A hedge fund services unit of Citigroup in Bermuda has become the latest in a line of third-party middle- and back-office service providers to be sued by the trustee liquidating Bernard Madoff's firm to recoup collect funds for disgruntled investors.
The unit, called Citi Hedge Fund Services Ltd. of Bermuda, was the fund administrator for the Kingate Global Fund Ltd. and Kingate Euro Fund, feeder funds that invested in Madoff's Ponzi scheme. Madoff is now serving a 150-year sentence in a federal prison after he plead guilty to fraud.
Instead of verifying Madoff's valuations of Kingate's assets, Citi Hedge simply calculated the Kingate funds' value using Madoff's data, according to the lawsuit brought by trustee Irving Picard. Citi also relied on Madoff's trade confirmations as accurate, he said. Citi acquired Citi Hedge Fund Services in 2007.
In his suit filed in New York, Picard said that the Kingate funds and other parties should have known of the fraud and should be ordered to return $975 million they redeemed from the Ponzi scheme before Madoff's scam unraveled. The Kingate funds are now being liquidated in the British Virgin Islands.
Pat Phillip-Bassett, a spokeswoman for the Bermuda Monetary Authority in Hamilton, Bermuda said that Citi Hedge Fund Services is registered with the regulatory organization. All hedge fund administrators located in Bermuda must register with the BMA. Ireland also requires registration of hedge fund administrators.
Phillip-Bassett would not comment further on Bermuda's requirements for registered fund administrators or whether Citi Hedge Fund Services' decisions fell in line with Bermuda regulations.
Citi Hedge Fund Services referred calls to a spokeswoman for the parent bank in New York, who declined to comment. Citi is one of the world's largest hedge fund administrators performing middle- and back-office recordkeeping and other operations work.
At the crux of the case against Citi Hedge Fund Services is just what level of responsibility Citi had as a fund administrator or third-party service provider to investigate Madoff, say legal experts. Picard has filed more than 1,000 lawsuits to recover $90 million from banks and former Madoff investors who allegedly profited from his fraud. Among those are custodian banks HSBC, JP Morgan Chase and UniCredit, who Picard claims should have been savvy to Madoff's scam. The banks, which are still fighting Picard, counter that they weren't obligated to investigate Madoff's firm and should not be sued as brokeage trustees.
Picard has recovered over $7 billion of the estimated $17 billion in principal lost in the Ponzi scheme since Madoff was arrested in 2008. However, most of that is not available for distribution. Picard and his law firm, Baker & Hosteller, have racked up more than $175 million in fees. MME
Following an announcement from the Financial Industry Regulatory Authority in January that it ordered Charles Schwab & Company,Inc. to pay $18 million to repay investors in its YieldPlus Fund after investment losses, a FINRA Arbitrator has awarded damages, attorneyâ€™s fees and other costs to a couple invested in the fund.
The coupleâ€™s lawyer, Mark A. Tepper, filed the claim against Schwab in which he alleged the firm, â€œtrained its registered representatives to sell YieldPlus, to claimants and others, as â€˜a smart alternative for your cash.â€™ However, unlike cash and money funds, YieldPlusâ€™ portfolio held large positions in securities which exposed the portfolio to substantial risk.â€
The claim alleged that Schwab told its clients to hold onto their YieldPlus shares even with the discount brokerage firm itself was liquidating its own YieldPlus shares from other mutual funds, as well as its funds operated for the benefit of Schwab senior management.
YieldPlus, an ultra short-term bond fund managed by Schwabâ€™s affiliate, Charles Schwab Investment Management, posted substantial losses in 2007 and 2008 because more than half its portfolio holdings were in mortgage-backed and assetbacked securities, the claim said.
FINRAâ€™s investigation found that despite severe losses in Schwabâ€™s YieldPlusâ€™ portfolio, the firm failed to change its marketing of the fund. â€œIn written materials and in conversations with customers, some Schwab representatives omitted or provided incomplete or inaccurate material information relating to the fundâ€™s characteristics, risk and diversification, and continued to represent Yield- Plus as a relatively low-risk alternative to money market funds and other cash alternative investments that had minimal fluctuations in net asset value,â€ FINRA noted.
Between Sept. 1, 2006 and Feb. 29, 2008 Schwab sold over $13.75 billion in shares of YieldPlus to customers, which accounted for approximately 98% of the amount Schwab customers invested in ultra shortterm bond funds, FINRA added. During this time, Schwabâ€™s solicited sales of YieldPlus totaled approximately $3.36 billion, approximately 40% of which were to customers 65 years of age or older. Schwab collected approximately $17.5 million in fees from sales of the fund.