Page last updated at 21:18 GMT, Tuesday, 16 December 2008

Watchdog queried over Madoff case

Hedge Funds Standards Board chairman Antonio Borges reacts to the alleged fraud

Alleged hedge fund fraudster Bernard Madoff has had his first court appearance delayed until Wednesday.

As the number of investors reporting potential losses grows, the role of the Securities and Exchange Commission (SEC) is coming under scrutiny.

Regulators have been criticised for not detecting earlier the alleged $50bn (33bn) fraud.

Jon Moulton of Alchemy Partners said some investors had complained about Mr Madoff's scheme as early as 1999.

"The SEC did remarkably well" to avoid spotting any problems, he said.

Meanwhile, the FBI has set up a hotline for people who invested money in Mr Madoff's fund.

The number is +1 212 384 2359.

Regulatory concerns

Leading Spanish, British and Japanese banks have said they could be facing losses of billions of dollars.

US authorities have ordered the liquidation of the trader's brokerage firm, Bernard L Madoff Investment Securities of New York.

But many financial commentators have questioned whether the alleged fraud could have been uncovered sooner.

A fraudulent investment scheme paying investors from money paid in by other investors rather than real profits
Named after Charles Ponzi who notoriously used the technique in the United States in 1919-20
Differs from pyramid selling in that individuals all tend to invest with the same person

Steven Bell of GLC fund managers said: "Apparently people reported these concerns to the SEC, they highlighted them."

"It's almost like someone saying 'my next-door neighbour's a burglar, go and have a check' and they didn't, apparently," he said.

Jon Moulton, of Alchemy Partners, said: "It would appear as early as 1999 a man... was writing to the SEC telling them that 'Madoff Securities is the world's largest Ponzi scheme', so the SEC did remarkably well to avoid spotting it."

Dominique Strauss-Kahn, director general of the International Monetary Fund, expressed his shock on Monday that US regulators had failed to identify and prevent the alleged fraud.

Investors losses

Mr Madoff, who was arrested on Thursday, has been charged with fraud in what is being described as one of the biggest-ever such cases.

He ran a fund that paid annual interest of about 10% but prosecutors say it was, in effect, similar to a pyramid scheme, with money from new investors paying off old ones.

Banks and financial institutions across the world had investments with Bernard Madoff, but not all have yet confirmed what their potential losses might be.


Clients of Santander, Spain - $3.1bn
HSBC, UK - $1bn
Natixis, France - $605m
Royal Bank of Scotland, UK - $601m
BNP Paribas, France - $460m
BBVA, Spain - $400m
Man Group, UK - $360m
Reichmuth & Co, Switzerland - $325m
Nomura, Japan - $303m

Among the potential losers is Spain's largest bank, Santander, which owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley.

The bank had a direct exposure of 17m euros ($23m; 15m), but clients of its Optimal fund management unit have another 2.3bn euros invested in the firm run by Bernard Madoff.

Japanese financial giant Nomura said it could lose up to $303m.

Britain's HSBC said it had investments of about $1bn that could be affected.

Royal Bank of Scotland said it could potentially lose about 400m if all its investments had to be written off.

Some of the biggest private losers seem to have been members of the Palm Beach country club, where many of Mr Madoff's wealthy clients were recruited.

Charities suffer

However, the collapse of Mr Madoff's firm is also having an impact far beyond the world of the wealthy private investors - many charities have been hit.


The New York-based JEHT foundation, said it was freezing all its grants and would shut by the end of January. The group is funded by one couple, Jeanne and Kenneth Levy-Church, whose personal investments were managed by Mr Madoff.

Other victims include film director Stephen Spielberg's Wunderkinder Foundation charity.

Mark Mulholland, a lawyer representing some of those who invested in the scheme, warned that the fraud could be bigger than the Enron scandal of 2001.

"We think the impact on the financial community is ultimately going to be bigger than Enron. This is staggering, it's extraordinary, it's breathtaking what has happened here," he said.

High returns promised

US prosecutors say Mr Madoff, a former head of the Nasdaq stock market, masterminded a fraud of massive proportions through his hedge fund and investment advisory business.

The collapse of Madoff is likely to accelerate the disappearance of hedge funds
Robert Peston

Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund.

A federal judge has appointed a receiver to oversee Mr Madoff firm's assets and customer accounts, while the 70-year-old banker was released on $10m bail.

Mr Madoff founded Bernard L Madoff Investment Securities in 1960, but also ran a separate hedge fund business.

According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn under management - was a fraud and had been insolvent for years.

He said he was "finished", that he had "absolutely nothing" and "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.

If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.

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