Some of the world’s biggest banks have revealed that they are victims of a fraud which has lost $50bn.
Bernard Madoff has been charged with fraud in what is being described as one of the biggest-ever such cases.
Among the banks which have been affected are Britain’s RBS, Spain’s Santander and France’s BNP Paribas.
One of the City’s best-known fund managers has criticised US financial regulators for failing to detect the alleged fraud.
Nicola Horlick, boss of Bramdean investments, said US regulators had “fallen down on the job”.
Mrs Horlick 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 haven fallen down in the job.”
“This is the biggest financial scandal, probably in the history of the markets – $50bn is a huge amount of money,” she said.
Banks and financial institutions across the world had investments with Bernard Madoff:
The Royal Bank of Scotland said on Monday it could potentially lose about £400m from the alleged fraud, if all its investments had to be written off
Spain’s largest bank, Santander, which also owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley, said one of its funds had $3.1bn invested in the firm run by Bernard Madoff
France’s BNP Paribas estimated its exposure to be more than $460m
The French bank, Natixis, a subsidiary of Caisse d’Epargne and Banque Populaire, said it could potentially lose up to 450m euros (£402m; $605m)
Spain’s second-largest bank, BBVA, said it could potentially lose 300m euros ($400m)
One of the world’s biggest investment groups, Man, said it had invested about $360m through its RMF institutional fund of funds business, representing 0.5% of its total funds
Japanese bank Nomura said its exposure was relatively small, at about 27.5bn yen (£201m), and added: “We regard this as non-material, considering our capital base.”
Mrs Horlick said 9% of Bramdean’s funds were invested with Mr Madoff, but she said even if the money was written off, the fund involved would be down just 4%.
“I just want to make it clear to investors that even after this, they they would have done extremely well, relative to anything else they could have invested in,” she said.
In a statement, Bramdean said: “It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith.
“The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the US.”
However, some argued that the fund managers should themselves have done more.
“City figures cannot call for light touch regulation yet at the same time complain that regulators missed risks that the industry failed to spot” said Simon Morris, a partner with City law firm CMS Cameron McKenna.
“It’s the unequivocal job of the fund manager to check out the bona fides of whoever they chose to pass their customers’ money onto,” he said.
Correspondents say the case is likely to fuel uncertainty about the entire hedge fund industry.
US prosecutors say Mr Madoff, a former head of the Nasdaq stock market, masterminded a fraud of massive proportions through his hedge fund and investment advisory business.
Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund.
A federal judge has appointed a receiver to oversee Mr Madoff firm’s assets and customer accounts, while the 70-year-old banker has been released on $10m bail.
High returns promised
Mr Madoff founded Bernard L Madoff Investment Securities in 1960, but also ran a separate hedge fund business.
According to the US Attorney’s criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business – which served up to 25 clients and had $17.1bn under management – was a fraud and had been insolvent for years.
He said he was “finished”, that he had “absolutely nothing” and “it’s all just one big lie”, and that it was “basically, a giant Ponzi scheme”, the complaint said.
Under a Ponzi scheme, which is similar to pyramid schemes, investors are promised very high returns on their investment, while in reality, early investors are paid with money collected from later investors.
If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.