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Missing $165m: Madoff cleaned London out just before his arrest

Bernie Madoff, the $60bn fraudster, ordered his London office to sell its $165m portfolio of UK gilts only a month before he confessed to the FBI that his business was a "big lie".

The London directors followed his instructions, transferring the sale proceeds to Madoff's New York office. However, it is still not clear where this money went to.

The Independent on Sunday has established that in the middle of November last year Madoff phoned Chris Dale, the finance director of Madoff Securities International (MSI), the London affiliate, and told him to sell the entire gilts portfolio. Madoff then instructed Mr Dale to transfer the money to his New York business, whereupon he would buy US treasuries on London's behalf.

In the telephone call, Mr Dale was told by Madoff that he wanted to make the switch due to worries about the return on gilts because of sterling's fall against the dollar. "He was worried about the British economy and said he preferred his investments in US treasuries," said a source. "This seemed perfectly realistic at the time because of the banking crisis and the pound's weakness."

Madoff's London office, headed by City veteran Stephen Raven, was a proprietary trading business capitalised by the Madoff family money to the tune of $200m (£125m). After the $165 million was transferred, London was left with assets of around $40m. These assets are still frozen by the UK courts, and may become subject to legal claims by investors in the US who have lost millions in the scam.

Madoff Securities directors carried out Madoff's instructions to sell the gilts, taking the certificates out of their bank vault in its Berkeley Street office and selling the bonds through their usual channels. As a member of the London Stock Exchange, MSI regularly cleared through Barclays Capital and the London Clearing House. A few days later, the London Madoff executives received the contract notes and settlement statement confirming the purchase of $165m of US treasuries from its counterpart, Madoff's New York office, BLMIS.

However, a few days after the firm's collapse, Lee Richards, the senior partner of Richards, Kibbe & Orbe, the US liquidator appointed to investigate Madoff, informed the London office that the contract notes and settlement statement for the US treasuries were bogus. It appeared that no US treasuries had been bought.

Neither Mr Raven nor Mr Dale were available for comment. But sources close to the situation claim that no one in the London office was suspicious about Madoff's request to sell gilts for Treasuries as he regularly made similar investment switches of up to $10m between London and New York, though he had never before ordered such an important investment decision.

To date, neither the Serious Fraud Office nor the US investigators have interviewed all the directors and traders operating the London firm.

The US liquidator was not available this weekend to comment on whether the money had been tracked down. But earlier this year, Mr Richards filed details of the complex paper trail surrounding the missing money with the US Southern District Court. It is understood that he has revealed many of the cover-ups operated by Madoff in his multi-billion-dollar Ponzi scam and has established where the funds were sent to. Among the 11 charges against Madoff, two are directly related to international money-laundering, said to cover money transfers mainly between London and New York.

Madoff, who is on a $10m bail, was due to be sentenced on 16 June but this has been postponed to 29 June. After he confessed his giant fraud to his sons, they turned him in and he was arrested by federal agents on 12 December.

In March, Madoff pleaded guilty to running what may turn out to be one of the biggest Ponzi schemes in history. He has maintained throughout that he was the only person involved in the swindle. In Madoff's statement to the New York court earlier this year, he said: "The Madoff London office was a legitimate, honestly run and operated business."

As well as his market-making business, Madoff ran an investment advisory business which drew in billions of dollars from many of America's top investors and celebrities. In the UK, several banks, such as HSBC and RBS, and hedge funds including Man Group and Nicola Horlick's Bramdean, lost millions in the scheme.