Ethics and governance in the European Financial centers

The Tribunal d'Arrondissement of Luxembourg had decided on March 4, 2009 that Luxalpha and UBS release certain important documents to the plaintiffs, investors in Luxalpha advised by Deminor. More in particular, these documents are the contracts entered into between UBS and Bernard Madoff Investment Securities LLC (BMIS) and the yearly auditor's report on the inner functioning of Luxalpha.


This decision followed another decision on February 19, 2009 were investors in Luxalpha advised by Gide Loyrette Nouel were supposed to be communicated informations and documents.


In a recent article in the Land, it is reported that the auditor Ernst & Young refused the communication of Long Form Reports. An investor went before the court to request the communication but the judge did not accept.

The so-called Long Form Report describing and testing the UCI’s activities was created by Circular CSSF 2002-81


As stated in the circular, the purpose of the long form report is to report on the findings of the auditor in the course of its audit concerning the financial and organisational aspects of the UCI comprising inter alia its relationship with the central administration, the custodian and the other intermediaries (the investment managers, the transfer agents, the distributors, etc.). The long form report must be concise, clear and critical.
It is not intended to be made available to the public. It is issued for the exclusive use by the board of directors of the UCI or the management company of the UCI as well as the CSSF.


As Nadia Faber, Ernst & Young Luxembourg , explained “Un tel rapport a pour objectif, entre autres, de décrire et d'évaluer les procédures de contrôle mises en place par les différents prestataires de services intervenant dans la production du produit final qu'est la VNI. (…) Cette façon de voir les choses s'est traduite dans le domaine de l'audit en un basculement d'une approche substantive vers une approche basée sur l'identification des contrôles et les tests de conformité de ceux-ci. Pour obtenir son assurance, l'auditeur va non seulement valider des données chiffrées à une date donnée, mais il va aussi analyser les principaux processus de production de la VNI et les contrôles internes qui alimentent ces processus. L'auditeur cherche à avoir une assurance raisonnable que des erreurs éventuelles soient détectées par des contrôles internes efficaces en place avant que la VNI ne soit publiée et ce jour après jour
(free translation : Such a report aims at, inter alia, to describe and evaluate the audit processes installation by the various service providers intervening in the production of the finished product which is the NAV. (…) This way of seeing things was translated in the field of the audit into a swing of a substantive approach towards an approach based on the identification of controls and the tests of conformity of those. To obtain his insurance, the auditor not only will validate statistical data on a given date, but he also will analyze the principal production process of the NAV and internal controls which feed these processes. The auditor seeks to have a reasonable insurance that possible errors are detected by effective internal controls in place before the NAV is published and this day after day)


Long form reports are clearly intended to provide safety and transparency to investors.

One cannot understand the reason why Ernst & Young does not want to communicate these whereas neither the depositary bank nor the CSSF opposed according to the Land, unless these reports would demonstrate a failure in the assignment to describe and evaluate the audit processes installation by the various service providers intervening in the production of the finished product which is the NAV.

One can understand the judge’s decision in the light of what Alex Schmitt wrote: in a book called La Responsabilité du Banquier en droit prive luxembourgeois (Banker’s liability in Luxembourg private law) he concludes that one could be pleased in that Luxembourg jurisprudence generally is very clear-sighted vis-a-vis the small investors (original text: “L'on pourra se féliciter de ce que la jurisprudence luxembourgeoise se montre généralement très clairvoyante face aux investisseurs à la petite semaine”).

The quotation is no longer online, but I had copied the screen:

Luxembourg: a well regulated center with high investor protection?

Caveat emptor.