Santander offers $1.8 bln to victims

Bloomberg

Spain’s largest bank said Tuesday it also will close seven hedge funds run by its Optimal Investment Services unit after the Madoff scandal triggered a surge in withdrawal requests. It didn’t disclose the size of the funds or amounts clients had sought to get back.

Santander, which said Dec. 14 it had 2.33 billion euros in client funds with Madoff, was sued in U.S. federal court in Miami by investors who accused the bank of failing to adequately vet Madoff.

Its settlement offer may elicit similar proposals from firms such as Bank Medici, the Vienna-based firm that funneled $3.2 billion to Madoff, the most among European banks, and Geneva-based Union Bancaire Privee, with $700 million.

The domino effect

"Other banks are going to see this and customers are going to say, ’What about us? Are you going to make a similar offer to us?’ " said Marvin Pickholz, a litigation attorney at Duane Morris in New York and former U.S. Securities and Exchange Commission enforcement official.

Santander, based in the city of the same name, proposed issuing preferred shares with an annual payout of 2 percent to compensate clients, a bank spokesman said Tuesday in a telephone interview. The bank would have the option to buy back the securities after 10 years, he said. Santander, which reports earnings on Feb. 5, will take a charge to 2008 pretax profit of 500 million euros to cover the settlement.

Madoff, 70, was arrested Dec. 11 after allegedly confessing to his sons that his investment business was a fraud and cost clients as much $50 billion. In a Ponzi scheme, early investors are paid with money from subsequent victims.

European banks sold Madoff-run investments to their clients and provided loans to hedge funds that aggregated money for the New York financier. Santander branch managers channeled customers into Madoff funds through Optimal, according to lawyers for the investors.