Madoff fund outlined extensive potential risks
Documents from a US fund that invested in products managed by alleged fraudster Bernard Madoff revealed at least 24 specific warnings about risks prospective investors would face, in spite of general consensus that funds had provided insufficient warning to investors over the dangers of the firm.
Many investors have blamed US regulators for failing to identify the alleged $50bn (€35.7bn) fraud committed by Bernard Madoff, and commentators generally expect a raft of legal cases to stem from it.
However, the offering document for a fund managed by Tremont Partners, which put money in products offered by Madoff's investment advisory business, made various warnings about its fund's possible investments, its management, the risks of investments being concentrated in number and potentially illiquid in nature.
The Tremont fund's documents cautioned it might also invest with managers not registered with the Securities & Exchange Commission. Although Madoff had registered with the watchdog, Tremont's Rye Select Broad Market Neutral fund said managers it chose might not be under strict oversight.
Tremont said: "The managers are not likely to be subject to the periodic information and reporting provisions under the 1934 Advisors Act. As a result, the amount of publicly available information that may be used...in selecting managers may be relatively small."
Tremont added: "underlying funds may not be subject to any substantive or effective regulatory oversight and may be established in jurisdictions where there are no established or effective investor protection laws, and therefore will not have the equivalent level of investor protection."
Managers including Bramdean Alternatives, Man Group's institutional management arm RMF and UBP have each drawn attention to the fact Madoff was SEC-registered, however one London hedge fund lawyer said any reliance on regulatory oversight was not likely to shield investors in Madoff from litigation. US lawyers including Holland & Knight, Lieff Cabraser and Pomerantz have established legal advisory services for investors. Madoff has been bailed for $10m, but is tagged and under house arrest, awaiting his trial.
Jérôme de Lavenère Lussan, managing partner of investment management consultancy Laven Partners, criticised investors for not having picked up the warning signals that all was not in order at Madoff Investment Securities and its investment advisory business.
Consultants have said danger bells should have sounded at so large a firm as Madoff having an auditor as small and little known as Friehling & Horowitz. They added that Madoff conducting periodic valuations of investments itself was also concerning, as was the potential for conflicts of interest, if not also fraud, as Madoff used his own broking firm to trade for his funds.
Lussan said: "Parts of the investment industry have been lax for years. Madoff is the ultimate failure in that it involved a fraud which by-passed most due diligence efforts by living off, in some cases, a reputation which played to the personal relationships that link investors to managers. Madoff’s collapse warns against being lazy when it comes to due diligence."
Tremont's press representatives could not be contacted by the time this article went to press.
-- Write to David Walker at dwalker@efinancialnews.com
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