The drive to attract alternative investment vehicles like hedge funds and registered funds accessible to investors across Europe will also depend on how the Luxembourg financial regulator confirms the rules on investor protection. “It is very important (Luxembourg) rules are applied from an investor standpoint. Some sophisticated investors rely on this,” said Dermot Butler, chairman of Ireland-based fund manager at Custom House Group. The dispute Madoff innovation is key to evaluating whether the standards of Luxembourg protect investors “not only fraud, but against the sloppy work, negligence and costly mistakes,” Butler said. The dispute centers on the role of custodian banks UBS and HSBC, which act as repositories of the Luxembourg-based funds LuxInvest and feeding LuxAlpha which lost more than $ 2 billion to fraud Madoff. A court case scheduled test in early 2010 will determine whether investors can sue UBS custodian directly for losses incurred. Claims may also be made by the trustees of funds, the attorneys said. Lawyers representing investors say UBS, which created the fund was, as custodian, responsible for the security of assets. UBS counters that the funds were created at the behest of investors specifically for feeding Madoff funds, and that investors knew the assets were held by signing Madoff Securities, and signed a waiver to the elimination of liability UBS. Luxembourg’s financial regulator, the CSSF has said repeatedly that the Community rules on the responsibilities of custody oblige banks deposit at all times to know how the assets are invested and where and how they are available. “This responsibility is not affected by the fact that the depositary has entrusted to a third party all or part of the assets in its custody,” the CSSF in a statement earlier this year. THREAT TO LUXEMBOURG Disgruntled investors have complained that the standards of investor protection are not being respected in Luxembourg. “When we now look what has happened with this case very strongly Madoff feel cheated,” said Luc Schaack, defense attorney for the group’s shareholders Deminor, which is acting for some investors who lost money to Madoff. “They think that Luxembourg is not a safe place to put money because despite all the legal guarantees, nothing has happened in order to put enough pressure on UBS to recover their money,” Schaack said. Players in Luxembourg 1.7 trillion fund industry euros say any decision is welcome, provided that adds clarity to the investment landscape in Luxembourg. “If malpractice is judged UBS as custodian, people will protect investors in Luxembourg is solid and the rules apply to everybody,” said Martin Kloeck, Zurich-based partner Signina capital asset manager, who has just register one of its funds in Luxembourg. “If the bank is exonerated, it will be because it created the fund, which was not publicly available, at your request.” Asset managers and service providers such as custodian banks, auditors and fund managers also want clarity on their legal obligations to holders of the funds Luxalpha regulated as UBS, which led to a UCITS label conforming. The EU directives known as UCITS are designed to protect retail investors by establishing strict rules for investment funds open to the public. “If the law is strictly enforced then the responsibility is clear,” said Marc Clapasson, managing director of Millennium Global is a Guernsey-based $ 14 billion alternative asset manager that you are registering a number of funds in Luxembourg. The wrongs “But it’s hard to judge. Madoff was an exceptional case which involved a lot of experienced investors, and a lot of people, not just the custodians. The story is much more complex,” said Clapasson . Investors are also demanding that the auditor Ernst & Young for damages in one of the funds involved. The directors may also be liable for damages. A ruling against UBS may also ultimately increase the costs of custody, as the highest level of risk for service providers would increase insurance costs and the results could be extended in the enforcement of rights and expensive, makes this less attractive business in Luxembourg. “It could change the whole industry. Would custodians take that risk for a few basis points of assets? If the trustees have a greater burden of responsibility and risk, is likely to have to ask for higher rates,” said Tushar Patel , chief investment officer HFIM, London-based fund of funds.