Your money vs. other’s

The SEC analysis of its bungling of the  Madoff matter is producing lots of interesting tidbits, including the fact that Renaissance Technologies grew suspicious of Madoff back in 2003 and eventually pulled its investments from him.

[….] Henry Laufer, Renaissance’s chief scientist, expressed amazement at Mr. Madoff’s ability to exit the market, selling its investments and holding primarily cash in a way that consistently staved off losses other investment firms suffered.

The timing of the moves, Mr. Laufer said, was almost statistically impossible. Mr. Laufer told the SEC in testimony earlier this year that “we would have loved to figure out how he did it so we could do it ourselves.”

He added: “And so that was very suspicious.”

Renaissance didn’t pull its Madoff investments immediately, according to the report. Nathaniel Simons told regulators that one reason was that the firm believed the SEC had closely examined Mr. Madoff’s investments, and that regulators could readily perform the same analysis Renaissance did of Mr. Madoff’s trading strategy.

“[Y]ou just assume that someone was paying attention to make sure that there was something on the other side of the trade,” the younger Mr. Simons told the SEC.

“We did feel that despite the fact that we’re kind of smart people, we were just looking at matters of public record,” he said, according to testimony in the report.

However, Renaissance’s discomfort with Mr. Madoff became greater, prompting the firm to withdraw money from the investments, people familiar with the matter said. Earlier this decade James Simons urged investors he knew also to withdraw, they said.

Renaissance employees expressed dismay to the SEC’s watchdog unit this year that regulators hadn’t unearthed Mr. Madoff’s fraudulent trades. “This is not rocket science,” Mr. Laufer told the inspector general’s office, according to Friday’s report. He added that an SEC examiner could “wander down, you know, to Goldman Sachs and wander over to their options department and ask them, how does somebody execute $10 billion of options, and find out it’s very difficult.”

So where was Walter Noel during this period? He and Andres were selling up a storm, pulling friends into the Madoff vortex not warning them away as Mr. Simons did. Why? I suggest that Simons wasn’t running a fund feeder, so he couldn’t pocket 20% of the illusory profits Madoff was claiming. And that affected his judgment.

Someone’s picking on Walt Noel

A reader sent me this link to a WSJ article which I missed in all the excitement of setting up my new business venture (below). Massachusetts’s AG rejected an offer from FGG to compensate all that state’s victims for every penny they lost. The AG claims his state’s residents lost $6 milion with FGG, FGG said “okay, here: take it back”. Not sufficient. The AG wants more discovery and, prossibly, this being a position held by politically ambitious persons (see Blumenthal, Richard, eg), a show trial. Hmmm. More fun scheduled for September 9th.

Uh oh, Walt’s sicced the dogs on me!

Received the following email from some Fairfield Greenwich Group PR guy. I’ll call him after lunch and report back but it sounds like fun. Oe question: where is FGG getting the money to pay a PR firm?

Christopher:
 
I just left you voicemail. I’m a media adviser to Fairfield Greenwich, and some comments that were posted to an item on your blog have raised concern. I hope there’s an easy way to resolve it. Please give me a call at [                               ] , when you have a moment.
 
Thanks,
Seth Faison

UPDATE: I spoke with Mr. Faison, who turned out to be very polite and had a simple request: someone commenting on an unrelated blog posting here several  months ago had put up the name, address and telephone number of a person vaguely related to FGG and would I consider taking it down off the Internet? Of course I would do that and have done so. I try to weed out that stuff before it gets posted because it can lead to real abuse of people, but this one slipped by. So now it’s gone, end of matter. How dull.

I did express my surprise to Mr. Faison that FGG was still around to pay a PR firm and he told me that “there are a lot of law suits out there”  who knew? And Faison’s firm is working on putting out fires. Interesting.

 

When does 175 Round Hill Road hit the market?

Madoff trustee Picard in settlement talks with Fairfield Greenwich Group. As noted earlier today, Noel’s Fairfield Sentry Fund was dissolved yesterdayin the British Virgin Island, Attorney Boies is just one of dozens of lawyers clawing their way up the road to Walter’s house and, all in all, things look bleak for Walter and the Fabulous Five. Will they discover that “tomorrow is another day”? Will they have to leave Tara? Tune in, as the world turns.

That settles that

As (the original) Fake Walt points out below, Frontline’s story on Bernie Madoff and Fairfield Greenwich Group’s involvement in the fraud was entirely inaccurate and false, in so far as it related to FGG’s participation, so, according to this press release, we should all give up and go home, after issuing a nice apology to Walt. If they say so it must be true, so apology duly noted. I remain just a tad skeptical, though, and I’m not entirely convinced that this bit is going to take FGG completely off the hook:

The Frontline program contained several other stark errors, as well. For example:

Frontline inaccurately portrayed a December 2005 call between Madoff and FGG personnel, in preparation for an interview with the SEC. Frontline failed to disclose that, prior to the call, FGG had requested permission from the SEC to speak with Madoff, and that FGG people discussed the Madoff call with the SEC afterward. Most important, records clearly show that FGG personnel responded truthfully to all of the SEC’s questions.

Frontline erroneously portrayed an on-site visit to Madoff’s office by FGG executive Jeffrey Tucker, implying thatTucker never received verification of Madoff’s trading. In fact, Tucker was shown an electronic screen with DTC records of Fairfield client trades.

Frontline erroneously reported that FGG’s due diligence operation was located solely in Bermuda. In fact, as Frontline producers were informed, FGG professionals actively monitored the investment with Madoff and conducted due diligence both in Bermuda and at the firm’s New York headquarters.

Look: Ican certainly understand how a genuine “electronic screen” could fool even a trained investor – happens to me all the time – why, just last fall, I saw a Patriot fumble on the five yard line and I tried to pick up the ball through my plasma screen and run it in for a touchdown. Boy, was my face ever red! But I wonder whether the defrauded investors will be so understanding. They should be, of course, but sometimes, when $7.5 billion is lost, people just aren’t as kind as they otherwise might be.

Coming soon to a theatre near you

Madoff trustee sues another feeder fund for $1 billion. Picard seems to be working his way up the food chain, from small to large. Hmm, who lost more than a billion dollars with Bernie? Oh, yes.

In the latest of a series of aggressive actions against the funds that helped to prop up Bernard Madoff’s Ponzi scheme, the trustee of Mr. Madoff’s investment firm sued a hedge-fund investor for more than $1 billion, claiming the fund “should have known” about the fraud.

Trustee Irving Picard, who is collecting the assets of Mr. Madoff’s firm to distribute to investors burned in the scheme, said Harley International (Cayman) Ltd. invested more than $2 billion with Mr. Madoff, receiving an average annual return of 13.5%. Mr. Picard said the Cayman Islands-based fund ignored warning signs that should have alerted it to the fraud.

Harley International couldn’t be reached for comment.

Thank goodness that the library offers free ineternet access

So we can continue to hear from Walter Noel after he and Monica remove themselves from the Round Hill cottage and move to a cardboard box in Baldwin Park. News today that thea Madoff trustee has sued a second feeder fund, former GMAC Chairman Ezra Merkin, for $558 million in fees he took out when he “knew or should have known” that Bernie was a fraud. At the rate of one feeder fund every other day, I’d expect Walter and the Fairfield Greenwich Group to be teed up Monday or Wednesday, depending on whether that Rye firm (Trenton? How quickly we forget) goes first.

As trustee, Mr. Picard can sue investors for any money withdrawn from Mr. Madoff’s firm “in bad faith,” including if they knew or should have known Mr. Madoff was engaged in fraud. Mr. Picard is relying on records he collected from the Madoff firm going back to 1995 and, for now, will be able to seek funds withdrawn only in that period.

Mr. Picard, an attorney with Baker & Hostetler LLP, is expected to sue more feeder funds, said lawyers involved in the Madoff bankruptcy case. But even if he wins in court, Mr. Picard may have trouble collecting much of what he is seeking. That’s because most of the money has already been distributed to the funds’ clients [unless, like Walt, you were pulling out $270 million a year for yourself – Ed].  If those clients had no inkling there was fraud, Mr. Picard won’t be able to touch funds they withdrew from their accounts, those lawyers said.

In his first suit alleging bad-faith withdrawals, Mr. Picard targeted the assets of another individual who ran a feeder fund, Stanley Chais. The suit seeks the return of $1 billion that Mr. Chais and his family withdrew from Mr. Madoff’s firm since 1995. Mr. Chais allegedly “knew or should have known” of the fraud because his family’s personal investment accounts with Mr. Madoff averaged annual returns of 40%, in some cases reaping 300% in one year, according to the complaint.

Mr. Merkin’s investments differ from those of Mr. Chais. The returns for Mr. Merkin’s funds averaged 11% to 16% annually. And, unlike Mr. Chais, Mr. Merkin didn’t have personal accounts with Mr. Madoff’s firm. Instead, Mr. Merkin collected a management fee.

In Thursday’s lawsuit against Mr. Merkin, Mr. Picard said that as a sophisticated fund manager, Mr. Merkin should have noticed the myriad warning signs that could have indicated Mr. Madoff was engaged in fraud. Among the clues: Purported trades made by Mr. Madoff, which were listed in account statements sent to Mr. Merkin, could never have taken place, a fact that Mr. Merkin could easily have detected, the suit alleges.

Walter, we hardly knew you

guestofaguest.com

Reader Sambone sends this link to Bloomberg – the suit against Walter Noel and Fairfield Greenwich Group has been amended to include fraud as a cause of action. Judgments awarded for fraud can’t be discharged in bankruptcy, among other bad things.

Uncle Walt’s partner Tucker lawyers up

 

Will bang gongs for food

FGG’s non-senile partner, Jeffrey Tucker, has hired former U.S. Attorney Stan Twardy and wants his assets unfrozen. The hearing on Attorney David Goleb’s pre-judgement remedy of freeing the assets of Walt, Jeffrey, Andres and everyone else related to the Madoff fraud stupid enough to have assets in Connecticut is scheduled for Monday, April 13th, according to news reports. I’m going to try to find out if that date’s still on and if so, try to be in Bridgeport Superior Court to see it. Twardy and Goleb, two excellent litigators, should put on quite a show.

If it didn’t happen in Bridgeport you won’t find it in Greenwich Time

So, as noted here yesterday and this morning, Massachusetts has charged Fairlfield Greenwich Group and its principals, including Greenwich residents Walter Noel and his son-in-law, Andres Piedrahita, with fraud in connection with the Madoff swindle. You might think that story would be of interest to general readers who live in town but the best our local daily could do was run a short AP article on page five, half of which was devoted to the charges and the other two halves spent on an FGG spokesman denying everything. No mention of Walter, or Andres, or their outsized salaries or, in fact, anything at all connecting the story to Greenwich. I’d link to the story if it were posted on their miserable, slow loading website but it’s not there. That would be like, you know, news, or something. There is a story on a new train run to Yankee Stadium but I’ll let you find that for yourself.

Protecting the rich? Maybe, but more likely is that, now that Greenwich Time is edited by some fellow in Bridgeport, they don’t know the local papers and wouldn’t recognize a Greenwich story if it bit them in the rear. Or the paper is continuing its pusillanimous history of ignoring the dirt on Back Country residents, take your pick. Any recent stories on Round Hill Bourke’s upcoming bribery trial, by the way?

It’s all Noel, all the time

While I was out, readers sent along tons of links on Walter Noel stories. Here’s a good one from the NYT Dealbook.com

Shortly before Bernard L. Madoff confessed to a Ponzi scheme that burned through tens of billions of dollars, partners of Fairfield Greenwich Group, one of Mr. Madoff’s biggest feeder funds, were on track to collect a combined $117 million in pay for 2008.

The estimated compensation figures were disclosed in an exhibit to a lawsuit filed Wednesday by Massachusetts securities regulators, who contend that Fairfield’s inadequate due diligence on Mr. Madoff’s operations amounted to a fraud on its investors.

The exhibit consists of spreadsheets attached to an e-mail that Daniel Lipton, Fairfield’s chief financial officer, apparently e-mailed to himself on Dec. 11, 2008 — the same dayMr. Madoff was arrested by authorities in connection with running a vast investment scheme.

Fairfield’s $7 billion Sentry funds were more than 95 percent invested with Mr. Madoff, but Fairfield also managed billions of dollars in other funds, all of which performed poorly last year. Even before Mr. Madoff’s arrest, the firm had already conducted two rounds of layoffs.

Nevertheless, Jeffrey Tucker and Walter Noel, Fairfield’s co-founders, were each expected to earn about $19 million in 2008, the document shows. In 2007, before the markets went south, both men made over $30 million. Andrés Piedrahita, the managing partner of Fairfield Greenwich and Mr. Noel’s son-in-law, was to make over $28 million for 2008. In 2007, Mr. Piedrahita took home over $45 million.

I started covering the Noel story December 12, when Bernie’s arrest was announced. By December 15th, one of Walt’s loyal friends wrote in to express her dismay – I wonder what she thinks now?

Anonymous
December 15, 2008 at 8:31 am · Edit

How singularly unpleasant and vindictive you are to prey on the misfortunes of a local family. Let us hope that such misery does not descend upon you and your family out of the blue at the instigation of others. I would hate someone to defame your character and talk about you as if you were so much “meat” to be hacked apart. Not that I expect you will allow this comment to be shown on your site – goodness knows we don’t want any balance to the whole thing, or heaven forbid, you may not be able to make a buck or two out of this unhappy mess.

Back to Mustique, Walt – hurry!

The Noels prepare to travel (Photo GuestofaGuest.com)

Massachusetts regulators charge Fairfield Greenwich Group with fraud. This is a civil complaint by the Securities Division and not the sort of thing that will directly cause certain principals to join Bernie in Ossining, but the hell just continues, and where civil authorities smell fraud, can criminal charges be far behind? I’d ask where our own stalwart Greenwich AG Blumenthal is but, as always, he’s lurking on the sidelines, ready to dash out and snatch the baton once his work is done for him. Besides, he’s a friend and neighbor of Walt’s and probably doesn’t want to return his campaign contributions.

April 1 (Bloomberg) — Massachusetts Secretary of the Commonwealth William F. Galvin accused Fairfield Greenwich Group of fraud in misrepresenting to Massachusetts investors its lack of knowledge of the operation of Bernard L. Madoff Investment Securities.

The administrative complaint filed by Galvin in Boston seeks restitution to Massachusetts investors for losses and reimbursement for performance fees paid to Fairfield by those investors. It also seeks an administrative fine.

“Investment advisers have a fiduciary responsibility to their clients under law,” Galvin said in the statement. “The allegations against Fairfield in this complaint outline a total disregard for such responsibility, which helped the Madoff scheme stay afloat for so long.”

Fairfield founder Walter Noel admitted in testimony to the securities division that Fairfield was not involved in anything “but turning money over to” Madoff, according to Galvin’s statement.

Executives Coached

Galvin said Madoff coached Fairfield executives on how to respond to questions from the U.S. Securities and Exchange Commission who were looking into concerns of fraud by Harry Markopolos, a former money manager, who has told Congress he tried to persuade the agency for nine years that Madoff was a fraud.

Fairfield executives “were blinded by the fees they were earning, did not engage in meaningful due diligence and turned a blind eye to any fact that would have burst their lucrative bubble,” according to Galvin’s complaint.

Earlier this week a Connecticut judge froze the assets of Fairfield Greenwich Group and other so-called feeder funds that steered investors to Madoff, along with those of Madoff’s family members, a lawyer said.

 

Oh dear, someone doesn’t like you, Walt!

Bloget has in interesting bit of email correspondence from an anonymous source who has mean things to say about Walter Noeland everyone else at Fairfield Greenwich Group. Sigh – can’t we all just get along?

Judge freezes Noel assets

Attorney David Golub, representing the town of Fairfield as it seeks to recover the millions it lost with Madoff feeder fund Maxam of Darien (yes, the fund that was run by a women to “empower women and minorities” turned out to have sunk every penny entrusted to it with Bernie – it closed the day Bernie was arrested), has persuaded a judge to grant a temporary restraining order freezing all the Madoff players’ assets until a full hearing on April 13th.

The restraining order granted by the judge is a “who’s who” of players in the Madoff scandal: Madoff, his wife Ruth, brother Peter, and son-in-law Andres Piedrahita; sons Andrew and Mark Madoff and Walter M. Noel Jr., a partner in the Fairfield Greenwich Group, all of whom live in Greenwich; Sandra L. Manzke, the founder of Maxam Capital; Robert I. Schulman, the former chairman of Tremont Group Holdings; and Jeffrey H. Tucker, the co-founder of the Fairfield Greenwich Group.

 

The restraining order prevents not only the sale of any real estate owned by any of the defendants, but also extends to all accounts at any financial institution and all personal property. That includes, but is not limited to, stock certificates or certificated securities and “any other assets in any of the defendants’ possession, custody or control,” according to court documents. 

The motion, filed by David Golub, a lawyer hired by the town for the Madoff case, states there is probable cause the town’s pension programs could receive a $75 million judgment and seeks to secure that sum by attaching Andrew Madoff’s home at 57 Tomac Ave., Mark Madoff’s home at 21 Cherry Valley Road, and Noel’s at 175 Round Hill Road home, all in Greenwich, as well as garnish all of the defendants’ accounts at financial institutions.”There is a reasonable likelihood that the defendants Andrew H. Madoff, Mark D. Madoff and Walter M. Noel Jr. are about to remove themselves or their property from this state, or are about to fraudulently dispose of or have fraudulently disposed of their property, with intent to hinder, delay or defraud their creditors,” the motion states.

I think highly of David Golub and I wish him luck in chasing down everyone who profited from Bernie Madoff’s fraud but in this instance, I don’t see how he reaches the Noel’s property. The town didn’t have any direct dealings with FGG, at least none are reported in the article, so it’s stuck with the rather weak argument that FGG and its partners were an integral part of the fraud and made it all possible. Maybe so, but freezing assets on so tenuous a claim seems a bit dubious. Still Connecticut’s judges, perhaps harkening back to the days when they passed out these ex parte orders like candy bars, still grant them with far more alacrity than judges in other states, and God bless them: it makes suing people so much more fun. And notice,by the way, that the judge granted the full $75 million invested. Fairfield invested $22 million, watched it “grow” to a phony $41 million and still got a $75 million attachment, no doubt to cover Goleb’s fees. I do like judges who protect litigators!
Bernie Madoff is unlikely to contest this order on April 13th – why should he care? – but Walt’s lawyers, Andres’ and Mark and Andy Madoff’s should all be in Bridgeport Superior Court that day. I may go up myself just to watch the fun.

The WSJ chats with Walt’s son in law

Andres Piedrahita sits down with a Journal reporter and denies knowing anything. He sold, got rich, and never questioned a thing. Smart guy, just like Corina’s dad.

After graduating from B.U., Mr. Piedrahita knocked around New York working variously as a commodities broker, selling penny stocks and as an investment adviser. His budding financial career was almost clipped in the early 1980s. At the time, Mr. Piedrahita, who was working for a small commodities dealer then called Balfour Maclaine, got a number of his father’s Bogota friends interested in investments that quickly went south. Many of his investors “stayed quiet and lost their money with dignity,” says one of the investors. “They valued their friendship with the father over their investment.” 

But one investor didn’t. He says he asked Mr. Piedrahita frequently for information on how his investment was doing. Mr. Piedrahita avoided the issue, even claiming on one visit to Bogota from New York that he had forgotten to bring along the client’s accounts. Growing suspicious, the client says he hopped a plane to Manhattan, went to Mr. Piedrahita’s office and confronted his boss, asking for the information Mr. Piedrahita had avoided providing. “It was catastrophic,” the client says, remembering the state of his account.

Bottom line: Mr. Piedrahita lost his job, says the client, who recovered all his money. Mr. Piedrahita says eight clients lost a total of about $600,000. “Everybody has some bounces,” he says. “I sold something that turned out to be bad. I sold it with the best intentions, and it didn’t work. That’s the nature of commodities.” He disputes the client’s claim that he was fired from Balfour. “Not true,” he says. “I moved to Prudential Bache.”

Here’s an intriguing bit of history:

Friends say Mr. Piedrahita settled down after his marriage to Ms. Noel. He merged Littlestone with Fairfield Greenwich in 1997. Shortly after, he moved to London to a mansion on Chester Square. In Madrid, where he moved in 2003, Mr. Piedrahita’s lifestyle became even grander. He commuted between Madrid and London on a private Gulfstream jet which was parked at a military base close to Madrid. He was invited to a costume party at a Russian estate where everyone dressed up as czarist-era aristocrats. He went hunting for pheasants with the cream of Spanish society.

Relatives of Piedrahita have told me that he “had to leave Greenwich” and then “had to” flee London. Why? So far, no one’s talking.

But here’s the bottom line. The man was dirt poor, living above a delicatessen in New York, and sold penny stocks. No one sells penny stocks who isn’t a crook because, by their very nature, those securities are solely vehicles for fraud and price manipulation. So a poor, penniless crook meets up with Walter Noel, starts peddling Madoff “investments” and within a few years is flying around in Gulfstream II jets and hunting with the aristocracy. When crooks get rich, I suspect the worst, but Piedrahita denies everything:

“I look at myself in the morning, and I’m very proud of what I have done, and so are my partners,” says Mr. Piedrahita. Then he adds, referring to the Madoff scam: “Nobody knew anything about anything.”

Somehow, I think litigation and criminal investigations will eventually prove otherwise.

Walter Noel and 60 Minutes

I missed last night’s  show on Madoff (in fact, I don’t watch the show, but would have had I known Walt was going to be on) but a reader sends this link to Walter’s letter to CBS.

As far as I can see, Fairfield Greenwich Group’s defense is that they received phony trade confirmations and their clients got their money back when they asked for it – until they didn’t. Doesn’t help their case that Bernie in fact made no trades whatsoever during the years, so “monitoring” wasn’t very deep and the investigation of Madoff Securities was non-existent despite what FGG promised in their promotional materials.

The Fairfield Greenwich Group and its employees are victims of the Madoff fraud.  

Fairfield personnel invested with Madoff alongside our customers, and we appear to have lost 

$60 million of our own money.    

 Over the course of a 20-year relationship, Fairfield received trading confirmations from 

Madoff that purported to reflect the trades he was making for our investors. Our investors 

received over $3 billion in response to redemption requests that were honored promptly and 

without question by Madoff.   

 

 Contrary to speculation that has appeared in the media, Fairfield engaged in continuous, 

ongoing monitoring of Madoff’s activity.  That monitoring and the fact that every redemption 

request was honored — combined with Madoff’s then-impeccable credentials, reputation and 

technology, multiple reviews of Madoff by the SEC, the NASD and numerous auditors and 

investors, high credit ratings assigned to Madoff-related products by Fitch, S&P and Moody’s, 

and an unblemished course of dealing over many years — all contributed to our confidence that 

the investments with Madoff were appropriate and safe.   

Say goodnight, Walter

A reader alerts me that Walter Noel’s Fairfield Greenwich Group has taken down its website – or at least its wonderful due diligence page in which it promised to investigate anyone they entrusted money to. Sadly, when I wrote on December 14, 2008 about FGG’s complete failure to conduct due diligence on Bernie Madoff I linked to their site, rather than make a copy of the page and post that. So the link’s now defunct. Oh well, I’m sure it will show up in court pretty soon.

UPDATE: Here it is, thanks to Google’s cache system. Just to make it doesn’t get lost again, Walt, ‘m posting it on my site – fewer accidental erasures, don’t you know.

This is Google’s cache of https://www.fggus.com/guest/due_diligence.html. It is a snapshot of the page as it appeared on Feb 15, 2009 05:10:40 GMT. The current page could have changed in the meantime. Learn more

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FGG’s Due Diligence Process

FGG’s due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.

A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Typically, a manager has been investigated and monitored for six to 12 months before that firm can be accepted onto the FGG platform. Long negotiating periods enable FGG to be more confident of its decisions before proceeding with a manager. Areas of examination are centered around the following:

1. Portfolio Evaluation, Investment Performance, and Financial Risks:

A core area for further analysis is to attempt to dissect and further understand investment performance, how a manager generates alpha, and what risks are taken in doing so. As portfolio management and risk management incorporate elements of both art and science, FGG applies both qualitative and quantitative measures. FGG:

• Examines independent prime broker trading records
• Conducts detailed interviews to better understand the manager’s methodology for forming a market view, and for selecting and exiting core positions
• Analyses trading records
• Conducts a number of qualitative and quantitative tests to determine adherence to risk limits over time
• Confirms portfolio loss risk controls, diversification and other risk-related control policies, as well as any experience regarding unexpected or extreme market events
• Reviews the risk and return factors inherent in the strategy
• Evaluates capacity issues, which may affect alpha, as well as expected opportunities going forward within each candidate’s strategy
• Analyses the various drivers underlying a particular portfolio’s risk
• Evaluates credit risk and market risk both at the instrument and portfolio level
• Assesses the extent to which leverage is used by a manager, as well as how it is used, the funding sources, and the impact on the risk profile of the fund
• Investigate whether or not private or special registration securities are held, and determine how the daily trading volume and inventory held compares to the float and/or daily trading volume for a given security

FGG also conducts many quantitative reviews of investment performance in light of:

• Fees and fee structure
• Historical draw-downs
• Return volatility
• Commissions earned
• Performance return in calm versus volatile markets
• Current/historical correlation of the fund under consideration with standard industry benchmarks, peer groups, and other FGG or competitor funds used as benchmarks

FGG attempts to understand the return attribution for individual securities in the portfolio, and conducts a full suite of VaR analyses and stress tests to model the loss distribution function under extreme market scenarios. Leverage, concentration limits, and long/short exposures are examined over time to assess whether they have remained within operating guidelines.

Style fidelity is another key area of inquiry; the manager’s trading pattern over time and through various market environments, FGG determines whether the manager is prone to trade outside of their area of expertise.

2. Personal Background Investigation:

FGG examines the abilities and personalities of the individuals involved in managing the fund through extensive interviews, as well as background investigations.
FGG verifies:
Education
Personal credit standing
Litigation and regulatory background
Track record
Other indicators

FGG explores the manager’s experience and qualifications relative to the strategy being managed. Prior professional associations of a manager’s key personnel can be crucial in understanding a person’s experience and character and how they run their investment management business.

3. Structural and Operational Risk:

“Operational risk” refers to the risk of loss resulting from inadequate or failed internal processes, human resources, or systems, or from external events.Operational failures, including misrepresentation of valuations and outright fraud, constitute the vast majority of instances where massive investor losses occur. Other operational risks include staff processing errors, technology failure, and poor data.

Pricing models, as well as the adequacy, independence, and transparency of valuation procedures, contingency plans, and other trading and settlement procedures are all matters for close scrutiny by FGG professionals.

FGG seeks a sound understanding of whether a hedge fund possesses key controls in the areas of portfolio management, conflicts of interest, segregation of duties, and compliance. FGG carefully assesses the controls and procedures that managers have in place and seek to determine actual compliance with those procedures, often suggesting modifications, separations of responsibilities, and remedial staff additions.

4. Legal, Compliance, and Regulatory Risk:

FGG’s legal, compliance, and accounting teams specialize in investment management regulation, securities compliance, corporate operations, and tax issues. Hedge fund managers function within an ever more complex legal and regulatory landscape, and the role of this part of the diligence exam is to determine the seriousness of any deficiencies in this area which may cause risk of sanction, loss, or reputational embarrassment.

Both in-house and retained legal professionals interview the management and staff of the manager, research regulatory filings, and review corporate organizational documents, as well as fund memoranda and related material contracts.

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If I were you, Walt, I’d stay in Mustique

Turns out that Bernie Madoff didn’t trade a single security in thirteen years.

• Madoff’s operation was enormous, taking in 2,350 clients.
• For at least 13 years, no securities at all were purchased on behalf of those clients. That means that every single transaction recorded, every cent of gain was simply made up out of thin air.

This may be bad news for Ol’ Bernie but it has to be even worse news for Walter and his Fairfield Greenwich Group. It’s arguable, I suppose, that their due diligence couldn’t be expected to uncover the fact that Madoff’s “auditor” was a retired old coot who split his time between a Florida trailer home and a strip mall in upstate New York – hey, how much expertise do you need to track a measly $50 billion? – but no trades in 13 years? You never tried to match a single one of them, did you Walt? Back when I hunted wicked stock brokers I used a very creative guy named Tom Benson to reconstruct trading activity in my clients’ accounts. Tom was wizard (he’s since moved from Naples but in his time he probably ran into Walt and Bernie at Palm Beach) who could usually generate a report, accurate to within a penny, in 3-5 days, max. Now, he was expensive – maybe as much as $5,000, but we were talking big money in those days, as much  as $1 million. Walter only had to worry about $7.5 billion and why would he spend a dime investigating how that was doing when (a) he was dealing with the Bernard Madoff and (b) he was skimming $270 million a year off the top, a tidy little profit that would screech to a halt if trouble were found at Madoff headquarters. No, there was no need to ever look at the accounts.

And you know, Walt’s friends in Greenwich still today insist that he’s just a wonderful, warm-hearted guy. I’m sure he is.

The More the Merrier up on Round Hill Road

Feeder funds like Walter Noel’s Fairfield Greenwich Group lost billions of dollars with Bernie Madoff and not surprisingly, their clients would like their money back. FGG alone is on the hook, perhaps, for $7.5 billion and no amount of real estate appreciation in either Greenwich or Mustique (or Southampton or Manhattan) will permit enough cash to be squeezed from the Noel real estate holdings to make people whole.

But the Wall Street Journal reports today that a number of accounting and legal experts see liability on the part of the feeder funds’ auditors to at least support actionable claims of negligence. I don’t know if the accounting firms’ insurers have anything left after paying off Enron claims but if they do, maybe Walt’s friends will forgive him and at least let him play the back nine at the Club, out of sight.

A Walter Client comes to Greenwich

"Bernie took my candy!"

And is surprised to discover that the folks at Fairfield Greenwich Group are a bunch of arrogant whiners.

Now that surprises me.