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Madoff Feeder Fund Settles with Massachusetts

The largest Madoff feeder fund has agreed to a settlement with the Massachusetts Secretary of State, who told CNBC he hopes it becomes a model for future agreements with Madoff-related funds.

Massachusetts Secretary of State William Galvin had filed an administrative complaint against Fairfield Greenwich Group in April, charging "flagrant and recurring misrepresentations to investors" about the firm's relationships with Madoff.

Under the agreement, reached on the eve of a Wednesday hearing in the case, Fairfield Greenwich neither admits nor denies guilt. The firm will pay what Galvin calls "full restitution, including interest" to the handful of Massachusetts residents that invested with the firm.

The settlement totals around $8 million dollars — including approximately $6 million in restitution, $1.5 million in interest, and a $500,000 fine, according to sources close to the case. It is a far cry from the total Madoff losses at Fairfield Greenwich — more than $7 billion.

But Galvin says the precedent is what counts. "We hope this will become a template," Galvin told CNBC in a telephone interview, adding that what he called the "total return of assets" to investors is significant. Under the agreement, Galvin dropped a charge of fraud contained in the original complaint.

Last month, Galvin rejected a settlement offer from the firm saying it did not go far enough and was premature. Just like in the deal the two sides ultimately agreed to, the firm offered full restitution to Massachusetts investors, including investors identified later. The settlement is similar to the offer Galvin rejected, but the inclusion of interest in the final amount is new, and, says Galvin, significant.

Fairfield Greenwich said it agreed to the settlement in order to focus on other claims. "Fairfield Greenwich’s goal was to resolve the Massachusetts action in order to avoid drawn-out hearings and significant legal bills, so that the firm could focus its time and resources on other legal claims involving many more investors," it said in a the statement.

Among others, Madoff bankruptcy Trustee Irving Picard has sued Fairfield Greenwich for $3.54 billion.

"Fairfield Greenwich is already in discussions that seek to settle these other claims," the statement said.