Massachusetts regulator sues Madoff feeder fund

By Svea Herbst-Bayliss

BOSTON (Reuters) - Massachusetts' securities regulators sued Fairfield Greenwich Group, a major "feeder fund" for Bernard Madoff's Ponzi scheme, accusing the hedge fund of lying to investors and not exercising enough diligence over investments that were worth billions of dollars.

The most damning accusations in the civil charges filed on Wednesday by Massachusetts Secretary of State William Galvin may be that Madoff prepared executives at Fairfield Greenwich in 2005 on how to answer federal securities regulators' questions about him after a whistle-blower told officials he suspected Madoff was running a fraud.

"Obviously, first of all, this conversation never took place, Mark, OK?", Madoff told Fairfield Greenwich General Counsel Mark McKeefrey and Chief Risk Officer Amit Vijayvergiya, according to a transcript Galvin included in his complaint.

At one point on the call Madoff tells them: "I mean, the idea is that it's, is that we're not the one that's making the decision how much to, I mean, you know, you know, we're not the one that's operating the fraud."

"When someone begins a conversation by saying these words, that is slang for saying I am about to ask you to help me deceive someone. That at the very least should have put them on notice," Galvin said in an interview.

The civil charges against Fairfield Greenwich mark the first action against one of Madoff's so-called "feeder funds".

It is the first time the public has been given an indication of how Madoff, in his own words, interacted with the hedge funds that poured billions into the scheme.

"This turns the page to a new chapter in the Madoff matter, and if there is any hope of getting any return for Madoff victims, we have to look at the entities that brought people to him," Galvin said.

Fairfield Greenwich once managed $14 billion.

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Galvin accused Fairfield Greenwich executives of turning a blind eye to the fraud and abandoning their fiduciary responsibility to investors because the company earned hundreds of millions of dollars in fees through its relationship with Madoff.

The complaint said Fairfield Greenwich had not carefully evaluated Madoff's investment model, did not visit Madoff often and had not questioned how a one-man accounting firm, Friehling & Horowitz, could handle all of Madoff's assets.

It said that Fairfield principals "matter-of-factly discussed amongst themselves the risk that Madoff would 'blow up,' but did not disclose that risk to investors."

Fairfield Greenwich pumped $14.8 million into Madoff's business only days before the former Nasdaq stock market chairman was arrested last December.

Madoff, 70, pleaded guilty on March 12 to orchestrating the biggest investment fraud in Wall Street's history, and David Friehling, his accountant, has been charged in connection with the case.