Bermuda’s Madoff connection

  • Feeder fund: Kingate’s signage as it was formerly displayed in Front Street

    Feeder fund: Kingate’s signage as it was formerly displayed in Front Street

  • Named as a defendant: Citi Hedge Fund Services Ltd's offices in Hemisphere House in Church Street

    Named as a defendant: Citi Hedge Fund Services Ltd's offices in Hemisphere House in Church Street

  • Bernard Madoff: Kingate’s funds were invested with the swindler’s fraudulent brokerage

    Bernard Madoff: Kingate’s funds were invested with the swindler’s fraudulent brokerage

Bermuda-based Kingate Management Ltd had just three employees purportedly running an operation that fed $1.7 billion to con man Bernard Madoff’s company in New York and racked up hundreds of millions of dollars in fees.

More light has been shed on Kingate’s activities on the Island and its role in the biggest Ponzi scheme in history in court documents filed in the US Bankruptcy Court for the Southern District of New York last month.

Irving Picard, the trustee of Madoff’s former company, who is seeking to recover funds for swindled investors, is suing Kingate Management, as well as the Kingate Global and Kingate Euro Funds and others.

Both Kingate funds, which were incorporated in the British Virgin Islands (BVI), are in liquidation. The liquidators have filed several actions in Bermuda, including one against HSBC Bank Bermuda Ltd, seeking the release of money held in the Kingate funds’ accounts.

In his third amended complaint, Mr Picard has alleged that Kingate and its founders, the London-based businessmen Federico Ceretti and Carlo Grosso and their company FIM Ltd, failed to carry out basic due diligence on its investments with Madoff and purposely ignored huge “red flags”, including unfeasibly consistent returns from Bernard L Madoff Investment Securities Ltd (BLMIS) and statistically impossible trading volumes.

Last week it emerged that Citi Hedge Fund Services Ltd, based in Hemisphere House, on Church Street, Hamilton, which is also named as a defendant in Mr Picard’s complaint, was served with a summons on June 17 this year.

Citi Hedge was the administrator of the Kingate funds and the complaint accuses the unit of not performing “any meaningful, substantive or reasonable due diligence on the Kingate Funds or BLMIS’ operations, its returns, or the basis for its consistency”.

Italian nationals Mr Ceretti and Mr Grosso set up Kingate Management on the Island in 1994 to manage the Kingate funds, whose investor funds all served to feed Madoff’s operation in New York.

The court documents state that at least $87 million was transferred from Kingate Management into a string of trusts and shell companies, based in the British Virgin Islands and Liberia in Africa, from 2001 onward. Mr Ceretti was the ultimate beneficiary of these companies, including El Prela Trust, Port of Hercules Trustees Ltd and Alpine Trustees Ltd, the documents add.

The complaint gives Mr Picard’s version of how the connection between Madoff and Bermuda came about. In the early 1990s, it states, Mr Ceretti and Mr Grosso were introduced to Madoff by Sandra Manzke, a hedge fund manager then affiliated with Tremont (Bermuda) Ltd, a significant player in feeding primarily US-based capital into BLMIS.

The Italian duo then established Kingate Global in 1994 to act as a BLMIS feeder fund and to target primarily European investors. The Kingate Euro fund was established as a separate euro-denominated entity in 2000.

Kingate Global was managed by Tremont and Kingate Management, while Ms Manzke became vice-president of Kingate Global. Kingate Management had only three employees who were “unclear about the scope of the duties”, states the court document.

“Neither Kingate Management nor Tremont ‘managed’ anything about the Kingate Funds,” the complaint adds. “Rather, Kingate Management and Tremont began taking fees for feeding hundreds of millions of dollars of other people’s money into BLMIS through the Kingate Funds.”

Both Tremont and Kingate Management profited handsomely from their arrangement. The complaint states that Mr Ceretti and Mr Grosso received one percent of the assets they introduced to the Kingate funds, while Tremont would receive 0.5 percent on the same assets. When Tremont introduced assets to the fund the fees were reversed, with one percent going to Tremont and 0.5 percent to Kingate Management.

Kingate Management’s contract with the Kingate funds specified that it was to be paid 1.5 percent of the Kingate funds’ net asset value annually, a fee that was calculated and paid on a monthly basis, according to the complaint, which adds that the fees were based on an asset value that “did not exist”, referring to the phoney accounts at BLMIS. In 2007, for example, Kingate Management was paid $38 million by Kingate Global and more than nine million euros by Kingate Euro.

Although Kingate Management received the bulk of the fees from the funds, it played a minimal role in managing the funds, while Mr Ceretti and Mr Grosso enlisted FIM to perform the work of a typical fund manager, Mr Picard’s complaint claims.

In Bermuda, FIM’s offices adjoined those of Kingate Management on Front Street.

“Critically, however, Ceretti and Grosso prevented FIM from undertaking genuine due diligence on BLMIS or the Kingate funds,” the document adds. “In place of such diligence, Ceretti and Grosso ‘vouched’ for Madoff.”

The document describes how the Italian pair had “strong personal relationships” with Madoff. Mr Grosso held meetings with him in London and New York about twice a year, and they spoke frequently by phone. “Ceretti and Grosso frequently met with Madoff for dinners in London, accompanied by their wives,” the complaint states.

The administrator of the Kingate funds from inception in 2002 was Bermuda-based Hemisphere, which was acquired by BYSIS Group in 2003.

BYSIS was in turn acquired by Citigroup in 2007, after which the administrator was named Citi Hedge.

The complaint claims that Citi Hedge failed to take industry-standard steps to calculate the net asset value of the Kingate funds; failed to independently confirm and verify pricing information provided by Madoff and failed to relay accurate information to investors.

“Citi Hedge failed to verify the prices provided by Madoff in at least 185 separate instances where the prices were not possible based on market prices,” the complaint states. “In all instances, the information necessary for Citi Hedge to verify the prices of the securities held by Madoff, consisting of S&P 100 stocks, was readily available through private financial services, such as Bloomberg, as well as on the Internet. Citi Hedge either did not verify Madoff’s reported prices or ignored the inconsistencies with market prices.”

The complaint adds that Citi Hedge, for its administration services, received almost $4.18 million from Kingate Global and 0.93 million euros from Kingate Euro.

“These payments were based on the illusory NAV of the Kingate funds, as calculated by Citi Hedge itself,” the court document adds.

Citigroup did not respond to a request for comment by press time yesterday.

Kingate was not regulated by the Bermuda Monetary Authority. Under the Investment Funds Act 2006, some fund managers can apply for exemptions, when the fund is open to “qualified persons”. The criteria for qualified persons include being a “sophisticated” investor, deemed to have enough experience of business and the financial markets to fully understand investment risks. The list also includes “high-income” individuals, whose annual income exceeds $200,000, or their and their spouse’s income combined is more than $300,000, and “high net worth” individuals, whose net worth exceeds $1 million.

Hedge funds elsewhere in the world have been allowed similar exemptions from regulation. But since the financial crisis, they have come under greater scrutiny.

Asked whether any changes were being considered to fund regulation in light of Kingate’s role in the Madoff fraud, a BMA spokeswoman said last night: “As part of the Authority’s continual review of Bermuda’s regulatory frameworks, last year we concluded work with industry to review the framework for investment funds.

“This resulted in a number of amendments to the Investment Funds Act 2006 to enhance regulation in this area, which were introduced by the end of the year. One of these amendments included enhanced disclosure requirements for funds to ensure greater transparency as regards all service providers for funds.

“The review process started in 2008 and involved extensive consultation with industry. The changes we have made ensure that Bermuda’s regulations maintain consistency with relevant international standards, while remaining risk-based and appropriate for the Bermuda market.”

The BMA has also worked with other fund jurisdictions to produce a statement of best practice for the regulation of hedge funds, reflecting the standards of the International Organisation of Securities Commissions (IOSCO).

Madoff is in prison serving a 150-year sentence in the US after admitting to running a giant Ponzi scheme which enabled him to steal approximately $20 billion from investors in his fraudulent brokerage.

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