By Josh Friedlander
When former New York City Mayor Rudolph Giuliani decided to expand his security business to include hedge fund due diligence, he chose an unusual partner: a man who oversaw millions of dollars lost by a wealthy Long Island family to Bernie Madoff.
Giuiliani’s partner, Stuart Rabin, doesn’t use the Madoff connection to promote his new venture, but maybe he should. In a press release announcing the deal, Rabin said the new venture is a way to “offer our clients the highest level of investor protection available.”
That’s protection Rabin could have used as manager for various trusts and foundations related to the Jacobson family, which made its fortune in the industrial distribution business. Entities related to Rabin and the Jacobson family appear several times in the massive list of Madoff victims.
Rabin won’t discuss the specifics of the Jacobson family’s losses. But his firm, Nine Thirty Capital, a registered investment adviser, managed $207 million in nine accounts as of December 31, 2008, according to a March Securities and Exchange Commission filing. It’s not clear what percentage of those assets belonged to the Jacobsons or how much they lost to Madoff (or if the $207 million reflects the losses).
Nor is it clear how much Rabin might have lost. “I have my money invested alongside our [Jacobson Family Investments] and Nine Thirty Capital families,” Rabin was quoted as saying in the August 2008 edition of Private Wealth magazine. “I have historically invested side by side with our family clients,” he now says. “I continue to do so. I think that’s a level of alignment of interest in the family office world in particular that is unusual in the industry.”
If he’s angry about losses, he won’t say. In January, according to plans formed years ago, Rabin and the Jacobsons parted ways as joint owners of Nine Thirty Capital. His former lieutenant, Bob Small, now oversees the Jacobson family wealth, some of which Rabin still manages. The family and Rabin continue to share office space and remain on good terms.
“Nobody likes losing money, but in investing sometimes you have good years or bad years,” Rabin says. “You never expect someone to cheat you or steal from you.”
The September 16 press release doesn’t mention Madoff by name but does allude to him (“As Ponzi schemes and bubble scam investment frauds continue to threaten investors ... "). Rabin avoided making his launch into a teachable moment, but he cannot discuss the Madoff situation because of client confidentiality.
“We believe we did all the appropriate and relevant due diligence for all the managers we invested in in the past,” Rabin says. “Madoff and the other frauds show there’s an opportunity to do even more.”
Madoff wouldn’t have made it past Pat D’Amuro, the head of Giuliani Security and Safety (and former assistant director of the Federal Bureau of Investigation in charge the New York office). There’s no way Madoff’s auditing firm could have handled a firm of Madoff’s size, D’Amuro says during an interview with Rabin. So how did Rabin miss that when he was managing the Jacobson family’s assets? “We had audit firms look at our investments, no question about it,” Rabin says, speaking generally. It is now alleged that some of the auditing firms, many of which are being sued, failed because they merely compared statements from Madoff: garbage in, garbage out.
“This new process lets us go a whole level deeper,” says Rabin. Does the new process fill gaps in the way Rabin had vetted Madoff? “I wouldn’t say it fills gaps. I’d say we took the opportunity with Pat and his team to have professionals from the law enforcement community work with us to design a new process.”
The new process, Rabin says, is “not a typical go out and hire someone to do a background check. It doesn’t start with a third party verification firm or background firm. It’s all cohesive and coordinated.” It’s uncertain to what degree in-person interviews of the type Giuliani plans would make a difference in catching frauds when basic legal checks seem sufficient. Investigative due diligence firm BackTrack Reports, a division of First Advantage Litigation Consulting, conducted research on the Stanford Financial Group fraud that found more flags—most red, some yellow—than stand in front of the United Nations building. Operational due diligence firm Aksia famously kept clients out of Madoff, citing numerous red flags. Clearly, thorough background and operational due diligence can work, but how could anyone argue against having former FBI agents interview managers in person? And unlike most due diligence checks, Giuliani plans to periodically renew its information—efforts which many investors don’t make.
Rabin seems simply to want to put Madoff behind him. With an MBA from the Wharton School of the University of Pennsylvania and a law degree from Georgetown, Rabin worked at Skadden Arps Slate Meagher & Flom, Bear Stearns and Morgan Stanley before a mentor, Richard Rainwater, whom he met after writing the investment legend for advice, brokered an introduction to the Jacobson family. The family’s recently deceased scion, Sid Jacobson, fit to a T the profile of a Madoff victim: He was rich, Jewish, lived on Long Island, and was a member of the Palm Beach Country Club where so many of Madoff’s victims were ensnared. It’s implausible to think Jacobson and Madoff weren’t acquainted. Does that mean the Jacobsons chose Madoff and stuck with him? Rabin won’t comment. He will say that, “Every one of Nine Thirty Capital’s relationships were independent, discrete and customized portfolios. Those family members—or clients, if you will—get to make the final decisions.”
Even though individual families are splaying their Madoff-related sorrow stories onto the pages of the New York Times and such investment giants as soon-to-be retired Jim Simons of Renaissance Technologies were (albeit briefly) caught in Madoff’s web, there is still an obvious hesitance among fiduciaries to admit they were duped.
The reluctance to broadcast errors is likely another reason why due diligence companies have lately seen only a slight uptick in the demand for their services. Though background checks are cheap—many firms charge as little as $3,000 per manager—the emotional cost of admitting past failures or pulling back the curtain on current investments is expensive.
Clearly not for Rabin. “You’re not going to believe this, but investing isn’t personal to me,” he says.
