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21 May 2009
Many offshore funds have lost large sums of money in the Madoff scandal and face further issues from the liquidation of Bernard L Madoff Investment Securities (BMIS).
BMIS trustees have extensive powers to recover payments made by BMIS to funds. For example, trustees may demand back payments made by BMIS in the 90 days before the date of liquidation, as well as previous transactions which trustees regard as 'fictitious profits'.
If proved, such claims will have an immediate impact on investment funds and may render previously solvent funds insolvent. Accordingly, funds should take advice on their position and analyze whether they are still solvent.
Funds will face a number of difficult issues, as will investors that submitted redemption claims but were not paid or submitted funds that were never invested. These may be creditors that could take direct action against the assets of the fund, or even liquidate the fund. Investors are forming action groups and considering actions to liquidate funds or file derivative actions on behalf of funds against directors.
Misrepresentation claims may be made for alleged inaccurate statements made by the fund or persons connected with the fund.
Directors have much to consider, including whether the fund which they thought was healthy may now be insolvent and potential derivative actions and misselling claims.
Managers may be in the firing line for claims and much will depend on what due diligence was carried out and what the investment manager knew about BMIS. Managers should be particularly concerned with actions in the United States (some of which have already started), where discovery rules are extensive and damages are generally higher. It is doubtful that an offshore manager will receive a welcome reception in the US courts and managers may be wise to ensure that they do not submit to the jurisdiction of the US courts, but meet any allegations in their home court.
Custodians have typically faced the issue of what to do with money that they hold on behalf of funds in the light of the fraud at the BMIS level. Most have reacted with a freeze on these funds and are now locked in litigation battles with funds over 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 that they may not be an easy target. However, many accountants may be sensitive to the publicity associated with the Madoff scandal.
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