Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and HSBC Securities Services (Luxembourg) Sa

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 23 August 2017
• Court: Grand Court (Cayman Islands)
• Date: 23 August 2017

Grand Court, Financial Services Division

(Jones, J.)

PRIMEO FUND (in official liquidation)

and

BANK OF BERMUDA (CAYMAN) LIMITED and HSBC SECURITIES SERVICES (LUXEMBOURG) SA

T. Smith, Q.C., R. Fisher and R. Amey for the plaintiff;

R. Gillis, Q.C., W. Willson, T. Brown and S. Gilson for the defendants.

Cases cited:

(1) AIC Ltd. v. ITS Testing Servs. (UK) Ltd. (“The Kriti Palm”), [2006] EWCA Civ 1601; [2007] 1 All E.R. (Comm) 667; [2007] 1 Lloyd’s Rep. 555; [2007] 2 CLC 223, considered.

(2) Alico Life Intl. Ltd. v. Thema Intl. Fund plc, [2016] IEHC 363, applied.

(3) Arcadia Group Brands Ltd. v. Visa Inc., [2015] EWCA Civ 883; [2015] Bus. L.R. 1362; [2015] 2 CLC 437; [2015] 5 C.M.L.R. 16, applied.

(4) Barclays Bank Ltd. v. Fairclough Building Ltd. (No. 1), [1995] Q.B. 214; [1994] 3 W.L.R. 1057; [1995] 1 All E.R. 289; [1994] CLC 529, followed.

(5) Bilta (UK) Ltd. v. Nazir, [2015] UKSC 23; [2016] A.C. 1; [2015] 2 W.L.R. 1168; [2015] 2 All E.R. 1083; [2015] 2 All E.R. (Comm) 281; [2015] 2 Lloyd’s Rep. 61; [2015] BCC 343; [2015] 1 BCLC 443, considered.

(6) Brazilian Rubber Plantations & Estates Ltd., In re, [1911] 1 Ch. 425; (1911), 80 L.J. Ch. 221; 103 L.T. 697; 27 T.L.R. 109, followed.

(7) Capita (Banstead 2011) Ltd. (formerly known as FPS Group Ltd.) v. RFIB Group Ltd., [2015] EWCA Civ 1310; [2016] Q.B. 835; [2016] 2 W.L.R. 1429; [2016] 2 BCLC 32; [2016] 1 CLC 105; [2016] P.N.L.R. 17, followed.

(8) Cave v. Robinson Jarvis & Rolf, [2002] UKHL 18; [2003] 1 A.C. 384; [2002] 2 W.L.R. 1107; [2002] 2 All E.R. 641; [2003] 1 CLC 101; (2002), 81 Con. L.R. 25; [2002] P.N.L.R. 25, applied.

(9) City Equitable Fire Ins. Co. Ltd., In re, [1925] Ch. 407; [1924] All E.R. Rep. 485; [1925] B. & C.R. 109; (1925), 94 L.J. Ch. 445; 133 L.T. 520; 40 T.L.R. 853, applied.

(10) County Ltd. v. Girozentrale Secs., [1996] 3 All E.R. 834; [1996] 1 BCLC 653, referred to.

(11) Forsikringsaktieselskapet Vesta v. Butcher, [1989] A.C. 852; [1989] 2 W.L.R. 290; [1989] 1 All E.R. 402; [1989] 1 Lloyd’s Rep. 331, applied.

(12) Galoo Ltd. v. Bright Grahame Murray, [1994] 1 W.L.R. 1360; [1995] 1 All E.R. 16; [1994] BCC 319, referred to.

(13) Giles v. Rhind, [2002] EWCA Civ 1428; [2003] Ch. 618; [2003] 2 W.L.R. 237; [2002] 4 All E.R. 977; [2003] BCC 79; [2003] 1 BCLC 1, referred to.

(14) Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465; [1963] 3 W.L.R. 101; [1963] 2 All E.R. 575; [1963] 1 Lloyd’s Rep. 485, referred to.

(15) India (Republic) v. India SS. Co. Ltd. (No. 2) (“The Indian Endurance”), [1998] A.C. 878; [1997] 3 W.L.R. 818; [1997] 4 All E.R. 380; [1998] 1 Lloyd’s Rep. 1; [1997] CLC 1581; [1998] I.L.Pr. 511, referred to.

(16) Johnson v. Gore Wood & Co., [2002] 2 A.C. 1; [2001] 2 W.L.R. 72; [2001] 1 All E.R. 481; [2001] 1 BCLC 313, followed.

(17) King v. Victor Parsons & Co., [1973] 1 W.L.R. 29; [1973] 1 All E.R. 206; [1973] 1 Lloyd’s Rep. 189, referred to.

(18) Marks & Spencer plc v. BNP Paribas Secs. Servs. Trust Co. (Jersey) Ltd., [2015] UKSC 72; [2016] A.C. 742; [2015] 3 W.L.R. 1843; [2016] 4 All E.R. 441; (2015), 163 Con. L.R. 1; [2016] 1 P. & C.R. 13; [2016] L. & T.R. 8, considered.

(19) Mears Ltd. v. Shoreline Housing Partnership Ltd., [2015] EWHC 1396 (TCC), dicta of Akenhead, J. considered.

(20) Meridian Global Funds Management Asia Ltd. v. Securities Commn., [1995] 2 A.C. 500; [1995] 3 W.L.R. 413; [1995] 3 All E.R. 918; [1995] 2 BCLC 116; [1995] BCC 942, referred to.

(21) Nykredit Mortgage Bank plc v. Edward Erdman Group Ltd. (No. 2), [1997] 1 W.L.R. 1627; [1998] 1 All E.R. 305; [1998] Lloyd’s Rep. Bank. 39; [1998] CLC 116; [1998] 1 Costs L.R. 108; [1998] P.N.L.R. 197, referred to.

(22) Perry v. Day, [2004] EWHC 1398 (Ch); [2005] BCC 375; further proceedings, [2004] EWHC 3372 (Ch); [2005] 2 BCLC 405, considered.

(23) Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd., [1995] EMLR 472, dicta of Lord Bingham, M.R. considered.

(24) Prudential Assur. Co. Ltd. v. Newman Indus. Ltd. (No. 2), [1982] Ch. 204; [1982] 2 W.L.R. 31; [1982] 1 All E.R. 354, considered.

(25) Red Sea Tankers Ltd. v. Papachristidis (“The Hellespont Ardent”), [1997] 2 Lloyd’s Rep. 547, dicta of Mance, J. considered.

(26) Sagicor Gen. Ins. (Cayman) Ltd. v. Crawford Adjusters (Cayman) Ltd., 2011 (1) CILR 130, considered.

(27) Shaker v. Al-Bedrawi, [2002] EWCA Civ 1452; [2003] Ch. 350; [2003] 2 W.L.R. 922; [2002] 4 All E.R. 835; [2003] BCC 465; [2003] 1 BCLC 157; [2003] WTLR 105; (2002–03), 5 ITELR 429, dicta of Peter Gibson, L.J. considered.

(28) Weavering Macro Fixed Income Fund v. Peterson, 2015 (1) CILR 45, applied.

(29) Williams v. Fanshaw Porter & Hazelhurst, [2004] EWCA Civ 157; [2004] 1 W.L.R. 3185; [2004] 2 All E.R. 616; [2004] Lloyd’s Rep. I.R. 800; [2004] P.N.L.R. 29, dicta of Mance, L.J. considered.

Legislation construed:

Limitation Law (1996 Revision), s.7:

“An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.”

s.37(1): “Subject to subsection (3), where in the case of any action for which a period of limitation is prescribed by this Law . . .

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant . . .

the period of limitation does not begin to run until the plaintiff has discovered, or could with reasonable diligence have discovered, the fraud, concealment or mistake.”

s.37(2): “For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

Torts (Reform) Law (1996 Revision), s.8(1): The relevant terms of this sub-section are set out at para. 313.

Financial Services — fund service providers — administrator — breach of duty — grossly negligent to prepare NAV on basis of single source of information — in normal circumstances, hedge fund administrator to reconcile information regarding existence of client’s assets with information from independent service provider — no implied term in administration agreement for administrator to independently verify information, though implied term to exercise reasonable care and skill

Financial Services — fund service providers — custodian — breach of duty — custodian not normally required to verify information received from client’s professional services provider — reasonably competent global custodian would require sub-custodian who also acts as investment manager and broker-dealer (BLMIS) to operate separate client accounts and provide monthly statements or notifications — failure to require such measures negligent breach of duty

Companies — derivative action — reflective loss — principle applies when company suffers loss following breach of duty — shareholder barred from suing to make good diminution in value of shareholding when reflective of loss suffered by company unless loss separate and distinct — feeder fund and master fund in analogous position to company and shareholder following breach of duty by professional service provider

The plaintiff commenced proceedings against the defendants seeking damages.

The plaintiff (Primeo) was one of many hedge funds, the so-called Madoff feeder funds, the assets of which had been 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, acting by its official liquidators, brought the present action for damages of some US$2 bn. for breaches of contract against its former administrator, Bank of Bermuda (Cayman) Ltd. (“BoB Cayman”), and its former custodian, HSBC Securities Services (Luxembourg) SA (formerly known as Bank of Bermuda (Luxembourg) SA) (“BoB Lux”). The Bank of Bermuda group had been taken over by HSBC in 2004.

Primeo had been promoted, marketed and managed by Bank Austria, through a special purpose vehicle, BA Worldwide Fund Management Ltd. BA Worldwide was appointed as Primeo’s investment adviser, and it appointed Eurovaleur as sub-adviser. Pioneer took over as investment adviser in 2007.

Under the 1993 custodian agreement, Primeo appointed BoB Lux as its custodian. Clause 6(B) provided that—

“the Custodian shall upon receipt of Proper Instructions, open accounts with brokers or other intermediaries in its name on behalf of the Company or in the name of the Company and may make such arrangements concerning the trading authorisations and other forms of authority with respect to such account or accounts as it deems advisable. The Custodian shall not be responsible for the safekeeping of Securities or cash deposited with or remaining in any such account or accounts and will not be liable for any loss occasioned by reason of the liquidation, bankruptcy or insolvency of such broker or other intermediary.”

Clause 16(B) provided: “In performing its duties hereunder the Custodian may appoint such agents, sub-custodians and delegates as it might think fit to perform in whole or in part any of its duties and discretions.”

From its inception, Primeo placed funds for investment with BLMIS. BLMIS had a reputation as a large, successful player in the market and was engaged in three distinct areas of business, market making, proprietary trading and investment management. The first two formed a real business engaged in genuine securities trading on a very large scale but the investment advisory business was wholly fictitious. As discovered in 2008, it never engaged in any securities trading or investment management activities on behalf of its clients. Customized software enabled it to generate tens of thousands of fake trading confirmations every month and allocate a pro rata share of them to each customer account. They were able to verify that the prices reflected in the fictitious trades were within the actual trading price range for the securities on the day in question. The fake reports...