff was notoriously secretive when it came to revealing his supposed investment strategy, and the lack of details he provided should have been a red flag to hedge fund managers.

The Associated Press also listed several other factors that should have caused hedge managers to reconsider their Madoff investments.  Among those:

  • A lack of  third-party oversight.  According to the Associated Press, Madoff used Friehling & Horowitz in New City, N.Y. as an outside auditor.  This was an unknown three-person shop, not a large firm that specialized in institutions.
  • No one could replicate Madoff’s investment strategy, but his returns were smooth and steady.
  • A major conflict of interest, in that one of Madoff’s sons was the chief compliance officer.
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