A commentator alerted me to Blogett’s latest (I was busy working on the post below) attempt to unpack Walter Noel’s and FGG’s “strategy” behind investing with Bernie Madoff. Blogett concludes, as I do, that Walter thought Bernie was front running and just assumed that it was someone other than Walter and his five fabulous girls who were getting hosed.
The documents do suggest, however, that FGG:
- Closed its eyes, shoved its fingers in its ears, and hummed as Madoff made the firm $500 million of fees in the past five years (and more before that).
- Took all the credit for the trading strategy and based its fees on the premise that FGG, not Madoff, was the brains behind the operation. The firm almost always spoke as though it managed its primary Madoff fund, Fairfield Sentry, itself. If Madoff ever came up in FGG’s marketing materials, he was described as a “broker.”
- Knew that the key driver of the fund’s stated returns was NOT the “split-strike conversion strategy” but market timing. The firm never explained, however, how this superb market timing was supposedly executed.
As investigators dig through the FGG wreckage, therefore, one of the key questions will be how partners like Walter Noel, Jeff Tucker, and Andres Piedrahita explained Sentry’s astonishing market-timing ability to themselves and their clients.
If the best answer is “proprietary models,” FGG may well be found to have been negligent in its failure to conduct adequate due diligence. Consistent market timing is extraordinarily difficult, and Madoff’s claim that he could do it when others couldn’t should have set the same alarm-bells clanging at FGG as it did elsewhere.
We suspect that the more likely answer is “We thought he was front-running.” Lots of other folks on Wall Street thought Madoff was front-running, including some major Madoff investors, and, for most folks, this seemed to explain his preternatural timing ability. The trouble for FGG with this explanation is twofold: First, front-running is illegal. Second, the firm doesn’t mention front-running it its fund documents. If FGG did rationalize Madoff’s performance on the suspicion that he was front-running, the firm will likely be exposed to charges of fraud.
FGG itself is almost certainly toast regardless of what investigators find. The legal distinctions will come into play with respect to victims’ ability to go after the personal assets of Noel, Tucker, Piedrahita, et al.
I was confronted a week ago by a red faced, goggle-eyed gentleman who stuck a finger in my face and demanded that I stop saying mean things about his dear, close friends, Walter and Monica. I can’t say I felt remorseful – I thanked him for reading my blog and edged away – but the more we learn about Noel, the less sympathy I feel for him. If that’s possible. My general summation of this sorry spectacle is that it couldn’t have happened to a more-deserving guy.