How Madoff's Feeder Funds Stole My Retirement

In our family's case, after decades of investing, and politely asking at cocktail parties how the arbitrage formula worked, and being politely rebuffed, it was made very clear by Chais that he was managing things — or his "New York people" were, "his brokers." Yeah, we bought it; he was getting older, in his 80s, and we all felt he had perfected the formula, whatever that was, and that "his people" were well trained.

Last June, Chais even wrote his investors a letter saying he was ill and should he get worse his son, Mark, who lives in Israel, would take over the investment business, which by my estimates handled between $500 million and $1 billion. Some were smart enough to pull out then, others, like my wife and I, continued to trust. If we pulled out, where would we put the money? In the caving stock market? In sinking real estate? In the bank? This seemed like a much safer bet, a bet that returned for over 30 years.

Though it would have been a good time to do so, the letter, the first real direct communication (other than quarterly account statements) we ever received from Chais, did not mention Madoff but just that "the relevant brokers" had been notified, as if there were others besides Madoff — which there were not, as we all learned six months later. It certainly didn't mention that Chais was just pretending to be the great Wizard of Wall Street. He did, however, make it clear that anyone was "free to withdraw part or all of their money" at quarterly withdrawal dates, which was a nice, reassuring touch. Giving more comfort, Chais rather breezily wrote that everything would be fine, that his son, a lawyer by training and manager of a venture-capital fund, was one of "the most thoughtful and honorable men" he knew. I can only suppose he included Madoff in that group, too.

This was as deep as the fiduciary responsibility had to go since, after all, he was in charge of the trades, right? That's what we thought. Let's face it: had this new name, Madoff, been mentioned at this time it was quite likely everyone in Chais' many funds would have yanked their money fast, or a good chunk of it, and where would that have left his 25% cut?

Of course, we know now there was no actual work going on, either by Chais' New York people (i.e. Madoff), or by himself, except collecting money and distributing money, much like Madoff and Fairfield Greenwich, and all the other feeder funds. Chais' lawyer, Eugene Licker of Loeb & Loeb, was unavailable for comment. Ezra Merkin's lawyer, Andrew Levander of Dechert LLP, was also not available for comment.

As Galvin said yesterday in his complaint against Fairfield, these fund managers "misrepresented to clients the work they did" and "turned a blind eye" while "leaving their clients in the breach."

As investigators begin to dig deeper into this next level of Madoff's crime, let's hope our eyes now stay wide open.

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