Quotes of the Day

Let's not kid ourselves. Bernard Madoff built his $65 billion Ponzi empire at least half on the backs of his feeder funds, like the one charged this week, Fairfield Greenwich Group, with a civil complaint by William F. Galvin, Massachusetts Secretary of State.

Fairfield, Madoff's largest feeder, with some $7 billion invested in his mad world, was run by socialite Walter Noel. But there were dozens of others run by a variety of unregistered funds and characters, including the Ascot Partners fund, run by Ezra Merkin, and on the West Coast, the Brighton Co., run by Stanley Chais, one of three he ran. (See pictures of the demise of Bernie Madoff.)

Through this entanglement of feeder funds, international hedge funds, sub-partnerships and pension funds, with thousands of unsuspecting investors, Madoff was able to keep his house of cards standing much longer than he otherwise could have with his ragtag band of family members, small-time accountants and clerks furiously cranking out false statements.

Galvin alleges in his complaint that Fairfield had "complete disregard of its fiduciary duties to its investors" and made "flagrant and recurring misrepresentations to its investors to the level of fraud." A Fairfield spokesperson said the complaint was false and misleading.

There were a couple of factors at play with Madoff feeder funds. The first: the giddily enormous fees for the feeders.

Having been a victim myself, through Madoff's West Coast feeder stalwart Chais, I know firsthand all about the high fees: 25% of income earned. Chais isn't talking, but that adds up to real money, enough to create, in his case, a foundation, the Chais Family Foundation, purportedly worth $175 million before Madoff's arrest on Dec. 11, 2008. The foundation is now kaput, as is Chais' financial sub-empire and as is, for that matter, my retirement. Chais has several lawsuits pending against him, including one by Eric Roth, the Hollywood screenwriter.

Anyone investing with Chais, Merkin and Noel probably never heard of Bernard Madoff. Why? Simple: the money.

Remember, we, the investors, didn't know we were in feeder funds. We were in funds, be it pension funds or partnerships, that pooled monies to be invested in a primary investment fund that was managed by people we trusted, smart people that really had an angle on beating the market. Or so we thought. Had we known our life savings were being shunted over to another party that actually did the real work, we may have invested elsewhere. After all, why would we pay such piggy fees to people that did nothing?

Had our trustworthy fund managers had the fiduciary decency to tell us that Bernard L. Madoff Investment Securities LLC was controlling our fates we may have had a shot at changing things: we could have done our own research — the research our fund managers were supposed to be doing for us, right? But, of course, they didn't. Why? The money. It was just too good to let us, the simple-minded investors, foolish enough to think this was all on the up and up, know too much, to raise concern, to cause trouble with perfectly legal, unregistered, multibillion-dollar funds that worked hard to stay under government radar. Legally, they didn't have to say a thing to us.

Hence, the cone of secrecy was pulled down tight from day one.

This is the second factor, what you might call the other big lie — the one Galvin is getting at — of the Madoff Ponzi scheme: the feeders and Madoff conspiring together to keep basic due-diligence issues from clients, even as Madoff lied to his own feeder-fund generals, even as he lied to government regulators. Everyone turned a blind eye, everyone was in bed on this, including down the line the hapless investor who trusted all those years.

See more about Bernie Madoff.

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.

See TIME's pictures of the week.

See 25 people to blame for the financial crisis.

• Robert Chew
• With Bernard Madoff now behind bars, the legal spotlight moves to his feeder-fund managers, the very wealthy guys who took our money