Skip to content

Banks liable to victims of Madoff fraud

In two cases the Luxembourg District Court has found, for the first time and in the same terms, a bank contractually liable for matters indirectly relating to Madoff fraud and awarded (limited) damages.

Luxembourg District Court, No 126.443, 19 October 2011 and Luxembourg District Court, No 127.565, 29 November 2012

The Madoff fraud has resulted in numerous claims being made before the Luxembourg courts (and foreign courts) by investors against financial institutions relating, directly, or indirectly, to the fraud (eg feeder funds, depository banks, administrative agents, auditors). Most of them are either pending or have been dismissed.1

The claimants had been advised by their bank to invest in a Madoff feeder fund called “Rafale”, registered in the British Virgin Islands, and for which their bank acted as depository and distributor. The claimants lost all their money as a result of the fraud. They sought repayment of their investment from their bank on the basis, inter alia, of the breach by their bank of its duty of information.

Alleged lack of accurate information

The claimants both alleged, inter alia, that:

  • they would never have opted for an investment as risky as Rafale if the information as to the nature of the fund provided at the time of subscription had not been misleading (i.e. if it had been comprehensive and clear);
  • they would have immediately withdrawn their investment if they had received such information; –– at no time had they been warned by the bank about the risk associated with this type of investment;
  • the bank’s information letter on hedge funds did not specifically refer to the Rafale fund; and
  • the bank had produced contradictory information (eg the risks associated with investments in hedge funds were mentioned in the “discharge” form which the claimants had signed, but not in a commercial brochure which referred instead to the Rafale fund having a positive and stable performance).

Bank’s defence: sophisticated investors with an appetite for risk

In both cases, the bank denied any liability. The bank argued, inter alia, that it had suggested that one of the claimants invest in the Rafale fund only after the claimant refused to invest in a term deposit, and requested a better investment return. Regarding the other claimant, the bank argued that, as that claimant was a lawyer, he was perfectly aware of the risk associated with the investment in Rafale.

In both cases, the bank argued that, from Rafale’s constitution in 2001 to December 2008, the fund had a regular and stable performance and there was no indication of any fraud perpetrated by Madoff. The bank also pointed to a letter that the claimants received from the bank specifically describing risks in offshore and hedge funds at the time of the investment, and the claimants also received information specifically on Rafale. Finally, the bank said that the claimants knowingly took a higher risk evidenced by the fact that they both signed a discharge outlining the risks associated with their investment in hedge funds.

Decision: Bank’s duty to provide information

The court first indicated, with references to French case law and French and Luxembourg doctrine, the following principles:

  • a bank’s general duty to provide information is significantly increased when a bank has of its own motion suggested that a client invests in specific securities. This is especially so when, as in these cases, the bank was a distributor of a fund and has, therefore, a self-interest in the sale of the securities;
  • in such a case, this obligation exists regardless of whether the client is or is not a “sophisticated” investor (investisseur averti);
  • a bank must refrain from communicating contradictory information on a product. A marketing document must be both internally consistent, and also consistent with the other documents provided by a bank to its clients; and
  • a bank’s duty to provide information is increased where it is on an unregulated fund (such as Rafale) given the increased potential risk for clients.

Based on these principles, the court found in both cases that the bank had breached its duty to provide information and its duty to warn (about risks). The bank had not provided consistent or complete information on the fund.

The court considered that the claimants should be compensated on the basis of a loss of an opportunity in order to reflect the fact that there was no certainty as to whether the clients would have acted differently if they had received the appropriate information. Case law consistently holds that damage for this type of loss should be compensated on the basis of a simple loss of an opportunity to invest in another investment and should not be confused with the nominal amount of the investment made.2 Compensation for a loss of an opportunity should be assessed based on the lost chance and should not equal the benefit that this “lost” opportunity would have provided if it had occurred. 3

Based on the facts in both cases, and taking into consideration the constant income of the fund when it was proposed to the clients and the general situation of the markets for the relevant period, the court considered ex aequo et bono that the loss of an opportunity for the clients, in both cases, was 30% and, therefore, ordered the bank to pay to each client 30% of the amount of their investment in the fund.

As far as we are aware to date, no appeal has been lodged against either judgment.


The court highlighted several factors which will increase the scope of a bank’s information duty, including the fact that:

(i) the bank has, of its own motion, suggested a particular investment,

(ii) the investment is in an unregulated fund and thus is considered a risky investment, and/or (iii) the bank was also the fund’s distributor and therefore has a financial interest in sales. Previous case law suggests that items (i) and (ii) seem to work independently,4 ie the existence of either will increase a bank’s duty to provide information. The circumstance under item

(iii) should, however, work only in conjunction with other circumstances (regardless of the question of the existence of a potential conflict of interest determined according to the circumstances).5

It is worth noting that the court gave no weight to the discharge signed by the client. On the contrary, the discharge actually worsened the bank’s liability as the court found it inconsistent with the other marketing materials provided by the bank. The court’s express and unambiguous recognition of a duty to provide consistent information is new. French case law had already recognised this duty,6 which derives from the principle of good faith in the performance of contracts set out in Articles 11347 and 11358 of the Civil Code. The duty of consistency means that documents must be internally consistent, and also consistent with other documents. The court’s findings on assessment of loss are also interesting. Even in the absence of certainty as to whether a client would have acted differently if a bank did not breach its duty, a client’s damage can nonetheless be indemnified based on the theory of loss of an opportunity.9 The indemnification should not cover the loss due to the investment, but the loss of an opportunity to make another investment. These two judgments show a more favourable treatment for investors than traditional Luxembourg case law. In the past, Luxembourg courts have been more severe in their assessment of the certainty of damage suffered by an investor.10


1. For example, Luxembourg District Court, 4 March 2010, Nos 121.585, 125.280 and 125.656. In these cases, the claim of the investor against the depository bank was held inadmissible.
2. The court referred to the French author T. Bonneau, “Droit des marchés financiers”, Paris, Economica, No 400.
The court referred to the decision of the French Cour de Cassation (First civil chamber), 16 July 1998, Bull Civ, I, No 260.
Luxembourg District Court, 19 February 2009, No 117.632, quoted in “Chronique de jurisprudence de droit bancaire luxembourgeois (avril 2008-mars 2009)”, Bulletin Droit et Banque, 44, page 53.
“Chronique de jurisprudence de droit bancaire luxembourgeois”, Bulletin Droit et Banque, 50, page 96.
X Delpech, “Publicité en matière de produits financiers: cohérence avec l’investissement proposé”, Recueil Dalloz, 2008, page 1892; M Stork,
“Le défaut de cohérence des documents publicitaires d’un fonds commun de placements à l’épreuve de la prescription”, RTD Com, 2012, page 317.
Article 1134 of the Civil Code provides that contracts “must be performed in good faith”.
Article 1135 of the Civil Code provides that “Agreements are binding not only as to what is therein expressed, but also as to all the consequences which equity, usage or statute give to the obligation according to its nature”.
This theory was already recognised in Luxembourg law, see G Ravarani, “La responsabilité des personnes privées et publiques”, Luxembourg, Pasicrisie luxembourgeoise, 2006, page 779.
Luxembourg Court of Appeal, 11 March 2009, No 33287, quoted in “Chronique de jurisprudence de droit bancaire luxembourgeois (avril 2008-mars 2009)”, Bulletin Droit et Banque, 44, page 71.

Western Europe