December 22 2008
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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