Mass. sues firm that fed clients to Madoff
Fairfield Greenwich accused of ignoring multiple red flags
Secretary of State William F. Galvin yesterday sued Fairfield Greenwich Group, which steered investors to Bernard L. Madoff Investment Securities, alleging Fairfield defrauded customers, including those in Massachusetts, by leading them to believe it had thoroughly examined Madoff's operations and investment strategy.
Fairfield Greenwich's Sentry Funds placed about 95 percent of their total assets of $7.2 billion with Madoff, allegedly without doing enough due diligence, according to the state's complaint. The Commonwealth alleged, among other things, that Fairfield did not question Madoff's unusual trading reports or his failure to hire an outside firm to handle record keeping on the money entrusted to his firm. Fairfield Greenwich acted as a so-called feeder fund that provided access to Madoff.
Seth Faison, a spokesman for New York-based Fairfield Greenwich, denied the state's allegations, calling the complaint "false and misleading." In a statement, he said the firm "conducted vigorous and robust monitor ing on an ongoing basis of the Madoff investments." He said the firm had cooperated with the state's investigation and that only three Massachusetts residents were in the fund, with $1.7 million.
The complaint also details a 2005 conversation in which Madoff coached Fairfield officials on how to respond to questions from the Securities and Exchange Commission. The SEC had been tipped off to potential problems at Madoff's firm by a Boston whistle-blower, Harry Markopolos.
According to a transcript of a telephone conversation between Madoff and two Fairfield executives, Madoff at the outset of the conversation said, "Obviously, first of all, this conversation never took place, Mark, OK?"
A Fairfield Greenwich executive agreed. Madoff then went on to discuss matters related to the relationship between the feeder fund and Madoff's firm, apparently to make sure Fairfield's story was the same as his own.
Later in the discussion, he tells them to be vague in responding to the SEC on certain interactions: " . . . 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 who calls."
In December, Fairfield Greenwich said it was "shocked and appalled" by the Madoff scandal and had no knowledge of the fraud. The firm had invested with Madoff for nearly 20 years, it said.
Hedge funds typically charge high fees to wealthy clients for hands-on management that outperforms the market. But in the case of many funds that did business with Madoff, firms charged fees simply to hand over assets. Fairfield charged its customers customary hedge fund fees - 1 percent of assets plus 20 percent of investment profits - reaping about $100 million a year on accounts invested with Madoff, according to the complaint.
The state is seeking restitution, disgorgement of fees, and a fine from Fairfield Greenwich.
Madoff is in jail awaiting an almost certain life sentence in June. He pleaded guilty last month to conducting a massive Ponzi scheme that claimed billions of dollars in client funds.
Investigators are looking into who else may have been involved in the fraud.
Also yesterday, a Boston law firm filed what it said was the first class-action case on behalf of Massachusetts investors who lost money with Madoff in a hedge fund controlled by Massachusetts Mutual Life Insurance Co., the Rye Select Broad Market Prime Fund. The law firm, Berman DeValerio, sued in Suffolk Superior Court on behalf of Family Swimmers Limited Partnership, a Newton entity that invested $250,000 with Madoff.
Named in the lawsuit are Rye, MassMutual, and two other units of the Springfield insurer that oversee Rye, as well as a number of executives.
In a statement, MassMutual said: "Some of our affiliated entities are among the many victims of the illegal activities perpetrated by Bernard L. Madoff Investment Securities LLC. MassMutual has strong defenses to this complaint and we will defend ourselves vigorously."
Beth Healy can be reached at bhealy@globe.com. 