With Bernie Madoff most likely wiped out, investors around the globe who lost money in his Ponzi scheme are looking for deep pockets to sue for recovery. Everyone from accounting firms to feeder funds will likely face law suits. And already, some big banks that set up Madoff feeders are trying to exculpate themselves.
The case of Switzerland’s UBS is fascinating. The bank ran a Luxembourg based mutual fund that invested with Madoff (FT). According to the marketing materials for the fund, UBS promised to safeguard the funds. But UBS says the subscription agreement that investors had to sign absolves them of this responsibility.
That strikes us as a specious argument. It’s a bit like a store posting a 30 day return policy and then having the credit card receipt say “all sales final” in small print. Most investors pay far more attention to marketing materials than the legal documents they sign as they hand over the check.
The Luxembourg market regulators are having none of UBS’s argument. In the first place, they say the marketing materials are binding. Second, even if they weren’t, these kind of arrangements aren’t legal anyway. Under European regulations, it may not be possible for a firm selling a mutual fund investment to delegate its safekeeping, custodial duties back to an investor through a subscription agreement. Some regulators have scpressed “suprise and anger” that the fund could be sold under the conditions UBS claims applies.
From the FT:
UBS’s wording of subscription documents for the Luxalpha Sicav, a Luxembourg mutual fund registered for sale across Europe, may set it in conflict with the Luxembourg financial regulator. The Commission de Surveillance du Secteur Financer said: “The provisions of the sales prospectus are binding.”…
Subscription documents for the Luxalpha Sicav explicitly remove UBS’s liability if the fund’s assets are lost. Under European rules, custodians such as UBS must take responsibility for “safekeeping” of a regulated mutual fund’s assets. But the Luxalpha subscription form states that UBS “is not the safekeeping agent of the assets of the fund as the assets are safekept by the US registered broker-dealer”.
In its defence, UBS says it established the fund of fund structure at the request of customers who wants to invest with Bernard Madoff, despite the fact that Madoff was not on the bank’s wealth management recommended list. So it seems at least a fair question of whether meeting customer demand for Madoff investment funds should imperil the bank for Madoff scams.