Friday, 30 September 2016
Last updated 2 hours ago
Apr 2 2009 | 7:53am ET
It has not been a good week to be a Bernard Madoff feeder hedge fund.
Just a day after four executives at Fairfield Greenwich Group and Rye Investment Management saw their assets frozen by a Connecticut judge, both firms are facing lawsuits in Massachusetts. The latter has been hit with a class-action lawsuit, the former accused of fraud by the state’s securities regulator.
Massachusetts Secretary of State William Galvin sued FFG, accusing it of due diligence failures that amounted to defrauding investors in its Fairfield Sentry fund. According to Galvin’s complaint, FFG invested about 95% of Sentry’s $7.2 billion in assets with Madoff without investigating any of the troubling red flags at Bernard L. Madoff Investment Securities, such as trading reports that turned out to be bogus.
FFG’s “flagrant and recurring misrepresentations to its investors rises to the level of fraud,” the suit alleges. The New York-based firm was “blinded by the fees they were earning” and “did not engage in any meaningful due diligence.”
According to the complaint, FFG executives sent Madoff another $14.8 million of their own money weeks before his scam collapsed, and wrote to him just a day before his arrest of plans to start another feeder fund. That one would have provided the fraudster with another $1 billion this year.
Madoff pleaded guilty last month to running a $50 billion Ponzi scheme, and is currently in jail awaiting sentencing. He faces more than 100 years in prison.
The complaint alleges that FFG and Madoff worked in concert to keep their stories straight, including a conversation between Madoff and two FFG executives that began with Madoff saying, “Obviously, first of all, this conversation never took place, Mark, OK?”
He went on to counsel vagueness in communications with the Securities and Exchange Commission, saying, “you don’t have to be exact on this stuff because it’s not, you know, no one pays attention to these types of things or who calls or who doesn’t or who remembers to call.”
The Massachusetts complaint seeks restitution, disgorgement of fees and a fine.
FFG has denied Galvin’s allegations, saying the firm “conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments” and was cooperating with Massachusetts authorities. The firm also noted that Fairfield Sentry had just three investors who live in the state, with just $1.7 million invested between them.
Meanwhile, Boston law firm Berman DeValerio has sued Rye and its parent, MassMutual, on behalf of Massachusetts investors who lost their investments with the since-closed Rye. The class-action suit also names Rye parent Tremont Group Holdings and several executives.
For its part, MassMutual counted itself “among the many victims” of Madoff and said it “has strong defenses to this complaint and we will defend ourselves vigorously.”