Whistleblower faults Madoff feeder fund

Fairfield Greenwich Group, the largest feeder fund for Bernard Madoff Investment Securities LLC with $7.5 billion invested, failed to notice red flags or perform due diligence that could have tipped it off, according to a fraud investigator who blew the whistle on the alleged Ponzi scheme. Walter Noel’s hedge fund firm also used three different auditors over three years for one of its own funds, which itself “is a major red flag,” said Harry Markopolos, a former investment manager who tried for nine years to alert regulators about Mr. Madoff. The fund “was not asking any of the questions one would expect of a firm purporting to conduct due diligence,” Mr. Markopolos told the House Financial Services subcommittee on capital markets, insurance and government-sponsored enterprises today. His testimony, most of which was directed at the Securities and Exchange Commission’s failure to follow up on his detailed complaints, appears to offer support to a class action filed against New York-based Fairfield Greenwich in December. The suit alleged the fund failed to protect investor assets while collecting millions of dollars in fees. Among the defendants named in the suit are Fairfield Greenwich co-founders Noel and Jeffrey Tucker. "Fairfield Greenwich indeed performed extensive due diligence but like others, it was a victim of a sophisticated fraud," fund spokesman Thomas Mulligan said today. He also disputed Mr. Markopolos's statement that the Greenwich Sentry Fund used three auditors in three years. He said that in one of those years, the fund switched from a PricewaterhouseCoopers affiliate in the Netherlands to one in Toronto. The fund said in a Jan. 8 statement to investors that “we are currently assessing the extent of potential losses and will pursue on behalf of our investors the recovery of all assets associated with our accounts.” Fairfield said it felt “shock and dismay” at the news of Mr. Madoff’s alleged fraud. Fairfield hasn’t decided yet whether to sue him, Mr. Mulligan said. The fund has said that about $7.5 billion of its $14.1 billion in assets under management was connected to Mr. Madoff. It lost $6.9 billion after cashing in $600 million, Mr. Mulligan said. Fairfield Greenwich reported $250 million in revenue in 2007, of which $160 million came from its connection with Mr. Madoff, the Wall Street Journal has reported. Mr. Markopolos, who had at least three investigators working for him as he pursued his suspicions without compensation, said he knows another dozen Madoff feeder funds “lying low in the weeds in Europe” that he plans to identify for regulators tomorrow. Feeder funds helped Mr. Madoff raise money from pension funds, European banks and wealthy individuals. Mr. Markopolos estimated the extent of investor losses at between $15 billion and $25 billion, rather than the $50 billion cited by Mr. Madoff as noted in the Securities and Exchange Commission complaint against him. This lower figure jibes with the testimony of Stephen Harbeck, president of the Securities Investor Protection Corp. of Washington, which tries to recover investors’ money when brokerage firms shut down. He said investor losses from the alleged fraud “are clearly billions, perhaps tens of billions” less than $50 billion because Mr. Madoff was giving investors account statements based on fictitious gains. Mr. Harbeck noted, for example, that Yeshiva University initially said it lost $110 million from Mr. Madoff’s scheme. The university later revised that to say it deposited $14 million with him 15 years ago and was told by Mr. Madoff that its deposit had grown to $110 million. Mr. Markopolos based part of his testimony about Fairfield Greenwich on audited financial statements from 2004 to 2006 for Greenwich Sentry, one of Fairfield’s funds, and 2007 performance data. “The financial statements themselves were nothing but a giant red flag to any investment professional looking at them,” he said. Mr. Markopolos noted that Mr. Madoff was in Treasury bills at yearend and “there were no investment positions to mark to market. How convenient for a fraudster not to have any trading positions” or physical securities for an auditor to inspect, he said. Mr. Markopolos also said one of his investigators interviewed Amit Vijayvergiya, head of risk management at Fairfield Sentry, another Fairfield Greenwich fund, for 45 minutes. The investigator asked several important risk-management questions of Mr. Vijayvergiya and “did not receive satisfactory answers,” he said. Mr. Vijayvergiya is a defendant in the class action. He is based in Bermuda, according to news reports. Mr. Mulligan declined to comment on that testimony. Mr. Markopolos also said Greenwich Sentry used three different auditors from 2004 to 2006, which “raised suspicions in my mind that Greenwich Sentry LP might be `auditor shopping.’” Lawyers representing investors in the suit said they will try to obtain the Fairfield Greenwich records and possibly seek testimony from Mr. Markopolos. “We certainly agree with his assessment that there was an astonishing failure by the various Fairfield entities, including fund administrators, custodians and auditors, to do even minimal due diligence,” said Victor Stewart, a partner at Lovell Stewart and Halabian LLP in New York. Mr. Mulligan declined to comment on the suit. Mr. Noel and Mr. Tucker founded Fairfield Greenwich in 1983, according to The Wall Street Journal. A graduate of Harvard Law School in Cambridge, Mass., Mr. Noel started as a private banker in Lausanne, Switzerland, before going to work at what is now Citigroup Inc. of New York. To see Mr. Markopolos’s written testimony: http://financialservices.house.gov/markopolos020409.pdf