NEW YORK – Rhode Island government investments are unaffected by the $50 billion hedge-fund scandal. But Banco Santander SA, the Spanish company buying Sovereign Bancorp Inc., and Royal Bank of Scotland Group Plc, the parent of Citizens Financial Group Inc., appear to be among the big losers.
The ripples have been spreading since Thursday, when Bernard L. Madoff, 70, was sued by the U.S. Securities and Exchange Commission (SEC) and charged with one count of federal securities fraud. A well-known New York philanthropist, financier and former Nasdaq chairman, he also had served as an adviser to the SEC on market regulation.
Madoff is accused of bilking investors of $50 billion through an investing scam he allegedly ran, under the guise of a hedge fund, out of his investment advisory business in Manhattan.
Company statements show that Banco Santander SA (NYSE: STD) has $3.1 billion invested with the fund – behind only the $7.5 billion investment of Fairfield Greenwich Group – while Edinburgh-based Royal Bank of Scotland Group Plc (LSE, NYSE: RBS) has $360 million at risk, a Bloomberg News analysis found.
Boston philanthropist Carl Shapiro’s charitable foundation, one of many philanthropies caught up in the scandal, reportedly had $145 million with the fund.
And the Rhode Island Family Life Center (FLC) – a small South Side nonprofit that assists people and communities affected by crime and incarceration – today learned that two of its primary donors will close their doors: “The JEHT Foundation and the RockIt Fund lost their endowments to Madoff,” the local group said in a statement. RockIt provided funding for the FLC’s Right to Vote drive on behalf of parolees and probationers; JEHT provided the local nonprofit with money for operating funds and policy drives, through its Reinvest in Justice campaign.
“The JEHT Foundation has been a supporter
of the Family Life Center since we opened our doors in 2003,” said Sol Rodriguez, executive director of the FLC. “We are saddened by the news but will continue to work for the values that they stood for: Justice, Equality, Human Dignity, and Tolerance.”
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But “the State of Rhode Island had no affiliation with Mr. Madoff or his company,” R.I. General Treasurer Frank T. Caprio announced last night.
The $6 billion R.I. State Pension Fund is overseen by a nine-member State Investment Commission that has strict rules for investments, noted Caprio, the panel’s chairman. “Mr. Madoff’s fund would not have met [state] policies and guidelines,” he said.
Prosecutors contend the fund operated as a Ponzi scheme, a pyramid-style fraud that promises high rates of return but actually pays early investors with the money raised from later investors. Most such scams collapse within a few months or years, but Madoff had been in business since 1960 – a factor that helped reassure many investors.
“It was not something that sprung up six months ago and paid 60 percent returns,” Carl Loewenson, a former federal prosecutor and co-chairman of the securities litigation and white-collar group at Morrison & Foerster, told Bloomberg News. “He had a great track record.”
Madoff himself allegedly told his sons the fund was a “giant Ponzi scheme,” in a conversation last week that triggered his arrest. If convicted, the financier faces a maximum penalty of $5 million and 20 years in prison.
Meanwhile, the New York City auditing firm of Friehling & Horowitz, which approved the financial statement filed by Bernard L. Madoff Investment Securities LLC for the fiscal year ended Oct. 31, 2006, is also under investigation, Rockland County (N.Y.) District Attorney Thomas Zugibe told Bloomberg News. “When you have a key player like that operating in your county, you have to look,” Zugibe said.
And the Commonwealth of Massachusetts has issued subpoenas to both Peter Madoff, the hedge-fund administrator’s brother, who is listed as chief compliance officer at Bernard L. Madoff Investment Securities; and Marcia Beth Cohn, chief compliance officer of Cohmad Securities Corp., which shares an address with the hedge fund, Bloomberg News reported today.
“We are seeking to discover the full number of their Massachusetts investors and customers,” Mass. Secretary of State William Galvin told Bloomberg Television today.
Bay State officials are seeking the names and numbers of all Massachusetts investors with Cohmad and Madoff, and a description of the relationship between the two, he said. “The SEC needs to step up here,” Galvin added. “The matter goes not only nationally but internationally.”
The case has spurred outrage abroad about the U.S. regulatory system, which has few rules for hedge funds. “It’s unbelievable that no auditor, no administrator, no fund manager noticed this fraud,” Christof Reichmuth, CEO of Swiss private bank Reichmuth & Co., told Bloomberg News in a telephone interview. “We will have to wait to find out how that was possible.”
The U.S. Securities and Exchange Commission is the federal agency charged with protecting investors, enforcing federal securities laws and regulating the stock and bond markets. For more information, visit www.sec.gov.
