Investors who lost out to US fraudster Madoff cannot sue direct, court decides

News - Banking

Written by Ray Clancy

Monday, 08 March 2010 09:36

Individual investors who lost money to fraudster Bernard Madoff in a fund set up by Swiss bank UBS cannot sue direct and must go through the official liquidators, a court has decided.

The court in Luxembourg ruling is likely to mean that others such as HSBC will also be ruled out of direct compensation claims.

It could also dent Luxembourg’s drive to increase its status as a domicile for the European Union’s UCITS-compliant funds, which are designed to protect retail investors by setting out strict rules for investment funds open to the general public since it raises questions over existing investor protection rules.

The court rejected the demands of a small group of investors looking to file individual direct claims against UBS rather than going through the Madoff fund’s liquidators. The ruling could affect many pending cases against UBS as custodian for the LuxAlpha and LuxInvest funds, which lost a total of about $1.7 billion to US swindler Madoff, whose fraud has been estimated at as much as $65 billion.

‘We expected the courts not to allow investors to sue the custodians and auditors directly, although we think from a legal point of view this is not in accordance with the UCITS directives,’ said Isabelle Wekstein, a partner at law firm Wan Avocats.

Wekstein, who represent clients in six of the 10 test cases, said she planned to appeal, as did lawyers Francois Brouxel and Frank Greff, who each represent clients in four cases.

The ruling could signal that investors who lost nearly $1 billion to Madoff from investments in Herald, a fund of HSBC's Luxembourg arm HSSL, will have to follow the same path.

Furthermore the ruling could complicate matters for Madoff investors seeking to get their money back by placing them in competition with the Madoff trustee, according to Irving Picard from law firm Baker Hostetler.

‘If only the liquidator can represent investors, individuals will have to sue the fund,’ said Erik Bomans, a partner at shareholder advocacy Deminor, which represents LuxAlpha clients in other cases filed in Luxembourg.

‘It's the only way they can be placed on an equal footing with the US trustee. In our lawsuit we didn't only sue UBS, we sued the fund itself in anticipation of this kind of outcome,’ he explained.

The ruling was good news for UBS, lawyers said, because it could cut compensation costs and the public relations fallout for the bank would be limited to a single case for each fund.

‘UBS welcomes the clarification of Luxembourg law as expressed by the decision of the Luxembourg Commercial Court,’ the bank said in a statement. HSBC declined to comment.

Madoff, a former non-executive chairman of the Nasdaq stock market, is serving a 150 year term in a US prison after pleading guilty last year to a worldwide Ponzi scheme that ruined large and small investors, including charities.

The LuxAlpha liquidators, appointed by a judge in April 2009 to recoup investor losses, filed a lawsuit in December, suing UBS, the fund’s manager and Luxembourg’s financial regulator among others.