A statement released by the Cayman Islands Monetary Authority regarding charges of massive investment fraud by Bernard Madoff indicates the authority is following the situation closely.
Madoff, an investment broker and former NASDAQ Stock Exchange chairman, is accused of securities fraud, based on accounts that he confessed to his sons on 10 December that his entire business was ‘a lie’ and a giant Ponzi scheme. According to court filings, he himself put the losses as high as $50 billion.
Most recently, Swiss newspaper Sonntag reported Credit Suisse clients may have lost up to 1 billion Swiss francs on investments connected to Madoff.
The extent of any investments made through the Cayman Islands into Madoff’s fund is not yet known. CIMA issued its statement last week.
‘CIMA has done a check of its records and database and has found no evidence so far that Bernard Madoff or any Madoff company is providing direct services to any Cayman Islands-regulated fund,’ it stated.
‘An initial check of the Companies Registry shows no Madoff-related entity incorporated in the Cayman Islands.
‘However, given that investors in Mr Madoff’s investment funds include banking and other institutions across Europe, the UK and the USA, CIMA anticipates that there could be a number of Cayman-regulated funds as well as other institutions that have made investments into the Madoff funds/schemes and which, therefore, could be impacted.’
The New York Times reported last week that the Fairfield Greenwich Group has taken more than $500 million in fees since 2003 alone from the money it placed with Madoff.
Fairfield Greenwich, and its partners, had about $60 million invested with Madoff.
A check of the CIMA website reveals Fairfield Greenwich and Fairfield Capital Management are registered with the authority, along with twenty-nine funds beginning with the name ‘Fairfield’.
Fallout from the Madoff scandal could affect Cayman in many ways.
On 16 December, Reuters reported that the New York Law School had sued Ascot Partners LP investment firm, its general partner J. Ezra Merkin and auditor BDO Seidman LLP over investments with Bernard Madoff. Ascot Fund Limited is registered with CIMA.
The putative class action lawsuit filed in U.S. District Court in Manhattan said the defendants “recklessly or with gross negligence caused and permitted $1.8 billion, virtually the entire investment capital of Ascot” to be handed over to Madoff.
Mort Zuckerman, a principal of Boston Properties, proprietor of the New York Daily News and U.S. News & World Report, also stated he would be going after Ascot.
The CIMA statement stated that to date, it had received confirmation from one Cayman fund administrator that one of its regulated funds had significant investment in the Madoff funds. One unnamed Class B bank, which doesn’t conduct domestic business, also confirmed that it had significant exposure to the Madoff funds.
‘CIMA is continuing to investigate whether there are any other CIMA-regulated institutions that have exposure to Madoff’s funds and will continue to monitor the situation and work with regulated entities that may be impacted,’ the statement said.
However, some financial industry professionals, like insolvency practitioner Chris Johnson, believe significant effects are inevitable.
‘There is no doubt that the effect of the Madoff fraud will have a significant effect on the Cayman Islands financial industry,’ he said.
‘Already litigation has been commenced against BDO Seidman, auditors to one of the entities. The remainder of the major accounting firms, not just the big four, must be seriously concerned about their involvement as must be their professional indemnity insurers.’
The Financial Times reported that three out of the so-called big four accounting firms – PricewaterhouseCoopers, KPMG and Ernst & Young – had audited Madoff funds.
Mr. Johnson said funds regulated by CIMA must be audited locally even where the majority of audit work is performed by satellite offices overseas, such as those in Bermuda, Dublin and Bermuda.
‘Moreover other professional advisors, such as fund administrators, must share considerable responsibility for the ensuing fallout and a drastic review of their due diligence procedures will no doubt be commencing shortly,’ he said.
‘Last but not least to be scrutinized will be the actions, or lack thereof, of the directors but until the Cayman laws are amended to preclude directors’ indemnities being granted almost as a right, at least they will have no sleepless nights; just a little less fee income.’
Mr. Johnson said the blame for the scandal cannot be placed just on a few shoulders.
The CIMA release asserts it has always urged investors to do their due diligence before investing, and on an ongoing basis.
‘This case provides another example of why it is necessary to do so, as it is apparent that many of Madoff’s investors missed relevant red flags,’ it said.
Mr. Johnson agreed. ‘In my opinion there were enough red flags out there to raise serious concerns at the monthly meeting of the matadors association in Madrid,’ he observed.
In its release, CIMA noted that the matter is now in the hands of the US Securities and Exchange Commission for review and investigation.
‘…CIMA stands ready to provide any assistance it is able to on this and other matters, given that so many of the organisations, which provide services to and on behalf of CIMA-regulated funds, are also regulated by the SEC,’ it stated.
CIMA also pointed out that the worldwide funds industry continued to struggle to attract new capital, to maintain investor confidence and keep the high level of redemption requests from investors at bay.
‘The Madoff scandal will undoubtedly shake the industry even further.’