Switzerland: The devil makes work

The Madoff scandal may be bad news for Switzerland’s fraud record, but at least it’s providing plenty of work for Swiss lawyers.

The familiar image of a grey-haired financier will be ­synonymous with a dire period in the history of the international financial markets. But whatever your own opinions of Bernie ­Madoff, some lawyers are thanking their lucky stars that he existed at all.

Apart from the hundreds of lawyers working in the US there are dozens sorting out claims in Switzerland – which has the honour of being crowned the most ­swindled nation in Europe.

Switzerland has long been at the forefront of the alternative investments and hedge fund market, the much repeated statistic being that one third of the world’s private investment is banked in the ­principality. So it was not a surprise when phones rang almost simultaneously at law firms across the canton of Zurich in November last year when the Bernard L Madoff Investment Securities (BMIS) scandal broke.

The biggest fraudster to-date (a prudent proviso to add to any discussion of economic ‘firsts’ at the moment) recently admitted to all charges relating to a $50bn (£34.91bn) Ponzi scheme. Figures being publicised have ranged up to the $71bn (£49.57bn) mark, but these are grossly inflated and lawyers working on behalf of claimants believe the true figure to end up at around $35bn-$40bn (£24.43bn-£27.92bn).

One lawyer for a Swiss law firm, only half-joking, sums it up. “What we really should do is raise a statue to Madoff,” he adds. In a recession, with corporate transactional work almost non-existent, one of the most complex pieces of litigation and funds disputes ever must be seen as a boon. Although that is not something you will hear publicly.

The work is cross-border, features people who invested money themselves, investors of funds that were advised to back Madoff by funds managers and, most hapless of all in this, investors in structures that added leverage on to their Madoff investment. All of which will keep lawyers busy for months.

“The amount of instruction and the ­complexity is amazing,” says a partner at a Swiss firm being instructed by Madoff claimants. “Lawyers have two jobs: to recover whatever funds they can and protect the bank from being blamed. The process can leave banks open to severe criticism from their clients.”

The prospect of having your due diligence (or lack of) on display for all your clients to see has spread fear among the duped banks and hedge funds.

The first to take decisive action to combat this was Union Bancaire Privée (UBP), the second-biggest investor in hedge funds, which offered partial compensation to clients hit by $700m (£488.67m) of losses from the Madoff fraud, so long as they waived the right to sue. UBP said it was willing to pay half of client losses but compensation would be based on the value of initial investments.

“If you were an investor in a vehicle then there are clawback claims that may increase the pot,” explains Shelby Pasquier, a partner at Lenz & Staehelin, which is representing a number of financial institutions and financial structures.

Regulators

What of the regulators and legislation once Madoff is locked away?

It was the economic downturn rather than any investigation by the authorities that finally did for Madoff. Much criticism has been laid at the door of the US ­authorities. The Securities and Exchange Commission (SEC) completed investigations into the company in 2005 and 2007 but took no action.

“One has to recognise that fraud is ­something that is impossible to prevent,” says Pasquier. “Whatever the level of ­supervision frauds will keep happening. What’s striking with Madoff is its size and the time it took to discover.”

“A large number of financial institutions had invested in BMIS knowing the risks,” Pasquier adds. “But at the end of the day, BMIS was regulated by the US authorities. It was considered that those weaknesses were overseen by the SEC, who found no fault.”

In fact, when presenting the relevant ­documents to investors, BMIS was much more transparent than other financial ­institutions in the US. The problem is it was all fake.

“What I think has struck many is how slim the recoveries are going to be,” says Charles Adams, who heads the Geneva office of Hogan & Harston. “Swiss residents lost a considerable amount of money. The only silver lining we may find in this is that it could be a catalyst to increase the effort to get rid of the toxins in the system. I think this prompted some serious thinking over what safeguards need to be put in place to make sure this doesn’t happen again.”

Adams adds: “There’s plenty of blame to go around, but first and foremost the blame lies with the individual and those who aided and abetted him. However, a certain amount of blame could also be said to lie with the due diligence from overseers and regulators.”

Pasquier says he believes that the fallout may see investors altering where they place their funds because, although offshore ­jurisdictions are putting up a robust defence of their own overseers (this fraud did take place in New York, after all), the recourse for claimants that are attempting to get their money back may simply not have the same clout in ­Cayman as it does
in Switzerland.

Says Pasquier: “There’s an expectation that those funds set up in Europe maybe more protected than funds set up in the British Virgin Islands or Cayman, for ­example. The situation is less clear offshore. This will certainly bring investors to focus on the jurisdictional risk of setting up in Cayman as opposed to Luxemburg.”

Fraud in Switzerland

Fraud in Switzerland is as old as the private banks themselves.

A recent report published by accountancy firm KPMG found that cases of white-collar crime brought before Swiss courts accounted for more than CHF1bn (£610m) in 2008.
The range of cases brought before Swiss courts in 2008 reflect the diversity of white-collar crime and read like a number-one bestseller.

Examples include the vice president of a bank who buried part of his fraudulently acquired money in the woods in Tupperware containers and the employer who promised employees (fictitious) jobs only to clean out their vested benefits accounts. Add to this around 70 more cases of white-collar crime brought before Swiss courts during 2008. The number of cases not brought before a court is unclear – in fact, most cases of this kind never make it to court at all.

“These are worrying signals. Fraud is occurring more and more in Switzerland, a fact reflected in our own current engagements,” says Anne van Heerden, partner and head of KPMG forensic in Switzerland.

“We don’t expect to feel the full effects of the current economic situation for several months or years,” she says. “In difficult times such as these, companies are going to have to turn their attention to achieving more streamlined structures and efficient processes.”

Andreas Theiss, a partner at Wolf Theiss, is currently being instructed by Bank Medici in the Madoff fraud. As a lawyer with 35 years’ experience of working all over Europe, Theiss says he has seen it all before – and it will happen again.

“The only difference with this fraud is that it was bigger. The question is how to get regulations to be more precise. I’m not sure what the SEC were checking when they investigated Madoff.”

Theiss believes that any investigation will discover nothing. There is already talk of the Securities and Exchange Commission being completely rebuilt post-Madoff, starting afresh with a new department and conveniently seeing those involved in the Madoff investigations swept away from the tough questions being asked by investors. “I’m very confident we won’t get a full explanation,” Theiss adds.

Swiss Claimants

Fairfield Greenwich Group
Banco Santander
Optimal Investment Services
Union Bancaire Privée
HSBC Holdings
Benbassat
EIM Group
Banque Bénédict Hentsch
Mirabaud
Notz Stucki
De Picciotto family (owners of UBP)