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Madoff Trustee Strikes Deal with Banco Santander

May 27, 2009 | Parker Waichman LLP

The Bernard Madoff trustee has reached a deal with Spain's largest bank regarding investments two of its hedge funds made with the admitted Ponzi schemer.  According to a Bloomberg.com, Banco Santander will pay $235 million to trustee Irving Picard to avoid a lawsuit.  Picard has recently been filing claw back lawsuits against individuals and funds for billions of dollars in false profits they supposedly made as a result of their Madoff investments.

The two hedge funds were operated by Santander’s Optimal Investment Services unit, Bloomberg.com said.   Santander said that its agreement with Picard did not imply any wrongdoing on its part.

As we reported previously, losses for Banco Santander’s clients were among the highest of any bank linked to Madoff’s investment advisory business. As a result of its Madoff's investments, the bank's clients  lost more than  $3.1 billion. Yet just weeks before Madoff’s Ponzi scheme collapsed, managers at Banco Santander’s Optimal hedge fund investment arm were praising Madoff’s supposedly “impeccable” market timing.  The massive losses prompted some Santander clients to file a class action lawsuit against the bank in Miami, charging it did not perform enough due diligence in regards to its Madoff investments.

Since the lawsuit was filed, Banco Santander has offered a compensation deal to its clients.  According to Bloomberg.com, a little more than 90% have accepted the offer.

Picard was hired by the Securities Investor Protection Corp. (SIPC)  to liquidate Madoff's assets in order to recover some of the $65 billion his investors lost to his scam.  So far, Picard has been able to collect  $1.22 billion as a result of his efforts.  According to Bloomberg.com, Picard has also filed several claw back lawsuits seeking  total of $10.1 billion in profits withdrawn by Madoff  investors that he claims should have known of the fraud. Picard also is seeking about $735 million from Madoff customers outside of court.  In spite of these efforts,  most experts expect Madoff's former investors will only recover pennies on the dollar.

According to Bloomberg, the SIPC is apparently very happy with the Santander deal.  "This settlement is the result of extensive factual research, diligent legal scholarship and practical craftsmanship by the trustee and his attorneys,” SIPC President Stephen Harbeck said in a statement. “It is a road map for similar recoveries that will benefit the victims of Bernard Madoff’s crimes.”

In addition to the asset liquidation, some investors might be able to recover up to $500,000 each from the SIPC, which acts essentially as an insurance fund for victims of securities fraud.  However, third-party investors - those whose Madoff investments were made through other entities - might not be eligible for the full SIPC benefit. Those investors could choose to sue the third party, and some hedge funds have already been named in such lawsuits.

On March 12, Madoff pleaded guilty to 11 fraud counts. The former chairman of the NASDAQ stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Madoff faces up to 150 years in prison, and is scheduled for sentencing next month.


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