Take A Tour Of The Train Wreak, Known As The, FFG
Walter Noel's Fairfield Greenwich Group would have collected about $135 million in fees this year for peddling Bernard Madoff's investing acumen to clients from South America, the Middle East and Asia.
The $7.3 billion Fairfield Sentry Fund invested solely with Madoff, taking a cut of 1 percent of assets and 20 percent of gains, which averaged about 11 percent annually in the past 15 years, according to data compiled by Bloomberg
Fairfield Greenwich, which has an office at 2 Soundview Drive in Greenwich, is one of at least 15 hedge-fund firms and private banks, including Tremont Holdings Group Inc. and Banco Santander SA, that earned similar fees for sending customers cash to the 70-year-old money manager.
"It's mind-boggling that people like Tremont and Fairfield Greenwich had been doing this for so long," said Brad Alford, who runs Alpha Capital Management LLC in Atlanta, which helps clients choose hedge funds. "It's the job of these funds of funds to be doing due diligence. That's why they get paid."
Madoff was arrested Dec. 11 after he allegedly confessed to running a giant Ponzi scheme that may have bilked investors of $50 billion. That fraud escaped the notice of Fairfield Greenwich, Tremont and other funds of funds that had at least $17 billion invested with Madoff.
In a Ponzi scheme, returns to early investors are paid with money from later ones, until there isn't enough cash to go around. Madoff's alleged scam unraveled when he received $7 billion in redemption requests that he couldn't meet.Hedge-fund investment adviser Aksia LLC said the managers should have seen red flags, such as Madoff's use of a little-known, three-person auditing firm.
Hedge funds that have disclosed holdings with Madoff were due at least $290 million in fees this year, based on reported assets, fees and Bloomberg data. The calculations don't include fees of as much as 5 percent that clients paid for some funds when they first invested. Madoff didn't assess fees for his money-management services, getting paid instead through commissions from his brokerage business for trading the stocks in the accounts.
Fairfield Greenwich is the biggest loser to emerge so far from the Madoff scandal. It had more than half its $14.1 billion in assets with him, according to a company statement
"We are shocked and appalled by the news," said founding partner Jeffrey Tucker in a Dec. 12 statement. Tucker was an attorney in the enforcement division of the U.S. Securities and Exchange Commission before starting Fairfield Greenwich with Noel in 1983. Thomas Mulligan, a spokesman for Fairfield Greenwich, declined to comment.
Noel built a marketing machine that covered the globe. His son-in-law, Yanko Della Schiava, is based in Lugano, Switzerland, and is responsible for selling Fairfield Greenwich funds in Southern Europe, according to the firm's Web site.
Another son-in-law, Andres Piedrahita, is head of Fairfield Greenwich's European and Latin American businesses and is based in London and Madrid. A third son-in-law, Philip Toub, markets the group's funds in Brazil and the Middle East.
Three months ago, the firm acquired Banque Benedict Hentsch, a deal that the Swiss private bank is trying to reverse, according to a report in the Geneva newspaper Le Temps.
Banque Benedict Hentsch, a Swiss private bank, said it has bought back its entire capital and ended a partnership with Fairfield Greenwich Group following the massive securities fraud by Madoff.
Tremont, founded by Sandra Manzke in 1985, also was an early Madoff investor. The Rye, N.Y.-based firm, a unit of Massachusetts Mutual Life Insurance Co.'s OppenheimerFunds Inc., has yet to disclose how much money it had invested with Madoff.
It sold Madoff-managed investments since 1997 under the Rye Select Broad Market name, charging 2 percent of assets, according to a marketing document. Monteith Illingworth, a spokesman for the firm, declined to comment.
Manzke now runs Darien-based MAXAM Capital Management LLC, which marketed a $280 million fund that was invested solely with Madoff. Manzke told the Wall Street Journal she was wiped out. Manzke didn't return calls or e- mails.
Worldwide Web
Investors ensnared by Madoff include Fred Wilpon, the owner of the New York Mets baseball team, clients of private bankers in Geneva, wealthy Jewish families in New York and Palm Beach, Florida, and institutions including BNP Paribas SA in Paris that loaned investors money to increase their bets. Losses have been reported by a pension fund in Fairfield, New York hospitals and a charity in Salem, Mass.
While Madoff didn't run a hedge fund, his alleged crime may accelerate investor defections from the $1.5 trillion industry, already hit by its worst losses since at least 1990 and redemptions that may reach $400 billion this year, according to estimates by Morgan Stanley.
In the Middle
Funds of hedge funds such as Fairfield Greenwich act as middlemen, raising money from investors and farming it out to other managers that they vet. The go-betweens manage 44 percent of hedge-fund assets, according to data compiled by Hedge Fund Research Inc. Their investments lost 19 percent on average through November, a little more than a percentage point more than single-manager funds, the Chicago-based firm says.
Institutions including New York State's $154 billion retirement system and the endowment of Baylor University have been cutting back their investments in funds of funds to save the extra layer of fees generally 1 percent of assets and 10 percent of profits that they charge on top of the underlying managers take.
Last year, for the first time, more than half of the hedge-fund assets of the 200 largest U.S. pension plans were invested directly with individual managers, according to data compiled by Pensions & Investments magazine. Funds of funds say they earn their fees by discovering the best managers and assembling a diversified group of investments. They also are supposed to conduct ongoing due diligence to avoid frauds or other dangers, such as managers straying from their core investment strategy.
Swiss Connection
Another Madoff investor is London-based FIM Ltd., whose Kingate Europe and Kingate Global funds had about $3.5 billion in assets as of the end of November, according to reports sent to clients. The firm, run by Carlo Grosso, marketed the funds to many wealthy Italian families. Kingate collected a 5 percent fee to get into the funds and a management fee of 1.5 percent of assets.
Access International Advisors LLC, a New York-based investment firm, charged a 5 percent fee up front, a 0.8 percent management fee and a 16 percent performance fee on its LUXALPHA SICAV-American Selection fund, according to Bloomberg data.
Spain's largest bank, Banco Santander, said its clients invested with Madoff through its Optimal Strategic U.S. Equity fund. Those investors paid 2.15 percent of assets in fees.
Swiss private banks also sent money to Madoff. Union Bancaire Privee, the largest investor in hedge funds, had a managed account called M-Invest that was a direct conduit into Madoff, people familiar with the situation said. Benbassat & Cie, another Swiss bank, had $935 million invested in Madoff on behalf of clients, according to Le Temps.
Warning Signs
When Aksia researched Madoff last year, it learned the firm's books were audited by accountants Friehling & Horowitz, operating out of a 13-by-18 foot location in an office park in New York City's northern suburbs. One partner, in his late 70s, lives in Florida. The other employees are a secretary, and one active accountant, Aksia said.
"Other details that made Askia nervous included the high degree of secrecy surrounding the trading of the feeder fund accounts, which provided capital to Madoff Securities, and its use of a trading strategy that appeared remarkably simple, yet could not be nearly replicated by our quant analyst," Aksia wrote in a Dec. 11 letter to its clients.
Source: Bloomberg.com News
MORE ON WALTER NOEL:
Walter Noel, a Founding Partner of Fairfield Greenwich Group in 1983, continues with his long-time partners, Jeffrey Tucker and Andres Piedrahita, to oversee all of the firm's activities. He is a member of FGG's Board of Directors, serves as a Director for many FGG funds and management company entities, and has focused on marketing and the client side of the business.
Prior to FGG, he was a Senior Vice President for seven years at Chemical Bank where he headed the International Private Banking Department. He worked as a Vice President in a similar area at Citibank from 1974 to 1977. He began his international private banking career as President from 1972 to 1974 of Bahag Banking, Lausanne, Switzerland.
Earlier, for twelve years, Mr. Noel was a consultant in the Management Services Division of Arthur D. Little, Inc. He received a Bachelor of Arts degree from Vanderbilt University in 1952, a Master of Arts in Economics from the Harvard Graduate School in 1953, and an LL.B from the Harvard Law School in 1959. He is based in the Greenwich office.
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