Full hearing cleared relating to jailed US fraudster Bernie Madoff's Ponzi scheme

US fraudster Bernie Madoff. File image

The Supreme Court has cleared the way for a full hearing of a claim concerning multi-million losses related to the Ponzi scheme run by jailed US fraudster Bernie Madoff.

Defender Ltd, a British Virgin Islands (BVI) registered investment fund, had sued HSBC Institutional Trust Services (Ireland) Ltd (HSBCITS), of Grand Canal Square, Dublin, but the case will proceed against HSBC France on foot of a consent order made last May.

The High Court had expressed strong reservations over estimates the case could run for five months but, in his Supreme Court judgment on Thursday focussing on case management issues, Mr Justice Peter Charleton noted the UK has "cut to a fraction" the time taken for complex litigation.

Judges are not bound by parties' estimates of time required for litigation and judges here need to be aware that the same tools for cutting time for complex litigation exist here and "should be deployed", he said.

Defender appealed to the Supreme Court after a late 2018 High Court ruling on a preliminary issue cast doubt on the case proceeding in full.

In the main judgment of the five judge Supreme Court on Friday, Mr Justice Donal O'Donnell allowed the appeal which centred on interpretation of provisions of the Civil Liability Act 1961 (CLA), particularly section 17 concerning claims involving "concurrent wrongdoers".

In its action, Defender alleges negligence and breach of contract regarding HSBCITS' alleged role as a custodian of funds lost as a result of fraud by its alleged sub-custodian Bernie L Madoff Securities LLC.

That company was operated by Madoff, who was involved in a €65bn Ponzi scheme in the US.

HSBCITS previously joined Reliance Management BVI Ltd and Reliance International Research LLC as third parties. It alleges those two companies, as Defender's investment manager, had full knowledge of all risks associated with funds being entrusted to the Madoff company.

The preliminary legal issue arose from HSBCITS' reliance in its defence on Section 17.2 of the CLA concerning claims involving "concurrent wrongdoers".

The High Court's Mr Justice Michael Twomey said that issue arose because Defender settled its claim for the return of $540m with Madoff's company for at least 75% of that sum and is suing HSBCITS as an alleged concurrent wrongdoer with Madoff for the balance of its loss.

HSBCITS claimed Defender will recover a lot more than 75% for reasons including the trustee in the Madoff liquidation had publicly said recovery could be 100% of allowed claims.

The judge said fraud by Madoff and alleged negligence by HSBCITS were alleged by Defender to have lead to the same damage.

For the purposes of the preliminary ruling only, he found Madoff and HSBCITS to be "concurrent wrongdoers" under the CLA in relation to the loss caused to Defender.

He upheld arguments by HSBCITS, because Defender has settled its claim against Madoff for the loss of that investment, and that settlement was with one wrongdoer, Madoff, then, as a result of Section 17.2 of the CLA, Defender cannot pursue the other wrongdoer, HSBCITS. That meant Defender's then €141m claim against HSBCITS is reduced by 100 per cent as a result of Defender's prior settlement with Madoff, he held.

In the main Supreme Court judgment, Mr Justice O'Donnell said, while the High Court was correct, as a matter of orthodox statutory interpretation, in its construction of section 17, it had wrongly concluded the only possible outcome of the application of sections 17 and 35(1)(h) of the Act was apportionment of 100% liability against Defender. Neither section 16 nor 21 of the act provide a basis for dismissing the damages claim from the start, he also found.

On those and other grounds, the appeal was allowed.

The judge said, if the case proceeds, HSBCITS may defeat Defender's claim or, conversely, will be liable to Defender in an amount equal to, or exceeding, the balance of Defender's claim after payment under the settlement with the Madoff trustee. If that happened, the proceedings would end and it would not be necessary to address outstanding matters concerning interpretation of the CLA.

If findings are made which lead to a shortfall in Defender's recovery of damages found to have been occasioned to it by negligence of HSBCITS, an issue concerning the constitutionality of section 17 may have to be addressed.

Most Read in Ireland