NEW YORK (Reuters) - Top former Merrill Lynch executives, including two former CEOs, invested in hedge funds that lost money with alleged fraudster Bernard Madoff, becoming the highest-level Wall Street victims of the scandal to date, the Wall Street Journal reported on Thursday.
Former chief executives Daniel Tully and David Komansky and former investment-banking chief Barry Friedberg personally invested in the funds, set up by former Merrill brokerage chief John Steffens, the paper said, citing people familiar with the matter.
Bernard L. Madoff Investment Securities LLC collapsed after the 70-year-old Wall Street trader was arrested and charged on December 11 last year with securities fraud.
Madoff, a former chairman of the Nasdaq stock market, is under house arrest and 24-hour surveillance in his luxury Manhattan penthouse apartment as criminal and civil investigators probe his global operations that purportedly lost $50 billion.
The firm comprised a brokerage and an investment division that Madoff ran separately in the same New York building.
Madoff confessed to his sons in December that the investment arm was “a giant Ponzi scheme” with losses of as much as $50 billion, according to court documents.
A Ponzi scheme is one in which early investors are paid off with the money of new clients.
Steffens’ exposure to the scheme was tied to Ezra Merkin, a top Madoff investor who was one of three partners in Spring Mountain Capital LP, which managed nine of Steffens’ hedge funds, the Journal said.
Spring Mountain invested in three Merkin-led funds, and Steffens was aware of their heavy Madoff exposure in one, it reported.
“The Madoff connection is sad,” the Journal quoted Tully as saying.
He said he invested with Steffens because “you back people you know and trust.” Komansky could not be reached to comment, the paper said.
While $35 million in Madoff investments amounted to just 4.4 percent of Spring Mountain’s $800 million in hedge-fund fund-of-funds investments, Madoff represented as much as 7 percent of at least one fund, the Journal said.
Ten days after the Madoff scandal broke in mid-December, Steffens announced plans to close down the Spring Mountain funds of hedge funds, even though some had positive returns, it said, adding that it was not clear how much money the executives may have lost.
Reporting by Christopher Kaufman; Editing by Valerie Lee
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