But I don’t see how he walks from the Madoff fiasco with a single asset intact. When Madoff was first arrested and FGG’s participation revealed, I checked to see what FGG promised about due diligence. It didn’t look good for the firm, and I said so. Certainly, were I still plying my trade hunting wicked stock brokers and discovered that the primary evil-doer had no assets, I’d have looked to his employer or in this case, anyone who directed my client to him, to recover lost monies. I wrote about all that earlier last week but here’s no one’s favorite Wall Street crook, Henry Blogett, who’s done the same job. It’s easier to link to him than to dig up my previous posts so try this.
Here’s how Fairfield describes its initial manager research process–the process by which Fairfield screens a handful of super-promising managers from the hundreds it meets each year:
FGG is introduced to several hundred potential managers in the course of each year. A relevant subset of these leads are pursued and background information on promising potential relationships is collected and shared among FGG’s professionals for initial assessment.
The nature of FGG’s manager transparency model employs a significantly higher level of due diligence work than that typically performed by most fund of funds and consulting firms. This model requires a thorough understanding of a manager’s business, staff, operational practices, and infrastructure.
[That's good to hear. So it will be interesting to see how FGG explains why Madoff's strip-mall based accountant and tiny operating infrastructure satisfied its requirements. Also, if FGG really developed a "thorough understanding of the business, staff, and operational practices," it may have been the only firm on earth to do so. Even people who worked for Madoff claim to have no idea what he was up to.]
At this stage, FGG begins qualitative and quantitative reviews of a manager’s past performance obtained from independent sources, as well as a series of manager interviews and reference calls.
[How many of the people who wrote to the SEC saying Madoff was a fraud did FGG talk to? What "independent sources" did they use to examine the returns. Madoff's accountant?]
Through this process, a preliminary assessment evolves of a manager’s business and investment practices. Particular attention is paid to the extent to which each manager’s controls are reasonably suited to maintain operational, market, and credit risks at an appropriate level and as represented by the manager.
During this period, FGG personnel also have an opportunity to evaluate a manager’s attitudes and receptiveness (as opposed to his proclaimed intention) towards providing FGG with full transparency of its security level trading activity and access to its investment thought process.
[This is the real key. Some folks who looked at Madoff's trading strategy in detail say they could not understand or replicate his returns. We look forward to reading the documents that made FGG comfortable that Bernie's trading strategy wasn't just some black box that spit out attractive-looking numbers on a page]
This close level of communication and access is the cornerstone of FGG’s ongoing relationship with the manager, without which a business relationship with FGG would not exist.
And on and on. Remember, FGG supposedly put Madoff through this extensive examination before ever entrusting him with a penny, let alone $7.5 billion, 100% of its Sentry Fund. And charged a huge fee for this screening. How will Tucker or Noel explain to a jury or an arbitration panel’s satisfaction that they delivered what they promised? Or convince them that it wasn’t their negligence and outright lies concerning the safeguards in place that caused their clients’ losses? I don’t think they can, or will.
Anyone interested in a villa in Mustique? It’ll be going cheap.