Ethics and governance in the European Financial centers

The CSSF published last Wednesday two press releases to state that two Luxembourg-domiciled investment funds that had money invested with Bernard Madoff are to be wound up. The first one for Luxalpha SICAV and the second one for Herald (Lux) SICAV.

In both cases it is stated that "The judgment specifies, that the liquidators represent the company as well as its investors and creditors and, that their powers will be exercised in the Grand Duchy of Luxembourg and abroad pursuant to the unity and universality principle [règle de l'unité et universalité] of the judicial winding-up of a company, having its registered office in Luxembourg. This rule applies to all moveable property and immoveable property of the wound up company, even if these properties are abroad.
The judgment states that the unitholders shall be considered as shareholders which will share the surplus of the winding-up. According to the judgment, they do not need in these circumstances to file their statement of claims in order to assert their rights. At least once a year, they will be convened by the liquidators in a general meeting in order to be informed of the results of the winding-up and the reasons why the winding-up procedure has not been terminated. The first general meeting will be held before 31 October 2009. During this meeting the possibility to constitute a committee of creditors/investors could be discussed."

As I already wrote, the Luxembourg authorities and professionnels are handling in a very bad way the Madoff case:
- they did not tell the truth about the legal and regulatory framework in Luxembourg that did not transpose faithfully the European Directive : the synoptic table is clear enough.
- they did not take the initiative at the beginning to compensate clients. Should they have compensated the clients, the issue would be over. The reality is that for clients recovering their money lost is a "long shot" with expenses to pay for the lawyers that anyway will not be included in the surplus of the winding-up.

As the fund industry is a key success for the jurisdiction I cannot understand the reason why almost everyone in the jurisdiction is doing wrong.

Or rather I understand very well: it is perfect illustration of what Sydney Finkelstein described:

· Flawed executive mind-sets that throw off a company's perception of reality

· Delusional attitudes that keep this inaccurate picture of reality in place

· Breakdowns in communication systems that were developed to handle potentially urgent information

· Leadership qualities that keep a company's executives from correcting their course

· Long before obvious danger signs appear, several of these syndromes can take hold of executive behavior. People might continue to do business the way they always have, maybe even doing it extremely well. But when a problem develops and things stop working the way they did before, managers have no way of knowing because they are largely cut off from the outside information they need