Madoff victims hit a brick wall in Luxembourg

Pedro Gonçalves
Madoff victims hit a brick wall in Luxembourg

Luxembourg's financial regulator, the CSSF, the CSSF has come under fire for failing to enforce its own rules regarding investor compensation, according to the Financial Times.

Investors in the $1.4bn Luxalpha fund, a UCITS fund set up by UBS in 2004 which reportedly invested 90% of the fund with Bernard Madoff's Ponzi scheme, accused the regulator of incompetence for not ensuring they received compensation for the fraud.

UBS Luxembourg was the vehicle's named investment manager and custodian. The Financial Times says it has seen court documents in which the CSSF states that managers which incorrectly calculate net asset value or breach the investment fund rules may compensate investors on a voluntary basis.

The CSSF told investors privately that it is not obliged to enforce the compensation rules laid out in circulars.

However, Albert Biebuyck of Investor Protection Europe, which represents the Luxalpha investors, said it was "selectively" applying its rules. He pointed out that the regulator recently fined another financial institution €125,000 for failing to comply with a separate circular. Biebuyck is reportedly urging Luxalpha's liquidators to demand CSSF enforce the rules on compensation.

He accused the regulator of not coming down hard on UBS because it feared that the bank would move jobs and investment out of the grand duchy. UBS declined to comment. Biebuyck added that by acknowledging its rules were not mandatory, the CSSF was "undermining its own authority" as a financial supervisor. Luxembourg is the biggest centre for funds in Europe and the second-largest in the world.

Luxalpha was put into liquidation by a Luxembourg Court decision of 2 April 2009, after it was removed from the official list of Luxembourg investment funds as of 3 February 2009. According to Wagener & Associés the "decision was motivated by the fact that UBS Luxembourg SA had signed, on 5 February 2005, a sub-custodian agreement with the company Bernard L Madoff Investment Securities LLC."

Madoff was arrested on Dec. 11, 2008, after he told his sons his firm was a fraud and his family contacted investigators.

He spent some customer funds on his family and friends, used new funds to repay older investors and issued fake account statements to make customers think he was making them money. Prosecutors have estimated that $65bn was wiped out. 

Madoff, 80, is serving a 150-year prison term in a medium security North Carolina prison for what is considered the biggest Ponzi scheme in financial history.

In imposing that sentence, Judge Denny Chin, now a federal appellate judge in New York, called Madoff's crimes "extraordinarily evil."