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Madoff and Latin America

How will the Madoff losses affect Banco Santander's business in Latin America? Three experts share their insights.

Inter-American Dialogue 

Latin American clients of Spain's Banco Santander lost approximately $2.1 billion in connection with Bernard Madoff's alleged Ponzi scheme, according to The Wall Street Journal. How will the losses affect Santander's business in Latin America? Will the situation lead to successful lawsuits in Latin America against the bank?

Adrian Cruz Vazquez, a member of the Advisory Board of Cross Keys Capital: Banco Santander, headquartered in Madrid, engages primarily in commercial banking with complementary activities in global wholesale banking, credit cards, asset management and insurance. By last September, Santander had over 1.079 trillion euros in funds from more than 65 million customers served through 11,685 offices around the world. Founded in 1957, Santander was the largest financial group in Spain and in Latin America. In Latin America (excluding Banco Real), Santander managed over $200 billion in loans, deposits, mutual funds, pension funds and managed funds through 4,638 branches. Under the leadership of Emilio Botin, the current president, Santander demonstrated audacity and speed at taking advantage of business opportunities that enabled it to grow more quickly than its local competitors. As the fastest-growing bank in Latin America, it was, arguably, the most respected and trusted financial institution in the region. Santander's Optimal Strategic US Equity Fund, is another story. The fund overall has lost more than $3.1 billion as a result of investing clients' money with the accused Ponzi schemer Bernard Madoff. Banco Santander's exposure in the alleged scheme has triggered lawsuits from clients claiming that Santander failed in its fiduciary duty by steering them to what was obviously an unsuitable investment vehicle. Prosecutors in Spain are probing why Santander itself lost just $22.7 million in its investments with Bernard Madoff Investment Securities, while the bank's clients lost more than $3.1 billion, the largest reported at a single bank. The irony of the situation is that those numbers do not reflect the entire picture. It most likely does not reflect the hundreds of millions invested with Madoff by Latin Americans with offshore funds and that are now silent for fear of exposure to their own countries' tax authorities. They dare not bring lawsuits against Santander, or Madoff, for that matter. It is sad to see Santander's once so brilliant financial shooting star so tarnished in the Latin American sky.

Michael Diaz,
Partner at Diaz, Reus, Rolff & Targ, LLP:  Banco Santader's future in Latin America will depend on how it maneuvers the Madoff scandal. Simply stated, this is a 'test' case. The success of any legal action in Latin America will depend on where the lawsuit is filed. Many investors in Latin America wrongly believe that they can only sue their personal banker, as opposed to the bank. Investors, however, may not sue their banker because of the long and confidential relationships they often share. Moreover, many Latin American investors lack confidence in their own judicial systems and are opting to join or file lawsuits in the United States or Spain. At least one class action lawsuit is already pending in Miami. Based on the number of inquiries we have received, additional lawsuits are coming. These cases will provide investors with the option to join a class in the United States, or file individual actions in Latin America. Other investors will file individual actions in the United States in the hope of recovering a greater percentage of their losses. Banco Santander and other financial institutions that allegedly 'Made-off ' with investors' monies will want to arbitrate many of these claims. Arbitration is convenient—it removes the case from jurors that may return multi-million dollar verdicts, it keeps the proceedings confidential, and it allows them to select arbitrators who may be industry-insiders and, therefore, more friendly to their position. If Santander can compel arbitration, its chances for success will greatly improve.

Jorge Hurtado,
Director of Agency for the Latin America and Caribbean Region at CB Richard Ellis: Banco Santander is very well positioned in markets such as Mexico, Brazil, Argentina, Chile, Colombia and Venezuela. In these markets the financial sector has been, so far, unaffected by the failure of major financial institutions in the largest markets, therefore the bank operates in relatively stable markets and has a sound, primarily retail banking business. The losses in the Madoff-related funds should have little impact in the bank's operating assets and capabilities. The retail bank operation has a very large client base that should go unaffected. The private banking segment that caters to high net worth individuals will be challenged. However, the bank's response to these clients should allow it to retain most of this client base.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.


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