BVI Offshore Business: Grey Area

The U.S. Securities and Exchange Commission (SEC) filed a fraud charges against Sentinel Management Group Inc., for Chapter 11 bankruptcy protection. The cash management firm working in the U.S. futures industry is accused of violating the Investment Advisors Act, by defrauding its clients and leveraging their securities without informing them.

One of company’s biggest clients was Discus Master Limited, an investment partnership registered in the British Virgin Islands. During the hearings, which were held in the District Court in Chicago, this BVI company on behalf of its attorney Christian Kemnitz accused Sentinel of “disturbing” and “illegal behavior”.

In the complaint filed in the court, the SEC alleged that Sentinel transferred at least $460 million in securities from client investment accounts to Sentinel’s proprietary account. The SEC also claimed that defendant used securities from client accounts to obtain a $321 million line of credit and additional leveraged financing.

The Commission also charged Sentinel of disclosing from its clients that their investment portfolios were highly leveraged as a result of company’s financial deals; to the contrary, Sentinel provided its clients with statements that did not contain any information about the improper activities.

Now the Commission seeks an emergency court order that would restrain Sentinel from engaging in illegal conduct.

An Austrian national Michael Berger that was pleaded guilty to charges of securities fraud in a Manhattan court in 2000 connected with his Internet stock market deals and  went fugitive in March 2002, last week was cought in Austria. Before that, for several years he was sought by the U.S. Federal Bureau of Investigation (FBI).

Michael Berger launched a hedge fund known as Manhattan Investment Fund (MIF), in 1995. It was incorporated under the law of the British Virgin Islands (BVI). Initially being an open end investment company; MIF started trading in 1996, selling securities of overvalued US technology companies.

The BVI-based fund suffered enormous losses between 1996 and 1999, when Berger bet against technology and Internet stocks. The fund got broke in January 2000, just two months before the Internet stockmarket bubble did burst in March 2000.

Berger was the investment manager and advisor for MIF, through his wholly owned New York company Manhattan Capital Management, while all of MIF’s assets were held in custody in New York by Bear Stearns.

Bear Stearns informed that Berger began losing money already when the BVI fund started its operations, however its monthly account statements demonstrated profits, and made the performance look much better than it actually was. Probably, Berger was operating a ‘Ponzi scheme’, where assets of new investors were used to conceal MIF’s mounting losses. Meanwhile, through the end of 1999, Berger collected more than $575 million from investors to its BVI fund. In early 2000, Berger admitted the fraud.

He started to deny his plea a year later; however, his motion was rejected by the judge. Berger was free on bail during all that time, but he did not show up at a court hearing on March 1, 2002. Since that time, he has been on the run.

Berger’s fraud with BVI-registered Manhattan Investment Fund is one of the most well- known frauds with hedge funds, partly because it was one of the first reported so widely. Berger had bet against technology stocks about three years. Being an Austrian national, Berger cannot be extradited to the U.S., where he would face up to 10 years in jail and fines of at least $1.25 million, plus restitution.

KPMG and Citco Fund Services in the Netherlands Antilles have been involved into litigation regarding a failed BVI-registered hedge fund, Dobbins Offshore Ltd.

On July 11, 2007, nearly 13 months after KPMG and Citco were dismissed on jurisdictional grounds from a previous action at the U.S. District Court for the Northern District of Texas, a new lawsuit was filed against them at the same court.

Back to history. On March 23, 2004 the Securities and Exchange Comission filed an action (Civ. Action No. 3-04-CV-605(H)) in the United States District Court for the Northern District of Texas and was granted emergency relief against J. Robert Dobbins, investment advisers under his control and hedge funds, Dobbins Partners, L.P. and Dobbins Offshore, Ltd. registered in British Virgin Islands on May 1997.

The SEC alleged that, since at least January 1, 2000, Dobbins raised at least $50 million from more than 50 investors from around the world. It was said that Dobbins made false statements to Dobbins Hedge Funds investors concerning the funds’ performance, especially those concerning thinly-traded and non-publicly traded securities.

In 2005 the group of plaintiffs was: Able Fund, Able Euro Fund, Bank of Bermuda Guernsey, Banque Cantonale Vaudoise, Banque de Luxembourg, Banque Privee Edmond de Rothschild Limited, Blazer Calpital Inc., Credit Suisse Private Banking, Ferrier Lullin & Cie S.A., Heracles, The Kerrosen Global Fund Ltd., Pictet & Cie Banquiers, Db Lux Special Opportunities Investing, KGH Neptune, KGH Saturne, Martinex Ltd, Societe Europeene de Banque, Somers Dublin Limited and UBS SA sued J. Robert Dobbins, BVI hedge fund Dobbins Offshore Ltd, as well as KPMG and Citco Fund Services (Curacao) N.V.
Most plaintiffs were institutional investors with wide spectrum starting from French and Irish companies to Swiss, Luxembourg, French and Cayman Islands funds and investment managers.

Plaintiffs stated that they have invested over 20 million USD in BVI hedge fund Dobbins Offshore Ltd and from January 2000 to March 2004 J. Robert Dobbins who managed the BVI hedge fund perpetrated a valuation fraud on plaintiffs. He systematically overvalued the Fund’s portfolio consisting of thinly traded and non-publicly traded securities.
KPMG as auditor of the fund and Citco Fund Services (Curacao) N.V. as BVI fund’s administrator were sued for the reckless and negligent conduct when presenting Monthly Net Assets Value statements and annual audited reports.

In 2005, KPMG and Citco tried to dismiss the complaints filed by Dobbin’s investors. They seeked to dismiss the complaints on the reason that the court lacks personal jurisdiction over them. Citco further argued that advocates have not stated valid claims for fraud or negligence.

Now, after 1 year timeout the KPMG and Citco Fund Services (Curaçao) N.V. should defend their money and reputation in Dobbins Offshore Ltd hedge fund case again. By the way, the hedge fund with the name Dobbins Offshore Ltd is still listed on BVI FSC website under Professional Funds section.

Performance Investments Products Corp., a company registered in the British Virgin Islands and owned by Michael H.K. Liew, appeared to be in the centre of a noted story that finished with the failure of financial scam. In this scam, lots of Philippine’s investors lost hundreds of millions of dollars.

Most victims were rich people or those who aspired to be rich; they have lost as much as $250 million of funds invested in a supposedly foreign trading outfit. The story has started when Michael H.K. Liew, the Singaporean owner of the BVI-based Performance Investments, has made himself to look legitimate having opened office at the Citibank in Makati. Then he incorporated in Philippines and signed up Cristina Gonzalez-Tuason, a person having some influence and good political ties.

Then, some weeks ago, Cristina Gonzalez-Tuason applied to the National Bureau of Investigation (NBI) and Interpol requesting them to find Michael Liew and to trace BVI company’s funds. She claimed, together with other investors of Performance Investments, that he had unlawfully took the money, which belonged to its investors.

Earnings were to be wired to individual investors’ bank accounts. However, after it became known that Liew had disappeared, investors found their banks accounts emptied and closed. The Singaporean office of the Performance Investments (BVI) informed investors that the funds were invested in three different banks. One of these offshore accounts in Hong Kong was already closed by Liew.

In the official request Tuason did not name the amount stolen; however, total investors’ losses probably make the amount between $140 million and $250 million.

Actually, Mr. Liew’s investment scam involved the trading of financial products named “futures derivatives”, which allow the investor to trade on margin. That magnifies the gains, but also amplifies losses if the market moves against the trader. So, even if not taking fraud into account, the investment scheme that involves “future derivatives” and foreign exchange is extremely risky by itself.

Along with NBI investigation, the victims of the above scam are now adviced to seek the help of the Anti Money Laundering Council (AMLC), which has enough power to block the accounts of the persons involved and to trace the money.

The attempt by California-based Advanced Medical Optics Inc. to purchase Bausch & Lomb – an American eye care company which is one of its main business rivals – is now under question. BVI-registered ValueAct Capital, which is a major shareholder of Advanced Medical, opposed company’s plan to buy out B&L. The owners of the BVI company evaluated the deal as “posing unacceptable risk”, and advised Advanced Medical to let another firm buy B&L.

Advanced Medical was competing with private equity firm Warburg Pincus LLC to purchase Bausch & Lomb. Advanced Medical offered $75 per share, while Warburg offer was for $65.

General objections to the proposal were named by the partners of the BVI-registered ValueAct Capital, and include the consideration about putting too much of Advanced Medical’s business in the consumer contact lens and lens care field, which is more risky and more likely to fluctuate than Advanced Medical’s surgical business. Other question of importance is whether Advanced Medical could successfully absorb a company twice its size.

ValueAct Capital’s partners Jeffrey W. Ubben and G. Mason Morfit also devoted much criticism to what they named the lack of adequate growth in Advanced Medical’s stock price and earnings per share.

ValueAct Capital, based in the BVI and operating out of San Francisco, owns 8.8 million shares of Advanced Medical, or 14.7% of the company. The experts have stated that the opinion of such a large shareholder will have significant weight with Advanced Medical, however, there is no guarantee that the company will be stopped in its intentions. The company will probably try to team up with private equity firms so it can offer all cash to B&L shareholders, instead of a mix of cash and its own stock. Buying B&L with cash alone would not require shareholder approval.

It should be said that ValueAct Capital (BVI ) is already known for aggressively and publicly criticizing the way how business is conducted in the companies it partially owns.

Since the British Revenue & Customs Authority started to get from the banks the details of their customers’ accounts in offshore jurisdictions, many offshore schemes have been revealed. Probably these schemes were planned and used illegally to avoid taxation. In the cases with real estate objects registered on offshore companies, mostly based in BVI and Channel Islands, most offences uncovered concerned evasion of inheritance taxes.

One of the last noted stories concerns Bob Geldof, the rock star and Third World debt campaigner, who has been recently accused by newspapers of claiming Irish residency to avoid Inheritance Tax. Bob Geldof is an Irish citizen who is living in two properties in England. One of these properties, a luxury apartment in South London, is reported to be owned by a company called Quiet Ventures, the second one, located in Kent, is owned by Bandol Holdings. Both are offshore companies, registered in the British Virgin Islands but having London contact addresses.

Geldof is accused of avoiding payment of £2.25m, by saying that he lives in Ireland. Geldof being a non-domiciled taxpayer, the houses, which are together worth an estimated £4million, would avoid the normal inheritance tax of 40%, or £1.6million. Geldof himself declined to comment the situation.

It was stated by tax expert Mike Warburton that owning property through companies based in tax havens (namely, in BVI), was a classic scheme that allows non-domiciled citizens to escape taxation. By his words, this provides for non-paying inheritance tax, and avoiding capital gains tax if the owner sells a property where he does not reside. Moreover, stamp duty on purchasing the UK property that costs more than £500,000 can be reduced from 4% to 0.5% by complicated deals between the holding companies.

In the middle of July the details of the financing of luxury cruiser of Rene Rivkin have emerged which would lead to the trustee of his bankrupt deceased estate recovering millions of dollars from a bank account in Jersey. In case of success, the trustee will distribute the funds to the creditors of the boat’s owner. The largest creditor is the Australian Taxation Office.

All the case starts with the company registered in the British Virgin Islands – Derata. This BVI company was the sole director of Thameslink, a company registered in another tax haven, Jersey. The  only asset of the Jersey company is a large boat, bought for $4.5 million and refurbished in 2002 for $2.3 million. This boat was chartered by Rene Rivkin for $25,000 a quarter, and the most important question is whether Rivkin was the owner of Thameslink and hence the owner of the boat.

The accounts of Jersey company showed a loan taken from “the shareholder”. Before refurbishing it was $4.4 million, after that it was $6.6 million. This meant that “the shareholder” had lent Thameslink an extra $2.2 million in 2002.

At a recent public examination in the Federal Magistrates Court, Rivkin’s bookkeeper, Margaret Woolveridge, gave evidence that while the boat was being refurbished in Cairns, she received invoices from the boat builder and paid them, as well as the charter fees. She received quarterly reminders from Rivkin’s solicitor, Richard Gelski, who will give evidence next month.