http://business.smh.com.au/business/how-madoffs-victims-fell-for-his-92b-scam-20090409-a275.html
How Madoff's victims fell for his $92b scam Andrew Clark April 10, 2009 HOW could so many smart, successful people have been so spectacularly gullible? Ever since Bernie Madoff was arrested in December over his $US65 billion ($92 billion) scam, it has been a puzzle to figure out how he got away with cooking the books for the best part of two decades. One answer, according to newly disclosed legal documents, is that some of his closest associates blithely turned a blind eye to warning signs. And they allowed themselves to be bullied and harangued by the 70-year-old. The Massachusetts Secretary of State, Bill Galvin, has filed fraud charges against Fairfield Greenwich, a hedge fund which was among the biggest "feeder funds" to Madoff's investment empire. Fairfield had $US14 billion under management, including about $US7.2 billion in a fund that was 95 per cent dedicated to Madoff. Galvin says Fairfield was criminally negligent and it made only the flimsiest of efforts to check what the financier was doing with its customers' money. An intriguing insight comes in an email sent three days before Madoff's arrest by Jeffrey Tucker, the co-founder of Fairfield. Madoff's house of cards was beginning to collapse as investors, spooked by the financial crisis, pulled out large sums known as redemptions. Madoff wanted Fairfield to replace the outflow of money. Tucker wrote to Fairfield's executive committee: "Just got off the phone with a very angry Bernie who said if we can't replace the redemptions for 12/31 he is going to close the account. His traders are 'tired of dealing with all these hedge funds' and there are plenty of institutions who can replace the money." Shortly after midday on December 8, Tucker signs off: "I believe he is sincere." The last sentence is telling. Tucker - who, ironically, is a former Securities and Exchange Commission official - fell for Madoff's bullying. It was a load of nonsense - there were no other institutions willing to provide money, and Madoff confessed 72 hours later that his business was riddled with lies. Madoff had hundreds of victims, most of whom were not financial experts. They included members of the US Jewish community, who were acquainted with Madoff through country clubs and social networks in Long Island and Palm Beach. There were charities, benefactors and showbiz names such as Steven Spielberg and Kevin Bacon. Madoff abused their trust, took their savings and used the money to fund his lifestyle of four homes, six boats, four cars and lashings of bling (he allegedly has 35 sets of watches and cufflinks). At least two suicides have been linked to Madoff's crimes. Fairfield Greenwich is in a slightly different category. Fairfield was co-founded by Tucker and business partner Walter Noel, a Connecticut socialite who is a mainstay of the ponies and cocktails circuit. Fairfield had acted as a go-between for Madoff since 1989, collecting money from investors and pumping it into Madoff's fund. For this, it took a cut of 1 per cent of deposits plus 20 per cent of all accrued profits. To justify this commission, clients were promised that Fairfield was looking out for them by gaining "privileged access" to Madoff's accounts and conducting deep "due diligence" including "onsight reviews". Yet the paucity of some of these checks is laughable. In a marketing document for clients, Fairfield boasted it would never have invested in a crooked venture like Bayou, a notorious hedge fund run by Samuel Israel, who faked his suicide to avoid prison for fraud. The reason? "We would question Bayou's obscure auditing firm." This is fairly brazen since Madoff was audited by a single-man accountancy firm called Friehling & Horowitz, based in a mall outside New York City. A Fairfield client once asked about this auditing outfit, prompting Fairfield's chief financial officer, Dan Lipton, to "investigate". He rang up Friehling's only employee, then emailed his client this reassurance: "Friehling & Horowitz CPAs are a small- to medium-sized audit and tax firm specialising in broker dealers and other financial services firms. They have hundreds of clients and are well respected in the local community." Lipton's subsequent interview with regulators is worth reproducing: Q. How did you determine they had hundreds of clients? A. That's what the partner said on the phone to me. Q. Did you corroborate it in any way? A. No. Q. How did you determine that they were well respected in the local community? A. That's what our conversation - my conversation with one of the partners at Friehling & Horowitz - that's what was told to me. Hardly the due diligence skills of Hercule Poirot, are they? It isn't hard to imagine that Fairfield was lulled into a sense of security over a 20-year relationship. Others smelt a rat including Harry Markopolos, a financier who brought concerns about Madoff to the SEC's attention. When the SEC investigated, Fairfield's chief counsel, Mark McKeefrey, had a phone conversation with Madoff to discuss what they should say to regulators during interviews. According to a transcript, Madoff's opener was: "Obviously, first of all, this conversation never took place, Mark, OK?" In a statement this week, Fairfield attacked the Massachusetts regulator for making accusations with "20/20 hindsight". The firm said it " conducted vigorous and robust monitoring" of the Madoff investments . the SEC, other regulatory agencies and every other investor in Madoff failed to detect his sophisticated fraud." Fair point, but not all investors were promising their clients deep due diligence of Madoff. Tucker, Lipton and Fairfield's chief risk officer, Amit Vijayvergiya, received tours of Madoff's operation but never met the employees involved. How, asked investigators, did they know such people existed or that Madoff's trading strategy was being executed? Vijayvergiya replied: "Madoff, after, you know, 18 years of a very lengthy and trusted relationship, an individual who had a stellar reputation and great credibility in the industry, . provided us with this information, so we had every reason to believe it was true." That's not quite good enough, is it? Guardian News & Media [Non-text portions of this message have been removed]
