Madoff’s ponzi scheme still haunts European investors

It’s been so long they’ve already made a movie and a miniseries. But nearly a decade after Bernard Madoff’s ponzi scheme was discovered, many European investors are still waiting for the resolution of endless lawsuits stalled in Luxembourg courts.

The European Union’s top court was asked at a hearing last week to rule on its first Madoff-related dispute — a fund executive’s fight for access to confidential files that he says may vindicate him held by Luxembourg’s financial regulator, including ones concerning UBS Group AG.

The case, referred to the EU Court of Justice by a local tribunal, is one of hundreds that have been trickling through the tiny country, the second-biggest fund market after the US. While it raises an important question on the conflicts between regulatory and criminal probes, the case is representative of how protracted European Madoff litigation has become.

“We are at a complete standstill” and it’s been like that for years, said François Brouxel, a lawyer who has represented investors seeking to find those liable for losses in Madoff funds. “What more is there to add?”

Luxembourg’s role as a hub for investment funds has put it at the centre of most Madoff litigation in Europe. At least 17 funds, including Access International Advisors’ LuxAlpha Sicav-American Selection and Luxembourg Investment Fund, were forced to suspend redemptions after Madoff’s arrest in December 2008. Dozens of lawsuits filed in the Grand Duchy against the custodians overseeing the funds, including UBS, have been stuck for years.

The EU case deals with an executive at LuxAlpha, the Luxembourg fund that has been most closely linked to Madoff.

LuxAlpha invested 95 per cent of its money with Madoff and had $1.4 billion in net assets a month before the Ponzi scheme was discovered. Thierry Magon de La Villehuchet, chief executive officer of Access International, which managed LuxAlpha, killed himself in his New York office 12 days after Madoff’s arrest.

Pierre Delandmeter, a lawyer and former board member of LuxAlpha and its management company, is fighting to get documents from the country’s financial regulator, CSSF, about its Madoff probe. In particular, he is seeking a document UBS sent to the CSSF.

UBS, which oversaw investor deposits as the fund’s custodian, the regulator and former LuxAlpha directors are seeking to block the request.

At the heart of the case is whether, under EU law, the country’s financial regulator, CSSF, can invoke professional secrecy to withhold documents from Delandmeter, whom it sanctioned due to his role in a Madoff-linked fund.

Delandmeter’s lawyer told the EU court last week that his client was made a “scapegoat for the Madoff case” when the CSSF said he was no longer a person to be trusted and asked him to resign from companies under the regulator’s supervision.

“We are dealing here with sanctions that were devastating,” Jean-Paul Noesen, Delandmeter’s lawyer, told the EU court.

An adviser to the EU court said she will publish her non-binding opinion about the case on July 26. The court’s final ruling will be binding across the EU and is expected to bring clarity of where regulators must draw the line between professional secrecy and the rights of defence of those they sanction.

Delandmeter and Access co-founder Patrick Littaye have been attacked in several court cases, and together with UBS and the CSSF, have been sued by the liquidators of LuxAlpha, who are trying to collect money for investors.

Frustration is mounting among lawyers like Brouxel, who are working with several hundreds of investors seeking to recoup some of their losses. After eight and a half years and masses of legal briefs having passed through the local courts, not a single case has tackled the substance of the whole dispute: who really is to blame for Madoff’s fraud in Luxembourg?

Madoff, 79, who founded his investment firm in 1960, is serving a 150-year prison sentence in the US after pleading guilty in 2009 to running a $17.5 billion Ponzi scheme that took money from new investors to pay old ones.

It was only a matter of time before the improbable story of greed and ignorance grabbed the attention of Hollywood directors. Richard Dreyfuss played the title role in last year’s ABC miniseries Madoff. HBO’s The Wizard of Lies, opened last month, starring Robert De Niro as the fraudster and Michelle Pfeiffer as his wife, Ruth.

“It is incredibly frustrating,” said Erik Bomans, a partner with Deminor Group, a Brussels-based adviser that represents more than 4,000 Madoff investors.

While there have been settlements elsewhere in Europe, including Ireland, it’s proving very difficult in Luxembourg “because of the slowness of the courts,” Bomans said. “Why would those adverse parties settle with us if they know they can get away with this.”

Still, deals aren’t impossible. The liquidators for Herald (Lux) US Absolute Return Fund, one of the three Luxembourg-based mutual funds that had placed assets with Madoff, on Friday announced the first such settlement, with “the parties involved in the Luxembourg proceedings,” without saying the names.

While smaller cases have been resolved, the key lawsuits to establish whether custodian banks and auditors can be held liable aren’t moving.

“UBS is constantly bringing new challenges to interim decisions, then take it to the court of appeal, then the highest court, and then these cases go back to the lower level. And it all starts again from scratch,” Bomans said.

Zurich-based UBS said it is involved in proceedings in various countries and “firmly believes that it has done nothing that provides any basis for claims against it in respect of losses caused by the Madoff case.”

Pierre Reuter, another Luxembourg lawyer who has worked on about 100 lawsuits filed by investors against UBS, said that some delay is to be expected, given the number of people involved, the amounts at stake and the questions asked.

“No bank wants to be told off for having worked badly in such a high-profile case that’s being followed globally,” he said. “They are fighting this tooth and nail, with every procedural measure, and appeal wherever they can.”

The glacial pace in Europe is in contrast to the U.S., where Irving Picard, the trustee overseeing the liquidation of Madoff’s firm, has paid out more than $9 billion (U.S). No such payouts have happened in Luxembourg, while court fights roll on.

“At this rate, we could be in it for at least another 10 years, easily,” Deminor’s Bomans said.