Swiss banks and asset managers are among a growing list of global institutions facing legal action over their links to the Madoff Ponzi scam.
Liquidators of the fraudulent scheme have demanded $2.5 billion (SFr2.47 billion) from UBS bank while Union Bancaire Privée has agreed to pay back up to $500 million in lost funds. Other institutions may also soon face civil or criminal suits.
Disgraced trader Bernard Madoff is serving a 150-year jail term for setting up the most notorious Ponzi scheme in history. Instead of investing the money he received from clients, Madoff used it to award himself large fees and used new cash to pay off people who left the scam.
When Bernard Madoff Investment Securities went bust in 2008 it wiped out $20 billion of cash still invested by clients and revealed that the reported $45 billion of asset growth was just a fiction.
Madoff’s client list was largely confined to the world’s wealthiest people and included A-List Hollywood stars and charitable organisations.
However, Madoff is not the only person being blamed for the massive fraud; he enlisted the help of a multitude of international financial institutions to help him attract new clients.
Among the institutions that were unwittingly involved in the scam were UBS, which set up two so-called “feeder funds” in Luxembourg to process clients’ money into the scheme, and other smaller Swiss private banks and asset managers.
The United States liquidator of the Madoff estate, Irving Picard, is pursuing damages against UBS and other major banks, such as HSBC and JP Morgan Chase. He is claiming in the US courts that while the banks were not knowingly complicit in the scam, they still received fat fees for their services while failing to carry out proper background checks.
UBS has denied liability, arguing that it was asked to set up its Luxembourg funds by Madoff clients and never actively marketed the scheme. “The allegations are completely unfounded and without merit. We will take all appropriate steps to demonstrate that the allegations are false and unfounded,” UBS spokeswoman Tatiana Togni told swissinfo.ch.
Union Bancaire Privée, however, has decided not to fight the legal action and agreed this week to pay up to $500 million while denying liability.
Spanish bank Santander, which attracted money to Madoff’s scheme through its Geneva-based Optimal Investment Services fund, had previously offered clients compensation for losses.
The official US liquidator is not the only entity trying to claim damages from UBS. A group of wealthy French families has launched legal action in Paris, while European investor protection consultancy Deminor is also pursuing the bank.
Deminor, that is representing some 2,500 investors (around 300 of them Swiss), believes UBS should pay back the €400 million (SFr523 million) that they lost in the scam.
Their main complaint is that UBS misled investors by failing to mention Madoff’s name in prospectuses, and particularly the fact that the fraudster was a sub-custodian of the Luxembourg feeder funds.
“UBS failed to disclose its commercial relationship with Madoff,” Deminor’s Edouard Fremault told swissinfo.ch. “It felt to clients like they were putting their money into a UBS product, but they were really entrusting it to Madoff.”
Criminal cases pending
Zurich-based lawyer Daniel Fischer, head of AFP Fischer and Partners, said he was negotiating with several institutions to seek compensation for Madoff-related losses suffered by more than 100 clients.
“These institutions had a duty to look after their clients’ money, but they did not do that properly,” Fischer told swissinfo.ch. “They have repeatedly claimed their innocence by saying there were no red flags to alert them that anything was going on. But we are getting more and more evidence that they did know that something was wrong.”
Fischer added that some of this evidence is starting to point to criminal negligence by managers of funds that fed clients’ money to Madoff.
He revealed that his office has already initiated criminal proceedings against one unnamed Swiss asset manager and was poised to issue charges against Swiss private bank Reichmuth and Co that had funneled funds to Madoff through its now extinct investment fund, Reichmuth Matterhorn.
The Madoff scandal
Bernard Madoff founded Bernard L Madoff Investment Securities on Wall Street in 1960. He started the fraudulent Ponzi scheme in the 1990s.
The scheme was reportedly worth $65 billion by the time the fraud was discovered in December 2008. This figure was made up of some $20 billion deposited by investors with the remaining amount consisting of fictitious growth on investments.
The money was not invested, but new cash injected by new clients was used to pay people who closed accounts.
Madoff ran the fund as an exclusive club, attracting money from Jewish charities and a host of wealthy people, including Steven Spielberg, according to reports.
The fund was run with strict secrecy and ran internal audits. Many financial institutions sounded alerts about a possible Ponzi scheme, but regulators admitted that they did not investigate these warnings thoroughly enough.
On December 10, 2008, Madoff was arrested in the US after allegedly admitting to his sons that the scheme was "one big lie".
In March 2009, Madoff pleaded guilty in court to 11 charges including fraud, perjury and money laundering. He said he was "deeply sorry and ashamed".
Madoff was sentenced to 150 years in prison on June 29, 2009.end of infobox