Yesterday, hedge funds operated by Banco Santander reached a settlement with the trustee in the Madoff liquidation. The funds agreed to return $235 million.
According to The New York Times, the trustee stated, “I am very pleased that we reached such a favorable settlement.”
The president and chief executive of SIPC was quick to agree. He 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.”
Backslapping and pronouncements of a fast victory—the self-congratulations are a red flag. There are plenty of unanswered questions. I can’t help but wonder what the clients of Banco Santander think.
Let’s break down the article:
NYT: “The funds also will get an initial distribution of $500,000 for their claims — the maximum that SIPC allows.”
Acrimoney: There’s no “look through.” Individual investors are not entitled to SIPC payments each. Investors are really dealing with Banco Santander. As the bank settles with clients, it will consider one payment of $500,000 from SIPC.
Uh-oh.
NYT: “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.”
Acrimoney: Is the offer “to compensate” tied to the bank’s pro-rata recovery of funds?
NYT: “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.”
Acrimoney: The bank agreed to pay $235 million back to the trustee. That number is about 16 percent of the bank’s $1.5 billion claim. Is 16 percent, minus expenses, a likely target for what investors will recover?
NYT: “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.”
Acrimoney: Okay, this deal is not a clawback. It falls under 90-day preference laws. Does that mean a 16 percent recovery is too high? Will clawbacks, presumably more contentious, return less?
NYT: The agreement “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.”
Acrimoney: This is a most-favored-nation agreement—good negotiating by Banco Santander. The contract says, in effect, “If anybody else cuts a better deal, we want the same treatment.” Also, should we expect to see $8.5 billion in recoveries in the weeks to come? That’s 85 percent of the $10 billion cited by NYT.
NYT: “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.”
Acrimoney: Says who? There are no SIPC payments to Banco Santander’s individual clients. The clients’ recovery is a function of what the bank agrees “to compensate.” We don’t know if it’s a victory for them because the bank’s settlements are private.
Remember that famous quote from Napolean? “Victory belongs to the most persevering.” It looks like there will be plenty of “persevering” by feeder fund clients.
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The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.