Primeo Fund V HSBC

IN THE GRAND COURT OF THE CAYMAN ISLANDS FINANCIAL SERVICES DIVISION Cause No. FSD 30 of2013 (AJJ) BETWEEN: PRIMEO FUND (In Official Liquidation) Plaintiff And (1) BANK OF BERMUDA (CAYMAN) LIMITED (2) HSBC SECURITIES SERVICES (LUXEMBOURG) SA Defendants In Open Court Appearances: Mr. Tom Smith QC, Mr. Richard Fisher and Mr. Robert Amey instrncted by Mourant on behalf of the Plaintiff Mr. Richard Gillis QC, Mr. William Willson, Mr. Toby Brown and Mr. Simon Gilson instructed by Campbells on behalf of the Defendants Before: The Honourable Mr. Justice Andrew J, Jones QC Released for Publication: 23 August 2017 J 70823 In the matter of Primeo Fund and Bank of Ben11uda(Cayman) Limited (I) HSBC SecurWes Services (Luxembour)SA - FSD30 o/2013 (AJJ) Judgment 1 JUDGMENT A. General Introduction I. The plaintiff in this action, Primeo Fund (In Liquidation) ("Primeo"), was one of many hedge funds, the so-called "Madoff feeder funds", whose assets were placed on a managed account with Bernard L. Madoff Investment Securities ("BLMIS") which turned out to have been the world's largest and most enduring Ponzi scheme. Primeo, now acting by its official liquidators, brings this action to recover damages of about US$2 billion for breaches of contract against its former administrator, Bank of Bermuda (Cayman) Limited ("BoB Cayman"), and its former custodian, HSBC Securities Services (Luxembourg) SA (formerly known as Bank of Bennuda (Luxembourg) SA) which I shall refer to as "BoB Lux" and "HSSL" depending on the context. The Bank of Bermuda group ("BoB") was taken over by HSBC Bank Pie ("HSBC") in February 2004. 2. Primeo claims that, upon a true construction of the custodian agreement made on 19 December 1996 ("the 1996 Custodian Agreement"), HSSL is strictly liable for the negligent or wiful breaches of duty committed by BLMIS in its capacity as sub custodian. In addition, Primeo claims damages against HSSL on the footing that it was in breach of its own duties in connection with the appointment and on-going supervision of BLMIS as its sub-custodian. HSSL's case is that BLMIS held the assets credited to the managed account as custodian directly for Primeo and that the sub-custody agreements were made for "credit purposes only" and were not intended to take effect in accordance with their terms and, even if BL MIS was appointed as sub-custodian, the expr§sf Jit~lof the 1996 Custodian Agreement excluded liability for the safekeeping oq~fa;i;i~n1e!d ~Y\r, ',:.,, ,'< 6''·.s: : .'·,-,,'( ;: BLMIS. , , (! ,:;c \ e,;~,"\.4'.~,':,' ;., .. ,,,,.,/' 3. Primeo claims damages against BoB Cayman for breach of the second ;dfufu!;t(~ifilk' agreement made on 19 December 1996 ('the Second Administration Agreement") pursuant to which it was responsible for maintaining its books and records and 170823 In the matter of Primeo Fundand Bankof Bermuda(Cayman) Limited (1) HSBCSecurities Services (L1Lrembour)SA -FSD30 o/2013 (AJJ)Judgment 2 detennining the NAV per share as at the last day of each month. The performance of the administrator obligations by BoB Cayman was largely delegated to BoB Lux pursuant to a delegation agreement. At the core of the administration claim is a dispute about the role of independent fund administrators and the nature and extent of BoB Cayman's contractual obligations in relation to the determination of the NA V per share. Primeo contends that it was an implied term of the contract that the administrator would exercise the reasonable care and skill to be expected of a reasonably competent independent fund administrator which would require that information received from BLMIS be reconciled with information received from an independent source. The Defendants' case is that, on a hue construction of the Second Administration Agreement, BoB Cayman was entitled to rely upon the information provided to it by or on behalf of Primeo and that there was no obligation to obtain confirmation from an independent source. In any event, it is exonerated from liability unless it was "grossly negligent" or in "wilful default". 4. Primeo also contends that it was an implied term of both the 1996 Custodian Agreement and the Second Administration Agreement that the Defendants would advise Primeo if in the circumstances they were unable to discharge properly their duties and explain their reasons for not being able to do so (referred to as the "advising duty") and exercise reasonable care and skill to ensure that any reports issued to Primeo were accurate and included all the information of which it was aware or ought to have been aware, which would be necessary to enable Primeo to evaluate whether the Defendants were performing their duties (referred to as the "reporting duty"). The Defendants say that there is no proper basis for implying these duties into the contracts and, in any case, deny that they would be in breach. 5. Primeo's causation hypothesis is that the Defendants ought to have concluded that, in the light of BLMIS' business model, they were unable to perfo1m their contractual duties and, having informed Primeo of their concerns about BLMIS and the reasons being able to perform their obligations, Primeo would have withdrawn the / 'l;~ invested elsewhere, thereby avoiding the eventual loss of its investments. T~~3,~,~e. contend that Primeo well understood the operational risks inherent i~')h\ '1~ ...J•t ,, 170823 In the matter of Primeo Fund and Bank of Bermuda (Cayman)Limited(}) HSBCSecurities Services (Luxembou~sti v;;i'Jr;J;oJ3 i :Jl{f/gu1tn(. 3 ~~~ business model and would have continued to have placed assets ( directly or indirectly) for investment by Mr. Bernard L Madoff ("Madoff") in any event. Even if Primeo can make out its case on causation, the Defendants say that it was the author of its own misfortune and that any award of damages should be substantially reduced by reason of its own contributory negligence. 6. Finally, even if Primeo can establish all the elements of its case in respect of duty, breach, causation and loss, the Defendants contend that its loss is reflective of the losses suffered by two other Madoff feeder funds, Herald Fund SPC ("Herald") and Alpha Prime Fund Limited ("Alpha"). With effect from May 2007, substantially the whole of Primeo' s assets were invested in shares issued by Herald and Alpha and it said that the losses claimed against HSSL by Primeo are not separate and distinct from the losses claimed against HSSL by Herald and Alpha, with the result that Primeo's claim in this action should be barred by the rule against recove1y of reflective loss. B. The Madoff Ponzi Scheme 7. In order to put the issues raised in this action into their proper context, it is necessary to describe the nature and extent of the Madoff Ponzi scheme which first came to light on 11 December 2008. The evidence before the Court comprises an expert report prepared by Louis J. Freeh ("Judge Freeh") which is based upon inf01mation gathered from numerous public sources, including the report of the Office of Investigations of the Securities and Exchange Commission (referred to as "the OIG Report")1 and the Dubinsky Report2. Judge Freeh is a lawyer who began his career as a special agent of the Federal Bureau of Investigation. He served as an assistant US Attorney for the Southern District of New York and in 1991 was appointed as a judge of the US District Court for the Southern District of New York. In 1993 he was appointed as Director of the Fecl_er11l 1 Securities and Exchange Commission, Office oflnvestigations' Report No. OIG-509 entitled Inve$1ig;t(~itoJ,,w_ Failure of the SEC to UncoverBernard Madof/'$Ponzi Scheme, published on August 31, 2009. ! if'>,-/ - · ' - if ( ,... ,\, '· ;'_,__.i • 1 l\ ·,c, ., · ', . ,_.,. 2 The expert evidence of Bruce G. Dubinsky dated 26 January 2012 and prepared for the purposes o(an 1j,cti91i·: _:::' before the US District Court for the Southern District of New York between Irvin H. Picard, Trustee fcir''tl)e:,.. '·· · Liquidation of Bernard L. Madoff Securities LLC as plaintiff and Saul B. Katz et al. as defendants. · ___·__ _ _ _:•'• 170823 In the matter of Primeo Fund and Bank of Bermuda(Cayman) Limited (1) HSBCSecurities Sen-ices (Luxembour)SA - FS!;>3doj'2IJJ 3· ''.\' (AJJ)Judgment- 4 Bureau of Investigation and served in this office until 2001. Following a period as general counsel for a national bank, Judge Freeh established his own business as a risk management consultant. In these various capacities, he has acquired enormous experience of investigating, prosecuting and adjudicating upon serious financial fraud matters. He has provided the Court with a description of Madoffs business and an analysis of his fraud which I found to be both authoritative and helpful. 8. The events giving rise to this claim began at the end of 1993, by which time Madoffwas already a well-known and respected figure in New York's financial services industry. His securities business had been founded and registered with the Securities and Exchange Commission ("SEC") as a broker-dealer in 1960. He established his business as a sole proprietorship under the name Bernard L. Madoff Investment Securities and it was not incorporated until 1 January 2001, whereupon he became the company's sole shareholder and director. I shall refer to it as "BLMIS" without distinguishing between the sole proprietorship and the company. It was one of the five original broker-dealer members of Nasdaq Stock Market and from 1979 Madoff served on the National Association of Securities Dealers ("NASD") committee that helped create an electronic trading platform linking the regional stock exchanges with the New York Stock Exchange ("NYSE"). Madoff served as a director of numerous industry bodies.

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