Fairfield Sentry Ltd. v. HSBC Sec. Servs. (In re Fairfield Sentry Ltd.)

657 B.R. 1

IN RE: FAIRFIELD SENTRY LIMITED, et al. Debtors in Foreign Proceedings.

Fairfield Sentry Ltd. (In Liquidation), et al., Plaintiffs, v. HSBC Securities Services (Luxembourg) S.A., et al., Defendants.

Case No. 10-13164 (JPM) (Jointly Administered)

Adv. Pro. No. 10-03630 (JPM)

United States Bankruptcy Court, S.D. New York

Signed January 29, 2024

Cleary Gottlieb Steen & Hamilton LLP, Counsel for Defendant HSBC Securities Services (Luxembourg) S.A., One Liberty Plaza, New York, NY 10006, By: Jeffrey A. Rosenthal, Joseph M. Kay, David Z. Schwartz, JD Colavecchio, Thomas Q. Lynch, 2112 Pennsylvania Avenue, N.W., Washington, D.C., 20037 By: Nowell D. Bamberger

Brown Rudnick LLP, Attorneys for the Plaintiffs Joint Liquidators, Seven Times Square, New York, NY 10036, By: Jeffrey L. Jonas, David J. Molton, Marek P. Krzyzowski

MEMORANDUM OPINION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS

JOHN P. MASTANDO III UNITED STATES BANKRUPTCY JUDGE

I. INTRODUCTION

Pending before the Court is the motion of the Defendant, HSBC Securities Services (Luxembourg) S.A., ("HSBC Lux" or "Defendant") to dismiss the Fourth Amended Complaint (the "Amended Complaint") for lack of personal jurisdiction. Mot. to Dismiss, ECF¹ No. 205. The Court held a hearing on the Motion to Dismiss on October 25, 2023 (the "Hearing"). For the reasons set forth herein, the Court DENIES the Defendant's Motion to Dismiss.

II. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157 and the Amended Standing Order of Reference dated January 31, 2012 (Preska, C.J.). This Court previously concluded that it has subject matter jurisdiction over this and related actions. See In re Fairfield Sentry Ltd., 2018 WL 3756343 (Bankr. S.D.N.Y. Aug. 6, 2018); see also Stip. Order, ECF No. 98. Personal jurisdiction is contested by the Defendant and will be discussed below.

III. BACKGROUND

This adversary proceeding was filed on September 21, 2010. (Compl., ECF No. 1). Kenneth M. Krys and Greig Mitchell (the "Liquidators"), in their capacities as the duly appointed Liquidators and Foreign Representatives of Fairfield Sentry Limited (In Liquidation) ("Sentry") and Fairfield Sigma Limited (In Liquidation) ("Sigma" and, together with Sentry, the "Fairfield Funds") filed the Amended Complaint on August 11, 2021. See Am. Compl., ECF No. 167. Via the Amended Complaint, the Liquidators seek the imposition of a constructive trust and recovery of over $84 million² in redemption payments made to HSBC Lux by Sentry and Sigma. Id. ¶¶ 1, 9, 49, 191.

A. The BLMIS Ponzi Scheme

This adversary proceeding arises out of the decades-long effort to recover assets of the Bernard L. Madoff Investment Securities LLC ("BLMIS") Ponzi scheme.³ Id. ¶ 1. Defendant allegedly invested into several funds, including Sentry and Sigma, that channeled investments into BLMIS. Id. ¶¶ 2, 5.

Fairfield Sentry was a direct feeder fund in that it was established for the purpose of bringing investors into BLMIS, thereby allowing Madoff's scheme to continue. Id. ¶¶ 5; 42-43; see also In re Picard, 917 F.3d 85, 93 (2d Cir. 2019) ("A feeder fund is an entity that pools money from numerous investors and then places it into a 'master fund' on their behalf. A master fund—what Madoff Securities advertised its funds to be—pools investments from multiple feeder funds and then invests the money."). Fairfield Sigma, in contrast, was an indirect feeder fund, established to facilitate investment in BLMIS through Fairfield Sentry for foreign currency. Am. Compl. ¶¶ 42-43. BLMIS used investments from feeder funds, like the Fairfield Funds, to satisfy redemption requests from other investors in the scheme. Id. ¶¶ 7-8. 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. Id. ¶¶ 8, 13-15, 43, 46-48.

The Amended Complaint alleges that investors received payments on account of their shares in the Fairfield Funds based on a highly-inflated Net Asset Value ("NAV"). Id. ¶ 8. Defendant is allegedly "one such investor." Id. To calculate the NAV, administrators used statements provided by BLMIS that showed "securities and investments, or interests or rights in securities and investments, held by BLMIS for the account of Sentry." Id. ¶ 45. In fact, no securities were ever bought or sold by BLMIS for Sentry, and none of the transactions on the statements ever occurred. Id. ¶ 46. The money sent to BLMIS by the Fairfield Funds for purchase of securities was instead used by Bernard Madoff to pay other investors or was "misappropriated by Madoff for other unauthorized uses." Id. The NAVs were miscalculated, and redemption payments were made in excess of the true value of the shares. Id. ¶ 48. The Fairfield Funds were either insolvent when the redemption payments were made or were made insolvent by those payments. Id.

Defendant HSBC Lux is a corporate entity organized under the laws of Luxembourg with a registered address in Luxembourg. Id. ¶ 33. HSBC Lux subscribed for the purchase of shares with Sentry and Sigma, eventually receiving approximately $84,497,835.97 in redemption payments from the Funds between April 8, 2004, and September 16, 2008. Id. ¶¶ 33, 49. At Defendant's "directions and instructions, some or all of the Redemption Payments were received at . . . designated United States-based bank accounts." Id. ¶ 46.⁴

Bernard Madoff was arrested in violation of federal securities laws on December 11, 2008. Id. ¶ 168. The United States Attorney brought criminal charges against him, alleging that Madoff ran a Ponzi scheme. Id. On December 11, 2008, the Securities Exchange Commission filed an action in the Southern District of New York to halt the continued offerings of securities. Id. ¶ 169. In March 2009, Madoff pleaded guilty to criminal charges against him and confessed to operating a Ponzi scheme and fabricating statements and trade confirmations. Id. ¶¶ 170-71. Madoff was sentenced to 150 years in federal prison and died in April 2021. Id. ¶ 172.

The Amended Complaint alleges that HSBC Lux "had knowledge of the Madoff fraud, and therefore knowledge that the Net Asset Value was inflated" when the redemption payments were made. Id. ¶ 184. The Amended Complaint further asserts that between 2001 and 2008, Defendant recognized the improbability of the returns from BLMIS, and employees of the Defendant "continued to identify multiple additional indicia of BLMIS-associated fraud." Id. ¶ 185. These indicia included Madoff's failure to segregate accounts and the lack of a reliable independent auditor. Id. In the face of red flags such as these, Defendant purportedly "continuously and deliberately failed to take steps to assuage the concerns associated with BLMIS." Id.

B. The Prior Litigation and Procedural History

The Fairfield Funds were put into liquidation in the British Virgin Islands ("BVI") in 2009. Id. ¶¶ 26-28. The BVI issued orders appointing the foreign representatives, Kenneth Krys and Greig Mitchell, as liquidators of the Fairfield Funds. Id. ¶ 28. Pursuant to the appointment order of the BVI court,⁵ the "Foreign Representatives are responsible for all aspects of the Funds' business, including protecting, realizing, and distributing assets for the Funds' estates." Id. ¶ 178. The Liquidators initiated proceedings in the BVI against a number of investors who had redeemed shares of the Fairfield Funds before the collapse of the scheme. Mem. L. at 6, ECF No. 206; Fairfield Sentry Ltd. v. Citibank, N.A. London, 630 F. Supp. 3d 463, 475 (S.D.N.Y. 2022); see also In re Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 596 B.R. 275, 284 (Bankr. S.D.N.Y. 2018) ("Fairfield II").

The Liquidators filed petitions in this Court in June 2010 under Chapter 15 of the Bankruptcy Code, seeking recognition of the BVI proceedings as foreign main proceedings. Id. ¶ 29. This Court granted that recognition on July 22, 2010. Id. All cases filed by the Plaintiffs were administratively consolidated before this Court in November 2010. See Consolidation Order, Adv. Pro. No. 10-03496, ECF No. 25; see also Letter from HSBC Lux Counsel Regarding Procedural History ("Letter Regarding Procedural History") at 3, ECF No. 321.

The Plaintiffs asserted multiple causes of action in those consolidated adversary proceedings including, inter alia, mistaken payment and constructive trust.⁶ Compl. ¶¶ 61-84, ECF No. 6; see also 630 F. Supp. 3d at 479. In October 2011, this Court stayed the U.S. proceedings pending resolution of the BVI proceedings. See Am. Order Staying Redeemer Actions, Adv. Pro. No. 10-03496, ECF No. 418; In re Fairfield Sentry Ltd., 2018 WL 3756343, at *3 (Bankr. S.D.N.Y. Aug. 6, 2018).

In April 2014, the Privy Council affirmed dismissal of the Plaintiffs' BVI law claims for restitution based on mistaken payment. Fairfield Sentry Ltd. (In Liquidation ) v. Migani, [2014] UKPC 9 ("Migani ").⁷ The Privy Council held that the Plaintiffs' claims for restitution in the BVI to recover redemption payments arising out of transactions governed by the Funds' Articles of Association are governed by BVI law. Id. ¶ 17. The Plaintiffs' claims to recover redemption payments thus depended on whether it was bound to make those payments under the "true NAV per share, ascertained in the light of information which subsequently became available about Madoff's frauds, or . . . the NAV per share which was determined by the Directors at the time of redemption." Id. ¶ 19. The Privy Council concluded that the NAV had to be definitively determined at the time of the subscription or redemption. Id. ¶ 21. The redemption payments made under the NAV were thus not subject to restitution and the payee was not unjustly enriched by receiving funds, even if the amount was mistaken. Id. ¶¶ 18-19.

After Migani was issued, the Plaintiffs allegedly obtained evidence of bad faith of Citco, the Fairfield Fund's administrator, when it...