Madoff Feeder Fund Liquidator Seeks $7M in 3 New Suits

By Brian Mahoney (Law360)– The foreign representative tasked with liquidating Bernard L. Madoff feeder fund Fairfield Sentry Ltd. launched three more clawback suits in New York bankruptcy court Wednesday, seeking to recover some $7 million from financial institutions like Barclays Private Bank and Trust Ltd.

Kenneth Krys, who is in charge of winding down Fairfield Sentry, Fairfield Sigma Ltd. and Fairfield Lambda Ltd. in a British Virgin Islands proceeding, filed the complaints in New York against Barclays, Luxembourg-based Select Absolute Strategies SICAV and Hyposwiss Private Bank Geneve SA.

The suit is Krys’ latest attempt to claw back money paid out to investors in the funds, which invested in Bernard L. Madoff Investment Securities LLC, the brokerage business Madoff used to perpetrate his massive Ponzi scheme. Krys seeks about $820,000 from Barclays, $4.2 million from Absolute Strategies and $1.9 million from Hyposwiss.

Krys claims that any payments made from BLMIS to Sentry and its sister funds were made to further the ends of Madoff’s $65 billion Ponzi scheme and avoid its detection. He further argues that the redemption payments made to Fairfield shareholders were also fraudulent.

“At the time such payments were made, Sentry mistakenly believed that such payments were in the amount of the net asset value of the shares tendered at the time of redemption,” the complaints said.

“In fact, however … the redemption payments made to [the defendants] far exceeded the actual net asset value of the shares redeemed,” they added. “Moreover, the source of these redemption payments was not, as Sentry believed them to be, proceeds of the liquidation of securities or
investments held for their accounts.”

The complaints come almost one month after Krys lodged five suits April 16 seeking $130 million in clawbacks from several global financial institutions, including$115 million from Atlantic Security Bank. On April 6 he launched seven adversary proceedings seeking more than $2.6 million, and on April 4 he lodged nine clawback suits against investors that totaled more than $65.5 million.

Sentry was the largest feeder fund that kept accounts with BLMIS, and Sigma and Lambda were indirect feeder funds that invested in BLMIS through Sentry, according to the complaints. The funds are themselves the subject of a $3.2 billion clawback suit filed by BLMIS liquidator Irving H. Picard, and they are seeking to recover money in connection with that action.

The redemption payments didn’t conform to the funds’ subscription agreements and other offering documents because their source was not the sale of securities or a return of investments, the suits say.

Instead, the payments were derived from uninvested funds of other BLMIS investors or other uninvested deposits made by Sentry in BLMIS and represented the fraudulent gains of Madoff’s Ponzi scheme, distributed by BLMIS to Sentry, the suits contend.

“In light of the fraudulent nature of BLMIS and its operation as a massive Ponzi scheme, at all relevant times the assets purportedly held at BLMIS for Sentry were nonexistent, and the funds were insolvent at the time redemption payments were made or they were rendered insolvent by those payments,” the complaints said. “As a result, at all relevant times, the net asset value of the shares redeemed was miscalculated, and redemption payments were mistakenly made for amounts far in excess of the actual net asset value of shares redeemed.”

Krys filed more than 45 similar proceedings in mid-March seeking to recover more than $300 million that was paid out to the funds’ shareholders before Madoff’s massive Ponzi scheme unfolded.

Krys is represented by Kerry L. Quinn, David J. Molton, May Orenstein and Daniel J. Saval of Brown Rudnick LLP.

Counsel information for the defendants was not immediately available.

The cases are Fairfield Sentry Ltd. et al. v. Select Absolute Strategies SICAV, case number 10-13164; Fairfield Sentry Ltd. et al. v. Hyposwiss Private Bank Geneve SA, case number 10-13164; and Fairfield Sentry Ltd. et al. v. Capital Global Management Ltd., case number 10-13164. All are in the U.S. Bankruptcy Court for the Southern District of New York.