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.


Know more

According to the press quoting a Luxembourg MP, EUR 5-7 billion have been funneled into Madoff's Ponzi scheme through Luxembourgish banks and fonds. Luxembourg's Spuerkeess (BCEE) should have been affected.
The Madoff fraud worldwide is assessed USD 50 billion This means that Luxembourg has 18.4% of the fraud in its investment funds (1 EUR = 1.31585 USD) for a jurisdiction of 2500 km2 (about 1000 sq miles).

The count of how much Luxembourg funds had committed in the Madoff case have been revised up," (The CSSF had initially estimated at the end of December that Luxembourg funds had EUR1.9 billion invested in funds managed by Bernard Madoff) said the lawmaker, who is a member of the financial crisis commission in Luxembourg's parliament.
"The experts have tallied the amount between five and seven billion euros," the MP added, speaking on condition of anonymity.
"It's mainly the assets in three Luxembourg funds: Lux Alpha, Lux Invest and Herald fund Luxembourg," he said

Know more : an interresting blog that inspire the wording at the begining of my article. Unfortunately the currency is wrong and the author is not courageous enough to provide his or her identity.

Luxalpha Sicav, Société d’Investissement à Capital Variable was created on 5 February 2004 by UBS.

Roger Hartmann, Managing Director, UBS (Luxembourg) S.A. was elected as director.
Ernst & Young was appointed the auditor.

Roger Hartmann remained director until the last election in the Memorial dated 26 June 2006 when he was elected for a one-year period. The publication of the information was done more than one year later (on 22 September 2007)

We don’t know what happened in 2007-2008, and especially who was elected director mid 2007.


On 15 November 2007, Roger Hartmann joined Ernst & Young as partner to focus on the development of Ernst & Young’s Advisory Services for financial services clients.
The press release underlines that Roger Hartmann “has played an active role in the development of Luxembourg’s financial centre. At the Luxembourg Bankers’ Association (ABBL), he became the founding chairman of the Private Banking Group; he is also a member of the Board of Directors. He is a member of two committees of the Luxembourg’s financial sector supervisory authority (CSSF): banking and anti-money laundering. At the Luxembourg School of Finance, as well as lecturing at the yearly Financial Services Strategy seminars, he has been instrumental in the development of the research and executive programmes.

In the context of the Madoff case were UBS/Luxalpha is involved and where there are questions about the weaknesses of the auditor of the fund, I do not think it is a good thing to allow the auditee to join the auditor even for advisory services all the more than Mr Roger Hartmann was representative of the fund.

There should be a tree-year-period to be able to do so.