Luxalpha investors call for CSSF to enforce compensation rules

The CSSF is the financial regulator in Luxembourg Maison moderne/archives

The CSSF is the financial regulator in Luxembourg Maison moderne/archives

Luxembourg financial regulator the CSSF has come under fire for failing to enforce its own rules regarding investor compensation, according to the Financial Times.

Investors in the $1.4bn Luxalpha fund, a UCITS fund set up by UBS in 2004 which reportedly invested 90% of the fund with Bernard Madoff’s Ponzi scheme, accused the regulator of incompetence for not ensuring they received compensation for the fraud.

UBS Luxembourg was the vehicle’s named investment manager and custodian. The Financial Times says it has seen court documents in which the CSSF states that managers which incorrectly calculate net asset value or breach the investment fund rules may compensate investors.

The article says the CSSF told investors privately that it is not obliged to enforce the compensation rules laid out in circulars.

However, Albert Biebuyck of Investor Protection Europe, which has represented a Luxalpha investors group since 2014, told Delano on Monday that it was “selectively” applying its rules based on the size and importance of the firms it would have to fine.

This, he claimed, is because of the legal mission of the CSSF which until 2012 was to promote the financial sector. “It has been removed from the law but, I suspect it’s still in their minds,” he said.

Biebuyck pointed out that the regulator had issued €220m in fines in the past 15 years, among them another financial institution, which it fined €125,000 for failing to comply with other circulars.

Biebuyck said he is now pursuing the liquidators. “I want the liquidators to do their job now. They will discuss with their lawyer to see how to answer,” he said.

At the time of publication, the CSSF declined Delano's invitation to comment.

Fraud exposed

Luxalpha was put into liquidation by a Luxembourg Court decision of 2 April 2009, after it was removed from the official list of Luxembourg investment funds as of 3 February 2009. According to Wagener & Associés the “decision was motivated by the fact that UBS Luxembourg SA had signed, on 5 February 2005, a sub-custodian agreement with the company Bernard L Madoff Investment Securities LLC.”

The investment scandal, which was publicly exposed on 11 December 2008, found that Madoff had operated the largest private Ponzi scheme in history, worth an estimated $64.8bn. Investors brought several lawsuits against UBS in a bid to recoup their losses. According to a 2010 Hedge Fund Law Report article, investors were told to pursue their claims through the liquidator of their fund.