Redemptions From Fraudulent Investment Funds

The collapse of an investment fund affected by a fraud will often lead to disputes between the investors who were paid out before the discovery of the fraud, the investors who gave notice to redeem prior to the discovery of the fraud, and the investors remaining in the fund when it collapsed. Following the recent decision of the Privy Council in SEB -v- Weavering Macro Fixed Interest Fund [2019] UKPC 36, given on 29 July 2019, it is an appropriate time to review the law in this area and to examine this decision alongside earlier decisions of the Privy Council given in the context of investment funds affected by fraud.

The importance of the Articles: Redemption process

The first decision of the Privy Council on redemption from an investment fund was not a fraud case, but arose out of the global financial crisis. In Culross Global SPC Limited -v- Strategic Turnaround Master Partnership Limited ([2010] UKPC 33) the issue was whether the redeeming investor of a Cayman fund was a current creditor at the time it had issued a winding-up petition against the fund. The answer depended upon whether the fund was able to suspend payment of redemption proceeds after the redemption date had passed. The Privy Council held that the power of a fund to suspend payment was determined by the true construction of the articles of association of the fund, read together with such other contractual documents as were incorporated or referred to therein. Upon the proper construction of the articles in that case there was no such entitlement. It was suggested by the Privy Council that clear words would have been required before the articles could be read as entitling the fund retrospectively to reverse or alter the effect of the passing of the redemption date pursuant to a valid redemption notice.

The terms of the articles will determine the time at which redemption has occurred and the consequent rights and obligations regarding payment of the redemption proceeds.

The significance of this decision is that it confirms that redemption is governed by the terms of the articles, and it will be to the articles that one should look for a solution to the respective rights of competing investors upon insolvency. That competition is between investors claiming to be creditors by reason of having redeemed prior to insolvency and the investors who have not redeemed.

The importance of the Articles: NAV determination

Fairfield Sentry Limited -v- Migani ([2014] UKPC 9) concerned a BVI fund which was a feeder fund for the infamous Bernard

L. Madoff Investment Securities LLC ("BLMIS") believed to have been the largest Ponzi scheme in history. The liquidators of a BVI fund sought to recover redemption payments which had been made to investors on the basis of NAVs which turned out to have been mistaken because they were calculated before the fraud was discovered. Whether the liquidators were entitled to recover those sums in restitution depended upon whether the Fund was bound by the terms of terms of the articles to have made the payments which it had made. The answer to that question in turn depended on whether the effect of the articles was that the Fund was obliged to pay the true NAV per share (ascertained in the light of the true facts as they subsequently turned out to be after discovery of the Madoff fraud) or the NAV per share as calculated at the time of redemption by the Directors. The Privy Council held that the whole scheme of share purchase and redemption set out in the articles depended upon the price being definitively ascertained by the Dealing Day and known to the parties shortly thereafter. Anything else would be unworkable...

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