Madoff was hunting for new investors as scandal hit

Bernard Madoff had been trying to raise new money when he was arrested and charged with fraud for allegedly running a $50bn Ponzi scheme, according to investors.

Mr Madoff had contacted some of his longest-standing investors to open up to new capital, following heavy withdrawals by clients hit by plunging markets this year. At least one was in the process of setting up a new fund, Kallisto, to invest with Mr Madoff, although the new fund had not yet carried out full due diligence.

Ponzi schemes, similar to pyramid schemes, involve repaying existing investors with new money, requiring a constant search for new investors.

"I went to him on October 2 and I said could I have $25m-$50m of capacity, and he said 'sure'," said one long-standing investor. "I asked him about the idea because I heard that he had had redemptions and was open for more money."

"It seemed that because of what was happening in the markets Madoff was having redemptions."

Kallisto would have been just the latest of well over a dozen feeder funds, had it launched. "There are far more feeder funds than anyone expected," said the manager of a big feeder. "They are popping up everywhere."

The feeder funds were lucrative for managers, who included Italian bank UniCredit, Spanish bank Santander, and Fairfield Greenwich and Tremont Group of the US.

Data compiled by the Financial Times shows fees varied widely, but reached as high as 2.15 per cent a year for Santander's €2.3bn ($3.2bn) Optimal Strategic US Equity - raking in €50m a year for the bank.

Two Primeo Select funds from UniCredit's Pioneer Alternative Investments charged 2 per cent a year and a fifth of profits above 10 per cent a year, bringing in about $17m a year.

Mr Madoff's Madoff Securities only charged brokerage commissions to the funds for running their accounts, leaving the rest of the money to fund hefty payments to salesmen or as pure profit.

For example, Thema International, a $1.1bn Irish fund approved for sale in Europe, charged fees of 0.5 per cent a year for Bank Medici, its manager, but paid another 1.25 per cent - $13.75m a year - to Genevalor Benbasset & Cie, a Swiss bank which helped set it up and distributed it.

Several of the feeder funds had close links to each other and to a handful of individuals and organisations who helped channel billions of dollars to Mr Madoff.

Thema was set up by Thema Asset Management, a British Virgin Islands-based company 55 per cent owned by Genevalor, its Swiss distributor, with Union Bancaire Privée holding an undisclosed stake. Two of the Benbassat family were directors of the fund, with Mario Benbassat, the head of the family, having been a former UBP nonexecutive director.

UBP has already admitted $700m of Madoff exposure from its funds of funds and discretionary accounts, with more than $300m held on behalf of clients. Its M-Invest fund - which held $390m at the end of 2005 - started as a vehicle for UBP's owners, but was later broadened out to allow internal funds to invest. UBP also acted as Swiss payment agent for several Madoff-linked funds, including Thema.

Two years ago, though, Thema switched to be run by Bank Medici, a Vienna bank a quarter-owned by Bank Austria, part of UniCredit. It continues to use Genevalor as its introducer.

But the move brings it into the circle of funds around Medici, which is run by Sonja Kohn. Ms Kohn did not return calls, but according to Medici's web site, "she blends European values with sophisticated American financial know-how".

This financial know-how includes selling the Herald USA and Herald (Lux) funds, which had $2.5bn under management, predominantly with Madoff, in October. Through the UniCredit ownership, it is also linked to the two Pioneer funds.

Kingate was part of a different circle, which rotated around Sandra Manzke. Ms Manzke, who founded Tremont Group, helped set up three separate groups of funds. The first was Tremont's own feeder funds, of which at least four, under the Rye Select brand, placed $3.1bn with Mr Madoff.

The second was Kingate Global, set up in joint venture between Tremont and Bermuda-based Kingate Management, and advised by London's FIM. Ms Manzke sat on the board of the fund, which became one of the biggest single feeder funds, raising $2.75bn.

When Ms Manzke sold Tremont, she set up her own firm, Maxam Capital Management, which was supposed to have a particular focus on finding minority and women-owned hedge fund managers. According to reports, Maxam had $280m with Madoff and is now closing. Ms Manzke did not return calls.