Fund that helped Madoff draws fraud charges

— -- A major feeder fund for convicted Ponzi scheme architect Bernard Madoff was charged with fraud Wednesday for allegedly misrepresenting its lack of knowledge about the disgraced financier's operations.

The case, the first government charges targeting one of the many funds that funneled investors' money to Madoff, was filed against the Fairfield Greenwich Group by Massachusetts Secretary of State William Galvin's office.

COURT PDFs:Complaint against Fairfield Greenwich Group, Part 1 | Part 2

The charges came as federal authorities in Florida seized Madoff's Palm Beach mansion, his 55-foot yacht "Bull" and a smaller boat as part of an effort to recover assets to repay swindled investors, the Associated Press reported.

Fairfield's Sentry funds invested and lost roughly $7.2 billion of investors' assets with the former Nasdaq chairman, who pleaded guilty last month to operating a massive scam that victimized celebrities, charities and average investors worldwide.

The complaint cited an alleged "profound disparity" between the due diligence Fairfield told investors it conducted on Madoff's operations and the minimal checking it actually performed.

"We allege that as time went on, they even worked with Madoff and helped conceal what he was really doing," said Galvin.

Seth Faison, a Fairfield spokesman, called the allegations "false and misleading" and said the company "conducted vigorous and robust monitoring on an ongoing basis of the Madoff investments."

"Unfortunately, Massachusetts has leapt to erroneous conclusions without completing its investigation and without even granting a meeting with Fairfield Greenwich Group in an attempt to arrive at an accurate understanding of the facts," said the firm, which stressed that it would contest the charges.

Despite its 18-year business tie with Madoff, Fairfield has insisted it had no way of knowing that he did none of the complex securities trades he promoted to thousands of clients, and that he used money from new investors to pay earlier ones, a typical Ponzi scheme.

But the complaint charged the lack of knowledge stemmed from Fairfield's failure to perform "basic checks," such as demanding the names of Madoff's purported trading counterparties and confirming that he actually bought and sold options. The complaint also charged that the firm:

•Reassured clients who raised questions about Madoff, even though Fairfield officials privately had similar concerns. On Aug. 19, 2008, Amit Vijayvergiya, the company's chief risk officer, wrote an internal email that said "unfortunately, there are certain aspects of (Madoff's) operations that remain unclear."

•Allowed Madoff to coach Vijayvergiya and Mark McKeefrey, Fairfield's chief operating officer, about how to answer Securities and Exchange Commission questions during a 2005 investigation of his operation. An audiotape transcript of the session shows Madoff warned, "this conversation never took place …OK?" He then recommended answers "that perpetuated the false impression" he was not illegally acting as an unregistered investment adviser.

•Helped set up and promote newly formed Madoff funds to investors in late 2008, when he struggled to meet massive redemption requests that ultimately caused his scam to collapse. Ironically, in the hours before Madoff's Dec. 11 arrest, Vijayvergiya sent an e-mail that touted Fairfield's due diligence supervision of the financier's business.

"These facts raise the question as to whether Fairfield was, in fact, acting as a fiduciary on behalf of its clients, or whether it was essentially acting as an external marketing arm of Madoff investments," charged the complaint, which said the company's actions amounted to fraud.

Victor Stewart, a New York attorney representing Madoff investors in a class-action lawsuit against Fairfield, said the charges "comport with what we've been saying all along … that the Fairfield Greenwich executives did no due diligence at all."

Galvin is seeking restitution on behalf of what Fairfield said were the firm's three Madoff investors in Massachusetts, plus a fine and disgorgement of performance fees and other payments to the company for the Madoff-related investments.

According to the complaint, one Fairfield official estimated the firm earned more than $100 million from those fees in each of the last four years. But the complaint charged that Fairfield executives collected millions more.