Madoff feeder fund settles with Massachusetts

— -- One of the largest feeder funds for Ponzi scheme architect Bernard Madoff agreed Tuesday to an $8 million settlement that's expected to repay in full a small group of Massachusetts clients who lost money in the massive scam.

Without admitting or denying wrongdoing, the Fairfield Greenwich Group also agreed to a $500,000 fine for the cost of the probe that led to fraud charges in April by Massachusetts Secretary of State William Galvin.

The settlement, in which the state dropped the original case, represents the first investor relief obtained by a regulator in the Madoff scandal. The case involved charges that Fairfield failed to conduct the rigorous oversight it promised clients it would exercise over the now-imprisoned money manager.

Although the settlement covers what Fairfield said was fewer than a dozen Massachusetts residents, Galvin said it could set a precedent for other legal actions against the firm. Fairfield faces a class-action investor lawsuit and a case filed by the trustee seeking Madoff's assets — actions that seek billions of dollars for burned investors.

"We think the settlement sets the standard for all investors in secondary feeder funds with Madoff," said Galvin.

Fairfield said in a statement it agreed to the resolution to "avoid drawn-out hearings and significant legal bills" and enable the firm to "focus its time and resources on other legal claims involving many more investors."

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

Galvin's office had accused the Connecticut-based firm of falsely reassuring clients about the firm's oversight of Madoff even as the company placed nearly all of its Sentry Funds assets, approximately $7.2 billion in all, with Madoff.

Fairfield had argued it had no way of knowing Madoff did none of the securities trades he promised. Instead, he confessed in March to using money from new investors to pay earlier ones. He's now serving a 150-year prison term.

But Galvin's office, noting that Fairfield had an 18-year business relationship with Madoff, accused the firm of failing to perform basic checks that could have prevented clients from losing money in a scam that operated for decades, victimizing thousands of charities, celebrities, financial funds and average investors.

Those checks included obtaining the names of Madoff's purported trading counterparties and confirming that the financier actually bought and sold options. The Massachusetts complaint also charged that Fairfield officials allowed Madoff to coach them on answers for a 2005 Securities and Exchange Commission investigation of his business.