The fallout from fraud allegations at Bernard Madoff's hedge funds will begin in earnest Monday, as the full extent of losses become clear and investors find another reason to walk away from alternative assets.
As a former Nasdaq chairman with a $17-billion family of funds and five decades of Wall Street history, the 70-year-old Mr. Madoff was an iconic figure. His fall, and the astounding fraud allegations that are being made, promise to do for hedge funds what Drexel veteran Michael Milken's prosecution did for junk bonds – tar an entire sector.
Monday has seen a number of Asian and European firms, including HSBC Royal Bank of Scotland, Man Group and Nomura, mentioned as backers of Bernard L. Madoff Investment Securities LLC.
“A number of European banks said they and their clients had billions of dollars of exposure to the alleged Madoff fraud,” said Bank of Montreal economist Sal Guatieri in a note on Monday. “The fear is that the massive losses could cause a wave of distressed asset sales by investment funds that invested with Madoff, and could also cause already skittish investors to pull their funds from other hedge funds and investment groups.”
Mr. Madoff's demise will haunt the fund of hedge funds industry, where managers are well-paid for steering clients into well-run funds. As Wellington Financial's blog noted on Monday, number of fund of hedge fund managers have money with the New York-based Mr. Madoff, and will face tough questions and even lawsuits from clients over their investment decisions.
Mark Madoff, son of Bernard Madoff, worked at the family-owned firm and is a familiar face in Canadian regulatory circles. He spent three years as a New York-based director at Market Regulation Services, the Toronto-based domestic market watchdog. There are reports that Mark Madoff and his brother, who also worked at the Madoff family-owned dealer but not the money manager, turned their father in to U.S. regulators.
