December 14, 2008 / 10:31 AM / 11 years ago

Three European banks announce exposure to Madoff

MADRID (Reuters) - Three European banks on Sunday announced a total of about $3.8 billion in exposure to an investment fund run by Bernard Madoff, the U.S. investor accused of running a $50 billion “Ponzi” scheme.

A man stands in the lobby of the building where Bernard L. Madoff Investment Securities LLC offices are located in New York December 12, 2008. All equity trades involving market-making firm Bernard L. Madoff Investment Securities LLC, which was founded by Bernard Madoff -- the broker arrested for an alleged $50 billion fraud -- will be processed as usual, the Depository Trust Clearing Corp told Reuters on Friday. REUTERS/Shannon Stapleton

The largest banks of both Spain and France, Santander (SAN.MC) and BNP Paribas (BNPP.PA), and Swiss private bank Reichmuth & Co became the latest parties to detail possible losses over investments made with Madoff, who was arrested in New York on Thursday in the alleged fraud.

Santander put its client exposure at over 2.33 billion euros ($3.09 billion). BNP Paribas said it could face a potential loss of 350 million euro from exposure to Madoff-linked investments. And Swiss private bank Reichmuth & Co said it had about 385 million Swiss francs at stake, around $325 million.

U.S. prosecutors and regulators have accused the 70-year-old Madoff, the founder of Bernard L. Madoff Investment Securities LLC and a former chairman of the Nasdaq Stock Market, of masterminding a fraud through his investment advisory business, which managed at least one hedge fund.

A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.

Hundreds of people, investing with him through the firm’s clients, entrusted Madoff with billions of dollars, industry experts have said.

Santander, which has to date emerged unscathed from the global financial crisis, said in a statement on Sunday that its investment fund Optimal had exposure to Madoff Securities of 2.33 billion euros, 2.01 billion of which were funds invested for institutional investors and private banking clients outside Spain.

The remaining 320 million euros were part of the investment portfolios of private banking clients in its home country, which are qualifying investors, the bank said in a statement.

“Optimal will undertake legal actions to defend the interests of the shareholders of the subfund,” the bank said in a statement on Sunday evening.

Santander said its exposure came from an investment company managed by Optimal called Optimal Multiadvisors Ireland, which was authorized by the Irish Financial Services Regulatory Authority.

The Irish-based company had a subfund called Optimal Strategic US Equity which had used Madoff Securities to carry out its investments.

The custodian of Optimal Multiadvisors and Optimal Strategic is HSBC Institutional Trust Services in Ireland, which belongs to HSBC (HSBA.L), said Santander.

It said the Santander group also had 17 million euros invested in Madoff-related investments through another fund.

In its statement, BNP Paribas said it had no investments of its own in Madoff funds but had risk exposure through its trading business and collateralized lending to funds of hedge funds.

Switzerland’s Reichmuth wrote to clients in a letter dated December 13, posting the letter on its website over the weekend.

The Lucerne-based bank said Reichmuth Matterhorn, a fund of hedge funds, had investments in instruments linked to Madoff.

“The affected funds amount to roughly 3.5 percent of our assets under management of approximately 11 billion Swiss francs,” the letter said.

The announcements are likely to be followed by others across Europe. On Saturday, French-language newspaper Le Temps said Geneva-based private banks and asset managers could lose more than 5 billion Swiss francs.

According to Spanish newspaper El Mundo, the Bank of Spain and Spain’s stock exchange regulator CNMV are assessing the impact on Spanish investors of the alleged fraud.

The two regulators are confident the impact will be “limited,” sources close to the investigations were quoted as saying.

Spain’s second largest bank, BBVA (BBVA.MC), told Reuters on Saturday that no BBVA customers in Spain were exposed to the alleged fraud, but the bank has so far not commented on whether clients outside Spain are exposed.

($1=.7537 euros)

Reporting by Sarah Morris in Madrid, Sudip Kar-Gupta in Paris and Lisa Jucca in Zurich; Editing by Leslie Adler

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