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Read the Funds Industry update in the Irish Agenda on Primeo v HSBC.

Primeo v HSBC: Cayman court delivers Madoff judgment

On 23 August 2017, the Grand Court of the Cayman Islands delivered a landmark judgment in Primeo Fund (in Official Liquidation) (Primeo) v Bank of Bermuda (Cayman Limited) and HSBC Securities Services (Luxembourg) SA (HSSL) (together the HSBC Defendants). 

In his judgment, Mr Justice Jones QC found that the HSBC Defendants breached various ongoing duties to Primeo, a Madoff feeder fund, in respect of the appointment and supervision of Bernard L Madoff Investment Securities LLC (BLMIS) as its sub-custodian.


Primeo was an investment fund incorporated in the Cayman Islands in 1993. It had directly invested in BLMIS until 1 May 2007 and, from that point on, had indirectly invested in BLMIS through two other Madoff feeder funds domiciled in the Cayman Islands, Herald Fund SPC (In Official Liquidation) (Herald) and Alpha Prime Fund Limited (Alpha). 

With the arrest of Bernard Madoff in December 2008 and the discovery of the world's largest Ponzi scheme, Primeo's liquidators issued legal proceedings in 2013 against the HSBC Defendants in relation to losses incurred as a result of the Madoff fraud. 

Primeo alleged, amongst other things, gross negligence on the part of the HSBC Defendants in respect of the performance of their contractual duties as custodian and administrator and claimed damages in excess of USD 2 billion in connection with its losses. 

Breaches of duty by the HSBC defendants 

The Court ruled that HSSL had breached its ongoing supervisory obligations to Primeo in respect of BLMIS as sub-custodian to Primeo. It was found by the Court that HSSL owed continuing contractual duties to satisfy itself about the ongoing suitability of BLMIS as sub-custodian and to require BLMIS to implement effective safeguards to protect Primeo's assets. 

It was an implied term of the custodian agreement in place that HSSL would exercise the care and skill expected of a reasonably competent global custodian and the fact that Primeo had appointed BLMIS to act as sub-custodian did not vitiate HSSL's supervisory duties. 

Notably Mr Justice Jones QC held that having regard to BLMIS' business model and associated heightened operational risks, HSSL had failed to recommend that (i) a separate Depositary Trust Company (DTC) account be established to hold Primeo's securities (as opposed to being held in BLMIS' single omnibus account at the DTC) and/or make use of the Institutional Delivery System (ID System) and (ii) a separate sub-account at Bank of New York be established to hold Primeo's US Treasury Bills. The Court commented that in both instances, the ‘safeguards would be equally effective if BLMIS had established the accounts for Primeo alone or for HSBC's relevant clients collectively’. 

The Court accepted expert evidence on behalf of Primeo which stated that by requiring BLMIS to establish these sub-accounts, and through use of the ID System, it would have been possible to independently verify the existence of Primeo's assets. 

Failure to apply these readily available and ‘most effective safeguards’ amounted to a breach of duty on the part of HSSL and, if implemented, would have been effective to safeguard Primeo's assets, the Court determined. The Court concluded that ’when the normal procedure is known to be ineffective, failing to apply a readily available alternative is negligent’.

Other legal issues and findings

Despite the Court's findings of breach of duty by the HSBC Defendants, Primeo's claim was dismissed on the basis of a number of technical legal arguments dealing with, amongst other issues, limitation and reflective loss points.


Although Primeo's claim was ultimately unsuccessful, the judgment is significant in terms of stating the professional and legal standards expected of investment fund service providers operating in the Cayman Islands and will be of some interest in the Irish context. Whether or not the judgment will be appealed remains to be seen.

However, the judgment is explicit regarding the scope of obligations owed by custodians and administrators in providing investment fund services, particularly where there are heightened operational risks or concerns or where unusual business models are adopted. The Court noted that in such circumstances ‘the reasonably competent custodian would look for an alternative operating procedure which is capable of producing the normal result. BoB Lux failed to do so.’

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