And then there are the feeder funds!
Madoff Fallout Grows as 'Feeder Firms' Scrutinized
by Jim Zarroli
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Jason DeCrow
Bernard Madoff returns to his Manhattan apartment after making a court appearance on Dec. 17. The fallout from Madoff's alleged Ponzi scheme continues to spread. AP
All Things Considered, December 23, 2008 · The scandal surrounding Bernard Madoff and his alleged $50 billion Ponzi scheme grew deeper Tuesday when Rene-Thierry Magon de la Villehuchet, the head of an investment firm tied to Madoff, was found dead in his office, an apparent suicide.
Magon de la Villehuchet founded Access International Advisors, which had reportedly invested more than $1 billion with Madoff. Access was one of numerous "feeder funds," which took money from investors and funneled it to Madoff's firm.
Many of these feeder funds now face big legal problems.
A Retirement Fund Wiped Out
Until a few weeks ago, Bob Chew had no inkling his retirement fund was in any jeopardy. He had put about $650,000 into an investment fund run by California money manager Stanley Chais, who had been investing for Chew's wife's family for decades. Chew says Chais was secretive about what he did with his clients' money.
"He wouldn't offer, and when we did try to ask specifics, we weren't given the answers," Chew says.
But the fund made steady returns, so Chew learned not to ask questions. Then, on Dec. 11, Madoff was arrested by FBI agents in New York and everything began to unravel.
"The person who was handling our family fund called and said we're wiped out," Chew says. "And I said, 'Well what do you mean?' And he said, 'There's this fellow Madoff who's been arrested and all our money went to him.' "
" 'Who's Madoff? Who's this guy Bernard Madoff?' " Chew responded. "We had never heard the name before."
Feeder Funds Face Lawsuits
As it turned out, Chew's money had been placed in one of the feeder funds that delivered investors to Madoff's firm.
For years, Madoff was known as a spectacularly successful money manager. Ordinary investors were barred from putting their money in his funds. However, they could go to one of the feeder funds, which for a fee would send their money on to him.
Dan Strachman, author of The Long and Short of Hedge Funds, says these funds have become increasingly popular with investors.
"They want a bite of the forbidden fruit, and organizations like Fairfield Greenwich and others in some cases provide that access," Strachman says. "Someone like Madoff seems to have been able to take advantage of that by using these people."
Fairfield Greenwich is a hedge fund company that operated what is believed to be the largest feeder fund — and it is reported to have lost $7.5 billion in the Madoff debacle.
Many other funds have now lost all or part of their investors' money, and they're expected to spend years fighting lawsuits.
Attorney Jeff Zwerling, who represents some of Madoff's alleged victims, says some of these funds are virtually bankrupt. It will be difficult for these investors to recover any money from them, but Zwerling says there are exceptions.
"If the feeder fund did not invest all its assets in there but lost, say, 50 percent of its investment and is still an ongoing entity, then I think the investors have a much better shot of recovering at least some significant portion of their investment," Zwerling says.
He points out that some of the feeder funds were tied to bigger companies with deep pockets.
Massachusetts Mutual Life Insurance Co., for example, was sued this week because one of its subsidiaries was tied to a company that invested with Madoff.
On Preventing Future Disasters
Chew says regulators need to demand that feeder funds be more transparent. He says the fund operated by his money manager wasn't registered with the government because it was so small and therefore was able to escape scrutiny.
"Had we been able to see what was going on, been able to pull the curtain to the side and see the black box and what it was doing, we would have been able to make a better investment decision," Chew says. "And maybe, in fact, we would have kept going — but at least we would have known."
Chew says he is speaking out on the issue because he wants to prevent future financial disasters. But for him, it's probably too late to recover much of the money he lost.
For now, he is left to sort out the damage caused by a man he hadn't heard of before this month.
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