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Two Years post Madoff
2.500 European Investors Federated by Deminor are More Than Ever Mobilized to Seek Full Recovery of Their Losses
A. Facts and figures: probably the largest group of European victims
Since December 2008, Deminor has been mandated by around 2.500 direct victims of the Madoff fraud and of the negligence of the professionals (custodian banks, investment managers and auditors) involved in the setting-up and running of the so-called "Madoff feeder-funds". These investors have lost altogether EUR 400 millions, and are mostly from Europe (Germany, France, Belgium, the Netherlands, Switzerland, Italy,...). A massive group of German investors (750 persons) recently joined the syndicate.
The investors federated by Deminor represent probably the largest group of victims active on the case and are more than ever mobilized to seek full recovery of their losses.
B. Achievements since December 2008: filing of numerous complaints seeking damages
Following successful pre-trial actions in 2009 aimed at obtaining sensitive documents shedding some light on the relationship between the feeder-funds, their service providers and Madoff, Deminor filed in 2009 and 2010 numerous complaints before the courts of Luxembourg and Amsterdam seeking damages as follows:
- On behalf of around 1.000 investors against UBS;
- On behalf of around 750 investors against HSBC; and
- On behalf of around 750 investors against Citco.
These banks and service providers, despite clear obligations and prohibitions, entirely delegated their tasks and functions to Madoff, with whom they entered into a sub-custody agreement which existence was knowingly never disclosed to the investors, nor to the local regulatory authorities. Moreover, they either failed to undertake a proper due diligence on Madoff - as it is standard when appointing a sub-custodian (see the guidelines issued by the "International Securities Services Association" of which UBS and HSBC are members) or accepted to appoint Madoff despite alarming conclusions brought to their attention by their auditors (see the KPMG reports of 2006 and 2008 titled "Review of fraud risk and related operational
risks at Bernard L. Madoff Investment Securities LLC" which identified more than 20 risks of fraud and operational risks). The KPMG reports confirm, as far as necessary, that the fraud was easily detectable.
Legal actions on the merits against the auditors (i.e. E&Y and PwC) have also been or will soon be initiated before the appropriate jurisdictions, as they failed, inter alie, to report to the investors and the local regulatory authorities the risks inherent to the real structure of the fund by which Madoff - whose name was never mentioned in the prospectus - had full control of the assets, in violation of regulations and elementary safeguard guidelines in the fund industry (the same person cannot act as investment manager and custodian, in order to avoid that the investment manager runs away with the fund's money).
C. The recent lawsuits initiated by the US Trustee: same objectives as the European initiatives?
Deminor takes notice of the recent flurry of lawsuits filed by the US Trustee against different entities and individuals before the courts of New York. The main concern from this side of the Atlantic is whether the US Trustee actions offer all guarantees for the European investors to maximize their own recovery potential.
These US legal proceedings are aimed at obtaining monies to the benefit of the "Madoff estate", which will be eventually redistributed to the "customers" of Madoff, as this term has been strictly construed by US courts. "Customers" are those investors who had a managed account with Madoff and had therefore a direct exposure to Madoff. The vast majority of European investors represented by Deminor had indirect exposure to Madoff through investments in the so-called "Madoff feeder-funds". They are not considered to fall within the definition of "customers" and are excluded from (i) the USD 500,000 SIPC protection (a lump-sum guaranteed to all "customers" of Madoff by the US authorities), and (ii) any direct payouts (if any) from the Madoff estate.
On the one hand, the alleged negligence of financial institutions and service providers such as UBS, HSBC and Citco mostly impacted European investors while, on the other hand, monies that the US Trustee could recover from these institutions and services providers will benefit to all Madoff victims, including US investors who had a managed account with Madoff and were not related in any way to UBS, HSBC and Citco. In order to avoid a possible dilution of their (potential) recovery, it remains of the utmost importance that European investors do not rely only on lawsuits of the US Trustee but undertake appropriate initiatives to obtain a full recovery of their own losses.
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