This is the thirty-fourth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Various Installments of this series have discussed the impact of the Madoff scheme on public charities in the context of new disclosure requirements for Form 990 adopted by the Internal Revenue Service in 2008. Installment 29 of this series featured the limited public disclosures made available by Howard Hughes Medical Institute (“HHMI”) regarding its reported investments with Madoff.

In light of the relative paucity of public information regarding the investments by HHMI with Madoff, a study of public filings of its stated investment adviser might be helpful. As reported in Installment 29 , on February 5, 2009, in the early aftermath of the arrest of Madoff in December 2008, HHMI was on a 163-page list of “victims” produced by the Madoff Bankruptcy Court and re-published by

According to that list, HHMI was an investor with Madoff through “RELATIVE VALUE STRATEGIES LLC C/O IVY ASSET MANAGEMENT CORP.” Just as one may learn significant information about charities from the publicly available Forms 990, one may acquire considerable information from Form ADV, the Uniform Application for Investment Adviser Registration, that is required to be filed with the Securities and Exchange Commission (“SEC”) and updated by all investment advisers registered with the SEC. The current form of a filed Form ADV may be obtained universally through the SEC Website. Forms ADV of earlier years may be obtained by making a request to the SEC under the federal Freedom of Information Act (“FOIA”).

My search on the Internet for “Relative Value Strategies LLC” yielded only that it is a limited liability company formed in Delaware in 1997. There was no record of its being an investment adviser registered with the SEC. Rather, “relative value strategies” may be found on the Internet primarily as a generic term for an investment strategy of hedge funds that seek profit by exploiting irregularities or discrepancies in the pricing of stocks, bonds or derivatives. Such hedge funds, which take a position on forward interest rates, the spread between different yields and the price differences between related securities, are also called “market neutral” or “arbitrage” funds.

Therefore, it appears that Relative Value Strategies, LLC was used by Ivy Asset Management Corp., now known as Ivy Asset Management LLC (collectively, “Ivy”), primarily as a fictitious name under which it operated. However, there is much information available about Ivy on the Internet and as a registered investment adviser on the SEC Website. An example is an April 1, 2010 article in The Wall Street Journal, which reports Ivy’s extensive executive restructuring, staff layoffs, acquisition by BNY Mellon and investigation by the New York Attorney General.

The most recent information on Ivy of note is the disclosure in Schedule D to the Ivy Form ADV on the SEC Website (the “Current Ivy ADV”) that the New York Attorney General filed a complaint on May 11, 2010 and a summons on July 22, 2010, against Ivy and two of its officers, alleging violations of New York law by Ivy in “concealing material information concerning Bernard L. Madoff from certain clients, allegedly contributing to losses by individuals or entities for whom those clients provided investment-related services.”

What is equally interesting, however, from the perspective of one who is analyzing HHMI and its investment with Madoff is a consistent response in the Current Ivy ADV and Forms ADV filed by Ivy during early 2008 and 2009 that were obtained under a FOIA request. Item 5.C. requires an investment adviser to identify each type of client that it advises and the approximate percentage that such type of client constitutes in number. One possible response is “None” with the next higher category being “Up to 10%.”

In each of Ivy’s Form ADV filings during 2008, 2009 and 2010, for the category “(7) Charitable organizations,” Ivy responded “None.” This is clearly and totally inconsistent with the type of client that HHMI was as an investor. On HHMI’s Internet page “About HHMI,” HHMI prominently has the following excerpt from its Code of Conduct: “As a non-profit charitable organization, HHMI is committed to conducting its activities in accordance with the highest standards of integrity and ethics.”

If HHMI had examined the Form ADV filed in 2008 by Ivy, it could have seen a red flag. Ivy has consistently reported that it did not advise clients that were charitable organizations. Either Ivy failed to carry out the requirement as to HHMI of “knowing its customer,” or Ivy simply inaccurately reported its composition of clients. By referring to the Forms ADV, HHMI could have become alerted earlier as to a potential problem in utilizing the services of Ivy. Clearly by Ivy’s own disclosures to the SEC, it lacked sufficient experience to provide advice on investment strategies for an organization of the stature of HHMI in the context of HHMI’s overall charitable mission.

In any event, a message is clear. Every investor, whether or not a charitable organization, should consider obtaining current and past Forms ADV filed by their investment advisers with the SEC as part of due diligence to consider whether the stated purposes, classes of clients and scope of operations are compatible with the needs of such investor.

[To be continued in Installment 35]