Dublin-registered Thema part of complaint filed to recoup $9bn received under Madoff

A $1 billion Irish fund placed money with US fraudster Bernard Madoff

ON THE last day of May 1996, the Irish Central Bank authorised Thema International Fund plc as a Ucits, a type of regulated fund that could operate throughout the EU on the basis of its Dublin authorisation. Last week, Thema featured in a multibillion-dollar complaint filed to a New York bankruptcy court.

The complaint is only part of a massive campaign to recover billions of dollars lost through the operations of Bernard Madoff, the perpetrator of “the largest financial fraud in history” who was sentenced last year to 150 years in jail.

The complaint explained how Thema, which has an address at the offices of William Fry Solicitors in Dublin, was part of a development whereby Madoff, having already scammed some of the wealthiest people in the US, used his friendship with Sonja Kohn, owner of the Medici Bank in Vienna, to source new European victims for his global “investment” operation.

Irving Picard, trustee for the liquidation of the Madoff business and estate, filed the complaint and used the type of forthright language often seen in US legal documents.

“For years, Madoff attracted investors through a mix of staggering results and quiet gamesmanship; his legendary secrecy did not decrease his popularity among the investors intoxicated by his unparalleled performance. Madoff expanded the fortunes of prominent New Yorkers whose confidence he gained. His reputation spread to other areas, such as Palm Beach, Florida, and Hollywood, California.

“But his reputation, as the world now knows, was based on a lie: Madoff was no whiz-kid; he was a criminal using the investments of new customers to satisfy the withdrawals of earlier investors. As his pool of investors threatened to run dry, Madoff was on the verge of exhausting the sources from which he had drawn money for his Ponzi scheme. His attention turned to potential investors abroad.”

The new stream of investors, many of them literally an ocean away, “thought they were investing in diverse and thoroughly vetted European funds when, in fact, they were simply depositing their money into the greatest fraud in history”.

Madoff and Kohn were friends. She was born in 1948 to refugees who were part of a small Jewish community in Geneva in the wake of the second World War. In the 1970s, she set up an import-export business in Milan with her husband Edwin. In the early 1980s, she set up the Medici bank and soon afterwards moved to New York, where she became known as “Austria’s woman on Wall Street”. She moved back to Vienna in the 1990s.

Madoff was born in Queens in 1938. His father was a plumber turned stockbroker and, after graduating from university, Madoff used money he earned as a lifeguard and sprinkler installer to set up his own penny stock trading firm on Wall Street. From humble beginnings in 1959, the firm went on to become a powerful Wall Street force.

Kohn got to know Madoff in New York in the 1980s and began introducing him to a wide array of new investors. In the early 1990s, by which time she was back in Europe, she introduced him to the Benbassat family.

The family ran a money managing firm in Geneva called Genevalor, Benbassat et Cie. In time, the Benbassats would channel almost $2 billion in investors’ money into funds and onwards to Madoff.

As well as the Benbassats, Kohn also introduced Madoff to Carlo Grosso and Federico Ceretti, and UniCredit Bank Austria. These, in turn, established funds that “invested” through Madoff. In his complaint, Picard refers to these funds, which include Thema, as “feeder funds”. The total involved was in the region of $6.4 billion.

Entities such as Thema have a board of directors but are really just a stash of cash belonging to a number of investors that is invested, administered and managed by a number of parties.

Usually such funds have a custodian and an administrator who oversee the investment of the fund and house its assets. In the case of Thema and a number of other feeder funds, the custodian and administrator functions were supplied by subsidiaries of HSBC Bank.

In total, HSBC subsidiaries directed about one-third, or almost $9 billion, of the money invested with Madoff. HSBC Institutional Trust Services (Ireland) Ltd acted as custodian to four of the Madoff feeder funds, including Thema, while HSBC Securities Services (Ireland) Ltd, served as their administrator. Both subsidiaries are based in Grand Canal Harbour, Dublin. According to Picard, the fact the funds bore HSBC’s imprimatur was the “perfect endorsement to convince foreign, and ultimately more American, investors to hand over their money”.

Madoff was famous for the returns he could achieve for his investors but Picard says his performance, which continued through such market downturns as the bursting of the dot.com bubble, was just one of many “red flag” measures that should have alerted HSBC, Kohn, the Benbassets and others to the possibility that Madoff might be a fraudster. He claims HSBC did not do the job it was being paid to do. The feeder funds felt Madoff had “graced them with the opportunity to invest” and were fearful due diligence by HSBC might jeopardise their relationship with the wizard investor.

“Probing the magic formula too deeply might evoke Madoff’s wrath and spell the end of the feeder funds’ access [to Madoff]. HSBC acquiesced.”

Picard says that, despite being warned of the possibility of fraud, HSBC surrendered its custodial role to Madoff and didn’t tell the investors it was doing so. He says the fees HSBC received “were nothing more than kickbacks paid for looking the other way”. Even when KPMG warned of the extensive fraud risks involved, the bank failed to act.

It is on the basis of these claims, which HSBC has said it will contest, Picard is looking for billions of dollars in damages. Picard is also looking for the return of money paid to the various funds over recent times, as well as the return of the millions paid in fees to the operators of these funds. In the case of Thema, Picard is looking for $692 million.

A striking aspect of the Picard complaint is the number of “red flags” he says existed. At a time when technology allowed most investors to have up-to-the-minute access to their accounts, Madoff was still supplying paper records of trades made days previously. Often he got the settlement days wrong, stating trades had to be settled on dates which were Sundays. He seemed always to buy and sell at points during particular trading sessions that were optimal which, Picard says, was a statistical impossibility.

Picard also says the bank and others knew that Madoff’s billion-dollar business was being audited by Friehling Horowitz – “an unknown, three-person accounting firm based in a strip mall in Rockland County, New York”.

Feeder fund: facts and figures

THEMA INTERNATIONAL, the Irish authorised “feeder fund” that channelled money to fraudster Bernie Madoff, grew in size to $1.44 billion in 2007, having been $1.13 billion at the start of the year.

It is one of a number of Irish funds that feature in the overall Madoff scam whereby he didn’t invest fund money at all but used it to make payments to people seeking their returns.

The 2007 accounts show an unaudited list of the number of shares in each top 100 US company allegedly bought and sold during the year, put options allegedly bought and sold, and US treasury bills allegedly dealt in.

The accounts say the fund had cumulative growth of slightly more than 50 per cent in the previous five years, and 29.27 per cent over the previous three.

The directors were: Daniel Morrissey, Gerald Brady, David Thomas Smith, and Alberto and Stephane Benbassat.

Morrissey is head of William Fry’s asset management and investment funds department and a former chairman of the Irish Funds Industry Association.

Brady, with an address in Dundrum, Dublin, was up to recently an executive with Northern Trust, of Townsend Street, Dublin.

Smith, Bermuda, is a former employee of HSBC Bermuda, a partner in Genevalor, Benbassat and Cie, and a defendant in the case taken by Irving Picard.

Alberto Benbassat, a Swiss money manager and partner in Genevalor who dealt directly with Madoff, was a primary manager of Thema and is another defendant in the Irving case. Stephane Benbassat is a brother of Alberto and another defendant in the case.

The accounts state William Fry was the company’s legal adviser and PricewaterhouseCoopers, Dublin, was its auditor. Its investment manager was Bank Medici, Vienna, which was owned by Sonja Kohn. Its distributor was Thema Asset Management Ltd, of the British Virgin Islands, which is owned by Kohn and the Benbassat family. Its subdistributor was Genevalor, Benbassat and Cie, Geneva. Its sponsoring broker was NCB Stockbrokers, Dublin.

The directors were paid $173,481 during the year. William Fry was paid £175,588 in fees. A $6.3 million was paid to Medici Bank in investment management fees.

Thema Asset Management was paid $15.8 million. Custodian fees of $784,752 were paid to HSBC Institutional Trust Services (Ireland) Ltd and administration fees of $783,129 were paid to HSBC Securities Services (Ireland) Ltd.

A spokeswoman for William Fry said it did not comment on client matters and matters before the High Court. Brady and the other Thema directors could not be contacted.

Chain reaction: the legal cases

BERNARD MADOFF’S scam came tumbling down in 2008 when he ran out of funds to make payments due to investors.

When news of the huge fraud broke, Sonja Kohn disappeared from view. Media reports speculated that her low profile might be due to concern that Russian investors she had steered towards Madoff might seek to take their own revenge.

The huge range of investors who put money into the feeder funds are taking legal cases against HSBC and others.

In Ireland, many are being handled by Dillon Eustace solicitors, which specialises in funds law. A check on the courts website shows there are more than 60 such cases pending. Two test cases, likely to be heard in 2012, will probably decide the outcome of most.

The investors are also taking cases against Thema, which is, in turn, taking a case against the two Dublin HSBC subsidiaries. HSBC is taking a case against Thema and against Medici Bank.

A spokeswoman for HSBC in Dublin said bank subsidiaries are defendants in cases in the US, Ireland, Luxembourg and other jurisdictions.

“All of the cases where HSBC companies are named as a defendant are at an early stage. HSBC considers that it has good defences to these claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the liability, if any, that might arise as a result of such claims.”