A letter dated December 22, 2008 and sent from Fairfield Sentry Limited to its investors recently surfaced here.  The fund, part of Fairfield Greenwich Group, had invested in excess of $7 billion in Bernard Madoff Securities, making it Madoff’s largest feeder fund investor.  In wake of the surrounding facts which have surfaced in the case, we have received a rough rewrite of that letter to investors which includes several suggested revisions.  It is provided below…

FAIRFIELD SENTRY LIMITED
Romasco Place, Wickhams Cay 1
Road Town, Tortola
British Virgin Islands, VG 1110
December 22, 2008

Dear Shareholder,

Suspension *Edit: Elimination of the Calculation of Net Asset Value
Reference is made to the extraordinary events of last week regarding Bernard L. Madoff Investments Securities LLC (“Madoff”). As you are most likely aware, on December 11, 2008 Bernard Madoff was arrested and charged with securities fraud for operating in essence a giant Ponzi scheme. It has been alleged that Madoff’s fraud involved a loss in both cash and securities of possibly US$50 billion.

As you will have read in the press, Fairfield Sentry Limited (the “Company”) was significantly exposed to *Edit: blindly dumped all of your money into Madoff.  At this point in time the value of the Company’s investment in Madoff is not certain *Edit: basically a pipe dream. There may be residual assets *Edit: presumably, proceeds from the sale of Ruth Madoff’s jewelry collection in Madoff to be distributed or, alternatively, there may be no assets *Edit: you’ve been totally had.

With the view to acting in the best interests of the Company and all of its shareholders and creditors *Edit: To save what little dignity we have left, the Board of Directors *Edit: Glorified “Yes” Men of the Company (the “Board” ) has suspended the calculation *Edit: fabrication of net asset value with a corresponding suspension of redemptions and subscriptions pursuant to Article 11(4) of the Articles of the Association of the Company, due to the fact that the Board determined that  (i) that circumstances exist as a result of which in their opinion it is not reasonably practicable for the Company to dispose of investments or that any such disposal would be materially prejudicial to shareholders, (ii) that a breakdown has occurred in the means normally employed in ascertaining the value of investments of the Company, (iii) that the value of the investments of the Company cannot reasonably or fairly be ascertained and (iv) that the Company is unable to repatriate funds required for the purpose of making payments due on redemption of shares *Edit: okay, we get it, blah, blah, blah, maybe ignorance does not equal bliss. As such, pursuant to the powers contained in the Articles of Association of the Company , the Board has suspended the determination of the net asset value. As a result of such suspension, all subscriptions into and redemptions from the Company have been suspended *Edit: good luck paying this month’s electric bill! With respect to redemption requests received for the November 30, 2008 dealing date, the payment of these proceeds of redemption have been similarly suspended pursuant to the powers contained in the Articles of Association of the Company *Edit: some document we just found out we have!

The Company has retained counsel in the British Virgin Islands *Edit: Retreat and the United States to represent its interests. These counsel will advise as to what action should be taken to ensure the Company’s interests in the remaining assets of Madoff are represented, to ensure an orderly running *Edit: potential winding down of the affairs of the Company and to ensure that all shareholders and creditors are treated equitably and fairly *Edit: you are all equally screwed. In this regard and as advised by counsel, we are not able to respond to requests for information *Edit: death threats, complaints, legal action by individual shareholders at this time. Rather, information will be provided to all shareholders to ensure that no one shareholder is at an advantage. We note that the manager to the Company, Fairfield Greenwich (Bermuda) Limited, has waived all fees until further notice *Edit: we emerge from hiding. We *Edit: CNBC will endeavour to keep you advised of developments with respect to the Company.

Yours faithfully *Edit: shamefully,

The Board of Directors

Tags: Bernard Madoff Securities, board of directors, British Virgin Islands, CNBC, Fairfield Greenwich Group, Fairfield Sentry, fund, Investors, madoff, Net Asset Value, Ponzi, Ruth Madoff, United States

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Global Money Trends-
Also threatening to undermine the green-shoots rally is the upward surge in the 30-year fixed mortgage loan rate to an average 5.42% in June, up from 4.78% in April, dealing a fresh blow to the housing market. The surge in mortgage rates surprised the Fed, since the central bank thought it could keep mortgage rates locked below 5%, by pledging to buy $1.1-trillion of mortgage bonds from April through the end of August.

The latest 1% jump in mortgage rates comes at a time when foreclosure filings in the US surpassed 300,000 for a third straight month in May and may hit a record 1.8-million by the first half of the year, RealtyTrac said.

Tags: honduran coup, madoff, mortgage rates, News that Moves Markets

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Penny Hersher tries to analyze hedge fund ethics and how they affect regulation over on Huffington Post. There are a a couple things wrong with the assumptions that she makes, but I’ll wanted to discuss something that is taken for granted in this post.

Penny assumes that the hedge fund has a high water mark and is down 20% from their HWM. The options she give are:

a) stay with the fund until you have recouped the losses and made your investors whole – working for “psychic income” as Kenneth Griffin of Citadel fame told the New York Times or
b) leave – retire, switch to a new fund, start a few fund – basically start again? If you had many years of excellent performance before this one terrible year you may well be able to raise another fund.

The third option that I’m putting forth (just for the record, it’s a BAD option so don’t try it at home):

c) Increase Risk. Your basic hedge fund strategy (which you’ve documented in your offering documents and pitched to your investors) is a conservative low-risk strategy. If you are down several months and you see that using this conservative strategy isn’t going to work, there is the temptation to increase your risk tolerance to get you back above your hwm.

Increasing risk is very tempting as it is a short term solution which could potentially get you out of a bad slump. The downside is that if the increased risk causes increased losses the manager is likely to raise the risk again and dig themselves deeper. The fact that there were so many Madoff feeder funds was exactly because of this. A fund was struggling through the economic downturn, so to balance the losses they invested in a vehicle which under regular circumstances they would not invest in.

So, why do I bring this obviously bad “solution” up? Simply to make the point that while high water marks sound like a good thing for the investor, they can have catastrophic side effects.

If you’re down 20% and have a fund with a HWM, close the fund, start a new fund without a high water mark and get back to business.

Tags: high water mark, huffington post, hwm, madoff, Not Categorized, Risk

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Here’s a list of madoff feeder funds, and the amount of money was reported lost

• Fairfield Sentry Ltd ($7.3 billion)(1)(2)
  
• Rye Select Broad Market Fund LP ($3.3 billion)(1)(2)
• Kingate Global Fund Ltd. ($2.8 billion)(1)(2)
• Herald USA Fund & Herald Luxemburg Fund ($2.1 billion)(1)(2)
  
• Ascot Partners L.P. ($1.8 billion)(1)
• Gabriel Partners ($1.5 billion)(1)
• LUXALPHA SICAV- American Selection (1.4billion) (1)
  
• M-Invest Ltd (as much as $700 million)(1)
  
• Fix Asset Management ($400 million) (1)
  

Tags: feeder funds, hedge fund fraud, madoff

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The Times broke a story which based on “Internal forecasts” the reported losses of investments made into Madoff funds by Credit Suisse clients could reach $925 million. This follows the admission that Swiss bank UBS lost $1.4 billion.

Credit Suisse are standing firm on their statement that they didn’t have anything to do with promoting or selling Madoff investments. While admitting that CS clients lost money, CS spokesman, Jan Vonder Muehll, states:

Credit Suisse did not actively sell stakes in Madoff funds to the bank’s clients and there were no Madoff funds on the Credit Suisse ‘recommended’ list. Also, no fund of hedge funds structured by Credit Suisse contained Madoff funds.

With this information, it’s unclear where the money was lost. Most people are pointing towards feeder funds, which where set up to extend the capacity for Madoff funds.

In other Madoff news:

• Madoff is rushing to get his accounts to the reciever by the 31st
• TPM is reporting that the Associated Press has calculated the total loss to be $30 billion, not $50 billion
• $10k statue stolen from Madoff’s lawn
• Judge states that investors will only get $100,000 back

Tags: credit suisse, fraud, madoff

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The big news today is that Thierrie de la Villehuchet, co-founder of Access International Advisors, and former Chairman and CEO Credit Lyonnais Securities USA was found dead in his Madison Avenue office.

Initial reports point to suicide. Not a lot of information is public right now but following are some bullet points.

• Access International Advisors website claims that they “Specializes in managing hedged and structured investment portfolios.”
• Access International Advisors announced on the 13th of December that it invested in Madoff
• Access’s LUXALPHA SICAV-American Selection invested solely with Madoff.
• AIA investors included units of Rothschild & several clients of UBS (source)
• LUXALPHA SICAV is marketed by UBS
• Thierrie de la Villehuchet investments were leveraged 150% (source)
• Final loss is estimated between 1.4 and 2 billion

Tags: fraud, madoff

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RCM Comment: Good news/bad news on the investment management front as it relates to the redemption/repatriation trade. Citadel’s decision to suspend redemptions until March will no doubt lead the way for others to do the same which should relieve some of the pressure on the markets. Of course, adhering to the cockroach theory (which states there is never only one) we now need to monitor the Madoff (pronounced Made Off, as in “he made off with the money”) story. What will be the ripple effect?

Citadel suspends redemptions from two hedge funds – Reuters.com

Reuters.com reports Citadel Investment Group said it has halted redemptions from its two largest funds until at least March. The suspension affects the Kensington and Wellington funds. The decision was “driven by continued volatility in the market,” Citadel spokeswoman Katie Spring told Reuters in an e-mail. The move was announced in a letter sent to investors on Friday by Citadel’s founder and president, Ken Griffin, and reported by Crain’s Chicago Business. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet,” Griffin wrote.

Losses in Madoff case spread – WSJ

WSJ reports investigators dug through financial records at Bernard Madoff’s investment co as the list of victims of his alleged Ponzi scheme widened to include real-estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, Sen. Frank Lautenberg and a charity of movie director Steven Spielberg. The scandal reverberated around the world, with banks including Spain’s Grupo Santander (STD) and France’s BNP Paribas saying that their clients and shareholders together face billions of euros of losses. Monday morning in Tokyo, Nomura Holdings (NMR) said its exposure to investments with Mr. Madoff totaled 27.5 billion yen ($302 million). A spokesman described the co’s potential losses as “limited.” At Mr. Madoff’s office in midtown Manhattan, guards have been positioned 24 hours a day. Investigators from the Federal Bureau of Investigation, Securities and Exchange Commission and the Financial Industry Regulatory Authority are trying to identify if any assets remain, a person familiar with the matter said. (According to a DJ story, other companies that have disclosed exposure to Madoff’s investment co include: RBS, AXA, BCS, UBS) RCM Comment: Is this a black eye for the hedge fund industry, or simply an example of investors not doing their due diligence? As the details are revealed we discover the following: 1) The Madoff fund was not registered with the SEC and there was a shocking dearth of information regarding the fund, 2) All the assets were held by Madoff, there was no custodian. This is a major red flag and one easy to identify, 3) The fund had no auditor!?!, 4)The investment strategy was shrouded in secrecy and investors were not allowed to know what the holdings were. Secrecy is a classic component of a Ponzi scheme.

So, I ask the investing public to cut the hedge fund industry some slack on this one and instead do a little introspection. Perhaps, the time has come for the investors in the Madoff fund to do the difficult and honorable thing and take responsibility for their own actions. For more on my thoughts of this novel idea, please see this Rosenthal Rant.

RCM Comment: Only a week ago we observed that politicians never overestimate the size of a spending package. Well, that observation is proved out by the following story. If the Obama administration continues to spend at this licentious rate I will be forced, as a precious metals advocate, to bumper sticker my car proclaiming Obama support.

Meatier stimulus plan in works – WSJ

The Wall Street Journal reports Obama’s economic team is considering an economic-stimulus program that will be far larger than the two-year, half-trln-dollar plan under consideration two weeks ago, according to people familiar with the team’s thinking. The president-elect is expected to be briefed on the broad parameters of the plan next week, with aides still hoping for Congress to pass a bill by the time Mr. Obama takes office Jan. 20. With the unemployment rate now expected to hit 9% without aggressive intervention, Obama aides and advisers have set $600 bln over two years as “a very low-end estimate,” one person familiar with the matter said. The final number is expected to be significantly higher, possibly between $700 bln and $1 trln over two years. Transition spokeswoman Stephanie Cutter denied any decisions have been made on the scope of the plan. “Any speculation on size or scope is premature at this time,” she said.

Bush administration is weighing a much larger rescue effort for U.S. automakers than originally envisioned – WSJ
WSJ reports in weighing a much larger rescue effort for U.S. automakers than originally envisioned, the Bush administration faces a complex set of decisions over what terms to seek ” including whether to push the companies to file for bankruptcy ” and how to raise necessary funds. The administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more. One possible source of funding is the Treasury Department’s $700 billion fund set up to rescue the financial industry. Only about $15 billion remains uncommitted from the first tranche of $350 billion, so the Bush administration could be forced to request the second half to cover the car companies’ needs, people familiar with the situation said. That likely would compel the administration to outline its plans for a range of other needs, including mortgage-foreclosure prevention for struggling homeowners and possibly aid for state and local governments. That could spark another confrontation with lawmakers, who are increasingly divided over industry bailouts” On Sunday, a person familiar with the situation said the companies’ collective needs could range from $10 billion to more than $30 billion. The administration spent the weekend poring over the automakers’ books to assess their financial needs. This person said the decision-making could stretch out for several more days.

RCM Comment: The last two weeks have been marked by the dexterous ability of the market to overcome bad news. We know the earnings of the big investment banks will be poor; the question will be how the markets react.

MS Morgan Stanley expected to ring up loss of about $1 bln – NY Post (13.85 )

NY Post reports Morgan Stanley (MS) is expected to ring up losses of about $1 bln when it reports its fiscal fourth-quarter earnings Wednesday. Continued fretfulness in the stock market magnified by the latest $50 bln scandal with New York money manager Bernard Madoff, and a seizing up in credit markets, has found Morgan CEO John Mack slammed. Morgan is said to have been particularly hard hit this quarter in areas including emerging markets and interest rates as the mortgage-inspired flu that infected the US spread to other countries. Goldman Sachs (GS) Chief Executive Lloyd Blankfein this week also is expected to see his marquee franchise whacked by a roughly $2-3 bln loss.

RCM Comment: Now here is news that actually moves markets. You won’t hear about this on CNBC, they would rather debate the auto bailout ad nauseam, which will not help you the investor make money. The prevailing wisdom of the financial news media tells us that deflation is upon us and commodity prices will head lower. However, read the following story carefully and you will see the nascent commodity rally may have legs.

Shipping charter rates soar – Financial Times

Financial Times reports one of the world’s key shipping markets has begun to recover from a slump, with a revival in Chinese demand for iron ore and coal pushing some average charter prices up almost threefold in the past week. The revival in prices, after a disastrous six months for the industry in which charter rates fell nearly 99% for the largest vessels, could encourage shipowners to bring mothballed vessels back into service. One participant said 12/13 that some owners were able to charge enough to cover the costs of operating Capesize ships, the largest dry bulk carriers. Average rates for these ships, which move coal and iron ore, have nearly tripled over the past week. However, smaller ships have yet to show the same recovery as Capesize vessels. Average spot rates, or the cost of carrying a single cargo immediately, finished the week at $8,261 a day for Capesizes, according to figures from Pareto Dry Cargo, an Oslo shipbroker. The previous week’s average was $2,763, one of the lowest yet seen. Pareto reported a long-term charter of a Capesize ship at $17,500 a day for a year, more than the daily basic operating costs of such a ship. Long-term charter rates are, unusually, higher than those in the spot market because of expectations that the spot market will recover.

Tags: auto rescue, bush, citadel, madoff, MS & GS EPS, obama, Shipping rates, stimulus plan

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