On January 18, 2012 the Court of Appeal of the
Eastern Caribbean Supreme Court sitting in the B.V.I. began hearing arguments
in the appeals involving claims brought by the liquidators of Fairfield Sentry
Limited - the
largest hedge fund invested in Bernard L Madoff Investment Securities LLC (BLMIS) - against the ruling of the BVI
Commercial Court in September 2011 to the effect that the Liquidators could not
claw back funds redeemed by investors.
The outcome of this appeal is awaited with interest throughout the
financial world.
The crux of Fairfield’s
argument on appeal is that before Madoff’s arrest, investors redeemed based on
a Net Asset Value (NAV) which itself was calculated on a now-mistaken
value of BLMIS, such that all redemption payments should be returned. The
BVI Commercial Court found that even if there had been a mistake it did not
vitiate Fairfield’s obligations to the investors on a redemption as it was a
shared mistaken assumption about the background against which it was expected
that the contract was to be performed as opposed to a shared assumption the
truth of which is a necessary condition for performance.
The Commercial Court found
that the redeemers had given Fairfield good consideration in redeeming the
shares and thus the sums redeemed could not be clawed back. This position stands in contrast to
that adopted in the context of another Ponzi scheme in the
United States, where at least one court has ruled that all redemptions in
excess of invested principal are “fictitious profits” and thus, as a matter of
law, not redeemed for value (In re Bayou Group, LLC, 396 B.R. 810, 843).
At present the ruling of
the BVI Commercial Court has not affected the New York proceedings flowing from
the same scandal where Irving H. Picard, as the Trustee of BLMIS seeks to claw back redemptions made by investors who
withdrew fictitious profits. Settlements were concluded last year in which Mr Picard agreed with the Fairfield fund liquidators not to proceed with his claim that the funds should return the $3.8billion they
withdrew from the fraud. In return the funds reduced their counterclaims
against the Madoff business by $1billion.
In respect of the remaining
proceedings instituted by Mr. Picard, it remains to be seen what transpires in those cases
where the New York claims are based on BVI law. This ruling and the outcome of the appeal may be the least
of Mr. Picard’s worries however, as his efforts to claw back funds have been dealt
a series of blows in recent months. In July 2011 Manhattan federal judge Jed Rakoff dismissed the Trustee's
$6.6 billion case against HSBC and a parallel $2.2 billion case against
UniCredit on the basis that he had no
legal standing to sue the banks for unjust enrichment and aiding and
abetting fraud and breach of fiduciary duty. In Mr. Picard’s action against the New York Mets, Judge Rakoff
concluded that a section of the federal bankruptcy code precludes Mr. Picard
from attempting to claw back money Madoff investors redeemed from the scheme
before 2006. Then U.S. District Judge Colleen McMahon in the Southern District of New York
dismissed approximately $20 billion in claims made against J.P. Morgan Chase
and UBS, also concluding that the Trustee lacked legal standing to bring
common law claims, because he technically represents Madoff’s bankrupt firm,
not the clients who are owed money. Earlier this week Judge Rakoff dismissed the
Trustee’s $60billion racketeering suit against UniCredit and two other foreign
banks.
