Financial giants revealed potential losses of almost £4billion yesterday as they joined a queue of investors caught up in an alleged fraud by Wall Street investment manager Bernard Madoff.
The Royal Bank of Scotland, HSBC and Abbey owner Santander as well as France’s BNP Paribas and Japan’s Nomura Holdings reported they had fallen victim to Madoff’s alleged $50billion (£33billion) pyramid scheme.
The Wunderkinder charity connected to film director Steven Spielberg and the foundation of Nobel laureate Elie Wiesel were reportedly among the investors.
Madoff, 70, a well respected investment manager and former chairman of New York’s Nasdaq stock exchange, was arrested last week after apparently telling his employees his operations were “all just one big lie” and “basically, a giant Ponzi scheme”.
A Ponzi scheme is a fraudulent investment vehicle which pays very high returns to existing investors paid for by money put into the fund by newcomers.
The arrest raised questions about the competence of financial regulators.
Hedge fund Man Group said: “Based on information available to date, it appears a systematic and comprehensive fraud may have been committed, evading structural controls.”
The company, which said it had approximately $360million (£239million) of exposure, said Madoff Securities was registered with the Securities and Exchange Commission (SEC), which monitors investment funds.
Madoff Securities was a member of five self-regulatory organisations, including US independent securities regulator Finra and the Nasdaq.
Nicola Horlick, who manages Bramdean Alternatives, which had nine per cent of its funds invested with Madoff’s scheme, said the SEC had given it a “clean bill of health”.
“I think now it is very difficult for people to invest in things meant to be regulated in America because they have fallen down on the job,” she said. “All through the credit crunch this has been apparent. This is the biggest financial scandal, probably, in the history of the markets.” She added even if Bramdean Alternatives was forced to write off its entire investment in Madoff’s scheme it would still only be down four per cent on the year while the stock market had fallen 35 per cent.
The Royal Bank of Scotland – 58 per cent owned by the taxpayer – said £400million was at risk while Spanish bank Santander, which owns Abbey and the savings business of Bradford & Bingley, said its potential exposure was around £2.1billion.
HSBC said it believed it had a potential exposure of around $1billion (£668million) from providing finance to “a small number” of clients who invested with Madoff.
Nomura, Japan’s largest securities company, had £204million invested, while Switzerland’s Reichmuth & Co said the private bank had £218million of exposure. BNP Paribas estimated its exposure could lead to £311million in losses.
The FBI said members of Madoff’s family turned him in after he confessed.
According to court documents released by the SEC, Madoff told two senior staff members he was “finished” and had “absolutely nothing”. He said he planned to hand himself in, but would first use his remaining $200million-$300million (£130million-196million) to pay certain employees, family and friends.
The documents said Madoff told the pair his business was insolvent and had been for years, they said he estimated the losses from his scheme were £33billion.
Many victims of the alleged fraud were connected to Madoff’s reputation as a philanthropist.
New Jersey Senator Frank Lautenberg – one of the wealthiest members of the US Senate – entrusted his family’s charitable foundation to Madoff and the Wall Street Journal reported Steven Spielberg’s fund, alongside the Elie Wiesel foundation and money from property magnate Mortimer Zuckerman were also affected.
Reports from Florida to Minnesota in the US included ordinary investors who gave Madoff their money. Some had been friends with him for decades, others were able to invest because they were a friend of a friend.
They told stories of losing everything from £26,000 to an entire nest egg worth almost £1million.