Treasury and Budget Minister of Luxembourg Calls for Arbitration of Madoff Claims
By: Ian Meredith, Sean Kelsey
For investors, advisors, liquidators and institutions contemplating their exposure, or potential exposure, to the European dimensions of Bernard Madoff's Ponzi scheme, there have been notable recent developments in one of the key European centres of the funds industry, where the unwinding of the Madoff scandal has recently intersected with a significant current trend in international commercial dispute resolution.
Many of the Madoff-related claims in Europe are being brought in Luxembourg, estimated to be Europe’s largest funds centre. Prominent among these are suits seeking compensation and access to documents from Luxembourg units of UBS AG (“UBS”), custodian bank for two Madoff feeder funds, Access International Advisors LLC’s LuxAlpha Sicav-American Selection and Luxembourg Investment Fund. More than twenty suits have been dealt with to date, according to reports. Luxembourg’s Treasury and Budget Minister, Luc Frieden, anticipates “dozens” more, and some commentators suggest they could run into the hundreds.
On April 28, Mr. Frieden urged custodian banks, fund liquidators, investors and all other parties to Madoff-related lawsuits in Luxembourg to agree to settle their differences by resort to international arbitration. Mr. Frieden believes that international arbitration - possibly seated in London or Paris - would provide a more appropriate, and a quicker solution than pursuit of such claims through the Luxembourg courts. Mr. Frieden also stated that he believed such an approach would be “in the best interest of the fund industry.”
Any solution along these lines would require the agreement of UBS, and might involve provisions permitting claimants to opt in (rather than requiring them to opt out). In some respects, Mr. Frieden’s proposal chimes with the increasing availability of representative or “class” action as a tool for dispute resolution in a number of jurisdictions around the world, and indeed the uses to which that tool is already being put in connection with Madoff-related claims. In the United States, where class action litigation has been long established, investors are pursuing a variety of such claims against a host of feeder funds and advisors. In the arbitration context, class arbitrations have existed in the United States for over 25 years, and the American Arbitration Association has had rules for their conduct since 2003. At least one New York law firm is reportedly filing a number of Madoff-related group arbitrations. International class arbitration has been gaining in prominence more recently, and several international class arbitrations seated in the United States are currently known to exist. Enforcement, under the New York Convention, of awards resulting from international class arbitrations has, however, the potential to create issues, particularly if parties seek to enforce against assets located in jurisdictions less familiar with the class concept.
In a separate development, on April 24, a Luxembourg court selected a handful of “test cases” from more than fifty Madoff-related lawsuits that have been filed against UBS by individual investors to assess the validity of their claims for compensation. This would appear to hold out at least the possibility that claimants may be willing to pursue class-based lawsuits by way of international class arbitration if they, and UBS, perceive any advantages in doing so.
We will look to provide a more detailed analysis of the disputes landscape flowing from recent upheavals in the capital markets in a future edition of this newsletter.
