RPT-UPDATE 1-Santander moves to head off litigation

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MADRID, Jan 28 (Reuters) - Spain's Banco Santander SAN.MC has moved to protect its reputation by offering compensation to private banking clients for their losses linked to the alleged Bernard Madoff fraud, potentially mitigating the bank's exposure to lawsuits over the matter.

Santander, with 2.3 billion euros ($3.04 billion) of client exposure to the alleged Ponzi scheme, said on Tuesday it would issue 1.38 billion euros in preferential shares to compensate individual private banking clients’ initial investment in the fund.

The plan, if accepted by the clients, would neither cover any gains the scheme had reported, nor would it compensate big institutional investors that the bank said it believed should have been aware of the risks involved.

Santander is the first bank to offer such a deal.

By 1018 GMT, Santander's shares were up 3.8 percent at 5.97 euros, making it the best-performing stock on the IBEX .IBEX, as investors welcomed the plan as a swift move by Chairman Emilio Botin to remove uncertainty over pending litigations and potentially higher settlement costs.

“Santander can boast that despite being in the worst financial crisis of our times, and being caught in one of the biggest financial frauds, they can still protect their clients,” a senior investment banker in London said.

“Their clients can go to sleep thinking that they are with the soundest bank in the world,” he said.

In November, Santander launched a surprise 7.2 billion euro rights issue, which was fully subscribed by investors in a vote of confidence for the eurozone’s largest bank.

The move provided Santander with a more comfortable capital position for manoeuvring through difficult market conditions.

“Once again, Botin is the first. He’s protecting the bank’s reputation and business, and also nips what could have turned into a very big problem in the bud,” Renta4’s Natalia Aguirre said.

Lawyers for Santander customers affected by the alleged Madoff fraud welcomed on Wednesday the bank’s decision to compensate all individual clients who suffered losses.

“This is good news but we have to look at it in closer detail,” a lawyer for Cremades & Calvo Sotelo told Reuters.

“We need to determine whether the exchange offered by Santander is ultimately positive for our clients or not, and what the bank means by private clients and whether there will be any move to compensate the institutions as well,” he said.

The law firm hopes to meet with Santander by the end of this week or the beginning of next to discuss the plan, he said. (Reporting by Tracy Rucinski; Editing by Andrew Macdonald)