A selection of Europe's largest banks could lose billions of euros after the collapse of an allegedly fraudulent pyramid-style investment fund run by Wall Street trader Bernard Madoff.
Madoff is accused of running a phony investment business that lost at least $50 billion
The business collapsed during the financial crisis and could lead to hefty losses for several leading European financial institutions, including the Royal Bank of Scotland (RBS), Man Group, Natixis of France and HSBC Holdings.
Madoff has been accused by US prosecutors and regulators of fraud through his investment advisory business Bernard L. Madoff Investment Securities LLC, which managed at least one hedge fund.
The 70-year-old has confessed to losing around $50 billion (37 billion euros) in the plot, referred to as a Ponzi Scheme, which pays out unrealistically high returns on money invested from the funds put in by ensuing investors.
Madoff, a former chairman of the Nasdaq Stock Market, was arrested in New York on Thursday, Dec. 11, over the alleged fraud.
Big banks, big losers
A report in the Financial Times business newspaper said HSBC could stand to lose around $1 billion, while RBS said its exposure to the alleged scam amounted to around 400 million pounds (444 million euros).
RBS said its losses came from trading and collateralized lending to hedge funds of funds invested in Madoff's group.
London-based investment firm Man Group estimated its exposure to be around $360 million, while French corporate and investment bank Natixis put its potential loses at 450 million euros.
Royal Bank of Scotland must now deal with the financial crisis and the Madoff case
"It appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls," Man Group said in a statement.
Meanwhile, Italy's second-biggest bank, UniCredit SpA said it could lose up to 75 million euros and, in Spain, the nation's largest bank Santander said its investment fund Optimal has an exposure to the scam of around 2.33 billion euros.
Fewer than 1,000 wealthy clients were exposed through the high-risk Optimal hedge fund unit, with institutional and international private banking clients accounting for 2.01 billion euros.
As number-crunchers were evaluating the potential loses for banks, regulators in the US came under fire for what has been described by some as a '"systemic failure" to counteract the fraudulent scheme.
Investment company Bramdean Alternatives, which invested around 23.3 million euros with Madoff's firm, said the case raised "fundamental questions" about the financial regulatory system in the US.
"It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith," Bramdean said in a statement.
The $50 billion allegedly lost my Madoff would constitute one of the largest cases of fraud on record. When Enron filed for bankruptcy in 2001, it reported assets of $63.4 billion.
US prosecutors said Madoff could face up to 20 years in prison and a fine of up to $5 million.