The scale of the fraud was extraordinary. Madoff conned thousands of clients including seasoned investors, friends, charities and religious groups who gave him money that fueled fake super-sized returns, believing he ran $65 billion. It ended with him being sentenced to 150 years in jail, he and his wife attempting suicide and his son killing himself. Madoff died last year in prison at the age of 82.
Rehman’s Madoff-linked ordeal began with the purchase in 2014 of claims tied to a Guernsey-based fund called FIM Long-Invest. Started in 1997, FIM was a so-called fund-of-funds that collected money from investors and allocated the capital to several funds for diversified exposure. It had tens of millions of dollars invested in Kingate Global, which was tied to Bernard L Madoff Investment Securities, the Ponzi scheme that collapsed in December 2008.
In March 2010, FIM announced it would wind up, and appointed liquidators to sell the assets and distribute the cash generated among investors. Rehman, who bought some of those claims from FIM investors wanting out, is still waiting for that cash. Last year, he and at least one another investor, took matters into their own hands and sought the resignations of Anthony Sanderson and Paul Pybus, joint liquidators from Price Bailey Ltd.
“We appear to be trapped as shareholders in a voluntary liquidation,” they wrote in their complaint to the Guernsey Financial Services Commission, a copy of which was reviewed by Bloomberg. “The joint liquidators have awarded service contracts to one of their personal companies at an amount that represents poor value for money. Transfer rules, EGM notice periods, EGM requirements have all been interpreted and manipulated at the will of the joint liquidators to suit their personal interests and elongate the liquidation.”
Pybus and Sanderson resigned in April. They did not respond to several emails requesting comments, and neither did Price Bailey. Rehman confirmed the contents of the complaint. A spokeswoman for the Guernsey regulator declined to comment on the complaint, citing “strict confidentiality obligations.”
Even after the resignations of the joint liquidators, Rehman’s recovery depends on the outcome of Kingate’s liquidation, which itself has been running for 14 years.
“I am a patient and passive investor and this was a last resort given the dreadful treatment of shareholders and the serious concerns I have on how the liquidation has been conducted for many years,” Rehman said. “Although the liquidators have resigned, the questions we posed in February 2021 remain unanswered and are still cause for serious concern.”
Most side-pockets are less complicated than the one Rehman is grappling with. The investment vehicles emerged from the depth of the financial crisis in 2008 after hedge funds got trapped in an avalanche of illiquid assets. Investors estimate that $200 billion to $360 billion were side-pocketed in 2008 — or as much as 20% of the industry then. While the vast majority of those side-pockets have been unwound, some complex liquidations remain, trapping billions of dollars.
Hedge funds have grown since then to manage more than $4 trillion and a repeat of 2008-like event would lock about $800 billion. To top that, more and more yield-hungry investors have migrated to bet on illiquid and private market assets amid historically low interest rates, creating a potential blind spot should funds start to face withdrawals as global markets and economies tank.
“Should we enter into a cycle of redemptions and liquidations, we may start to see more side-pockets and hard-to-value assets emerging from portfolios,” said Nicolas Roth, head of alternative assets at Geneva-based private bank Reyl & Cie, who has helped clients deal in side-pockets. They “can be the expression of some excesses in the system and deviation from mandates from managers.”
The niche sector of side-pockets has exploded over the years, with dozens of firms drawn to it by its rich pickings. Rehman is among the sector’s most-influential players.