(CN) – Two investment funds claim that Deutsche Bank Securities reneged on a “binding commitment” to purchase $1.6 billion in bankruptcy claims, for money lost to Bernard Madoff’s Ponzi scheme.
Kingate Global Fund Ltd. and Kingate Euro Fund Ltd. sued Deutsche Bank Securities in Manhattan Federal Court.
The complaint states: “This is an action to enforce a major investment bank’s ‘firm, irrevocable and binding’ commitment to purchase the bankruptcy claims of two investment funds that lost the vast bulk of their assets as the result of Bernard Madoff’s massive, and now infamous, fraud.
“For years leading up to the November 2008 collapse of Bernard L. Madoff Investment Securities (‘BLMIS’), the two Kingate Funds acted as so-called ‘feeder funds,’ investing virtually all of their assets in BLMIS. When Madoff’s fraud was publicly revealed, the funds lost billions of dollars reflected on their monthly account statements.”
Kingate say it is “among the largest claimants against the Madoff estate,” and that Deutsche Bank “agreed to purchase $1,624,748,095 in claims from the Kingate Funds.”
“The agreement between the parties was memorialized in their ‘confirmation letter’ – a document initially drafted by Deutsche Bank – that provides that the Kingate Funds will convey their allowed claims against the BLMIS estate, together with any interest they may have in a forfeiture fund maintained by the Department of Justice for victims of Madoff’s fraud, to Deutsche Bank. In exchange, Deutsche Bank will pay the Kingate Funds 66.00 percent of that amount, or $1,072,333,743,” the complaint states.
But Kingate says that “notwithstanding the expressly binding commitment,” Deutsche Bank has been “unwilling” to complete the purchase.
“Deutsche Bank has conjured a rationale for its refusal to proceed; it maintains that a settlement agreement between the Kingate Funds and the Madoff estate’s trustee does not afford Deutsche Bank, as purchaser of the Kingate Funds’ claims, with sufficient protection,” the complaint states.
But Kingate says the bank’s stance “is a ruse on several levels,” and that there is “absolutely nothing” in the parties’ agreement that allows the bank to “demand any particular language in the settlement agreement to which it is not a party.”
“And, in any event,” the complaint continues, “the Kingate Funds’ settlement with the Madoff Trustee provides far greater protection to the purchaser of the Kingate Funds’ claims than any claims purchaser ever could have reasonably anticipated.
“While Deutsche Bank contends that its unwillingness to consummate the sale it agreed to stems from a disagreement over contract language, Deutsche Bank’s real reason for abandoning its commitment is plain to see. Namely, in the months that have elapsed since Deutsche Bank signed the confirmation letter, the market price for claims in the Madoff estate has dropped by at least 6 cents on the dollar, if not more. As a result, Deutsche Bank is violating one of the fundamental precepts of market trading; it is going back on its written, binding commitment to purchase the Kingate Funds’ claims because it does not want to pay what it now views, with the benefit of hindsight, as too high a price.”
Kingate says that similar claims are selling for 60 cents on the dollar or lower.
“The difference between the agreed-upon purchase price and the current market value is substantial. On approximately $1.5 billion of claims, a drop from 66 percent to 60 percent is equivalent to $90 million,” the complaint states.
It adds: “The Kingate Funds will suffer real and concrete damages if Deutsche Bank continues its bad faith attempt to either renegotiate or terminate what everyone understood to be – and what plainly states that it is – a done deal. The Kingate Funds’ settlement with the Madoff Trustee, which is the result of years of negotiations, will fall apart. And the Kingate Funds and their innocent investors may recover nothing from the Madoff estate, notwithstanding their billions of dollars in losses. All of this is avoidable if Deutsche Bank simply steps up and closes on the deal that it agreed to.”
Kingate is represented by Richard Werder Jr., with Quinn Emanuel Urquhart & Sullivan.