Conspicuously absent from the ever-growing list of Madoff victims (so far, knock on wood) have been large, institutional investors such as pension funds and universities. Fortune reports today that this is no accident, as big institutions are typically required to stick to strict rules “rather than allowing their managers to invest on personal connections or hunches.”
James Hedges IV of LJH Global Investments told Fortune that “[t]here’s no Duke Endowment [among the list of Madoff investors],” Hedges says. “There’s no Harvard management, there’s no Yale, there’s no Penn, there’s no Weyerhauser, no State of Texas or Virginia Retirement system.” This is because letting Madoff manage your money “wouldn’t pass an institutional-quality due diligence process,” he says. “Because when you get to page two of your 30-page due diligence questionnaire, you’ve already tripped eight alarms and said ‘I’m out of here.’ ”
In short, in Hedges’ opinion, any sophisticated entity that actually did its homework would have seen the warning signs.
Hedges recounts an interesting visit with Madoff in 1997, when he was advising the Bessemer Trust. He says that during their two hour meeting, “there was one red flag after another” and that he couldn’t grasp Madoff’s investing strategy. Red flags included that Madoff was charging no fees other than trading commissions (“too good to be true”) and that Madoff’s operation was audited by a “microscopic” accounting firm. “He was also so secretive about his asset base — that was another red flag.” Bessemer decided not to let Madoff manage any of its money.
Hedge’s conclusions are consistent with those of a team from Société Générale’s investment bank that was sent to New York to perform some routine due diligence on Madoff in early 2003. The International Herald Tribune reports that after performing due diligence, Société Générale concluded Madoff’s numbers simply did not add up, and
immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.”
The red flags at Madoff’s firm were so obvious, said one banker with direct knowledge of the case, that Société Générale “didn’t hesitate. It was very strange.”