Anwar et al v. Fairfield Greenwich Limited et al

Filing 1044

MEMORANDUM OF LAW in Opposition re: #1032 MOTION for Settlement Notice of Motion for Final Approval of the Proposed Partial Settlement and Plan of Allocation. PwC Defendants' Limited Objections to Plaintiffs' Motion. Document filed by Pricewaterhouse Coopers Accountants N.V., Pricewaterhousecoopers L.L.P.. (Attachments: #1 Exhibit A (Part 1), #2 Exhibit A (Part 2), #3 Exhibit B)(Duffy, Timothy)

EXHIBIT A (PART 1)

A-1.doc

Oude Elferink
Gerechtsdeurwaarders & Incasso

REGISTERED LETTER
Pricewaterhousecoopers LLP
Chartered Accountants
PwC Tower 18 York Street Suite 2600
Toronto, Ontario M5J 0 B2 (CANADA)

H. Oude Elferink Amsterdam,l'5oktober 2012
Gerechtsdeurwaarder

N. Bicker
E.J. Bruin

Inzake
Uw referentie
Dossiernummer

: forwarding legal documents ex art. 55 lid 2 Rv (HccH)
: L1200856 / JMS

(C.k.-) Gerechtsdeurwaarders
mr. C.S.M. Kruik - van Straaten
Jurist

Dear Sir, Madam,
According „to-the iLaw of the Netherlands on the service of judicial and extrajudicial
documents, I hereby enclose one copy of a judicial document, this day served by me.

A.M. Bogaard
Chef he Bureau

With kind regards, I remain,

Bezoekadres
Hilversumstraat 33 ,

Bailiff

Amster '_..

Oude Elferink
Gerechtsdeurwaarders en Incasso
Correspondentie-adres
Postbus 37680
1030 BH Amsterdam

UDE FCFQ:

T020 636 62 61
F 020 636 62 65
k [e-mail]
www.oegdw.nl
ING Bank
66.09.54.974
53.17.539
Derdengelden/
kwaliteitsrekeningen
BTW nr. NL8500.09.819301
KvK nr. 51428520
Kantoorbes-k na afspraak
Betalingen uitsluitend per bank.
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EL I H I
II

L1200856 / JMS

Pricewaterhousecoopers LLP
Chartered Accountants
PwC Tower 18 York Street
Suite 2600
Toronto, Ontario M5J OB2 Canada

herstelexploot
Informatie & correspondentie: CMS Derks Star Busmann N.V., Newtonlaan 203, 3584 BH Utrecht
mr. D. Castelijns
F:030-2121 158
T:030-2121 451

tweeduizend twaalf,

Heden, de

H. Oude Elferink

N. Bicker
E.J. D ruin
(t. k.

nr. C.S.M. Kruik - van Straaten

Op verzoek van de rekwiranten:
1. de rechtspersoon naar het recht van de Britse Maagdeneilanden Colima
International Limited gevestigd op de Britse Maagdeneilanden, Palm Grove House,
P.O. Box 438, Road Town, Tortola;
2. de stichting Stichting Fairfield Compensation Foundation gevestigd en
kantoorhoudende to (1077 ZX) Amsterdam aan het adres Strawinskylaan 3051

Jurist
A.M.Bogaard
Chef de Bureau

beiden voor deze zaak woonplaats kiezende to (3584 BH) Utrecht aan het adres Newtonlaan
203 op het kantoor van de advocaat mr. P.J. Soede (CMS Derks Star Busmann N.V.), die
door rekwiranten tot advocaat wordt gesteld om als zodanig voor hen in rechte op to treden,

Bezoekadres
Hilversumsi

^ :36

Correspondentie-adres
Postbus 37680
1030 B1 1 AinsterdanI
0)n

r-:2c a-;2

61

12 (i5

aan:

de gerekwireerde: de rechtspersoon naar het recht van Canada Pricewaterhousecoopers
LLP Chartered Accountants gevestigd en kantoorhoudende to Toronto, Ontario M5J 0B2,
Canada in de PwC Tower, 18 York Street, Suite 2600, zonder bekende plaats van vestiging of
kantoor in Nederland, mitsdien uit kracht van artikel 55 Rv mijn exploot doende aan het parket
van de ambtenaar van het openbaar ministerie van de Rechtbank Amsterdam to (1076 AV)
Amsterdam aan de Parnassusweg 220 en aldaar mijn exploot doende en twee afschriften
dezes alsmede twee vertalingen daarvan in de Engelse taal, alsmede na to melden
dagvaarding plus Engelse vertaling daarvan latende aan:

1
aldaar werkzaam,
ING Bank welke betekening is vergezeld van het formulier als bedoeld in artikel 7, eerste lid, van het
Verdrag van 15 november 1965 inzake de betekening en de kennisgeving in het buitenland
van gerechtelijke en buitengerechtelijke stukken in burgerlijke en handelszaken, door mij,
(t.k.) gerechtsdeurwaarder ingevuld in de Engelse taal,
aan de ontvangende instantie heb ik verzocht om dit exploot aan gerekwireerde to betekenen
overeenkomstig de artikelen 3 tot en met 6 van het Verdrag van 15 november 1965 inzake de
betekening en de kennisgeving in het buitenland van gerechtelijke en buitengerechtelijke
stukken in burgerlijke en handelszaken, door eenvoudige afgifte of - zo dit niet mogelijk is -

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door betekening volgende de wet van de aangezochte staat, in beide gevallen onder afgifte
van een bewijs van ontvangst.
terwiji voorts nog een derde afschrift van dit exploot alsmede de Engelse vertaling daarvan
door mij, (t.k.) gerechtsdeurwaarder per aangetekende post met ontvangstbevestiging heden
zal worden toegezonden aan gerekwireerde op haar voormeld adres.
Uit een aan dit exploot gehecht betalingsbewijs blijkt dat door voornoemde
gerechtsdeurwaarder inmiddels de in verband met de uitreiking van het exploot verschuldigde
kosten ad Can $ 50,00 zijn overgemaakt op de bankrekening van Ministry of the Attorney
General, Ontario Court of Justice 393 Main Street, Haileybury, Ontario, POJ 1 KO, Canada,

aanqezeqd:

dat gerekwireerde op verzoek van rekwiranten blijkens aangehecht exploot d.d. 15 augustus
H. nude. Elferink 2012 door de daarin genoemde (t.k.-) gerechtsdeurwaarder, is gedagvaard om op woensdag
26 september 2012, des voor middags to 10:00 uur, niet in persoon, doch vertegenwoordigd
door een advocaat to verschijnen op de terechtzitting van de Rechtbank Amsterdam, alsdan
N. Bicker gehouden wordende in het gerechtsgebouw to Amsterdam, aan de Parnassusweg 220, ter
E.J. Bruin zake en teneinde als in het exploot omschreven:
(t.k

mr. C.S.M. Kruik - van Stmaten
Jurist

A.M. Bogaard

dat gerekwireerde abusievelijk op een to korte termijn is gedagvaard. Er is een termijn van
vier weken in acht genomen;
dat dit echter een termijn van drie maanden had moeten zijn en de rechtbank heeft
toegestaan het voormelde to herstellen door kennisgeving middels een (herstel)exploot
aan de gerekwireerde;

Chef he Bureeti

dat gerekwireerde hierbij wordt opgeroepen tegen een nieuwe rechtsdag;
Bezoekadres
it 336

A rr1.e rerdu m

vervolgens heb ik (t.k.-) gerechtsdeurwaarder, de gerekwireerde bij dit exploot, onder
uitdrukkelijke handhaving van het voormelde exploot van 15 augustus 2012, voor zover hierbij
niet uitdrukkelijk gewijzigd;

Correspondentie-adres

opgeroepen:

I O 3O E' ' A

Om op woensdag dertig januari tweeduizenddertien, des voormiddags om 10.00 uur, niet
in persoon doch vertegenwoordigd door een advocaat, to verschijnen op de terechtzitting van
de Rechtbank Amsterdam, alsdan zitting houdende in een der lokalen van het
I Gerechtsgebouw aan de Parnassusweg 220, to Amsterdam;

INt Bank
66.09.54.974
1 7.539

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met aanzegginq
a. indien gedaagde verzuimt advocaat to stellen of het hierna to noemen
griffierecht niet tijdig betaalt, en de voorgeschreven termijnen en formaliteiten in
acht zijn genomen, de rechter verstek tegen gedaagde zal verlenen en de hierna
omschreven vordering zal toewijzen, tenzij deze hem onrechtmatig of ongegrond
voorkomt;
b. indien ten minste een van de gedaagden advocaat heeft gesteld en het
griffierecht tijdig heeft voldaan, tussen alle partijen een vonnis zal worden
gewezen, dat als een vonnis op tegenspraak wordt beschouwd;
c. bij verschijning in het geding van ieder van de gedaagden een
griffierecht van € 575,00 zal worden geheven, to voldoen binnen vier weken to
rekenen vanaf het tijdstip van verschijning;
d. van een persoon die onvermogend is, een lager griffierecht wordt geheven,
namelijk van € 73,00, indien hij op het tijdstip waarop het griffierecht wordt
geheven heeft overgelegd:
1e een afschrift van het besluit tot toevoeging, bedoeld in artikel 29 van de
H. nude Elferink Wet op de rechtsbijstand, of indien dit niet mogelijk is ten gevolge van
omstandigheden die redelijkerwijs niet aan hem zijn toe to rekenen, een
afschrift van de aanvraag, bedoeld in artikel 24, tweede lid, van de Wet op
N. Bicker de rechtsbijstand, dan wel
2e eon verklaring van de raad als bedoeld in artikel 1, onder b, van die
E.J. Bru"'
wet, waaruit blijkt dat zijn inkomen niet meer bedraagt dan de bedragen,
bedoeld in artikel 35, derde en vierde lid, telkens onderdelen a tot en met d
dan wel in die artikelleden, telkens onderdeel e, van die wet;
nr. C.S.M. Kruik van straaten met then verstande dat als gevolg van een inmiddels van kracht
'Jurist geworden wijziging van de Wet op de rechtsbijstand nu geldt dat de
verklaring wordt verstrekt door het bestuur van de raad voor
A.M. Bogaard rechtsbijstand, bedoeld in artikel 2 van die wet, terwijl de bedragen
Chef de Bureau waaraan het inkomen wordt getoetst zijn vermeld in artikel 2,
eerste en tweede lid, van het Besluit eigen bijdrage rechtsbijstand;
Bezoekadres e. van gedaagden die bij dezelfde advocaat verschijnen en gelijkluidende
conclusies nemen, op basis van artikel 15 van de Wet griffierechten burgerlijke
E1iiversurrns, it
1 zaken slechts eenmaal een gezamenlijk griffierecht wordt geheven;
Am.s'l ,
ter berechting:

Correspondent;ie-adres
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van de met voormelde, op 15 augustus 2012 aan gerekwireerde betekend exploot van
dagvaarding aanhangig gemaakte zaak.
De kosten dezes zijn nihil

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amended writ

On this day of

1.

in the year two thousand and twelve, at the request of

Colima International Limited, incorporated under the laws of the British Virgin
Islands and having its registered office at Palm Grove House, P.O. Box 438, Road
Town, Tortola, British Virgin Islands; and

II.

Stiehting Fairfield Compensation Foundation, established and having its registered
office at Strawinskylaan 3051, 1077 ZX Amsterdam, the Netherlands;

both for the purposes of these proceedings choosing to reside at Newtonlaan 203, 3584 BH
Utrecht, at the offices of CMS Derks Star Busmann N.V., Lawyers, Notaries and Tax
advisers, from which office Mr. P.J. Soede is appointed counsel in this case and as such shall
appear,

TO:

Respondent: PricewaterhouseCoopers LLP Chartered Accountants, incorporated under
the laws of Canada, having its registered offices at PwC Tower, 18 York Street, Suite 2600,
Toronto, Ontario M5J 0B2, Canada, with no known address or address in the Netherlands,
wherefore pursuant to Article 55 of the Dutch Code of Civil Procedure I have delivered

y

writ to the office of the official of the public ministry of the District Court of Amsterdam at
Parnassusweg 220, 1076 AV Amsterdam, there delivering two copies of my writ together
with two English translations thereof to:

said writ being accompanied by the form referred to in Article 7, section 1 of the Treaty of 15
November 1965 on the service abroad of judicial and extrajudicial documents in civil or
commercial matters, completed by me, the bailiff, in English,

and I have asked the receiving authority to deliver this summons to defendant sub III in
accordance with Articles 3 to 6 inclusive of the Treaty of 15 November 1965 on the service
abroad of judicial and extrajudicial documents in civil or commercial matters, by simple
delivery or, if this is not possible, by communicating in accordance with the law of the state
applied to, in either case against an acknowledgement of receipt,

and a third copy of this writ together with an English translation thereof will today be sent by
me, the bailiff, by registered post with acknowledgement of receipt to defendant sub III at its
abovementioned address.

A receipt is attached to this writ which showes that Oude Elferink Gerechtsdeuwaarders
mentioned above has made payment of the costs for service of this writ of CAN $ 50,- on
the bank account of Ministry of the Attorney General, Ontario Court of Justice, 393 Main
Street, Haileybury, Ontario, P0J 1KO, Canada.

WITH NOTICE:

that respondent at the request of claimants according to the attached summon dated 15
August 2012 by the (assigned junior) bailiff mentioned, is summoned to appear on
Wednesday the twenty-sixth (26th) of September two thousand and twelve, at 10 a.m., not in
person but represented by a lawyer, before the District Court of Amsterdam sitting in one of
the courtrooms of the Court House at Parnassusweg 220, 1076 AV Amsterdam, to the point
and for the purpose of in the writ mentioned:
that respondent mistakenly has been summoned within a too short term. A term of four weeks
has been observed.
that a term of three months should have been observed and that the Court House allowed
claimants to correct afore-mentioned by notice of an amended writ to respondent;

that respondent hereby is summoned to appear on a new date of the hearing;

subsequently, I (assigned junior) bailiff have, the respondent by this writ, on express
upholding of the afore-mentioned writ dated 15 August 2012, in so far as hereby not
explicitly amended;

SUMMONED TO APPEAR:

on Wednesday the thirtieth of January two thousand and thirteen, at 10 a.m., not in person but
represented by a lawyer, before the District Court of Amsterdam sitting in one of the
courtrooms of the Court House at Parnassusweg 220, 1076 AV Amsterdam;

THEY BEING INFORMED:
a.

that if a defendant delays in appointing a lawyer or fails to pay the court fee referred to
below in a timely manner, and the prescribed terms and formalities have been observed,
the judge will declare the defendant in default and grant the request described
hereunder, unless he deems it unwarranted or groundless;

b.

that if at least one of the defendants has appointed a lawyer and paid the court fee in a
timely manner, a single ruling shall be made as regards all parties, which shall be
considered to be judgement after trial;

c.

that each defendant appearing in the proceedings shall be charged a court fee of €575.00
to be paid within four weeks of the appearance;

d.

that any person who is indigent shall be charged a reduced court fee of £73.00
providing such person produces, within the time in which the court fee is due:
1.

a copy of the resolution to provide aid as referred to in Article 29 of the Legal Aid
Act, or if this is impossible due to circumstances not reasonably attributable to
such person, a copy of the application referred to in Article 24, section 2 of the
Legal Aid Act, or

2.

a declaration of the Legal Aid Council as referred to in Article I b) of said Act to
the effect that his income is not more than the amounts referred to either in
subsections a) to d) inclusive, or in subsection e), of sections 3 and 4 of Article 35
of said Act;
on the understanding that as a result of an amendment to the Legal Aid Act
which has meanwhile come into effect, the declaration will now be made by
the Board of the Legal Aid Council as referred to in Article 2 of the Act, while
the amounts against which the income is measured are as mentioned in Article
2, sections 1 and 2 of the Decree on own contributions to legal aid;

e.

that, on the basis of Article 15 of the Law on Court Fees in Civil Cases, defendants
appearing with the same lawyer and pleading similarly are charged a joint, once-only
court fee;

IN ORDER:

to adjudicate the above-mentioned by writ served on respondent on 15 August 2012
commenced proceedings.
he costs of this writ are nil

r

.
11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

SUMMONS AND INCIDENTAL DEl\
DUTCH CODE OF

W~Y\.g
VOJA.f~~

c~ {V\0...
On this day of

I.

vijftiende augu stusin the ye

d9fl- 43AOFTHE

.e.M-

TQl { WJ..

g~ .
t the request of

Colima International Limited, incoq
Islands and having its

r~gistered

he British Virgin

officE

. Box 438, Road

Town, Tortola, British Virgin Islands; an
II.

Stichting Fairfield Compensation Fou

.

-- --~ .. ~u......

uuu

uC1ving its registered

office at Strawinskylaan 3051, 1077 ZX Amsterdam, the Netherlands;

both for the purposes of these proceedings choosing to reside at Newtonlaan 203, 3584 BH
Utrecht, at the offices of CMS Derks Star Busmann N.V., Lawyers, Notaries and Tax
advisers, from which office Mr. P.J. S,oede is appointed counsel in this case and as such shall
appear,

Heb ik, Hendrikus Oud~ T-''~-"" - :.., lt: .
gerechtsdeurwaarder te AmM.:.r...am.
kantoor houdende aldaar
aan de Hilversum~ traat 336;

I HAVE SUMMONED:

I.

PricewaterhouseCoopers N.V. having its registered offices at Thomas R. Malthusstraat
5, 1066 JR Amsterdam, choosing to reside at the office of Mr. D.F. Lunsingh Scheurleer
of NautaDutilh N.V, Strawinskylaan 1999, 1077 XV Amsterdam for the purposes of
these proceedings, at which address I have delivered my writ and copy thereof to:

1

..... . '.
.. .:

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

II.

PricewaterhouseCoopers Accountants N.V. having its registered offices at Thomas R.
Malthusstraat 5, 1066 JR Amsterdam, choosing to reside at the office of Mr. D.F.
Lunsingh Scheurleer ofNautaDutilh N.V, Strawinskylaan 1999, 1077 XV Amsterdam
for the purposes of these proceedings, at which address I have delivered my writ and
copy thereof to:

III.

PricewaterhouseCoopers LLP Chartered Accountants, incorporated under the laws
of Canada, having its registered offices at PwC Tower, 18 York Street, Suite 2600,
Toronto, Ontario M5J OB2, Canada, with no known address or address in the
Netherlands, wherefore pursuant to Article 55 of the Dutch Code of Civil Procedure I
have delivered my writ tQ the office of the official of the public ministry of the District
Court of Amsterdam at Parnassusweg 220, 1076 AV Amsterdam, there delivering two
copies of my writ together with two English translations thereof to:

said writ being accompanied by the form referred to in Article 7, section 1 of the Treaty
of 15 November 1965 on the service abroad of judicial and extrajudicial documents in
civil or commercial matters, completed by me, the bailiff, in English,

and I have asked the receiving authority to deliver this summons to defendant sub III in
accordance with Articles 3 to 6 inclusive of the Treaty of 15 November 1965 on the
service abroad of judicial and extrajudicial documents in civil or commercial matters, by
simple delivery or, if thi~ ,is not possible, by communicating in accordance with the law
of the state applied to, in either case against an acknowledgement of receipt,

and a third copy of this writ together with an English translation thereof will today be
sent by me, the bailiff, by registered post with acknowledgement of receipt to defendant
sub III at its abovementioned address.
2

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

A receipt is attached to this writ which showes that Oude Elferink Gerechtsdeuwaarders
mentioned above has made payment of the costs for service of this writ of CAN $ 50,on the bank account of Ministry of the Attorney General, Ontario Court of Justice, 393
Main Street, Haileybury, Ontario, POJ 1KO, Canada.

TO APPEAR:

on Wednesday the twenty-sixth (26th) of September two thousand and twelve, at 10 a.m., not
in person but represented by a lawyer, before the District Court of Amsterdam sitting in one
of the courtrooms of the Court House at Parnassusweg 220, 1076 AV Amsterdam;

THEY BEING INFORMED:

a.

that if a defendant delays in appointing a lawyer or fails to pay the court fee referred to
below in a timely manner, and the prescribed terms and formalities have been observed,
the judge will declare the defendant in default and grant the request described hereunder,
unless he deems it unwarranted or groundless;

b.

that if at least one of the defendants has appointed a lawyer and paid the court fee in a
timely manner, a single ruling shall be made as regards all parties, which shall be
considered to be judgement after trial;

c.

that each defendant appearing in the proceedings shall be charged a court fee of€575.00
to be paid within four weeks of the appearance;

d.

that any person who is indigent shall be charged a reduced court fee of€73.00 providing
such person produces, within the time in which the court fee is due:
3

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

1.

a copy of the resolution to provide aid as referred to in Article 29 of the Legal Aid
Act, or if this is impossible due to circumstances not reasonably attributable to
such person, a copy of the application referred to in Article 24, section 2 of the
Legal Aid Act, or

2.

a declaration of the Legal Aid Council as referred to in Article 1 b) of said Act to
the effect that his income is not more than the amounts referred to either in
subsections a) to d) inclusive, or in subsection e), of sections 3 and 4 of Article 35
of said Act;
on the understanding that as a result of an amendment to the Legal Aid Act
which has meanwhile come into effect, the declaration will now be made by
the Board of the Legal Aid Council as referred to in Article 2 of the Act, while
the amounts against which the income is measured are as mentioned in Article
2, sections 1 and 2 of the Decree on own contributions to legal aid;

e.

that, on the basis of Article 15 of the Law on Court Fees in Civil Cases, defendants
appearing with the same lawyer and pleading similarly are charged a joint, once-only
court fee;

; .' . I

4

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

.. .
.

IN ORDER:

To hear the conclusions and demands as follows:

I.

OVERVIEW

1.1

The summons is composed as follows:

I.

OVERVIEW.................................................................................. Page. 5

II.

INTRODUCTION .... :..'.......................................................................... ?
II.1
11.2

Core of the dispute .............................................. .............................. 7

II.3

Parties ..................................................................................... 8

11.4
III.

Madoff fraud .............................................................................. 7

Funds ..................................................................................... 11

FACTUAL BACKGROUND .................................................................. 14
111.1

Ponzi scheme at BMIS ................................................................. 14

111.2

Structure of the Funds, service-providers of the Funds and
implications as regards risk factors ....................................................... .15

A.

Managers/directors of the Funds............................. .. ......................... 16

B.

Investment manager of the Funds .......................................................... 16

C.

Custodian and administrator of the Funds................................................ 17

D.

Sub-custodian, sub-investment manager and
broker/ dealer

of the Funds ... ............................... .............................25

E.

Implications of this structure as regards risk factors .................................... 29

III.3

Role ofPwC ................................. ................... ...................... ... 31

III.4

Importance and significance ofPwC's role as auditor of the
Funds .............................................................................................................. 32

111.5 Disciplinary proceedings .................................................................. 35
IV.

APPLICABLE LAW.............................................................................. 37
5

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

IV.l
IV.2
V.

Misconduct (toJ1) ............................................................................. 37
Performance of task ..................................................................... 39

LEGAL FRAMEWORK ........................................................................ 41
V.l
V.2

Audit standards to be complied with .................................................. 43

V .3
VI.

Auditor's duty of care vis-a-vis third parties ......................................... .41

Application of legal framework ...................................................... .47

IN THE INCIDENTAL CLAIM............................................................... 58
VI. I

The demand under Article 843a of the Dutch Code of Civil Procedure .......... 58

VII.

Defences raised by PwC against the demand and the corresponding grounds ............ 67

VIII.

Evidence offered ..... ................... ......................... .... .. .......................... 67

IX.

Jurisdiction of the District Court of Amsterdam............................................... 67

X.

Indication reappearance .............. ................................. .......................... 68

!• l ' '

,•

6

11200554//2906531
Translation writ Colina -Stichting I PwC
Original document in Dutch

II.

INTRODUCTION

ILl

Madofffraud

2.1

The now globally notorious fraud perpetrated by New York investment guru Bernard

.•'

Madoff ("Madoff') and his firm Bernard L. Madoff Investment Securities Inc.
("BMIS") came to light at the end of 2008. Unless otherwise indicated hereafter,
Madoff and BMIS are hereinafter to be identified as being one and the same.

2.2

Madoffs modus operandi has meanwhile become sufficiently well known. He
generated his money both through direct clients (mainly from the United States) and
via so-called feeder funds. These feeder funds (investment funds) attracted money
from private individuals, companies and other funds, and then let these assets almost
entirely managed by Madoff, who moreover obtained exclusive and full control of
these assets. The feeder funds enabled Madoff to attract even more money - tens of
billions according to available sources- from all over the world. Investors' money
entrusted to Madoff was actually not invested, as subsequently came to light.
Payments to redeeming investors (redemptions) were paid from new investors'
subscriptions. The amounts redeemed were equal to (i) the money initially invested
and (ii) the "fictitious profits" accumulated to date (there were no regular dividend
payments). Such a scheme works well as long as the newly attracted capital exceeds
the pay-outs. When the increase in new investors tails off, as it did in this case because
of the credit crisis, the scheme gets stuck and the Ponzi fraud is exposed. Madoff has
been sentenced to 150 years in jail for this fraud.

IL2

Core of the dispute

2.3

In essence, this case 'concerns the defendants' liability, as auditors of a number of
investment funds- the "Funds", as further defined hereunder- which allowed their
money to be managed by Madoff, towards defrauded investors because of the
defective and negligent performance of their task, as a result of which investors
7

11200554//2906531
Translation writ Colina -5tichting I PwC
Original document in Dutch

suffered losses. By not exercising the degree of care that external auditors must
observe in their activities as regards the standards of care applicable to corporate
affairs, they wrongly issued unqualified opinions on financial statements containing
material misstatements·.i Had no such unqualified opinions been given, it would not
have been possible for the Fairfield Funds to attract or continue attracting investors'
money - including that of the Plaintiffs- worldwide, and the Plaintiffs would not have
lost their investment.

IL3

Parties

2.4

Defendants sub I and sub II (individually "PricewaterhouseCoopers N.V." and
"PricewaterhouseCoopers Accountants N.V." respectively, and collectively "PwC
Nederland"), and Defendant sub III ("PwC Canada") form part of the worldwide
network of member firms of PricewaterhouseCoopers International Limited, a private
company limited by guarantee, incorporated in the United Kingdom (PwC Nederland
and PwC Canada are referred to collectively as "PwC").

2.5

PwC acted as auditor to the Madoff funds relevant to these proceedings. PwC wrongly
issued unqualified opinions on the financial statements of these investment funds
without any qualification. Exceptional importance is attached to auditors' statements.
The auditor's report is supposed to present a true and fair picture. In this case the
importance of reliable audit of the financial statements by an auditor was even greater,
because these controls were the only form of effective external and independent
supervision of the Funds. As will be described in more detail in discussing the Funds,
the Funds' investment performance and portfolio were not subject to any form of
supervision by a market authority. This was even presented as a risk in Fund
documentation:
''Absence of Regulatory OVersight. While the fund may be considered similar to an
investment company, it does not intend to register as such under the US. Investment
Company Act of 1940, as amended, in reliance upon an exemption available to
8

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privately offered investment companies, and, accordingly, the provisions of that Act
(which, among other matters, require investment companies to have disinterested
directors, require securities held in custody to at all times be individually segregated
from the securities of any other person and marked to clearly identify such securities
as the property of sue~ :investment company and regulate the relationship between the
adviser and the investment company) will not be afforded to the Fund or the
shareholders." (Exhibit 2, p. 21 ).
Exhibit 2 and the exhibits mentioned hereafter will be submitted on the day on which
the case will come up.

This meant that PwC's audits of the Funds' financial statements were the only form of
external and independent oversight. The fmancial statements constituted - together
with the monthly NAV (Net Asset Value) calculations- the basic information on the
results and assets of the Fairfield Funds. The fact that there was an auditor who was
entrusted with carrying out ,audits of the financial information of these funds was
therefore an essential guarantee and comfort to all third parties. It is clear that the
fraud perpetrated over a number of years led to the Funds' financial statements
presenting a misleading:picture of the Funds' fmancial position.
Colima

2.6

Plaintiff sub I ("Colima") was incorporated under the laws of the British Virgin
Islands on 4 January 2000. Colima invested money (in)directly in Sentry, one of the
funds discussed hereinafter. Colima's Articles of Association are enclosed as Exhibit

3.
The Foundation on behalfo(the victims collectively

2.7

Plaintiff sub II (hereinafter the "Foundation") is a Dutch stichting (foundation)
incorporated on 6 July 2009 by Deminor Nederland B.V., a private limited liability
company.

.

'•

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2.8

According to its Articles of Association, the Foundation's aim is to recover losses
suffered by investors on their investments in the Sentry and/or Sigma and/or Lambda
investment funds as discussed hereunder (exhibit 4). Investors in these funds can join
the Foundation by signing a panicipation agreement with the Foundation (exhibit 5 is
a specimen participation agreement; the (remaining) participation agreements will be
filed with the Clerk of the Court) in which the participant declares that he (i) holds
shares in Sentry and/or Sigma and/or Lambda, (ii) assigns his claim under mandate
within the meaning of Article 7:414 of the Dutch Civil Code to the Foundation for
prosecution, (iii) grants the Foundation an exclusive power of attorney to take judicial
and/or other measures in its own name or in that of the participant and (iv) authorises
the Foundation to

se~le

the dispute collectively in accordance with the Dutch

Collective Settlements Act as it applies to mass damage cases (those who have signed
or shall have signed a participation agreement being collectively referred to as the
"Participants"). The Foundation thus appears in these proceedings as proxy holder,
and based on the power of attorney granted to it to this end, brings the claims in its
own name on behalf of the Participants.

2.9

The Foundation is a foundation with full legal capacity, whose purpose according to
its Articles of Association is to defend the interests of investors in the Funds including, but not limited to, the Participants - so that, in view of the legal claim
brought by it, to that extent it complies with the requirements laid down by Article
3:305a of the Dutch Civil Code. In this case the Foundation represents the interests of
the Participants, and in general of the investors, who invested in Sentry and/or Sigma
and/or Lambda. The Foundation's collective action is aimed at obtaining a declaratory
judgment to the effect that PwC acted wrongfully and, for the Participants, a finding of
joint and several liability on the part of PwC to pay indemnification in an amount to be
determined subsequently. The Participants (and Colima) accuse PwC, in short, of
having failed to fulfil its (legal) task as auditor of Madoff funds by not complying with
standards regarding the performance of its task and by carrying out audits in an
inadequate manner and with insufficient professional skepticisim. If PwC had acted as
should be expected of a diligent and reasonable auditor, then no unqualified opinions
would have been issued, and it would then have been impossible for the Funds to
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attract or continue to attract money from investors worldwide - including from the
Plaintiffs - and the Plaintiffs would not have lost their investment. Since PwC did not
act in this way, the investors in the Funds, including the Participants (and Colima)
have suffered losses. That is a sufficient similar interest for the Foundation to be heard
in a collective action under the terms of Article 3:305a of the Dutch Civil Code. The
Foundation accordingly brings the claim primarily as a collective action based on
Article 3 :305a of the Dutch Civil Code on behalf of all investors in the Funds,
regardless of whethe.r or not they are Participants; and subsidiarity on behalf of, and as
mandate holder of, the Participants.

2.10

In these proceedings the only matter to be ruled on is whether or not PwC's conduct
was wrongful. In answering this question, special circumstances relating to the
Participants can be set aside. Such circumstances are relevant only to questions
regarding such matters as (size of) damages, causation and own fault and therefore
circumstances that can be taken into account in establishing any indemnification that
might be awarded to the Participants. Accordingly, this also provides an effective and
efficient legal protection, since, amont other things, contradictory decisions regarding
the question of wrongfulness ·can be avoided, which is also in PwC's interests.

2.11

Colima and the Foundation are referred to jointly as the "Plaintiffs".

IL4

Funds

2.12

In these proceedings the Foundation is defending the collective interests of the
victims, including approximately 700 Participants who, like Colima, invested and on
10 December 2008 (based on the last available NAV) represented a total investment of
approximately €190 million, in the .following investment funds:

Fairfield Lambda Limited ("Lambda"), incorporated on 7 December 1990;
Fairfield Sigma Limited ("Sigma"), incorporated on 20 November 1990; and
Fairfield Sentry Limited ("Sentry"), incorporated on 30 October 1990.

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The Plaintiffs, like the other investors in the Funds, are the beneficial owners of the
investments in the Funds. This means that they are those who bear the risks of any loss
on the investment and they are entitled to claim indemnification in compensation for
the damage suffered because ofPwC's misconduct.

2.13

Lambda, Sigma and Sentry are collectively referred to as the "Funds".

2.14

The Funds are all incorporated in the British Virgin Islands. Fairfield Greenwich
(Bermuda) Limited ("Fairfield") is the investment manager of the Funds. All monies
invested by investors in Lambda and Sigma were invested by Lambda and Sigma in
Sentry. Thus Lambda and Sigma are feeder funds of Sentry. In fact, for investors it
makes no difference whether they invested in Sigma and/or Lambda on the one hand
or in Sentry on the other, since their money was ultimately invested in Sentry, whether
directly or indirectly.

2.15

As regards involvement and supervision by market authorities, the following applies
(exhibit 2, p. iv; see also exhibit 1, p. iv):

"The Fund is incorporated as an International Business Company under the
International Business Companies Act of the British Virgin Islands. The Fund
constitutes a ''professional fund" as defined in the Mutual Funds Act, 1996 (as
amended) of the British Virgin Islands (the "BVI Act'') and as such is required to be
and is recognized as a ''professional fund" under the provisions of the BVI Act. Such
recognition does not entail supervision of the investment performance or portfolio of
the Fund by the Financial Services Commission of the British Virgin Islands (the
"BVI''), which accepts no responsibility for the financial soundness of the Fund or the
correctness of any statements or opinions expressed herein. (. .. )

As an entity regulated under the BVI Act, the Fund will be subject to the supervision of
the Financial Services Commission in the BVL which is authorized by the BVI Act to
direct the Fund to furnish information or provide access to any records, books or

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other documents which it deems necessary to ascertain compliance with the BVI Act
or any regulations made under the BVI Act."

2.16

Sentry was listed on the Irish Stock Exchange, in Dublin, under SEDOL number
0330934. There was however no public trading on the stock exchange, and the
shareholders' redemption rights were not affected by the listing (exhibit 2, p. 3; see
also exhibit 1, p.3). The Fund's administrator, Citco Fund Services (Europe) B.V.,
was responsible among other things for calculating the Net Asset Value ("NAV"), or
the net worth of the Funds per share and informing the Irish Stock Exchange directly
(exhibit 2, p. 12; see also exhibit 1, p.ll). So far as is known there were no other

obligations whatsoever :for Sentry regarding the listing on the Irish Stock Exchange
based on which more control was exercised over Sentry. The lack of oversight by a
market authority also appears from the Fund's basic documentation (Private Placement
Memorandum): "Absence of Regulatory Oversight." (Exhibit 2, p. 21 ).

2.17

Up until the end of November 2008 Lambda and Sigma (indirectly), together with
Sentry (directly), entrusted approximately USD7.2 billion to BMIS, of which the
approximate equivalents of EUR720 million originated from Sigma and EUR29
million from Lambda. As well as Lambda and Sigma, Sentry thus also had its own
investors unrelated to Sigma or Lambda. Sentry was one of the biggest if not the
biggest fund among BMIS' clients.

2.18

While investors, including the Plaintiffs, had entrusted their money to Sentry, Lambda
and/or Sigma, which\!). turn had entrusted it to Citco as depository and custodian, the
money invested ultimately went to Madoff who, as will be explained later, had direct,
total and exclusive control of it, which made it possible for him to set up and maintain
his Ponzi scheme.

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III.

FACTUAL BACKGROUND

JILl

Ponzi scheme at BMIS

3.1

In December 2008 it came to light that Madoff, founder and owner of BMIS, had
defrauded the investors whose assets had been entrusted to BMIS over the years, by
using a so-called Ponzi scheme.

3.2

In a Ponzi scheme, a group of investors is offered the chance to invest money in a
given fund or through a given intermediary. The prospect of unusually high and/or
unusually stable returns is often held out to these investors. These returns are usually
I

explained by reference to a 'secret' investment strategy that can be found only with
this fund or intermediary. In reality the money invested is hardly used or not used at
all to make investments but to pay back exiting investors' funds plus fictitious profits.
Meanwhile the perpetrator of the fraud receives remunerations for the services
supposedly provided. .

3.3

Upon exiting a Ponzi scheme (redemption), investors- particularly those who invested
in it relatively early on- generally receive a (fictitious) return on their 'investment'.
However these amounts are fmanced from new investors' subscriptions. This creates
the illusion of a successful investment, certainly in the minds of existing investors, but
also of potential ones, enhancing the credibility of the investment strategy (and of the
fund or intermediary implementing it). This in turn entices more and more new
investors to invest

in the

same strategy. This snowball effect repeats itself until it

becomes widely evident that a Ponzi scheme is at work. Investors then usually try to
withdraw their money from the fund - all too often in vain, as a result of the
bankruptcy of the fund or the intermediary.

3.4

An important difference between the above example of a Ponzi scheme and the present

case is that the latter involved not a fund of BMIS itself in which other funds or
investors invested, but funds that held accounts with BMIS and had their assets
managed by BMIS through these accounts. These BMIS-managed funds showed
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fictitious gains, which the operation of the Ponzi scheme made possible to pay out. For
years BMIS carried on in this way, until Madoff confessed and it became painfully
clear that there was a large-scale Ponzi scheme behind BMIS. The exact size of this
fraud is still not known, but it is certainly in the tens of billions of US dollars. Not long
after the Ponzi scheme at BMIS was unveiled, BMIS filed for bankruptcy, as did many
funds, including Sentry, Lambda and Sigma, whose assets had been entrusted to and
managed by BMIS.

3.5

The bankruptcy of BMIS thus led to the Funds, which had entrusted practically all
their assets directly or indirectly to BMIS as manager and sub-custodian, also going
into liquidation (a situation comparable to that of bankruptcy under Dutch law).
Consequently investors in the Funds, including the Plaintiffs, suffered enormous
losses; they are expected to lose virtually their entire investment in the Funds. It is
highly unlikely that they will ever recover anything of their investment. In any case
they will never recover their full investment.

3.6

As the main person responsible for this fraud, Madoff was sentenced on 29 June 2009
by a US judge to a term .of imprisonment of 150 years.

III.2

Structure of the Funds, service-providers of the Funds and implications as regards
risk factors

3. 7

The Funds are investment funds incorporated in the British Virgin Islands.
Investments in Lambda were made in Swiss francs, those in Sigma in euros and those
in Sentry took place in US dollars. All monies invested by investors in Lambda and
Sigma were invested
· -

py
...

Lambda and Sigma in Sentry. Thus Lambda and Sigma are

'"

0

feeder funds of Sentry.

Fairfield was the manager of the Funds. Various entities were involved with the Funds
as service providers. These separate roles are detailed hereunder. A graph
summarizing the

rela~.9ns

between the aforementioned entities and their investments

is attached as exhibit 6.
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A. Managers/directors o[the Funds
3.8

The managers of the Funds had "overall management responsibility" for the Funds,
including "establishing investment, dividend and distribution policy, and having the

authority to select and replace the Fund's administrator, registrar and transfer agent,
custodian, any officers of the Fund and other persons or entities with management or
administrative responsibilities to the Fund. None of the Fund's Directors own an
equity interest in the Fund." (exhibit 1, p. 5 and exhibit 2, p. 6).

3.9

The board of directors of the Funds consisted of three individuals: Messrs. Walter M.
Noel Jr., Jan R. Naess and Peter P. Schmid (exhibit 1, p. 5; see also exhibit 2, p. 6).
Mr. Noel was also a director of the investment manager of the Funds.

B. Investment manager o[the Funds

3.10

Fairfield was the investment manager of the Funds (exhibit 2, p. 7; see also exhibit 1,
p. 6). As manager of the Funds, Fairfield had- in summary- the following obligations

(exhibit 1, p. 6; see also exhibit 2, p. 7):

"It is responsible for the management of the Fund's investment activities, the selection
of the Fund's investments, monitoring its investments and maintaining the relationship
between the Fund and its custodian, administrator, registrar and transfer agent."

3.11

The Funds' investment policy was as follows (exhibit 1, p. 8) and exhibit 2, p. 9):

"The Fund seeks to obtain capital appreciation of its assets principally through the
utilization of a non-traditional options trading strategy described as "split strike
conversion'~

to which the Fund allocates the predominant portion of its assets"

and (exhibit 1, p. 9 and exhibit 2, p. 10):

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"The Investment Manager, in its sole and exclusive discretion, may allocate a portion
of the Fund's assets (never to exceed, in the aggregate, 5% of the Fund's Net Asset
Value, measured at ·.fhe time of investment) to alternative investment opportunities
other than its "split strike conversion" investments (the "Non-SSC Investments'T'

3.12

Exhibit 7 is the Investment Management Agreement between Fairfield and Sentry of 1

October 2004. Exhibit 8 is the Investment Management Agreement between Fairfield
and Sigma of 1 October 2004. By virtue of these agreements Fairfield undertook, inter
alia:
to manage the investments in the manner described in the Private Placement
Memorandum (Article 1); and
"to perform or oversee the day-to-day investment operations of the Fund' (Article
2 b));

"to provide information in connection with the preparation of all reports to the
Funds' shareholders described in the memorandum in connection with the
investment decisions" (Article 2 d)); and
"send to the Fund weekly and monthly valuations of the SSC Investments and NonSSC Investments" (Article 3)

C. Custodian and administrator ofthe Funds

3.13

The Citco group performed an important function within the Funds. Various Citco
entities, namely Citco Global .Custody N.V. ("CGC"), Citco Bank Nederland N.V.,
Dublin Branch ("CBN") and Citco Fund Services (Europe) B.V. ("CFS") (the Citco
entities being referred to collectively as "Citco") acted inter alia as custodian,
depository and administrator for the Funds. The use of these entities to perform
fundamental tasks such as those of depository, custodian and administrator was aimed
at enhancing the credibility of the Funds and thus the trust of third parties such as
investors.

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(i)

3.14

Citco entities as bank and custodian for the Funds

From Sentry's PPM of2004 it appears that CBN acted as bank and that CGC acted as
custodian (exhibit 1, p. 14):
'·

'

"The Funds' escrow account is maintained at Citco Bank Nederland N. V. ("Citco
Bank"). Citco Global Custody ("Citco Custody") has agreed to act as custodian of the
Fund's assets."

3.15

It further appears from Sentry's 2006 PPM that by virtue of a custodian agreement,
CBN and CGC agreed to provide 'custodial services' (exhibit 2, p. 16):
"Pursuant to a custodian agreement (the "Custody Agreement"), Citco Bank
Nederland N. V., Dublin Branch ("Citco Bank") and Citco Global Custody N. V.
("Citco Depository") have agreed to provide custodial services to the Fund."

3.16

CBN is an investment company based in the Netherlands with a licence from DNB
(De Nederlandsche Bank, the Dutch Central Bank) for the conduct of banking

business. CGC is a wholly-owned subsidiary of CBN. As regards the custodian
business carried on by CGC and CBN through their Dublin branch, these activities
also fall under Dutch supervision. This follows from Article 4:1 of the Wft (Wet
financieel toezicht, the Dutch Financial Supervision Act, hereinafter "Wft") which

declares the 'Supervision of conduct of financial undertakings' section of the Wft
applicable to investment companies having their head office in the Netherlands. No
exception to this is made for Article 4:87 of the Wft which applies here. Pursuant to
Article 4:87 of the Wft, CBN and CGC are obliged to take adequate measures to
safeguard their clients' rights regarding financial instruments held for clients.
Compliance with the rules on segregation of assets must first and foremost prevent
financial instruments belonging to clients from being considered part of the investment
company's assets in the event of the latter's bankruptcy.

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3.17

Article 4:87, section 3 of the Wft forms a basis for establishing further rules on the
protection of clients' rights regarding financial instruments and money held by
investment companies. This concerns Articles 58-58d and 165-165d of the Bgfo
(Besluit gedragstoezicht financiele ondernemingen or Decree on the Supervision of

Conduct of Financial Companies) of the Wft (hereinafter "Bgfo"). The relevant Article
here is Article 165a of the Bgfo. From Article 165a of the Bgfo it follows specifically
that CBN and CGC must exercise the necessary care, competence and vigilance in
selecting, appointing and controlling sub-custodians such as BMIS. Moreover, these
tasks and duties were explicitly mentioned in Sentry's PPMs of2004 and 2006.
3.18

Furthermore, pursuant to Article 6:14 of the Nrgfo (Nadere regeling gedragstoezicht
financiele ondernemingen or Further Regulations on the Supervision of Conduct of

Financial Companies, hereinafter "Nrgfo") CBN and CGC are obliged to make such
arrangements regarding clients' financial instruments in order to provide adequate
protection for those clients' rights. In this respect Article 6:18 of the Nrgfo is also
relevant:

"An investment firm holding a licence granted by [DNB] to conduct the business of a
bank, may comply w~th the requirements of Article 6:14 by concluding an agreement
with the client, stipulating at least that a credit or debit to the financial instruments
account of the client held with the credit institution only takes place together with a
simultaneous debit or credit of the amount to be received or due as a result of the note
regarding financial instruments note to the designated cash account of the client and:
a. the financial instruments are held and managed in accordance with the Securities
Bank Giro Transactions Act, if the financial instruments are subject to the Securities
Bank Giro Transactions Act and the investment firm is a member of Necigef (the
Dutch Central Securities Depository); or
b. the financial instruments are held by a depository and the following conditions have
been met:
- the depository firm is a legal entity under Dutch law;
- any person who represents the depository firm pursuant to its Articles ofAssociation
or regulations or detetmines its day-to-day policy, must be sufficiently knowledgeable

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regarding the conduct of the business of the depository firm. The reliability of the
persons referred to in the preceding sentence and of the persons who are directly or
indirectly authorised to appoint or dismiss those persons must also be beyond doubt;
- persons who perform work for the depository firm may not be employed by the
business unit of the investment firm, holding a licence to conduct the business of a
bank granted by [DNB], that performs transactions in financial instruments;
- the depository firm performs no other activities than the safekeeping of financial
lj

instruments;
-the depository firm has an equity capital of at least £125, 000;
- the sum of the units in financial instruments held by clients equals the sum of the
financial instruments held by the depository firm for clients;
- the fulfilment of the obligations of the depository firm is guaranteed by the
investment firm;
- the AFM (Netherlands Authority for the Financial Markets) can make all the
enquiries at the depository firm, or have others make these enquiries, that in the
opinion of the AFM are necessary for the proper performance of its statutory duties
and powers;
-the depository firm only acts·in the interests of the clients ofthe investment firm on
whose behalffinancial instruments and moneys are deposited with the depository firm;
- the depository firm, i.J,·,liable to the clients for any damage suffered by them, insofar
as this damage is caused by imputable non-compliance with its obligations;
- the depository firm provides for a procedure, should the depository firm announce
its intention to end its role; and
- The depository firm organises its operations in such a way as to guarantee the
controlled and sound conduct of its business, in accordance with sections 31 (1), (2)
and (3), 31(b), 35(1), (2) and (4) and 165(1) a) to c) inclusive, ofthe Bgfo."

3.19

Pursuant to the aforementioned Article, CBN and CGC were obliged amongst other
things to act exclusively in the interests of their clients (i.e. the Funds), for which
financial instruments and money had been entrusted for safekeeping by the custodian.
Thus Citco, as custodian, was obliged by the aforementioned Dutch financial
supervision rules to keep the Funds' assets (i.e. the investments of, amongst others, the

20

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•.

Plaintiffs) legally segregated from the other assets in custody and in this way to ensure
that monies entrusted to it as custodian were protected from the consequences of fraud,
abuse or bankruptcy. The solvency of the custodian is thus of great importance.

3.20

The custodian agreement(s) between the Funds and Citco provide further
understanding of the contractual relationship between the Funds and Citco. The
Plaintiffs have a number of agreements in their possession. In summary, the following
can be stated as regards the contractual relations with Citco.

3.21

The 2004 PPM for Sentry shows that CGC acted as custodian for Sentry, at least since
an agreement dated 20 September 1994. The same PPM also shows that CBN held an
escrow account for Sentry. Sigma's 2004 PPM shows that CGC had also been
appointed as custodian for Sigma. Apparently CGC also acted as custodian for
Lambda in the same period. These appointments were the subject matter of
agreements. Exhibit 9 relates to the Brokerage & Custody Agreement of 1 September
2003 between CBN, CGC and Sentry. Exhibit 10 relates to the Brokerage & Custody
Agreement dated 12 August 2003 between CBN, CGC and Sigma.

3.22

Sentry's 2006 PPM shows once again that CBN and CGC had agreed to provide
custodial services to Sentry. This was also the subject matter of agreements. Exhibit
11 relates to the Custodian Agreement of 3 July 2006 between CBN, CGC and Sentry.

This Custodian Agreement replaced the aforementioned Brokerage & Custody
Agreement of 1 September 2003 (see above).

3.23

The tasks and duties of CBN and CGC as described m these agreements are
summarised as follows in the PPM for Sentry and Sigma:

For Sentry:

"All assets under custody will be held by Citco Custody and/or a Sub-Custodian,
as the case may be, in a separate client account and will be separately designated

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in the books and records of Citco Custody and the Sub-Custodians." (Exhibit 1,
p.15, emphasis added)

"Sub-custodians may be appointed by Citco Custody provided that Citco Custody
shall exercise reasonable skill, care and diligence in the selection of a suitable
sub-custodian and shall be responsible to the Fund for the duration of the subcustody agreement for satisfying itself as to the ongoing suitability of the subcustodians to provide custodial services to the Fund. Citco Custody will also
maintain an appropriate level of supervision over the sub-custodians and will
make appropriate inquiries periodically to confirm that the obligations of the subcustodians continue to be completely discharged." (Ibid, emphasis added)
"Citco Bank shall, to the extent it deems necessary, appoint and Citco Depository
shall make use of sub-custodians with respect to certain securities of the Fund
Citco Bank will not be liable for any act or omission or for the solvency of such
sub-custodians, provided Citco Bank exercised due care in selecting the subcustodians. Citco Depository will not be liable for any act or omission or for the
solvency of such sub-custodians. Citco Bank will exercise reasonable skill, care
and diligence in the selection of a suitable sub-custodian and shall be
responsible to the Fund for the duration of the sub-custody arrangement for
satisfying itself as to the ongoing suitability of the sub-custodian to provide
custodial services to the Fund. Citco Bank will maintain an appropriate level of
supervision over the sub-custodian(s) and make appropriate enquiries,
periodically, to confirm that the obligations of the sub-custodian(s) continue to
be competently discharged." (Exhibit 2, p.16, emphasis added)

For Sigma:

"Citco Global Custody N V. has been appointed as Custodian by the Fund The
Custodian will be entrusted with the safe custody of certain financial investments
of the Fund pursuant to a custody agreement made and entered into between the
Fund and the Custodian. ('... ) The Custodian may make use of sub-custodian and
depositories in the exercise of its functions. ( ... ) Where sub-custodians are
appointed, the Custodian must exercise reasonable skill, care and diligence in

22

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the selection of sub-custodians and is responsible to the Fund for the duration of
the appointment of each sub-custodian, for satisfying itself as to the ongoing
suitability of the sub-custodians to provide custodial services to the Fund. In
addition, the Custodian must maintain an appropriate level of supervision over
the sub-custodians and make appropriate enquiries, from time to time, to
confirm that the obligations of the sub-custodians continue to be completely
discharged." (Exhibit 12, p. 15; see also exhibit 13, p. 16 emphasis added.)

(ii)

3.24

Citco entities as administrator for the Funds

..

In addition to being a custodian, Citco entities were also actively involved with funds
as an administrator. Sentry's 2004 PPM shows that CFS acted as administrator
(exhibit 1, p. 15):

"Pursuant to an agreement between Citco Fund Service (Europe) B. V. and the Fund,
Citco serves as the administrator for the Fund, under the overall direction of the
Funds' Board of Directors"

3.25

As administrator, Citco was responsible inter alia for calculating and publishing the
Net Asset Value (NAV) or the net asset value per share of the Funds (exhibit 2, p. 12):

"The Net Asset Value ofthe Fund will be calculated on a monthly basis by the Funds'
Administrator, Citco Fund Services (Europe) B. V., which will promptly notify the Irish
Stock Exchange of the results of each such Net Asset Value calculation. "

The tasks and duties of CFS as administrator for the Funds were also described in
agreements. Exhibit 14 relates to the Administration Agreement of 20 February 2003
between CFS and Sentry. Exhibit 15 relates to the Administration Agreement of 20
February 2003 between CFS and Sigma. The tasks ("Services") of CFS involved the
following, inter alia (Schedule 2 to the Administration Agreement):

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Original document in Dutch

"The Services
Part 1
Financial and Accounting Services

(a) Maintenance of the Fund's customary Financial and accounting books and
records including, but not limited to:
-processing of trade-related transactions and corporate actions;
-processing ofnon-trade related transactions (cash movements, etc.);
- monitoring and processing of capital subscriptions/redemptions;
- reconciliation of cash and other balances at brokers;
- reconciliation of bank accounts;
- calculation of income and expense accruals;
- calculation of management and incentive/performance fees with supporting
schedules;
-independent reconciliation of the Fund's portfolio holdings;
- calculation of the Net Asset Value and Net Asset Value per Share on a monthly
basis in accordance with the Fund Documents.

(b) Preparation of monthly financial statements, in conformity with the

International Accounting Standards, such financial statements to include:
- Statement ofAssets and Liabilities;
- Statement of Operations;
-Statement of Changes in Net Assets;
- Statement of Cash Flows (if desired); and
- Portfolio listings.

(c) Preparation of books and records (including specific schedules and analysis) to
facilitate external audit, and liaising with the Fund's auditors in their review and
preparation of the annual financial statements.

(d) Provision of accounting or accounting related reports and/or support schedules as
agreed between the Administrator and the Investment Manager.
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( ... )

Part 2
Administrative and Registrar and Transfer Agency Services

In accordance with the applicable provisions of the Fund Documents:
( ... )

(f) reconciliation of information provided by the Fund's prime broker and custodian

with information provided by the Investment Manager( ... )" (Exhibit 14, p. 18 and
19; see also exhibit 15, p. 18 and 19, emphasis added)

From the foregoing it appears sufficiently that the Citco entities took a large number of
essential tasks and duties upon themselves, particularly with regard to the assets and
investment transactions of the Funds. All these tasks and duties were clearly written on
paper (in agreements), but the question is and remains whether these entities
performed their tasks and duties properly and whether PwC performed the necessary
audits and controls on this.

D. Sub-custodian. sub-investment manager and broker/ dealer o(the Funds

3.26

Despite the fact that all these service providers were, on paper, involved with the
Funds, the Plaintiffs wish to stress that virtually all tasks of these service providers
were delegated to BMIS. It has been established that there was a legal relationship
between Citco as custodian and BMIS as sub-custodian (exhibit 1, p. 14):

"Bernard L. Mado./f !lnvestment Securities LLC ("BLM" and, together with other
qualified entities with which sub-custodial arrangements may be made, the "SubCustodians", and each, singularly, a Sub-Custodian'') serves as a sub-custodian for
certain assets of the Funcl'

25

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and (exhibit 2, p. 16):

..

"BLM will be a sub-c~stodian of the Fund'
3.27

See also exhibit 13, p. 16):

"As a result of the Investment Manager's selection of Bernard L. Madoff Investment
Securities, LLC ("BLM") as execution agent of the split strike conversion strategy,
substantially all of FSL 's (Fairfield Sigma Limited; added by lawyer) assets will be
held in segregated accounts at BLM, a US. registered broker-dealer and qualified
custodian. Accordingly BLM will be a sub-custodian of FSL."
3.28

The content of the agreement(s) relating to these legal relationships (the Sub-custodian
Agreement) is not known to the Plaintiffs nor, they understand, is it known to the
Funds themselves, their managers and now their liquidators. Citco refused to disclose
the Sub-custodian Agreement or even to confirm or deny the existence of such
agreement(s) during an earlier kort geding ("summary proceedings") brought by the
Plaintiffs with a view to obtaining the Sub-custodian Agreement. Whether PwC was
familiar with the Sub-custodian Agreement(s) at the time of its audits remains to be
seen, from the audit files. This is important, among other reasons, in order to be able to
determine whether and if so to what extent the Citco entities fulfilled their duties with
respect to the supervision of the sub-custodians of the Funds and whether PwC
effectively incorporated this into its own audit assignments.

3.29

The Plaintiffs have however managed to acquire a sub-custodian agreement - which
though being unsigned, certainly points to Citco - which very probably reflects the
legal relationship between Citco as custodian and BMIS as sub-custodian (exhibit 16).
Signed variants of the ~agreements with other custodians for feeder funds to which
BMIS provided sub-custodian services are known, with virtually the same content,
except as regards applicable law, which in exhibit 16 is Dutch law. This single
difference is almost certainly due to the involvement of the Dutch Citco entities.

26

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Original document in Dutch

3.30

BMIS also acted as sub-investment manager for at least 95% of Sentry's assets, and
also as broker/dealer for Sentry (exhibit 1, p. 15). Fairfield (the actual investment
manager of Sentry) gav,e BMIS, as sub-manager, the mandate to implement the "split
strike conversion strategy" ("SSC Strategy") as the Funds' investment strategy. In this
capacity BMIS was supposed to execute investment transactions for the Funds in line
with this SSC Strategy. BMIS took the investment decisions independently- indeed
delimited by certain "guidelines", but in fact autonomously (exhibit 2, p. 9):

"The Split Strike Conversion strategy is implemented by Bernard L. Mado.ff Investment
Securities LLC ("BLM''}, a broker-dealer registered with the Securities and Exchange
Commission, through accounts maintained by the Fund at that firm. The accounts are
subject to certain guidelines which, among other things, impose limitations on the
minimum number of stocks in the basket, the minimum market capitalization of the
equities in the basket, the minimum correlation of the basket against the S&P 100
Index, and the permissible range of option strike prices. Subject to the guidelines,
BLM is authorized tQ determine the price and timing of stock and option transactions
in the account. The services of BLM and its personnel are essential to the continued
operation of the Fund, and its profitability, if any."

and (exhibit 2, p. 16):
"As a result of the Investment Manager's selection of Bernard L. Mado.ff Investment
Securities, LLC ("BLM'') as execution agent of the split strike conversion strategy,
substantially all of the Fund's assets will be held in segregated accounts at BLM, a
U.S. registered broker-dealer and qualified custodian. Accordingly, BLM will be a
sub-custodian of the Fund'

3.31

BMIS was thus de facto custodian, investment manager and broker/dealer for at least
95% of the Funds' assets, possibly more.

3.32

It can already be concluded that this structure was deliberately designed to give BMIS
and Madoff complete, direct and exclusive control of the Funds' assets. This was

27

11200554//2906531
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Original document in Dutch

absolutely necessary for Madoff to be able to operate and protect his Ponzi scheme. It
is noticeable that Madoffrefused to have any 'official' direct contact with the Funds or
any other funds. He always insisted on having an intermediary (here the Citco entities)
between him and the Funds. In this way Madoff could continue to sit discreetly behind
all the feeder funds (not only the Funds) without attracting too much attention. This
was also necessary for keeping Madoff's Ponzi scheme afloat. This made it possible
for Madoff to use money from one fund (subscriptions) to finance withdrawals from
other funds (redemptions.)

This intermediation by BMIS was no secret (at least not based on the available
documentation of the Funds), and is not in dispute. What matters in this case is
whether PwC paid sufficient attention to it when auditing the Funds' financial
statements. Madoff's intermediation was certainly seen as a risk factor: "17.

Possibility of Misappropriation of Assets. When FSL invests with Bernard L. Madoff
Investment Securities or in a Non-SSC Investment vehicle, it will not have custody of
the assets so invested Therefore, there is always the risk that the personnel of any
entity with which the Fund invests could misappropriate the securities or funds (or
both) of the Fund." (Exhibit 12, p.20)

3.33

The fact that BMIS played a key role in the Funds can also be seen from Sentry's 2006
PPM (exhibit 2, p. 18, under the heading "Key risks"):

"Dependence upon Principals and Key Employees of the Investment Manager and
BLM [BMIS, added by lawyer]. The services of the Investment Manager's principals
and key employees and BLM are essential to the continued operations of the Fund."

3.34

This combination of duties in a single legal entity was at that time and is today still not
permitted under Dutch law. Pursuant to Article 6:18 of the Nrgfo a custodian may
perform only the duties of custodian, the underlying logic behind this being that in
view of the risks, including the risk of fraud, these duties should remain segregated.
Because the custodiaLand trading activities were concentrated in a single legal entity -

28

11200554//2906531
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Original document in Dutch

BMIS - there was no clear separation of these essential duties, and BMIS had total
control of the Funds' assets.

This concentration of all these 4uties (and safeguards) in a single entity (BMIS) should
have prompted PwC to give greater attention to and adopt a attitude of more
professional

skepticis~

...

~

towards the Funds and BMIS. In fact PwC Nederland and

thereafter PwC Canada had to audit three Funds which together, directly or indirectly,
had approximately US$7.2 billion in assets under management, which they had
entrusted entirely to BMIS since practically all management and control mechanisms
had been delegated by the Funds and their service providers to BMIS.

E. Implications o(this structure as regards risk factors

3.35

The Funds' Private Placement Memoranda mention various risk factors regarding
parties involved with the Funds. The Private Placement Memoranda are the basic
documents regarding investment in the Funds:

"The Shares offered hereby (the "Shares'') will be issued only on the basis of the
information in this P,riypte Placement Memorandum and any attachments thereto (the
"Memorandum"). No other information about Fairfield Sentry Limited (the "Fund'')
has been authorized." (Exhibit 2, p. iii).

Regardless of whether or not these Private Placement Memoranda were actually made
available to any or all ipvestors, including the Plaintiffs, and, if so, whether or not they
took or were able to have knowledge of them, it is in any case clear that Fairfield
considered the abovementioned risk factors sufficiently significant to be mentioned.
Moreover, one may assume from this that the other parties involved, including Citco
and PwC, were or should have been equally aware of these risk factors.

3.36

Sentry's Private Placement Memorandum of 1 October 2004, ("PPM Sentry 2004"),
Sentry's Private Placement Memorandum of 14 August 2006 ("PPM Sentry 2006")

29

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Original document in Dutch

and Sigma's Private Placement Memorandum of 1 October 2004 ("PPM Sigma
2004") mention the following risk factors, among others:

•

"3. Dependence upon Principals and Key Employees of the Investment Manager
and BLM. The services of the Investment Manager's principals and key employees
and BLM are essential to the continued operations of the Fund.

If their services were

no longer available, their absence would have an adverse impact upon an investment
in the Fund. The key employees of the Investment Manager will allocate a small
portion of the Fund's assets between and among the Non-SSC Investment managers.
The Fund will be dependent on the continued presence of these key employees in
connection with identification of the recipients of these allocations and the monitoring
of the Non-SSC Investments." (Exhibit 1, p. 17; Exhibit 2, p. 18, Exhibit 12, p. 17)
•

"15. Absence of Regulatory Oversight. While the fund may be considered similar to
an investment company, it does not intend to register as such under the US.
Investment Company Act of 1940, as amended, in reliance upon an exemption
available to privately offered investment companies, and, accordingly, the provisions
of that Act (which, among other matters, require investment companies to have
disinterested directors, require securities held in custody to at all times be individually
segregated from the securities of any other person and marked to clearly identify such
securities as the property ·o f such investment company and regulate the relationship
between the adviser and the investment company) will not be afforded to the Fund or
the shareholders." (Exhibit 2, p. 21).

•

"17. Possibility of Misappropriation of Assets. When FSL invests with Bernard L.
Madoff Investment Securities or in a Non-SSC Investment vehicle, it will not have
custody of the assets so invested. Therefore, there is always the risk that the personnel
of any entity with which the Fund invests could misappropriate the securities or funds
(or both) ofthe Fund." (Exhibit 1, p.19, Exhibit 2, p. 21, Exhibit 12, p. 20)

Since these risks were explicitly mentioned in the documentation of the Funds, it was
impossible for PwC not to take such essential information into account in planning and
executing its audit activities .
.. ,

..

;

30

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Original document in Dutch

IIL3

Role of PwC

3.37

PwC acted as auditor of the Funds.

3.38

For financial years 2000, 2001, 2002, 2003, 2004 and 2005 the Funds' financial
statements were audited by PricewaterhouseCoopers N.V. or PricewaterhouseCoopers
Accountants N.V., or PwC Nederland. For financial years 2006 and 2007 the annual
audit of the financial statements was taken over by PwC Canada. PwC Canada further
continued the mistakes of PwC Nederland. If PwC Nederland had done its work
properly and thus had not issued the unqualified opinions, then PwC Canada would
also not have issued unqualified opinions, at least not without qualifications.
Furthermore, if no unqualified opinions had been given or qualifications had been
made since 2000 at the latest, investors - including the Plaintiffs - would never have
invested in the Funds.

3.39

The relevant financial statements of Sentry are attached as exhibits 17 to 24 incl.

3.40

The fmancial statements of Sigma for fmancial years 2003, 2004, 2005, 2006 and
2007 are attached as exhibits 25 to 29 incl. The financial statements of Sigma for the
financial years 2000, 2001 and 2002 are not in possession of the Plaintiffs.

3.41

The financial statements of Lambda for financial years 2000 to 2007 inclusive are also
not in the Plaintiffs' possession.

3.42

Despite the fact that the Plaintiffs do not have all the financial statements of the Funds
for financial years 2000 to 2007 inclusive, based on the statements of the Funds'
liquidators it can be established that PwC Nederland was the Funds' auditor for
financial years 2000 to 2005 and that PwC Canada was the auditor for financial years
2006 and 2007. Exhibit 30 concerns the "Declaration by Kenneth Krys", the
liquidator, of 14 June 2010, in which the Funds are defined as the "debtors" (margin
number 2, p. 3. para. 1):

31