Nov. 13 (Bloomberg) -- Almost six years after Bernie Madoff admitted his investment firm was based on “one big lie,” two European criminal cases linked to the convicted fraudster are working their way to trial in Geneva.
Prosecutor Marc Tappolet is finishing an indictment of five managers at Aurelia Finance SA after the final pre-trial hearing wrapped up, said Henri Della Casa, a spokesman for the Geneva prosecutor’s office. One more witness needs to be questioned in another country before a second case can proceed against the former head of Banco Santander SA’s Optimal Investments unit, he said.
Aurelia was one of dozens of European vehicles that were known as “feeder funds” because they pooled assets to invest with Madoff.
“The Aurelia criminal trial is of great importance as it’s the first time managers of a so-called Madoff feeder fund are being held accountable for their alleged misconduct at a European criminal court,” said Erik Bomans, a partner with Deminor Group, a Brussels-based adviser that represents about 4,000 Madoff investors. “It will be a first important test for investor protection over the Madoff fallout in Europe.”
Madoff, 76, is serving a 150-year prison sentence in the U.S. after pleading guilty in 2009 to running a $17.5 billion Ponzi scheme that took money from new investors to pay old ones. A U.S. federal jury in March found five members of Madoff’s inner circle guilty of securities fraud, in what was likely the only criminal trial linked to the fraud anywhere in the world.
The five Aurelia managers were charged with “aggravated mismanagement” of clients’ money in April 2009, Tappolet said when he began his pre-trial investigation. The term typically means mismanagement with the intent of profiting from the act.
Albert Righini, a lawyer for Pascal Cattaneo, one of the Aurelia executives, declined to comment on any trial, which probably wouldn’t be scheduled before next year. Gerhard Auer, the Geneva-based administrator liquidating Aurelia Finance’s assets, said that the company has had no civil proceedings pending against it and declined to comment on the criminal case.
Francois Canonica, one of a team of lawyers who represent 75 investors who invested about 60 million Swiss francs ($62 million) with Madoff through Aurelia, said his clients were cheated by fund managers who didn’t sufficiently diversify their investments and were overly trusting of the New Yorker.
“The traditional rules by which fund managers are obliged to diversify investments were gravely violated,” he said in an interview.
Canonica has said his clients have received nothing while other Geneva investment firms that invested with Madoff have been offered compensation. Notz Stucki & Cie in 2009 pledged to return as much as 120 million Swiss francs to customers and Union Bancaire Privee about $700 million the same year.
They are among at least seven firms in the region that lost as much as $7 billion in the fraudulent scheme that cost investors worldwide about $65 billion.
Charles Poncet, who represented the Aurelia executives when the charges were filed in 2009 and has since stepped back from the case, said the case is without merit.
“This is a ridiculous case brought by an overeager prosecutor who thinks that making a bad investment can be a crime,” he said in an interview.
Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, has recovered more than $9.8 billion, or 56 percent, of the $17 billion in claims, and distributed almost $6 billion of that. Picard is holding back about $4.3 billion because of ongoing appeals and related disputes.
Madoff’s deception was a blow to Geneva’s reputation as a safe place to do business and the trials are an unwelcome reminder at a time when the city’s financial community has other challenges.
The fraud “was a shock as Geneva is very much old money, so credibility and prestige are very important,” said Stephane Garelli, a professor at IMD business school in Lausanne, Switzerland. “It was a bad moment for a lot of people in Geneva because they didn’t show very good judgment -- and today people will say ‘let’s turn the page, let’s forget about that, we have enough on our plate in future with banking secrecy and other things.”
While victims of the fraud were spread across Europe, Tappolet is the only public official who has been willing to file a case. The U.K. Serious Fraud Office in 2010 said there was insufficient evidence to bring charges against Madoff’s U.K. unit, where U.S. prosecutors said he transferred more than $250 million.
Manuel Echevarria, the former head of Santander’s Optimal Investment unit, was charged in 2009 with criminal mismanagement over his handling of client funds. Optimal had about 2.33 billion euros ($2.9 billion) invested with Madoff at its peak.
Saverio Lembo, a lawyer for Echevarria, declined to comment on the case beyond saying that his client “is strongly determined to prove his innocence.”
Six years on, Tappolet will face a challenge in securing a guilty verdict, said Luc Thevenoz, a professor of law and director of the University of Geneva’s Centre for Banking and Financial Law.
“It will be very difficult to convince a court that there was criminal intent and that the defendants were aware of Madoff’s fraud,” he said.
--With assistance from Stephanie Bodoni in Luxembourg.
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