BVI Offshore Business: Grey Area

The director of Firepower Operations Pty Ltd, who also took the positions of the director and executive chairman of its parent company Firepower BVI, is giving his evidence at the liquidators’ hearing of the Firepower’s case.

The Federal Court examination of the collapse of Firepower, which raised about $100 million from its shareholders, continues and includes more and more details. Mr Johnston did not specify any reasons why he agreed to increase a multi-million dollar 2007 Supreme Court settlement by $2 million and millions of shares following a dispute with the former chief executive of Firepower Trevor Nairn and his wife Rhonda. The Perth court was told that the original deed of settlement had given $1.5 million in 2007, and one million shares of Mrs. Nairn.  Mr Nairn’s company Bikpela Investments received another $2.5 million and 19 million shares.  So, by February 2009 the settlement made $3 million and 7,425,000 shares for Ms Nairn and $3 million and 18 million shares for his company.

Mr. Nairns and his wife had an interest in the Cayman Islands-based Firepower Holdings Group, from which Mr Johnston transferred intellectual property rights for Firepower products. The transfer followed the setting up of another Firepower umbrella company in the British Virgin Islands, Firepower Holdings Group Ltd. 

During the liquidators’ hearing, ex-director of the company did not reveal information about how the operations between his own company, Firepower Operations, and the BVI- and CI-based companies were coordinated. Mr. Johnston has claimed that in 2006 and 2007 he gave $11 million to Owston Nominees, the company of Warren Anderson, saying that he was under threat from Mr. Anderson. The property developer Warren Anderson was the previous director of the BVI-registered holding of Firepower Holdings Group Limited. Now he is alleged by Mr. Johnston of intimidating him.

Lawyers for the liquidator agreed to Mr. Johnston writing the names down to avoid them becoming public. Richard Douglas, the barrister for the liquidator, asked for the allegations in writing. Mr. Johston said he would not object to make the names public.

Craig Hall, a well-known businessman from North Texas, attempts to get back more than $150 mln of the $180 mln which he has lost by loaning or investing in several natural gas partnerships. Two of the companies in which he is majority shareholder, Hall Phoenix/Inwood Ltd. and Hall Performance Energy Partners 4 Ltd., are now plaintiffs in the court case. Hall claims that both limited partnerships
provided financial support to various drilling partnerships based on lies by the senior executives running them. Three partnerships and four individual defendants are alleged of falsely portraying the  situation, and enticing Hall’s partnerships into loaning or investing huge sums.

In court filings, Hall said that business relationships and friendships made him invest more than $150 mln into loans and equity for drilling partnerships, and he is trying to get back the losses that are tied to misleading information from the partnerships.

The events leading to the lawsuit started in 1986, when Hall, through affiliates of his company Hall Phoenix/Inwood Ltd., started to invest in business ventures of his friend Anthony J. Gumbiner. Now Gumbiner and petroleum engineers William H. Marble and Meduna are the defendants in the lawsuit. Other defendants are  Dallas-based Hallwood Group Inc (HWG), controlled by Gumbiner;  William L. Guzzetti, president and CEO of HWG; and British Virgin Islands-registered companies Hallwood Investments Ltd. and Hallwood Financial Ltd., both established and controlled by Gumbiner. The only other officers or owners of the BVI companies are Gumbiner’s family members. According to the lawsuit, these companies also do not have any employees.

Attorney Mark Werbner, who represents most of the defendants, said he will prove in court that Hall was not misled into investing or loaning money for the drilling ventures. By his words, “Craig Hall was a sophisticated investor and was fully informed about the Hallwood Energy drilling program,” and his lawsuit is just an attempt to recover a loan that he made understanding and knowing the risks of the oil and gas business.

The relationship between Phoenix Venture Holdings director Nick Stephenson and Dr Qu Li, which  was not only professional but also personal, became one of the most unexpected revelations in the investigation connected with MG Rover Group scandal and the way how the directors of  Phoenix Venture Holdings paid themselves large amounts of money. It is known that Dr Li received £1.69million for 15 months work providing consultancy services to MG Rover Group. She was already involved in Anglo-Chinese business, and was hired by Phoenix Venture Holdings in January 2004 to provide consultancy services. It became unclear who recruited her but the contract provided a company car and a retainer of £1,000 a week plus £1,000 for each day Dr Li was involved in business negotiations abroad, and £750 a day in the UK. Also, by words of financial director of MGRG, the agreement included a ‘reasonable success fee’ to be agreed by both sides on a case-by-case basis.

In 2004-2005, Phoenix Venture Holdings paid about £375,000 to China Ventures Ltd, a company of which Dr Li was sole shareholder and director. Also, Dr Li received fees through a British Virgin Islands company associated with her. For example, in September 2004, when the Shanghai Automotive Industry Corporation paid £37 million for the blueprints for the Rover 75, Dr Li received a fee in the amount of £740,000 through this BVI company. Quite large amounts were paid for some deals into a Singapore account.

Mr Stephenson paid the money without consulting most of the other directors. He was a member of the Rover group board, in 1996-1999, then Phoenix deputy chairman. Also, he was a member of a consultancy company to the car firm.

On March 19 Weavering Capital, a $639m (£440m) London hedge fund, put into liquidation its main fund - Weavering Macro Fixed Income fund in the Cayman Islands. Weavering froze the fund last week, after it was discovered that it was a $637m derivatives trade with an offshore company controlled by the fund’s founder and chief executive.

PwC, appointed to investigate the position as the liquidators of the fund, said there was “considerable uncertainty” over the $637m value listed for the fund’s main asset not pledged to lenders, a derivative transaction with Weavering Capital Fund Ltd in the British Virgin Islands.

PwC said it had been told the BVI company’s assets were $10m of cash and $40m of private equity positions, although these have not been substantiated. It was unclear who the directors of the BVI company are, but PwC said that Mr Peterson had told them he controlled it.

Matthew Wilde, partner and head of the hedge fund resctructuring team at PwC, said that he could not comment on who at Weavering put the trade in place, or for what reason. The problem with the fund was discovered after investors tried to withdraw $223m, of which just $90 m has been paid so far. In addition to the outstanding $133m payments, the fund reported assets in the amount of $506m at the end of February this year - down from $535m in January.

Weavering is one of the oldest hedge fund managers, running small funds including one in Sweden, and set up in 1998 by Magnus Peterson - former head of trading at Swedish bank SEB. For the past years it had returns of 10-12%.

British Virgin Islands-registered fund Auriga International Advisers has lost more than 400 mln Swiss francs ($350 mln) that were invested with the company’s main shareholder Bernard Madoff. According to the information provided by Jacques Rauber, the majority shareholder of the fund, as well as to the reports published in Swiss weekly SonntagsZeitung, funds of the company were wholly invested in Fairfield Sentry – the US fund which, in its turn, invested all of its assets, which made $7.3 billion, with Madoff.

Auriga is licensed to provide financial management services by the BVI authorities. There is no much information about Auriga’s investors, except for the fact that among them there are institutional investors and high net worth individuals. Jacques Rauber also said that another fund, Auriga Alternative Strategies, was affected much less.

This case is similar to the court case with transfering money of another BVI-domiciled company Repex Ventures into funds run by Madoff. The arrested money manager has confessed to losing up to $50 billion in a giant Ponzi scheme.

From the documents received two weeks ago concerning the failed fuel technology company Firepower Operations Pty Ltd 2004-2005 and 2005-2006 profit and loss figures, it became clear that its director Tim Johnston, who was also the director and executive chairman of the parent company Firepower BVI, has spent incredible sums for the personal needs and the needs of his family. There was a huge rise in spending, particularly in the amounts spent on travel, hotel accommodation and phone bills.

This information revealed in documents obtained this week is related to the two years period before the company’s collapse, and includes, among others, the following facts:

Company’s expenditure on international flights rose from $157,062 in 2004 – 2005 to $1.1 million just one year later. In the same way, mobile phone bills of Mr Johnston and his family were all paid by Firepower investors. Hotel bills jumped dramatically from $37,292.61 in 2004-05 to $322,962.55 in 2005-06.

According to Firepower liquidator Bryan Hughes, Mr Johnston would claim the expenses were incurred “running round the world”, to firm up contracts for the sale of stock, which would be used to underpin an international stock exchange listing. In the opinion of Mr. Hughes, however, stock exchange listing was impossible for Firepower due to fatal flaws and misrepresentation related to the company’s property, of which its director should have known.

Last year, before his company collapsed, Mr Johnston and his family led a luxury life, using millions raised from investors. Almost $100 million was raised for Firepower, and its director faces charges brought by the Australian Securities and Investments Commission in the Federal Court that relate to the sale of shares without a prospectus, but ASIC has no power to force Mr Johnston to return to Australia.
Before any extradition application could be made, Firepower would have to be charged with a criminal offence.

A billionaire sheikh, senior member of the Qatari royal family, raised legal claims in the Spanish court against Barclays bank, over an alleged fraud in the amount of €50m ($70m).

It is said that the fraud took place in the period between December 2001 and February 2003; the sheikh alleges Barclays allowed its employee to set up ghost account in his name, and siphon off money from the legitimate account. The sums stolen from the personal account in Marbella were about €4m a month.

In such a way, total amount of €29m in cash was withdrawn, while €20m was transferred to other bank accounts, before the alleged fraud was revealed by the Qatari sheikh. During one four-day spell, €2.5m in cash was withdrawn from the account.

Money transfers of €2m or more were frequently made to bank accounts in Monaco, the British Virgin Islands and Switzerland. The sheikh said that, although he was a co-signatory, he was never contacted by Barclays about all these huge sums being moved in the account.

The sheikh has already recovered €500,000 from an account in the British Virgin Islands, and €3.4m has been reclaimed from a third party believed to have been involved in the alleged fraud. Another €1.3m has been arranged as legitimate household expenses that were paid from the account on behalf of the sheikh.

In the legal suit, the sheikh claims that Barclays still ows him about €42m. He also alleges that the bank failed to demand any proof of identity, or to conduct a face-to-face document-signing process.

Some days ago, the directors of two ASX listed companies known as Hallmark Gold (now called Hallmark Consolidated Limited) and Welcome Stranger Mining Company (now called Commsecure Limited), Stuart Adrian Corp. and Brian Millwood Smith, were jailed for taking part in a share warehousing scheme. They were sentenced to three years in prison in the District Court, on a total of 29 charges brought by the Australian Securities and Investments Commission (ASIC).

The ASIC Act charges against these persons were brought from their conduct as directors of these companies. ASIC alleged that Mr Corp. had an undisclosed beneficial interest in shares in Hallmark Gold and Welcome Stranger, which were held through the use of offshore companies registered in the British Virgin Islands and Gibraltar, namely Courtenay Investments Limited, Davenrite Limited, and Happle Limited. ASIC alleged that the shares were used by Mr Corp to vote on related party resolutions at general meetings of Hallmark Gold and Welcome Stranger, which delivered him a benefit. Mr Smith was alleged of warehousing shares in Hallmark Gold and Welcome Stranger, through the use of these offshore companies domiciled in the BVI and Gibraltar.

ASIC also alleged the directors of making false and misleading statements and documents at compulsory ASIC examinations, and therefore obstructing the Commission and destroying documents relating to the ASIC investigation. Jan Redfern, ASIC’s executive director of enforcement, said the market’s integrity relied on directors of listed companies acting honestly and transparently, but the actions of these Mr Corp and Mr Smith undermined confidence in the market and demonstrated a blatant disregard for the law.

This is the first successful prosecution by ASIC relating to the use of offshore companies to avoid disclosure of directors’ interests, and followed a complex investigation by ASIC in Australia and overseas.