Whilst we hope none of our clients are affected by the Madoff fallout, a large number of BVI and Cayman funds have lost enormous sums of money in the scandal, and face further issues from the liquidation of Bernard L. Madoff Investment Securities (“BMIS”).

 US Law Claims

The BMIS trustee has extensive powers to claw back payments made by BMIS to funds. For example, the trustee may demand back payments made out of BMIS in the 90 days before the date of liquidation, and also previous transactions going back years which the trustee regards as “fictitious profits”.

Such claims, if proved, will have an immediate impact on investments funds and might make previously solvent funds insolvent. Accordingly funds should take advice on their position and analyse if they are still solvent.

Investors Claims

Funds will face a number of difficult issues including investors who submitted redemption claims but were not paid or who submitted funds that were never invested. They may be creditors who could have direct actions against the assets of the fund or even to liquidate the fund. Even if a person is a shareholder, investors are starting action groups and are considering actions to liquidate the fund or file derivative actions on behalf of the fund against directors.

Misrepresentation claims might also be made for alleged inaccurate statements made by the fund or persons connected with the fund. Cleary directors also have much to consider, including whether the fund which they thought was healthy, might now be insolvent as well as potential derivative actions and mis-selling claims.

Investment Managers

Managers are clearly in the firing line for claims and much will depend on what due diligence was done and what the investment manager knew about BMIS. Managers should be particularly concerned with actions in the US (some of which have already started) where, not only are discovery rules extensive, but damagers are generally higher. It is also doubtful that an offshore manager will receive a very welcome reception in the US courts and managers might be wise to ensure that they do not submit to the jurisdiction of the US courts and therefore meet any allegations in their home court.

Custodians and auditors may also have issues. Custodians have typically faced the issue of what to do with money they hold on behalf of funds in the light of the fraud at the BMIS level. Most of them have reacted with a “freeze” on these moneys, and are now locked in litigation with funds on whether it was lawful for the custodians to act in this way. Other banks promoted funds to their clients, unfortunately including BMIS, and could therefore be exposed. Auditors may also be a target, although common law suggests they might not be an easy one. However many accountants may be quite sensitive to the publicity associated with the Madoff scandal.