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Madoff case (Luxalpha SICAV) - Orders imposed on UBS (Luxembourg) S.A.

by the Luxembourg
regulator (CSSF)

By Olivier Sciales

oliviersciales@cs-avocats.lu

On 25 February 2009, the Luxembourg regulator (CSSF) (Commission de Surveillance du Secteur


Financier) took the following decisions towards UBS (Luxembourg) S.A. The CSSF ordered
UBS (Luxembourg) S.A.:

to put into place the necessary infrastructure (i.e. all sufficient human and technical means and
internal rules in order to carry out all the duties and tasks related to the function of custodian bank
of a Luxembourg undertaking of collective investment in accordance with the law of 20
December 2002 on undertakings of collective investments, as amended from time to time (the
"Law of 2002") and Circular IML 91/75. UBS (Luxembourg) S.A. is required to provide
evidence of such adequate guarantees to the CSSF within a period of 3 months as of the date of
notification of the decision of the CSSF to UBS (Luxembourg) S.A. It is important to note that
the CSSF mentioned that the wrongful execution of the obligation of "due diligence" constitutes a
serious breach of the supervisory duty (devoir de surveillance) of a custodian bank and can
consequently constitute a violation of a contractual obligation in view of the legal provisions
imposed by the Law of 20 December 2002. Article 36 of the Law of 2002 provides that "the
depositary shall, be liable, in accordance with Luxembourg law to the shareholders for any loss
suffered by them as a result of its wrongful improper performance thereof".
to analyse and rectify all the structures and procedures in place in relation to its supervisory duty
(obligation de surveillance) as custodian bank and UBS (Luxembourg) S.A. shall pay damages in
case of breaches to the above-mentioned supervisory duty as custodian bank imposed upon by
Luxembourg law, without prejudice to any contractual provisions to the contrary and/or as the
case may be any court decision.

The right of injuction of the CSSF is based on article 59 of the Law of 5 April 1993, as amended from
time (the "Law on the Financial Sector"), which provides in paragraph (1) that "where a person subject to
the supervision by the CSSF is not complying with the provisions of any laws, regulations or
memorandum and articles of association relating to him, or where his management activities or financial
situation are not such as to constitute an adequate guarantee of proper discharge of his commitments, the
CSSF shall enjoin that person, by registered letter, to remedy within such period as it may prescribe the
situation found to exist".

It is furthermore important to set out what the consequences may be in case UBS (Luxembourg) S.A.
would not comply with the above orders. These can be found in Article 59 paragraph (2) of the Law on
the Financial Sector which provides that "if, by the end of the period prescribed by the CSSF pursuant to
the preceding paragraph, the situation in question has not been remedied, the CSSF may:

(a) suspend the members of the administrative, executive or management bodies or any other persons
who, by their actions, negligence or lack of prudence, have brought about the situation found to exist or
the continued exercise of whose functions may prejudice the implementation of recovery of
reorganisation measures;

(b)suspend the exercise of voting rights attaching to shares held by shareholders or members whose
influence is likely to operate to the detriment of the prudent and sound management of the person in
question;

(c) suspend the pursuit of that person's business or, if the situation found to exist concerns a particular
area of business, the pursuit of the latter."

The CSSF is entitled on the basis of article 53 of the Law on the Financial Sector to request from any
person subject to supervision by it (i.e. UBS (Luxembourg S.A.) any information which may be of
assistance in the performance of its tasks. The CSSF may in light of this provision inspect books,
accounts, registers or any other deeds and documents belonging to such persons.

In view of the above, it will be important for UBS (Luxembourg) S.A. to evidence proof and provide the
adequate guarantees (as mentioned above) to the CSSF within the prescribed period of 3 months.

The question could also be raised what the legal impact is in court of such press releases. The legal impact
in court of the content of such press release is in my opinion limited as a press release or circular issued
by the CSSF or by any Luxembourg administration must limit themselves so as to interpret the rules set
out under the applicable Luxembourg laws, without being able in principle to create new rules. In other
words, it is not the press release or a circular which can impose by themselves new obligations on parties
but only the applicable laws. However, the interpretation made by the CSSF or by a Luxembourg
administration is an indication of how the laws could be applied in court, taking into account that the
courts could always adopt a different interpretation.