Jason DeCrow/AP
Bernard Madoff, chairman of Madoff
Investment Securities

Chilean Firm Takes Lead in Accountability for Madoff Losses

December 22, 2008 12:54 PM
by findingDulcinea Staff
A Chilean brokerage firm is paying back its clients for losses incurred in the Bernard Madoff fraud; firms that don’t act similarly may be faced with client lawsuits.

Chilean Firm Refunds Clients; Lawyers Ponder Madoff Lawsuits

Celfin SA, a Chilean brokerage firm, will repay a total of $10 million to clients that lost money in Bernard Madoff funds. “We are committed to returning 100 percent of the capital invested,” Celfin partners Juan Andres Camus and Jorge Errazuriz said, according to Bloomberg.
The case of Celfin is one example of a firm holding itself accountable for the lapses in due diligence that accompanied the Madoff affair. Sol Waksman, president of BarclayHedge, which tracks the performance of hedge fund managers, summed up the climate of the industry: “It’s gone from being an old boy’s network to a real business. If you knew the right people, or if the right people could vouch for you, you were in,” he said, according to CNNMoney. “That’s what due diligence was—checking the references.”

Celfin’s motivation may be a genuine sense of responsibility to its clients, but it may also be an attempt to avoid being sued by those clients for failing to perform the due diligence on Madoff’s firm. On Dec. 19, Reuters reported that there has not yet been a wave of lawsuits related to the Madoff case. However, lawyers claim that the lawsuits will certainly come in large numbers, and they will continue in the years ahead.

Lawyers indicate that many of Madoff’s former clients have not yet comprehended the enormity of their losses to take their cases to court, according to Reuters. “People all over the country are still in shock at hearing that their millions have evaporated,” said Jan Soifer, special counsel at law firm Baron & Budd PC.
Also, many law firms are taking on only the cases that have a chance of winning. “Our goal is to come up with something that we think will hold water in court,” said Robert Schachter of law firm Zwerling Schachter & Zwerling LLP.

The Madoff case raises questions as to how well established auditing firms like PricewaterhouseCoopers and KPMG failed to see the warning signs over the years, and they too will likely face lawsuits. New York Law School, for example, has already sued the auditor BDO Seidman for such reasons, according to The New York Times.

Background: Madoff scandal, fingerpointing at AIG

Madoff is facing a securities fraud charge for an alleged $50 billion Ponzi scheme at his investment firm, Bernard L. Madoff Investment Securities. According to the criminal complaint signed by FBI Agency Theodore Cacioppi, Bernard Madoff told at least three high-level employees at his New York apartment Wednesday night that the business was “basically, a giant Ponzi scheme.”

Related Topic: Madoff scandal leads to trepidation over U.S. investment

The alleged Madoff Investment Securities Ponzi scheme walloped several major European banks.

British bank HSBC said that it had some $1 billion that may be “affected,” as the BBC put it, by the Madoff scandal. Royal Bank of Scotland announced that it stands to lose up to $601 million from Madoff, and France’s Natixis may lose as much as $605 million.

Another top European financial player, Santander, a Spanish bank that is the parent company of British banks Alliance & Leicester, Bradford & Bingley and Abbey, potentially lost $23 million in the alleged fraud, while investors in its Optimal fund division had another $3.11 million tied up with Madoff.

Banks in the Santander family have been exposed to other financial ills as of late. The U.K. government announced this past autumn the nationalization of Bradford & Bingley’s £50 billion ($91.8 billion) in mortgages and loans. Abbey bought up B&B’s  £20 billion ($36.72 billion) savings division.

Nicola Horlick, the head of London’s Bramdean Investments, told the BBC, “I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down on the job.”

U.S. Securities and Exchange Commission chair Christopher Cox essentially conceded that in a statement issued late Tuesday. “The Commission has learned that credible and specific allegations regarding Mr Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action,” said Cox, quoted by MarketWatch.

In what is turning out to be possibly the largest-ever fraud on Wall Street, the assets of Madoff Investment Securities were frozen and put into receivership Friday after federal authorities received a tip-off that the $50 billion firm is allegedly a giant Ponzi scheme.

The number of investors hit by the deal continues to balloon. Among the victims are Sterling Equities Inc., the company that owns the New York Mets, as well as the firm’s owner, Fred Wilpon. Wilpon had invested millions of dollars into the investment firm and was a longtime friend of Madoff Securities founder Bernard L. Madoff. Other big-time investors who may have lost millions include former Philadelphia Eagles owner Norman Braman, the charitable foundation of Sen. Frank Lautenberg, D-N.J., and GMAC Financial Services chair J. Ezra Merkin, who was a heavy benefactor of Jewish causes, which as a whole are reeling from the scandal.

AIG, another potential weight on the markets, received Federal Reserve and TARP bailout funding with one potential reason being to retain confidence among foreign investors. The official rationale for injecting AIG with liquidity while letting Lehman fend for itself: Lehman had contingency plans in the works, whereas AIG’s fall took them by surprise.

Reference: Due diligence


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