Feeder Funds Turned Blind Eye To Madoff’s Alleged Front-Running
The Bernie Madoff scandal is a classic tale of modern-day dysfunction - and a life lesson for codependents everywhere. For years, investors were quick to sing the praises of the now-disgraced 70-year-old hedge fund manager who is charged with running a $50 billion Ponzi scheme. It wasn’t just individual investors who revered Madoff; global financial institutions from as far away as Switzerland and Colombia, pension funds, banks, hedge funds and charities and foundations were caught up in the adulation, as well, with many holding Madoff in almost God-like status.
Closer inspection of Madoff’s fraud is focusing new attention on the role of certain investment firms - the so-called feeder funds - that funneled clients’ money to Madoff. In spite of constant red flags, including indecipherable accounting statements and double-digit returns that miraculously appeared even in a down market, the people in charge of these feeder funds apparently never thought to ask any questions of Madoff. They simply paid their fees for his investing acumen, and reaped the benefits.
After all, Madoff was the former chairman of NASDAQ. In investing circles, colleagues referred to him as the King of Wall Street. As it turns out, the King was indeed fallible.
When asked in interviews how he achieved such remarkable returns month after month and year after year, Madoff would remain coy. He said it was a “proprietary trading strategy.” Now we know that Madoff never did any actual trading at all.
Many people thought Madoff participated in what’s known as “front running,” or using knowledge of trades you are about to do for clients to make a profit. As reported Jan. 26 by Bloomberg, allegations of front running apparently have followed Madoff for years. In fact, many of the feeder funds that did business with Madoff had long suspected he was involved in the illegal activity.
Despite those suspicions, the feeder funds took an ‘ask no questions of Bernie stance.’ The cost of that enabling would be dear, however, with clients of those funds ultimately losing billions and billions of dollars.
Granted, no evidence has been uncovered - yet - to prove that any of the feeder funds connected to the Madoff scandal actually participated in front-running themselves. Instead, they just ignored the obvious. Faced with returns that were too-good-to-be true, they chose to look the other way. In other words, they enabled Madoff to conduct his scam. They were just like the parents of the 30-year-old child who is now an adult yet still lives at home, without a job and sponges off Mom and Dad. By obliging the child/adult, they are shrieking their responsibilities as parents because the child will never learn how the real world works.
According to the Bloomberg article, Madoff never could have pulled off his historic crime without the participation of this constant stream of feeder funds-turned-enablers. The premise of a Ponzi scam relies on the reputation of its participants. And Madoff had plenty of participants eager to profit. The feeder funds that funneled money to Madoff included the likes of respected firms like Access International Advisors LLC of New York and Geneva-based Banque Marcuard Cook & Co.
The job of a feeder fund is to thoroughly examine hedge funds for the wealthy clients it represents. Instead of practicing due diligence, however, the feeder funds tied to Madoff turned a blind eye when it came time to protect their clients’ money. In return for that codependency, they charged clients hundreds of millions of dollars in service fees.
Federal regulators played the enabler card, as well. As far back as the 1970s, the Securities and Exchange Commission (SEC) received complaints about Madoff and his investment-advising business. Among the accusations: Madoff was running a large-scale Ponzi scheme. Despite the seriousness of the claims, regulators never charged Madoff with a crime.
The actions - and inactions - of the many enablers surrounding Madoff came to an abrupt end on Dec. 11, when federal agents formally arrested the hedge fund manager at his luxury $7 million Manhattan penthouse. Later, Madoff confessed to authorities that his business had “all been just one big lie.”
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