Ethics and governance in the European Financial centers

The CSSF as of today published a press release that is worth commenting.

Firstly the CSSF seems that despite weaknesses that were identified by the CSSF in the infrastructures and procedures of the depositary bank, UBS was not fined. It definitely would have been in the UK by the FSA. UBS reviewed its infrastructures and procedures, that are now found to be convenient.  Pierre Reuter, from Luxembourg law firm Thewes & Reuter that is handling about 70 claims against Madoff-related funds, banks and auditors, quoted by bloomberg said: "It’s extremely frustrating for investors to see that the bank was faulted for a grave breach and now, three months later, everything seems to be in order" 

Secondly, the CSSF states again that the transposition of the UCITS directive was faithful, which does not comply with the synoptic table and Circular CSSF 05/177, which is quoted in the press release. Circular CSSF 05/177 states that "The concept of custody used to describe the general mission of the depositary should be understood not in the sense of “safekeeping”, but in the sense of “supervision” (…) The depositary has discharged its duty of supervision when it is satisfied from the outset and during the whole of the duration of the contract that the third parties with which the assets of the UCI are on deposit are reputable and competent and have sufficient financial resources."

Thirdly and mainly, the CSSF states that “ As the CSSF has previously noted, UBSL shall have to indemnify a UCI depositor according to its obligations as a Luxembourg depositary bank, subject to valid and opposable contractual clauses to the contrary and, as the case may be, to a court decision in such matter."

 « Subject to valid and opposable contractual contrary clauses “ : This means that if the client signed any provision to discharge UBS’s responsibility, there will be no compensation.

Finally, ithe CSSF states that “the ordinary courts (juridictions de droit commun) are exclusively competent for any grievances regarding rights of a private law nature (droit civil). Therefore, only the ordinary courts (juridictions de droit commun) can establish the liabilities incurred and the damages to be indemnified."

This means that, as I had said, the client has to go to the court and the recovery of his/her money will be a long shot and very expensive.

It will be a long shot for 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 criminal point of view, the criminal 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” all the more than the CSSF admits possible valid and opposable contractual clauses contrary to the normal liability of the depositary: subscription documents for the Luxalpha Sicav explicitly remove UBS's liability if the fund's assets are lost. Under European rules, custodians such as UBS must take responsibility for "safekeeping" of a regulated mutual fund's assets. But the Luxalpha subscription form states that UBS "is not the safekeeping agent of the assets of the fund as the assets are safekept by the US registered broker-dealer"

Clients cannot be satisfied. That is the reason why proceedings are now underway in Paris for aggravated betrayal of trust, aggravated fraud, handling of stolen goods by a criminal group and money laundering by a criminal group, as Reuters reported.