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.
Corporate regulators appointed a trustee for an Australian-based Trio Capital Limited, believing US$47 million of its assets have been invested in a company registered in the British Virgin Islands. It is advised by the new trustee to make assessment of the assets of the superannuation entities, providing the authority with a plan regarding their management.
In December 2009, the Australian Prudential Regulation Authority suspended Trio Capital Limited as trustee of its funds and one trust. At the same time, the ASIC withdrew company’s licence to operate its 24 managed investment schemes, including its main vehicle, Astarra Strategic Funds. The reason for this, according to the authority, became the breach of the company’s licence conditions and failure to satisfy concerns regarding the valuation of assets.
According to the new trustee, US$70 million of $300 million of Trio’s total assets had been invested in Astarra Strategic Funds. The accounting group PPB as the firm’s administrator is investigating Trio Capital’s managed investment schemes.
The four main superannuation entities – Astarra Superannuation Plan, Astarra Personal Pension Plan, My Retirement Plan, the Employers Federation of NSW Superannuation Plan – are said to have about 10,000 members, and at the end of September 2009 they reported assets of US$300 million. These funds have made significant investments in the Astarra Strategic Fund.
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 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.
K1 Invest Ltd., the British Virgin Islands-based hedge fund operated by German K1 group - one of the two BVI hedge funds believed to be used in a network of investment firms to transfer the money received from reputable banks, - is to be liquidated after its assets were frozen.
This information was provided by the fund’s director who said in a letter to distributors that the BVI fund has hired accountancy firm Grant Thornton to liquidate it. The freezing of assets and the resulting inability to pay its obligations have led K1 Invest to voluntary liquidation “in the best interest of the company and the investors.”
K1 Invest Ltd. is managed by K1 Group’s founder Helmut Kiener who is now suspected of committing fraud and breach of trust. Kiener now remains in jail, although his diplomatic status would provide him with immunity.
In 2004, German regulator BaFin tried to ban K1 Invest Ltd from operating in Germany.
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.
Stefan R. Seuss, German financial manager, was arrested in his home in Miami charged of money laundering as part of global criminal investigation into the German hedge fund. The K1 Group, whose business activities became the reason of losses about US$400 million for major banks, is headed by Helmut Kiener who is now in custody after being arrested by German prosecutors in his house 40 km from Frankfurt.
The K1 Group is alleged of organizing “circular transactions” with a network of investment firms and offshore companies in many countries, including BVI, to make an illusion of having enough money for backing up loans from the banks. Among the banks involved in the case there are Barclays, JPMorgan Chase & Co. and BNP Paribas.
Bank’s money were then transferred to offshore companies in the British Virgin islands and other jurisdictions, and from their accounts - to the accounts in foreign banks. Seuss is said to have ties with various Swiss financial institutions.
In the allegations against Mr. Kiener, the relationship with Barclays is described that began in 2005 when he allegedly agreed to set up K1, a fund of hedge fund. Mr Kiener is said to have ignored the rules for investments agreed with Barclays and used other firms to channel about US$114m provided by the bank into two other hedge funds based in the British Virgin Islands and managed by him.
It is remarkable that the German arrest warrant for Mr Kiener, for some unclear reasons, describes Mr Seuss as a witness. The arrest warrant includes information that the Swiss bank lent US$31.7m to a firm connected to Mr Kiener, and some part of this money went into one of his BVI-based hedge funds.
Mr Kiener is represented by the Munich law firm Lutz Libbertz, which said that they were going to appeal against his arrest. The law firm described allegations against Mr Kiener as thin and based on police inquiries rather than real evidence.
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 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.