Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another

JurisdictionUK Non-devolved
JudgeLord Kitchin,Lord Sales
Judgment Date09 August 2021
Neutral Citation[2021] UKPC 22
Docket NumberPrivy Council Appeal No 0089 of 2019
CourtPrivy Council
Primeo Fund (in Official Liquidation)
Bank of Bermuda (Cayman) Ltd and another
(Respondents) (Cayman Islands)

[2021] UKPC 22


Lord Reed

Lord Hodge

Lord Lloyd-Jones

Lord Kitchin

Lord Sales

Privy Council Appeal No 0089 of 2019

Privy Council

Trinity Term

From the Court of Appeal of the Cayman Islands


Tom Smith QC

Richard Fisher QC

Robert Amey

(Instructed by Mourant Ozannes (Cayman Islands))


Richard Gillis QC

William Willson

Toby Brown

Simon Gilson

(Instructed by Campbells (Cayman Islands))

Heard on 20 and 21 April 2021

Lord Sales

Lord Kitchin AND


This appeal relates to loss suffered as a result of the Ponzi scheme operated by Bernard Madoff (“Mr Madoff”). The appeal gives rise to a number of issues. The Board gave directions to hear and determine one discrete issue first, which is concerned with the operation of the rule in company law which prevents recovery by a shareholder of loss which reflects loss suffered by the company in which they are invested (“the reflective loss rule”). Another hearing will follow to deal with the other issues on the appeal, including in relation to causation, limitation and contributory negligence.


For the present hearing, the parties are agreed that Cayman Islands law regarding the reflective loss rule is the same as English law, which is to say the law as determined by the majority in Marex Financial Ltd v Sevilleja (All Party Parliamentary Group on Fair Business Banking intervening) [2020] UKSC 31; [2021] AC 39 (“ Marex”).

Factual background

The appellant (“Primeo”), a Cayman Islands company now in official liquidation, carried on business from 1994 as an open-ended mutual investment fund. It raised money from investors (who subscribed for shares in it) which it then invested. Primeo was promoted, marketed and managed by Bank Austria AG (“Bank Austria”) as a fund of funds to provide Bank Austria's customers with access to international investment funds and exposure to the US equity market.


The respondents are professional service providers. On 21 December 1993 the second respondent (“R2”) was appointed as Primeo's custodian and as its administrator pursuant to separate custody and administrator agreements. These agreements were superseded in 1996 when R2 was appointed as custodian for Primeo under an agreement dated 19 December 1996 (“the 1996 Custodian Agreement”) and the first respondent (“R1”) was appointed as administrator for Primeo under an agreement dated 19 December 1996 (“the 1996 Administration Agreement”). However, again on 19 December 1996, R1 and R2 entered into a delegation agreement whereby R1 delegated most of its duties under the 1996 Administration Agreement to R2. The result was that from that time both the custodian function and the administrator function were in practice carried out by R2.


The 1996 Custodian Agreement conferred, by clause 16(B), on R2, as custodian, the power to appoint such sub-custodians as it might think fit, provided that “the Custodian will use due care and diligence in the appointment of suitable sub-custodians and must be satisfied for the duration of the sub-custody agreements as to the ongoing suitability of the sub-custodians to provide custodial services to the Company [Primeo] … [and] will require the sub-custodian to implement the most effective safeguards available under the laws and commercial practices of the sub-custodian's jurisdictions in order to ensure the most effective protection of the Company's assets”. These duties have been referred to in these proceedings as the appointment duty, the ongoing suitability duty and the most effective safeguards duty. In addition, clause 6(A) imposed on the custodian a duty, subject to sub-clauses (B) and (C), to “record and hold in a separate account in its books all Securities received by it from time to time and shall arrange for all Securities to be deposited in the Custodian's vault or otherwise held by or to the order of the Custodian as it may think proper for the purpose of providing for the safekeeping thereof”.


Under the 1996 Administration Agreement R1 was appointed to provide a Secretary and act as Registrar and Accountant for Primeo. Clause 4 set out a series of duties to which R1 was subject and these included a duty to determine in the name and on behalf of Primeo on each valuation day the net asset value (NAV) upon which Primeo and its shareholders could properly rely for the purposes of transacting subscriptions and redemptions. There was no dispute that it was an implied term of the Administration Agreement that, in calculating NAVs, R2 had to exercise reasonable skill and care. However, clause 9.2 relieved R1 from liability for any act or omission in the course of or in connection with the services provided under the agreement in the absence of gross negligence or wilful default on the part of R1 or its servants, agents or delegates. Clause 9.5 imposed on R1 an obligation to use reasonable endeavours to verify pricing information supplied by the Investment Adviser.


From Primeo's inception it placed a proportion of its funds with Bernard L Madoff Investment Securities LLC (“BLMIS”) for investment (“the direct BLMIS investments”).


BLMIS was the vehicle by which Mr Madoff carried on his Ponzi scheme. BLMIS purported to operate managed accounts for investors, such as Primeo, which placed funds with it for investment, and the investor had a contractual right for the delivery-up of equivalent securities or cash to those recorded in the managed account. BLMIS purported to adopt an investment strategy involving listed securities, treasury bills and cash. In practice, BLMIS almost invariably reported a move at the month end into holdings of US treasury bills. Periodically BLMIS would purport to carry out valuations of the underlying assets supposedly held by it and if an increase in value was reported, that would be reflected in the purported value of the investments held by it for its clients so that they appeared in that way to be receiving an appropriate share of the profits purportedly generated.


In January 1994 and again in February 1996 Primeo entered into a package of agreements (respectively the 1994 and 1996 Brokerage Agreements) with BLMIS pursuant to which Primeo opened two managed accounts with BLMIS, which functioned as Primeo's investment manager, broker and custodian (or, in due course, sub-custodian) in relation to those accounts. BLMIS had a complete discretion to buy and sell listed securities and financial instruments, the value of which would be reflected in the account in the manner we have described. BLMIS was obliged to report to Primeo on a monthly basis and to allow it to redeem on demand the investments held by it according to their value as reported to Primeo.


The courts below held that prior to August 2002, BLMIS was itself the custodian for Primeo in respect of the direct BLMIS investments but that in August 2002 when a sub-custody agreement (“the 2002 Sub-Custody Agreement”) was concluded between R2 and BLMIS, R2 became custodian of those investments, with BLMIS as its sub-custodian.


Primeo increased its investment in BLMIS and the direct BLMIS investments came to constitute the major part of its investment portfolio. In addition, Primeo also invested funds it received from its clients indirectly in BLMIS. It did this by buying shares in two feeder funds funnelling assets for investment into BLMIS, called Herald Fund SPC (“Herald”), a Cayman-domiciled fund, and Alpha Prime Fund Limited (“Alpha”), a Bermuda-domiciled fund. Where Primeo invested funds in Herald or Alpha it received shares in those companies; in turn, Herald and Alpha placed their funds with BLMIS for investment, and Herald and Alpha were valued according to the value of the investments supposedly acquired and held by BLMIS using those funds. Herald and Alpha placed all of their assets for investment with BLMIS.


Primeo's shares, as issued to investors, were valued periodically in line with Primeo's NAV and this set the price at which they could be redeemed when investors wished to disinvest. Primeo's NAV, as stated from time to time, was audited by its auditors Ernst & Young (“EY”). This was assessed, first, by reference to the purported value of its direct investments in BLMIS, which reflected the value of the equities and financial instruments supposedly held for it by BLMIS. For Primeo's indirect investments in BLMIS, Primeo's NAV was assessed by reference to the supposed value of the shares in Herald and Alpha which it owned, which was derived from their respective NAVs which, in similar manner, were arrived at by reference to the supposed value of their direct investments with BLMIS.


Over time, Primeo increased the proportion of its fund which was invested with BLMIS either directly or indirectly until by 1 May 2001 the whole of its fund was invested in this way. By April 2007 approximately 90% of Primeo's investment with BLMIS was direct, with the balance being indirect through Herald and Alpha.


On 1 May 2007 Primeo's direct investments with BLMIS were restructured. Primeo's direct BLMIS investments were transferred to Herald in consideration for new shares in Herald (“the Herald Transfer”). The change was effected by Primeo assigning its rights under its managed accounts with BLMIS with a reported value of US$465,824,061 in return for newly issued shares in Herald having an equivalent subscription price assessed by reference to Herald's NAV at the assignment: the transaction is described in Pearson v Primeo Fund (No 2) [2020] UKPC 3, para 10. From that date, Primeo no longer had any direct investments with BLMIS; all its investments in BLMIS thereafter were indirect investments via Herald (97.5% of the value of Primeo's fund) or Alpha (2.5% of that value).


At all material times...

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