Funds industry reflects on Madoff scandal

LUXEMBOURG Wed Mar 18, 2009 12:27pm EDT

Thames River Capital Head of Multi-Manager Ken Kinsey-Quick speaks during an interview with Reuters at the Reuters Funds Summit in Luxembourg, March 17, 2009. REUTERS/Francois Lenoir

Thames River Capital Head of Multi-Manager Ken Kinsey-Quick speaks during an interview with Reuters at the Reuters Funds Summit in Luxembourg, March 17, 2009.

Credit: Reuters/Francois Lenoir

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LUXEMBOURG (Reuters) - Financial experts gathered in funds capital Luxembourg insisted this week the fraud orchestrated by Bernard Madoff was an unfortunate incident that would not dent the country's leadership.

But they still could not stop talking about him and made frequent remarks about the affair as Madoff's silent presence lurked like Banquo's ghost at the Luxembourg fund industry association's annual conference.

"We had 20 years of growth and just one accident," John Li, Chairman of the Supervisory Board at KPMG told the Reuters Funds Summit. "There is no system that can prevent fraud or accidents on a 100 percent basis."

Former Nasdaq chairman Madoff is currently in jail awaiting sentencing in the United States after orchestrating a fraud that could amount to $65 billion.

Rich investors from his circles of friends and acquaintances were lured into investing in his seemingly high-return products only to find out in the crisis that Madoff's investment strategy was a giant Ponzi scheme.

The issue has affected Luxembourg as one of the larger funds investing in Madoff, Luxalpha, was based in the country. The funds, holding assets of about $1.4 billion, was set up by giant Swiss bank UBS (UBSN.VX)(UBS.N) at the investors' request.

Luxembourg regulators and the funds industry have come under pressure in the wake of the scandal with regards to the soundness of its regulation.

"From the funds industry perspective, what more could we have done?," said Noel Fessey, Managing Director of fund firm Schroders in Luxembourg.

OFF THE TABLE

Luxembourg Treasury Minister Luc Frieden said on Tuesday he would like to see an out-of-court settlement to the Luxalpha case, a clear move to take the debate off the table and let the industry concentrate on its business at a time of crisis.

"The hedge fund bubble has popped. The market bubble has popped, and to put a cherry on the top you had the Madoff probe in December," said Ken Kinsey-Quick from hedge fund Thames River Capital.

While Luxembourg has been enormously successful in establishing itself as the leading European center for funds, the global financial crisis has sparked massive outflows from funds. The value of assets held by funds in Luxembourg fell by one quarter to $1.5 trillion in 2008.

Investor confidence, already shaken by the gyrations of financial markets, has not been reinforced by revelations of the Madoff scam,

"(The Madoff case) is not helping the industry," said Yves Francis, a partner at Deloitte.

"Many of the investors realize this is overblown on Luxembourg. The way forward is to reassure investors that the way we apply the law is severe."

Yet, the debate over Madoff is not likely to abate soon and there are lessons to be learned from the scandal, in particular with learning to do more due diligence and not simply trust funds even if they are based in heavily-regulated jurisdictions like the United States, experts said.

"We have to accept that our reputation has been a bit tarnished by Madoff, even if this is an isolated incident," Li said.

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