Madoff feeder fund trouble continues - Tremont and Fairfield's Slow Death

It is being reported that William Galvin, the Massachusetts Secretary of State, has rejected a settlement offer by Fairfield Greenwich Group to repay $6 millon to Massachusetts investors who were victims of fraud in the Madoff scandal.



Galvin's civil complaint, in part, claims that Fairfield executives were coached by Madoff on how to answer federal investigators questions. The complain further alleges that Fairfield misrepresented how much they knew. With the settlement offer reject a hearing is scheduled for September 9.

Fairfield spokesman Thomas Mulligan was quoted as saying, "It would be irresponsible for Fairfield to devote any more time or resources to a case involving at most a dozen people with losses of $6 million, when Fairfield is facing litigation involving thousands of investors and hundreds of millions of dollars elsewhere."

In other Madoff feeder fund news, Tremont Group, has been forced to auction off its hedge fund assets.

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Madoff’s Film Studio and the risks of outside business activities

It has been reported by Bloomberg that Madoff’s son Andrew and Nehst Media Enterprises LLC are being sued for $5.3 million. Nehst is a Madoff-funded film studio. The suit is being brought by allegedly wronged filmmaker Dana Offenbach whose production/director credits includes such independent films as Hav Plenty, Love & Orgasms and The Mamsahib.



Ms. Offenbach is seeking at $5 million in punitive damages and $300,000 in regular old-fashioned damages. Also named in the suit are Nehst Chairman Larry Meistrich and CEO Ari Friedman. The complaint alleges that Madoff was the “principal investor” in Nehst film studio. Here is a video about Nehst which is described as one-stop shop for independent film making that interestingly doesn't mention anything about the Madoff connection:



This suit highlights another important, yet often overlooked, aspect of hedge fund operational due diligence – outside business interests. Often times during the operational due diligence process investors are so focused on reviewing the risks associated only with the hedge fund manager that they often fail to cast a wide enough net to look at exogenous risks, such as outside business activities.

Any such activities are often important for a number of reasons. By way of illustration, suppose the Chief Investment Officer or lead Portfolio Manager of a hedge fund invests in a music company run by one of his close relatives, let’s say in this case his son. Continuing our example, when asked this question the standard hedge fund reply is often, “Mr. So-and-so does not devote a material amount of time to any external endeavors.” Some hedge funds may even go further and state, “All such external outside business activities must be approved by the firm’s compliance department.”

While all that sounds great, such activities often involve more than simply writing a blank check to a relative. Often times, and with the best intentions, the check writers/Portfolio Manager will be involved if not for the sole reason that they want to offer guidance to their relative and perhaps, albeit less noble an objective, look after their investment.

There is nothing inherently wrong with such external activities or investments. That being said, during the operational due diligence process investors should take steps to learn about these outside activities and determine what risks or distractions they may pose to a hedge fund manager. Many investors will be surprised to learn what external activities a hedge fund manager may be invested in. Knowledge of such activities will allow investors to make more informed allocation decisions and provide another data point by which to manage operational risk.

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"It was all fake" - Madoff's Frank DiPascali Jr.'s Begins Talking...

Frank DiPascali Jr., Bernard Madoff’s former “chief lieutenant” and chief financial officer formally entered his guilty plea yesterday. Mr. DiPascali pled guilty to 10 felony counts of conspiracy, fraud, money laundering and perjury. DiPascali was hired by Madoff straight from Archbishop Molloy High School. He went onto work for Madoff for 33 years. Some notable quotes from Mr. DiPascali’s appearance include:


-"I ended up being loyal to a terrible, terrible fault."

-"I apologize to every victim of this catastrophe, and to my family and to the government. I'm very, very sorry."

-“It was all fake”

-“It was all fictitious. I knew no trades were happening.”

-“I knew I was participating in a fraudulent scheme, I knew everything I did was wrong, and it was criminal, and I did it knowingly and willfully. I accept complete responsibility."

Despite these statements and both the prosecution and defense arguing for bail, U.S. District Judge Richard Sullivan denied his $2.5 million bail.

In making this decision the Judge Sullivan cited a presumption that a convict should be denied bail in the absence of "clear and convincing" evidence that he isn't a flight risk.

Here is a video discussing Mr. DiPascali's appearance:


With Mr. DiPascali remaining behind bars perhaps it will continue his continued cooperation and the additional parties who participated in the Madoff fraud he is expected to name.

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Frank DiPascali Jr.'s Secret Fee Arrangments - Don't Ask Don't Tell

Frank DiPascali Jr. is scheduled to plead guilty today. Mr. DiPascali was reportedly Madoff’s top aide who sometimes referred to himself as the Chief Financial Officer of Madoff’s firm. While the specific charges to which he will be pleading guilty to are unclear (although it is likely to include multiple counts of fraud) it is suspected that his sentence will be lessened by the fact that he is reportedly cooperating with investigators. This cooperation is also supposed to assist investigators in strengthening their case against certain feeder firms. These supposed deals guaranteed certain feeder funds (and perhaps even funds of hedge funds) with higher rates of return, albeit fraudulent ones, than other Madoff clients were receiving.


I find these supposed deals quite interesting. While pre-Madoff it may have been unheard of to think that investors with the same terms might all be generally receiving the same performance returns for investment in the same hedge funds it is now becoming more apparent that all investors are not competing on a level playing field. Please note I said above, investors with the same terms. That’s just the problem, not everyone has the same terms for each hedge fund investment. While, today many hedge funds seem to be resisting the temptations they may have succumbed to a few years ago to enter into side letters with investors spelling out a myriad of different nuances such as capacity agreements, most favored nations clauses and the like, such agreements are still prevalent, if not only for legacy reasons.

Here is a video from Fox Business News about the planned guilty plea:


During the course of the operational due diligence process, it is often useful to inquire about not only the so-called standard fund terms listed in the fund’s offering documents and marketing materials but about what “special deals” other investors may have bartered. Sometimes a hedge fund may clam up and simply state they don’t disclose the details of other investors. This curt response should be viewed as a stumbling block, not a brick wall. When faced with such a dilemma, the role of the operational due diligence analyst should be to try to utilize their red flag social network, to locate other investors and gather some general market intelligence. This may not yield any results, but at least it’s worth asking. Additionally, if the same request is sent to the hedge fund for this information several times they may eventually crack. Uncovering such information is no guarantee that a hedge fund manager may give you the same preferential terms as it may have given to a day one or extremely large investor, but it will give you the peace of mind to know that you are making an informed decision.

In Mr. DiPascali’s case, any unwillingness to talk, even generally, about such deals should have certainly been a red flag. Bloomberg even reported that Madoff didn’t want any notes taken during meetings, no less discussing such sensitive issues about fee arrangements. Now it looks like those investors which were swindled by Madoff will have to learn about them via court documents rather than during the due diligence process.

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Cartoon Gallery: Madoff, Hedge Funds and Ponzi Schemes

There have been a number of cartoons put out involving Bernard Madoff, Ponzi schemes and hedge funds lately. We have put them all together in a new cartoon archive. Here are some of the notable ones:

For a more complete list of Madoff and Ponzi cartoons please visit our cartoon gallery.

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Obama and Geithner's New Hedge Fund Regulation Fosters Environment for Next Madoff

It has been reported that on June 17 the Obama administration is reported to release its new plans for broad financial regulation. This will reportedly be followed by the June 18th testimony of Timothy Geithner before the House Financial Services Committee.

Reuters reports that it is likely that the administration plan will effectively carve up the existing regulatory framework into four agencies. These will be:
1)the FED
2)the FDIC
3) a new entity which will be the merger of: Office of Thrift Supervision and the Office of the Comptroller of the Currency
4) another new entity which will be the merger of the: SEC and CFTC

Here's an outline of how it is supposedly all supposed to break down:

THE FED
The new plan will support putting the Federal Reserve in charge of broadly overseeing systemic market risk.

While the Fed may lose some of its oversight powers over consumer protection (such as credit cards and insurance issues) it will likely gain several new regulatory powers including supervisory powers over: broker dealers, private equity, derivatives and hedge funds.

The FED's Advisory Committee
The FED would be backed up by a so-called, "advisory committee" (similar to the President Working Group on Financial markets) to assist in monitoring system risk.

THE FDIC
The proposal will give new power to the Federal Deposit Insurance Corp. (FDIC) to oversee the unwinding of troubled financial institutions.

OFFICE OF THRIFT SUPERVISION AND THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
It has also been speculated that the Obama administration will propose merging the Office of Thrift Supervision and the Office of the Comptroller of the Currency. So effectively instead of the current four bank regulatory agencies, we would be left with three larger ones.

THE SEC + CFTC
It has also been reported that a likely merger of the SEC and CFTC is likely - this new entity would oversee: investor protection and market integrity. Although other reports have come out, including this one by Bloomberg, suggesting that Geithner may not support such a merger. Such public dissent by Geithner is nothing new as continued turmoil seems to persist between Geithner and President Obama's chief economic advisor, Larry Summers.

Where is the Unsystemic Risk (Aka: Operational Risk) Regulatory Oversight?

While it has also been reported by CNBC that republicans are preparing their own version of financial system regulatory overhaul, on the surface it seems that these plans have essentially completely ignored, or severely minimized, the risks association with the operational risks in hedge funds.

Operational risks (i.e. - legal and compliance risks, valuation and accounting risks, reputational risks, asset verification, third part independence etc.) are exactly the types of risks that led to the Madoff scandal and the recent deluge of hedge fund frauds and Ponzi schemes. Ignoring such risk fosters a lax regulatory environment that could foster the next Madoff.

It seems as if the voices of the hedge fund industry lobby groups such as AIMA and the MFA, at least in the US, were loud enough to steer the discussion away from operational risk.

Where are the investor advocate groups touting the importance of enhanced operational risk disclosures for hedge funds and private equity?

With regards to alternative investments these proposed plans are essentially the polar opposite of the gist of the European Union's directive which - while still not focusing on operational risk - places a great deal more emphasis on overall transparency, risk reporting and monitoring.

How many more Madoff's will it take before the US, and the rest of the world, begins to dedicate the appropriate focus towards truly monitoring operational risk?

Many compliance and legal professionals in the US feel that a good first step would be with the SEC enhancing form ADV disclosures, but it seems as if this is a low priority on Mary Schapiro's to do list.

A Mini Regulator Not A Super Regulator
The planned merging of the SEC and CFTC, with the combined oversight of the Fed, effectively creates a super regulatory agency for the hedge fund industry.

With respect to operational risk in the alternatives space, this is the wrong approach.

Operational risk data collection and on-going monitoring from hedge funds and private equity will best be served by an experienced regulator focused on the nuances and specifics of the hedge fund industry. Lumping hedge funds together with all other financial institutions (such as banks, mutual funds, thrifts, insurance companies etc.) is simply the wrong approach. Too many small operational issues will slip through this broad regulatory net. These smaller issues may not be deadly in isolation but in aggregation they can snowball into a Madoff like blizzard for the financial markets.

A better approach would be a smaller regulatory agency (or dedicated division of a larger regulator) with the nimbleness and detailed knowledge and experience necessary to properly oversee and monitor operational risk in

[caption id="" align="alignleft" width="192" caption="Harry Markopolos"][/caption]

hedge funds. To quote Harry Markopolos (the man who knew Madoff was a fraud) - they should have enough experience to "have gray hair or no hair."

Unfortunately for US investors, and perhaps fortunately for the hedge fund industry lobbies, who generally it seems oppose such increased transparency and disclosure requirements are not in the plan for the short term regulatory framework.

A Continued Hedge Fund Exodus from Europe?
This proposed lax operational risk disclosure environment, the failing of increased hedge fund regulation on the state level (i.e. - recent news of Connecticut's recent decision to let proposed hedge fund legislation, which would in part

[caption id="" align="alignright" width="92" caption="Crispin Odey"][/caption]

enhance disclosure requirements, die for the time being) combined with the hedge fund industry's disdain over the EU directive, may add more fuel to the talks of a European hedge fund exodus, from hedge fund manager's such as Crispin Odey, from UK to the US. Hopefully, the US is appropriately planning for the impending deluge.

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The Depth Of The Dive: Gauging The Scope And Scale Of Due Diligence

Corgentum Managing Partner, Jason Scharfman, has written an article as a guest contributor for FINalternatives. The article, The Depth Of The Dive: Gauging The Scope And Scale Of Due Diligence .
The piece states in part, "in the post-Madoff environment it is no longer acceptable for a fund of hedge funds or any institution, which allocates to hedge funds, to simply claim that they have comprehensive investment and operational due diligence practices. These firms must be able to consistently demonstrate the depth and breadth of their due diligence." The full article can be read on the FINalternatives website here.
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Madoff-Proofing Your Hedge Fund With Corgentum

APRIL 14, 2009

Corgentum Consulting and Managing Director Jason Scharfman were profiled in a recent piece on HedgeFund.Net. The artilce, which is entitled, "A New Service-Provider Pitch: Is Your Hedge Madoff-Proff?", highlights an increased trend of hedge fund investors seeking guidance from operational due diligence experts such as Corgentum to avoid fraud and Ponzi schemes such as the Madoff crisis.

The article reads in part, "While automation and outsourcing were mandated to eliminate mutual fund operational risk, the risk of outright fraud in the hedge fund industry is now fueling service provider growth. Scharfman theorized the average hedge fund [investor] might not be able to undertake due diligence on its own, turning businesses like Corgentum a necessity rather than a luxury."

The full article can be read on HedgeFund.Net here.

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Ponzi Schemes With Affinity: Due Diligence Kryptonite

APRIL 14, 2009

Weizhen Tang, a hedge fund manager who called himself the "Chinese Warren Buffet," has been accused by the SEC with raising $75 million for a Ponzi scheme.

The SEC claimed in a statement that Mr. Tang admitted in February that he misappropriated new client money to pay existing clients to cover trading losses since 2006 in a classic Ponzi. The SEC claim follow claims by the Ontario Securities Commission ("OSC") last month. Apparently, Mr. Tang was the cause of his own undoing when he was unable to replicate his hedge fund strategy to investors via a public demonstration.

The OSC complaint claimed it couldn't trace $15 million in losses Mr. Tang's Oversea Chinese Fund Limited Partnership. Mr. Tang is being represented by Dallas attorney Edwin Tomko.

The interesting thing about this case is the affinity element. Adding an affinity scheme element to his Ponzi scheme, Tang, who in addition to managing a Plano, Texas investment advisory firm called WinWin Capital Management, had focused on the Chinese-American community in Dallas and California. Similar to Madoff, Mr. Tang sought to target an community based on his ethnic background and hertiage.

Here is a video of Mr. Tang (in Chinese) with a nice slideshow of all the investors (replete with pictures of Warren Buffett and pictures of CNN and CNBC playing in the background) he allegedly ripped off: Chinese Warren Buffet Video Presentation

The SEC put out a guide to avoiding affinity schemes in 2006 which includes such helpful tips as "check out everything" and "be skeptical." Sounds like they are trying to sell something. Gee... thanks, is that everything or everything and anything. How can I possibly check everything? Thanks again, SEC.

DUE DILIGENCE KRYPTONITE

As a general rule, people in general (and hedge fund investors in particular it seems) often let their guard down when dealing with people like themselves. Unfortunately, it seems that this affinity is kryptonite to the red flag sensors which are supposed to go off during the due diligence process - and few if any hedge fund investors exposed to these affinity Ponzi schemes recognize too late the wolf in sheeps clothing. But can investors really practice such professional skepticism all the time?

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A Due Diligence Quagmire: Merkin's Day in Court

APRIL 6, 2009

Andrew Cuomo (New York's attorney general) and son of Mario Cuomo (former NY governor who is now on the Willkie Farr & Gallagher payroll) filed a complaint today charging J. Ezra Merkin (a Harvard Law School graduate) and his Gabriel Capital Corporation (the Ascot, Gabriel and Ariel funds) with civil fraud charges alleging, in part, that:

1) Merkin concealed his links to Madoff
2) Lied about where investor's money was actually going
3) Used company's funds for personal purchases (including approximately $91 million of artwork for his apartment at the famous 740 Park Avenue, New York, NY)
4) Collected more than $470 million in management and incentive fees
5) Was responsible for investor losses of approximately $2.4 billion



The statement from Cuomo's office can be read here and the full complaint can be read here.

The complaint's more interesting quote highlights include:

1) "J. Ezra Merkin betrayed hundreds of investors who entrusted him with their savings by recklessly feeding their funds into the largest Ponzi scheme in history,..."
2) "Merkin was just a 'glorified mailbox.'"
3) “Merkin admitted that his 'monitoring' of Ascot consisted of, at best, general conversations with Madoff approximately once per month"
4) “Merkin was 'at best a charlatan.'"

Mr. Merkin's lawyer (Dechert's Andrew Levander) claims that the suit is "hasty" and "without merit." Mr. Levander further elaborated that:
1) clients knew that money was going to Madoff
2) some of them even met with Madoff personally
3) Merkin analyzed Madoff's strategy before investing
4) “Contrary to Mr. Zuckerman’s allegations, Mr. Merkin performed extensive due diligence on Madoff and his trading strategy,” Levander said. “Unfortunately, Mr. Merkin’s due diligence, just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetrated by Madoff.”

Schulte Roth & Zabel represents the Ascot Partners fund.

Merkin reportedly lost millions of his own money in the Madoff fraud.

Adding to Mr. Merkin's woes was another suit filed by Mort Zukerman. Mr. Zukerman is the chairman of chairman of Boston Properties Inc. and publisher of the New York Daily News.



According to Bloomberg the case is CRT Investments Ltd. v. J. Ezra Merkin, 601052/2009, filed in New York State Supreme Court (Manhattan).

The Cuomo complaint raises a number of operational due diligence red flags:

1) Misstatements regarding the roles of Madoff:

Merkin misstated Madoff's role in offering memorandum for the Ascot funds. The offering memorandum suggested that Madoff was one of many prime brokers utilized when quite the opposite was in place.

In 2006, for example, approximately 98% of Ascot’s transactions were both effected and cleared by Madoff, and Madoff had custody of over 99% of Ascot’s purported securities holdings.

The role, diversity and independent oversight of third-parties is an essential element to proper operational due diligence. All of which were apparently missing in this case.

2) Lack of reporting transparency:
Ascot’s quarterly statements to investors disclosed only the value of each investor’s account and the purported appreciation during the prior quarter.

3) A smoke screen was created regarding the roles of traders:

If investors asked who carried out Ascot’s trading activity, Merkin would sometimes deceive them by explicitly indicating that he and his employees at the 450 Park Avenue office did so.

Merkin's traders however, were involved only in managing Ariel’s and Gabriel’s assets, not Ascot’s, and Ascot’s trading was almost entirely carried out by Madoff.

4) Unclear investment strategy:

Merkin at times concealed the fact that Ascot engaged in the “split strike conversion” strategy by misrepresenting Ascot’s investment strategy as well as its management.

5) Counterparty risk:
Merkin made false and misleading statements to investors to foster the impression that Ascot’s funds were held with a sound, creditworthy broker (Morgan Stanley) when in fact the majority of assets were held with Madoff.

6) Misstatements about the role of BDO (the Ascot fund's auditor):
The complaint alleges that Merkin told an investor that he required Ascot’s auditor, BDO Seidman LP, to visit Madoff’s offices two or three times a year to perform standard operational due diligence. This representation was false. BDO did not perform standard operational due diligence, or any other kind of examination, on Madoff’s operation, and Merkin had no reason to believe otherwise.

Interestingly, the complaint also claims that Mr. Merkin himself "failed to conduct adequate due diligence in the face of clear warning signals for fraud."

• I am curious how many investors picked up the phone and called Morgan Stanley, BDO or anyone else to check on the nature of Merkin's claims?

• Or a better question could be what kind of due diligence was being conducted by the financial advisors of the hundred of investors who most likely funneled their client's money to Merkin?

• With all of these red flags seemingly overlooked, how did so many get it so wrong?

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Corgentum Launches Consultancy to Provide Comprehensive Operational Due Diligence for Investors and Hedge Funds

APRIL 2, 2009

Jason Scharfman, author of Hedge Fund Operational Due Diligence:Understanding the Risks, John Wiley & Sons, Inc. 2008, today announced the launch of Corgentum Consulting, LLC, a full service hedge fund operational due diligence consulting firm. Corgentum's focus is on working with investors -- including fund of hedge funds, pensions, family offices and high-net worth individuals -- to perform comprehensive operational due diligence on hedge funds. In addition, Corgentum will work directly with hedge funds to strengthen their operational risk management processes.

Prior to launching Corgentum, Mr. Scharfman was a senior member of a team that oversaw all of Morgan Stanley's hedge fund operational due diligence efforts and which allocated in excess of $13 billion to a firm-wide platform of over 300 hedge fund managers, across multiple investment strategies. He also oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley.

"Investors today are focused on operational risk because of a series of high profile hedge fund failures, the majority of which have poor operational planning at their core," said Jason Scharfman, Managing Partner. "Recent market events have demonstrated the need for more comprehensive and frequent investor due diligence on a hedge fund's operational risks. Corgentum will help investors to meet the challenges of this new demand." Corgentum's mission is to ensure that investors have the knowledge and best possible tools to assess operational risk management. To this end, the firm utilizes proven proprietary methodologies and original operational risk research to diagnose and mitigate investors' operational risk exposures and improve upon the overall efficiency and effectiveness of their operational due diligence process.

The firm's unique approach leverages off of Corgentum's Resource Network, a team of senior industry practitioners with expertise in law, compliance, hedge fund auditing, fraud investigation and information technology. Corgentum will also work with hedge funds to prepare for operational due diligence reviews, perform operational efficiency analyses to reduce Operational Drag(SM), and to recommend long-term sustainable operational risk solutions.

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Corgentum Managing Partner, Jason Scharfman, Authors Timely Book 'Hedge Fund Operational Due Diligence: Understanding The Risks'

--Comprehensive Treatise is the 'Bible' for Assessing Essential Non-Investment Risks and Mandatory Reading for Investors and Hedge Funds

APRIL 2, 2009

Jason Scharfman, Managing Partner of operational due diligence consultancy Corgentum and former senior team member at Morgan Stanley's Graystone Research, has recently authored Hedge Fund Operational Due Diligence: Understanding the Risks, John Wiley & Sons, Inc. 300pp.

Corgentum has been thrust into the spotlight because of recent market turmoil caused by the financial crisis and the resulting impact on hedge funds and those who invest in them. "Operational risk--the loss resulting from inadequate or failed internal processes--is clearly in the forefront, most notably in the Madoff scandal," said Mr. Scharfman. "I wanted to write the book to help investors and hedge funds lessen the chance that anything like that should ever happen to them."

In the book's ten chapters, Scharfman identifies the operational risks inherent in running a hedge fund and provides a detailed guide to an operational due diligence program to diagnose, analyze and mitigate potential risks. He also examines modeling techniques for operational risk and discusses how to consider asset allocation based upon this important factor.

Scharfman defines a four-pronged approach necessary to conduct an effective hedge fund operational risk analysis which takes into account both internal and external risk factors. He also expounds upon five core themes in an operational risk analysis by which investors can significantly reduce any exposure they may have to fraud such as Ponzi schemes, and provides in-depth examples of situations in which operational risk should have been uncovered.

In later chapters Scharfman reviews the skills investors need to evaluate the background and reputation of a hedge fund, effective analysis techniques, and the necessity of conducting ongoing reviews. He also portrays possible scenarios presented to investors who conduct operational due diligence reviews.

The book's last chapter discusses the various quantitative approaches to modeling operational risk and provides a detailed review of the advantages and disadvantages of utilizing these models. Scharfman concludes by writing on the various trends facing the hedge fund industry including the impact of FAS157 and further regulation.

About Corgentum, LLC

Corgentum Consulting, LLC is a full service hedge fund operational due diligence consulting firm whose focus is on working with investors, including fund of hedge funds, pensions, family offices and high-net worth individuals, to perform comprehensive operational due diligence on hedge funds. Corgentum utilizes proven proprietary methodologies and original operational risk research to diagnose and mitigate operational risk exposures at hedge funds as well as improve upon the overall efficiency and effectiveness of the operational due diligence process. The firm's unique approach leverages off of Corgentum's Resource Network, a team of senior industry practitioners with expertise in law, compliance, hedge fund auditing, and fraud investigation and information technology. Corgentum will also work with hedge funds to prepare for operational due diligence reviews, perform operational efficiency analyses to reduce Operational Drag(SM), to recommend long-term sustainable operational risk solutions. Corgentum is headquartered at 20 Fleet St. in Jersey City, New Jersey, 07306. Phone 201-360-2430. The Web site is www.corgentum.com.

About Jason Scharfman

Jason A. Scharfman holds the position of Managing Partner of Corgentum. He is recognized as one of the world's leading experts in the field of hedge fund operational due diligence. Before he founded Corgentum, Scharfman oversaw the operational due diligence function for a $6 billion alternative investment allocation group called Graystone Research at Morgan Stanley. While at Morgan Stanley, Scharfman was also a senior member of a team that oversaw all of Morgan Stanley's hedge fund operational due diligence efforts allocating in excess of $13 billion to a firm-wide platform of over 300 hedge fund managers across multiple investment strategies. Prior to joining Morgan Stanley, he held positions that focused primarily on due diligence and risk management within the alternative investment sector at Lazard Asset Management, SPARX Investments and Research and Thomson Financial.

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Fairfield Greenwich Charged With Fraud in Madoff Case

APRIL 1, 2009

An administrative complaint was filed today by Massachusetts Secretary of the Commonwealth William F. Galvin.

In the complaint it is alleged that a "profound disparity between the due diligence that Fairfield represented to its investors that it would conduct with respect to Bernard L. Madoff Investment Securities and the due diligence it actually conducted."

Here are the links to the complaint as filed:

1) Fairfield Complain (part 1 of 2)

2) Fairfield Complaint (part 2 of 2)

The exhibits are located here.

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Madoff Pleads Guilty

MARCH 13, 2009

Bernard Madoff finally entered a guilty plea. Specifically, Madoff pled guilty to 11 different felony charges. Here is the list:

Count 1: Securities fraud. Maximum penalty: 20 years in prison; fine of the greatest of $5 million or twice the gross gain or loss from the offense; restitution.
Count 2: Investment adviser fraud. Maximum penalty: Five years in prison, fine and restitution.
Count 3: Mail fraud. Maximum penalty: 20 years in prison, fine and restitution.
Count 4: Wire fraud. Maximum penalty: 20 years in prison, fine and restitution.
Count 5: International money laundering, related to transfer of funds between New York-based brokerage operation and London trading desk. Maximum penalty: 20 years in prison, fine and restitution.
Count 6: International money laundering. Maximum penalty: 20 years in prison, fine and restitution.
Count 7: Money laundering. Maximum penalty: 10 years in prison, fine and restitution.
Count 8: False statements. Maximum penalth: Five years in prison, fine and restitution.
Count 9: Perjury. Maximum penalth: Five years in prison, fine and restitution.
Count 10: Making a false filing with the Securities and Exchange Commission. Maximum Penalty: 20 years in prison, fine and restitution.
Count 11: Theft from an employee benefit plan, for failing to invest pension fund assets on behalf of about 35 labor union pension plans. Maximum penalth: Five years in prison, fine and restitution.

Not included in this list was a conspiracy charge. This was reported to be the sticking point which blocked a plea deal with prosecutors. This means that Madoff is keeping mum about the potentional role of others in this fraud. None of Madoff's family members have been formally accused of any wrongdoing. The list of denials from attorneys representing people who worked with and are related to Madoff is long:

Madoff's wife (Ruth Madoff) - Hiring her own new attorney. (She is reported to have withdrawn $15.5 million before Bernie's arrest)
Madoff's sons (Mark and Andrew) - Claim they were not involved in the firm's asset management business according to their attorney Martin Flumenbaum
Madoff's CFO (Frank DiPascali, Jr.) - No comment from his lawyer Marc Mukasey (whose father US Attorney General Michael Mukasey has recused himself from the Madoff case)
Madoff's Auditor (David Friehling of Friehling & Horowitz, CPA's) - No comment from his lawyer Andrew Lankler
Madoff's Aide (Annette Bongiorno) - No comment

U.S. District Judge Denny Chin ordered that Madoff should be immediately jailed while awaiting sentencing which is scheduled for June 16. Madoff is now in the Metropolitan Correction Center in lower Manhattan. He faces up to 150 years in prison.
Madoff defense lawyer Ira Sorkin filed notice that he would appeal the jailing of Madoff prior to his sentencing. Incidentially, Mr. Sorkin's two sons had $900,000 invested with Madoff in a trust account set up by their grandfather.

"I never invested the funds in securties as promised," Madoff told Judge Chin at the heading. Madoff said he was "deeply sorry" and knew what he did was criminal. Madoff told Chin that in the early 1990s, when the U.S. was in a recession, he felt "compelled" to provide the returns he promised investors. He said when the Securities and Exchange Commission asked about it, he lied to the SEC.

The full Madoff plea is available here. Madoff's complete client list is available here or a searchable version of the client list is available here.

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The effect of the Madoff guilty plea on hedge fund operational due diligence

MARCH 10, 2009

Bernard Madoff is expected to enter a guilty plea tomorrow and faces up to 150 years in jail. In light of this Corgentum Consulting has released a new white paper which discuss the effects of the Madoff scandal on hedge fund operational due diligence from both the investor’s and hedge fund’s perspective. The paper is entitled, “The Madoff Identity: A New Operational Due Diligence Paradigm in a Post-Madoff World.” and is available here.

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