Primeo was a Madoff feeder fund that invested with BLMIS - Bernie Madoff's investment advisory and trading business that was central to the Madoff Ponzi scheme.  Primeo incurred huge losses and sued its custodian (HSBC) and administrator (Bank of Bermuda) for breach of duty.  The Court found that there were breaches of duty but that these breaches did not cause Primeo's losses.   

The Court's decision in this case was informed by the unusual facts and structure of Bernie Madoff's investment model.    BLMIS acted as investment manager, broker and custodian (or sub-custodian) for its clients leading to a high risk investment structure, with no checks and balances.  

The Court found that:

• Primeo's custodian and administrator were under an implied duty to exercise the care and skill expected of a reasonably competent custodian or administrator.
• This required the custodian to flag the risks of the investment structure to Primeo and recommend ways in which the risks could be minimised - for example, to recommend that BLMIS be required to establish segregated trading accounts for clients with DTC. 
• The administrator did not have the same duty to give risk management advice.  The duty did however extend to ensuring that the published NAV was accurate including, in light of the lack of checks and balances, to verify the existence of the assets under management by BLMIS from independent sources.  The administrator could not simply rely on information provided by BLMIS when calculating Primeo's NAV.
• However, the breaches identified were not causative of Primeo's loss. The Court found that even if the custodian and administrator had fulfilled their duties, on the balance of probabilities, Primeo would not have withdrawn its investment from BLMIS and/or would not have declined to invest further funds with BLMIS.

The key take away for custodians is that where an investment structure is irregular or raises red flags, this should be discussed with the client and recommendations made to limit risk – even in circumstances where the client should be well aware of the risks involved.  

Likewise for administrators, where such circumstances exist, information provided for NAV calculation should be carefully and independently verified.  Failure to do so in both cases could be a breach of duty.       

The judgment is expected to be appealed.  The link to the judgment is here.