Fairfield Greenwich Rejects Fraud Allegations

The largest "feeder fund" to Bernard Madoff's fraudulent investment scheme rejected on Wednesday allegations by Massachusetts regulators who say it misled investors in its knowledge of Madoff's business.

Connecticut-based Fairfield Greenwich Group, whose Sentry funds lost $7.2 billion to Madoff, said the fraud allegations were "so filled with errors and factual distortions as to completely misstate the conduct" of the firm.

The hedge fund manager called the Massachusetts lawsuit filed on April 1 by Massachusetts Secretary of State William Galvin "grossly unfair" and said its diligence and risk management practices were consistent with representations to Sentry's investors.

The Massachusetts lawsuit marked the first charges against one of Madoff's so-called "feeder funds" after Madoff pleaded guilty on March 12 to orchestrating Wall Street's biggest-ever investment fraud.

Sentry's offering memoranda made clear Madoff held substantially all of the funds' assets, and Galvin's civil complaint relied on theories of "guilt by association" and "fraud by hindsight", Fairfield said.

Galvin accused Fairfield of failing to question how Madoff generated strong and steady returns over decades even when the market was down. It seeks to have Fairfield return the fees investors paid and the money they invested, and pay an administrative fine.

Madoff, 71, a former chairman of the Nasdaq stock market, was arrested on Dec. 11 and pleaded guilty on March 12 to charges accusing him of perpetrating a fraud worth as much $65 billion over 20 years. He is in jail pending sentencing.

Fairfield said consistent returns and low volatility from Madoff were expected given his supposed trading strategy, known as a "split strike conversion", along with Madoff's other supposed strategies including investments in Treasury bills.

Galvin's complaint said Madoff coached Fairfield executives, who once managed about $14 billion, on how to respond to questions from the Securities and Exchange Commissions in 2005.

According to a transcript of a phone conversation between Madoff and two Fairfield executives, Madoff said: "Obviously, first of all, this conversation never took place."

Fairfield said allegations its executives took "instructions" from Madoff and "tailored" answers to the SEC were "demonstrably false."

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A spokesman for Galvin was not available to comment.  In its response to Galvin, Fairfield said it had no reason to believe Madoff operated a Ponzi scheme, which uses money from new investors to pay distributions and redemptions to existing investors.

Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, honored more than $3 billion in redemption requests from its Sentry funds between 1990 and 2008, Fairfield said.

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