Hedge Funds Agree to Return $235 Million in Madoff Case

Date: Wednesday, May 27, 2009
Author: Diana B. Henriques, The New York Times

Two Caribbean hedge funds operated by Banco Santander, the Spanish financial giant, have agreed to return $235 million they withdrew from their accounts with Bernard L. Madoff in the months before his global Ponzi scheme collapsed.

The agreement was announced on Tuesday by Irving H. Picard of the law firm Baker Hostetler, the trustee in the Madoff liquidation. It is the first negotiated settlement by any of the giant investment funds that steered clients’ money into Mr. Madoff’s hands.

The deal requires the two hedge funds to return 85 percent of the money they withdrew in the 90 days before the fraud surfaced with Mr. Madoff’s arrest in mid-December. Federal law permits Mr. Picard to demand the return of any money withdrawn from the Madoff firm during that time period.

If approved by the federal bankruptcy court in New York, the arrangement will be both a practical and a strategic victory for Mr. Madoff’s victims.

At a practical level, the agreement will substantially increase, to more than $1.25 billion, the pool of cash available to compensate victims of the fraud — without the added uncertainties and delays involved in suing the offshore hedge funds, which are based in the Bahamas.

And it establishes 85 percent as the floor for negotiations between the trustee and other funds that took at least $10 billion in profits out of the Madoff scheme in its final days. Under the terms of this deal, the trustee cannot accept less from any of those funds without extending the same deal retroactively to Banco Santander.

“I am very pleased that we reached such a favorable settlement,” Mr. Picard said in a statement announcing the deal. “We hope that other entities against which we have claims will likewise come forward to settle those claims for the benefit of all of Madoff’s victims.”

Mr. Picard noted in court filings that his staff has investigated the activities of the funds and determined that they “were not complicit in the fraud” perpetrated by Mr. Madoff “and did not have any actual knowledge of the fraud.”

Mr. Picard is overseeing the Madoff liquidation on behalf of the Securities Investors Protection Corporation, the industry-financed agency authorized by Congress to oversee bankruptcy cases involving brokerage firms.

Stephen P. Harbeck, the SIPC president and chief executive, said his agency “supports the settlement wholeheartedly” and praised the “extensive factual research, diligent legal scholarship and practical craftsmanship” by the trustee and his staff.

Banco Santander was one of the largest conduits carrying global cash to Mr. Madoff. The bank invested about $24 million of its own money and $3 billion of its clients’ money in the Madoff scheme, largely through its Geneva-based hedge fund unit, Optimal Investment Services. In return, that hedge fund unit earned more than $100 million in fees from clients in 2006 and 2007 alone.

Santander is one of several banks that have offered to compensate its clients who lost money in the fraud, and it recently reported that most of its customers had accepted the reimbursement offer.

The settlement, if approved, would shield the Optimal funds from any future claims by Mr. Picard and allow them to go forward with their own claims against the Madoff estate, which total about $1.5 billion. The funds also will get an initial distribution of $500,000 for their claims — the maximum that SIPC allows.

As of Memorial Day, SIPC has committed more than $116 million in initial distributions to 237 of Mr. Madoff’s victims, most of whom have qualified for the maximum payment.

Mr. Madoff pleaded guilty to fraud charges in March and is in jail awaiting sentencing, scheduled for June 29. A hearing on the Banco Santander settlement is scheduled for June 16.