a charity established by Oscar-winning film director Steven Spielberg, the Wunderkind Foundation, appears to have invested a significant portion of its assets with Madoff.

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Shock waves spread from Madoff scandal
Monday December 15, 2008, 6:42 pm EST

By Martha Graybow and Douwe Miedema

NEW YORK/LONDON (Reuters) - Shock waves from Bernard Madoff's alleged fraud spread globally on Monday, as charities, wealthy individuals and banks disclosed losses from the prominent Wall Street trader's investment management business.

Britain's HSBC Holdings Plc was the latest bank to join the growing list, saying it had exposure of around $1 billion, making it one of the biggest victims of the alleged $50 billion fraud.

Royal Bank of Scotland Group Plc and Man Group Plc in the United Kingdom, Japan's Nomura Holdings Inc and France's Natixis SA also said they were hit by the worldwide scandal.

In the United States, no major banks have said they were exposed. But Sterling Equities, which owns the New York Mets professional baseball team, acknowledged it had accounts managed by Madoff -- one of hundreds of private investors, pension funds and charities believed to have been bilked by companies tied to his investment advisory business, part of Bernard L. Madoff Investment Securities LLC.

The Securities Investor Protection Corp (SIPC), a nonprofit organization funded by the brokerage industry that provides limited insurance on investors' accounts, named a trustee to oversee the firm's liquidation.

The trustee, Irving Picard, said in a statement he would "work with SIPC to do what the law allows to ameliorate the losses to customers." SIPC steps in to help investors at brokerage firms, but does not cover individuals who are sold worthless securities or help them recoup losses on investments.

In a sign that suspicions are growing that others may have been culpable in the alleged fraud, the auditing firm that Madoff used, Friehling & Horowitz, is now the focus of a criminal probe by the district attorney in Rockland County, New York.

"We are in the very early stages of our investigation," District Attorney Thomas Zugibe said. "Our focus is on whether the independent auditor reports that were prepared by Friehling were fraudulent."

A message left on the auditor's voice mail was not immediately returned.

Among big losers from Madoff's alleged Ponzi scheme were the state of Massachusetts, which said it lost $12 million. Multiple charities also reported big losses, including about $30 million in a charitable trust funded by real estate mogul Mortimer Zuckerman, who also owns the N.Y. Daily News tabloid.

"I'm going to be a lot more risk-adverse," after the Madoff losses, Zuckerman, told CNBC Television, adding that he was mulling his legal options.

Madoff's lawyer, Ira Sorkin, declined comment on the case on Monday. The 70-year old trader's two sons, who worked at the firm, said Monday through their lawyer they had no knowledge of the alleged fraud.

U.S. prosecutors and regulators have accused Madoff, a former chairman of the Nasdaq Stock Market, of running the fraud through his investment advisory business.

CHARITIES HIT

The Wall Street Journal reported Monday that a charity established by Oscar-winning film director Steven Spielberg, the Wunderkind Foundation, appears to have invested a significant portion of its assets with Madoff.

A Spielberg spokesman, Marvin Levy, confirmed that the foundation "did have an investment with (Madoff)" and that it suffered some losses, but declined to elaborate.

Other charities were also hurt. The Chais Family Foundation, which gives away about $12.5 million a year to Jewish causes, said it will close down. Its entire fund was invested with Madoff.

The Jewish Federation of Greater Los Angeles said its United Jewish Fund Endowment Fund may have lost $6.4 million, or about 11 percent of its assets as of December.

Financial companies, reeling after a year of enormous writedowns on bad credit assets, have so far tallied up more than $10 billion in direct and indirect exposure to the alleged fraud by Madoff, who was arrested on Thursday.

Even investors who managed to pull their funds out of Madoff's firm two years ago, or more, may have to return money, said Jeff Marwil, a partner at law firm Winston & Strawn, which is representing a group of Madoff investors.

"It's about the equalization of harm," Marwil said.

France's Natixis said it had as much as 450 million euros ($605 million) of exposure to the fiasco. Man Group, the world's largest listed hedge fund manager, said it has $360 million in funds directly or indirectly subadvised by Madoff.

And Swiss private bank Benedict Hentsch said it had undone a recent merger with Fairfield Greenwich, the alternative investment specialist, which said it had put half of its assets in one of the funds set up by Madoff. American depositary receipts for many international banks dropped due to Madoff exposure on Monday.

CLAWING BACK LOSSES

Under U.S. bankruptcy code, investors that pulled money out of a fraudulent fund up to two years before it went under must give their money back, if they knew or should have known the fund was bogus, Winston & Strawn's Marwil said. And state law typically broadens that window to four to six years.

Marwil, who is representing the bankrupt Bayou Group of hedge funds, successfully took back funds from investors that had withdrawn money years before Bayou went under.

"Our view was there were sufficient red flags for any investor to know there was a problem at Bayou. I think a similar argument could be made here," Marwil said.

There were several red flags at Madoff's asset management business, according to forensic accountants, former prosecutors and private investigators.

Among them, Madoff executed trades for the fund through his own firm; many senior people in his firm were relatives, which could create obvious conflicts of interest; as well as the small, little-known auditor, now under investigation.

"You have to wonder why regulatory agencies were asleep at the switch and didn't detect anything," said Bradley Simon, a criminal defense lawyer at law firm Simon & Partners LLP who is not involved in the Madoff case. "It doesn't give a lot of reassurance to investors."

But some argue that the fraud would have been difficult to find if Madoff's sons Mark and Andrew, who worked in their father's business, did not know.

SONS SAY NOT INVOLVED

A lawyer for the two said they were not involved in the firm's asset management business and that "they were shocked to learn of his actions."

"The brothers were among the many victims of this scheme and will continue to cooperate fully with the U.S. Attorney and the SEC in their investigations," said the lawyer, Martin Flumenbaum, of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

A rising number of financial institutions detailed their potential losses from Madoff, who allegedly set up a so-called Ponzi scheme in which existing investors are paid out with money from new clients, not from actual investment returns.