Custodian Liability

On 23 August 2017 the Financial Services Division of the Cayman Islands (Justice Andrew J Jones QC) delivered the landmark judgment in Primeo Fund v HSSL in which findings of breach of contract, negligence and gross negligence were made against the custodian and administrator of the fund in the face of arguments by them that they had implemented standard commercial practices.

This article looks at how the approach to the custodian’s liability in Primeo compares to the approach under the Alternative Investment Fund Managers Directive depositary liability (AIFMD) and considers whether Jones J’s decision in Primeo held the custodian of the fund to a higher or lower standard of liability than would generally apply under the AIFMD.

The Primeo Fund (Primeo) was a Cayman Islands incorporated investment fund that invested with Bernard L Madoff Investment Securities LLC (BLMIS). Primeo appointed Bank of Bermuda (Cayman) Limited (BBCL) as administrator and HSBC Securities Services (Luxembourg) SA (HSSL) as custodian. Both BBCL and HSSL were later acquired by HSBC.

In late 2008 BLMIS was revealed to be the vehicle for the infamous Madoff Ponzi Scheme. In 2013 Primeo instituted its claim and sought to recover US$2 billion from BBCL and HSSL.

Custodian liability
Custody was provided by HSSL under an arrangement with BLMIS as sub-custodian. The judge made findings against HSSL, as custodian, at two levels. The first was its liability for the default of BLMIS. The judge found that because BLMIS’s default was wilful, HSSL was liable for that default regardless of whether it was at fault for its choice of BLMIS as sub-custodian and regardless of whether its supervision of BLMIS was inadequate. This was referred to as “strict liability”.