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Tim Clipstone, partner, Walkers

Fairfield Sentry case is a feather in BVI’s judicial hat

Interview with Tim Clipstone, Partner, Walkers BVI – The recent ruling in September 2011 by Justice Edward Bannister QC not to allow the liquidators of Fairfield Sentry – the largest hedge fund invested in Bernard L Madoff Investment Securities LLC – to claw back investor redemptions illustrates well the strength of the BVI judiciary system.

As Tim Clipstone (pictured), a partner in the Global Investment Funds and Corporate Groups, Walkers BVI, comments: “Whatever is thought of the outcome, given that Madoff was the biggest fraud on Wall Street the easiest thing to do would have been to roll over and follow the lead of many US Courts in allowing claw backs to take place.”

To its credit, the BVI Commercial Court did not. Rather, it applied BVI legal principles and followed them.

In recent months, Fairfield Sentry’s liquidators had sought to claw back redemption payments from investors that had been paid out by the Fairfield fund up to six years prior to the Madoff fraud being uncovered. The hearings were held in front of Justice Bannister, with the liquidators presenting a two-pronged argument.

Firstly, that payments were made by Sentry under a mistake of fact. Secondly, that redemption payments were based on a mutual mistake. Clipstone explains the basis of the two claims: “As Sentry had miscalculated the fund’s NAV – an innocent mistake but nonetheless incorrect – redeemers had consequently been ‘unjustly enriched’, with the overpayment being subject to repayment to the Company. Regarding the mutual mistake, no one knew about the Ponzi scheme when calculating the redemption payment, so the equitable solution was for the investors to pay back the redemption payments and be restored as members of the company.”

In response to these two claims, a summary judgement application was made by ABN Amro, one of the investors. Bannister agreed with ABN Amro that the claw back claims should be struck out: the arguments presented to support the ability of the liquidator to claw back were not, in his view, capable of success.

Bannister found the fact that the underlying asset values were misunderstood didn’t mean that the contract was invalid. “In effect, Bannister maintains that if underlying valuations of particular assets are later proved to have been incorrect, that alone is insufficient to revisit the redemption contract and re-open the NAV calculations,” states Clipstone.

Bannister’s decision is welcome news not just to those who received redemption proceeds out of Madoff feeder funds, but to all investors who have received money out of funds whose asset valuations are subject to challenge subsequent to their redemption out of the fund.

Clipstone sees the decision as consistent with the commercial imperative that investors in funds “must be able to rely on the NAV used to calculate their redemption proceeds and have comfort that the court will not require NAV to be recalculated solely because assets are subsequently discovered to have been innocently mispriced”.

The summary judgement decision is being appealed by Fairfield Sentry’s liquidators. If successful, the case would return to the BVI Commercial Court for a full hearing and may be subject to a different outcome.

But as Clipstone concludes: “Whatever the ultimate outcome, the Fairfield Sentry case underscores the strength of law in the British Virgin Islands and the fact that all industry participants can have confidence in the British Virgin Islands' legal system.”

Please click here to download a copy of the Hedgeweek Special Report: BVI Hedge Fund Services 2012

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