Monday, December 15, 2008

Lawyers are getting busy!

For investors who got suckered when they met Madoff’s intermediaries at the Palm Beach Country Club or one of the many other posh US golf courses where Madoff swung his driver, there may be little restitution. Ditto for those who invested through insubstantial funds of funds with little capital of their own. But, in some cases, there will be deep pockets.

The deepest of these pockets appear to be outside the US. First, there’s Santander, the Spanish banking giant. Optimal, its Swiss-based fund of funds operation, had $3.1bn of money invested with Madoff. Given that it only had 6bn euros ($8bn) in funds under management at the end of last year, that’s quite a lot of eggs in one basket.

Then there’s Unicredit, the Italian banking group. Pioneer Investments, its Dublin-based fund manager, has indirect exposure to the alleged Ponzi scheme through “feeder funds” that channelled money into Madoff. Pioneer isn’t saying how big its exposure was – but one report says that two of its funds had “substantially all” of their $835m invested in Madoff.

A large number of Swiss private banks were also exposed. Meanwhile, Man Group, the London-based fund manager, had roughly $350m lodged with Madoff via its RMF operation. The alleged fraud has also affected Nomura. The Japanese broker marketed a feeder fund to its clients.

The scandal is hugely embarrassing to all these substantial institutions. At the very least, it will undermine their reputations as savvy investment advisers. More likely, investors will demand compensation. How will these substantial institutions then react? One option will be to say no. But they could then face a slew of lawsuits for alleged negligence. Lawyers, including the class-action firm of Sonn & Erez, are already chumming the waters in search of aggrieved Madoff clients.

Investors in other funds managed by these deep-pocketed Madoff feeders who have not been affected might also lose confidence and take their money away – damaging their entire fund management franchises.

Another alternative will be to pay up. That’s what Santander did earlier this year after it had put some of its private bank customers into Lehman Brothers' investment vehicles. Voluntary compensation can be costly – especially for banks whose capital bases are being hammered from all sides. But, in the long run, it may be less expensive than toughing it out.
http://www.telegraph.co.uk/finance/breakingviewscom/3773632/Bernard-Madoff-victims-will-go-after-deep-pockets.html

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