Phoenix Global Fund Ltd et Al v Citigroup Fund Services (Bermuda) Ltd et Al

• Jurisdiction: Bermuda
• Judge: Bell, J.
• Judgment Date: 04 December 2009
• Court: Supreme Court (Bermuda)
• Docket Number: 20 of 2006
• Date: 04 December 2009

Supreme Court

Bell, J.

20 of 2006

Phoenix Global Fund Limited et al

and

Citigroup Fund Services (Bermuda) Ltd. et al

Appearances:

Victor Lyon Q.C. and Larry Mussenden, Attride-Stirling & Woloniecki, for the plaintiffs.

Richard Sheldon Q.C. and Andrew Martin, Mello Jones & Martin, for the 1st defendant.

Narinder Hargun and Alex Potts, Conyers Dill & Pearman, for the 2nd defendant.

Investment law - Investment funds — Duties owed by administrators and custodians of investment funds — Breach of investment restrictions contained in prospectus — Capital quality restriction — Capital illiquidity restriction.

Bell, J.

INTRODUCTION

1 This action concerns the nature and extent of the duties owed by administrators and custodians of investment funds which are classified by the relevant regulations as Bermuda Standard Schemes. More particularly, the nature and extent of those duties have to be looked at in the context of two funds where investments were made which are said to have been in breach of the investment restrictions contained in the relevant prospectus. In this regard, among the many issues to be determined by the Court are the interpretation and application of the Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations, 1998 (“the Regulations”). I should mention that the Regulations were repealed by the Investment Funds Act, 2006 (“the 2006 Act”). The plaintiffs (respectively “Phoenix Global” and “Phoenix Capital” or “the Fund”, and together “the Funds”) are described in the pleadings as mutual investment funds which were incorporated under the laws of Bermuda on 11 and 18 June 1999 respectively. In the promotional literature published by Phoenix Advisors LLC (“Phoenix Advisors”), Phoenix Global was described as an emerging market hedge fund, and Phoenix Capital as a leveraged hybrid money market fund. Phoenix Capital was a daily dealing fund, which required daily calculations of the net asset value (“NAV”) per share of the Fund, and Phoenix Global was a monthly dealing fund which required calculation of the NAV at the end of each month, although there is an issue between the parties as to the obligation to calculate the NAV daily on a pro forma basis. The first defendant (“Citigroup”) was formerly named Forum Fund Services Limited (“Forum”), and under that name acted as administrator to the Funds. Citigroup's services as administrator were provided to Phoenix Global and Phoenix Capital pursuant to agreements dated 24 June and 29 June 1999 (respectively “the Citigroup Phoenix Global Administration Agreement” and “the Citigroup Phoenix Capital Administration Agreement”, and together “the Citigroup Administration Agreements”). which agreements remained in force until Citigroup's resignation as administrator, notice of which was given on 3 May 2002, to be effective on 31 July 2002, which effective date was subsequently extended to 30 September 2002. The second defendant (“the Bank of Bermuda” or “the Bank”) acted both as administrator and as custodian to the Funds (for different periods), pursuant to administration agreements dated 30 September 2002 (respectively “the Bank of Bermuda Phoenix Global Administration Agreement” and “the Bank of Bermuda Phoenix Capital Administration Agreement” and together “the Bank of Bermuda Administration Agreements”) for the period from 30 September 2002 to 31 December 2003, and as custodian pursuant to agreements dated 29 May 2001 (respectively “the Bank of Bermuda Phoenix Global Custodian Agreement” and “the Bank of Bermuda Phoenix Capital Custodian Agreement” and together the Bank of Bermuda Custodian Agreements”) for the period from 29 May 2001 to 30 November 2003.

ENTITIES RELATED TO THE FUNDS

2 The first of these to which I will refer is Phoenix Investment & Private Trust Ltd (“Phoenix Investment”), which company was the investment manager for the Funds between June 1999 and June 2004. Phoenix Investment was appointed to give investment advisory and management services to the Funds by agreements dated 24 June 1999 in the case of Phoenix Global, and 30 June 1999 in the case of Phoenix Capital.

3 However, Phoenix Investment appointed a sub-advisor, Phoenix Advisors, a Delaware company with offices in New York. Phoenix Advisors was appointed to act as sub-advisor in respect of both Phoenix Global and Phoenix Capital under investment sub-advisory agreements dated respectively 24 June 1999 and 30 June 1999, to which agreements the Funds were parties. The payments made by the Funds to Phoenix Advisors give rise to one of the claims made by the Funds against both Citigroup and the Bank of Bermuda.

4 Phoenix Advisors in turn had an agreement with a company of similar name, Phoenix Advisors SA, formerly known as Lakeshore Finance SA. That agreement recited that Phoenix Advisors was to act as sub-advisor to the Funds, which were then in the process of being established, that its duties were to include responsibility for marketing and investor acquisition, and that Phoenix Advisors had been authorised to sub-contract such activities. Phoenix Advisors duly appointed Phoenix Advisors SA as marketing and client development and maintenance representative on behalf of Phoenix Investment and the Funds.

5 Lastly, there was a company named Phoenix Worldwide Growth Fund Ltd (“Phoenix Worldwide”) a third company within the Phoenix group, managed and run by Diego Moretti, which was established in June or July of 2002.

THE INDIVIDUALS BEHIND THE VARIOUS PHOENIX ENTITIES

6 The principal individual involved in the operations of the various companies within the Phoenix group at all material times was Patrick Blum, a Swiss national. He was a director of each of the Funds, and was apparently the owner of a company which held a 50% beneficial interest in Phoenix Investment. The other 50% of Phoenix Investment was apparently owned by Maurice Ramseyer, who had a close relationship with and now shares an office with Mr. Moretti, the individual who has taken on the task of seeking to effect recoveries for the class A shareholders of the Funds. I will need to say more about Mr. Ramseyer and his role in these proceedings in due course. Phoenix Investment in turn wholly owned Phoenix Advisors, of which Mr. Blum was the managing director. Mr. Blum was also a director for a period of Phoenix Worldwide, the fund managed by Mr. Moretti. He resigned as a director of the Funds and Phoenix Worldwide at the request of Mr. Ramseyer and Mr. Moretti on 14 October 2003, on condition that he continue to serve, with Mr. Moretti, from October 2003 until such time as Mr. Moretti was able to secure the services of a replacement director, but on the basis that his resignation was to be effective by 31 December 2003 at the latest.

7 Maxim Risman was a director of each of the Funds between June 1999 and October 2000, and was also a managing director of Phoenix Advisors. Seng Liew was a director of each of the Funds between October 2000 and April 2002. Martha DeArteaga was a director of each of the Funds between April 2002 and 14 October 2003, and had been employed by Phoenix Advisors before then. She had extensive dealings with the administrators, as did a more junior employee employed by the Funds, Kelly Chicas.

8 Mr. Moretti has been a director of each of the Funds since 14 October 2003, and as I have indicated, he is, or presents himself as, the individual driving this litigation for the benefit of the class A shareholders who were the investors in the Funds, and who suffered losses in consequence of the diminution of the NAV of the Funds. Exactly how those class A shareholders will benefit from any recoveries is another matter. The majority of those class A shareholders (some 15% or so chose to redeem in cash rather than take shares in the new company) became shareholders in June or July 2004 in a Cayman Islands segregated portfolio fund company originally named Dynagest Investment Funds SPC (“Dynagest”), and since 18 March 2005 named DM Investment Funds SPC. Dynagest maintained some five separate portfolios, and the illiquid assets transferred from Phoenix Global and Phoenix Capital were held respectively by DM Special Assets Global Fund SPC and DM Special Assets Reserve Fund SPC. Ultimately, DM Special Assets Global Fund SPC was closed following the disposal of all of its illiquid assets, while the DM Special Assets Reserve Fund SPC remains open pending the sale of its last asset. One of the other portfolios within Dynagest contained the assets of Phoenix Worldwide. I will refer to the company holding the assets as Dynagest, whether before or after the name change, and note that that entity is now said to be in liquation. According to Mr. Moretti's evidence, no distinction is to be drawn in relation to the distribution of the proceeds of this litigation, if successful, between those shareholders who redeemed rather than exchange their shares in the Funds for shares in Dynagest and those shareholders who did become shareholders in Dynagest. The latter will have received substantial payments reflecting the substantial recoveries which the Funds were eventually able to make, but for which on their primary case the Funds do not give credit to the defendants, against whom recovery is sought. Given the importance of this re-structuring, not least in relation to the losses said to have been suffered by the Funds and their class A shareholders, I will need to revert to the detail of the re-structuring, as well as the arrangements for the funding of this litigation and the division of any recoveries from it.

THE PLEADED CLAIMS AGAINST BOTH DEFENDANTS

9 The statement of claim has been amended some five times, four before trial and once during trial, and of the four pre-trial amendments, three were made within the last year. The consequence of the amendments is that major parts of the case for the Funds were not originally...