Funds News

Luxembourg watchdog sees no long-term Madoff damage

LUXEMBOURG (Reuters) - Luxembourg’s fund industry will suffer no long-term damage from Wall Street swindler Bernard Madoff’s fraud, and rules governing the sector need no overhaul in its wake, the country’s regulator said.

"I don't think it has really damaged in any measurable way the fund industry here in Luxembourg ... You have to start from the fact that this was fraud and there will always be fraud," Jean Guill, director-general of the Commission de Surveillance du Secteur Financier CSSF.L, told Reuters on Friday.

Investors in Luxembourg lost $1.7 billion (1 billion pounds) to Madoff, mainly via the Luxalpha fund, for which UBS UBSN.VX acted as a custodian bank.

The U.S. financier has been found guilty of committing a $50 billion fraud and sentenced to 150 years in prison.

Luxembourg’s fund industry, which hit a low last autumn as the financial crisis struck, has been recovering with renewed net inflows since the first quarter of 2009, Guill said.

“The outflow was never really important, but still people did not invest in funds during the second half of last year,” he said in an interview.

Guill said the Luxembourg financial watchdog could not have detected Madoff’s fraud and that it never had any reason to suspect such a crime.

The watchdog had been aware that Luxalpha and other funds’ assets were managed by Madoff. It did not oppose the contracts the custodian banks signed with investors limiting their responsibility as custodian.

“People did not invest with Mr Madoff because they thought he was a thief, but precisely because he had a very good reputation. People thought that explained why he could give good results,” Guill said.

The regulator is investigating whether investors were made aware of such clauses, and while UBS has reformed its activities in Luxembourg and is continuing to do business, it could still face sanctions.

“What has to be checked is whether people were aware of these clauses and signed them,” Guill said.

“We are looking at everybody who was involved, not just the depository bank but all the other companies which were involved in those investments.”


The regulator could fine UBS or might force executives involved to step down, Guill said. Revoking UBS’s licence to operate in Luxembourg was theoretically possible but unlikely, he said.

“You could also revoke only part of it. The bank could go on but no longer be a depository bank for UCITS (undertakings in collective investment in transferable securities). But as UBS is conforming to the standards I don’t see a reason at this point in time to consider anything like that,” Guill said.

Investors from across Europe have launched lawsuits and are demanding compensation for losses. But Guill said the CSSF would not force banks that acted as custodians to reimburse investors.

“That is a question for the courts to decide -… we cannot decide ... whether damage has been caused, whether there is a link between what was done and the damage,” he said.

An out-of-court settlement would be “a good solution”, he said, adding that this was not an unlikely option.

“It would be in the interest of investors to have an out-of-court settlement, which would be quicker than a court case. There is also more freedom to find a solution,” he said.

Reporting by Antonia van de Velde, additional reporting by Matthieu Protard