Regulators and Industry Reel after $50bn Madoff Fraud

Losses and Lawsuits

WASHINGTON, DC - The shockwaves of Bernard Madoff's epic $50 billion fraud have by now hit all manner of financial institutions and investors. The US Securities and Exchange Commission (SEC) is facing accusations of falling asleep at the wheel, after failing to investigate Madoff despite repeated complaints from the industry. Meanwhile, banks, hedge funds and charitable investment funds were all hoodwinked into throwing their money into history's biggest pyramid scheme.

Hedge funds seem to have shouldered the largest losses. Thierry de la Villehuchet, the chief-executive and co-founder of fund manager Access International, was found dead in his New York office on December 23 - police suspected suicide. That was a little over a day after saying "I have to fight for my clients and myself" in the face of European client losses of up to $1.5 billion to Madoff's fraudulent scheme. Other big US hedge fund losers include Fairfield Greenwich - now being sued by its investors for failing to protect $7.5 billion of their assets - and investors of the Tremont group are seeking a similar class action. In Europe, the UK's largest bank, HSBC, has admitted $1 billion of exposure to Madoff's con, while London-based hedge Man Group has also suffered a $360 million exposure. Among the other bank counterparties, such as the Royal Bank of Scotland and Spain's Santander, Austria has already announced the nationalisation of its Bank Medici, which has sustained a $2.1 billion loss.

But it is the SEC that might yet sustain one of the heaviest blows. Responding on December 16 to mounting accusations of failure, SEC chairman Christopher Cox said: "I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them." Cox also called for support while the SEC begins to investigate the full extent of Madoff's fraud and its own failures: "The Commission believes strongly that it is vital that SEC investigators, examiners and enforcement staff be above reproach while conducting their duties, in order to ensure the integrity and effectiveness of the SEC."

The US House of Representatives Financial Services Committee will now decide, based on the testimony of investors and SEC inspector-general David Kotz, how to proceed with regard to the regulator's failure to effectively detect Madoff's fraudulent fund - and by implication decide on the future of the regulator itself, and of the hedge fund industry in general.

Reported losses so far:

Fairfield Greenwich, US - $7.5 billion

Tremont, US - $3.3 billion

Optimal Santander, Spain - $3.1 billion

Bank Medici, Austria - $2.1 billion

Access International, US - $1.5 billion

HSBC, UK - $1 billion

Natixis, France - $605 million

The Royal Bank of Scotland, UK - $601 million

BNP Paribas, France - $460 million

BBVA, Spain - $400 million

Man Group, UK - $360 million

Reichmuth & Co, Switzerland - $325 million

Nomura, Japan - $303 million.