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Madoff Victims: It's Payback Time

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Banco Santander agrees to cough up quarter of a billion dollars.

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Madoff
There's now about $1.25 billion in the pot of money available to compensate the victims of Bernie Madoff's fraud.

Two hedge funds run by Banco Santander (STD), a Spanish concern, have agreed to return $235 million withdrawn from their accounts a few months before Madoff's Ponzi scheme fell apart.

Irving Picard, of the Baker-Hostetler law firm, who's been handling the Madoff liquidation, announced the agreement this week. It's the first negotiated settlement by investment funds that poured money into Madoff.

In court filings, Picard says his investigators found that the funds "were not complicit in the fraud" and "did not have any actual knowledge of the fraud," the New York Times reports.

The 2 Caribbean-based hedge funds agreed to return 85% of the cash they withdrew in the 3 months before Madoff's arrest in December 2008. Hedge funds doing business with Madoff may have made at least $10 billion in profit in the final months of Madoff's scam. Federal law allows the trustee to demand return of any funds withdrawn during that time.

The agreement must be approved by the federal bankruptcy court in New York.

Madoff's fraud grew into a global scam that involved hedge funds, charities and celebrities. He bamboozled thousands of individual investors, including Democratic Senator Frank Lautenberg of New Jersey, former Dodger pitcher and Hall of Famer Sandy Koufax, and a charity run by Nobel Peace Prize winner Elie Wiesel.

About 200 investors have received legal requests to return money they withdrew from Madoff's funds before the scheme collapsed. Other firms with some exposure to Madoff include the Royal Bank of Scotland (RBS), Societe Generale (GLE), and HSBC (HBC).

Such "clawback" requests are routine, and were expected after Madoff pleaded guilty to running a scam that cost investors about $65 billion. The withdrawals were paid as part of a scam, the legal theory goes, and therefore should be returned and divided proportionately among all those who were defrauded.

This can get sticky: What if an investor withdrew the money and immediately spent it? Or lost it on another investment? How can spent money be recalled, and how can the court ask investors to lose the same money twice?

A savvy investor may have gotten a whiff of the true nature of Madoff's operation and pulled out before the scheme collapsed. Should that person be penalized for being smart? But if the answer is no, you can bet a lot of investors will suddenly claim to have been unusually smart about Bernie, further complicating compensation for Madoff's victims.

Madoff, 70, pleaded guilty in March to 11 counts of fraud, money laundering, perjury and theft. He faces a maximum of 150 years in prison when sentenced June 16.

Bernie has traded his multi-million dollar apartment on Manhattan's posh Upper East Side for a jail cell, where he's being held without bail. The detention facility in lower Manhattan is known as "The Tombs" - a preview of coming attractions for Bernie, because he'll certainly die behind bars.
No positions in stocks mentioned.
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