Madoff Securities International Ltd ((in Liquidation)) v Stephen Raven and Others
| Jurisdiction | England & Wales |
| Judge | The Hon. Mr Justice Popplewell,THE HON MR JUSTICE FLAUX,The Honourable Mr Justice Flaux |
| Judgment Date | 18 October 2013 |
| Neutral Citation | [2013] EWHC 3147 (Comm),[2011] EWHC 3102 (Comm) |
| Docket Number | Case No: 2010 Folio 1468,Case No: 2010 FOLIO 1468 |
| Court | Queen's Bench Division (Commercial Court) |
The Honourable Mr Justice Flaux
Case No: 2010 Folio 1468
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Pushpinder Saini QC, Shaheed Fatima, Robert Weekes and Tom Richards (instructed by Taylor Wessing LLP) for the Claimants
Terence Mowschenson QC and Sebastian Allen (instructed by Olswang LLP) for the Ninth and Thirteenth Defendants
Hearing dates: 14 to 16 September 2011
Introduction and background
Over a period of some twenty years until he confessed his fraud to US federal agents in December 2008, Bernard Madoff perpetrated a massive multi billion dollar fraud on investors by way of an elaborate Ponzi scheme. His New York company, Bernard L. Madoff Investment Securities LLC ("BLMIS") (of which the second claimant is the Liquidation Trustee in New York) had three divisions, investment advisory, market-making and proprietary trading. Mr Madoff purported to run the investment advisory business as a legitimate and highly successful business with impressive returns, in which high net worth individuals and, latterly, corporate investment funds invested.
However, the reality was that the investment advisory business made no material investments at all. Clients' money was pooled in a single account at JP Morgan and treated by Mr Madoff and his associates as his own. He would pay "profits" or "redemptions" to clients ostensibly by way of return on their investment, but in reality this consisted of other clients' money, the Ponzi scheme being funded by a constant influx of funds. However, in December 2008, requests for redemptions by customers nervous at the financial crisis and the collapse of Lehman Brothers exceeded the amount of funds deposited by new customers and the scheme collapsed. The customers of the investment advisory business had between them lost about US$ 19.5 billion.
The first claimant, Madoff Securities International Limited ("MSIL") was an English registered company incorporated in 1983 of which Mr Madoff was 99% shareholder, the remaining 1% being held by his brother Peter, the sixth defendant, who seems to have acted in accordance with Mr Madoff's instructions. The first five defendants were the English directors of MSIL. The sixth to eighth defendants (Mr Madoff's brother and two sons) were also directors of MSIL, although not domiciled in the United Kingdom. The ostensible purpose of MSIL was to hold a seat on the London International Financial Futures Exchange. It did carry out some legitimate trading activities but its primary function was to facilitate the concealment of Mr Madoff's fraud and the distribution of its proceeds. In particular, Mr Madoff used MSIL to launder stolen money and as a vehicle for making payments of stolen money.
The ninth defendant, Mrs Sonja Kohn, is Austrian but has lived and conducted her affairs internationally, through a series of corporate vehicles including the eleventh and thirteenth defendants. I will refer collectively to her and her companies as "the Kohn defendants". She met Mr Madoff in the 1980s and began to introduce investors to him, specifically those who invested via corporate investment funds or feeder funds, with many of which she had a connection. The monies invested in his ostensible investment advisory business through her introductions amounted to billions of dollars.
In return for effecting these introductions, over the years, the Kohn defendants received tens of millions of dollars directly from BLMIS and indirectly via MSIL, which monies were of course part of the proceeds of the Madoff fraud. It is important to note at the outset that, despite some serious allegations levelled by the second claimant against Mrs Kohn in various public pronouncements he has made, it is no part of the claimants' pleaded case that Mrs Kohn or any of the other Kohn defendants was actually a party to Mr Madoff's fraud or that she or any of them was or ought to have been aware of it.
The monies received amounted to at least US$35 million from BLMIS and at least £13.9 million via MSIL. MSIL did not have sufficient funds of its own to make these payments, which accounted for about a third of its overheads, but was dependent upon subventions from BLMIS, with instructions from Mr Madoff to the directors to make the payments to various entities, including the Kohn defendants. Over the years, the payments were made to a number of Mrs Kohn's corporate vehicles, variously the tenth to thirteenth defendants.
The detail of the payments does not matter for the present applications, save to note that, although the payments to the Kohn defendants are said by those defendants to be in the nature of commissions for the introduction of customers, they were never once described as such in any of the invoices issued by her companies. Instead the invoices refer to "services", "research, analysis and consulting", "market researches", "updating" "strategic consulting and market researches" and, in the case of the eleventh defendant only, "strategies and strategic alliances".
Although it is not alleged that Mrs Kohn was complicit in Mr Madoff's fraud, nonetheless, the claimants' pleaded case (to which I refer in more detail below) is that the payments were illegitimate payments amounting to secret kickbacks to Mrs Kohn for introducing money into Mr Madoff's scheme and that Mrs Kohn knew that the real reason for the payments was secretly to pay her for introducing money into the scheme and that the various invoices were sham documents intended to hide the true nature of the payments to the Kohn defendants.
According to the defences of the directors of MSIL, they did not know or believe that the payments MSIL made to the Kohn defendants were by way of commission for introductions. Rather, they say the payments were made on Mr Madoff's instruction in respect of the research Mrs Kohn provided. Box loads of purported research were delivered by her to MSIL in London and to BLMIS in New York, yet, save on a couple of isolated occasions, MSIL had not requested research from Mrs Kohn. It is contended by the claimants that the research was either useless or at least went unused. Furthermore, the claimants point out that it is surprising, to say the least, given the volume of alleged research provided, that there was no formal contract between Mrs Kohn and MSIL for the provision of research.
The allegation that the research was some sort of sham to disguise the true nature of the payments is strenuously denied by Mrs Kohn in her witness statements served in relation to the various applications which have been issued. She contends that she did provide valuable research to MSIL at its request, but then says in her third witness statement: "Payments were not primarily for research but were commissions for introductions made". Part of the difficulty with that explanation is that none of the invoices breaks down the amount demanded into "research" and "commission", indeed commission is not mentioned at all.
Mrs Kohn then goes on to say: "I was happy to provide the research to Madoff as part of my client management and in order to develop my business relationship with him" which, as the claimants point out, seems to be an acceptance that she was providing or would have provided the research for free, which makes it all the more puzzling that the invoices (or so many of them) appear to be for research and the like but never mention commission.
No real explanation is currently put forward by Mrs Kohn as to why, if, as she contends, the payments were essentially legitimate payments of commission for the introduction of customers, the invoices did not simply say that the payments requested were for "commission" and why it was necessary to adopt a whole series of descriptions, none of which made reference to commission. It seems to me that this is an area which cries out for a proper explanation from Mrs Kohn, which has currently not been forthcoming.
However, given the impossibility of deciding contested issues of fact at an interlocutory stage, I do not propose to deal in more detail with the underlying facts. For the purposes of these applications, I simply proceed on the basis that the claimants have an arguable case that Mr Madoff and Mrs Kohn disguised the true nature and purpose of the payments to the Kohn defendants.
The present applications
In the time available at the hearing on 14–16 September 2011, the court heard two of the applications which have been issued by the parties: (1) the application by Mrs Kohn and the thirteenth defendant to set aside the proceedings by the second claimant against them on the grounds of want of jurisdiction and (2) the application by the first claimant, MSIL, for a freezing injunction and/or a proprietary injunction against Mrs Kohn and the thirteenth defendant. Before considering the detail of the applications, it is necessary to set out at least an overview of the claimants' pleaded case.
The pleaded case
As is clear from the Particulars of Claim, each of the claimants has quite separate and distinct claims, although there is an obvious factual overlap between the claims in so far as they are pursued against the Kohn defendants, not least because ultimately all the money paid to the Kohn defendants emanated...
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