Banco Santander SA sold Bernard Madoff investments Branch managers channeled customers with money from property sales or inheritances

Banco Santander SA sold Bernard Madoff investments Branch managers channeled customers with money from property sales or inheritances to private banking salespeople, lawyers for the investors said. A retired school teacher put 300,000 euros ($388,000), half her savings, in a structured product linked to Madoff, said Jordi Ruiz de Villa, an attorney at the Barcelona law firm Jausas. The vendor invested 325,000 euros of lottery winnings in a similar product and may have to return to street sales, according to lawyers at Cremades & Calvo-Sotelo in Madrid.
“The fact that someone has a sum of money in the bank doesn’t make him a suitable customer for this type of product,” said Ruiz de Villa, who’s representing about 30 account-holders with potential claims of 10 million euros, including the teacher. “Some retail clients have suffered true
personal catastrophes because of this.” He wouldn’t provide the teacher’s name. Santander, Spain’s biggest lender, may lose customers at the domestic branch network that accounts for a third of profit if it is found to have misled people who trusted their neighborhood bankers, said Peter Hahn, a fellow at Cass Business School in London. The bank, led by Chairman Emilio
Botin, has said clients have 2.33 billion euros invested with Madoff, including 320 million euros from private banking customers in Spain. “The model in Spain where customers just left it to Big
Daddy Botin to take care of things has been broken,” said Fernando Zunzunegui, a Madrid-based lawyer. He said he is taking on Madoff-related claims valued at 8.2 million euros from 20 clients who are “clearly retail.” He declined to provide detailed information about his firm’s clients.
Ruiz de Villa and Zunzunegui said they are signing up clients and reviewing the cases in preparation for filing possible lawsuits against Santander. Javier Cremades, chairman of Cremades & Calvo-Sotelo, said he’ll push for a settlement first. New York-based Bernard L. Madoff Investment Securities LLC collapsed last month after Madoff told his sons it was a $50
billion Ponzi scheme, according to a complaint filed by the U.S. Federal Bureau of Investigation. Worldwide, the victims include banks, charities and investors such as Madrid-based billionaire Alicia Koplowitz and film director Steven Spielberg. Santander, based in the Spanish city of the same name, on Dec. 14 said international private banking clients and institutional investors had 2.01 billion euros of potential losses in Madoff-related funds. The rest of the money is in
investments sold to “qualifying investors” in SpainBranch customers were sold products linked to Madoff through Santander’s Geneva-based Optimal Investment Services hedge-fund arm, said the three lawyers representing the bank’s customers. Investors were asked to sign statements that they understood what they were purchasing and met the criteria for
investing. The bank has said it won’t compensate clients who invested with Madoff because the losses involve fraud. A spokeswoman for Santander said the bank had no further comment on the matter. Selling structured products to wealthy clients has been a popular strategy in Spain and wasn’t in itself wrong, because Santander believed it would yield safe and stable returns, said Fernando Luque, an analyst at Morningstar Inc. in Madrid. “Many of these institutions like Santander are going to be protected by the documentation, but the question is how great is the business damage from all this,” Hahn of Cass Business School said.

Banco Santander SA,hit by worlds largest fraud

The $7.3 billion Fairfield Sentry Fund invested solely with Madoff, taking a cut of 1 percent of assets and 20 percent of gains, which averaged about 11 percent annually in the past 15 years, according to data compiled by Bloomberg. Fairfield Greenwich is one of at least 15 hedge-fund firms and private banks, including Tremont Holdings Group Inc. and Banco Santander SA, that earned similar fees for sending customers’ cash to the 70-year-old money manager. “It’s mind-boggling that people like Tremont and Fairfield Greenwich had been doing this for so long,” said Brad Alford, who runs Alpha Capital Management LLC in Atlanta, which helps clients choose hedge funds. “It’s the job of these funds of funds to be doing due diligence. That’s why they get paid.” Madoff was arrested Dec. 11 after he allegedly confessed to running a “giant Ponzi scheme” that may have bilked investors of $50 billion. That fraud escaped the notice of Fairfield Greenwich, Tremont and other funds of funds that had at least $17 billion invested with Madoff. Hedge-fund investment adviser Aksia LLC said the managers should have seen “red flags,” such as Madoff’s use of a little-known, three-person auditing firm. Hedge funds that have disclosed holdings with Madoff were due at least $290 million in fees this year, based on reported assets, fees and Bloomberg data. The calculations don’t include fees of as much as 5 percent that clients paid for some funds when they first invested. Madoff didn’t assess fees for his money-management services, getting paid instead through commissions from his brokerage business for trading the stocks in the accounts. Investors ensnared by Madoff include Fred Wilpon, the owner of the New York Mets baseball team, clients of private bankers in Geneva, wealthy Jewish families in New York and Palm Beach, Florida, and institutions including BNP Paribas SA in Paris that loaned investors money to increase their bets. Losses have been reported by a pension fund in Fairfield, Connecticut, New York hospitals and a charity in Salem, Massachusetts.
While Madoff didn’t run a hedge fund, his alleged crime may accelerate investor defections from the $1.5 trillion industry, already hit by its worst losses since at least 1990 and redemptions that may reach $400 billion this year, according to estimates by Morgan Stanley. In a Ponzi scheme, returns to early investors are paid with money from later ones, until there isn’t enough cash to go around. Madoff’s alleged scam unraveled when he received $7 billion in redemption requests that he couldn’t meet. Funds of hedge funds such as Fairfield Greenwich act as middlemen, raising money from investors and farming it out to other managers that they vet. The go-betweens manage 44 percent of hedge-fund assets, according to data compiled by Hedge Fund Research Inc. Their investments lost 19 percent on average through November, a little more than a percentage point more than single-manager funds, the Chicago-based firm says. Institutions including New York State’s $154 billion retirement system and the endowment of Baylor University have been cutting back their investments in funds of funds to save the extra layer of fees -- generally 1 percent of assets and 10 percent of profits -- that they charge on top of the underlying managers’ take. Last year, for the first time, more than half of the hedge-fund assets of the 200 largest U.S. pension plans were invested directly with individual managers, according to data compiled by Pensions & Investments magazine.