Victims of Madoff's alleged Wall Street scam spread to Europe

ByJeffrey Stinson, USA TODAY
December 15, 2008, 5:48 PM

LONDON -- The list of victims of an alleged Wall Street swindle of giant proportions spread into Europe on Monday, raising questions about the level of competence of U.S. financial regulators.

Britain's Royal Bank of Scotland acknowledged it was exposed to $600 million in possible losses in hedge funds managed by Bernard Madoff, who was arrested last week and accused of running a $50 billion Ponzi scheme.

The Financial Times reported that HSBC Holdings Plc had emerged as one of the Wall Street fund managers largest possible victims, with potential exposure of about $1 billion. HSBC has yet to comment.

The largest banks in Spain and France — Santander and BNP Paribas — said Sunday they faced possible losses of $3.07 billion and $460 million, respectively.

Italy's second largest bank, UniCredit SpA, said it was exposed to about $100 million in potential losses. Other banks and investment houses in Britain, France and Switzerland also reported exposure.

The alleged scam by Madoff, 70, once unassailable on Wall Street, is possibly the world's biggest investment fraud run by a single person.

It follows the collapse last year of the U.S. subprime mortgage market, which exposed European and other world banks to billions in losses in securities backed by worthless mortgages.

And it sparked questions on this side of the Atlantic about whether U.S. financial regulators are on top of anything and whether U.S. investments are safe.

"The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the U.S.," the British investment firm Bramdean Asset Management said in a statement.

Nicola Horlick, the firm's boss, went further, questioning whether Europeans should invest in any U.S. financial markets and instruments.

"I think now it is very difficult for people to invest in things that are meant to be regulated in America because they have fallen down on the job," she told the BBC.

Andrew Clare of the Cass Business School at City University London said that while the alleged fraud was "more embarrassing than the credit crunch" there always would be "smart individuals who can pull the wool over the eyes of regulators."

Regulators and big institutional investors can always ask questions, Clare said, but there aren't always foolproof ways of detecting when people are lying.

U.S. securities authorities say that Madoff oversaw a fraud of epic proportions through his hedge fund and investment advisory business. He is alleged to have falsified reports from a secretive money management service that he owned separately from his main stock transaction firm. That made the firm appear to be more successful than it was.

He allegedly kept the fund going in a traditional Ponzi scheme method: by taking money from new investors to pay off existing investors who wanted to cash out. Authorities say Madoff privately put the losses at $50 billion.

Madoff's lawyers have denied the allegations.

Other European banks and investment houses reporting exposure included:

•The Man Group, the world's largest publicly traded fund manager. It reported exposure of around $360 million, saying, "It appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."

•The French bank Natixis said it was exposed to possibly $605 million in losses.

•Reichmuth, a private Swiss bank, reported Sunday that it had about $330 million exposed.

The potential losses spread beyond Europe. The Japanese financial house, Nomura Holdings, said it had $306 million at risk.

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