Axiom Legal Financing Fund stakeholders to oppose receivership application

Battle lines are being drawn up between the various stakeholders in the beleaguered Axiom Legal Financing Fund (the “Fund”).

Taylor Moor (“TM”), who acted as the main distributors of the Fund, are angry that the directors notified that shareholders that they would apply to the Cayman Grand Court for KPMG to be appointed as receivers of the Fund, without putting it to a shareholder vote.  Originally, this was one of the matters upon which the shareholders were expected to vote at the EGM earlier this month, but at short notice the resolution was withdrawn and the directors announced that they intended to go ahead with the receivership application unilaterally. TM intend to take legal action to oppose this move.

TM believe that the Fund should be put into liquidation rather than administration, with independent insolvency practitioners being appointed as liquidators. They believe that this would enable the liquidators to conduct a thorough investigation into the past affairs of the Fund and to take action against anyone who has been guilty of wrong-doing. The powers of Receivers are materially more limited in this regard. Furthermore, they are unhappy that the sole aim of a receivership is to ensure an orderly closure of the Fund – a decision which they believe is premature given that the investigation into the Fund’s loan portfolio is far from complete.

TM are also unhappy with the costs of investigating the situation to date ($1.3 million) and the lack of a complete and coherent report detailing the findings.

Whatever the merits of the case, this does seem to be a situation of poor stakeholder management by the Fund directors.  They must be aware of the sensitivities of the investors and need to be seen to take all steps that are necessary to investigate fully and take action if wrong-doing has occurred.  By proceeding with a receivership application in circumstances where they have not permitted the shareholders a vote on the issue, and in the knowledge that the main distributor of the Fund is clearly opposed, they are setting themselves on a difficult and antagonistic course.  Given the atmosphere of allegations and suspicion, it does appear unnecessarily inflammatory to proceed with an application that may limit a comprehensive investigation, without fully explaining the rationale for that to those who stand to lose their investment.

The Cayman Islands court is expected to hear the parties on 31^st January.

McKeeva Bush removed as Premier of Cayman Islands

The governor of the Cayman Islands, Duncan Taylor, has revoked McKeeva Bush’s appointment as Premier following yesterday’s vote of no confidence in his government, which was supported by members of his own UDP party.

Juliana O’Connor-Connolly has been appointed Premier in his place, to lead a minority UDP government.  The new government will need to build support from the opposition in order to be effective, with 3 of the former UDP members having crossed the floor along with Bush during yesterday’s no confidence debate, and so it will be a significant challenge for the new Premier to ensure the effectiveness of her leadership.

The move has come as something of a surprise to those who were expecting the governor to dissolve the Assembly instead, provoking an election - something which Bush himself had apparently suggested should happen.  Bush retains support amongst a not insignificant number of Islanders, and may have been hoping that they would vote to re-elect him and thereby vindicate his decision not to step down voluntarily.  It seems, however, that the governor has thwarted this ambition, for the time being at least, with O’Connor-Connolly’s appointment.  

Vote of no confidence in Cayman government passed

A motion of no confidence in the Cayman Islands government was passed yesterday in the Legislative Assembly, with 11 supporting the motion, and only 3 opposing. The no confidence motion was proposed after Bush refused to resign following his arrest and release on police bail on corruption charges, even after he had been called upon to do so by members of his own United Democratic Party

. 

The issue has split the UDP with a small number of his colleagues publicly backing the beleaguered Premier, but, as yesterday’s voting shows, he has lost the confidence of at least some of his colleagues and a split has opened up in the party, making its government untenable.

At the beginning of the debate, Bush and 3 UDP colleagues expressed their split from the remainder of the party by crossing the floor of the house.  Bush himself did not speak in the proceedings and abstained from voting.

He is expected to meet with the Governor to discuss what to do now – a difficult meeting no doubt, given the fact that Bush has very publicly called the Governor the “enemy” and accused him of being behind a “vindictive witch hunt”.

It would appear that an election is inevitable.

McKeeva Bush's position looking increasingly vulnerable

Confusion reigns over the position of Cayman Islands Premier McKeeva Bush’s political position following his arrest last week on corruption charges.

Following several days of almost complete silence from his party, the UDP, it was reported that over the weekend the party (with the exception of Ellio Solomon who publicly backed Bush’s decision to remain in office whilst the allegations are investigated) had decided to oust McKeeva Bush from office and replace him with Juliana O’Connor.  However, it seems that the position is not yet a fait accompli as although a letter was delivered to Bush asking him to step down, he has made it clear that he will not go voluntarily and no action has yet been taken to force this to happen. Politicians who are brave and make bold statements behind closed doors seem more reluctant to do so in public. The Governor’s office has said that it has not yet received any communication on the issue.

The opposition leader wrote to the speaker on Friday asking her to call a special meeting of the Legislative Assembly to debate the situation with a no confidence motion.  In view of the position taken by the UDP over the weekend, it is impossible to see that McKeeva Bush could count on the support of his erstwhile political colleagues to support him. As a result, it is difficult to see how Cayman can in practice avoid an early general election.

Bush, who retains a fair degree of popular support in the Island, did not release any statement on the situation yesterday although he is understood to feel angered and let down by the actions of some of his colleagues in failing to support him.  

The current uncertainty is not good for Cayman.  The government is effectively paralysed whilst this situation unfolds – an invidious position to be in whilst there is so much going on which needs to be very carefully handled – such as the Island’s relation with the UK and the new proposed “mini-FATCA” negotiations. 

Silverfleet in exclusive talks to acquire Ipes

It is understood that Silverfleet Capital, the European mid-market buy-out firm, is in exclusive discussions with RJD Partners to acquire Guernsey head-quartered fund administration business Ipes for a sum in the region of £50 million.

The deal is expected to close in the new year.

Axiom Legal Financing Fund managers asleep at the wheel

KPMG, the firm appointed initially to carry out a review of goings-on at embattled Axiom Legal Financing Fund, are reported to have said that whilst the fund does not appear to be a Ponzi scheme the managers of the suspended £117m fund carried out "little or no due diligence" on the cases in which they invested shareholders' money, and did not follow investment criteria.

Following a period of suspension, the funds directors have now appealed to have the fund wound up because it is unable to meet its financial obligations.  According to IFA online, the court documents disclose that KPMG's investigations "reveal grounds for suspecting there has been mismanagement" of the fund's assets, and that the net asset value of the fund has been overstated.  The size of the shortfall is not clear at this stage.

The loans made by the fund appear to have been made to law firms conducting genuine cases, but are unlikely to be repaid within the time frames required by the fund’s investment criteria.  Loans should only have been made to cases which could be completed within a year, whereas most, if not all, of the cases being funded will take much longer than this to resolve – in some cases up to 3 years – and in at least one case a loan appears to have been made to a firm which was close to insolvency at the time. 

There is also controversy regarding the payment of a “facilitation fee” of 50% of the loan value.

The findings disclosed in the court paper seem to show a situation where there has been a real breakdown in good governance at the fund.  However, it is not yet clear whether some of the stronger allegations of fraud made by OffshoreAlert are well founded – the court papers suggest that further investigation  is required before a conclusion can be drawn on that issue.

Does FATCA pose an unacceptable security risk to Americans abroad?

There has been a lot written about the problems of FATCA recently.  The financial institutions which will be subject to the new law have complained about the burden (in both time and costs) of reporting the information, and the fact that the anticipated IRS revenue receipts (estimated at $8 billion over 10 years – which is not a huge amount of money for a nation the size of the US) are probably outweighed by the costs of implementation. Americans expats (and in particular those who hold dual citizenship) are starting to appreciate the difficulties in opening bank or investment accounts overseas and are resentful of the fact that America is the only one of the leading industrialized nations which requires its citizens to pay US taxes even if they live outside the United States.

But one aspect about which there has been surprisingly little fuss is the security implications for Americans living abroad.  When FATCA becomes fully effective, foreign financial institutions will have to submit detailed annual reports on their American customers with bank accounts of more than $50,000, including cash balances, receipts, and withdrawals.

In order to meet all of the FATCA data gathering and reporting requirements FATCA will require the banks to keep data on a plethora of information including residential addresses, green card status and even the names of the Americans’ relatives.  The information is far, far more detailed than that which has been previously held by any financial institution with which I have ever had dealings.  Never before would the banks have had to gather and isolate such detailed records specifically relating to US citizens.

The US is a nation which is, post 9/11, usually somewhat obsessed with security.  And not without good reason.  It is a powerful country which has made a lot of enemies in recent years, and it usually takes the safety of its people very seriously.

Who might find it useful to have a database of all of the American residents in their territory?  Might perhaps a jihadist group in Afghanistan be interested to know where all of the US persons in Afghanistan live?  Might a South American kidnapping group be interested in a list which shows the cash balances held by US citizens in their territory, and the names of their relatives?  Might an anti-capitalist extremist be interested in being given the private and business details of a US resident business mogul near them?

Of course the data that the financial institutions gather should be kept confidential.  But bank IT systems are only as confidential as the employees who have to access them.  The IRS and HMRC (who are likely to follow the US in implementing FATCA-type legislation) know this already – indeed, they both make very good use of it by encouraging and even paying handsome cash rewards to whistle-blowers.  So if the IRS know they can get information from the banks by offering employees cash incentives to blow the whistle on wrong-doing, what on earth makes them think that Al-Qaeda can’t employ the same techniques with very different aims?   

By introducing legislation designed to stop tax cheats in their tracks, the US may be unwittingly putting at risk the lives of many of their expatriate citizens.  It seems that being seen publicly to take a tough stance on tax cheats takes a higher priority in these straightened times than the security of US citizens abroad.

The UK has a huge number of expats based in countries all over the world – including a large number of relatively unstable locations where corruption is rife.  The UK government would do well to consider this important aspect of security before deciding simply to follow a “me too” strategy and take the same route as the US.