The Spanish Supreme Court has ordered Banco Santander to pay €600,000 to clients who invested in a structured deposit linked to the performance of five underlying funds based in Ireland, including the Optimal Strategic US Equity Fund, one of the funds affected by Bernard Madoff and his firm Bernard L. Madoff Investment Securities’ Ponzi scheme. The Optimal Strategic US Equity Fund invested 100% of its assets with Madoff Investment Securities, despite red flags signalling a Ponzi scheme.
According to the court’s sentence, which partially upheld the appeal of investors affected, the bank liquidated the structured product “at the net asset value” of the fund based on the early termination date, set for November 28, 2008, but the settlement was not performed properly.
On December 16, 2008, the board of directors of Optimal Multiadvisors – part of Optimal Investment Services, the former Geneva-based fund of hedge funds management unit of Santander that routed client money into Madoff’s fund – decided to suspend calculation of the net asset value (NAV) of the underlying funds whose investments were handled by Madoff Investment Securities, since this broker had been seized by the US Securities and Exchange Commission (SEC) and shut down after the arrest of its president.
In January 2009, NAV calculations were suspended at the remainder of underlying funds linked to this company, which initiated an orderly process of compulsory liquidation. The suspension of NAV calculations for the five funds underlying the product and their orderly liquidation prevented their redemption on the dates envisaged and, as a result, the structured deposit could not be liquidated as there was no way of determining its redemption price.
According to the ruling, the plaintiffs invested €600,000 in the Producto Financiero Estructurado Multiestrategia Optimal structured deposit on May 18, 2006, with the product striking and beginning its term on May 31. The three-year structure was initially set to mature on November 30, 2009, but the contract included a clause allowing early termination every six months as long as notice was given in writing at least 80 days in advance.
The plaintiffs gave the sell order for the early termination of the contract on November 28, 2008, but when the scheduled date for settlement (January 9, 2009) came, the settlement was not performed as the underlying fund, the Optimal Strategic US Equity Fund, was hit by the “Madoff scandal”.
Although Banco Santander paid to claimants €220,199.96 for the settlement of the structured deposit, the court took the view that the net asset value of the fund set by the bank to repay the plaintiffs needed to be clarified and was considered a “a dark matter” that was not specified in the contract.
“Risks taking place after the date of cancellation affecting the net asset value of the fund should not harm the client,” read the sentence. “[Also] it was not expected that any unexpected and surprising revaluations occurring between that date and the settlement would benefit the investors.”
The sentence also noted that where the terms of the contract established as a measure of investment protection in such a situation adversely affect a fund, it should be replaced by another fund. “[Banco Santander] did not make use of this possibility, nor dutifully reported the inability to do so, incurring a new breach of contract, in the opinion of this court”
The Supreme Court concluded that the content of the contract did not allow for the investor to burden the damages suffered by the credit institution (Banco Santander) victim of fraud, and that Banco Santander, at the conclusion of the contract, showed negligence in the management of the events that occurred after the discovery of the fraud, and asked Banco Santander to indemnify the investors for the damage suffered.
A Banco Santander spokesperson declined to comment on the sentence.
Click the link to read Spain’s Supreme Court’s sentence in Spanish.
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