Nov. 26 (Bloomberg) -- UBS AG and Ernst & Young LLP said Luxembourg lawsuits filed by investors who lost millions of dollars in mutual funds linked to Bernard Madoff’s Ponzi scheme are invalid and should be thrown out.

Private and institutional investors who lost money through Access International Advisors LLC’s LuxAlpha Sicav-American Selection have no right to bring direct claims against the fund’s custodian bank, its auditor and other institutions linked to the fund, lawyers for UBS and Ernst & Young told a Luxembourg court today. In a second day of hearings, they said arguments by the investors are “vague” and “simply wrong.”

“Yesterday we were not told a great deal in terms of arguments,” Marc Elvinger, a lawyer representing UBS, told a three-judge panel today. “And the few things that we were told, were wrong.”

French investors who lost money through LuxAlpha are suing UBS and the fund’s auditor Ernst & Young for “seriously neglecting” their supervisory duties. The court is reviewing in at least four days of hearings whether the investors can be regarded as shareholders of the fund and whether they have the right to bring such direct claims.

The Luxembourg commercial court in April decided to use a small group of LuxAlpha claims out of about a hundred to review the issue. LuxAlpha, which invested 95 percent of its assets with Madoff, had $1.4 billion in net assets a month before his arrest. The fund was dissolved and is being liquidated.

‘Set the Course’

A ruling in favor of the investors “could set the course for some 100 pending cases and many more to come,” Pierre Reuter, who represents clients in six of the lawsuits being reviewed, said by telephone before the hearings.

Investors’ arguments yesterday that they weren’t allowed to put their names on the company register, which would help them to be recognized as the fund’s shareholders “are incorrect,” Elvinger said.

“Investors do have the right and they had the choice also here to subscribe directly to the fund and to give instructions to the bank to do so not only for the investor’s account but to also subscribe in the investor’s name,” Elvinger said.

Investors say they are being blocked from seeking any compensation because instead of their names, only their intermediary bank’s name is included on the official register. Liquidators say that since the investors are not included on the register “they are not shareholders and cannot bring claims,” said Francois Brouxel, a lawyer representing mainly French investors in LuxAlpha, at yesterday’s hearing.

Explicit Waiver

Zurich-based UBS has previously said that LuxAlpha’s fund documentation contained an explicit waiver that “made it very clear that UBS (Luxembourg) SA was not expected to be responsible for the safekeeping of the assets.”

UBS’s Luxembourg unit was custodian bank to the fund, which was created in 2004. Custodians are charged with oversight of funds, and manage deposits and payments to investors. The bank and its local unit are entangled in dozens of lawsuits by investors claiming the bank failed to protect their savings.

Thierry Magon de La Villehuchet, chief executive officer of Access International, which managed LuxAlpha, was found dead in his New York office in December. Patrick Littaye, co-founder of Access International, was charged on Nov. 4 with breach of trust by a French judge investigating Madoff losses.

Ernst & Young

Ernst & Young was in charge of auditing the fund’s annual accounts and for being in touch with the Luxembourg financial regulator. In one complaint, a French investor claimed Ernst & Young is “co-responsible” for losses because it “didn’t follow the necessary obligatory controls and checks.”

“These claims have all been filed in a very light-hearted manner,” Marc Kleyr, who represents Ernst & Young in Luxembourg, told the court today. Investors “should have known that they can’t bring such claims under Luxembourg law and they should have refrained from doing so.”

Any ruling will affect similar lawsuits concerning Luxembourg Investment Fund and Herald (Lux) US Absolute Return, two other funds that were dissolved earlier this year after investing with Madoff. The Commission de Surveillance du Secteur Financier, Luxembourg’s financial regulator, last week said it “falls exclusively to the courts” to decide whether banks must pay compensation over their role as custodians.

Madoff, 71, pleaded guilty in March in federal court in Manhattan and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors. He directed a multibillion-dollar Ponzi scheme from his now-defunct New York money-management firm.

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

Last Updated: November 26, 2009 11:45 EST