Wednesday, 4 May 2016
Last updated 9 min ago
Apr 13 2009 | 2:07am ET
While the collapse of Bernard Madoff’s Ponzi scheme may have cost some of his hedge fund clients dearly, the scam earned them hundreds of millions in fees.
According to The Wall Street Journal, Madoff feeder funds made at least $790 million in fees over the life of his scam. The Journal’s estimates are based on a review of lawsuits—which are being filed against feeder funds with increasing frequency—and other documents related to the case.
Optimal Investment Services, the Swiss-based fund of hedge fund shops owned by Banco Santander, earned $96 million in fees in 2006 and 2007 from its Strategic U.S. Equity Series, which invested exclusively with Madoff, the firm reported in its 2007 annual report. Last year, Optimal called its relationship with Madoff a “very profitable business for the group,” as it earned an average management fee of “above 2%” on the Madoff fund.
Meanwhile, the growing pile of lawsuits against Madoff feeders provides another look at just how profitable he was for firms that invested client money with him. Massachusetts regulators, in their lawsuit against Fairfield Greenwich Group, estimate that the New York-based fund of funds shop earned at least $400 million in fees collected from its Fairfield Sentry Fund, which invested some 95% of its assets in Madoff, between 2005 and last year. And a lawsuit filed last week against Madoff feeder magnate J. Ezra Merkin by New York authorities say Merkin’s Ascot funds took in $169 million in management fees from 1995 through 2007, on top of fees earned by two other Madoff feeder funds he ran.
Another big Madoff feeder shop, the now-defunct Rye Investment Management, had some $3.5 billion in two funds that invested with the convicted fraudster, who pleaded guilty to running a $65 billion scam last month and is in jail awaiting sentencing. According to the Journal, at that asset level, the firm would have collected $57.5 million in fees each year.
All of the feeder funds have vowed to contest that lawsuits filed against them, and it is unclear whether the court-appointed receiver running the recovery program will seek the fees collected by feeder funds. The trustee, Irving Picard, has found just $1 billion in assets thus far.