How I was stung by the oh so charming Madoffs

Wealthy London peer Lord Jacobs of Belgravia today admits he suffered 'a real loss' at the hands of Bernie Madoff as investigators examine role of his wife Ruth...

The former Liberal Democrat peer Lord Jacobs of Belgravia today revealed that he was a victim of Bernie Madoff, the American fraudster whose $50 billion scam has plunged New York and London investment markets into turmoil. As investigators in the United States and London continued their probe into Madoff's affairs, Lord Jacobs disclosed to the Evening Standard that he had suffered "a real loss".

He declined to put a figure on the amount but said: "It's not peanuts," reflecting the fact that Madoff demanded at least $1 million from his wealthy clients and encouraged them to invest $10 million or more.

The 78-year-old peer is spending Christmas at his holiday home in Palm Beach, Florida, where he first met Madoff. "Such a charming man," he said. "He was obviously very wealthy but he didn't live high on the hog. I used to see him and we'd chat. He seemed like a very nice guy."

Lord Jacobs, whose fortune was estimated at £128 million in this year's Sunday Times Rich List, prospered with businesses including the British School of Motoring and fast food chains - Spudulike was one of his brands. He is thought to have given the Liberals and Lib-Dems more than £1 million over the past 20 years but he recently left the party to become a crossbencher. He cited differences with leader Nick Clegg over tax policies.

Like many casualties of 70-year-old Madoff's fraud, Lord Jacobs was drawn into the scheme through social contacts in the wealthy Jewish community in Palm Beach. This was one of the main centres of Madoff's operations where, according to the Standard's inquiries, he operated with a cynicism that was breathtaking. While he and his wife Ruth were befriending people, his so-called fund was robbing them.

Now friends, such as Lord Jacobs, are left wondering how much the elegant and highly-likeable Mrs Madoff knew about what was happening. "It seems impossible that he could have acted alone," Lord Jacobs said. "I found Ruth a rather quiet lady, concerned with her charity work. But she's certainly no fool and his sons were closely involved in the business."

Investigators working for the Securities and Exchange Commission have discovered evidence that Mrs Madoff, 67, monitored financial transactions in her husband's firm. It was also reported in New York that the SEC had discovered her name on a number of deals. She has been asked to surrender her passport and is expected to be questioned in the coming days.

Mrs Madoff met her husband when they were students. They have two sons, Andrew and Mark, both in their 40s. Mrs Madoff, who once published a best-selling book on kosher cooking, has a reputation for being a staunch supporter of the Democrat Party. She and her husband have given more than $100,000 to candidates to the Senate and other political posts. One report suggested they were "A-List" donors who had given more than $250,000 to the Democrats.

Now her husband is confined to their £5 million duplex apartment on New York's Upper East side. He is allowed out during the day but must wear an electronic tag. Mrs Madoff and his brother Peter posted $10 million bail to keep him out of prison.

"I don't suppose I shall see him again," Lord Jacobs said, "but if I did I should like to ask him this: 'Bernie, you had a very good business. You were doing so well. Why did you do it?'"

The answer to that question has not yet become clear but investigators are beginning to believe that Madoff turned crook only relatively recently. According to sources in New York, the SEC believes Madoff started stealing from his clients in earnest in 2005. At that time he faced a run of calls for cash from investors who wanted to take out their money to cover losses elsewhere. Signs of panic are evident in the figures the SEC has uncovered. This year, Madoff filed documents claiming he had $17.1 billion under management in his funds. As stock values dived he reported a mark-up of 5.6 per cent at the end of November. At the same time stocks in Standard and Poor's 500 index fell by nearly 38 per cent.

This was the market in which Madoff was doing most of his trades and it was unthinkable that he could have profited so handsomely when virtually everyone else was losing. Yet the truth emerged only when his fund clients tried to cash in a total of $7 billion. Madoff had to admit the money wasn't there and the whole thing had been a charade or, as he himself put it, a "giant Ponzi scheme", a pyramid fraud in which money from new investors was used to pay phoney returns.

Lord Jacobs first gave him money to invest 10 years ago. He said: "I met a friend of mine at the club in Palm Beach one day and we discussed investments. He said he had been investing with Bernie Madoff for about seven years. I liked the sound of it because it gave a reasonable return and it didn't have the risks you have with hedge funds. He was giving about 10 per cent a year and while you could get much more from a hedge fund you are also exposed to big losses. Madoff was not borrowing to invest, which made it that much more secure.

"The money came in every month. There was very quick liquidity. If people asked for their money back, they got it."

Around the time Lord Jacobs started investing with Madoff the fund was subjected to an investigation by the SEC. The peer said: "Apart from finding one or two minor things wrong, they gave it a clean bill of health. When a body like that gives the all clear, it gives you confidence. Now we know that the SEC so grossly failed. If it had done its work properly, it would have realised it was all a fraud."

The SEC has faced severe criticism for not acting on a series of warnings about Madoff's operation. Lord Jacobs said: "If the SEC had gone to the auditors and asked to see the working papers, it would have realised something was wrong in one minute flat. It didn't do that." He has taken legal advice in London and believes the SEC may be held liable for its failures.

"The US government has a role in this. Regulatory bodies are expected to regulate. I have incurred a real loss. But there are people here in Palm Beach who have been wiped out. They will never recover. Pensions have gone, life savings have been lost. For those people what has happened is a catastrophe."

Investigators have seen evidence that Madoff recently made a desperate plea to his rich investors for more money. Fairfield Greenwich, the firm run by Walter Noel which is the single biggest Madoff loser with $7.5 billion missing, poured in millions of dollars during the past few weeks at Madoff's request. The company, which has a big London operation run by Andres Piedrahita and his wife Corina, Noel's daughter, who live in Belgravia, took money from other funds to give to Madoff. It seems Madoff was making a last-ditch attempt to plug the gaps, recklessly throwing other people's money into a yawning financial abyss.

Lord Jacobs said he was not asked for more money recently but others with Palm Beach connections were not so fortunate. Madoff and his wife socialised at the Palm Beach Country Club, an exclusive members-only establishment that does not encourage visitors. It doesn't even have a sign outside the high hedge around the clubhouse, and its golf course is shielded from the road.

Lord Jacobs met Madoff through contacts at the club, as did many other of his victims . One was 95-year-old textile magnate Carl Shapiro. He and his son-in-law Robert Jaffe are believed to have lost more than $400 million. Mr Shapiro's charitable foundation has seen another $145 million disappear.

Just weeks ago Madoff asked them for more money. The Shapiros sent a cheque for an undisclosed sum, thought to be in the millions. Mr Shapiro's wife Ruth, 91, said: "He seemed a little anxious this time. He kept calling, saying, 'I didn't get it; it hasn't come yet. Are you sure you sent it?'" Unluckily for the Shapiros, they had.

Madoff's home in Palm Beach seems locked up and deserted, although a Mini Cooper and a silver grey Lexus have been parked on the drive in recent days. The house, on North Lake Way near the intercoastal waterway, was once owned by the Pulitzer family. It has five bedrooms, seven bathrooms and the living area covers 6,500 square feet, nearly five times the space in a typical three-bedroom London home. It has been valued at $9.4 million. Like other Madoff properties, ownership is registered in the name of his wife, Ruth.

The house has its own dock but a boat that neighbours used to see tied up there has gone, possibly to protect it from being grabbed by investors.

Anger over Madoff's fraud is running high and a lot has been directed against the Madoffs as a couple. A Palm Beach socialite said Ruth played a crucial role in getting people to invest. She said: "They were a real pair at the country club. Networking among very rich people there is about the best on earth. When there is a cocktail party, husbands always bring their wives and people would try to get to Bernie through Ruth."

Madoff created an illusion of exclusivity around his fund and declined some investors, apparently to sharpen interest. As one Palm Beach resident said, without conscious irony: "You felt you'd really arrived if Bernie let you in on his scheme."