“Over the past few years, Fairfield was successful selling in Europe, thanks to the ability of Mr. Noel’s sons-in-law to tap wealthy individuals and banks there. Andres Piedrahita, who married Mr. Noel’s eldest daughter, was particularly skilled at weaving a social network in Madrid and London, those who know the fund say.
In a presentation about 18 months ago, Mr. Piedrahita pitched a Madoff-related fund to a wealthy London individual investor, according to David Giampaolo, chief executive of Pi Capital, a money-management firm, who was invited by the investor to sit in on the presentation. Mr. Piedrahita stressed the fund’s years of steady and attractive performance. “The thing I remember hearing that I liked was the longevity and the consistency” of returns, Mr. Giampaolo said.
But he says the presentation was thin on details about the investment strategy. When pressed to articulate how the fund generated the performance, Mr. Giampaolo said, “There was no deep scientific or intellectual response.” The wealthy individual didn’t invest. A spokesman said Mr. Piedrahita wasn’t available for comment.
Still, banks on two continents offered investors souped-up versions of the Fairfield Sentry fund, designed for funds-of-funds clients and wealthy private-bank clients clamoring for consistent investment returns and access to Mr. Madoff. These products were backed by loans from banks including Banco Bilbao Vizcaya Argentaria SA and Nomura Holdings Inc., according to documents reviewed by The Wall Street Journal. These banks loaned money designed to amplify the gains of the Sentry funds. Nomura on Monday said its exposure to Mr. Madoff was about 27.5 billion yen, or about $304 million. A Nomura spokesman Thursday declined to comment further….”
Comment:
The WSJ is reporting that Walter Noel’s Fairfield Group, which actually had a former SEC officer on board, was the channel through which the Madoff fund was sold to a range of foreign investors looking for steady positive returns. Fairfield charged stiffly – 20% of the return plus 1% in fees – for what they claimed was their technical skill in analyzing/supervising the investments. In practice, they simply turned the fund over to Madoff.
The SEC official, Tucker, was at the Commission from 1970-1978. He left and went on to co-found Fairfield Group with Walter Noel, to whom he introduced Madoff in 1989. The firm was apparently a family-run outfit, like Madoff’s, in this case, with 4 sons-in-law of Noel (and Tucker) in charge.
Apparently, investigations in 2006 found no proof of fraud, but determined that Fairfield hadn’t properly disclosed its connection to Madoff.
The Times (UK) is reporting that Mary Schapiro, Barack Obama’s choice to head the SEC, picked one of Madoff’s sons, Mark, to serve on the board of the very division (the National Adjudicatory Council) that reviews disciplinary actions by the Financial Industry Regulatory Authority (FINRA), of which she is the current chief executive. (my emphasis)
And this:
” At the time of Mark Madoff’s appointment, Ms Schapiro was serving as president of the National Association of Securities Dealers (NASD), according to the Wall Street Journal, which was consolidated with the New York Stock Exchange Member Regulation in 2007 to form Finra. ”
The whole business is so peculiar and so irregular it boggles the mind that no one caught on. (Actually, someone did and sent tips to the SEC, which was why it looked at Madoff in 2006).
It’s clear where the problem lies:
Consolidation, Centralization, and Corruption
The three go together. The people who want to control and corrupt the process are usually the people pushing for consolidation and centralization. Without that, with local authorities, with inefficiencies between different markets, different regulatory environments, its hard to make changes, fiddle with books or do anything on a grand scale. The greater the degree of centralization, the more power in any one spot, the more the potential for that spot to be taken over by a cabal.