More than five years after Bernard Madoff’s massive Ponzi scheme was uncovered, most European victims of the scam are still waiting to recoup some of their losses. “In the beginning I was confident that under EU law, it was clear who was liable if anything went wrong,” says Frank Amann, a German investor who lost €20,000 ($27,000). Now, Amann says, he doesn’t believe he’ll ever see the money he put into the Herald (Lux) US Absolute Return Fund, one of three Luxembourg-based mutual funds that placed assets with Madoff and liquidated after the scheme collapsed.
Recovery efforts by lawyers representing Madoff’s European investors, most of whom were exposed through funds, are concentrated in Luxembourg, the world’s second-largest fund market. It’s “the most important place in Europe for the outcome of the whole affair,” says Erik Bomans, a partner with Deminor Group, a Brussels-based adviser that represents about 3,000 Madoff investors.
At least 17 funds, including Access International Advisors’ LuxAlpha Sicav-American Selection and Luxembourg Investment Fund, were forced to suspend customer redemptions after Madoff’s arrest. Dozens of lawsuits filed in the Grand Duchy against the custodians overseeing the funds, including HSBC (HSBC) and UBS (UBS), have stalled.
The banks have used procedural tactics to delay final decisions, according to lawyers and advisers representing the investors. “Everything at the courts, the financial regulator, and the criminal prosecutor is stuck,” says Bomans.
François Brouxel, a lawyer for investors suing UBS, Ernst & Young (the auditor of the three funds), and LuxAlpha’s administrators, says the banks have filed repeated appeals hoping to forestall the process. “To only be this far along after five years is crazy,” he says.
Questions over the banks’ liability are at the heart of the lawsuits. Investors argue that the banks, as custodians, failed to protect their assets. UBS and Ernst & Young won an initial ruling in 2010 that forced court-appointed liquidators, rather than individual investors, to file the lawsuits. UBS says its role as a custodian was limited to managing deposits and payments to investors. “UBS firmly believes that it has done nothing that provides any basis for claims against it in respect of losses caused by the Madoff case,” the Zurich-based bank said in a statement. HSBC and Ernst & Young both declined to comment on the cases.
Existing laws in Europe and Luxembourg are “sufficiently clear,” says Luc Frieden, Luxembourg’s finance minister until last year. “The custodian bank has a responsibility to make restitution,” he says. Frieden adds: Luxembourg’s authorities and the courts “always try to strike the right balance between the interests of the investors and the fund industry.”
The glacial progress in Europe is in stark contrast to the U.S., where Irving Picard, the trustee overseeing the liquidation of Madoff’s investment business, had recovered $10 billion of the $17 billion in lost principal through lawsuits and settlements as of the end of January. Of that amount, Picard has distributed $4.9 billion in claims to Madoff’s direct investors. In January, JPMorgan Chase (JPM) settled with the U.S. Department of Justice and agreed to pay $2.6 billion to resolve criminal and civil allegations, acknowledging that it ignored red flags for years. Picard will distribute $543 million of the JPMorgan settlement, with $1.7 billion going to the Justice Department and $350 million to the Office of the Comptroller of the Currency.
In Europe, protracted litigation and uncertainty over liabilities under current EU rules have pushed the European Commission to propose tougher regulations for banks that safeguard investment funds’ assets. The draft law clarifies liabilities in the event of losses.
“We are keeping up the pressure, but we have no choice than to respect the legal process,” says Alain Rukavina, a liquidator for LuxAlpha and the Luxembourg Investment Fund. The liquidators, who are seeking more than $1.5 billion in compensation in the Luxembourg lawsuits, have recovered nothing to date.