Financial fraud: data transfer “necessary for reasons of substantial public interest”

In the matter of Bernard L Madoff Investment Securities LLC [2009] EWHC 442 (Ch), Mr Justice Lewison granted an application for the transfer of personal data in the possession of the joint provisional liquidators of a UK subsidiary to the trustee in bankruptcy of its parent company in the US, Bernard L Madoff Investment Securities LLC. The application was granted on the basis that it was necessary for reasons of substantial public interest. Although the judge acknowledged that the order could also be made on the basis that the transfer was necessary insofar as it related to legal rights and proceedings, he did not, however, go so far as to extend the order to “unspecified” information to be determined by the liquidators at their discretion as necessary for those purposes.

BACKGROUND

Bernard Madoff, former head of the Nasdaq stock market, stands accused of perpetrating possibly the biggest fraud in history. Some U.S. $50 billion worth of investments made by individuals and organisations all over the world, including a large number of charities and public authorities, has apparently disappeared into the black hole of Mr Madoff’s hedge fund and investment advisory business. Mr Madoff is alleged to have run a fraudulent investment scheme, paying investors from money paid in by other investors rather than from real profits.

CURRENT APPLICATION

The application before Mr Justice Lewison was brought by the joint provisional liquidators of the English company, Madoff Securities International Ltd, under Section 112 of the Insolvency Act 1986. The application sought various directions relating to the transfer of data regulated by the Data Protection Act 1998 and in particular the eighth data protection principle:

Personal data shall not be transferred to a country or territory outside the European Economic Area unless that country or territory ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data.

Neither the United States nor New York State is a territory that “ensures an adequate level of protection” for the purposes of the Directive. However, there are exceptions to the eighth data protection principle. In particular, Schedule 4 paragraph 4(1) disapplies the eighth principle where “the transfer is necessary for reasons of substantial public interest”. The trustee and the liquidators’ case was that the transfer of the information was necessary in order to unravel the alleged fraud and what has happened to the assets that had been invested in the Madoff empire.

JUDGE’S DECISION

Granting the application insofar as it related to specific data, the judge said that he was satisfied that it was in the public interest for an alleged fraud on this scale and of this complexity to be investigated. On the evidence, he was satisfied that transfers of the information were necessary for reasons of substantial public interest.

The judge also held that he would have granted the order to that extent under further exceptions to the eighth principle set out in paragraph 5 of Schedule 4, specifically where the transfer is necessary in relation to legal proceedings, for the purpose of obtaining legal advice, or for the purposes of establishing, exercising or defending legal rights. The fraud would undoubtedly involve legal proceedings; indeed, the liquidations of the companies involved in this application were two such proceedings. The establishment of legal rights would no doubt be necessary in order to wind up the affairs of both companies. It was also likely that the transfer was necessary to establish, exercise or defend legal rights, although the judge made no finding to that effect.

However, the judge was not prepared to extend the order to information that was unspecified and which gave the joint provisional liquidators the discretion or the ability to make value judgments as to what they consider to be necessary. Lewison J did not consider that the Court should make a blanket order of that kind without knowing what it was that it was being asked to authorise.

Finally, the judge held that there was nothing in Section 235 of the 1986 Act that limited the liquidators’ ability to have whomsoever they pleased at interview. However, it was clear from this provision that an interviewee could only be required to answer questions about the liquidators’ company and not his own. Thus, the liquidators would be entitled to ask questions about the English company, which might shed light on the dealings and affairs of the American company, but Section 235 was not, in the judge’s view, a short cut to an application by the American trustee in bankruptcy under Article 21 of the Cross- Border Insolvency Regulations.

COMMENT

The general reaction to this decision is that it is correct based on its particular facts. The scale of the fraud and the significance of the investigation into it means that there were particular reasons for allowing the transfer of data. However, this cannot be interpreted as generally liberalising the transfer of personal data to the United States as part of an investigation into the dealings of a company and its individuals. In practice, EU Member States are likely to have different ideas about where the “substantial public interest” threshold lies. U.S. multinationals, for example, have found themselves between a rock and a hard place in relation to the compatibility of U.S. whistleblowing schemes under the Sarbanes-Oxley Act (SOX), which apply to EU subsidiaries and EU restrictions on the transfer of personal data. To date, the EU authorities and national courts have taken a restrictive view on whether a U.S. company’s obligations under SOX legitimise data transfer without consent. Such is the scale of the wrongdoing in this latest case that Lewison J’s decision is unlikely to be interpreted as indicating otherwise.