Feeder funds that acted as middlemen between investors and Madoff

Swiss banker Werner Wolfer, the memory of his first encounter with one of Bernard Madoff's emissaries nine years ago is as clear as the waters of Lake Geneva.
To hear Patrick Littaye talk, the Wall Street money manager could walk on those waters. "It was like a religion," Wolfer says of the promise of steady returns, which would be echoed by other acolytes. "These people firmly believed in the story."
Littaye was co-founder of New York-based Access International Advisors, one of more than a dozen feeder funds that acted as middlemen between investors and Madoff. Wolfer visited Littaye at his office near the Champs Elysees in Paris in 2000, after becoming chief investment officer at Banque Marcuard Cook in Geneva, to learn more about how Madoff made his money.Banque Marcuard, a private bank catering to the wealthy and now part of Swiss lender St. Galler Kantonalbank, had invested about $50 million of its clients' money directly with Madoff in the mid-1990s on Littaye's recommendation.

Banque Marcuard made money with Madoff along with its clients. They paid fees based on the profits Madoff reported, which averaged 11 a year. There was never a losing year, regardless of whether markets went up or down. The proof was in the trading statements sent to clients every month.

"It all looked so good," says Wolfer, who has a master's degree in economics from the University of St. Gallen.The truth turned out to be something else — and far more complex than a criminal masterminding a $50 billion Ponzi scheme that bilked investors from Palm Beach to Paris, as Madoff allegedly confessed to doing Dec. 11.If the 70-year-old money manager was running a con, then his marketers like Access International, wittingly or not, were part of the scam.The purported mission of such feeder funds was to vet hedge funds for wealthy clients. Instead, the line between victim and perpetrator was blurred. Middlemen like Littaye funneled billions of dollars to Madoff, even when they suspected he was engaged in questionable trading practices. In return, they reaped hundreds of millions of dollars in client fees.Wolfer says he heard of traders trying to replicate the split-strike conversion strategy Madoff told investors he used — buying shares of large U.S. companies and entering into options contracts to limit the risk — and getting far lower returns. He also says he heard Littaye and other middlemen talk about how Madoff may have used the knowledge he gained from his market-making firm, New York-based Bernard L. Madoff Investment Securities, to get in and out of stocks ahead of market swings.That's front-running, a term usually applied to brokers' trading for their own account — and profit — ahead of clients.It's also applicable to Madoff's purported practice, says Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor."Front-running isn't who's getting the benefit; it's who's paying the price," says Henning, noting that Madoff's market-making customers expected the firm to obtain the best price available when buying or selling stocks. Instead, their interests were apparently subordinated to those of Madoff's investment clients.While front-running is illegal, it didn't horrify Madoff's champions."They were convinced that the risk was only that the Securities and Exchange Commission would do something about breaches of the Chinese wall in the Madoff organization," Wolfer says. In the worst case, he says, "What could be expected was that at a certain point the SEC could say stop."Wolfer, who says he doesn't speak for his former employer, now manages a fund of funds at Geneva-based Banque SCS Alliance, which invested in another Madoff feeder fund, Fairfield Sentry. He says he handled the risk that Madoff might be front-running by sharing this suspicion with clients who put money into the fund."With every year passing, the worries were a little bit less," Wolfer says.Other money managers made similar winks and nods about Madoff's advantage, according to people who were pitched the funds. One Swiss bank, Geneva-based Union Bancaire Privee, which had $700 million invested with Madoff, told clients in a Dec. 17, 2008, letter that "in essence, the perceived edge was Madoff's ability to gather and process market-order-flow information to time the implementation of the split-strike option strategy."A spokesman for Union Bancaire Privee says it didn't believe Madoff was engaged in any fraudulent activity. Littaye, who now runs Access by himself and has not been charged with any wrongdoing, says he lost his own savings. His fund had more than $2 billion invested in Madoff.