Ponzi schemes in an offshore world – a juggling act?

In early November Krys & Associates, a professional firm in the Cayman Islands and the BVI providing corporate recovery and insolvency services on large complex cross-border frauds, hosted a breakfast discussion “Ponzi Schemes in an Offshore World – A Juggling Act?” at the Marriot Hotel.

Invitations were extended to participants at the INSOL International conference held on the same day. INSOL is a worldwide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. The session was aimed at providing delegates with an overview of opportunities and issues that arise in the liquidation of mutual funds caught in a Ponzi scheme.
The event was moderated by Kenneth Krys, Principal Managing Director of Krys & Associates and included a panel comprising Margot MacInnis, Managing Director and Tim Le Cornu, Director, of Krys & Associates.
The session was directed at providing a basic understanding of some of the issues arising in the liquidation of mutual funds which had become, through no fault of their own, victims in a Ponzi Scheme.
Krys introduced the session by highlighting some of the key issues to be addressed. He explained how the factors usually considered in a standard liquidation changed when a Ponzi scheme was involved. The standard avenues for recovery, that is, pursuing claims against the “deep pockets” may no longer be sufficient to recover the losses incurred.
Le Cornu noted that many investors in funds caught up in the fallout of a Ponzi scheme naturally turned to the ‘traditional wrongdoers’ for compensation of losses; directors, auditors, administrators, investment managers and other fiduciaries, through lengthy and costly third party litigation. Whilst these avenues remain available, in the context of Fairfield Sentry, a mutual fund in which Krys & Associates are managing the liquidation in the BVI, the losses were anywhere in the region of USD3 Billion and it was unlikely that the service providers involved, should they be found culpable, had assets or insurance sufficient to cover such a loss. That meant that looking at alternative recovery strategies.
McInnis explained that a further issue that was different from standard liquidations was determining who the victims were. Because subscriptions and redemptions are based on a net asset value that is now known to be false, it is no longer appropriate to look at the number of shares held by a particular investor. In fact it was very possible that an investor with shares was actually a net winner when one considered cash inflows and outflows, rather than a net loser. The impact of this is that consulting with and reporting to the investors of the fund became a balancing act between a liquidator’s duties to report and to maximise the recoveries to the estate.