Madoff Brokerage To Liquidate; Man, RAB, Tremont Among Victims

Dec 16 2008 | 5:14am ET

The list of Bernard Madoff's alleged victims continues to grow, with several prominent hedge funds joining the unfortunate ranks. As investors around the world sought to calculate their losses, the investigation into Madoff's apparent fraud proceeded, as did the legal wrangling.

Yesterday, a federal judge ordered that Bernard L. Madoff Investment Securities’ brokerage be liquidated by the Securities Investor Protection Corp. U.S. District Judge Louis Stanton named Irvin Picard, a lawyer at Gibbons PC in New York, as trustee, charged with returning cash and securities to the brokerage’s clients. Picard is the most experienced brokerage liquidation trustee in the country, according to the SIPC, a federally-created group that insures brokerage accounts.

“It is clear that the customers of the Madoff firm need the protections available under federal law,” Stephen Harbeck, SIPC president, said. But he warned that “the scope of the misappropriation and the state of the defunct firm’s records will make this more difficult” that your everyday brokerage failure.

Harbeck added that it was unlikely that Picard would be able to transfer the Madoff brokerage’s assets to another firm, and that it was unclear how much would actually be returned to Madoff’s customers.

Meanwhile, federal investigators have been working around the clock to sift through the records of the Madoff firm. The Securities and Exchange Commission has more than a dozen inspectors at Madoff Securities’ New York office.

The investigation has uncovered an unregistered money-management unit that Madoff allegedly ran separately from the investment advisory business, which until now was thought to be the site of most of the losses, which could total $50 billion. According to Bloomberg News, clients of the secretive unit may have included hedge funds, and the SEC is seeking evidence that people or firms other than Madoff himself were involved in the Ponzi scheme.

One name that has reportedly come up is Madoff’s wife, Ruth, who has not been charged with any wrongdoing. Her name apparently appears on some documents related to transactions that the SEC is scrutinizing.

As for other members of the Madoff family, investigators have apparently found no evidence that Madoff’s sons or brother, all of whom worked at the firm, participated in the alleged fraud.

Madoff’s sons, Andrew and Mark, and his brother, Peter, all held top posts at the Madoff firm. But The New York Times reports that no evidence contradicting Madoff’s alleged claim that the Ponzi scheme was “all his fault” has yet to be found.

Madoff reportedly ran his investment advisory business on a separate floor from the rest of his firm in a landmark office building on Third Avenue in Manhattan. His sons and brothers worked on the 18th and 19th floors, which housed the firms market-making business and proprietary trading desk, while Madoff kept matters on the 17th floor, where the investment advisory was located, under lock and key. What’s more, one of Madoff’s sons reportedly had “a meaningful amount of money” invested with his father, and received the same allegedly phony statements that all other investors were sent.

The Feds aren’t the only ones investigating the Madoff scandal. William Galvin, the media-loving Massachusetts secretary of the commonwealth, has launched his own probe, subpoenaing all Massachusetts-related records from the Madoff firm.

Galvin is no stranger to the hedge fund industry. He has engaged in a long-running battle with equally-outspoken hedge fund manager Phil Goldstein over hedge fund marketing, as well as suing Bear Stearns over that firm’s collapsed mortgage-backed securities hedge funds and railing against public pension funds investing in the asset class.

“Our jurisdiction is extensive, especially when it comes to fraud,” Galvin told the Boston Herald.

Galvin’s constituents are among the hardest hit by the Madoff scandal, with a Salem, Mass.-based Jewish charity closing its doors in response to its losses, and several other wealthy Boston-area investors apparently victimized. Galvin said he has been contacted by 10 Massachusetts residents affected by the alleged fraud.

“Most or virtually all had multimillion-dollar investments—there was no one in this for $50,000,” he said.

In addition to subpoenaing the Madoff firm, Galvin has sent subpoenas to Cohmad Securities—which reportedly recruited Massachusetts investors for Madoff—as well as anyone else who might be liable.

“If there’s any hope of recovery here, it will be to locate entities and assets involved,” he said.

The Massachusetts charity, the Robert I. Lappin Charitable Foundation, is just one of three philanthropic organizations forced to shut down due to their investments with Madoff. Another Jewish charity, the Chais Family Foundation, and the JEHT Foundation, which supports reform of the criminal justice system, also closed.

“I regretfully write to inform you that due to a sudden financial crisis and the resulting loss of funding, the JEHT Foundation has stopped all grant-making effective immediately and will be closing its doors in early 2009,” Robert Crane, the foundation’s president, wrote in an e-mail obtained by FINalternatives. “Unfortunately, the funds of the donors to the JEHT Foundation were managed by Bernard L. Madoff, a financial advisor who was arrested last week for defrauding investors out of billions of dollars.”

Representatives of the two closed Jewish charities were less diplomatic.

“It’s horrifying,” Amy Powell of the Lappin Foundation told Reuters. The Chais Foundation’s Avraham Infeld told the news agency, “I find this man’s immorality almost as great as the Chais’s generosity.”

The identity of victims of the alleged Ponzi scheme continues to trickle out. The list of Madoff investors now includes such prominent hedge funds as the Man Group, whose RMF strategy had some $360 million invested with Madoff, and RAB Capital, which had about $10 million of exposure. But with one exception—Fairfield Greenwich Group, which has $7.5 billion in exposure—no hedge fund is on the hook for more than Tremont Group’s Rye Investment Management. The Rye, N.Y.-based group had all of its $3.1 billion in assets under management invested with Madoff.

“Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable,” the firm told investors in a letter on Friday.

Tremont’s fund of hedge fund group, Tremont Capital Management, also had substantial exposure to Madoff, with 7% of its $2.7 billion invested with the alleged fraudster.

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