Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 407

Revealed: Madoff so close to embezzling Australian investors

  •   Anon
  •   12 May 2021
  • 4

Editor's note: Firstlinks has never published an article anonymously before, but while we cannot reveal the source of this piece, it is known to us and we consider it impeccable.

In debating whether to publish, we felt encouraged by the decision by Peter Singer and colleagues as reported in The Conversation:

"Philosophers Peter SingerJeff McMahan, and Francesca Minerva have announced a new academic outlet, the Journal of Controversial Ideas, as an “open access, peer-reviewed, interdisciplinary journal specifically created to promote free inquiry on controversial topics,” it will give authors the option to publish their work under a pseudonym “in order to protect themselves from threats to their careers or physical safety.”"

In the same spirit, confident in the source, we are publishing this informative piece without implicating anyone.


In 2007 Bernie Madoff’s fraudulent hedge fund came perilously close to being distributed by a major Australian wealth manager. Sensible minds (just) prevailed and the distribution deal was aborted. A year later the largest hedge fund fraud of all time, a US$65 billion Ponzi scheme, was exposed.

This article, which for obvious reasons must remain anonymous, is a reminder that financial institutions, just like retail investors, are vulnerable to fraud. Financial institutions have their own set of agency issues and behavioural biases which need to be managed.

Distribution of the funds of external managers

In the finance industry, distribution is king. The logic is that it doesn’t matter how good your product is, if it doesn’t sell, it's not worth having. Even if you argue that money will eventually find its way to quality investment products, there is a shorter-term imperative that demands businesses maximise their short-term return on equity.

Look at the CEOs of most wealth managers. Many come from a distribution rather than a specialist background such as investments. This is not a bad outcome by any measure: an all-round suite of skills is required for a CEO to succeed and a successful grounding in distribution provides many of those skills.

It is common for wealth managers to distribute externally managed funds. This practice has existed for decades and can take many forms. A simple contractual arrangement is known as a third-party distribution arrangement while a more integrated relationship could be described as a partnership model. Another model is the white label approach, commonly used for global sectors, whereby a wealth manager outsources the asset management of their own branded product to an external manager.

Third-party distribution decisions bring different payoff profiles to wealth managers compared with the outcomes realised by retail or institutional investors. Performance will impact the asset-raising prospects for the wealth manager while directly impacting performance outcomes for end investors. Non-success of a third-party distribution arrangement represents an opportunity cost more than any significant financial cost.

Fiduciary responsibility and fraud ... enter Madoff

It is only in the case of a fraud that both wealth managers and investors experience extreme pain. For wealth managers, their brand may be irreparably damaged and there is an issue of compensation. For investors, there is a performance write-off and reputational damage if the investor is an institution, such as a super fund.

There are many agency issues and behavioural biases which exist in wealth management. The agency issue centres on the degree to which staff view themselves as fiduciaries or renters of the company’s brand and scale. Some of the behavioural biases include confirmation bias (tendency to ignore contrary information to their view), herd mentality (blindly follow and copy others), and a framing bias (where the narrative may distract from the facts).

So how does Bernie Madoff come into this story?

One of many tactics used by Madoff was to allow other firms to distribute his hedge fund through select third-party relationships. This added further credibility to his name: investors take comfort from the assumed due diligence undertaken by the distributor.

A major Australian wealth manager came perilously close to entering a distribution arrangement with a respected US-based third-party distributor. The major attraction: access to Madoff’s hedge fund which had enviable performance, a legendary reputation and limited capacity, some of which this distributor had exclusively reserved.

What a coup to be able to partner with this group! It could really make someone’s career.

The business case was straightforward: exclusive access to a legendary hedge fund and an attractive distribution fee.

How to garner business case support?

Here's where big institution politics came into play. At the time there was an unofficial ideological power struggle between distribution and investments. The business case was selectively shared with ‘friendlies’ before being distributed to the broad executive group. There was significant momentum behind the business case by the time key questions were asked regarding the investment integrity of the underlying investment managers.

One investment executive engaged an independent consultant to provide an initial investment opinion on the suite of funds offered by the US third party distributor, including Madoff’s.

Madoff never cooperated with the due diligence processes of any investor but he had many established strategies to attract clients, including:

  • access to exclusive IP (intellectual property) which couldn’t be shared
  • his previous career successes, where Madoff had been heavily involved in broking and software
  • connections and implicit endorsement from the sheer weight of investors and capital invested in the fund, and
  • exclusive distribution rights, as others were ready to take your spot.

The consultant report raised concerns that something didn’t feel right, but without full due diligence access it would have been near impossible to claim that such a large and famous hedge fund manager was a fraud.

A fine balance tilted the right way

The decision was finely balanced, but it was decided to not proceed. I’ll never know to what degree the decision was political or objective. All I can say is that I am forever glad the right decision was made and that Madoff’s Ponzi scheme never managed to defraud Australian investors.

What’s fascinating is that no one did anything wrong. It is healthy for employees to propose new business ideas. The processes worked, and the agency issues and behavioural biases were managed.



This article is published anonymously but from an exemplary source as a warning that even when dealing with the biggest names in the industry for what looks like a sure profit, great care and due diligence are required. 


Sulieman Ravell
May 16, 2021

I seem to recall that one of the fund of hedge funds distributed in Australia already had exposure to Madoff but was only 1-2% of the overall exposure

Patrick Bennett
May 13, 2021

Not a happy ending for those who lost money with Madoff, but an amusing read none the less.
Institutions managing other people's money should decide whether they are primarily investment businesses or distribution businesses. In my experience, not much good ever came out of allowing the marketing people to have a say in what investments should be offered to clients. Too little understanding of risk and too much lure of bonuses based on sales. Memories of Challenger High Yield, Basis Capital, BT's TMT Fund, various agri-schemes, Macquarie's Geared REIT fund, CDOs, etc. leap to mind. All had big red flags and all were sold with great enthusiasm by naive distribution teams. When senior management is stacked towards distribution, as is usually the case because they are perceived as being the revenue generators, risk is down played and that is when things do not end well.

Graham Hand
May 13, 2021

Please note that some comments are coming in speculating who was behind this, and since they are guesses with some indiscriminate and unrelated remarks, we are not publishing them.

Warren Bird
May 13, 2021

Well, the existing process at the time might have 'worked', but hopefully that organisation learned to add a requirement from then on. If the principal of the fund being investigated would not co-operate with due diligence, then that should be an automatic 'no go'.

I remember exiting an investment that we acquired as part of the several take-overs by Colonial First State back in 1998. It was held in one of the portfolios we now had management of. We didn't quite understand what was backing the security, so we approached the issuer to enquire about the due diligence they'd done on the pool of assets. "Due diligence, we didn't need to do DD on that, they were put together by someone reputable" was the response (or close to that - it was 23 years ago).

We sold out immediately and that security defaulted with little capital return a few months later. Phew, but testament to the importance of DD at every point.


Leave a Comment:



No easy way to make money


Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.