Optimal pays $235 million to Madoff trustee

Optimal Investment Services, the Switzerland-based asset management arm of Banco Santander, has agreed to pay $235 million to the trustee responsible for liquidating Bernard Madoff's investment management firm, Bernard Madoff Investment Securities (BMIS).

The out-of-court deal amounts to 85% of the clawback claims the trustee, Irving Picard, had against two funds run by Optimal for money they took from BMIS before the disclosure of Madoff's fraud. Picard has also agreed not to commence litigation against Optimal.

"After conducting an investigation into the circumstances relating to the trustee's claims against Optimal, the trustee concluded that the settlement with Optimal is appropriate and in the best interest of Madoff's victims," Picard said.

Santander asserted the agreement followed a review by Picard of Optimal's due diligence processes "in which the trustee concluded that [Optimal's] conduct does not provide grounds to assert any claim".

The agreement also permits Optimal to claim back funds from BMIS through Picard's attempts to remunerate the victims of the Madoff fraud. Santander revealed its claims against the BMIS estate total $1.55 billion. Picard has managed to collect $1.23 billion to repay Madoff's victims so far.

Madoff admitted to a $65 billion Ponzi scheme on March 12, pleading guilty to 11 charges including securities fraud, money laundering and perjury. The Wall Street legend had relied on a group of high-profile feeder funds to channel capital into his scam, which involved paying out returns using inflows of new capital from other investors. Fairfield Greenwich Group (which invested $6.9 billion in BMIS) and Tremont Group (which invested $3.3 billion) are being sued by their investors, who claim there were fundamental flaws in the companies' due diligence processes.

Optimal and Santander have also attracted legal action from their own investors. Despite offering private clients preference shares in Santander worth a total of €1.38 billion on January 27, two class-action lawsuits were filed against the bank and Optimal earlier this year in the US, alleging profound shortcomings in Optimal's due diligence processes.

Mark Raymond, managing partner at law firm Broad and Cassel in Miami - which is advising customers with around $30 million invested in Optimal - told Risk earlier this year: "It was the failure to follow up on red flags. Moreover, the failure to provide adequate disclosure to customers is a breach of fiduciary duty and negligence."

Nonetheless, Picard's decision not to pursue legal action against Santander should provide some solace for the bank. On May 18, Picard filed a lawsuit in the US Bankruptcy Court in the southern district of New York, against Fairfield Greenwich Group, claiming the "defendants knew or should have known that BMIS' [investment advisory business] was predicated on fraud". The lawsuit seeks repayment of the $3.5 billion that Fairfield Greenwich Group received from BMIS between 1995 and 2008.

The lawsuit alleges that Fairfield Greenwich Group helped Madoff co-ordinate responses to the US Securities and Exchange Commission's (SEC) investigations, collaborated with BMIS in SEC filings, and helped secure new capital for Madoff. Fairfield Greenwich Group also allegedly "did little, if any, due diligence of BMIS and instead ignored multiple red flags".

The case claims these red flags were numerous, including flaws in Madoff's avowed split-strike conversion strategy - for which he would need to be holding more than 100% of the total S&P 100 put option open interest to hedge his stock holdings - as well as Madoff's unusually high and consistent returns of around 11% per year.

See also: Madoff fallout