(Grand Cayman, Monday, 22 December 2008) The Cayman Islands Monetary Authority (CIMA) has been following the developments relating to charges of massive investment fraud brought in the USA against investment broker and former Nasdaq Stock Exchange Chairman Bernard Madoff. Prosecutors allege that the fraud could run as high as US$50 billion.
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.
To date, CIMA has received confirmation from one Cayman fund administrator 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. This is a Class B affiliate bank that does not conduct any domestic business. 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.
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.
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.