British banks losing billions to ‘one big lie’ in biggest ever fraud

Antaletriangle · 12-16-2008, 12:34 AM

http://business.timesonline.co.uk/to...cle5349166.ece
Wall Street investors struggle to understand how they fell for simple pyramid-selling fraud

The eye-popping scale of what is being billed as the world’s largest swindle became apparent yesterday as wealthy investors and banks around the world emerged as the victims of Bernard L. Madoff.

The Royal Bank of Scotland admitted that it stood to lose £400 million, and HSBC warned its shareholders that its losses could be $1 billion (£675 million), making it Britain’s largest victim so far of the New York financier’s “one big lie”.

Clients of Man Group, the former sponsor of the Man Booker literary prize, are facing a $360 million loss.

Several local authorities are also exposed. Hampshire County Council has invested about £8 million in Madoff funds, and five Merseyside boroughs fear that they will lose about £2 million from the scam.

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Banks and investors around the globe announced probable losses of $19.5 billion in aggregate, although Mr Madoff has said that the figure could go as high as $50 billion.

Wall Street was still trying to digest the unprecedented scale of the fraud, news of which broke last week when the FBI announced that Mr Madoff, a pillar of New York society and a former chairman of the Nasdaq share market, had been arrested and charged. What had taken Mr Madoff years to set up had collapsed in less than three months.

As the ripples of the Madoff scandal spread outside the US, it emerged that the firm’s London office, based off Piccadilly at 12 Berkeley Street in the heart of hedge fund Mayfair, had closed for business on Friday.

The London office however, was reported to have insisted that it was a separate entity from the scandalised business in New York. It is 88 per cent owned by Mr Madoff and employs about 15 people.

Mr Madoff founded a Wall Street trading firm that bore his name in 1960 and began dealing for fund managers, big banks and brokers in stocks and bonds. The firm was successful enough for him to commute from his Long Island home to Wall Street in a helicopter, and years later to take three floors in the renowned Lipstick Building on Third Avenue in Midtown Manhattan – an area teeming with hedge funds, investment firms and banks.

With homes in New York and Florida, Mr Madoff enjoyed the trappings of a wealthy New York financier. A member of the elite Palm Beach Country Club, private dining societies, Mr Madoff played golf and drank cocktails with the exclusive tranche of old American money for 50 years. His offices were adorned with Roy Lichten-stein prints and the glass lobby was flanked with a colonnade of red granite pillars. In the past few years – it is not clear exactly when – Mr Madoff began to diversify.

He set up a separate arm of his business designed to invest the funds of rich individuals, enticing them with his long-established name, his own wealth, and promising potential investors returns of up to 12 per cent.

Investigators believe he was able to lure new clients through recommendations from his institutional clients, such as the banks on whose behalf he had traded for decades. According to a regulatory filing in January, Mr Madoff’s advisory business had $17.1 billion of assets under its control.

Had it not been for the collapse of Lehman Brothers on September 15, Mr Madoff would probably be planning his Christmas golfing plans in the tropical warmth of Florida. He would not be on a $10 million bail bond and instructed not to stray far beyond the New York state boundaries.

He would not be facing up to 20 years in prison, perhaps seeing out the rest of his life behind bars. And he would not be mulling over the prospect that his name will feature in college term papers on Wall Street fraud next to paragraphs on Enron.

It was the collapse of stock markets across the world, triggered by the fall of Lehman Brothers, the Wall Street bank, which proved to be Mr Madoff’s unravelling.

His investors got scared. They applied to withdraw their funds which, they had been informed in neat invoices at the end of each year, were invested in blue-chip stocks and benign, rock-solid Treasury bonds. Regulators believe that no such investments were made.

Scouring audit trails, they believe new money entering the fund was simply used to pay returns for existing investors, the model of a classic Ponzi scheme. Under the terms of such a scam, all investors are paid with their high returns so long as new clients keep joining the fund to provide fresh capital. Overwhelmed by a rush of requests from investors to withdraw cash, Mr Madoff still managed to hold things together, until last Wednesday.

According to the New York state attorney, Mr Madoff told two senior employees – now believed to be his sons, Mark and Andrew – that his advisory business was a fraud. On the separate floor reserved for the advisory business, cut off from the rest of the firm, he told them that he was “finished”, that he had “absolutely nothing”, that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme”.

He also admitted that he thought the losses were about $50 billion and that, after disbursing the $200 million to $300 million he had left to employees, family and friends, he planned to confess all to the authorities.

It is understood that his sons did not give him time to do so, and contacted the authorities themselves. On Thursday evening he was arrested.

Now Mr Madoff is the least of the regulators’ worries. Apart from trying to assemble the case against him and ascertain whether he was assisted by other employees, they must also face vicious criticism over how the world’s biggest financial centre managed to miss a fraud on such a colossal scale.

Last night a US judge appointed a trustee to liquidate the entire American business of Mr Madoff.

12-16-2008, 12:34 AM	#1
Antaletriangle Avalon Senior Member Join Date: Sep 2008 Location: U.K. Posts: 3,380	British banks losing billions to ‘one big lie’ in biggest ever fraud http://business.timesonline.co.uk/to...cle5349166.ece Wall Street investors struggle to understand how they fell for simple pyramid-selling fraud The eye-popping scale of what is being billed as the world’s largest swindle became apparent yesterday as wealthy investors and banks around the world emerged as the victims of Bernard L. Madoff. The Royal Bank of Scotland admitted that it stood to lose £400 million, and HSBC warned its shareholders that its losses could be $1 billion (£675 million), making it Britain’s largest victim so far of the New York financier’s “one big lie”. Clients of Man Group, the former sponsor of the Man Booker literary prize, are facing a $360 million loss. Several local authorities are also exposed. Hampshire County Council has invested about £8 million in Madoff funds, and five Merseyside boroughs fear that they will lose about £2 million from the scam. Related Links Wealthy fought to join Mandoff's club Boom-time scam laid bare by bust The conman, the dream - and the sharp suit Banks and investors around the globe announced probable losses of $19.5 billion in aggregate, although Mr Madoff has said that the figure could go as high as $50 billion. Wall Street was still trying to digest the unprecedented scale of the fraud, news of which broke last week when the FBI announced that Mr Madoff, a pillar of New York society and a former chairman of the Nasdaq share market, had been arrested and charged. What had taken Mr Madoff years to set up had collapsed in less than three months. As the ripples of the Madoff scandal spread outside the US, it emerged that the firm’s London office, based off Piccadilly at 12 Berkeley Street in the heart of hedge fund Mayfair, had closed for business on Friday. The London office however, was reported to have insisted that it was a separate entity from the scandalised business in New York. It is 88 per cent owned by Mr Madoff and employs about 15 people. Mr Madoff founded a Wall Street trading firm that bore his name in 1960 and began dealing for fund managers, big banks and brokers in stocks and bonds. The firm was successful enough for him to commute from his Long Island home to Wall Street in a helicopter, and years later to take three floors in the renowned Lipstick Building on Third Avenue in Midtown Manhattan – an area teeming with hedge funds, investment firms and banks. With homes in New York and Florida, Mr Madoff enjoyed the trappings of a wealthy New York financier. A member of the elite Palm Beach Country Club, private dining societies, Mr Madoff played golf and drank cocktails with the exclusive tranche of old American money for 50 years. His offices were adorned with Roy Lichten-stein prints and the glass lobby was flanked with a colonnade of red granite pillars. In the past few years – it is not clear exactly when – Mr Madoff began to diversify. He set up a separate arm of his business designed to invest the funds of rich individuals, enticing them with his long-established name, his own wealth, and promising potential investors returns of up to 12 per cent. Investigators believe he was able to lure new clients through recommendations from his institutional clients, such as the banks on whose behalf he had traded for decades. According to a regulatory filing in January, Mr Madoff’s advisory business had $17.1 billion of assets under its control. Had it not been for the collapse of Lehman Brothers on September 15, Mr Madoff would probably be planning his Christmas golfing plans in the tropical warmth of Florida. He would not be on a $10 million bail bond and instructed not to stray far beyond the New York state boundaries. He would not be facing up to 20 years in prison, perhaps seeing out the rest of his life behind bars. And he would not be mulling over the prospect that his name will feature in college term papers on Wall Street fraud next to paragraphs on Enron. It was the collapse of stock markets across the world, triggered by the fall of Lehman Brothers, the Wall Street bank, which proved to be Mr Madoff’s unravelling. His investors got scared. They applied to withdraw their funds which, they had been informed in neat invoices at the end of each year, were invested in blue-chip stocks and benign, rock-solid Treasury bonds. Regulators believe that no such investments were made. Scouring audit trails, they believe new money entering the fund was simply used to pay returns for existing investors, the model of a classic Ponzi scheme. Under the terms of such a scam, all investors are paid with their high returns so long as new clients keep joining the fund to provide fresh capital. Overwhelmed by a rush of requests from investors to withdraw cash, Mr Madoff still managed to hold things together, until last Wednesday. According to the New York state attorney, Mr Madoff told two senior employees – now believed to be his sons, Mark and Andrew – that his advisory business was a fraud. On the separate floor reserved for the advisory business, cut off from the rest of the firm, he told them that he was “finished”, that he had “absolutely nothing”, that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme”. He also admitted that he thought the losses were about $50 billion and that, after disbursing the $200 million to $300 million he had left to employees, family and friends, he planned to confess all to the authorities. It is understood that his sons did not give him time to do so, and contacted the authorities themselves. On Thursday evening he was arrested. Now Mr Madoff is the least of the regulators’ worries. Apart from trying to assemble the case against him and ascertain whether he was assisted by other employees, they must also face vicious criticism over how the world’s biggest financial centre managed to miss a fraud on such a colossal scale. Last night a US judge appointed a trustee to liquidate the entire American business of Mr Madoff.