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Certainty for Investors: Privy Council Rules on the Distribution Methodology for Investment Funds in Liquidation

February 2020

The Privy Council has ruled that Cayman Islands law does not permit a liquidator of a Cayman Islands based open-ended investment company in solvent liquidation to rectify the company’s register so as to alter the members’ legal rights. In Pearson v. Primeo Fund (In Official Liquidation) [2020] 1 WLUK 187, the Privy Council rejected a proposal by a liquidator, seeking to achieve what they considered to be a fairer distribution to members who were victims of fraud, to use a net investment methodology. The Privy Council held that absent internal fraud, distributions to investors should be based on shareholdings as at the commencement of the liquidation.


Herald Fund SPC (Herald) was founded as a feeder fund for the investment vehicle, Bernard L Madoff Investment Securities (BLMIS), which was later found to be a fraudulent Ponzi scheme orchestrated by the infamous Bernard Madoff. Madoff solicited investments on the basis that he was operating an actively managed portfolio but never made any actual investments. Instead he accumulated them and used them to pay off departing investors whilst at the same time publishing entirely fictitious reports of a seemingly constantly profitable portfolio. BLMIS crashed in 2008 shortly after the Lehman failure, basically having run out of cash, thereby preventing the scheme from continuing.

Herald invested all of its assets into BLMIS and therefore suffered significant loss as a consequence of the Madoff fraud. Primeo Fund (Primeo), another Cayman Islands fund, was a substantial investor in Herald and entered liquidation itself.

Upon discovering the Madoff fraud, Herald suspended the publication of its Net Asset Value (NAV) and the issue and redemption of its shares. Some of its investors had redeemed their investments in part already before the scheme collapsed (like Primeo) but remained members in respect of the balance. Other investors had not redeemed any part of their investments. They were greater victims of the fraud because investors, such as Primeo, had received a return of capital and also the fictitious profits represented by the NAVs, now known to be incorrect as a result of the Madoff fraud.

After the BLMIS scheme collapsed, recoveries made by the BLMIS liquidators meant that Herald stood to receive a substantial sum on account of its investment. Unable to recover amounts owing to it, Primeo petitioned to wind up Herald which was placed into liquidation in July 2013.

Herald’s (additional) liquidator, Mr. Pearson, was directed by the court to carry out the following functions:

“Settling the list of contributories pursuant to section 122(1) of the Companies Law and determining related issues, including whether [Herald]’s register of members should be restated pursuant to section 112(2) of the Companies Law and whether [Primeo’s] shareholding in [Herald] should be adjusted on the ground that the consideration for the issue of its shares was the transfer to [Herald] of the portfolio of securities and/or cash held by Primeo in its account with BLMIS, the amount or value of which had been fraudulently overstated.”



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Certainty for Investors: Privy Council Rules on the Distribution Methodology for Investment Funds in Liquidation



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