Madoff house arrest ordered as European banks reel

December 17 2008

By Grant McCool and John Poirier

NEW YORK/WASHINGTON (Reuters) – Disgraced financier Bernard Madoff, accused of orchestrating a $50 billion (33 billion pound) fraud, was placed under house arrest on Wednesday as BNP Paribas  became the latest European bank to be sideswiped by the scandal.

A federal judge ordered the 70-year-old former pillar of Wall Street confined to his $7 million Manhattan apartment and told Madoff’s wife to surrender her U.S. passport by noon on Thursday.

Madoff will be fitted with an electronic ankle bracelet and will only be allowed to leave his home for appointments prearranged with authorities.

The changes in bail conditions for the one-time Nasdaq Stock Exchange chairman were ordered a day after U.S. Securities and Exchange Commission Chairman Christopher Cox offered an embarrassing mea culpa for the agency’s lack of oversight of Madoff’s investment advisory firm.

A rewrite of U.S. regulations to prevent a relapse of the Madoff fiasco will be high on the agenda of the new U.S. Congress, U.S. Rep. Paul Kanjorski said. He said he will convene a congressional inquiry in early January to focus on the case.

Kanjorski, who chairs the House Capital Markets Subcommittee, called the matter “deeply disturbing,” and said the scandal only weakens “already-battered investor confidence in our securities markets.”

BNP’s stock was the main loser among Europe’s top banks after it announced an unexpected 11-month loss at its CIB investment bank unit, blamed partly on exposure to Madoff.

“Generally there is a sense of nervousness going on with Madoff’s alleged fraud and BNP’s losses,” said Fox-Pitt Kelton analyst David Williams.

In Asia, Great Eastern Holdings Ltd , the insurance arm of Singapore’s Oversea-Chinese Banking Corp , said it had an indirect exposure of about S$64 million (US$43.93 million) to Madoff.

In Europe, the Dutch pension fund of Royal Dutch Shell Plc  said it had a $45 million exposure.

YEARS TO SORT OUT LOSSES

An investor protection group in the United States said it could take several years to sort through investor losses.

The Securities Investor Protection Corp is overseeing the liquidation of Bernard L. Madoff Investment Securities LLC.

Madoff, who counted celebrities and many friends among his investors, was unable to obtain four co-signers to guarantee his $10 million bond.

Only two people, his wife, Ruth, and brother, Peter, had signed it as of Wednesday morning. Peter Madoff also worked at Madoff’s firm.

In lieu of two additional signatures, Madoff and the government agreed that his wife surrender her passport and put up properties in her name in Montauk, New York, and Palm Beach, Florida.

Madoff will not be required to appear in court for a bail hearing unless he fails to file the documents on the additional conditions by Monday, the deadline set by the judge.

A preliminary hearing and appearance by Madoff was scheduled for January 12.

Cox’s admission that the SEC had missed obvious red flags in the Madoff case was seen as the latest in a series of black eyes to the U.S. securities watchdog, already under fire for weak oversight as U.S. banks loaded up on risky assets that have ripped huge holes in their balance sheets.

Cox said the agency’s failure to catch Madoff’s alleged massive Ponzi scheme was “deeply troubling.” Under a Ponzi scheme, later investors’ funds were used to pay returns to initial investors.

Cox asked the agency’s inspector general to probe the SEC’s conduct in the Madoff case. Madoff’s niece, Shana Madoff, a compliance lawyer at his firm, is married to a former SEC lawyer, Eric Swanson, who was the agency’s assistant director in the office of compliance inspections and examinations.

A spokesman for Swanson said his romantic relationship with his wife began years after the compliance team he helped supervise inquired into Bernard Madoff’s securities operations.

In another sign of Madoff’s close ties to the powerful, U.S. Attorney General Michael Mukasey has removed himself from involvement in the investigation, a department spokesman said.

He declined to discuss the reason. Mukasey is leaving office in January.

Marc Mukasey, a son of the attorney general, told Reuters on Wednesday that he represents Frank DiPascali, a senior official at Madoff’s firm. The younger Mukasey leads white-collar defense and special investigations at New York law firm Bracewell & Giuliani.

Madoff, accused of defrauding hundreds of wealthy investors including Ezra Merkin, the former chairman of auto finance company GMAC, and real estate and newspaper mogul Mortimer Zuckerman, faces up to 20 years in prison and a maximum fine of $5 million if convicted.

At least two putative class-action lawsuits have been filed in U.S. district court in Manhattan over investments handled by Madoff.

On Wednesday, an investor sued Gabriel Capital LP, its manager Merkin and auditor BDO Seidman for “gross negligence” in handing over at least 27 percent of Gabriel investment capital to Madoff. A similar lawsuit was filed by New York Law School on Tuesday against Ascot Partners LP, Merkin and BDO Seidman.

(Additional reporting by Rachelle Younglai in Washington and Martha Graybow in New York; writing by Christian Plumb; editing by Jeffrey Benkoe)

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