NAV And Other Financial Determinations: Implications Of Fairfield Sentry Limited (In Liquidation) V Migani And Others

In this alerter, we discuss the wider implications of the recent Privy Council decision in Fairfield Sentry Limited (In Liquidation) ("Fairfield") v Migani and others (the "Defendants")1. The court decided that investors were entitled to keep redemption amounts, even though they were calculated on the basis of determinations of NAV which used data that was subsequently found to be fictitious.

Whilst the case is directly applicable to investments in funds, it has indirect application also to fund-linked derivatives and fund-linked notes linked to fund assets and has potential wider application in CDOs and other transaction structures with market value triggers. It may influence how provisions relating to determinations are drafted in transaction documentation in the future.

The facts

Between 1997 and 2008, the BVI mutual fund Fairfield placed investor funds with Bernard L. Madoff Investment Securities LLC ("BLMIS"). Investors participated indirectly in these placements by subscribing for shares in Fairfield at a price dependent on Fairfield's net asset value per share ("NAV") and were entitled to withdraw funds by redeeming their shares under the provisions of Fairfield's Articles of Association (the "Articles").

In December 2008, after BLMIS was discovered to be a Ponzi scheme, the directors of Fairfield (the "Directors") suspended the...