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BVI rejects liquidators' clawback of Madoff redemption payments

Tuesday, 22 April, 2014

The liquidators of insolvent feeder fund Fairfield have failed in their attempt to claw back redemption payments made to its BVI-based investors before the USD50 billion Madoff fraud was exposed in late 2008.

Bernard Madoff's fraud was exposed when his New York firm, BLMIS, collapsed during the banking crash of late 2008. It turned out to be a classic Ponzi scheme, in which the generous rewards distributed to investors in the scheme are funded by new investments supplied by later entrants to the scheme. Madoff himself received a 150-year prison sentence.
Fairfield Sentry was the largest feeder fund channelling investments into Bernard Madoff's financial empire. From 1997 onwards it placed some USD7.2 billion with BLMIS for investment, although in fact BLMIS never actually made any investments from at least the early 1990s onwards.

The collapse of BLMIS dragged Fairfield and several other companies down into insolvency with it. Fairfield's liquidators subsequently discovered that the company had distributed large sums to investors in the preceding six years. This is normal in a Ponzi scheme, in which the losses fall entirely on those still holding the baby when the scheme fails, while those who withdraw their funds before the collapse can escape with substantial profits.

Some of these more fortunate early investors were based in the British Virgin Islands. In 2010 the liquidators launched litigation in the BVI courts to recover the redeemed investments. Their case was that the BVI investors were paid out in the mistaken belief that the assets were as stated by BLMIS, when there were in fact no such assets.

The BVI Commercial Court rejected the liquidator's claims on the basis that the redeemers had given good consideration for the payments they received, according to law firm Harneys, which acted for some of the BVI investors. The Commercial Court's judgment was later backed by the Eastern Caribbean Court of Appeal.

The liquidators then took the case to the Privy Council (PC), which has now followed the Appeal Court in dismissing the claims. The PC, under Lord Sumption, ruled that a payment that discharges a contractual debt of a payee cannot be recovered even if made under a mistake, unless the mistake is such as to void the contract. In this case, the Fairfield directors were obliged to pay the investors at the time of redemption the net value of the investments as determined at the time, and not the (much lower) value that was ascertained with hindsight after the fraud was exposed (Fairfield Sentry v Migani & Others, British Virgin Islands, 2014 UKPC 9).

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