Fairfield Sentry (Fairfield) was the largest feeder fund into the Ponzi scheme perpetrated by Bernard L. Madoff Investment Securities LLC. Following BLMIS’s collapse, Fairfield’s liquidators brought restitutionary claims against a number of investors (Redeemers), who redeemed some or all of their shares in Fairfield before December 2008. The liquidators sought to recover the amounts paid, which they argued were paid out in the mistaken belief that the assets were as stated by BLMIS, when there were in fact no such assets; instead, the liquidators intended to make a rateable distribution to all members, whether or not they had redeemed prior to December 2008.

1. None of the documents relied upon by the Redeemers constituted a “certificate” within the meaning of Fairfield’s articles; and
2. In surrendering their shares and the rights attached, the Redeemers had given good consideration for the payments, meaning the liquidators were unable to recover these.

The decision was upheld by the Eastern Caribbean Supreme Court of Appeal and subsequently appealed to the Privy Council.

The Privy Council held that Fairfield’s claims depended on whether it was bound by the redemption terms to pay either: (i) the true NAV per share, ascertained in the light of information which subsequently became available about the frauds, or (ii) the NAV per share determined by the directors at the time of redemption. It concluded that “the whole of this scheme depends upon the price being definitively ascertained by the [date of redemption of shares] and known to the parties shortly thereafter. It is unworkable on any other basis.”  Accordingly, the Court held that the NAV per share on which the Subscription and Redemption Price were based must be the one determined by the directors at the time. The reference to a “certificate” must be read as referring to the ordinary transaction documents recording the NAV per share or the Subscription or Redemption Price which will necessarily be generated and communicated to the member at the time, “not to some special document issued at the discretion of the Directors.”  

The Court concluded that the above documents plainly constituted “certificates” within their ordinary meaning and there was nothing in the articles which set out any further formal requirements.

The Privy Council found in favour of the Redeemers, allowing the appeal on the issue of certificates (save as to certain website information) and dismissing the appeal on the question of good consideration.

This is an important decision highlighting the need for finality with respect to the redemption of shares in funds and has provided welcome clarity for investors. Harneys acted for the successful parties on the appeal.