Recent scrutiny of Madoff “feeder” funds is raising the due diligence and disclosure sensitivities of investment funds that place money with other investment managers, even where the ultimate investment manager has no connection to Madoff.

Much of this scrutiny has come from state and federal authorities. For example, the largest feeder fund to Madoff, Fairfield Greenwich Group, has been sued by Massachusetts regulators. The complaint alleges that Fairfield Greenwich Group failed to perform the level of due diligence that it promised to its customers, while ignoring red flags and collecting large fees. In another recent suit, the New York Attorney General filed a civil fraud action against J. Ezra Merkin in connection with investments his Ariel Fund made with Madoff. Like the Massachusetts suit, New York’s suit alleges that Merkin failed to disclose that investors’ money was going to Madoff and ignored irregularities and other red flags concerning Madoff’s investments. Additionally, the SEC and at least one U.S. Attorney are reportedly investigating Madoff feeder funds to determine whether the funds told investors that their money was invested with Madoff and whether the feeders disclosed to investors that they were receiving fees from Madoff for doing business with him.

In addition to such governmental actions, numerous private lawsuits have been instituted against funds and advisers that fed their customers’ assets to Madoff. These lawsuits make numerous allegations that are similar to the authorities’ concerns outlined above.

Both governmental and private actions concerning the Madoff feeders will doubtless continue to proliferate. Moreover, many of the principles on which such actions are based will doubtless also apply to funds and advisers who feed their customers’ assets to other, non-Madoff, investment managers. It may be only a question of time, therefore, until the authorities and private litigants turn their sights to the due diligence and disclosure practices of such non-Madoff feeders.