Cayman Islands Clawbacks: Another Brick In The Wall

The recent decision of the Cayman Islands Grand Court in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund (unreported, 17 November 2014) is a further reminder of the serious challenges associated with bringing clawback actions against "innocent" third party fund investors who have received redemption proceeds from a Cayman Islands fund in the period leading up to the fund's collapse. It is a decision which should be welcomed by fund investors who are seeking certainty in this area - and in that regard, it is a useful companion-piece to the Privy Council's recent decision in Fairfield Sentry v Migani and others.1

DD Growth 2X ("2X Fund") was an open-ended feeder fund incorporated in the Cayman Islands. As with many funds, it encountered serious difficulties in late 2008 and early 2009, and was faced with large redemptions. 2X Fund's difficulties were compounded as a result of the NAV having been massively overstated as a result of a fraud: in order to cover up losses, the manager had acquired certain debt instruments (the "Asseterra bonds") for cents on the dollar, but had then reported them in the NAV at face value (for example, one bloc had been purchased for $5 million, but then marked in the NAV at $190 million). As the Court put it, the result was that the fund in effect became a Ponzi Scheme.

The 2X Fund had a number of investors who redeemed in December 2009. There was no suggestion that any of the redeeming investors knew anything about the fraud. Some of those redeemers, including RMF, were paid in part, while others received nothing. There was no suspension of NAV or of redemptions. The 2X Fund was then wound up in around May 2009 and the full extent of the fraud was uncovered.

The 2X Fund liquidators threatened a clawback action against RMF. RMF sued for a negative declaration and was met with a...