Madoff scam reaches Cayman

(CNS): Though the Cayman Islands Monetary Authority (CIMA) said it has found no evidence so far that Bernard Madoff, the Wall Street investment manager who has admitted to a fraud scam totalling some $50 billion, was providing direct services to any Cayman Islands-regulated fund, the Authority said one Cayman fund administrator has confirmed that one of its regulated funds had significant investment in the Madoff funds.

One bank has also confirmed that it had significant exposure to the Madoff funds, and CIMA says it anticipates that a number of Cayman-regulated funds could be impacted by the massive scam that is reverberating around the world.

Madoff, a former Nasdaq Stock Exchange Chairman who was arrested in New York on 11 December, ran a hedge fund that US prosecutors said racked up $50 billion of fraudulent losses. The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors, though this alleged scam could amount to one of the biggest ever.

On Monday, CIMA released a statement to say the regulatory body has been following the developments relating to charges against Madoff. “CIMA has done a check of its records and database and has found no evidence so far that Mr Bernard Madoff or any Madoff company is providing direct services to any Cayman Islands-regulated fund. An initial check of the Companies Registry shows no Madoff-related entity incorporated in the Cayman Islands. However, given that investors in Mr Madoff’s investment funds include banking and other institutions across Europe, the UK and the USA, CIMA anticipates that there could be a number of Cayman-regulated funds as well as other institutions that have made investments into the Madoff funds/schemes and which, therefore, could be impacted.”

So far CIMA has received confirmation from one Cayman fund administrator that one of its regulated funds had significant investment in the Madoff funds. One bank – a Class B affiliate bank that does not conduct any domestic business – has also confirmed that it had significant exposure to the Madoff funds. “CIMA is continuing to investigate whether there are any other CIMA-regulated institutions that have exposure to Madoff’s funds and will continue to monitor the situation and work with regulated entities that may be impacted,” it says.

The statement continues, “CIMA has always urged investors to do their due diligence before investing, and on an ongoing basis. This case provides another example of why it is necessary to do so, as it is apparent that many of Madoff’s investors missed relevant red flags.”

CIMA notes that this matter is now in the hands of the US Securities and Exchange Commission (SEC) for review and investigation. In line with its ongoing working relationship with the SEC, which was formalised through the Undertaking Between Cayman Authorities and the SEC in 2005, CIMA stands ready to provide any assistance it is able to on this and other matters, given that so many of the organisations which provide services to and on behalf of CIMA-regulated funds are also regulated by the SEC.

Worldwide, the funds industry continues to struggle to attract new capital, to maintain investor confidence and keep the high level of redemption requests from investors at bay. The Madoff scandal will undoubtedly shake the industry even further, CIMA says.

With the intensification of the global financial crisis, CIMA has seen less fund authorisations between July and November this year (586 funds authorised) compared to the same period in 2007 (820 authorised). At the same time, there were more terminations between July and November this year (311 terminations) than for the same period last year (219 terminations). However, the level of terminations, which averaged 60 per month between July and November this year, is still very low when compared to the overall number of active Cayman Islands-authorised funds, which remains at over 10,000.

CIMA anticipates the numbers of terminations in December and January to increase substantially. However, it must be noted that these two months are the ones in which funds traditionally terminate. CIMA will have a fuller picture of the numbers of terminations during the first quarter of 2009.

Steps that regulated funds have been taking to manage their liquidity problems include suspending redemptions and/or the calculation of net asset values (NAV). To date, CIMA is aware of 67 funds that have suspended redemptions, 44 funds that have suspended their NAV calculation, and two funds that have been forced into court ordered liquidation.

A positive sign is that three funds that had formerly suspended redemptions have now lifted their suspensions.