Caribbean court backs end-investors in Madoff fraud case
A small Caribbean islands has potentially had a large impact on future hedge fund fraud cases, after ruling one offshore feeder fund into Bernard Madoff could not recoup redemptions they had honoured before the fraudster was caught.
Many such ‘feeder funds’ were entangled in Madoff’s $65bn Ponzi scheme. Some collapsed, and then were sued by clients claiming they conducted scant investigation before investing.
Under various financial and legal pressures, some funds have sought to recoup withdrawals that effectively, they claim, comprise ‘ill-gotten gains’ unjustly enriching clients.
The liquidators of Fairfield Sentry, the subject of the case in the British Virgin Islands, issued over 175 claims against investors, seeking the return of more than $1.4bn.
A BVI court ruling earlier this year stated redeemers from Fairfield Sentry up to six years before Madoff was uncovered could not be forced to return withdrawals.
A summary judgement, applied for by ABN Amro Fund Services, this week confirmed that decision.
Lawyers Ogier acted for over 15 defendants against Fairfield’s liquidators’ claims.
Robert Foote, Ogier managing associate (pictured), said: “This judgment is, of course, good news for the redeemers, but it is also good news for insolvency practitioners, legal practitioners and the funds industry generally in the jurisdiction, and in other offshore jurisdictions. It provides clarification on a number of issues that have not before been judicially determined.
“Investors will now be able to redeem out of BVI funds, safe in the knowledge it is unlikely the fund will be able subsequently to make a claim for the recovery of redemption proceeds paid under a mistake as to the correct NAV.”
Ogier added the ruling could set precedent for similar cases elsewhere, including in the US where Fairfield Sentry’s liquidators are trying via New York courts to claim back money from early redeemers.
On the initial BVI judgement, Ogier said the judge found “it was not open to Sentry to seek recovery of the price it paid for the purchase of the shares of redeeming investors simply because it had calculated the NAV upon information subsequently proved to be unreliable, for reasons unconnected with any of the redeemers.
“The judge found that Sentry contracted to invest its members’ money, and pay them the return from this investment when demanded, on the basis of a rateable proportion of Sentry’s NAV.
“The fact that a fund that Sentry and its investors believed to be genuine, but which subsequently turned out to have been run fraudulently, had no impact whatsoever on Sentry’s ability to perform its obligations to its investors.”
Fairfield Sentry’s liquidators are widely expected to appeal, but Ogier noted Sentry “cannot now claim back the redemption proceeds that it historically paid to the redeemers”.