BVI Offshore Business: Grey Area

The investors in the ARP Growth fund formally received a nil valuation of their investments, and now the losses from the fund’s manager Trio Capital Limited are to exceed US$180mln.

The administrators of Trio Capital Limited, the accounting group PPB, were investigating company’s managed investment schemes, and in a meeting in Sydney on May 23 informed that they were unable to value the main investment vehicle of the ARP fund, British Virgin Islands-registered Professional Pensions ARP Ltd (PPARP), through which more than US$52mln were invested. By words of unit holder, Mr. Terry Gammell, the delay in finding any value in PPARP meant the ASIC should examine the disappearance of the money.

The nil valuation of PPARP adds to the disappearance of US$123mln invested by another fund managed by Trio Capital, Astarra Strategic. This investment, made through another BVI company EMA International, brought likely losses from Trio Capital to more than US$180mln. By order of NSW Supreme Court, five Trio Capital funds, including ARP Growth and Astarra Strategic, were winded up. The judge found that Astarra Strategic had signs of a “fraudulent scam”, and he also said there were “inherent vices” in Trio Capital’s business model.

The administrators are awaiting the appointment of a liquidator in the British Virgin Islands, PricewaterhouseCoopers, to attempt to recover some value from the PPARP investment, which was held through a complicated structure, using also a HK-based Empyreal Holdings as funds manager.

Two more arrests were made in connection with investigation of K1 Group’s activities. According to Dietrich Geuder, the spokesman for the Wuerzburg Prosecutors’ Office, the managing director of the British Virgin Islands-based hedge funds K1 Global Ltd. and K1 Invest Ltd., as well as the managing director of a trustee company were arrested.
Mr. Geuder said that the German investigation has shown that these BVI companies were Ponzi schemes which were not intended to make profits, but through which, as prosecutors suspect, investors lost more than 90 million euros.
The assets of K1 Invest Ltd., one of the two BVI funds believed to be used in a network of investment firms to transfer the money received from reputable banks including  Barclays Plc, JPMorgan Chase & Co. and BNP Paribas SA, were frozen in the end of 2009. Both K1 Invest and K1 Global filed for liquidation.
For some months, K1 Group is at the center of an international criminal probe. European and U.S. authorities are seeking information about whether K1 founder Helmut Kiener, who also managed the funds of the BVI hedge funds, used his business relations to the above-named banks to channel their money to K1 Invest and K1 Global through a net of funds and sham companies.

The Seattle City Employees’ Retirement System (SCERS), the pension fund which is holding $1.6 billion to pay the pensions of 15,000 Seattle city workers, is trying to get back $20 million of its investment money through a several hedge funds in the U.S., Europe, the British Virgin Islands and the Cayman Islands.

In 2003-2004, SCERS invested in Epsilon Global Active Fund II; the Epsilon “feeder fund”, incorporated in BVI and domiciled in Switzerland, was supposed to channel money to a larger fund based in the Cayman Islands. According to the lawsuit filed by SCERS, about 90 per cent of money invested in Epsilon was withdrawn in 2006-2007, and only a liitle more was left except what was invested by retirement system. Also, Epsilon Fund did not produce an audited financial statement for 2008.

According to the recent account statement, SCERS’s investment is worth about $24 million, but the SEC inquiry and the delayed audited financial statement put this sum under suspicion. SCERS Executive Director Carter mentioned in a court filing that the fund “has suffered very significant losses in the past in short periods of time.”

In February, the hedge-fund manager Steven Stevanovich, who is controlling the Epsilon Fund, informed Epsilon investors about the suspension of all payouts, blaming of the halt the SEC investigation into another of his funds, called Westford Special Situations Fund. SCERS officials were not aware that Epsilon money had been channeled into the Westford fund, and, moreover, they rejected Stevanovich’s invitation to invest into the Westford fund. Last month a court in the British Virgin Islands was asked to declare the insolvency of Westford fund.

The Epsilon fund investment is just a small part of the SCERS portfolio, but the rest of the fund has not done well during the last two years.

The ARP Growth Fund, managed by Trio Capital Limited, has invested $52 million through the British Virgin Islands in a fund of hedge funds. Trio Capital’s administrators (the accounting group PPB), which are investigating company’s managed investment schemes, were not able to establish the value of this investment. The investment vehicle of the fund, Professional Pensions ARP Ltd, which is also based in the British Virgin Islands, uses a HK-based Empyreal Holdings as its investment manager.

Earlier, administrators and regulators could not find out details about $118 million investments made by another Trio Capital managed fund, Astarra Strategic, through another British Virgin Islands-registered company EMA International.

There is the uncertainty with the major investment of ARP Growth Fund because of negotiations on a confidentiality agreement requested by the BVI-registered Professional Pensions ARP. Even once the existence of the assets is established, it is very difficult to value investments in hedge funds including the Denholm Hall Russia Arbitrage Fund Class A, the Alpstar Secured Bank Loan Fund and the Fairfield Ludgate Hill Asian Arbitrage Fund.

Professional Pensions has applied for BVI approval for winding up the fund, raising the prospect of hard-to sell hedge fund assets being sold at discount. By words of Philip York, a director of Empyreal Holdings, the money, which was invested in a series of hedge funds, was now held by JPMorgan due to  its takeover of Bear Stearns, - the company which in 2005 entered an agreement with Professional Pensions Fund. This agreement was known as a “total return swap”, under which the investors benefit from a “synthetic” exposure to a basket of hedge funds while JPMorgan holds the assets. Mr. York also said they had provided to ASIC all the information supporting the existence of those assets, and also that they have provided PPB with all the documents they have in relation to the valuations and shareholdings.

The Australian company Trio Capital, whose hedge fund known as Astarra Strategic Fund made $118 million investments through the British Virgin Islands-registered company EMA International, could not provide detailed information about the assets repatriated to overseas hedge funds.

By words of Neil Singleton, an executive with the administrators PPB (appointed by Trio’s directors after regulators froze their funds in October 2009), there was lack of information about BVI company’s assets.

Information provided by Trio Capital shows that more than $233 million of investors’ money is placed within the managed investment schemes, including the BVI company - more than $100 million more than ASIC’s initial estimates of $126 million. Also, PPB investigators found high level of inter-related investments between the schemes.

Astarra Asset Management was the investment manager to Astarra Strategic Fund. Its creditors include Trio Capital, with a loan document stating Trio Capital is owed up to $1.5 million under a complex arrangement with Astarra Asset Management.

The Australian Securities and Investments Commission revoked Trio’s licence to operate its 24 managed investment schemes. Some days after that, a liquidator was appointed to Astarra Asset Management after a meeting passed special resolution citing a “voluntary winding-up by creditors”.

The Australian Prudential Regulation Authority appointed a trustee to manage the $300 million the company holds in its funds, and stopped it receiving further cash inflows.

The process of liquidation and recovery of fees to investors into the BVI-registered Kingate Global Fund Limited and Kingate Euro Fund Limited, which are sued as the funds linked to Madoff Investment Securities LLC, may cause even more problems than it was expected. The dispute between the court-appointed trustee for the liquidation of Madoff’s fund Mr. Irving Picard and the liquidator of the BVI funds Zolfo Cooper may become the reason for the delay of payouts to Madoff investors, and could result in solving the dispute in BVI court.

Last week, Picard had approved payments of $534 million to victims of Madoff’s $65 billion fraud, while there is $4.44 billion in claims that he has deemed valid so far. According to the documents, Picard had claimed about $870 million from the two Kingate funds, including more than $600 million sum that was paid in commissions to the BVI funds by Madoff Investment Securities during the six years to December 2008.

Zolfo Cooper is asking Kingate shareholders to approve a deal in which they would pay the trustee 50 per cent of Kingate’s current assets. The BVI funds would also pay 50 per cent of any additional recoveries to Madoff’s company, and the investors would be allowed full claims in its liquidation. Some investors are not satisfied with this distribution and want to receive any recovered management and performance fees that were paid to Kingate. However, Zolfo Cooper claims that the only alternative to the settlement would be lengthy and costly litigation, because Picard could ask the courts in BVI (where the funds are registered) and in Bermuda (the domicile of the asset manager Kingate Management Ltd) to give him control of any funds recovered there.

Picard is also involved in lawsuits with the liquidators of several other feeder funds in the U.S. and other countries, while Zolfo Cooper has to deal with the claims from  those who subscribed to invest in the Kingate funds after December 2008. Their money (about $12 million only for one of the funds) was never invested, but still it was in the Bank of Bermuda, when Madoff collapsed. In August 2009, the Supreme Court of Bermuda ordered Kingate Global to repay $6 million and $3 million to Knightsbridge Fund Limited and Standard Chartered Bank. This ruling could become a precedent for the return of the rest of money invested after December 2008, but the decision was appealed by the liquidator.

Following up an investigation of a hedge fund Weavering Capital and a related offshore firm Weavering Capital Fund Limited, registered in the British Virgin Islands, the UK Fraud Authority started to investigate sales of credit-default swaps and structured-finance products, including collateralized debt obligations. The swaps are derivative contracts used to guard under fluctuations in borrowing costs.

The SFO is looking into whether banks sold such products with flawed values; no specific companies or credit rating agencies have been targeted under the investigation. This may be part of the SFO’s investigations of the collapse of the hedge fund Weavering Capital, and American International Group Inc.’s financial products unit. Also, the Serious Fraud Office commits more resources to probing possible corruption in the private-equity and hedge-fund industries, and looks into the cases of fraud at UK hedge funds.

Using a small auditor was a trait common to many failed hedge funds, most of them may be discounted with larger auditors. In May 2009, two managers of the collapsed fund Weavering Capital were arrested as part of investigation of the fund, which had about $640 mln under management. The investigation of the fund is focused on interest-rate swaps between the hedge fund and a related BVI-registered Weavering Capital Fund Ltd. According to the SFO allegations, the BVI company was used to inflate the net asset value of the fund.

On June 22, the U.S. Securities and Exchange Commission filed securities fraud charges against a prominent California investment adviser, who allegedly oversaw three funds that invested all of their assets (nearly $1 billion) with Madoff, and a NY brokerage firm Cohmad Securities Corp. that are said to be controlled by Bernard Madoff. They are accused of funneling billions of dollars from investors into Madoff’s Ponzi scheme.

It is alleged by the SEC that, while channeling billions of dollars in investor funds to Madoff scheme, the associates together collected several hundred million dollars in fees from him. These money are said to have played great role in the success of Madoff’s $50 billion fraud scheme, and the defendants are said to get nearly all of its revenue from introducing investors into Madoff’s operations.

The SEC lawsuit widened the circle of players around Madoff who have been charged by the government in what might be one of the biggest investment frauds in history. There are some British Virgin Islands-registered companies and  “feeder funds” of Madoff’s company Investment Securities LLC involved in the large-scale process. Concerning the current case, the federal regulator is seeking injunctions against the defendants, and unspecified civil fines and restitution of allegedly ill-gotten profits.

On Friday, May 15, Britain’s Serious Fraud Office arrested two managers of the collapsed hedge fund Weavering Capital, which is now investigated in connection with artificial inflation of its value by derivative transactions.

Liquidators of Weavering Macro Fixed Income hedge fund (Cayman Islands) are now investigating the swaps where the counterparty was an offshore firm Weavering Capital Fund Limited, registered in the British Virgin Islands, and controlled by the fund’s founder and chief executive.

The Weavering Macro Fixed Income Fund (CI) was working mainly with high-net-worth clients. Actually, it started voluntary liquidation after it failed to meet its investor demands for withdrawals. Its main asset was a series of derivative transactions valued at $637.1 million, while a derivative counterparty, which was described as a BVI entity “effectively under common control” with Weavering Capital UK, had a net worth not exceeding $50 million.

The Irish Stock Exchange listing of the Cayman Islands-registered fund was suspended, and by the opinion of the fund representatives it had “revealed a related party transaction in the form of a large interest rate swap position of a material amount where the counterparty is a company controlled by a related party”.

Now, the main issue of the British investigators into the fund is whether the connection between the Cayman fund and BVI fund should have been disclosed under the rules of the Irish Stock Exchange (ISE)composite triple beat, as a related party transaction.

In the last time, the hedge fund industry was influenced very much by a number of high-profile scandals, the most notable of which is scandal with the U.S. financier Bernard Madoff alleged of large-scale fraud and pyramid scheme.

On May 8, 2009, the Eastern Caribbean Supreme Court in the British Virgin Islands made an order appointing William Tacon and Richard Fogerty of Zolfo Cooper as Joint Provisional Liquidators of the British Virgin Islands-registered funds Kingate Global Fund Limited and Kingate Euro Fund Limited, the funds which are sued as the feeder funds which were fully invested in Bernard L. Madoff Investment Securities LLC. Both BVI funds have investors in many parts of the world. The legal action against the funds was recently started by the court-appointed trustee for the liquidation of Madoff’s fund, Mr. Irving Picard in the U.S. Bankruptcy Court.

Their function as Joint Provisional Liquidators is to identify, manage, secure and preserve the underlying assets of the funds, in accordance with the terms of the BVI Court order and the provisions of the BVI Insolvency Act of 2003. The Joint Provisional Liquidators also said that they were not asking investors to submit details of their interests or claims in the BVI funds. One of the provisional liquidators, Mr. Tacon, added that the lawsuits against the funds which have been filed by Mr. Picard will also be an immediate priority for the Joint Provisional Liquidators.

In order to assist investors and creditors, the Joint Provisional Liquidators have established special websites - www. kingateglobal-liquidation .vg and www. kingateeuro-liquidation .vg, where information updates will be posted periodically. The Joint Provisional Liquidators hope to receive full co-operation and support of directors of the BVI funds. They are also going to communicate with investors and any creditors in the near future.