Banks at risk from alleged fraud

Last Updated: Monday, 15 December 2008, 04:56 GMT

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Royal Bank of Scotland said £400m was at risk in hedge funds invested with Madoff

Banks are lining up to reveal billions in potential losses as a result of alleged fraud by Wall Street investment manager Bernard Madoff.

The Royal Bank of Scotland - 58% owned by the taxpayer - said £400 million was at risk in the hedge funds invested with 70-year-old Madoff, who was arrested last week after police said he admitted a £33 billion scheme to defraud investors.

Spanish bank Santander, which owns Abbey and the savings business of Bradford & Bingley, said its potential exposure was more than £2 billion, while HSBC could reportedly lose up to £668 million.

Nicola Horlick, who manages Bramdean Alternatives, which had 9% of its funds invested with Madoff's scheme, said the case raised serious questions about the regulatory system in the US. She said it had been given a "clean bill of health" by the Securities and Exchange Commission.

"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," she told the BBC Radio 4 Today programme. "All through the credit crunch this has been apparent. This is the biggest financial scandal, probably, in the history of the markets."

She said that, even if Bramdean Alternatives was forced to write off its entire investment in Madoff's scheme, it would still only be down 4% on the year while the stock market had fallen 35%.

According to court documents, Madoff - a former chairman of New York's Nasdaq stock exchange - told his employees that his operations were "all just one big lie" and "basically, a giant Ponzi scheme".

A Ponzi scheme is a fraudulent investment vehicle which pays very high returns to existing investors paid for by money put into the scheme by newcomers.

Madoff's arrest will raise questions about the effectiveness of regulatory authorities, which failed to notice the scam.

Hedge fund giant Man Group, said: "Based on information available to date, it appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."

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