Shock greets Luxembourg minister's custodian calls
Claims made by Luxembourg's Treasury Minister that custodian banks should compensate clients who lose money have been met with disbelief and criticism, as the country's regulator attempts to deal with the aftermath of exposure to fraudster Bernard Madoff's funds.
Treasury Minister, Luc Friedman, said in an interview yesterday that custodians had clear obligations to compensate investors for losses tied to Bernie Madoff and make restitution for lost assets, according to reports from Bloomberg.
Custodians are responsible for the day-to-day management of clients' cash including monitoring flows in and out of funds, but ultimately have no input into how or where assets are invested.
However, Frieden has been pushing for the rapid consolidation and resolution of multiple court cases launched in the country - which is a domiciling centre for many funds due to its favourable regulatory system - since the discovery of the Madoff fraud late last year.
Chris Angel, principal at Mercer Sentinel, the investment consultant's client servicing arm, said: "I cannot see how a custodian would be responsible for losses as they would only be executing clients' instructions."
Sources within a large custodian bank said as the Madoff fraud was so complex with a great deal of uncertainties remaining, it was difficult to know what the fraud actually was or how custodians could be made responsible.
Angel added: "If the custodian bank's parent group carried out short term cash investing that was somehow connected to Madoff's funds, it may be liable that way, but otherwise it would be stepping out of its role as custodian by influencing where assets were invested."
HSBC Securities Services, the custody arm of the global bank, was singled out by Frieden as having held money which was channelled by its owner to funds run by Madoff.
A spokesman for HSBC said: "HSBC continues to believe it has good defences to legal claims made against it and will vigorously defend itself against the actions that have been brought."
A source at a separate large European custody bank said: "It is very confusing. Mr Freiden has quoted what can be found in Luxembourg's laws about being responsible for the safekeeping of assets, but the regulator made it clear there are exceptions, such as this."
The Minister could not be reached for comment.
--write to epfeuti@efinancialnews.com
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