Restitution
UBS, HSBC Have Duty to Madoff Investors
UBS AG, HSBC Holdings Plc and other custodian banks for Luxembourg-based mutual funds have "clear" obligations to compensate investors for losses tied to Bernard Madoff, Treasury Minister Luc Frieden said.
"The principle is very clear: the custodian bank has to indemnify investors," Frieden, 45, said in an interview at the Luxembourg Ministry of Finance. "Regarding the law, the situation is not that difficult: the custodian bank has a responsibility to make restitution for these assets."
The comments may put pressure on UBS and HSBC to participate in Frieden’s plan to settle dozens of lawsuits over Luxembourg mutual funds that invested with Madoff. The nation’s financial regulator estimated that Luxembourg funds lost as much as 1.9 billion euros ($2.7 billion). Seventeen funds were forced to close after Madoff’s Ponzi scheme was uncovered last year.
"An international arbitration will be a more professional and fast solution that is probably more satisfactory to all," said Frieden, who may become Luxembourg’s finance minister after the June 7 elections. "I prefer an arbitration of two, three years than having 100 court cases decided in 10 years."
UBS and HSBC served as custodian banks for three funds that directly invested with Madoff. As custodians they are responsible for oversight of the funds and manage cash inflows and payments to investors.
"HSBC has custody clients who have invested with Madoff, but we don’t believe that these custodial arrangements should be a source of exposure" to the company, said Brendan McNamara, a spokesman for the London-based bank.
UCITS
UBS spokeswoman Tatiana Togni declined to comment. The Zurich-based bank has argued that it wasn’t responsible for losses because the contracts limited its liability and the funds were created for sophisticated investors who sought to place money with Madoff.
The disputes and litigation in Luxembourg were triggered by uncertainty in the country over the liabilities of custodian banks in charge of Undertakings for Collective Investment in Transferable Securities in cases of fraud. UCITS, European- regulated funds, burgeoned in Luxembourg after it became the first nation to implement European Union rules in 1985.
These funds have helped Luxembourg become the world’s second-largest mutual-fund market with 3,396 registered funds holding 1.53 trillion euros in assets. Funds in all of Europe hold about 4.5 trillion euros.
LuxAlpha
Frieden may be named Luxembourg’s finance minister if his party, the Christian Democrats, wins the June 7 elections. Jean- Claude Juncker, the country’s prime and finance minister, said June 3 he will cede the finance post to Frieden if the party retains the required majority.
UBS’s Luxembourg unit was custodian for Access International Advisors LLC’s LuxAlpha Sicav-American Selection fund, which once had assets of $1.4 billion, and for Luxembourg Investment Fund. HSBC’s local unit was custodian for Herald (Lux) US Absolute Return Fund, which was managed by Bank Medici.
Frieden said he supported a May 27 finding by the nation’s financial regulator that the UBS unit "shall have to indemnify a UCI depositor according to its obligations as a Luxembourg depositary bank, subject to valid and opposable contractual clauses to the contrary."
UBS was criticized in February by the regulator, the Commission de Surveillance du Secteur Financier, for failing to fulfill its duty of due diligence. The CSSF said May 27 that the bank had provided proof that its internal policies "are in line with professional standards."
CSSF
While the presumption is that the banks have a duty to investors, Frieden and the CSSF said that courts or arbitrators will need to review the contracts in each case.
"It will be for the courts or the arbitration to see whether in each individual case there were contractual clauses to the contrary," said Frieden, who also is the country’s justice minister.
A lawyer representing investors said Frieden and the CSSF should have made more specific comments on the issue sooner.
"It took them six months to come to this conclusion, while all the while it was written down in the law," said Jean-Pierre Martel, a Paris lawyer with Orrick Rambaud Martel. "I’m happy that it’s been clearly said."
In addition to the Madoff scandal, Luxembourg has been criticized over its banking-secrecy laws and for failing to implement international tax standards. Frieden said the country seeks to enter bilateral agreements with 15 nations by the end of the year. It has already concluded accords with the U.S. and France that should show Luxembourg is dedicated to ending allegations that it is a tax haven, he said.
Banking Secrecy
"It’s a misconception in many countries that people come here because they can invest their money without those funds being subject to any taxes," said Frieden. "Luxembourg is not a tax haven."
Madoff, 71, is in prison after pleading guilty to running the biggest Ponzi scheme in U.S. history. His sentencing is scheduled for June 29.
The Madoff scandal triggered criticism of Luxembourg investor-protection rules and custodians’ liability for investor losses. France, where investors may have incurred losses of more than 500 million euros through Madoff’s fraud, in January pushed to strengthen European Union mutual-fund rules.
The government is acting as mediator to ensure people who invested in Luxembourg products will "have faith in them," Frieden said. Arbitrations should take place in London or Paris, said Frieden, who is seeking an agreement by September.
"I met already with a number of those investors and so far the idea was received rather favorably," said Frieden. He said he will also talk to UBS this month.
French Criticism
Lawyers for investors suing the banks said local courts still might be the best method of trying the cases.
"I don’t see why the Luxembourg tribunals would not be best placed to decide on these cases, which all concern Luxembourg law," said Marc Pierre Stehlin, a founding partner of Paris firm Stehlin & Associes, which represents French investors. "The law is clear so why can’t it rapidly be resolved by the Luxembourg courts?"
Frieden said that arbitration would be faster and prevent allegations that Luxembourg judges are biased.
"Parties would be well-advised to accept such an arbitration" and those who refuse "will have to explain to me very carefully why," he said.
(Published by Bloomberg - June 5, 2009)