UBS Luxembourg Must Face $50M Fairfield Clawback Suit

Originally posted on Law360

UBS Luxembourg can’t escape a lawsuit seeking to claw back nearly $50 million the bank allegedly redeemed from Bernard L. Madoff feeder fund Fairfield Sentry Limited at highly inflated values, a New York bankruptcy judge ruled on Friday.

In an opinion, U.S. Bankruptcy Judge John P. Mastando III rejected UBS Lux’s effort to dismiss the complaint after the bank said it didn’t have enough contact with the U.S. for the case to proceed. Judge Mastando said its use of correspondent accounts at an affiliate — UBS AG, Stamford Branch — is sufficient to establish minimum contacts with the United States. 

“A defendant’s selection and repeated use of a New York correspondent account, where the specific selection was at the defendant’s direction, can show that the contacts with ‘New York [are] not random or fortuitous but sufficiently purposeful to satisfy New York’s long-arm statute,” said Judge Mastando III in the opinion. 

Fairfield Sentry, Madoff Investment’s biggest feeder fund that invested about $7.2 billion into the Ponzi scheme, filed an amended complaint against UBS Lux on Aug. 11, 2021, alleging the bank received payments on account of its shares based on a highly inflated net asset value. 

Fairfield Sentry argued UBS “deliberately and repeatedly utilized U.S. bank accounts to effectuate the subscription and redemption payments.” It added: “On at least 99 occasions over five years, UBS Lux intentionally utilized its account at UBS Stamford to send its subscription payments to, and to receive its redemption payments from, Sentry.”

UBS Lux, according to the opinion, received approximately $50 million in redemption payments from the fund between Aug. 13, 2004, and Nov. 21, 2008. It also received approximately $25 million in redemption payments at its bank account with UBS AG in Stamford. 

UBS Lux, in its motion to dismiss, disputed saying its use of a U.S.-based bank account “does not subject UBS Lux to personal jurisdiction in the United States.”

The bankruptcy court also pointed out the bank then had knowledge that investments in Fairfield Sentry were effectively investments in Madoff. The judge said evidence shows that employees of UBS Lux were in communication, via email, with managers of Fairfield to discuss investments with the fund. 

“These contacts demonstrate more than mere purchases or a one-time visit to the forum. The liquidators have demonstrated facts showing continuous and systematic contacts with the forum,” the judge said. “The contacts demonstrate UBS Lux’s purposeful activities aimed at New York in order to effectuate transfers from the Fairfield funds,” he added. 

Fairfield Sentry, in the complaint, also alleged the bank miscalculated the net asset value — and the redemption payments were made in excess of the true value of the shares. It argued the net asset value was based on the statements the Madoff fund provided, which showed “securities and investments, or interests or rights in securities and investments, held by [Bernard L. Madoff Investment Securities LLC] for the account of Sentry.”

But in fact, no securities were never bought or sold by Madoff for Sentry, and none of the transactions on the statements ever occurred. Instead, the money sent to Madoff was used to pay other investors or for other unauthorized uses, according to the complaint. 

Fairfield Sentry was a direct feeder fund that was established to bring investors to Madoff, which allowed Madoff’s scheme to continue. “Without new investors, BLMIS would have been unable to make payments to those who chose to withdraw their investments, and the scheme would have fallen apart,” the opinion shows. 

The Fairfield funds were put into liquidation in the British Virgin Islands in 2009, and the liquidators filed for Chapter 15 petition in the New York bankruptcy court in June 2010.

Bernard Madoff was arrested in violation of federal securities laws in December 2008. In 2009, Madoff pled guilty to criminal charges against him and confessed to operating a Ponzi scheme. He was sentenced to 150 years in prison and died in April 2021. 

Counsels for both parties didn’t immediately respond to requests for comment. 

Fairfield Sentry is represented by Jeffrey L. Jonas, David J. Molton, Marek P. Krzyzowski and D. Cameron Moxley of Brown Rudnick LLP.

UBS Europe SE, Luxembourg Branch is represented by Marshall R. King and Gabriel Herrmann of Gibson Dunn & Crutcher LLP

The case is Fairfield Sentry Limited et al. v. UBS Europe SE, Luxembourg Branch, case number 11-01250, in the U.S. Bankruptcy Court for the Southern District of New York

The case is In re: Fairfield Sentry Limited et al., case number 10-bk-13164, in the U.S. Bankruptcy Court for the Southern District of New York.