Luxembourg Funds Suspended After Madoff Investments

Sixteen funds in Luxembourg were forced to suspend redemptions after they made investments with Bernard Madoff, a group representing the nation’s investment industry said.

The affected funds, or units of funds, made investments with Madoff totaling 1.9 billion euros ($2.45 billion), the Luxembourg Fund Industry Association said in a statement today. Several of the funds have previously disclosed that redemptions have been halted after Madoff was arrested last month for running an alleged Ponzi scheme, the group said.

The number of funds and questions over safeguards have bankers concerned it may hurt their ability to attract placements from investors worldwide. Luxembourg, a country with fewer than 500,000 people, is the world's second-largest mutual fund market after the U.S.

"Considering the size of our industry, it’s not surprising that Luxembourg funds also invested money (directly or indirectly) with Madoff and are now among his victims," Charles Muller, the association's deputy director-general said in the statement. "Lessons have to be learned to avoid such situations from happening again."

Some of the funds affected include Herald (Lux) US Absolute Return Fund and Access International Advisors LLC’s LuxAlpha Sicav -American Selection, as well as Luxembourg Investment Fund - U.S. Equity Plus, the association said. The group didn’t release the names of all the funds.

'Interested Parties'

The weeks since Madoff’s arrest in New York have rocked Luxembourg as funds disclosed losses, France criticized the country's rules and Former Access International Chief Executive Officer Thierry Magon de La Villehuchet killed himself after potentially losing all of the money he invested with Madoff.

The association called for an investigation of "interested parties" that helped investors place funds with Madoff.

Those involved with European and Luxembourg funds, which acted "as a bridge between Madoff and his ultimate victims" have to be checked to see if they acted with the necessary diligence, the group said in the statement.

French Finance Minister Christine Lagarde complained to the European Union last week that other countries haven't enforced rules related to custodian banks that oversaw the money investors placed in the funds.

The association rejected criticism of Luxembourg's investment protection rules, saying claims that laws are weaker in Luxembourg than France are "completely without a foundation."

Madoff, 70, was arrested in New York last month after allegedly telling his sons about the fraud. So-called Ponzi schemes pay early investors with money from subsequent participants. The financier faces as much as 20 years in prison and a $5 million fine if convicted. He hasn't formally responded to the charges or entered a plea.

(Published by Bloomberg - January 20, 2009)