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Firm Built on Madoff Ties Faces Tough Questions

Since Bernard L. Madoff was arrested 11 days ago in connection with a $50 billion Ponzi scheme, the Fairfield Greenwich Group has portrayed itself as an unwitting victim of the fraud, the biggest of Mr. Madoff’s many losers.

Clients of Fairfield, a secretive hedge fund advisory company based in Connecticut, lost $7.3 billion to Mr. Madoff’s fund. But for Fairfield, working with Mr. Madoff was hugely profitable.

Internal documents from Fairfield show that the firm has taken more than $500 million in fees since 2003 alone from the money it placed with Mr. Madoff. Nearly all those fees went to a handful of Fairfield executives, including Walter M. Noel, Fairfield’s founder, who used the money to build a glamorous life, splitting his time between homes in New York, Connecticut, Florida and the Caribbean.

As it raised money all over the world, Fairfield also made detailed pledges about how it would monitor and track Mr. Madoff’s investments, the documents show. Now, investors and regulators are sure to ask whether Fairfield made good on those promises — or whether it was a facilitator of the Madoff scandal as well as a victim.

Similar questions may arise for the dozens of banks and hedge funds around the world that reaped extraordinary fees for steering investments to Mr. Madoff over the last decade. None of them, however, earned more from their Madoff business than Fairfield did during the firms’ 20-year relationship.

Fairfield promised its investors that money could not be moved from its accounts with Bernard L. Madoff Investment Securities without two signatures. It said that it would independently calculate the value of the funds it invested at Mr. Madoff’s firm at least once a week. It promised to reconcile statements from individual trades with Mr. Madoff’s custodial records.

It is not clear what Fairfield did to make good on those pledges.

A spokesman for Fairfield, Thomas Mulligan, offered only a statement characterizing the firm as a victim of Mr. Madoff.

“Fairfield Greenwich Group is in the process of gathering and reviewing all of the factual information relevant to its having been defrauded by Bernard Madoff,” Mr. Mulligan said in a written statement. “It made efforts to verify the information it received from Madoff. Following its review, Fairfield Greenwich expects to be in a position to provide more specifics.”

Mr. Mulligan also said that Fairfield Greenwich, and its partners, had about $60 million invested with Mr. Madoff.

That sum, while significant, is less than 1 percent of the overall amount that the firm placed with Mr. Madoff, and barely 10 percent of the fees that Fairfield reaped since 2003 from its client investments with Mr. Madoff.

Fairfield raised money for Mr. Madoff mainly through a fund called Fairfield Sentry, which supposedly had $7 billion in assets by 2007. As it sought new investors for Fairfield Sentry, Fairfield highlighted its close control over the fund and the protections it would provide investors.

In a “due diligence questionnaire” made available to potential investors in Sentry, Fairfield promised that it calculated the value of Sentry’s assets weekly and monthly. It also said Citco Fund Services, an independent hedge fund administrator based in the Netherlands, separately calculated the value of Sentry’s assets each month.

Further, Fairfield promised that both it and Citco double-checked the monthly statements from Mr. Madoff’s firm it received against records of the assets held in the fund. To prevent unauthorized stock trades or the unauthorized removal of cash from Sentry’s accounts, “the movement of cash among the Fund’s accounts requires two signatures,” Sentry said.

Mr. Mulligan did not respond to questions about whether Mr. Madoff could have moved money or securities out of Fairfield Sentry’s accounts without its approval. Reached Friday afternoon, a manager at Citco Fund Services in Amsterdam asked for questions via e-mail, then did not respond to them.

“They were just incredibly squishy and vague"

Another document, this one prepared in 2007 as Fairfield Greenwich considered selling itself in what at the time was a very rich market for hedge-fund advisory companies, shows just how much money it made from its relationship with Mr. Madoff.

According to the document, Fairfield generated $250 million in revenue and $200 million in profit for the year that ended Sep. 30, 2007. Nearly 65 percent of that money came from fees on Sentry, and nearly all the profits were distributed among the firm’s 21 partners. Fairfield’s employees were also lavishly compensated, with at least four receiving more than $5 million in pay.

In early 2008, several private equity and investment firms were approached by Fairfield about purchasing a share of the company. A partner of one that considered buying a stake that he estimated was between one-third and one-half of Fairfield — the firm was valuing itself somewhere between $1 billion and $1.5 billion — said that he was scared off about 20 minutes into his initial meeting with a team of Fairfield managers.

“They were just incredibly squishy and vague even during the warm-up,” said the prospective buyer, who spoke on condition of anonymity because of a non-disclosure agreement with Fairfield. “I asked them to tell me about the manager of the fund Sentry feeds into, and I was told, ‘We don’t really talk about him.’ ”

Like Mr. Madoff’s firm, Fairfield was at least in part a family business. Four of Mr. Noel’s sons-in-law worked at Fairfield. But unlike Mr. Madoff, Fairfield’s partners, led by Mr. Noel, were not shy about spending their money and taking a high profile in wealthy New York society circles.

“The last few years, they really made a play to be a part of that New York-Southampton social axis,” David Patrick Columbia, the editor of NewYorkSocialDiary.com, said of Mr. Noel and his family. “It happened so fast that you really noticed them.”

Mr. Noel, whose primary residence and office remain in Greenwich, has at least five luxury homes. Along with his Greenwich house, whose value has been estimated at $4.2 million, he has homes in Southampton and Palm Beach. And since 2000, the Noels have also maintained a pied-à-terre at 812 Park Avenue. The combined value of those homes is more than $20 million.

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