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Banco Santander Trying to Force Compensation Offer

Feb 2, 2009 | Parker Waichman LLP

Banco Santander is trying to strong-arm clients who lost money because of its hedge fund unit's investments with Bernard Madoff into accepting a compensation offer that comes with many strings.  Lawyers for clients, meanwhile, have asked a U.S. judge to halt the Spanish bank's compensation plan.

Numerous individuals, institutions and hedge funds lost money because of Madoff’s alleged Ponzi scheme.  But according to the Associated Press, losses for Banco Santander’s clients were among the highest of any bank linked to Madoff’s investment advisory business.  Those clients were invested in the Optimal Strategic US Equity Fund, which is managed by a unit of Banco Santander. That fund has lost more than  $3.1 billion as a result of investing with Madoff, the Associated Press said. Yet just weeks before Bernard Madoff’s alleged Ponzi scheme collapsed, managers at Banco Santander’s Optimal hedge fund investment arm were praising Madoff’s supposedly “impeccable” market timing.

Angry  Santander clients have filed a class action lawsuit against the bank in Miami, charging it did not perform enough due diligence in regards to its Madoff investments.  That lawsuit was quickly followed by Santander's offer of compensation.  Under the proposal, Santander would issue preferred shares with an annual payout of 2 percent to compensate private banking clients for their Madoff losses. The bank would have the option to buy back the securities after 10 years.

According to one fund manager interviewed by Bloomberg, Santander’s offer is well below market prices because similar securities yield up to 9 percent.  As a result, investors might not ever be able to trade those shares, and there is no guarantee that Santander would actually buy them back in 10 years.  They would also have to forgo taking any legal action against Santander, and agree to keep it as their  “preferred” bank as long as the shares stay in circulation, which may be indefinitely, Bloomberg said.

Now, Spanish lawyers have told Bloomberg that Santander is pressuring its Optimal clients to commit to the compensation offer.  According to the report, the bank has given customers until Feb. 5 to sign the contract for compensation, and is inviting them to meetings to do so in person.  The bank is not allowing them to see the contracts prior to the meetings.  If they fail to sign on, Santander has said they risk being disqualified from the offer.  Not surprisingly, many Santander clients say they feel coerced.

On Friday, lawyers representing Santander clients in a Class Action Lawsuit asked a U.S. judge in Miami to block the compensation plan. Lawyers who made the filing said that  majority of investors they are  representing are not happy with Santander's compensation offer.

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