UBS Must Transfer Madoff-Linked Funds to Liquidator

Date: Tuesday, April 21, 2009
Author: Stephanie Bodoni, Bloomberg.com

UBS AG’s Luxembourg unit must transfer the assets it holds for LuxAlpha Sicav-American Selection, a fund that invested with Bernard Madoff, at the request of the fund’s liquidator, a Luxembourg court ordered.

UBS, custodian bank for LuxAlpha, must transfer the money to a bank selected by LuxAlpha’s liquidators within 24 hours or face a daily fine of 1 million euros ($1.3 million), Judge Agnes Zago said in a ruling today. UBS argued it was concerned it might have to pay both the liquidator and the U.S. trustee winding up Bernard L. Madoff Investment Securities LLC.

U.S. Trustee Irving Picard is seeking to recover the remains of Madoff’s assets to compensate investors for as much as $65 billion in losses from Madoff’s Ponzi scheme. LuxAlpha, which had $1.4 billion in net assets a month before Madoff was arrested, now has about 38.8 million euros, lawyers said.

“The court cannot see why there would be an additional risk of being condemned to pay Irving H. Picard an equivalent amount to the one UBS Luxembourg SA holds, if it gives the assets it holds to the liquidators,” Zago said.

Liquidators for LuxAlpha, which invested about 95 percent of its money with Madoff, had sued UBS for “rejecting” their demands to transfer what’s left in the fund to a “neutral” bank.

The case concerns a dispute between the U.S. trustee and LuxAlpha’s liquidator about who should control the LuxAlpha funds, said Tatiana Togni, a spokeswoman for Zurich-based UBS.

No Interest

“The bank did not have any interest in those funds,” Togni said in an e-mail. “UBS (Luxembourg) SA was not in a position to choose between the two. Therefore, UBS (Luxembourg) SA accepts the decision by the competent court, as its legal position in this matter is not affected by this.”

A Luxembourg court on April 2 ordered the dissolution of LuxAlpha, appointing two liquidators with the “widest possible powers” to recover money for investors. Thierry Magon de La Villehuchet, chief executive officer of Access International LLC, which managed LuxAlpha, was found dead in his New York office in December after news of Madoff’s fraud emerged.

UBS lawyer Francois Kremer said at a hearing last week that the bank was “caught between chairs,” because if it paid the Luxembourg liquidators now it may end up having to pay the U.S. trustee Irving Picard a second time “out of its own pocket.”

Kremer had invoked a letter sent to UBS’s unit by Picard’s firm Baker & Hostetler LLP on Feb. 26, stating that UBS should “refrain from engaging in or permitting any transfers or dispositions of the Funds and other monies received from BLMIS without an order from the Bankruptcy Court” in the U.S.

‘Simple Letter’

The judge today said this was “a simple letter” by Picard “without any compulsory value in Luxembourg” and that nowhere in the letter or the U.S. law cited in it was there an indication that UBS would be forced to pay twice.

The judge imposed the daily fine as “a coercive measure due to the attitude taken by” the UBS unit and its refusal to comply with the liquidators’ order.

Laurence Frising and Franz Schiltz, Luxembourg lawyers for Picard, couldn’t immediately be reached to comment.

Madoff, 70, is in jail after pleading guilty March 12 to defrauding investors. He faces as much as a 150-year sentence for using money from new investors to pay off old ones in a global fraud that ran from at least the early 1990s. His sentencing is scheduled for June 16.

The dispute over the fate of the fund assets may prompt the European Union to revise its investor-protection laws, after the French government complained that existing rules haven’t been applied uniformly in the 27-nation area.

The European Commission, the EU’s executive arm, today opened a public consultation on how to revamp the regulations. EU finance ministers called for the review in December.

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