Leading banks from Britain, France and Japan helped investors treble or quadruple bets on Bernard Madoff by lending billions of dollars to “feeder” funds, which placed their money with the alleged fraudster.
HSBC, Royal Bank of Scotland, Nomura and BNP Paribas lent the money without spotting a fraud, and in at least one case without due diligence teams visiting Mr Madoff’s brokerage, which held the assets.
Banks including Nomura and Spain’s BBVA also helped create special “notes”, structured products that allowed small investors or those barred from investing in offshore vehicles to put as little as $50,000 into Madoff feeder funds. BBVA – which raised €300m ($429m) through these products – offered a guaranteed return of capital, while Nomura provided leverage.
Madoff’s alleged $50bn fraud also hit some fully regulated onshore funds accessible to small investors, with shares in feeder funds listed on Irish and Luxembourg stock exchanges.
Bankers said they had done everything they could, including checking the auditor and regulatory reports, and could not have been expected to spot a fraud.
“The lending bank clearly looks at all the data available, looks at the audited material, what the regulators have said, does a site visit to the fund of funds [feeder fund]: they go through everything,” said one bank facing a big potential loss.
However one banker specialising in fund lending, who was not exposed to Madoff, said: “Every bank has to look at their own procedures and ask the questions – it underscores the importance of a solid due diligence function.”
Lending by all the banks was secured on the assets, making it appear to be a low-risk loan. Even so, RBS and HSBC limited lending to twice the level of assets, while Nomura was willing to go to three times, according to documents and people familiar with their practices.
In the case of RBS, now majority-owned by the British government, bankers lent £400m ($601m) to two feeder funds even though private banking advisers had decided not to put client money with Madoff, according to one person familiar with the bank.
HSBC lent $1bn to a handful of feeder funds, while BNP lent €350m and Nomura Y27.5bn ($307m).
The banks earned hefty fees from their lending, leading to an increase in the size of the teams running fund derivative businesses over the past few years.
John Godden, head of IGS, the consultancy, said: “It became increasingly competitive and, every time a bit of capacity became available in the Madoff feeders, the banks had to lap it up and move quickly. So they didn’t go and do the due diligence.”
The banks declined to comment.
