Banco Santander, one of the financial institutions hardest hit by the Bernard Madoff Ponzi scheme scandal,Â has offered restitution to clients whose money it invested with the alleged swindler.Â According to Bloomberg.com, the Spanish bank said yesterday that it would issue 1.38 billion euros ($1.82 billion)Â to its individual private banking clients whose money was invested with Madoff.Â Apparently, Banco Santander is trying to head off lawsuits filed by angry clients who lost money because of the bank’s Madoff connection.
Numerous individuals, institutions and hedge funds lost money because of Madoffâ€™s alleged scheme.Â But according to the Associated Press, losses for Banco Santanderâ€™s clients were among the highest of any bank linked to Madoffâ€™s investment advisory business.Â 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 thanÂ $3.1 billion as a result of investing with Madoff, the Associated Press said. Yet just weeks before Bernard Madoffâ€™s alleged Ponzi scheme collapsed, managers at Banco Santanderâ€™s Optimal hedge fund investment arm were praising Madoffâ€™s supposedly â€œimpeccableâ€ market timing.
Shortly after the U.S. FBI arrested Madoff for securities fraud last December, Spainâ€™s anticorruption prosecutor began investigating the relationship between Banco Santander and the accused swindler.Â TheÂ prosecutor wants to know whether managers of the Optimal Strategic US Equity FundÂ knew of problems at Madoffâ€™s operations when they marketed the vehicle to investors.Â A key question is why Santander Chairman Emilio BotÃn sent one of his chief lieutenants to seeÂ Madoff in New York just weeks before the alleged Ponzi scheme collapsed. They are also looking at the timing of the resignation of Manuel EcheverrÃa, who The Wall Street Journal said presided over the Optimal fund while it built its relationship with Madoff. He left the bank on June 30, 2008 after 19 years there. Five colleagues also quit at the same time.
The Madoff scandal has also raised serious questions about the method Banco Santander to recruit investors for the Optimal fund.Â While the funds were meant for wealthy private banking clients, Santander branch managers reportedly channeled customers with money from property sales or inheritances to private banking salespeople, who convinced them to sink their money into the Optimal Strategic US Equity Fund.Â These investors were often of modest means.Â They included a former street vendor who was convinced to invest more than $400,000 in lottery winnings in the Optimal fund.Â That client had to return to street vending after Santander lost his winnings.
According to Bloomberg.com, Santander has proposed issuing 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.Â Another report from Reuters said the compensation would only cover clients’ initial investments, and not apparently false gains Madoff had reported.Â Institutional investors, which Santander saidÂ should have been aware of the risks involved, will not be eligible for the compensation program.
Banco Santander’s clients still have to approve the package.Â But if they do, it is believed that other institutions and firms who invested client funds with Madoff would be under pressure to offer similar compensation.