Madoff in pictures: RBS's Madoff loss climbs to £600m

Published on Thursday 12 March 2009 20:55

DISGRACED US financier Bernard Madoff yesterday admitted he was guilty of the biggest investor fraud in history. Pleading guilty to 11 charges that leave him facing a sentence of up to 150 years, Madoff said that he was "ashamed" following the collapse of his $64 billion (£46 billion) investment fund.

Among his victims were Royal Bank of Scotland, which The Scotsman learned yesterday had lost about 600 million in the scam. The figure is half as high again as the 400 million RBS previously predicted it had lost.

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Click here to view a picture story of Bernard Madoff's fraud

The bank's losses came via the investment banking business it bought from ABN Amro.

The news emerged as Hector Sants, the chief executive of the Financial Services Authority (FSA), warned the City to be "frightened" as he pledged an era of more intrusive and direct regulation.

Mr Sants said the City watchdog would move away from a box-ticking culture in a "fundamental" change in its philosophy.

He added: "There is a view that people are not frightened of the FSA. I can assure you this is a view that I am determined to correct – people should be very frightened of the FSA."

In December, RBS stated it stood to lose 400 million from the collapse of the Madoff financial empire.

In statements to the Stock Exchange at the time - issued separately - Royal Bank of Scotland Group plc and the hedge fund Man Group plc said their losses could be up to $600 million, and the Man Group warned that it had invested about $360 million.

"If, as a result of the alleged fraud, the value of the assets of these hedge funds is nil, RBS's potential loss could amount to approximately 400 million," the RBS statement said.

However, yesterday an RBS spokesman confirmed the loss from the affair was 600 million, as disclosed to analysts when the bank's annual report was published last month. Last night, the source of the additional 200 million loss was unclear.

Speaking at a hearing in a New York courtroom, Madoff, 70, said: "I am actually grateful to publicly comment for my crimes for which I am deeply sorry and ashamed. I cannot express how regretful I am for my crimes."

Fifty of his victims, who had been allotted seats in the court, cheered when the judge, Denny Chin, ordered Madoff to be taken straight to jail, ending his controversial three months' bail, spent in his 4 million Manhattan penthouse. He will return to court for sentencing in June.

Apologising for a scheme that wiped out individuals' life savings, bankrupted scores of charities and is blamed for the suicides of at least two investors, Madoff said: "As the years went by, I realised my risk and (that] this day would inevitably come. I cannot adequately express how sorry I am for my crimes."

Such is the anger of investors that police had put up barricades outside the courthouse for Madoff's appearances, ferrying him inside.

The size of the swindle – and the failure of the country's financial regulators to spot it – has shocked America.

Eleven days before his arrest, in December, Madoff sent statements to the 4,000 investors of Bernard L Madoff LLC Investment Securities announcing the fund was worth $64 billion.

But prosecutors say there was less than $1 billion left in the fund. Madoff admitted in court: "I never invested the money, I deposited it into a Chase Manhattan Bank."

About $30 billion is missing – the actual amount that investors paid in to the fund.

For at least a decade, Madoff's firm had been lying to his victims, sending out regular statements itemising the funds and banks where their money was supposedly invested.

Prosecutors are widening their investigation to include Madoff's wife, Ruth, plus his brother and two sons, and 20 other people. Attention is also now turning to how the watchdog the Securities and Exchange Commission (SEC) failed to act despite numerous warnings that Madoff was a fraud.

Four investigations were conducted by the SEC into Madoff's fund, one triggered by a 2005 report by financial expert Harry Markopolis, The World's Largest Hedge Fund is a Fraud, which pointed to the impossibly high returns Madoff was claiming.

Yet the SEC failed to act, and it was only in December, when the banking meltdown left investors clamouring to withdraw money that did not exist, that Madoff confessed to the FBI.

The Obama administration is going to be under pressure when the House of Representatives' financial services sub-committee begins hearings demanding an explanation from the SEC.

And as investigations widen into so-called "feeder funds", victims are likely to trigger a blizzard of lawsuits, questioning the lack of regulation throughout America's already battered financial system – which is also reeling from a multi-billion-dollar fraud allegation against the banker Allen Stanford.

Bill McPherson, a US political analyst, said: "It has shaken everybody's belief that the system operates more or less fairly. It obviously wasn't working."

Madoff was christened "The Wizard of Wall Street" when he pioneered the use of computers to make complex mathematical models used to guide investment funds. By the 1970s, these models had earned him tens of millions of dollars. He was fted by charities and became the toast of the Manhattan elite and the country club circuit.

So successful was he that he became chairman of New York's Nasdaq exchange.

Madoff owns homes in France, Florida and upstate New York, in addition to his Manhattan penthouse. His Florida home is valued at $9.3 million (6.7 million).

Prosecutors say Madoff laundered a further $250 million (179 million), transferring it to his London office and then moving it back to New York.

An insight into Madoff's taste for luxury came in January when prosecutors intercepted five parcels he tried to mail to relatives while under guard on bail in his New York apartment. The parcels held a dozen Cartier and Tiffany diamond watches, four diamond brooches, an emerald ring, a jade necklace and other jewellery, together worth several million dollars.

One theory is that Madoff's motivation for the fraud was prestige. By the 1980s, other investment houses had caught up with the computer age and his own funds were no longer ahead of the rest in their returns.

This may have put pressure on him to devise a new way to give higher returns and led him to begin his "Ponzi" scheme, named after the early 20th- century Boston conman Charles Ponzi, which pays returns to investors from their own money or money paid by subsequent investors.

• City watchdog signals tough new banking regulations

THE CHARGES

Securities fraud: Failed to invest money as stated

Investment adviser fraud: From 1980s until 2008, gave incorrect advice to investors

Mail and wire fraud: Sent fraudulent statements to investors

International money laundering: Wired money from his New York office to London and back again.

False statements: Sent false accounts to the SEC.

Perjury: Lied at an SEC inquiry.

Falsely filed statements to SEC

Theft: $10 million taken from employees' pension fund.

THE MAN

Rise and fall of the American Dream personified (and golf cheat to boot)

FRAUDSTER Bernard Madoff has even been shown to be a cheat at golf.

A number of business writers analysed his returns from infrequent rounds played at three prominent country clubs in Florida and New York, and found that, in one year, he registered only 12 rounds of golf, but each time scored between 82 and 89 – showing a consistency almost impossible among amateur golfers, especially those out of practice.

Critics say this is more evidence of a burning desire to succeed that pushed Madoff into a rags-to-riches story phenomenal even by American standards. Born to Jewish parents in 1938 in Queens, New York, he was long fascinated by the stock market and started his own fund in 1960, investing money he saved while working as a lifeguard and installer of lawn sprinkler systems.

He quickly saw the possibilities of computers, and the system he devised for dealing with stocks and shares was the one adopted by the Nasdaq technology exchange, of which he became chairman.

Madoff is married to Ruth, his high school sweetheart, and they have two sons, Mark and Andrew, who are involved in his legitimate investment business.

Last night, their father had swapped a life of luxury – he also owns a 55ft yacht, moored in the French Riviera – for a spartan prison cell.

The name of the vessel is "Bull". It is not know whether that refers to a buoyant market or the lies he told.

THE VICTIMS

Roll call of investors reads like who's who of transatlantic elite

CHRIS STEPHEN

THE list of investors hit by Bernard Madoff's Ponzi sales scheme includes many of America's most prominent names.

Actor Kevin Bacon, film director Steven Spielberg and actress Barbara Bach are among those likely to have lost money. Many were unaware their brokers had placed their funds with Madoff.

Other victims include the owner of New York's Mets baseball team, Fred Wilpon, the Kissenger family trust and the New Jersey senator Frank Lautenberg.

Santander, the Spanish bank that owns Abbey and the savings business of Bradford & Bingley, said its potential exposure was 2 billion.

Among Britons on Madoff's client list are Lady Victoria de Rothschild, who caused controversy last year with a 1 million loan to the Conservative Party. Also included is Lord Anthony Jacobs, a former joint treasurer of the Liberal Democrats.

Steven Raven lost his job as chief executive of Madoff Securities International in December after the scandal broke, and is now trying to sell his house in Esher, Surrey. Outside the court yesterday, Bennett Goldworth, another former investor in the fund, said he had been ruined by the scheme, in which he had invested $4 million (about 3 million), 97 per cent of his assets. He said: "I was retired, I'd moved to Florida. Now I've had to move back in with a parent. At 52, I'm starting over again."

And many of the victims gathered here wanted to know why regulators missed such a huge fraud. "I think the government does not want a trial, because the SEC (Securities and Exchange Commission] negligence would come out," said Bernard Friedman, an accountant who claims to have lost $3 million in the fraud.