Thursday, December 18, 2008

The Madoff-Fairfield Connection

The Wall Street Journal has a lengthy story about an SEC examination of Madoff in 2006, as well as a detailed version of the Harry Markopolos story - Markopolos is the analyst at a rival firm who figured out that Madoff's returns were not real, and tried to get the SEC to believe him for years.

Interested parties should read the article, it repeats, with detail, the examination of Madoff's trading strageties that demonstrated that the story was impossible and provides other detail that we have not seen yet.

And there is another interesting aspect to the story. According to the article, the examination in 2006 did not only involve Madoff's firm, it involved Fairfield Greenwich. Fairfield Greenwich is the 17 billion dollar hedge fund that placed money with Madoff on behalf of its clients. Estimates are that Fairfield Greenwich lost 9 billion dollars with Madoff.

We just posted a article about Fairfield Greenwich suing its accountants for not discovering the Madoff fraud. Now we learn that in 2006, the SEC requested documents not only from Madoff, but from Fairfield Greenwich, in connection with its examination of Madoff. The article also states that the SEC interviewed Madoff, his assistant, an official from Fairfield Greenwich and another employee.

One problem was apparently that Fairfield Greenwich did not disclose to investors that their money was being managed by Madoff, and that Madoff was not registered as an investment adviser. The story is a bit cryptic, but says that the examination ended when Madoff registered as an investment adviser, and Fairfield agreed to disclose information about Madoff to its investors. That of course, it what the law requires them to do, but it was enough to close the investigation.

I am not so sure that would have been the result if a small broker-dealer violated the registration requirements of the Investment Advisor Act, or if a small investment adviser violated the disclosure provisions of that Act, but that is another issue - the disparate treatment of financial firms based on their size and muscle.

The interesting part of the story is that Fairfield Greenwich, which is being portrayed as a victim in the Madoff Mess, appears to be a little closer to the core than previously reported. The move by Fairfield Greenwich to sue its accountants may very well be an strategy designed to provide cover for the investor claims that may be coming down the road.
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