Madoff’s ‘Lie’ Ensnares Victims From Paris to Tokyo

Date: Monday, December 15, 2008
Author: Jon Menon and Charles Penty, Bloomberg

Bernard Madoff’s scam that allegedly cost investors $50 billion ensnared firms from London and Paris to Tokyo.

HSBC Holdings Plc, Europe’s biggest bank, has $1 billion at risk after providing financing to funds that invested with Madoff, the London-based bank said today. Nomura Holdings Inc., Japan’s largest brokerage, has 27.5 billion yen ($302 million) of exposure to Madoff’s funds, while France’s BNP Paribas SA has as much as 350 million euros at risk, the banks said.

Madoff, 70, was arrested by federal prosecutors Dec. 11 and charged with operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. He told senior employees that the firm was insolvent and “had been for years,” prosecutors said in the criminal complaint.

“A frothy market encourages slack oversight,” said Peter Hahn, a fellow in finance at London’s Cass Business School, in an interview today. “Whenever something like this happens, everyone who has been hit will comb through their investments.”

The Madoff collapse comes as banks and investment companies are reeling from falling asset prices and sputtering economies after the U.S. subprime mortgage market crash. Financial firms have reported almost $1 trillion of credit losses and writedowns since the start of 2007, data compiled by Bloomberg show.

‘Big Lie’

Madoff, who had advised the U.S. Securities and Exchange Commission on how to regulate markets, described his investment management operations as “one big lie,” prosecutors said. Investors have disclosed about $24 billion of investments in Madoff’s funds, according to data compiled by Bloomberg.

Ira “Ike” Sorkin, a lawyer at Dickstein Shapiro LLP in New York representing Madoff, declined to comment. Calls to residences listed in the Madoffs’ names in Manhattan, Montauk, New York, and Palm Beach, Florida, weren’t answered. Sorkin said on Dec. 13 that the situation was “a tragedy.”

BNP Paribas fell 10 percent in Paris trading after reporting its Madoff exposure and suffering a legal setback in its plan to buy the Belgian operations of Fortis. The Brussels Court of Appeals ruled Dec. 12 that the sale of Fortis assets must be put to investors for a vote before Feb. 12. The court decision complicates BNP Paribas’s plan to complete the purchase quickly and preserve Fortis’s customer base.

Fortis Bank Nederland (Holding) NV said it could lose as much as 1 billion euros ($1.4 billion) because of Madoff. While neither Fortis nor its subsidiaries have direct holdings with Madoff, some units provided loans to funds that invested in the failed firm, the bank said in a statement today.

Banco Bilbao

Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, said it may face up to 300 million euros in losses from the hedging of structured products linked to Madoff. BBVA acted for other financial institutions and investors to set up products linked to third-party funds that had invested in Madoff Investment Securities, the Bilbao, Spain-based lender said in a filing today to market regulators in Madrid. BBVA has no direct investments in Madoff.

Banco Santander SA, Europe’s second-biggest bank by market value, said yesterday its hedge fund unit invested 2.33 billion euros of client funds with Madoff. The bank’s Optimal Investment Services unit placed money with Madoff through its Optimal Strategic U.S. Equity fund, the Spanish lender said.

Santander dropped as much as 4.9 percent in Madrid trading before ending the day unchanged. Santander, based in the Spanish city of the same name, lost 53 percent of its market value this year. BBVA advanced 10 cents, or 1.2 percent, to 8.42 euros.

Client Funds

Royal Bank of Scotland Group Plc could lose as much as 400 million pounds ($601 million) on investments linked to Madoff. The U.K.’s second-largest bank, 58 percent owned by the government, had “exposure” through trading and collateralized lending to funds of hedge funds invested with Madoff, the Edinburgh-based bank said today.

Natixis, based in Paris, said today it has as much as 450 million euros of client funds invested with Madoff. The stock fell 3.4 percent in Paris trading.

Man Group Plc, Europe’s largest publicly traded hedge-fund company, has about $360 million invested directly or indirectly in funds linked to Madoff. The investments in two Madoff funds represent 0.5 percent of Man’s total assets under management, the London-based company said in a Regulatory News Service statement.

Zuckerman, Spielberg

The list of victims of the alleged scheme may also include real-estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, Senator Frank Lautenberg and a charity of movie director Steven Spielberg, the Wall Street Journal reported today, without saying where it got the information.

UniCredit SpA, Italy’s biggest bank, has 75 million euros of exposure to funds run by Madoff, the Milan-based lender said in a statement today. Its asset manager, Pioneer Investments, has some indirect risk related to Madoff through its alternative investments unit, and had “substantially all” of its $280 million Primeo Select Fund with Madoff, according to the unit’s Web site.

To contact the reporter on this story: Charles Penty in Madrid at at cpenty@bloomberg.netJon Menon in London at jmenon1@bloomberg.net