SWISS private banks are estimated to have lost at least £2.5 billion in Wall Street veteran Bernard Madoff’s alleged $50billion (£33 billion) fraud.

The scandal has been growing since Madoff was arrested last week after confessing to employees that the business bearing his name was “a giant Ponzi scheme”. He is currently free on a $10m bond.

Many of the world’s richest families are embroiled in the saga. Fred Wilpon, owner of the New York Mets baseball team, and J Ezra Merkin, chairman of the car finance giant GMAC, are among dozens emerging as the victims of Madoff’s scheme.

A number of wealthy Britons are expected to be hit through exposures to investments in Switzerland.

Union Bancaire Privée, the Geneva-based private bank, is estimated to have lost about one billion Swiss francs (£570m) in Madoff funds.

Nicola Horlick, the fund manager, has already revealed that her Bramdean Alternatives fund had 10% of its assets with Madoff. Local-authority pension schemes from Hampshire and Merseyside are big investors in Horlick’s fund.

Larger institutions are also believed to be affected, including Santander, the owner of Abbey, and BNP Paribas. Royal Bank of Scotland confirmed last night that it has some exposure to Madoff and is now investigating its position.

In America, a number of Madoff’s friends and neighbours are preparing to sue the fund manager, who is alleged to have told staff that his firm was “one big lie”.

“Many of these people are going to go from being very wealthy to virtually destitute,” said a lawyer who is representing investors.

Horlick said last night that the affair had raised “fundamental questions” about the regulatory system. She added: “It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades. The Madoff business has been subject to due diligence by many of the most experienced professionals in the global markets . . . yet it seems that criminal activity has continued unfettered and undetected.”

Horlick claimed that Madoff’s advisers said the firm had been subjected to a full-scale investigation by the US Securities and Exchange Commission twice in the past two years. She also stressed that international accountancy firms had been auditing funds with exposures to Madoff.

She added that Bramdean’s investment performance had been very strong, aside from the potential Madoff losses. Bramdean was about to redeem some money from the Madoff fund when the scandal broke.

She continued: “I never met Madoff — he didn’t meet any investors. All contact was through these feeder funds that supplied him with the capital. The strategy we were supposedly buying into was very conservative.

“There was extensive due diligence being conducted on the funds by our advisers, who are part of Man Group. He must have been matching the amount of money he paid out to what would have happened had he followed the strategy that he said he was following.”

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