Institutional Investor's Alpha Magazine - February 2009 - (Page 36)

Bernard Madoff with respect to the management of the capital of the Partnership are made exclusively by J. Ezra Merkin”). New stories of investors being burned — even wiped out — by Madoff continue to appear almost daily. They only add to the many questions about the integrity of an entire industry; funds of funds purportedly follow the principles of transparency, diversiﬁcation and due diligence. What were they thinking, all these sophisticated managers who seem not to have followed their own rules? “This had nothing to do with managing people’s money and everything to do with maximizing their own proﬁts,” says Ted Seides, a principal with New York–based multimanager hedge fund ﬁrm Protégé Partners. If all a fund of funds had to do to collect a 1 or 2 percent fee was to divert client money to Madoff, what was the point of doing anything else? One way to see into Madoff ’s world is through the eyes of those who skirted it. that had hired Greycourt disclosed that it was already invested with Madoff, prompting Curtis and his colleagues to reach out again — to no avail — for a meeting with him. Undeterred, the family had an employee drop by Madoff ’s ofﬁce unannounced to poke around. The employee was turned away by a low-level staff member who was unable to answer any questions, and came away with the impression that Madoff Securities was an odd place. “The recommendation was that the client redeem, which they did,” Curtis says. Twice in 2007 and once more in early 2008, the name Madoff popped up in Greycourt’s dealings with clients, most notably in a visit from Fairﬁeld Greenwich, which came to Greycourt to say it had access to a roster of managers. “But they only pitched us Madoff,” recalls Curtis. “We said we weren’t interested. They said they’d come back with more; they never did.” Richard Bookbinder, founder of Bookbinder Capital Management, a small New York–based fund of hedge funds ($25 million in assets), says Madoff failed miserably to meet his ﬁrm’s due diligence requirements on several occasions. “We had been introduced. We were shown to him by a number of these ﬁnancial intermediaries, but we just didn’t understand the strategy, the source of returns or how the returns were generated,” he says. “We also understood we couldn’t meet the manager, which is just a big, ﬂat-out no. Most important, they violated tenet No. 1 of our investment philosophy, which is, ‘Who is your auditor?’” Madoff, it seemed, was his own auditor. Stories like these appeared not to bother the legions of individuals and funds of hedge funds that poured money into Madoff. But they should have scared everyone away, argues Christopher Addy, president and CEO of due diligence ﬁrm Castle Hall Alternatives in Montreal. Addy doubts that any fund of funds that put money into Madoff can brandish boilerplate disclaimers as a way to fend off recriminations. “It’s difﬁcult to see how a Madoff feeder can avoid the responsibility to complete effective due diligence simply by including a bunch of risk disclaimers in its offering document,” he says. “Madoff was hardly an organization with an absence of operational red ﬂags — one being his notorious secrecy and inaccessibility; two, the no-name audit ﬁrm; and three, the obvious absence of any thirdparty oversight from the broker-dealer level down.” The glaring disparity between the amount of money Madoff said he had and what investors publicly stated they had invested with him should have been a red ﬂag as well. SEC forms ﬁled by Madoff ’s ﬁrm last year said that it had approximately $17 billion in assets at the time, far short of the amount that had been sent his way, a huge tip-off to the deception that came to light a few months later. “If you went down the list of the major feeder entities and asked how much they were running, it wouldn’t have taken very long at all, maybe six lines, to get well past that ﬁgure,” Addy notes. “It’s a big surprise that no one did this simple math.” WHERE HE GOT THE MONEY* FAIRFIELD GREENWICH GROUP UBS $7.5 billion TREMONT GROUP HOLDINGS $1.4 billion UNION BANCAIRE PRIVÉE $3.3 billion BANCO SANTANDER $700 million BNP PARIBAS $2.9 billion KINGATE MANAGEMENT $431 million MAN GROUP $2.8 billion BANK MEDICI $360 million MAXAM CAPITAL MANAGEMENT $2.1 billion ASCOT PARTNERS $280 million *PARTIAL LIST. $1.8 billion Curtis, the Greycourt chairman, had several brushes with Madoff over more than 20 years, often at the behest of clients who were enchanted by the prospect of getting an “in” with the famed money manager. Greycourt ultimately warned clients away. “There were just too many unanswered questions — things we just didn’t get,” Curtis explains. He says he was initially impressed, however, after his introduction to Madoff ’s ﬁrm in 1987, when Greycourt heard what Curtis describes as Madoff ’s trademark low-key pitch. He was “a smart, likable, rather modest fellow who even then had a very large reputation,” Curtis recounted in an early January letter to clients and friends. He and his colleagues liked what they heard and suggested another meeting. But no one from the Madoff camp ever followed up, so Greycourt didn’t send any clients their way. In 2001 a Greycourt client bumped into Madoff at a resort hotel in the south of France, and was smitten. At his behest, Greycourt tried to contact Madoff. “We learned quickly that Madoff wouldn’t meet with us,” Curtis recalls, “and wouldn’t even take our call.” Greycourt’s advice: Any manager who will not deign to hold a due diligence meeting with an investor should get a pass. In 2006 a family 36 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

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