Madoff Securities International Ltd v Raven & Ors, Court of Appeal - Commercial Court, October 18, 2013, [2013] EWHC 3147 (Comm)

Resolution Date:October 18, 2013
Issuing Organization:Commercial Court
Actores:Madoff Securities International Ltd v Raven & Ors

Case No: 2010 FOLIO 1468

Neutral Citation Number: [2013] EWHC 3147 (Comm)




Royal Courts of Justice

Rolls Building, Fetter Lane

London, EC4A 1NL

Date: 18/10/2013



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Pushpinder Saini QC, Robert Weekes, Tom Richards and Shane Sibbel (instructed by Taylor Wessing LLP) for the Claimant

Nicholas Yell (instructed by EMW Law LLP) for the 1st Defendant

Ian Clarke and Lara Kühl (instructed by Radcliffes Le Brasseur) for the 2nd Defendant

Philip Toop (Litigant in Person) the 4th Defendant

Zoe O'Sullivan (instructed by Pitmans LLP) for the 7th & 8th Defendants

Jonathan Crow QC and James Knott (instructed by Asserson Law Offices) for the 9th & 11th Defendants

Hearing dates: 10-13, 17-20, 24-27 June; 1-4, 8-11, 15-18 July 2013

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The Hon. Mr Justice Popplewell:

(1) Introduction

  1. On 29 June 2009, Bernard Madoff was sentenced by a Court of the Southern District of New York to 150 years in prison and ordered to forfeit US$170 billion. The present claim is brought in the long shadow cast by his notorious Ponzi scheme fraud, perpetrated through his New York business for two decades or more. But this case is not primarily about the Ponzi scheme. None of the remaining Defendants knew of, or suspected, the fraud. It is not suggested that they did, nor that they should have done. Many lost their own savings as a result of the scheme. All have had their lives turned upside down. They are all victims of Bernard Madoff's fraud.

  2. During the three decades with which this case is concerned, Bernard Madoff enjoyed a reputation as a titan of Wall Street. Prior to the revelation of the fraud in December 2008, he was to the world a self made billionaire, regarded within the financial industry, by participants and regulators alike, as a successful businessman of high standing and integrity. His New York business filed audited statements of financial condition attesting to his enormous wealth and success. His stature was enhanced by the senior positions he held within institutions at the heart of the US financial establishment. He served on several committees to advise the Securities & Exchange Commission; he was chairman of NASDAQ; he was vice chairman of the National Association of Securities Dealers; he was a director of the US Securities Industry Association. His reputation was not built on his investment advisory business, which turned out to be a Ponzi scheme, but on his proprietary trading and market making business, which was conducted conventionally and legitimately with envied success for over forty years.

  3. From around 1960 to the end of 2000 Bernard Madoff's New York business was conducted under the trading style Bernard L. Madoff Investment Securities, of which he was sole proprietor. Thereafter it was conducted through Bernard L. Madoff Investment Securities LLC which was incorporated as a New York company on 1 January 2001. He was the sole director and owned all the shares. In this judgment I use ``BLMIS'' to refer to both the incorporated and unincorporated entities.

  4. BLMIS had three divisions: investment advisory, market making and proprietary trading. The investment advisory business was housed on the 17th floor of the firm's New York offices, separately from the market making and proprietary trading divisions which were on the 19th floor. It was run by Frank DiPascali, under Bernard Madoff's personal supervision. Personnel in the investment advisory business did not share information with the personnel in the market making and proprietary trading businesses: compliance policies and procedures expressly forbade any interaction between the businesses.

  5. The market making and proprietary trading divisions carried out legitimate and profitable business activities. By contrast, BLMIS' investment advisory business engaged in no material investment activity. The ``investments'' made for clients did not take place. The investors' money was mixed with money from the legitimate trading activities in a variety of bank accounts, including in particular one held at JP Morgan (``the 703 account''). BLMIS issued to each of its clients monthly or quarterly statements which purported to show the securities which were owned and traded in the client's accounts with BLMIS, and the growth and profit in such accounts. In reality there was no such trading, growth or profit. When from time to time customers of BLMIS sought repayment of their investment, BLMIS would make payments which were consistent with the false account statements which the customers had been receiving. In reality the customers' funds had been co-mingled and depleted by BLMIS's payments out of the scheme to other customers. Towards the end of 2008, when requests for redemptions exceeded the amount of funds deposited by new customers, the scheme became unsustainable. In early December 2008 BLMIS had generated about 5,000 client account statements, which together purported to show the clients' investments totalling approximately US$ 65 billion. In fact at that time the investment advisory business had only about US$ 200 million in cash and no investments.

  6. This case is concerned with Bernard Madoff's London business, Madoff Securities International Ltd (``MSIL''). MSIL was not part of the Ponzi scheme. It was conducting its own legitimate business in London. At all material times Bernard Madoff was MSIL's executive CEO or chairman, and owned virtually all of the voting shares. MSIL had a number of other directors apart from Bernard Madoff, the composition of the board varying over time. The present claim is brought by the liquidators of MSIL against some of its former directors; and against Mrs Sonja Kohn, an Austrian businesswoman who was very well connected with a range of influential individuals and institutions in the European financial and political world. Her introductions led to billions of dollars worth of investments in BLMIS in what turned out to be the Ponzi scheme.

  7. It is necessary to keep firmly in mind that the conduct and state of mind of the Defendants in this case falls to be judged against the widespread contemporary perception of Bernard Madoff as a man of integrity, whose honesty in all his business dealings was taken for granted; and as a man whose success and high standing in the financial world caused his views on financial matters to command widespread deference and respect. Mrs Kohn and the directors had no reason to suspect Bernard Madoff's fraud, and none for a moment did so. In common with the rest of the financial world, they believed Bernard Madoff to be a man of unquestioned probity whose high reputation and status was justified by his apparently formidable history of financial trading and investment.

    (2) The claims and defences in outline

  8. There are five directors against whom the claim is now pursued (``the director Defendants''). They are Mr Raven, Mr Flax, Mr Toop, Mr Mark Madoff and Mr Andrew Madoff. Mr Raven, Mr Flax and Mr Toop were directors of MSIL, based in MSIL's London office. So too were Mr Dale and Mr Stevenson, the third and fifth defendants with whom MSIL settled. There were other directors of MSIL in London from time to time during the relevant period whom MSIL has not sued. Three members of the Madoff family in addition to Bernard Madoff himself were also directors of MSIL, but worked principally from BLMIS's New York offices. They were Peter Madoff, Bernard Madoff's brother; and Mark and Andrew Madoff, Bernard Madoff's sons. MSIL discontinued the action against Peter Madoff, the sixth Defendant, on 4 April 2013. Mark Madoff is deceased; Andrew Madoff represents his late brother's estate in these proceedings.

  9. The claim relates to three sets of payments made by MSIL, to which I will refer as (i) ``the MSIL Kohn Payments'', (ii) ``the Interest Payments'' and (iii) the ``Lifestyle Payments''. The first of these was described by MSIL as its principal claim.

    (i) The MSIL Kohn Payments

  10. The MSIL Kohn Payments were made by MSIL regularly throughout the period between 1992 and 2007 to entities connected with Mrs Kohn. They total US$27,059,054. Until 2001, the payments were made to the Tenth Defendant, Erko Incorporated, (``Erko''), a New York company dissolved in 1998. From 2002 to 2007 they were made to Tecno Development and Research Srl, an Italian company also now dissolved, (``Tecno Italy''). In 2007 they were made to the Eleventh Defendant, Tecno Development & Research Limited, a Gibraltar company (``Tecno Gibraltar''). The payments ceased in 2007 in circumstances to which I shall return. The payments were generally made quarterly and the annual totals were as follows:

  11. The payments to Erko were made by cheque, collected by Mrs Kohn or her husband when in London. The Erko cheques were, at least from 1996, paid into an account or accounts at Bank Gutmann AG (a private bank in Austria) in the name of Mrs Kohn's daughter. The payments to Tecno Italy and Tecno Gibraltar were made by electronic bank transfer. BLMIS funded MSIL to make all these payments in the way I describe in more detail below.

  12. Mrs Kohn had agreed with Bernard Madoff that such payments would be made by MSIL in return for services provided by her. Mrs Kohn's evidence was that the payments were for a range of services which were essentially (a) introductions to important individuals and institutions (b) advice, information and ideas about global financial and economic matters, communicated at face to face meetings with Bernard Madoff and (c) written research. Written research was delivered in very substantial quantities to both MSIL in London and BLMIS in New York. MSIL's case is that the payments were...

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