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* Santander unit ignored reports' advice on Madoff
* First report raised red flags over verifying trades
* Second report toned down advice, commended Madoff ops
By Martin de Sa'Pinto
ZURICH, June 9 Managers at Geneva-based Optimal
Investment Services continued investing in convicted fraudster
Bernard Madoff despite two 2006 internal reports raising a
series of concerns, lawyers said this week.
Optimal, the hedge funds arm of Spanish banking giant
Santander (SAN.MC), which lost an estimated $3.1 billion to
Madoff's fraud, is facing a series of legal actions brought by
investors in both the U.S. and Swiss courts.
"Both documents strongly suggest that in 2006 Optimal had
identified the critical risks with Madoff, investigated, and did
not obtain answers providing any real comfort," said Javier
Bleichmar, acting for plaintiffs in a Miami case lodged against
Santander, Optimal and certain executives.
"Accordingly, the level of wrongful intent appears to have
been higher now than prior to the disclosure of these documents"
said Bleichmar, from New York law firm Labaton Sucharow.
The first report was prepared by a senior risk executive
after an extensive review of operations at Madoff's New York
offices and red flags the inability to verify both trading data
and the identity of counterparties.
The recommendations of that report were much sterner than
those in the later report drafted by investment analyst Jonathan
Clark, said people with knowledge of both reports.
Both reports have been seen by Reuters. Clark could not be
reached for comment. A Santander spokesman declined to comment
on either report.
"There are some important questions. Why were two reports
written within such a short time, and with no new material
appearing in the second?" said a person with knowledge of the
"We should also ask why the second report was authored by a
relatively junior person, even though the Madoff relationship
was worth $50 million a year in fees to Optimal," he said.
Sources close to Optimal said the second report was a
watered-down version of the first, and made it easier to justify
the Madoff investment and continue to rake in fees.
The first report states that 'there is absolutely no reason
why Optimal should not be able to review how trades are made and
allocated to clients'. "It is a basic request that has
mysteriously disappeared from the second report written only
five months later," said one source.
In the Miami action, the filing claimed the huge fees were a
sufficient incentive for feeder funds to ignore clear signs of
Madoff's wrongdoing given that it was the investors, not the
funds, who bore the real risk of loss.
The Miami filing estimated Optimal's assets with Madoff at
$3.1 billion at December 2008.
For a link to the filing, click here
Former Optimal CEO Manuel Echeverria, who left the group
just months before the Madoff scandal broke, has been charged in
Geneva with criminal mismanagement.
The 2006 reports will be pivotal in the case against
Echeverria, who left Optimal for Geneva private bank Notz Stucki
-- which also had sizeable Madoff exposure -- in October 2008
but left Notz Stucki 'by mutual agreement' in July last year.
The defence may stress that the second report, while
flagging defects in operational procedures and proposing risk
monitoring measures, found Madoff's operation to be "efficiently
and professionally managed".
This qualifier does not appear in the first report.
Manuel Echeverria in a statement sent through his lawyer
said he categorically contested allegations of criminal
mismanagement. His lawyer, Saverio Lembo, said he reserves his
comments for the investigating authorities.
(Additional reporting by Laurence Fletcher in London; Editing
by Louise Heavens)