Luxembourg warns UBS on Madoff fraud - Luxalpha - Luxembourg fund

Luxembourg warns UBS on Madoff fraud
The Associated PressPublished: February 25, 2009

BRUSSELS: Luxembourg's financial regulator said Wednesday that Swiss bank UBS AG did not have enough checks in place to judge the risk of investing in the massive alleged Madoff fraud.

UBS is facing legal action from investors angry that the bank advised them to place funds with Luxalpha, one of several Luxembourg-based hedge funds that lost at least €1.7 billion ($2.16 billion) in what prosecutors say was a pyramid scheme run by U.S. financier Bernard Madoff.

The regulator, CSSF, warned UBS that its Luxembourg branch did not have enough staff, procedures or internal rules to comply with local laws that govern investment banks. It gave UBS three months to make changes.

It made no direct comment on UBS' liability for the Madoff losses but cautioned that bad due diligence violates a bank's duty to supervise investments "and can consequently constitute a violation of a substantial contractual obligation."

The regulator said banks are responsible for supervising and following investment funds they promote and must know where and how money is invested and how it can be withdrawn.

Madoff says he lost some $50 billion of other people's money. In Europe, investors' ire is directed not at him but at the banks that told them to put their money into funds linked to him.

Under EU investor protection rules, banks could be liable for compensation claims if they did not properly check how that money was invested.

Luxembourg's banking secrecy and low taxes have attracted many investors from neighboring France and Germany. But its banking rules came under fire from French officials who claimed regulatory failures were to blame for investor losses.

Luxembourg insists its rules are the same as other EU nations. The European Commission is currently checking that all 27 EU member nations follow the same investor protection regulations.