Three European banks hit by Madoff scheme

Some of the world's biggest banks have been hit by one of Wall Street's biggest alleged frauds which has lost an estimated $50m…

Some of the world's biggest banks have been hit by one of Wall Street's biggest alleged frauds which has lost an estimated $50m.

Three European banks yesterday announced a total of about $3.8 billion in exposure to an investment fund run by Bernard Madoff, the US investor accused of running a $50 billion "Ponzi" scheme.

The largest banks of both Spain and France, Santander and BNP Paribas, and Swiss private bank Reichmuth & Co became the latest parties to detail possible losses over investments made with Madoff, who was arrested in New York on Thursday in the alleged fraud.

Santander put its client exposure at over $3.09 billion. BNP Paribas said it could face a potential loss of €350 million from exposure to Madoff-linked investments. And Swiss private bank Reichmuth & Co said it had about 385 million Swiss francs at stake.

US prosecutors and regulators have accused the 70-year-old Madoff, the founder of Bernard L. Madoff Investment Securities LLC and a former chairman of the Nasdaq Stock Market, of masterminding a fraud through his investment advisory business, which managed at least one hedge fund.

A Ponzi scheme is a scheme which offers unusually high returns, with early investors paid off with money from later investors.

Hundreds of people, investing with him through the firm's clients, entrusted Madoff with billions of dollars, industry experts have said.

Santander, which has to date emerged unscathed from the global financial crisis, said in a statement yesterday that its investment fund Optimal had exposure to Madoff Securities of €2.33 billion, 2.01 billion of which were funds invested for institutional investors and private banking clients outside Spain.

The remaining €320 million were part of the investment portfolios of private banking clients in its home country, which are qualifying investors, the bank said in a statement.

"Optimal will undertake legal actions to defend the interests of the shareholders of the subfund," the bank said in a statement on Sunday evening.

Santander said its exposure came from an investment company managed by Optimal called Optimal Multiadvisors Ireland, which was authorised by the Irish Financial Services Regulatory Authority.

The Irish-based company had a subfund called Optimal Strategic US Equity which had used Madoff Securities to carry out its investments.

The custodian of Optimal Multiadvisors and Optimal Strategic is HSBC Institutional Trust Services in Ireland, which belongs to HSBC, said Santander.

It said the Santander group also had €17 million invested in Madoff-related investments through another fund.

In its statement, BNP Paribas said it had no investments of its own in Madoff funds but had risk exposure through its trading business and collateralized lending to funds of hedge funds.

Switzerland's Reichmuth wrote to clients in a letter dated December 13, posting the letter on its website over the weekend.

The Lucerne-based bank said Reichmuth Matterhorn, a fund of hedge funds, had investments in instruments linked to Madoff.

"The affected funds amount to roughly 3.5 per cent of our assets under management of approximately 11 billion Swiss francs," the letter said.

The announcements are likely to be followed by others across Europe. On Saturday, French-language newspaper Le Temps said Geneva-based private banks and asset managers could lose more than 5 billion Swiss francs.

Reuters