A Royal Shame: Sarah Ferguson Money Scandal

UPDATED 06/07/2010 at 01:00 AM EDT Originally published 06/07/2010 at 01:00 AM EDT

As the clock ticked past midnight on May 23, Sarah Ferguson seemed at the top of her game. There she was in Cannes at a 40th-birthday party for supermodel Naomi Campbell, dancing with her daughter Beatrice, 21, to the Black Eyed Peas, whose lead singer, Fergie, shares her famous nickname. By 1 a.m., however, the Duchess of York had dropped out of sight. Later that day, as Ferguson made her way to the U.S. to accept an award for her children's-charity work, a traveler on one of her flights told Britain's Mirror that the duchess appeared "very, very upset."

By the time Ferguson hit L.A., the cause of her distress was well known: A British tabloid had captured her on video offering a stranger access to her ex-husband Prince Andrew in exchange for $40,000 in on-the-spot cash, to be followed by a wire transfer of more than $700,000 to her personal HSBC bank account. Unknown to Ferguson, 50, the person posing as a wealthy businessman was Mazher Mahmood of the News of the World, and every moment of their transaction was being taped-including Ferguson's gesturing for Mahmood to bring the money, staring in seeming awe at the piles of cash and assuring Mahmood his payments would "open up all the channels...you meet Andrew." Caught red-handed, Fergie fessed up. "I very deeply regret the situation and the embarrassment caused," she said in a statement May 23. "It is true my financial situation is under stress. However, that is no excuse for a serious lapse in judgment."

It's been 14 years since she's worn a tiara, but Fergie has proved once again that when it comes to embarrassing Buckingham Palace, she has no equal. An army officer's daughter who married Prince Andrew in 1986, she was mocked as the "Duchess of Pork" for her full-bodied figure and unfavorably compared with the willowy Princess Diana. In 1992 she undermined her marriage and disgraced the Windsors after photographs surfaced first of her vacationing with American millionaire Steve Wyatt, followed half a year later by pictures of a topless Ferguson sunning herself near Saint-Tropez while her financial adviser John Bryan kissed her royal toes. The so-called Disgraced Duchess soon racked up new monikers-Freebie Fergie and Duchess Do-Little-as she gained a reputation for accepting lavish gifts and accumulated $7.1 million of debt. But the latest scandal has brought the duchess to a new low. "She's absolutely devastated," says one of her friends. "The fact that she would sink to that shows how desperate she is."

Prince Andrew, 50, was heading back to London from Malaysia, where he had been serving as a trade ambassador for Britain, so the royal family issued a terse statement that "the Duke of York categorically denies any knowledge of any meeting" between Fergie and Mahmood. "None of us is happy here," says a Palace source. A day later royals biographer Robert Lacey encountered Andrew, Queen Elizabeth's second son and fourth in line to the throne, at an intimate party with Saudi businessmen. The prince, he says, showed "no sign of discomposure."

Fergie, on the other hand, is "very, very fragile," says a friend. A decade-long deal with Weight Watchers has ended, and her other ventures-children's books, speaking engagements-have proven insufficient. She was forced to shutter Hartmoor, the company founded to promote her ventures, and she also faces a lawsuit and a spate of bills. "She lost all her money," says the friend.

Now speculation has turned to whether Andrew will toss her out of his Royal Lodge in Windsor, where she's been living rent-free for the past few years. Majesty magazine editor-in-chief Ingrid Seward, however, says the famously friendly exes, who jointly raised Beatrice and their younger daughter Eugenie, 20, may well get past this. "Andrew is very much, 'She's the mother of my children.' She can do no wrong."

Whatever her future abode, it's never wise to count her out. Scotland Yard plans no criminal investigation. And over the years, Sarah Ferguson has displayed a singular talent for landing on her feet. Accepting her award in L.A., she managed to show some humor, quipping, "Phew, I've had a heavy day." "Time heals," says royal watcher Lacey. "There's still a great reserve of affection for her."

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