Luxembourg backs UBS unit revamp after Madoff scam

BRUSSELS, May 27 (Reuters) - Luxembourg's financial market watchdog CSSF said on Wednesday it had approved changes proposed by UBS's (UBSN.VX: Quote, Profile, Research) Luxembourg custodian bank which was exposed to Wall Street fraudster Bernard Madoff via its Luxalpha fund.

The regulator gave UBS three months to reform its Luxembourg bank after the arrest of Madoff and warned it had many powers of sanction if the bank did not reform, including revoking its licence to operate.

Investors in Luxembourg lost $1.7 billion to Madoff, mainly via Luxalpha. Madoff pleaded guilty in March to running a fraud of upto $65 billion and is jailed pending sentencing on June 29.

"The CSSF acknowledges that UBSL (UBS Luxembourg) has provided proof and guarantees of having put in place the necessary infrastructure and necessary internal rules," the regulator said in a statement.

It had said these were necessary for the bank to fulfil all its responsibilities as a depository bank.

UBS has said the Luxalpha fund was created to meet wealthy clients' requests for a fund that would allow them to invest with Madoff.

UBS said it had told investors it did not recommend investments in Madoff products.

Luxalpha investors said in March they would take UBS to court over the losses they suffered related to the Madoff fraud, and said they wanted UBS to compensate them fully. (Reporting by Antonia van de Velde; Editing by David Cowell)