More banks reveal exposure to Madoff scandal

NEW YORK/LONDON Mon Dec 15, 2008 6:17pm EST

1 of 10. Bernard L. Madoff, the Chairman of Madoff Investment Securities, is seen speaking in this image from a video made during a panel discussion on the future of the stock market at the Philoctetes Center in New York in this file video from October 20, 2007 that was released by the center to Reuters on December 15, 2008.

Credit: Reuters/Philoctetes Center/Handout

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NEW YORK/LONDON (Reuters) - Banks and investment funds around the world lined up on Monday to disclose they invested billions of dollars in companies controlled by Bernard Madoff, who is accused by U.S. authorities of masterminding a massive fraud.

Britain's HSBC Holdings Plc was the latest bank to join the growing list, saying it had exposure of around $1 billion, making it one of the biggest victims of the alleged $50 billion fraud.

Royal Bank of Scotland Group Plc and Man Group Plc in the United Kingdom, Japan's Nomura Holdings Inc and France's Natixis SA also said they were hit by the worldwide scandal.

In the United States, no major banks have said they were exposed. But Sterling Equities, which owns the New York Mets professional baseball team, acknowledged it had accounts managed by Madoff -- one of hundreds of private investors, pension funds and charities believed to have been bilked by companies tied to his investment advisory firm, part of Bernard L. Madoff Investment Securities LLC.

Madoff's lawyer, Ira Sorkin, declined comment on the case on Monday, other than to say that a hearing was scheduled Friday in the Securities and Exchange Commission's case against his client in U.S. District Court in New York. Sorkin said he did not know yet if Madoff would attend that hearing.

Madoff's two sons, who worked at the firm, said Monday through their lawyer they had no knowledge of the alleged fraud.

U.S. prosecutors and regulators have accused Madoff, a former chairman of the Nasdaq Stock Market, of running the fraud through his investment advisory business.

The Wall Street Journal, citing regulatory filings, reported Monday that a charity established by Oscar-winning film director Steven Spielberg, the Wunderkind Foundation, appears to have invested a significant portion of its assets with Madoff.

In 2006, the Journal said, the Madoff firm accounted for roughly 70 percent of the foundation's interest and dividend income.

A Spielberg spokesman, Marvin Levy, confirmed to Reuters that the foundation "did have an investment with (Madoff)" and that the charity suffered some losses on that investment, but Levy declined to elaborate.

Financial companies, reeling after a year of enormous writedowns on bad credit assets, have so far tallied up more than $10 billion in direct and indirect exposure to the alleged fraud by Madoff, the 70-year old trader who was arrested on Thursday.

Even investors who managed to pull their funds out of Madoff's firm two years ago, or more, may have to return money, said Jeff Marwil, a partner at law firm Winston & Strawn, which is representing a group of Madoff investors.

"It's about the equalization of harm," Marwil said.

Shares in France's Natixis were down 3.4 percent after it said it had as much as 450 million euros ($605 million) of exposure to the fiasco.

Man Group, the world's largest listed hedge fund manager, said it was exposed to Madoff through its RMF fund of funds business, which has $360 million invested in funds directly or indirectly subadvised by Madoff.

And Swiss private bank Benedict Hentsch said it had undone a recent merger with Fairfield Greenwich, the alternative investment specialist, which said it had put half of its assets in one of the funds set up by Madoff.

CLAWING BACK LOSSES

Under U.S. bankruptcy code, investors that pulled money out of a fraudulent fund up to two years before it went under must give their money back, if they knew or should have known the fund was bogus, Winston & Strawn's Marwil said. And state law typically broadens that window to four to six years.

Marwil, who is representing the bankrupt Bayou Group of hedge funds, successfully took back funds from investors that had withdrawn money years before Bayou went under.

"Our view was there were sufficient red flags for any investor to know there was a problem at Bayou. I think a similar argument could be made here," Marwil said.

There were several red flags at Madoff's asset management business, according to forensic accountants, former prosecutors and private investigators.

Among them, the auditor, Friehling & Horowitz, was a small, relatively unknown firm in Rockland County, New York; Madoff executed trades for the fund through his own firm; and many senior people in his firm were relatives, which could create obvious conflicts of interest.

"You have to wonder why regulatory agencies were asleep at the switch and didn't detect anything," said Bradley Simon, a criminal defense lawyer at law firm Simon & Partners LLP who is not involved in the Madoff case. "It doesn't give a lot of reassurance to investors."

But some argue that the fraud would have been difficult to find if Madoff's sons Mark and Andrew, who worked in their father's business, did not know.

SONS SAY NOT INVOLVED

A lawyer for Mark and Andrew Madoff, Bernard's sons, issued a statement saying they were not involved in the firm's asset management business and that "neither had any knowledge of the fraud before their father informed them of it on Wednesday."

"They were shocked to learn of his actions and contacted the authorities immediately upon being told that he had been defrauding the firm's clients," said Martin Flumenbaum, an attorney at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

"The brothers were among the many victims of this scheme and will continue to cooperate fully with the U.S. Attorney and the SEC in their investigations," Flumenbaum said.

A rising number of financial institutions globally detailed their potential losses from Madoff, who allegedly set up a so-called Ponzi scheme in which existing investors are paid out with money from new clients, not from actual investment returns.

BNP Paribas SA and Banco Santander SA detailed potential losses on Sunday, and others joined at the start of the trading week, with Italy's UniCredit SpA revealing exposure of around 75 million euros.

Royal Bank of Scotland said its potential loss could amount to about 400 million pounds ($595 million), assuming the value of its assets in Madoff's firm were nil.

Nomura said earlier in the day it had 27.5 billion yen ($302 million) in exposure related to Madoff, though the impact on its capital would be limited.

On Sunday, three European banks announced a total of $3.8 billion in exposure.

Santander and BNP, the largest banks of Spain and France, respectively, and Swiss private bank Reichmuth & Co also detailed possible losses.

"Santander's direct exposure is very limited, so the impact on their P&L account is virtually null," said Natalia Aguirre, an analyst at financial services firm Renta4.

"But it's not the same story for their clients ... and evidently there could be a long legal process."

Santander put its client exposure at more than 2.3 billion euros ($3.1 billion), while BNP Paribas said it could face a potential loss of 350 million euros.

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(Additional reporting by Steve Gorman in Los Angeles, Joel Dimmock and Olesya Dmitracova in London and Tracy Rucinski in Madrid, editing by Andrew Callus, Will Waterman and Jeffrey Benkoe)

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