Madoff Securities International Ltd v Raven

This judgment concerns claims by the liquidators of Madoff Securities International Ltd (MSIL) against former MSIL directors and against Sonja Kohn arising from three sets of payments: the MSIL Kohn Payments, subordinated loan interest payments, and so-called lifestyle payments. The court applied established principles on directors' duties (including the duties now reflected in ss.172–174 Companies Act 2006), the Duomatic principle of shareholder approval, limitation under the Limitation Act 1980 (notably ss.21 and 32), and equitable causes of action such as dishonest assistance and knowing receipt.

The judge found that the London directors honestly and reasonably believed the payments were in MSIL’s interests, that substantial parts of the MSIL Kohn Payments had been funded by BLMIS so were cash‑neutral for MSIL, and that MSIL’s auditors and compliance processes were aware of and had not challenged the arrangements. The Duomatic principle (unanimous shareholder approval) and the absence of loss defeated many pleaded claims; limitation and lack of requisite dishonest knowledge defeated others. The court dismissed the claims in their entirety.

Background and parties: MSIL was a London affiliate of Bernard Madoff’s business. After the exposure of Madoff’s Ponzi fraud, MSIL’s liquidators sued several former MSIL directors (Raven, Flax, Toop, Mark and Andrew Madoff) and Sonja Kohn (and entities connected to her) alleging breaches of directors’ duties, knowing receipt, dishonest assistance, restitutionary claims and proprietary claims in relation to (i) recurring payments from MSIL to entities connected with Mrs Kohn (the "MSIL Kohn Payments"), (ii) interest paid under two subordinated loans provided by Bernard Madoff to MSIL (the "Interest Payments"), and (iii) payments for the private benefit of members of the Madoff family ("Lifestyle Payments").

Procedural posture and remedies sought: This was a first instance trial before Popplewell J. MSIL sought recovery (including equitable restitution and proprietary remedies) from the directors and from Mrs Kohn as recipient/assistant.

Issues the court framed:

• Whether directors breached fiduciary duties (duty to act in what they honestly considered the company’s interests; duty to exercise powers for proper purposes; duty of care, skill and diligence - see ss.172–174 Companies Act 2006 and common law antecedents).
• Whether the Duomatic principle operated to bar MSIL’s claims.
• Whether MSIL suffered loss (no‑loss defence) given funding/subventions from BLMIS.
• Whether equitable claims against Mrs Kohn (dishonest assistance, knowing receipt, restitution, proprietary claims) were established.
• Limitation and concealment issues under the Limitation Act 1980 (notably ss.21 and 32), and availability of relief from sanction (Companies Act relief provisions).
• Whether public policy or ex turpi causa prevented MSIL’s claims.

Court’s reasoning (concise): The court made detailed factual findings. The MSIL Kohn Payments were agreed with Bernard Madoff and invoiced by Erko/Tecno entities; substantial written research was supplied to London and New York though a measurable portion was plagiarised. Crucially, MSIL’s payments were funded by BLMIS (initially by specific transfers, later by subventions), so they were generally cash neutral for MSIL. The auditors (KPMG) had access to records and were aware of the arrangements. The judge concluded that the directors who knew of the payments honestly and reasonably believed the payments (taking account of BLMIS funding and Bernard Madoff’s role) to be in MSIL’s interests; some defendants (Toop, the Madoff sons) had not focused on the question but, judged objectively, could reasonably have believed the payments were in the company’s interests. The court therefore rejected breach findings in respect of fiduciary duties. Where omission‑based breaches were alleged, the court applied the correct causation and remedy principles (restoration on misapplication v. counterfactual inquiry for omissions).

The Duomatic defence succeeded in respect of acts susceptible of shareholder ratification. Limitation defeated claims pre‑8 December 2004 in many respects because there was no deliberate concealment and the payments and invoices were open. The ex turpi defence failed on the reliance test (the Ponzi fraud was not an ingredient of MSIL’s direct claims against the directors). Equitable claims against Mrs Kohn failed because the payments were made under valid contracts, there was no actionable dishonesty established against the directors, and receipt/change‑of‑position and limitation defences applied.

Outcome: the claim was dismissed in full.

Claim dismissed. Popplewell J found on detailed factual findings that (i) the MSIL Kohn Payments, Interest Payments and Lifestyle Payments were made openly and (where relevant) were funded by BLMIS making them cash‑neutral for MSIL; (ii) the directors who knew of the payments honestly and reasonably believed them to be in MSIL’s interests and were not dishonest; (iii) the Duomatic principle, limitation and no‑loss principles (and, in relation to equitable claims, the absence of the requisite knowledge or unconscionability) defeated MSIL’s claims; and (iv) the claims against Mrs Kohn failed for the same reasons (valid contractual payments, lack of dishonest assistance/knowing receipt). The court therefore dismissed the claims.