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New York, NY, United States (AHN) – Two funds have filed a lawsuit against British bank Hong Kong and Shanghai Banking Corporation for profiting from hedge fund Bernard Madoff’s Ponzi scheme.

Alpha Prime Fund and Senator Fund filed a claim against HSBC before a New York bankruptcy court on Friday. The two funds said HSBC served as custodian of Madoff’s funds and failed in its duty to monitor the discredited banker.

It is the second claim filed against HSBC after Madoff trustee, lawyer Irving Picard, filed a lawsuit against HSBC and several feeder funds for $9 billion in December. Picard charged that the bank and funds should have spotted Madoff’s fraud.

Irving claimed that HSBC asked accountancy firm KPMG twice to investigate the bank’s suspicion that Madoff’s investment company was involved in fraud, but the bank had a strong financial incentive to take part in the scheme by being silent about it.

HSBC previously said that KPMG did not conclude in its two reports that fraud was being committed by Madoff’s firm. The bank claimed lack of knowledge about the Ponzi scheme and cited a $1 billion loss as proof that it , too, was a victim of Madoff. HSBC previously asked a New York district court judge to dismiss Picard’s lawsuit.

Madoff, who is serving a 150-year sentence in a North Carolina federal prison, confirmed that HSBC went over his company’s books twice, but missed things.

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Washington, DC, United States (AHN) – U.S. Securities and Exchange Commission Inspector General H. David Kotz initiated over the weekend a probe into the regulator because of potential conflicts of interest in the latter’s investigation of the Bernard Madoff Ponzi scheme.

Kotz cited the recent lawsuit brought by Madoff trustee Irving Picard against SEC general counsel David Becker, whose deceased mother left Becker and his brothers a $2 million inheritance in a Madoff account several years before the discovery of the hedge fund’s scheme. When Becker liquidated the money, he was not connected with SEC, but rejoined the agency in 2009 and resigned again last week.

Kotz’s investigation comes a day after Rep. Darrell Issa, chairman of the House Oversight and Government Reform Committee, and Sen. Charles Grassley, member of the Senate Judiciary Committee, said that SEC Chair Mary Schapiro allowed Becker to represent the agency on Madoff issues without a full proper examination of his financial interests in the case.

The house committee’s lawyer said legislators are determining if a criminal laws were violated by Becker because of a prohibition for federal officers from participating in proceedings where they have a financial interest.

The legislators also demanded that Schapiro explain why an SEC ethics official advised Becker that the general counsel did not have to recuse himself from matters involving Madoff.

Before he resigned from the SEC, Becker wrote to the House Republicans that he informed Schapiro of his inheritance and handled the Madoff case on advise of the ethics counsel. Becker helped craft the SEC’s position on how much money investors should be entitled to recover in the Madoff scheme under the clawback lawsuits filed by Picard.

Many investors want the full, bogus amount based on their last account statements, but the SEC sided with Picard that investors’ claim should be limited to what they put in, less what they withdrew. But the SEC favored an inflation adjustment on money deposited with Madoff, which the trustee disagreed with.

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Bruce Madoff, President and founder of a New York firm that invested money for hedge funds and wealthy individuals and institutions, has been charged with operating a long-running Ponzi scheme that could cost investors billions of dollars. If this turns out to be true, it could be almost as large as the Enron scandal and will jeopardize the financial well-being of many individuals and institutions.

Ponzi schemes such as the one Madoff perpetrated are named after a 1920′s fraudster named Charles Ponzi. It is a “rob Peter to pay Paul” scheme whereby unsuspecting investors are sucked in by a fraudster making promises of unbelievable interest rate returns. Meanwhile he is just using that new money to payoff earlier investors. Once no new recruits can be found, the house of cards collapses, much like Madoff’s did when he could not meet $7 Billion of payouts to his investors.
In reading about this fraud, several very important lessons stand out: read more…