Toomre Capital Markets LLC

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HSBC, UBS May Be Liable for Madoff Losses As European Retail Custodians

On Wednesday January 14th 2009, Bloomberg News reports that HSBC Holding Plc and UBS AG may be held liable for as much as $3.2 billion of the losses linked to Bernie Madoff fraud scandal. Apparently there is quite the dispute over the duties of European financial custodians at funds in Luxembourg and Ireland. According to the article, "At stake is the image of the European fund industry, French Finance Minister Christine Lagarde wrote in a Jan. 12 letter to the European Commission and Luxembourg Prime Minister Jean- Claude Juncker. European funds’ assets grew 59 percent to 6.8 trillion euros ($9 trillion) over the past six years, partly because rules protecting investors made them attractive.

"'If they aren’t required to pay the money, then investor protection doesn’t mean anything and people might as well just invest in offshore funds,' said Isabelle Wekstein-Steg, a lawyer at Wan Avocats in Paris who is representing 10 French retail investors and two institutions that face Madoff-related losses at Luxembourg funds. 'UBS didn’t do its job of knowing at all times where the assets were, and the same with HSBC.'

"Custodians are charged with oversight of funds and they manage cash inflows and payments to investors. Those looking to recoup money would have to prove the banks failed to fulfill their duties, according to nine lawyers surveyed by Bloomberg News. HSBC has said it isn’t liable and UBS declined to comment on the issue."

Later, the article further explains, "Funds sold in the European Union to retail customers must follow rules on how money can be invested, called the Undertaking for Collective Investment in Transferable Securities, or UCITS. The rules also set out the responsibilities of custodian banks. Liability is determined under national laws in each member state. The EU said yesterday that it’s reviewing how rules that require EU-regulated mutual funds to safeguard clients’ assets are enforced around the 27-country bloc."

Toomre Capital Markets LLC ("TCM") suspects that HSBC and UBS will be held to be at least partially responsible for not fulfilling their custodial duties. Somewhat ironically then investors in following funds may have some additional deep pockets to recover their losses from: the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg (for which UBS is custodian), the $419 million Luxembourg Investment Fund-U.S. Equity Plus (for which UBS also is custodian), the $226 million Herald LUX-US Absolute Return Fund (for which HSBC is custodian) and Dublin-based $1.1 billion Thema International Fund Plc (HSBC custodian). The Thema and Herald funds were managed by Bank Medici AG, the Austrain bank founded by Sonja Kohn, whose clients invested approximately $3.2 billion in the Madoff fraud scandal.