Cayman Islands: CDR – Primeo Fund v HSBC: On reflection

Last Updated: 20 September 2019
Article by Andrew Pullinger and Shaun Tracey

The Cayman Islands Court of Appeal has dismissed the USD2 billion appeal by Primeo, a Madoff feeder fund. Andrew Pullinger and Shaun Tracey of the Cayman Islands office of Campbells discuss the wider significance of the judgment, particularly on the law concerning the rule against the recovery of reflective loss.

Despite more than a decade now having passed since Bernard Madoff’s arrest, litigation resulting from Madoff’s infamous Ponzi scheme continues. In Primeo Fund v Bank of Bermuda (Cayman) and HSBC Securities Services (Luxembourg) S.A. (HSBC), the Cayman Islands Court of Appeal (Justices Birt, Beatson and Field) has delivered the latest significant judgment in a recovery action by a Madoff feeder fund.

In a 184-page judgment, the Court of Appeal dismissed Primeo’s appeal against the judgment of the Cayman Grand Court, which had in 2017 dismissed Primeo’s USD2 billion claims against HSBC as its administrator and custodian.

The Court of Appeal’s wide-ranging judgment is of interest on a number of fronts touched upon in this article, particularly the rapidly developing area of the law concerning the rule against the recovery of reflective loss; the United Kingdom Supreme Court has recently heard and reserved judgment in another reflective loss case, Garcia v Marex.

In the Primeo v HSBC litigation, the Court of Appeal upheld the first instance ruling barring recovery by Primeo because the loss claimed represented the diminution in the value of its shareholdings in two other Madoff ‘feeder funds’, known as Herald and Alpha Prime, in which Primeo was invested at the time Madoff’s fraudulent scheme collapsed.

As Herald and Alpha Prime had also engaged HSBC entities as their administrator and custodian, both courts determined that they are the proper plaintiffs in respect of any such loss – indeed Herald and Alpha are suing HSBC in separate proceedings in other jurisdictions.

Any loss suffered by Primeo is therefore “reflective” of the loss suffered by Herald and Alpha, and barred by the long-standing but evolving rule against the recovery of reflective loss. In its judgment, the Court of Appeal confirmed the broad ambit of the rule against reflective loss, which can have major practical implications, and clarified its application in the novel circumstances of this case, as discussed below.


Primeo was a Cayman Islands investment fund run by Bank Austria that placed monies with Madoff for investment on a discretionary basis from 1993 until 2008. Madoff operated a ‘managed account’ for Primeo, which purportedly generated consistently strong returns over many years, and always satisfied Primeo’s redemption requests. In 2003, Primeo began investing some of its investors’ money with Madoff indirectly, via shareholdings in Herald and Alpha. Following an in specie transfer in May 2007, whereby the balance of Primeo’s managed account was transferred to Herald, Primeo’s entire exposure to Madoff became indirect as its sole assets were shares in Herald and Alpha. Those funds, in turn, unwittingly placed money with Madoff that was used to sustain his giant Ponzi scheme. Following Madoff’s arrest, Primeo’s shares in Herald and Alpha – thought to be worth hundreds of millions of dollars – were potentially worthless.

Following the discovery of the fraud, Primeo entered liquidation and its liquidators brought claims in contract against Primeo’s administrator and custodian, companies within the Bank of Bermuda group (which had been acquired by HSBC in 2004) to recover sums placed with Madoff, as well as lost profits.

As against the custodian, Primeo alleged breach of contractual duties concerning the appointment and supervision of Madoff as HSBC’s sub-custodian, and that HSBC was in any event strictly liable under the terms of the Custody Agreement for the wilful default of Madoff.

As against the administrator, Primeo alleged breach of duties to maintain its books and records and determine its net asset value (NAV) per share; notably, that the administrator should not have relied upon single-source data provided by Madoff (albeit in his separate capacities as broker-dealer, investment manager and custodian). In each case, Primeo alleged that if HSBC had complied with its duties, Primeo would have withdrawn its investments with Madoff and reinvested the proceeds elsewhere, generating a significant profit.


During a 12-week trial in 2016/17, Mr Justice Jones QC heard evidence from more than 25 factual and expert witnesses including three of Primeo’s former directors and a number of experts in the fields of custody and fund administration. In summary, Primeo succeeded in establishing certain breaches of duty by HSBC, including negligence and later gross negligence by the administrator in calculating the NAV.

HSBC’s fault lay in relying solely upon data received from Madoff, where HSBC as custodian had also been providing Primeo’s auditors, EY, with ‘custody confirmations’ based upon the same data, such that there was no independent verification of the existence of the managed account assets. The custodian was also found to have acted in breach of duty by failing to recommend to Primeo that certain additional safeguards be put in place, including that Madoff be asked to open a separate account for Primeo at the DTC, the US securities depository.

Further, the custodian would have been strictly liable for the wilful default of Madoff as its sub-custodian. However, Madoff had not been in wilful default in that capacity (since it had honoured all redemption requests made by Primeo). In any event, the judge held that no loss had flowed from any such default, since Primeo had received full value for its investments when its managed account was transferred to Herald in May 2007 in exchange for Herald shares.

Despite these findings of breach of duty, Primeo’s claims were dismissed in their entirety on three bases. First, the rule against reflective loss barred the recovery of all of Primeo’s alleged losses. Secondly, Primeo failed to establish causation, since the judge was unpersuaded that Primeo’s directors would, in fact, have withdrawn Primeo’s investments with Madoff to invest elsewhere. Primeo and its directors had the same knowledge of the ‘red flags’ associated with Madoff as HSBC, but the lure of equity-like returns with bond-like volatility was too good to forego. Thirdly, parts of the claims were statute-barred. The judge also determined that he would in any event have reduced any damages awarded against the administrator by 75% due to Primeo’s contributory negligence, since Primeo was “to a very substantial degree, the author of its own misfortune”.

Primeo appealed against the judge's dismissal of its claims, and HSBC sought to uphold the first instance judgment, while seeking to overturn certain adverse findings at first instance.


The Court of Appeal upheld the judge’s dismissal of Primeo’s claims on the ground that they infringed the rule against ‘reflective loss’; put simply, Primeo was not the proper plaintiff for the losses claimed. This dispositive aspect of the judgment clarifies the application of the reflective rule in important respects discussed below.

The Court of Appeal’s other findings were obiter, but are also of interest. The Court upheld the judge’s rulings on ‘breach of duty’, save for finding that the judge had erred in concluding that Madoff had not wilfully defaulted as sub-custodian to HSBC and that, in any event, no loss flowed from any such default.

On ‘causation’, the judge had rightly found that Primeo had failed to prove its case in relation to the pre-2005 period, but was found to have applied the wrong legal test in reaching the same conclusion post-2005. The judge should have applied a “loss of chance” analysis, since causation depended upon the possibility of actions being taken by Primeo and third parties (notably, its auditors) in hypothetical scenarios.

The question of causation would therefore have been remitted to the Grand Court if Primeo had otherwise succeeded on its appeal. As to ‘contributory negligence’, HSBC succeeded in establishing that this defence was also available to the custodian, although the Court of Appeal reduced the proportion of any hypothetical reduction of Primeo’s damages from 75% to 50%. On ‘limitation’, the Court of Appeal upheld the judge’s finding that the administrator claim was partially statute-barred, but overturned the judge’s equivalent finding in respect of Primeo’s strict liability custodian claim.


The rule against the recovery of reflective loss has been a feature of English law since the early 1980s. In Prudential Assurance, it was established that where a person’s loss consists of the diminution in the value of a shareholding in a company then, if the company also has a cause of action against the same defendant with a real prospect of success, the company is the proper plaintiff. As a matter of public policy, the shareholder’s claim is barred since they should not be permitted to bring an action to recover loss which is ‘reflective’ of that suffered by the company.

The rule was subsequently affirmed by the English Court of Appeal in 2004 in Johnson v Gore Wood, where solicitors had settled a negligence claim brought by their client – the company – only for the company’s owner to sue them again. Unsurprisingly, the owner’s claim was barred as a matter of principle, since the reduction in value of his shareholding simply reflected the loss suffered by the company.

The potential harshness of the rule has been mitigated by an exception, per Giles v Rhind (2003), whereby the rule does not bar a reflective claim where the wrongdoer has disabled the company from pursuing its claim against him. Plainly, any such bar would be unjust.

However, the general and accelerating trend has been towards an expansion in the scope of the rule. In Gardner v Parker (2004), the rule was extended to losses claimed in the capacity as employee of a company. The Court of Appeal held that the critical factor was not the capacity of the plaintiff, but rather whether they would be made whole if the company’s claim succeeded. The rule is not concerned with barring causes of action, but with barring recovery of certain types of loss.

Most recently, in Garcia v Marex, the English Court of Appeal last year confirmed that the rule also applies where the reflective loss is suffered by a creditor rather than a shareholder. Any distinction between the two capacities would be arbitrary and unprincipled. The Court also confirmed that the exception in Giles v Rhind is narrow: it only applies where the wrongdoer has caused the company’s claim to become impossible as a matter of law (rather than simply due to a lack of funds). An appeal by Garcia was heard in May by the UK Supreme Court – the first time a reflective loss case has been heard at the highest appellate level – and judgment is expected in the coming months.


In this context, Primeo appealed against the judge’s dismissal of its claims on the grounds that they were reflective of the loss suffered by Herald and Alpha. First, Primeo argued that the rule did not apply because Primeo was not a shareholder in either Herald or Alpha at the time it invested directly with Madoff. Primeo’s case was that it was irrelevant that it later became such a shareholder, and remained so when Madoff’s fraud came to light and its claims were commenced against HSBC. Secondly, Primeo argued that for the rule to apply the company’s hypothetical claim against the defendant must be a good (i.e. more likely than not to succeed) claim, rather than the lower threshold of having a real prospect of success.

Both arguments failed. The Court of Appeal reviewed the authorities, notably Garcia v Marex, and emphasised the gradual expansion of the scope of the rule on a principled basis. The rule upholds the principle of company autonomy, ensures that the company's creditors are not prejudiced by the action of individual shareholders, and prevents a party from recovering compensation for a loss which another party has suffered.

Otherwise, where the company is in or near insolvency, there would be prejudice to the company’s unsecured creditors if a shareholder (or creditor) could sue directly, subverting the principle of collective insolvency and the pari passu rule. In other words, a shareholder or a creditor cannot ‘scoop the pool’ by bringing its own competing claim against a defendant, where the company;s claim has a real prospect of success.

The Court of Appeal confirmed that the operation of the rule does not depend on the capacity in which the plaintiff brings the proceedings, but rather on whether their loss would be made good if the company were successfully to pursue its claims. The object is to ascertain whether the loss claimed is one which would be made good if the company had enforced its rights. This has to be tested at the time the plaintiff’s claim is made. Therefore, it is irrelevant that Primeo only became a shareholder in Herald and Alpha after making its initial investments with Madoff.

Likewise, before applying the bar, the judge had correctly evaluated whether Herald’s and Alpha’s claims had a real prospect of success, rather than apply any higher threshold, since that question would usually be determined in proceedings to which the company would not be a party. On the facts, the Court of Appeal found no reason to interfere with the judge's findings that the claims brought by Alpha and Herald against HSBC had a real prospect of success.

In reaching its conclusion on reflective loss, the Court of Appeal also rejected Primeo’s submission that Primeo should simply give credit for recoveries received by Primeo from Herald or Alpha. That is not how the law operates where a claim is reflective.


The significance of the Court of Appeal’s ruling on reflective loss is that it confirms that the rule remains broad and principled, and that it can provide a complete defence.

For prospective plaintiffs and their attorneys, this means there is a need to consider carefully whether the losses claimed are reflective, both at the outset of the litigation and as it progresses. This question arises not merely where the plaintiff has always been a shareholder in a company that has suffered loss, but also where the plaintiff has become such a shareholder later. Likewise, the losses could be reflective even if they are owed to a creditor or employee. If a claim is pursued for reflective loss, it is liable to be struck-out at the interlocutory stage. Even if that does not happen, the result might be a pyrrhic victory for the plaintiff. They may have proven their claim at trial, yet still be barred from recovering the loss claimed – and have to pick up the costs bill for the litigation. This will be a particular concern to liquidators of an insolvent estate.

For defendants and their attorneys, the latest Primeo judgment provides welcome confirmation that the courts will uphold this established rule of law, in the face of novel but unprincipled attempts by a shareholder to ‘scoop the pool’.

Primeo has appealed to the Privy Council and the UK Supreme Court will shortly deliver its decision in Garcia, determining whether the rule against reflective loss applies to claims by creditors. The progress and outcomes of both appeals will be watched with interest as this important area of the law continues to develop.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions