April 16, 2014
The Judicial Committee of the Privy Council (the court of final appeal for many Commonwealth jurisdictions) handed down judgement today, in a claim brought by the liquidators of Fairfield Sentry Limited (Sentry), a fund incorporated in the British Virgin Islands (BVI). The multi-billion dollar claims involved dozens of major financial institutions and were an attempt on Sentry’s part to try and reclaim monies paid out to investors during the years before the discovery of the Bernard Madoff’s massive fraud.
Sentry was one of the largest of the so-called “feeder funds” that invested with Bernard L Madoff Investment Securities, LLC (BLMIS). By the end of October 2008, Sentry had invested approximately US$7.2 billion with BLMIS, amounting to 95% of its assets. With the arrest of Bernard Madoff in December 2008, and the revelation that BLMIS was the world’s largest ever ‘Ponzi’ scheme, Sentry effectively lost its investments with BLMIS and entered liquidation.
Sentry claimed restitution of redemption payments paid out to investors prior to December 2008; these were alleged to be based on a mistake as to the value of Sentry’s assets invested with BLMIS. Proceedings were issued by Sentry in courts in the BVI and in the US. Certain defendants in the BVI proceedings applied to the BVI court to have preliminary issues determined in their favour, and then sought summary judgment based on the successful outcome of the preliminary issues. The defendants were ultimately successful at first instance in the BVI and before the BVI Court of Appeal. Sentry appealed to the Privy Council and the defendants cross-appealed. The US actions, numbering over 300 and with claims exceeding $6 billion, were stayed pending the outcome of the appeal to the Privy Council.
In a judgment by Lord Sumption, the Privy Council held today in favour of the defendants on both of the two issues in dispute. The first issue was whether certain documents provided to the shareholders (investors) in Sentry recording the Net Asset Value (NAV) per share or redemption price were ‘certificates’ and, therefore, binding on the parties under Sentry’s Articles of Association. The second issue was whether the shareholders could rely on a defence of good consideration in respect Sentry’s claims based on unjust enrichment; in other words, that, by surrendering their shares in Sentry in exchange for the redemption payments, the investors gave up something of value for their redemption proceeds which could not then be 'clawed back' by Sentry many years later.
By finding that funds such as Sentry cannot recover redemption payments made to investors long after payment has been made, by clearly describing what constitutes a ‘certificate’ setting out a fund’s relevant NAV per share (and by holding the fund to that certificate), the Privy Council judgment provides certainty to investors. Lord Sumption said:
“The sole object of certification [under the provisions of Sentry’s Articles of Association] is to produce finality, and the scheme of the Articles…shows that finality is equally important for all determinations of the NAV per share and all Subscription and Redemption Prices. There is no rational ground for regarding finality as desirable in some cases but not in others, according to the discretionary decision of the Directors or their delegates. Such a discretion, if it existed, could only operate capriciously, and is therefore most unlikely to have been intended by the draftsman.”
Latham & Watkins was one of several firms acting for financial institutions defending these proceedings and worked alongside Harneys’ BVI office, and Mark Hapgood QC and Alan Roxburgh of Brick Court Chambers. This team acted for the bank that made the application for summary judgment. The Latham & Watkins team was led by partners John Hull and Oliver Browne in London and partner Christopher Harris in New York. The Harneys team was led by Phillip Kite and Kissock Laing.