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Court favours investors in Madoff scheme


Investors who made withdrawals from the largest hedge fund to become insolvent because of Bernard Madoff’s fraud scheme cannot be forced to return the money, a judge in the British Virgin Islands has ruled in a test case there.

The BVI court held that liquidators for the Fairfield Sentry fund, domiciled in the BVI, cannot claw back funds from Bank Julius Baer and other defendants who withdrew money in the six years before Mr Madoff confessed to his fraud in December 2009.

“It is not open to Sentry to now seek to recover the price it paid for the shares of redeeming investors simply because it calculated [their worth] upon information that has subsequently proved unreliable for reasons unconnected with any of the redeemers,” Mr Justice Bannister wrote.

Sentry and other funds run by the Fairfield Greenwich Group fund manager invested $7bn with Mr Madoff between 1995 and 2008, making them the largest single group of victims of the scheme, according to Irving Picard, the US trustee charged with winding up Mr Madoff’s business and recovering money for his investors.

Mr Picard and the Fairfield fund liquidators reached settlements earlier this year in which Mr Picard agreed not to try to collect on his claim that the funds should return the $3.8bn they withdrew from the fraud, and the funds in return reduced their counterclaims against the Madoff business by $1bn. The two sides agreed to work together to recover money for end-investors.

Lawyers familiar with the BVI case said it would not affect those settlements.

Both the Fairfield Sentry liquidators and Mr Picard are also using the US courts in New York to try to claw back money from investors who withdrew money from the Fairfield fund. The BVI ruling does not automatically affect those lawsuits, except in those cases where the New York claims are based on BVI law.

Lawyers for the Fairfield liquidators did not respond to e-mails and a telephone call. But the BVI judgment is at a preliminary stage and is likely to be appealed against, other lawyers said.

Lawyers for the BVI defendants said that in general, the BVI claims were focused on older withdrawals than those still pending in New York because of differing rules on the cut-off date for claims. Bank Julius Baer did not return a phone call.

Robert Foote, a partner at Ogier, which represented some test case defendants, said the ruling helped not only his clients but also the funds industry in BVI, because it clarified its responsibilities in case of fraud. “This area of the law has been untested and it’s good to have a judgment resolving the issues. It gives the fund industry in the BVI some certainty,” he said.


Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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