Madoff’s \"Dull\" Returns, Investigation Didn’t Alarm Notz Stucki

Date: Thursday, January 29, 2009
Author: Warren Giles, Bloomberg

Notz, Stucki & Cie., a Swiss money manager, probed and later dismissed concerns about Bernard Madoff investments, which offered “dull but steady” returns.

“Certainly some people raised concerns,” the Geneva-based firm wrote of Madoff in a Dec. 20 letter to investors obtained by Bloomberg News. “We were aware of these and investigated them. All our enquiries led us to believe that he was operating a legitimate, profitable business.”

Notz Stucki told clients the loss faced on the investments is $737 million, “assuming a complete loss of all assets managed by Madoff.” The firm’s due diligence included visits to Madoff’s offices, regular meetings with Madoff himself and research with auditors, custodians, lawyers, administrators and counterparties. “No evidence to suggest improper practice was ever found,” the letter said.

Founded in 1964, Notz Stucki specializes in funds of hedge funds and has one of the “most effective networks of contacts in the industry,” according to a Standard & Poor’s report dated June 2007. Geneva-based Union Bancaire Privee and Banque Benedict Hentsch & Cie. also disclosed client losses linked to Madoff, who told authorities he ran a $50 billion Ponzi scheme, prosecutors said.

Notz Stucki declined to comment. The money manager invested with Madoff through Plaza Investments International Ltd. and two feeder funds, according to the letter. It also had a 7.6 percent exposure to Plaza through DGC Pendulum Ltd. and its feeder funds. Notz Stucki managed both Plaza and DGC Pendulum.

‘Highest Standing’

Madoff’s annual returns over the past five years ranged from 8.5 percent to 11.7 percent, and included “several months” of negative results, the letter said. While the “split-strike” strategy Madoff purported to use would have produced returns of about 5 percent annually, Notz Stucki was led to believe that the results were boosted by proprietary models predicting short-term market movements and sophisticated execution systems, the firm said in the letter.

“Rather than being too good to be true it was ‘dull but steady,’” the money manager wrote.

The Swiss firm said that Madoff, a former chairman of the Nasdaq Stock Market, had the “highest standing in the financial world and the wider community.” The fact that Madoff’s business was regulated by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority was also viewed as a positive, the investor letter said.

Madoff, 70, was arrested on Dec. 11 and charged with using billions of dollars from new investors to pay off older ones.

Seeking Redress

Notz Stucki said in the letter that it was in discussions with lawyers and planned to pursue “all possible avenues” that might lead to a recovery of assets or other redress.

Notz Stucki employs more than 90 staff and has “several billion Swiss francs” under management, according to its Web site. The company has six partners, including Christian Stucki, who co-founded the money manager with Beat Notz, and has offices in cities including Zurich, London, Luxembourg, Bermuda, Montreal, Mumbai, New York and Singapore.

Notz Stucki’s business is “to cherry pick individual talent” in fund management, and the firm’s partners “invest their personal assets alongside their clients, participating in the same risks and returns,” according to the Web site.

UBP, the world’s largest investor in hedge funds, had about $700 million in investments linked to Madoff, the money manager said last month. Benedict Hentsch had 56 million francs ($49 million) at risk.

Santander Offer

Banco Santander SA’s Optimal Investment Services hedge fund unit, also in Geneva, had 2.3 billion euros ($3 billion) with Madoff. Santander, based in the Spanish city of the same name, said Jan. 27 it will offer $1.38 billion to clients who lost money with Madoff and close seven funds run by Optimal.

Manuel Echeverria resigned as chief investment officer of Optimal last year and joined Notz Stucki. In an e-mail, Echeverria declined to comment.

UBP said in letter to clients last month that Madoff’s investment strategy “was not supposed to generate outsized returns” and that it relied on Madoff’s reputation as a regulated dealer and broker as well as regular audits.

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net