By Jonathan Stempel
(Reuters) - Banco Santander SA
U.S. District Judge Shira Scheindlin said investors in a feeder fund advised by the Spanish bank's Optimal Investment Management Services SA unit could not rely on U.S. securities laws to recover losses on investments made outside the United States.
The Manhattan judge said investors may still pursue other fraud claims and a negligent misrepresentation claim.
According to the investors, the Optimal Strategic U.S. Equity Fund invested 100 percent of its assets with Madoff and his firm Bernard L. Madoff Investment Securities LLC, despite red flags signaling a Ponzi scheme.
They said their purchases deserved protection under U.S. securities law because they related to Madoff's alleged trades of New York Stock Exchange stocks, and that the "economic reality" equated their purchases to investments in these stocks.
Scheindlin disagreed, saying no contract bound the parties in the United States. She added that Madoff never actually made his trades, and that there was at best an "extremely tenuous and speculative" link between the investments and the Big Board.
The investors "failed to overcome the presumption against the extraterritorial reach" of the law created by a 2010 U.S. Supreme Court ruling, National Australia Bank Ltd
Javier Bleichmar, a lawyer for the investors, did not immediately respond to a request for comment. Shawn Regan, a lawyer for Santander, declined to comment.
Optimal has faced other litigation by investors in U.S. and Swiss courts over its role in the Madoff fraud.
Madoff, 74, is serving a 150-year prison sentence.
The case is In re: Optimal U.S. Litigation, U.S. District Court, Southern District of New York, No. 10-04095.
(Reporting By Jonathan Stempel in New York; editing by Carol Bishopric)