Madoff Fraud Won’t Hurt Luxembourg Funds, Guill Says
Madoff Fraud Won’t Hurt Luxembourg Funds, Guill Says


By Stephanie Bodoni

May 7 (Bloomberg) -- Bernard Madoff’s global fraud was an unforeseeable criminal act that will have little long-term effect on Luxembourg’s 1.53 trillion-euro ($2 trillion) fund industry, the head of the country’s financial regulator said.

Jean Guill, 58, who became director-general of the Commission de Surveillance du Secteur Financier May 1, said he isn’t “particularly worried” about Madoff’s crimes damaging the country’s financial industry, Europe’s largest fund market.

The CSSF was forced to seek the liquidation of three funds that invested with Madoff. Another 14 funds and sub- funds ceased redemptions to customers. Investors from across Europe have swamped Luxembourg courts with lawsuits, suing Luxembourg-based banks, auditors and even the CSSF seeking compensation, court-ordered redemptions and access to documents for use in future lawsuits.

“If you look at the size of the Luxembourg fund market, Madoff is very small,” Guill, who was director of Luxembourg’s treasury for the last decade, said in an interview at the CSSF. “It may be a huge figure for a single investor, but it makes up less than 1 percent of assets managed by Luxembourg funds.”

Comparing the scale of Madoff’s fraud to market values makes little sense, said Leopold Seiler, an asset manager at Vienna-based Seiler Asset Management and an associate at PEH Wertpapier. The comments are “like a punch in the gut.”

No Pressure

The regulator is proceeding with investigations into the way custodian banks, including Luxembourg units of UBS AG and HSBC Holdings Plc, handled money for local investment funds affected by Madoff. They include the now defunct LuxAlpha Sicav- American Selection and Luxembourg Investment Fund.

The CSSF in June will release a report on HSBC’s unit, the custodian bank for Herald (Lux) US Absolute Return Fund, one of the three funds dissolved by the CSSF. In addition, Guill is waiting for a reply from UBS to claims that it committed a “grave breach” of oversight in its role as custodian bank for the funds.

“There is no particular pressure,” Guill said this week in his first interview since starting the job. “It’s normal procedure going on.”

Ruth Lavelle, a spokeswoman at London-based HSBC, said the bank is cooperating with regulators.

“HSBC continues to believe that it has good defenses to legal claims made against it and it will vigorously defend itself,” she said.

Tatiana Togni, a spokeswoman for Zurich-based UBS, declined to comment.

No Redemptions

Luxembourg is the second-largest mutual fund market after the U.S., with about 3,403 registered funds holding 1.53 trillion euros ($2 trillion) in assets, compared with about 4.6 trillion euros in funds across Europe.

Guill said that that as the fallout from Madoff’s arrest and March 12 guilty plea have faded, the nation’s mutual fund industry has recovered. The change in the amount of assets under management in Luxembourg, which decreased by 19.5 percent in the past year, is more a result of the global economic decline than Madoff’s Ponzi scheme.

Madoff has “definitely not” shaken the foundations of Luxembourg’s financial industry, “it’s much more on the surface,” said Guill.

‘More Cautious’

There are new funds that keep opening up in Luxembourg and “there are also no redemptions,” said Guill. “It’s not as if people were fleeing from UCITS into different types of deposits.”

Undertakings for Collective Investment in Transferable Securities, UCITS, are European-regulated funds that burgeoned in Luxembourg 20 years ago after it became the first nation to implement European Union rules in 1985.

“The coolness of the comments currently made gives future investors clear signals to be more cautious,” said Seiler. “There are no redemptions immediately, but the pace and mood of further investments will for sure change.”

To the extent that Madoff has shaken the whole industry, it must also have shaken Luxembourg, said Damien Byrne Hill, a partner at Herbert Smith in London.

“Madoff and other frauds which have come to light in recent months have led to wide uncertainty in the market generally about whether risks are being adequately identified,” he said.

Madoff, 71, faces as much as a 150-year jail sentence for using money from new investors to pay off old ones in a $65 billion global fraud that ran from at least the early 1990s.

‘Far Removed’

If U.S. regulators “didn’t see it coming in New York, how could we have seen it coming here, being so far removed from the actual fraud,” Guill said.

“There was no hint that this could be a fraud,” Guill said. “Even with hindsight, I don’t see where there would have been anything to really catch your attention.”

Deminor International, adviser to a group of about 600 investors “doesn’t agree” that Madoff’s fraud was undetectable, said Erik Bomans, a Brussels-based partner. “It’s too early to draw that conclusion because we don’t have all the information.”

Potential losses in Luxembourg funds through Madoff could be as much as 1.9 billion euros, according to the CSSF. This is “the absolutely total, maximum” lost, Guill said.

The CSSF after Madoff’s arrest created a team of 12 specialists to work on Madoff-related cases.

Frauds can happen at any moment, said Guill. “I don’t see why we should be particularly or more worried about it than usual.”

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net.

Last Updated: May 7, 2009 11:24 EDT

Comments: 0
Votes:36