A recent decision by the Cayman Islands Grand Court relating to the ability of liquidators to “clawback” money from third party fund investors in the aftermath of a fund collapsing will be welcomed by fund investors seeking certainty in this area, according to a report by Maples.
The recent decision in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund represents a further reminder of the serious challenges associated with bringing clawback actions against third party fund investors who have received redemption proceeds from a Cayman Islands fund in the period leading up to the fund's collapse, the report said.
“It is a decision which should be welcomed by fund investors who are seeking certainty in this area,” the law firm said.
The case related to DD Growth 2X, an open-ended feeder fund incorporated in the Cayman Islands. It encountered serious difficulties in late 2008 and early 2009, and was faced with large redemptions.
Its difficulties were compounded as a result of the NAV having been massively overstated as a result of a fraud: in order to cover up losses, the manager had acquired certain debt instruments for cents on the dollar, but had then reported them in the NAV at face value.
The 2X Fund had a number of investors who redeemed in December 2009. There was no suggestion that any of the redeeming investors knew anything about the fraud. Some were paid in part, while others received nothing. The 2X Fund was then wound up in around May 2009 and the full extent of the fraud was uncovered.
The 2X Fund liquidators threatened a clawback action against one investor: RMF. RMF sued for a negative declaration and was met with a counterclaim. This recent judgement was made in favour of the investor.
“Overall, this judgment reflects what we would suggest is an entirely orthodox approach to preference claims under Cayman Islands law,” said Maples in the report. “It brings further helpful clarity to the area, and in particular, emphasises the benefits of certainty in the context of funds which permit redemptions on a ‘first come first served’ basis.
“It is a decision which should rightly give additional comfort to innocent third party redeemers of Cayman Islands funds who may otherwise be concerned about the possibility of being subject to clawback actions many years after they have (through no fault of their own) been caught up in a fraudulent investment scheme.”
DD Growth 2X, Cayman, RMF, Maples