A hedge fund services unit of Citigroup in Bermuda has become the latest in a line of third-party middle and back office service providers to be sued by the trustee liquidating Bernard Madoff’s firm to recoup collect funds for disgruntled investors.
The unit, called Citi Hedge Fund Services Ltd of Bermuda, was the fund administrator for the Kingate Global Fund Ltd. and Kingate Euro Fund, feeder funds that invested in Madoff's Ponzi scheme. Madoff is now serving a 150-year sentence in a federal prison after he plead guilty to fraud.
Instead of verifying Madoff’s valuations of Kingate's assets, Citi Hedge simply calculated the Kingate funds’ value using Madoff’s data, according to the lawsuit brought by trustee Irving Picard. Citi also relied on Madoff’s trade confirmations as accurate, he said.
Citi Hedge Fund Services was bought by Citi in 2007. In his suit filed in New York, Picard said that the Kingate funds and other parties should have known of the fraud and should be ordered to return $975 million they redeemed from the Ponzi scheme before Madoff’s scam unraveled. The Kingate funds are now being liquidated in the British Virgin Islands.
Pat Phillip-Bassett, a spokeswoman for the Bermuda Monetary Authority in Hamilton,Bermuda said that Citi Hedge Fund Services in Bermuda is registered the regulatory organization. All hedge fund administrators located in Bermuda must register with the BMA. Ireland also requires registration of hedge fund administrators.
Phillip-Bassett would not comment further on Bermuda's requirements for registered fund administrators or whether Citi Hedge Fund Services' decisions fell in line with Bermuda regulations.
Citi Hedge Fund Services in Bermuda referred calls to a spokeswoman for the parent bank in New York, who declined to comment. Citi is one of the world's largest hedge fund administrators performing middle and back-office recordkeeping and other operations work.
At the crux of the case against Citi Hedge Fund Services -- as is with other service providers- is just what level of responsibility Citi had a fund administrator or third party service provider to investigate Madoff, say legal experts. Picard has filed over 1,000 lawsuits to recover $90 million from banks and former Madoff investors who allegedly profited from his fraud. Among those are custodian banks HSBC, JP Morgan Chase and UniCredit, who Picard claims should have been savvy to Madoff's scam. The banks which are still fighting Picard counter that they weren't obligated to investigate Madoff's firm and doesn't have any right to sue them as a brokeage trustee.
Picard has recovered over $7 billion of the estimated $17 billion in principal lost in the Ponzi scheme since Madoff was arrested in 2008. However, most of that is not available for distribution. Picard and his law firm Baker & Hosteller have racked up more than $175 million in fees.