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Cayman court rules on redemptions from busted Madoff feeder funds

Thursday, 29 September, 2016

The Cayman Islands Court of Appeal has issued a key decision in the Primeo case, regarding distribution of the assets of feeder funds linked to Bernard Madoff's bankrupt investment empire, which crashed in 2008.

Primeo was a corporate investor in the Herald feeder fund, placing about USD460 million with Herald. It requested to redeem out of the fund in December 2008, just before Madoff confessed his fraud. Herald, though it had already accepted the request, suspended its redemptions payments. It later went into liquidation, as substantially all of its assets were sunk in the Madoff funds, as indeed had Primeo itself. Both have subsequently been wound up.

Since that date, the Madoff empire has been under the control of its trustee in bankruptcy. Madoff's modus operandi was the so-called Ponzi fraud, in which current investors are paid their returns out of the fund's capital assets, not its income. Thus Herald's net asset valuations were based entirely upon mis-statements by Madoff, in perpetuation of his fraud. Because of this, it has been hard for liquidators and courts to establish what the net value of each fund's assets really were at any given time, and to what extent the claims made by each investor against the Madoff fund and its feeders were valid, and which claims have priority over the others.

This is the first time this rectification issue has been addressed in detail by Cayman courts, though it is a common one for the US bankruptcy courts.

The Cayman Court of Appeal decided that Primeo did indeed have an enforceable debt against Herald, because its redemption request had been accepted. But it also found, under s.37 (7) of the jurisdiction's Companies Law, that Primeo’s debt was subordinated to outside creditors, of whom there are many. However, that section has never previously been tested in the case of offshore funds.

The Court of Appeal's decision is now being appealed to the Privy Council. But whether the Privy Council can give further guidance or clarification on a complex and largely unanalysed area of Cayman Islands law remains to be seen, commented Rachael Reynolds and Paul Murphy of law firm Ogier.

The judgment will be of interest to Cayman Islands liquidators, and to investors in any Cayman funds that are wound up following either an internal or, as in this case, an external fraud, said law firm Campbells.

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