Securities: Madoff trustee sues UBS
Bernard Madoff made much of his so-called "feeder funds" in which financial institutions took investments and passed them onto Madoff to manage. Many financial institutions and so-called hedge funds adopted this practice. One of them was UBS and the trustee, Irving Picard, alleges that the bank failed in its duties.
UBS is a high-profile target in the USA, already lampooned in the media and by the US government alleging that it aids US citizens to evade or avoid tax due. The bank, with the agreement of the Swiss Government, recently settled an action by the US and as part of that settlement agreed to hand over details of a large number of American account holders.
It was, therefore, almost inevitable that UBS rather than one of the other, lesser-known, financial institutions would form the basis of a test case.
Picard is seeking "at least" USD2,000 million from UBS which denies any and all wrongdoing.
But the financial institutions may be in difficulty: at the time of Madoff's arrest, several institutions admitted that they had placed clients' money with Madoff on the basis of his reputation; they did not claim to have undertaken any effective due diligence on him or his business practices.
UBS did not make such statements but it is understood that the allegations of this type of conduct will form a major plank of the case.
UBS, on the other hand, will no doubt argue that due diligence would have thrown up that the regulator had failed to unearth any dubious practices or other problems despite reports made to it by third parties and to point out that Madoff made payments due and / or produced statements to demonstrate that the accounts he managed were profitable.
UBS, and no doubt others who may be sued in similar fashion, will almost certainly argue that they were just as much a victim of Madoff's criminal actions as their own clients.
Picard says "The action in the United States Bankruptcy Court Southern District of New York alleges 23 counts of financial fraud and misconduct against UBS AG and related entities and individuals for collaboration in the Bernard Madoff Ponzi scheme."
Picard says that UBS did perform due diligence and that it threw up issues: according to the complaint, "UBS actively assisted the Madoff Ponzi scheme, by, among other things, serving as the sponsor, custodian and administrator of various affiliated international feeder funds, including Luxalpha SICAV (“Luxalpha”) and Groupement Financier Ltd. (“Groupement Financier”). As purported sponsor of Luxalpha, UBS lent an aura of legitimacy to it, but at the same time, disavowed any liability through indemnity agreements that were not disclosed to the public. In addition, even though UBS’s due diligence revealed indicia of fraud, UBS made Madoff the sub-custodian of the assets of Luxalpha and Groupement Financier, enabling Madoff to run an operation with no checks and balances. As administrator of these funds, UBS allowed Madoff to be the only source of information for valuing the funds."
Picard jumps on the bandwagon set rolling in the tax cases referred to above, alleging UBS holds close as much information as possible: "We have battled with UBS regarding disclosure of information about the bank’s knowledge of Madoff. Unfortunately, they are still trying to shield this information from the public by designating all of their information as confidential. We intend to move to have that designation removed and the complaint made public as soon as possible," he says.
The complaint further alleges "Madoff’s scheme could not have been accomplished unless UBS had agreed not only to look the other way, but also to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did," according to Picard's lawyer, David J. Sheehan, who is a partner in the same law firm as Picard.
Making claims against the Madoff estate is not as simple as many investors thought. On 29 November, Picard provided figures about the claims so far received:
Total Claims: 16,394
Total Determined Claims 15,105 92.14%
Allowed 2,305 14.06%
Determined - No Claim 10 0.06%
Denied 2,754 16.80%
Denied - Third Party 9,965 60.78%
Withdrawn 71 0.43%
Remaining To Determine 1,289 7.86%
Amount of Allowed Claims: USD5,758,631,738.00
Amount of SIPC Coverage Committed: USD748,793,202.05
Amount by Which Allowed Claims Exceed Statutory Limits of SIPC Protection: USD5,009,838,535.95
Download PDF version of this page