Madoff fallout grows

The fallout from the Bernard Madoff hedge fund fraud continues to grow in the Cayman Islands.

The Cayman Islands Monetary Authority confirmed last week that as of 6 January, a total of 24 regulated funds have been directly impacted by the Madoff fraud. On 22 December, CIMA issued a statement saying only one regulated fund had confirmed it had significant investments with Madoff, in addition to one class B bank.

‘It is a legal requirement that funds notify CIMA, within 21 days, of any material changes from what is reflected in their offering document. We are liaising with the 24 impacted funds to gain a fuller picture of the operational and financial impact,’ said Joan Scott, CIMA’s public relations executive.

‘In addition, we are in the process of contacting all our licensed fund administrators requesting that they inform us of any impacts from the Madoff fraud on their operations and on their clients.’

While some victims may claim that the fraud came as a complete surprise, Tim Ridley, former head of CIMA, is not so sure.

‘There were plenty of red flags for the SEC and others in the USA,’ he said.

‘Offshore funds that have lost money may well have exercised poor judgement or worse (for which they will doubtless be called to account by their investors) but they appear for the most part to be as much victims as all the other investors,’ he continued.

Ms Scott said that CIMA has requested all its bank licensees inform them of any exposure they have to the Madoff fraud.

‘Responses are still coming in,’ said Ms Scott.

‘Insurance companies, including captives, are expected to inform CIMA of any impacts that would reduce their net worth to below the required minimum level.’

In the latest developments in the affair, the New York Times reported Thursday that prosecutors were arguing that even though Mr. Madoff had promised prosecutors not to dispose of any of his assets, he had sent approximately $1million in jewellery to relatives. They also discovered 100 signed checks worth $173 million in Mr. Madoff’s desk that were ready to be sent to family members and friends on the day of his arrest.

The Serious Fraud Office in Britain announced the same day that it was opening an investigation into Mr. Madoff’s business operations.

The impact, while severe, is also creating a stir in financial circles by raising concerns about offshore centres.

The New York Times last week reported that Federal prosecutors are beginning to consider what role offshore fund operations may have played.

‘Of particular interest is whether Mr. Madoff and some of his investors used funds based in offshore tax havens to evade American taxes,’ it stated.

‘Also under scrutiny is whether certain charities invested with Mr. Madoff had improperly allowed their donors to shift money offshore, and whether foreign banks had withheld American taxes on Madoff accounts, as required by the Internal Revenue Service.’

It reported that at least a dozen offshore entities were involved with Mr. Madoff’s firm. They include funds linked to the Fairfield Greenwich Group, a fund of funds that lost $7.4 billion of its investors’ money after entrusting it to Mr. Madoff.

Other offshore entities involved are affiliated with Tremont Group Holdings, which had $3.3 billion invested, and several Swiss banks, including Union Bancaire Privée and Banc Benedict Hentsch & Cie.

Mr. Ridley thinks the attention on offshore is detracting from the real problem.

“It is predictable to try and shift the focus and blame for Mr Madoff’s alleged criminal behaviour away from the core of the problem, i.e. the failure of the US domestic regulators to stop his activities when they had a number of opportunities to do so,’ said Mr. Ridley.

‘If Mr Madoff and others were also involved in tax evasion or other illegal activities that had an offshore connection, I am sure that will be investigated and, if proven, punished appropriately in the relevant jurisdictions.’

Mr. Ridley pointed out that in his opinion, the greater long-term issue for the hedge fund world and Cayman is that Mr Madoff may well be the final wake-up call to naive investors and managers to recognise that there is no easy money or free lunch.

‘Too many people believed in the new paradigm of the hedge fund world that it was indeed possible to make great risk-free returns in all markets and without asking too many questions,’ he said.