FBI diverts anti-terror agents to Bernard Madoff $50 billion swindle

December 22 2008

Brian A Pounds/Connecticut Post

From left; Doug Chavenello, president of Firefighters Union Local 1426, and Bob Smith, secretary, listen to the meeting of the Joint Retirement Board at Independence Hall in Fairfield. The town’s pension fund may have lost over $40 million in a scheme by Wall Street hedge fund manager Bernard Madoff

The FBI has been forced to transfer agents from its counter-terrorism divisions to work on Bernard Madoff’s alleged $50 billion fraud scheme as victims of the biggest scam in the world continue to emerge.

Only ten days after Mr Madoff confessed to his two sons that he had created a giant fraud, the FBI and the Securities and Exchange Commission (SEC), the Wall Street regulator, have narrowed the focus of their inquiries to ascertain which individuals and funds helped him. They are questioning other employees of Madoff Securities and are also examining the role of feeder funds that provided Mr Madoff with clients and capital.

It is understood that the US authorities believe it would have been impossible for the financier to have sustained a fraud of such magnitude over a number of years without significant assistance.

While the FBI and SEC trawled through documentation seized from three floors of the Manhattan headquarters of Mr Madoff, 70, more individuals and organisations who had fallen prey to the scheme were discovered. Members of the Fifth Avenue Synagogue, on the wealthy Upper East Side of Manhattan, are estimated to have lost about $2 billion (£1.4 billion) between them. Of these Ira Rennert, the chairman of the synagogue board, had about $200 million invested in the fund.

It is believed that J. Ezra Merkin, the president of the synagogue, introduced clients to Mr Madoff and gave him access to prominent Jewish charities and universities. The fund of Mr Merkin, Ascot Partners, had about $1.8 billion invested in the schemes.

At the weekend it emerged that Burt Ross, a former banker at LF Rothschild, and once the mayor of Fort Lee, New Jersey, was another victim. Mr Ross estimated that he had lost about $5 million, the bulk of his personal wealth.

Two classes of victim are emerging in the Madoff scandal: those who had a direct relationship with him and fund of funds investors, where one hedge fund invests in another. The biggest of the latter – so far – appears to be Walter M. Noel, who founded Fairfield Greenwich Group in 1983. Mr Noel marketed his investment services to the upper crust of the financial elite, introducing his international clients to Madoff funds.

Mr Noel ran his business from Connecticut, but about 95 per cent of his business was derived from overseas money. It is estimated that Fairfield Greenwich stands to lose $7.5 billion from the collapse of the Madoff scheme.

At the other end of the spectrum the town pension scheme in Fairfield, Connecticut — apparently unconnected to the fund belonging to Mr Noel – suffered a $45 million loss for its firefighters, police officers and teachers.

American regulators have sought to compile evidence against Mr Madoff, who is now electronically tagged and this weekend was placed on 24-hour curfew in his East 64th Street New York apartment.

The FBI and SEC are under increasing pressure from Washington to explain how they could have allowed a scam of such magnitude to operate and flourish – especially after a preliminary inquiry within the SEC found that it had been tipped off several times in the past decade about Mr Madoff’s schemes.

Harry Markopolos, a derivatives expert who once worked for a rival fund, spent ten years urging the SEC to investigate Mr Madoff. In numerous reports, including a 19-page document written in November 2005 entitled The World’s Largest Hedge Fund is a Fraud, Mr Markopolos picked apart the investment strategy of Mr Madoff.

Some claims by Mr Markopolos were anecdotal – “I have spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud” – but vast chunks of his accusations involve detailed analysis of Mr Madoff’s investment strategy. He questions the way that Mr Madoff charged for commissions and alleges that Mr Madoff used the names of leading investment banks such as UBS and Merrill Lynch to lend credibility to his schemes.

He also claims that the overall investment strategy of Mr Madoff would have been impossible to carry out. Mr Madoff sought to lure investors with the promise of 12 per cent returns by buying blue-chip stocks and insuring against the possibility that their value would fall by selling derivatives – a process known as hedging. Mr Markopolos argues, however, that for Mr Madoff to have fulfilled such a strategy he would have regularly done more business than the entire New York market in those securities.

Barack Obama, the President-elect, has accused US regulators of being “asleep at the switch” after it emerged that Mr Madoff had been questioned by the SEC in 2006 but no fraud had been discovered.

Mr Madoff’s business has now been liquidated. He has been charged on one count of fraud and awaits trial.

THE BIGGEST LOSERS

Fairfield Greenwich Group (investment management firm) $7.5 billion

Tremont Group (hedge fund) $3.3 billion

Banco Santander (Spanish bank) $2.87 billion

Bank Medici (Austrian bank) $2.1 billion

Ascot Partners (hedge fund founded by J. Ezra Merkin) $1.8 billion

Access International Advisors (New York investment advisers) $1.4 billion

Fortis Bank Nederland (Dutch bank) $1.35 billion

Union Bancaire Privée (Swiss bank) $1 billion

HSBC (British bank) $1 billion

RBS (British bank) $599 million

Natixis (French investment bank) $554 million

Carl Shapiro (founder of Kay Windsor) $545 million

BNP Paribas (French bank) $431 million

BBVA (Spanish bank) $369 million

Man Group (British hedge fund) $360 million

Reichmuth & Co (Swiss private bank) $327 million

Nomura (Japanese broker) $304 million

Maxam Capital Management (fund of funds based in Connecticut) $280 million

EIM (European investment firm) $230 million

Aozora Bank (Japanese bank) $137 million

AXA (French insurer) $123 million

Yeshiva University (private, New York) $110 million

UniCredit (Italian bank) $92 million

UBI Banca (Italian bank) $86 million

Swiss Life Holding (Swiss insurer) $78.9 million

Great Eastern Holdings (Singapore insurer) $64 million

Nordea Bank (Swedish bank) $59 million

M&B Capital Advisers (Spanish broker) $52.8 million

Hyposwiss (Swiss private bank) $50 million

Banque Bénédict Hentsch & Cie (Swiss private bank) $48.8 million

Fairfield, Connecticut (town pension fund for firefighters, policemen and teachers) $42 million

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Bad for investors, good for lawyers

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Madoff victims threaten legal action

Banks and investment firms blamed for introducing clients to ‘$50bn fraudster’

By Stephen Foley in New York
December 17 2008

The victims of the world’s biggest fraud are raising harsh questions about how Bernard Madoff was able to run his $50bn (£33bn) scam for so long without his staff, the authorities or his trading partners noticing.

A firestorm of legal action is gathering as individuals who lost their life savings and charities threatened to pursue the banks and investment firms that made their ill-fated introduction to Mr Madoff.

“If this were a traditional bank robbery, the eyewitness reports would say Mr Madoff walked out with billions of dollars as someone held the door open for him,” said Jeffrey Zwerling, a lawyer representing some of the victims. “There is just no way that this happens without help of some kind.”

The fall-out from Mr Madoff’s arrest on Thursday is being felt around the world as banks, hedge funds, charitable organisations and thousands of well-to-do individuals tot up their losses. With each passing hour, new victims come to light, often in the tight-knit world of Jewish philanthropy, where Mr Madoff managed cash for numerous charities and for many of their biggest donors.

Christopher Cox, chairman of the Securities and Exchange Commission, the US financial regulator, said last night that he was “gravely concerned by the apparent multiple failures over at least a decade” and that he had ordered “full and immediate review of the past allegations regarding Mr Madoff and his firm and the reasons they were not found credible”.

More European finance houses confessed to losses, including Crédit Mutuel, France’s second-largest bank. Regulators in Spain said 224 investment funds in the country had been exposed and faced losses of €107m (£97m). Among the celebrity victims revealed yesterday is Uma Thurman. Her husband, Arpad Busson, had £145m invested with Mr Madoff through his hedge fund. A charity connected to Steven Spielberg, the Hollywood director, was already among the list of victims. UK banks HSBC, Royal Bank of Scotland and Santander – owner of Abbey and Alliance & Leicester – have previously admitted exposure of more than $5bn between them.

The breathtaking fraud, committed over many years by one of Wall Street’s best-respected investment managers, was uncovered only when Mr Madoff confessed to his two sons a week ago that he was “finished”. In a criminal lawsuit filed the next day, public claims that Madoff Investment Securities was managing $17bn of client money and had made double-digit returns every year for almost a decade were “all just one big lie”, he had told them.

Mr Madoff was running a giant pyramid scheme, paying out to existing investors with money coming in from new ones. But as the credit crunch began to bite, investment dwindled and there was a surge in requests to cash out. It proved to be his undoing.

Lawyers said the investment managers who recommended that their clients invest with Mr Madoff should have investigated his methods, which he had shrouded in mystery. They pointed to red flags going back as far as 1999, when Harry Markopolos, a securities industry executive, urged the SEC to investigate Madoff Investment Securities. Last year, investigators hired by potential investors urged them not to invest because they were suspicious.

The New York Law School – which fears losing $3m of its endowment fund – launched a lawsuit against one of its financial managers, Ascot Partners, Ascot’s boss, Ezra Merkin, and the auditor, BDO Seidman. The defendants “recklessly or with gross negligence caused and permitted $1.8bn, virtually the entire investment capital of Ascot” to be handed over to Mr Madoff, according to the suit. Separately, Yeshiva University said it was considering its options after it lost about $110m.

Mr Madoff is due in court today for a bail hearing. He was released on a $10bn bond last week but has failed to find the required three co-guarantors. Meanwhile, details are emerging of the two separate sets of books he kept: ones showing the real losses, the other detailing the fictitious trading and profits, which he would mail to investors.

Mr Madoff has told the FBI he acted alone. His sons, Andrew and Mark, work in a different part of the business and the Massachusetts Secretary of State, William Galvin, did not suggest his brother Peter was involved.

The victim: A charity devoted to the poor

As well as the super-rich circling Mr Madoff in his playgrounds of Palm Beach, Florida, and Long Island, New York, there are scores of philanthropic victims of his record-breaking fraud, the JEHT Foundation among them. Since it was formed in 2000, it has given away $62m to fund research, to lobby for progressive reforms, and to prop up projects in some of the most deprived areas of the US. It harnessed the fortune of the late real estate mogul Norman Levy, but the family’s money was invested with Mr Madoff, and is probably now gone.

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Bank billions at risk from Wall Street Fraud