Luxembourg Treasury Minister has stated that it would be best for the legal row between investors and UBS regarding money lost to Bernard Madoff to be settled out of court.
I urge an extra-judicial settlement in these cases, Minister Luc Frieden said at a conference. As long as this goes on it will be bad for the whole industry. I will not allow mistakes of some to damage the industry overall.
Luxalpha, a Luxembourg based fund to which UBS was the creator and the custodian, has been at the centre of the storm. The fund was created in order for high-net-worth individuals to invest in Madoff-related products.
UBS, as custodian, has been accused by Luxembourg financial regulator CSSF in not conducting due diligence in the fund by checking whether the money invested in the fund was present.
UBS has denied any wrongdoing and has stated that at no time did it recommend Madoff products to any clients.
In a statement to Reuters, a UBS spokesperson stated: “The investors were sophisticated financial institutions. UBS is the custodian of Luxalpha. The fund documentation made it very clear that UBS (Luxembourg) SA was not expected to be responsible for the safekeeping of the assets UBS does not have responsibility to these shareholders for the unfortunate results of the Madoff scandal.”
The conclusion of the CSSF investigation will help determine the role of the custodian and the regulator in terms of asset responsibility. According to European mutual fund industry adviser Mark Tennant, the Luxembourg regulatory regime cannot be held directly accountable for the Madoff scandal, despite the big flaws in the system. According to Tennant, the depository bank is the logical choice as the independent representative and guardian of investor interest, but in Luxembourg a funds board of directors can usurp or blur the role of a depository, despite the fact that the board may only meet once a month.
However it remains to be seen if the documentation for the Luxalpha fund differs in terms of custodian responsibility to other Madoff-products based in Luxumbourg. The prospectus for the Herald (Lux) Fund stated: The Custodian is responsible for the safekeeping of the assets of the Fund. Despite the fact that Madoff was his own custodian, UBS (and in the Lux fund, HSBC) remained the custodian for the Luxalpha fund, and had the power to refuse to facilitate investors wishing to invest in Madoff.