Santander’s New Madoff Offer May Boost Acceptance

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Santander’s New Madoff Offer May Boost Acceptance
By Charles Penty

March 11 (Bloomberg) -- Banco Santander SA, Spain’s biggest bank, is offering some clients with Bernard Madoff-related losses a new compensation contract that may boost acceptance among customers with undeclared investments.

Santander has offered some customers 30-year certificates issued under Swiss law that omit a clause saying the bank would notify Spanish tax authorities about the owners, according to a copy of the contract seen by Bloomberg News.

The notes, which yield 2 percent, may respond to the needs of those who invested offshore and didn’t declare the money, said Jose Carlos Blanco, a partner at Blanco & Etcheverry Abogados in Montevideo, Uruguay. Santander in January said it would compensate private banking clients who lost 1.38 billion euros ($1.75 billion) with Madoff to restore relationships.

“Confidentiality is absolutely a key issue,” said Blanco, whose firm has been contacted by about 10 Argentines who invested as much as $10 million in Madoff funds through a Santander office in the Uruguayan capital’s duty-free zone. “There’s no doubt at all that a product that addresses that issue would be more acceptable.” Blanco said he hadn’t seen the offer.

Santander initially offered customers preferred shares, also paying a 2 percent yield. That contract included a clause saying Santander would tell Spanish authorities who owned the shares. As many as 70 percent of customers accepted that offer, a lawyer for the bank said last month during a Miami court hearing on a lawsuit by investors hit by Madoff losses.

The new contract was aimed at helping companies or foundations prevented by their statutes from holding preferred shares, said Javier Marin, head of global private banking for Santander. The certificates would also benefit a small group of international clients by helping them avoid having tax withheld in Spain, he said. The new contract isn’t designed to provide anonymity, which is already guaranteed to non-Spanish investors with the preferred-share offer, Marin said.

Rebuilding Relationships

Santander’s willingness to vary the terms shows how keen it is to increase acceptance, said Peter Hahn, a fellow at London’s Cass Business School. Customers who take compensation forego any legal claims against Santander and agree to keep it as their “preferred” bank. Still, the bank may end up antagonizing clients by varying its offer based on the circumstances of different customers, Hahn said.

“Given the fact that the whole point of this was supposedly to rebuild client relationships, it’s poor crisis management because things just get messier,” Hahn said. The 2 percent yield wouldn’t even “pay for a funeral,” he added.

The customer who showed the certificate offer to Bloomberg is a European resident who invested in Optimal Strategic U.S. Equity, a Santander-run fund wiped out by Madoff.

‘Very Long Term’

The certificates are non-tradable, classed as junior debt and must be held to maturity, according to the contract seen by Bloomberg. If the client dies, his heir must also hold them for what’s left of its term.

“The fixed date of maturity of the certificate is very long term and the customer has no right to request its early maturity or cancellation,” the contract says. In the event of death, the customer’s successor will be “subrogated in the obligations pertaining to the certificate.”

Santander may be making use of European legislation that allows offshore investors to maintain anonymity while paying a withholding tax, said Juan Ignacio Sanz, a law professor at Esade Business School in Barcelona.

“It’s nothing illegal,” said Sanz, who represents one of the Madoff victims. “They’re adapting to the law.”

Some customers who rejected the preferred shares are also angry about the yield, which is below market rates, said Marcelo Gebhardt, a partner at Aguirre Saravia & Gebhardt Abogados law firm in Buenos Aires, who is advising about 100 Santander customers.

Santander has already been flexible on the terms of its offer, offering some customers the opportunity to take out a loan with the preferred shares as collateral, said Alejandro Figueiras, another partner of the firm.

“Some customers have accepted but there are still many that have not,” Figueiras said.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

Last Updated: March 11, 2009 20:16 EDT