Last updated: November 11, 2009 3:11 pm

Ex-head of Santander arm faces Madoff charges

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The former head of Optimal, the Geneva-based hedge fund investment arm of Spanish bank Santander, has been charged with criminal mismanagement of client funds that were placed with fraudulent US broker Bernard Madoff.

Manuel Echeverría was charged as part of a probe by Geneva investigating magistrate Marc Tappolet, according to legal sources and a court document seen by the Financial Times.

He is one of the first and most senior wealth managers known to be facing criminal charges in connection with the Madoff scandal.

European, Latin American and other wealthy clients of Santander, the biggest bank in the eurozone by market capitalisation, were among those worst affected when Madoff was revealed as a fraud.

The bank admitted client losses of up to €2.33bn ($3.5bn) through Optimal funds, although it subsequently offered compensation packages.

Mr Echeverría, who moved from Optimal last year to Swiss money manager Notz, Stucki but subsequently left that group as well, was charged in August with mismanagement with the aim of self-enrichment.

The charge, however, became known only this week after Mr Echeverría failed in a legal bid to disqualify Franck Berlamont, an asset manager who lost client money and $101,000 of his personal funds, as a civil party to the case.

Mr Tappolet, the magistrate, had already charged five directors of Aurelia Finance for mismanaging assets entrusted to Mr Madoff.

The core argument of the case against Mr Echeverría – and of the accusations against Santander by Mr Berlamont – is that Mr Echeverría was rewarded with financial commissions as a result of the Madoff investments, but misled investors by wrongly claiming to have conducted adequate due diligence on Mr Madoff’s operations.

A section of a November 4 court ruling outlining the charge against Mr Echeverría says he is accused of having certified more than 10 counterparties in Madoff’s option trades when they did not in fact exist, and of falsely having asserted that assets were held in custody by a third party.

Mr Echeverría denies the accusations.

“Santander lied to us repeatedly about the controls they were supposedly making, especially about the counterparties used by Madoff to carry out the transactions,” Mr Berlamont told the FT. “We invested on the basis of these false statements.”

Santander on Wednesday repeated its January statement that it had “acted at all times with due diligence in the management of its clients’ investments in the Optimal Strategic fund and in accordance with all applicable laws and sound banking practices and procedures with respect to those investments”.

The bank said 94 per cent of its clients affected by the Madoff affair had accepted its offer of repayment in Santander preference shares. The offer pays back over time a nominal 100 per cent of the sums initially invested, but is estimated by lawyers and financial analysts to have a real present value of as little as 20 per cent of that.

Santander also pointed to its settlement with Irving Picard, the US trustee seeking to recover money for Mr Madoff’s victims, in support of its view that there were no grounds to assert any claim against Optimal. The bank agreed to pay $235m to resolve claims against two of its hedge funds.

Saverio Lembo, Mr Echeverría’s lawyer, declined to comment on the case.

Carlo Lombardini, Mr Berlamont’s lawyer, said: “The investigation will have to establish why people were closing their eyes and not asking further questions of Madoff.”

In addition to the criminal cases, various investors whose funds were placed with Madoff have launched civil lawsuits.

One class action suit in Florida alleges that Mr Echeverría received directly as commission 0.15 per cent of the approximately $3bn in the Optimal Strategic US Equity fund, which was wholly invested with Madoff. That amounts to more than $4m a year.

Criminal mismanagement carries a maximum sentence of five years in jail under the Swiss penal code.

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