Ethics and governance in the European Financial centers

The AFP reported that Luxembourg authorities ordered UBS Luxembourg on Thursday to compensate French brokerage Oddo et Cie for EUR3 0 million invested in funds managed by Bernard Madoff.
Oddo had invested EUR30 million in investment fund Lux Alpha, for which UBS Luxembourg was the custodian. Lux Alpha in turn invested the money in Madoff's funds.
Luxembourg authorities gave UBS Luxembourg 24 hours to disburse the money from the moment the order was issued and told the bank to pay EUR 10,000 to cover Oddo's legal fees.
Oddo took legal action against UBS on the grounds that it had sold its clients' shares in Lux Alpha on Nov. 4, 2008 - more than a month before the Bernard Madoff scandal blew up - but had never received the money.

In my opinion, the case is not a question of responsibility because of Madoff for UBS.
As I already wrote, it will be a long shot of investors who lost their money in Luxalpha to have it back:
1) From the administrative point of view, when processing a client complaint, the regulator CSSF’s positions are not binding on the professionals (See CSSF annual report 2007 page 162),
2) From a penal point of view, the penal liability of legal persons does not exist,
3) From the civil point of view, the civil jurisprudence in not in favour of the investor “from day to day”

As far as one the one management of UBS/Luxalpha and on the other hand the auditor are concerned, they definitely ignored red flags because of the local lax business culture in Luxembourg.

There were at least three red flags for any clever professionnal, either banker or auditor :
1) Madoff was at the same time intermediate and manager, which involves risks of important conflict of interest but it is true that in Luxembourg one lives with the conflict of permanent interest without taking precautionary measures,
2) His auditor was very a small structure but it is true that in Luxembourg no matter who can be the statutoty auditor and accounts are in the dark as there is no balance sheet database,
3) The interest yield of the fund was suspect but Luxembourg is a country where the short term and the growth take precedence over the critical spirit and the independent mindset.


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