We’ve said this all along

Surprise! Feeder funds fed Madoff because they thought he was front running. As I’ve suggested before, if you’re participating in a fraud, make certain you know who the victim is.

New York-based Fairfield Greenwich, which was founded by Walter Noel in 1983 and named after the county and city where he lives, was an international money machine. Its Fairfield Sentry Ltd. fund channeled all of its $7.3 billion in assets to Madoff, taking a cut of 1 percent of the total and 20 percent of the gains each year.

Family Ties

Noel, who declined to comment, built his global business in part on marriage. Three of his five daughters — who were profiled in a 2002 Vanity Fair piece titled “Golden in Greenwich” –married husbands who took Fairfield Greenwich’s business to far-flung lands.

One husband, Yanko Della Schiava, based in Lugano, Switzerland, was responsible for selling Fairfield’s offshore funds in Southern Europe, according to the firm’s Web site.

Another, Colombian-born Andres Piedrahita, led the European and Latin American businesses, working out of London and Madrid.

The third, Philip Toub, son of Swiss shipping magnate Said Toub, marketed the group’s funds in Brazil and the Middle East.

A fourth son-in-law, Matthew Brown, worked for the firm in New York.

For Madoff, the feeder funds weren’t only a way to gather money. They also enabled him to distance himself from individual investors. He didn’t like to socialize or hustle or answer questions, friends say.

Royal Treatment

The feeders were the gatekeepers, and they qualified for royal treatment. A money manager for a family office recalls accompanying Sonja Kohn, whose Vienna-based Bank Medici AG funneled $3.2 billion to Madoff, to a meeting with Madoff in New York in 1991.

He says Madoff treated her as if she were the Queen of England. The money manager also says Madoff wouldn’t answer any questions about his strategy.

A delegation from Credit Suisse Group AG, led by Oswald Gruebel, then head of private banking, had a similar experience in 2000. Gruebel, whose bank had about $500 million invested in Madoff funds at the time, wanted to know why the firm had an obscure auditor, why Madoff didn’t have a third-party custodian hold his clients’ assets and how much money he was running.

After the fifth or sixth query, people who were at the meeting say, Madoff ended the session.

Gruebel’s Warning

“You guys, if you are not happy with the returns you are getting,” he said, “you can take your money.”

Gruebel, 65, who retired as chief executive officer of Credit Suisse in 2007, urged clients to withdraw from Madoff’s funds, according to three people familiar with the matter.

Only about half of the money was taken out, the people say, indicating that many clients preferred Madoff’s returns to Gruebel’s advice.

That’s why it’s hard to weep for some of Madoff’s victims, says James Walsh, author of You Can’t Cheat an Honest Man (Silver Lake, 1998), a study of Ponzi-scheme perpetrators and victims.

“We’ve become a nation of investors, but nobody wants to do the work of applying Benjamin Graham’s analysis tools,” Walsh says, referring to the father of value investing. “They want a genius to give them a shortcut. That’s what made it a target-rich environment for Madoff.”

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One response to “We’ve said this all along

  1. Inagua

    Key Quote:

    “the feeder funds were, in effect, being paid out of principal, which would have been depleted after 15 years.

    In other words, much of the money invested in Madoff through feeder funds wound up in the pockets of fund managers.”

    And because Walt and the Boys were the greediest salesmen with the highest fees, they took investors money even faster, for a total of probably about $1 billion over an 18 year period.

    If Walt is the honorable man his friends claim, he will refund those unearned fees. Walt waived his 2008 Madoff fee. Why doesn’t he do that retroactively for all his Madoff fees?