Madoff's Investors Facing Billions in Potential Losses
Investors
scrambled on Friday to assess potential losses from the $50 billion
fraud allegedly perpetrated by Bernard Madoff, a day after the arrest
of the prominent Wall Street trader.
Prosecutors
and regulators accused the 70-year-old former chairman of the Nasdaq
Stock Market of masterminding a Ponzi scheme of epic proportions
through a hedge fund he ran.
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CNBC.com Bernard L. Madoff
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Hundreds
of people, investing with him through the fund's clients, entrusted
Madoff with billions of dollars, industry experts said.
"Madoff's
investors included captains of industry, corporations (some of which
are publicly traded) that used Madoff almost as a high-yielding cash
management account, endowments, universities, foundations and,
importantly, many high-profile funds of funds," said Douglas Kass, who
heads edge fund Seabreeze Partners Management.
"It
appears that at least $15 billion of wealth, much of which was
concentrated in Southern Florida and New York City, has gone to 'money
heaven,'' he added.
Federal
agents arrested Madoff at his apartment on Thursday after prosecutors
said he told senior employees that his money management operations were
"all just one big lie" and "basically, a giant Ponzi scheme."
Madoff is the founder of Bernard L. Madoff Investment Securities,
a market-making firm he launched in 1960. His separate investment
advisory business had $17.1 billion of assets under management.
About
a dozen angry investors gathered on Friday in the lobby of the Lipstick
Building in midtown Manhattan, where the market-making firm and
advisory fund are both headquartered, demanding to know the fate of
their money.
One
woman who declined to give her name said that when she called the
firm's offices on Thursday she was told it was "business as usual."
Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right."
Police later evicted the small group from the building.
The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund, run by Kingate Management.
Video: The latest on the scandal.
Fairfield
Sentry and Kingate Global were among a small group of hedge funds to
report positive returns for 2008; the average hedge fund was down 18
percent, according to data from Hedge Fund Research.
"People
who came to us for portfolio construction were often already invested
with Bernie Madoff, he had hundreds of clients," said Charles Gradante,
who invests in hedge funds as a principal at Hennessee Group. 'Now his
whole legacy is destroyed. He was God to people."
In
a Ponzi scheme, a swindler uses money from new investors, who are lured
with the promise of high or consistent returns, to pay off earlier
investors.
Prior
to Madoff's arrest, investors had wondered how he was able to generate
annual returns in the low double digits in a variety of market
environments. Many questioned how U.S. regulators were able to ignore
numerous red flags with regards to Madoff's fund.
"Many
of us questioned how that strategy could generate those kinds of
returns so consistently," said Jon Najarian, an options trader who
knows Madoff and is a co-founder of optionmonster.com.
In
May 2001, Barron's reported that option strategists for major
investment banks said they couldn't understand how Madoff managed to
generate the returns that he did.
"We
weren't comfortable with Madoff," said Brad Alford, president at
investment adviser Alpha Capital in Atlanta. "We didn't understand how
his strategy could generate the kind of returns it did. We will walk
away from things like that."
Investors overseas were also reeling from the alleged fraud.
Benedict
Hentsch, a Swiss private bank, said it had 56 million Swiss francs ($47
million) of exposure to Madoff's investment advisory business.
UniCredit SpA's fund management unit, Pioneer Investments, has exposure through its Primeo Select hedge fund, two people familiar with the matte said.
Bramdean Alternatives said almost 10 percent of its holdings were exposed to Madoff, sending shares in the UK asset manager crashing.
CNBC reported that Sterling Equities, which owns the New York Mets baseball team, had accounts managed by Madoff.
Madoff
said "there is no innocent explanation' for his activities, and that he
'paid investors with money that wasn't there," according to the federal
complaint. Prosecutors also alleged that Madoff wanted to distribute as
much as $300 million to employees, family members and friends before
turning himself in.
Charged
with one count of securities fraud, he faces up to 20 years in prison
and a $5 million fine. The U.S. Securities and Exchange Commission
filed separate civil charges.
A
U.S. federal judge is expected later Friday to hold a hearing on
whether to put assets under Madoff's control into a receivership.
Madoff's
lawyer, Dan Horwitz, said on Thursday, "We will fight to get through
this unfortunate set of events." His client was released on $10 million
bond.
Madoff is a
member of Nasdaq OMX Group Inc's nominating committee. His firm has
said it is a market-maker for about 350 Nasdaq stocks.
He is also chairman of London-based Madoff Securities International, whose chief executive, Stephen Raven, said the firm was 'not in any way part of' the New York-based market-maker.
"Our
business activities are not involved in any way with the U.S. asset
management company with which the reported allegations appear to be
concerned," Raven said.
Copyright 2008 Reuters.