Tue, December 16, 2008
Bernie Madoff With Staggering Amounts of Money
The news media continue to reverberate with details of Bernard Madoff’s fraudulent investment scheme. Sadly, a number of charitable foundations, including Elie Wiesel's Foundation For Humanity, Steven Speilberg’s Wunderkinder Foundation, the Carl and Ruth Shapiro Foundation, and the Robert Lappin Foundation, had most of their funds invested with him. The Lappin Foundation, based on the North Shore of Boston, has had to shut down.
The most complete list that I’ve seen so far of institutions and individuals that stand to lose money courtesy of Madoff is by Henry Blodget at Clusterstock. The list includes banks that lent money to hedge funds so they could invest with Madoff. I’ve written previously about the downsides for hedge funds that invest with borrowed money. Big-name victims include the Nomura and Neue Privat Banks, which marketed a security that was a 3x leveraged version of the Madoff funds.
Among the biggest losses:
- Tremont Capital - > $1 billion
- Kingate Global Fund Ltd. - $2.8 billion
- Grupo Santander SA (Spain) had $3.1 billion in client funds exposed to Madoff, largely through one of its hedge funds
- Fairfield Greenwich Group - $7.5 billion
The fallout from Madoff’s scheme will be tremendous. Families that had their life savings invested with him have begun putting real estate on the market. Some commitments made by the charitable foundations will have to be withdrawn. Several hedge funds are expected to close, and there could be further fallout as the damage to the banks involved is fully disclosed.
Failed Ponzi schemes often end with the victims hiring lawyers and suing anyone they can find – auditors, fund advisers, fund custodians, insurers – in hopes of recovering some portion of their lost funds. Sadly, this sometimes means that victims sue each other, as the payouts in a Ponzi scheme come from money that other investors have contributed. Madoff himself stands to lose most of what he owns, but much of the money stolen has probably been consumed, and legal fees will eat up a lot of the proceeds. Clients with funds in brokerage accounts are probably covered by the SIPC, but with a $500,000 limit on SIPC insurance, that won’t be enough for Madoff’s investors, who tended to be wealthy people and hedge funds.
Ron Lieber and Tara Siegel Bernard at the NY Times wrote a nice article last week describing some of the ways that investors can avoid getting ensnared in this kind of scam. The piece provides a link to a letter written by hedge fund research/advisory firm Aksia summarizing some of the “red flags” it found when it examined Madoff Securities.
The SEC, which actually investigated Madoff in the past and found nothing of consequence, is likely to come under intense criticism once the smoke clears in this case.
Dec. 15th Postscript: The Boston Globe is reporting this evening that Rye Investment Management, a division of Massachusetts Mutual Life Insurance Companies’ Tremont Group Holdings, had more than $3 billion invested solely with Madoff.