February 22, 2020

Cayman Islands-based Bernie Madoff feeder fund author of own demise

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By Kirsten Hastings From International Adviser

After a 12-week trial, liquidated Cayman Islands investment fund Primeo, which invested with infamous Ponzi scheme Bernard L Madoff Investment Securities (), was found to be “to a very substantial degree the author of its own misfortune”, a judge has ruled.

The Grand Court of the Cayman Islands delivered its verdict on 23 August 2017 on Primeo Fund versus Bank of Bermuda (Cayman) Ltd () and HSBC Securities Services (Luxembourg) ().

Primeo brought a claim against the two fund service providers that acted as its administrator and custodian respectively, seeking damages of approximately $2bn (£1.55bn, €1.67bn), reports law firm Campbells, which represented the defendants.

Bernie Madoff

Founded by Madoff in 1960, BLMIS was based on Wall Street. Investors lost millions when Madoff was arrested in December 2008 and his scheme uncovered as one of the largest financial frauds in US history valued at nearly $65bn.

Sentenced to 150 years in prison in 2009 for investment fraud, Madoff admitted that he had not traded since the early 1990s and that all of his impressive returns had been an elaborate Ponzi scheme.

Accusations

As custodian, Primeo accused HSSL of breaching its contractual duties concerning the appointment and supervision of the Madoff fund as its sub-custodian.

Against , Primeo alleged that the company breached its obligation as administrator in the maintenance of books and records for Primeo and in determining the net asset value (NAV) per share at the end of each month.

In his judgment, justice Jones QC said that “at the core of the administration claim is a dispute about the role of independent fund administrators”.

Primeo alleged that, had HSSL and BBCL complied with their obligations, the investments with BLMIS would have been withdrawn and reinvested elsewhere prior to the fraud being uncovered.

Both HSSL and BBCL denied that they had breached their contractual obligations to Primeo.

Defence

The firms claim that Primeo was well aware of the risks associated with BLMIS and that the company would have continued to invest with the Madoff fund in any event.

HSSL and BCCL also argued that Primeo was not the proper claimant as the company’s losses were merely reflective of the losses suffered by Herald and Alpha, in which Primeo was a shareholder at the time of Madoff’s arrest.

The two defendants also argued that a statute of limitations had expired as Primeo was seeking to recover losses arising from a cause of action that happened prior to 23 February 2007, which are time-barred under Cayman’s Limitation Law.

They added that any damages payable to Primeo would have to be substantially reduced to reflect negligence on the part of Primeo that contributed to the losses.

Claim dismissed

After hearing evidence from more than 25 witnesses, justice Jones dismissed Primeo’s claim in its entirety.

The court found that HSSL and BCCL were negligent in their duties as administrator and custodian.

Local newspaper Cayman Compass reports that the judge conceded that BCCL had adopted grossly negligent procedures to calculate the value of the assets of the fund, and that HSSL had failed to ensure that BLMIS was suitable to act as sub-custodian and failed to give any consideration or make any recommendations to Primeo in relation to safeguarding the assets of the fund.

However, the court also found that Primeo failed to prove that any breach of duty by HSSL and BCCL had caused its losses. The judge also ruled that Alpha and Herald were the proper claimants, as they were the firms directly invested in BLMIS, and agreed that the statute of limitations had passed.

In any case, the judge determined that had he found in favour of Primeo, he would have reduced any damages awarded against BBCL by 75% to take into account Primeo’s contributory negligence.

For more on this story go to: http://www.international-adviser.com/news/1037832/cayman-bernie-madoff-feeder-fund-author-demise

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