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Due Diligence duties of Asset Management companies - the Madoff funds example

March 2013

The Enforcement Committee of the French Financial Markets Authority has held a management company liable for having failed its due diligence process while investing in funds related to Bernard Madoff.

Autorité des Marchés Financiers, AMF v OFI Asset Management, 20 December 2012

On 20 December 2012, the Enforcement Committee (EC) of the Autorité des Marchés Financiers (AMF), the French Financial Markets Authority, handed down a decision in which an asset management company, named OFI Asset Management (OFI), was fined EUR 300,000 for having failed in its due diligence process while deciding to invest in various funds related to Bernard L. Madoff Investment Securities (BMIS), and while subsequently following up on these investments.

Decision to invest

The EC first considered whether the due diligence conducted by OFI while deciding to invest in the funds was sufficient to allow it to assess properly the features and risks of the funds.

The EC noted that OFI had not been able to contact executives from BMIS to obtain disclosure of specific information about BMIS nor was it granted access to their premises. Evidence showed that OFI tried to obtain information on BMIS but only after the investments were made and not directly from BMIS but through the fund contributor (apporteur d’affaire), Byron Funds. According to the EC, the latter failed to provide the information required and, more significantly, was not in the position to give impartial information anyway. The EC found that OFI should have looked for other sources of information and should have taken the lack of transparency and cooperation of BMIS into account when deciding to invest.

The EC also stressed that the documents prepared by OFI and handed to the AMF during the investigations did not contain enough information to show that it had fulfilled its due diligence duty. Examples of documents provided by OFI included two- and three-page documents containing figures but no detailed analysis of the funds’ features and risks. In particular, the initial due diligence report concluding that “my analysis of this fund is positive. I recommend to maintain our investments in this fund”, was too brief and could not be considered as appropriate. The EC concluded that OFI failed in its due diligence process when it invested in the funds.

Post-investment conduct

The EC found that OFI did not sufficiently monitor its investments. OFI had tried to rely on monthly reporting on the strategy and performance of these funds and frequent phone calls with the fund contributor, Byron Funds. The EC rejected the argument. It considered that the fund contributor is not the fund manager, which is the only reliable source of information on the strategy and performance of a fund.

The EC relied on general provisions such as Article L.533-1 of the French Monetary and Financial Code which provides that “the investment service providers shall act in an honest, fair and professional manner which is conducive to the integrity of the market” and Article 314-3 of the AMF General Regulation according to which “investment services providers shall act honestly, fairly and professionally, with due skill, care and diligence, in the best interests of clients and the integrity of the market”.


This ruling is in line with two previous decisions issued by the EC of the AMF, both on 20 October 2011 in which it found that asset management companies had failed to conduct thorough due diligence when investing in funds linked to Bernard Madoff.

As a consequence, due diligence duties appear to be widely construed under French law. Asset management companies should, therefore, be very careful and take the following steps to avoid liability for failure to comply with due diligence duties:

  • conduct very extensive due diligence not only on the characteristics of the assets concerned but also on fund managers;
  • conduct their own investigations in order to collect objective information;
  • collect information before making the decision to invest and also once the decision has been made; and
  • gather written records of the due diligence carried out.
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