Judge signs order to protect Madoff investors

A US judge has thrown a lifeline to investors who may have been duped in one of Wall Street’s biggest alleged frauds.

US District Judge Louis Stanton ordered that clients of Bernard Madoff’s private investment business seek relief under a statute created to rescue cheated investors.

Yesterday it emerged the alleged victims who sunk cash into veteran Wall Street money manager Madoff’s investment pool included some of the world’s biggest banking institutions and hedge funds, the super rich and the famous, pensioners and charities.

The 70-year-old Madoff, well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested on Thursday in what prosecutors say was a £33bn (€36.7bn) scheme to defraud investors.

Some investors claim they have been wiped out, while others are still likely to come forward.

Judge Stanton also ordered yesterday that the business be liquidated under the jurisdiction of a bankruptcy court and named lawyer Irvin Picard as trustee to oversee that process.

The judge signed the order after the Securities Investor Protection Corporation (SIPC) asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50bn (€36.54bn) in losses.

Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts.

Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000 (€365,400). The figure includes a maximum of up to $100,000 dollars (€73,000) on claims for cash.

The order came just days after prosecutors charged Madoff with securities fraud, saying he had admitted to orchestrating a massive Ponzi scheme.

Madoff is free on $10m (€7.3m) bail after he was charged with securities fraud last week.

Ira Lee Sorkin, Madoff’s lawyer, declined to comment.

SIPC President Stephen Harbeck said in a statement that the fund’s task will be harder than in other bankruptcies because of the size of the misappropriation and the condition of the defunct firm’s records.

Mr Harbeck said it would be unlikely that the trustee can transfer the firm’s customer accounts to a solvent brokerage firm. He added that it was impossible at this point to determine what share each investor might hold in any remaining assets.

From its inception through to December last year, the SIPC has advanced $507m (€370.6m) and made possible the recovery of $15.7bn (€11.47m) in assets for an estimated 626,000 investors, the fund said on its website.

Several major banks confirming their exposure to the alleged scam yesterday, including Spain’s Santander, the largest bank in the eurozone by market capitalisation.

Santander said its clients have €2.33bn at risk with Madoff, mostly through a fund called Optimal Strategic US Equity.

HSBC, Britain’s largest bank, said a “small number” of its institutional clients had exposure totalling some £660m (€735m) in Madoff funds.

It added that it has custody clients who have invested with Madoff, but it did not believe those “custodial arrangements should be a source of exposure to the group”.

Royal Bank of Scotland – Britain’s second-largest bank, which is now 58% nationalised – said it could lose around £400m (€446m).

Man Group, the world’s largest publicly traded fund manager that reported exposure of around £237m (€264m), said: “It appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls.”

Other major investors also lost out in the scam, including former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and the chairman of GMAC Financial Services, Ezra Merkin.

The extent of the potential damage prompted Britain’s Nicola Horlick, nicknamed “Superwoman” while a fund manager at Societe Generale, to lash out at US regulators for failing to detect the fraud earlier.

“I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down in the job,” Ms Horlick, the manager of Bramdean Alternatives, which has 9% of its funds invested in Madoff’s scheme, told the BBC yesterday.

“All through the credit crunch this has been apparent,” Ms Horlick added. “This is the biggest financial scandal, probably, in the history of the markets.”