Golf Courses, Dead Horses and Ugly Divorces -
By Kenneth Krys
Published in: The Bermudian
When it comes to attempting to identify and recover concealed assets and proceeds of crime, one needs to have a team that includes professionals with experience and expertise in tracing assets in an offshore environment. Insolvency practitioners and corporate recovery professionals have these tools and often can bring value to an investigation or litigation scenario with the combination of their knowledge in such matters and the other areas of expertise they can bring to the table.
In Bermuda and in the Caribbean Insolvency practitioners and corporate recovery professionals have been on the front lines of investigating fraud and obtaining recoveries in cross border litigation. Cases like IPOC, Madoff, Parmalat, and BCCI have grabbed the attention of crime fighters and international headlines over the past two decades.
When dealing with these cases, particularly where there is fraud or criminal activity, those investigating fraud find they need to come up with original, creative, and often unconventional ways to identify and procure assets. This approach is particularly necessary when dealing with cross border matters where the laws from one country to the next are different and there is usually a complex web of offshore vehicles, trusts and foundations.
There are of course various civil interim legal remedies available to those investigating fraudulent behaviour. These include discovery orders (aka Norwich Pharmacal orders), freezing orders (aka Mareva orders), injunctions, and search orders (aka Anton Pillar orders). While these orders provide powerful and effective pre-emptive relief, due in part to their draconian nature, the legal hurdles to apply for these remedies are often quite high. A victim must demonstrate a good and arguable case on the merits, show urgency and a real and substantial risk that assets may be dissipated or moved in the absence of the order. Further the victim may be required for some of the remedies to provide a bond in case of harm or injury to the party he is seeking the remedy against. Thus there is a financial burden as well. Many attorneys both on-shore and offshore are well-versed on these topics, and it is not my intention to go into greater detail other than to make one aware that these remedies are available and if sufficient evidence exists, one would be well-minded to consider these rights and reliefs.
In reality however the evidence that is required to make such orders often does not exist. This is because the person committing the fraudulent behavior is the only person (except those aiding and abetting him) who has this information and if he is clever at all, he will not have left much of a trail for the victim to follow. The victim is left to hunches or premonitions, often the result of gut feelings, experience and knowledge of the fraudster, and certain ‘red flags’ and subtle changes (and sometimes not too subtle) in the fraudster’s daily routines, habits and general day to day lifestyle. It can be something as small as increased business trips to certain locations, or something more prevalent as a new purchase of an expensive item outside of the wrongdoer’s financial means. But these fall short of evidence when considering the above remedies and therefore those remedies are often not an option to trace and recover assets.
Does that mean that the victim is in dire straits? Not necessarily. There are other effective approaches, when applied with the appropriate amount of pressure and determination, may either give the victim the tools to consider the above remedies or at least create a greater balance when negotiating a resolution of the wrong in either commercial or financial terms. The below scenarios will provide some thoughts on unconventional approaches in which the writer has been involved in identifying and pursuing assets for victims of fraud.
Going for the Green
This involves a case where the estate for the deceased engaged us to assist them in finding assets they were sure must exist. The deceased had cancer and in the years prior to her finding out that she had the illness, she (and the organizations she part-owned) had been recognized as a successful real estate broker, winning many international awards in this regard. The estate was surprised to be informed on her passing that despite these accolades, both the deceased and the company for which she was a part owner, had minimal assets. Her husband and the majority shareholder (who was not executor of the estate) offered a small amount of money to the estate for her share of the assets and shares, supposedly hoping they would take this and walk away.
Following various discussions and negotiations, the husband agreed to allow us to come in and conduct discrete analysis and inquiries into the company and certain related companies with the intent of demonstrating that the company wasn’t earning significant revenues and that the assets which the estate was suggesting should exist did not in reality.
The focus of our work was on understanding and conducting ratio and comparative analysis on the company’s real estate brokerage fees. We identified a significant reduction in sales following the deceased’s departure from the day-to-day business, not surprising given her role, but the decrease was greater than one would have projected. Further we reviewed prior sales to see where the proceeds were paid.
As a result of our inquiries and analysis, we identified an elaborate scheme where the husband had made investments and purchased properties and other assets by making arrangements with third parties in exchange for the payment of monies comprising primarily of brokerage fees paid directly to the third party. In exchange the third party identified certain properties in which to invest in exchange for a compensation fee. This avoided the transactions coming onto the company’s cash books and accounts. The property portfolio included a number of luxury condominium flats located near some of the husband’s favorite golf courses. The estate eventually negotiated a settlement in the millions of dollars.
You Can Lead a Horse to Water…
Our second case involves the prosecution of a person charged for money laundering under the Proceeds of Crime Act. In this case the plaintiff, the Attorney General, went to court to have us appointed Receiver over the perpetrator’s assets until a decision had been rendered on the money laundering charges. We had limited information on the defendant’s assets. We were aware that he had a property in the Caribbean and the Attorney General had access to some bank information which he forwarded to us. With the assistance of a private investigator, we learned that he was involved in a casino in Colorado and various penny stock transactions in the US and Canada. A chance piece of information from an informant identified additional information (and assets) and, together with financial analysis we conducted, suggested that at least in certain time frames, the perpetrator might be involved in a pump and dump scheme. We understood that the defendant, who was hiding in South Africa to avoid extradition, might be traveling to the United States and we, together with the Attorney General, made plans to serve him with subpoenas and other legal documents when he arrived in the States.
We received a call from the Federal Bureau of Investigation days before we were planning to serve the defendant. We were requested in strong terms not to serve the defendant and to cease any efforts to pursue the inquiries we were conducting. While we were not privy to the discussions on what was going on (the Attorney General communicated with the FBI directly), the defendant was never served. We were later informed unofficially that the defendant had key information which the FBI had determined critical to an investigation it was conducting into a mafia organization. One of the rumors conveyed was that this group, taking a page from the first The Godfather movie, had left a dead horse in the front yard of one of its adversaries to send a message.
War of the Roses
Some of the most difficult cases to deal with are divorces. Depending on how much time the marriage has been in trouble and how much money is at stake, a husband can take steps to hide assets and avoid a paper trail. Throw in the emotional aspects, and possibly the intangibles like who gets access to children and a dramatic change in lifestyle, these situations tend to be litigation heavy and draining (emotionally and financially). Insolvency practitioners and those who pursue asset recoveries can play various roles in divorce proceedings. Not only can they bring their expertise and experience in fraud investigation, forensic accounting, asset recovery and procurement, but they can also provide the opportunity to bring in someone who is independent and objective from the adversarial parties, not emotionally connected to the outcome. The work they conduct will be discrete and confidential. This can, at times, be just as important as the principal role of the exercise of identifying and procuring assets. In addition many insolvency practitioners have on-staff or have access to business valuators and those with expertise in damage quantification. This can be particularly beneficial when the issue is attempting to determine the value of the husband’s business or investments.
In our view, our role in these cases is to provide greater transparency to the victim (usually the wife) and to bring the parties to a situation where they can negotiate a settlement out of court that is sufficiently satisfactory (although making neither happy with the result). The below sets out a couple of cases where we have been involved and have provided value by getting the two parties to come to a resolution of their dispute.
The first case involves a person of Asian descent who created a European alias to conceal his heritage. At the time of his original divorce, he swore a statement that he had no assets and the wife received nothing. The ex-wife didn’t trust him however and a few years after the divorce she used the internet to research her ex-husband and discovered that he had made an application to a fast food franchise disclosing his net worth in excess of $30 million. The ex-wife, armed with this information, obtained an injunction against the husband and we were appointed receiver over the ex-husband’s assets and provisional liquidator over certain related corporate vehicles.
As receiver and provisional liquidators, we obtained a discovery order against the attorneys and bankers of the corporate vehicles and the defendant. Using our fraud investigative and forensic accounting skills, we identified a number of assets offshore. The case eventually settled with the ex-wife receiving millions of dollars.
The second situation we were involved in deals with a case where the husband was making significant bonuses during the marriage but these disappeared once the marriage got into trouble and divorce proceedings were commenced. This case had a wrinkle in that the employer was the husband’s father, who was not a party to the proceedings. The wife was of the view that her husband and his father were colluding to avoid any payment while the proceedings were afoot and that the bonuses would return once a decision was rendered. The husband (and his father) argued that the business had been adversely impacted by the recession and that the bonuses had decreased accordingly.
We spoke with both parties and arising from these discussions, agreed to be retained as Special Joint Examiners (“SJE”) to review the financial performance of the father’s company and the husband’s remuneration prior to and subsequent to the divorce proceedings. One of the interesting aspects of the engagement was that the parties agreed we would conduct the financial, ratio and comparative analysis we deemed necessary but that we would neither be able to retain the records or report on previously undisclosed financial information in our report. The first issue was addressed by reaching an arrangement with the company’s legal counsel to hold the documents and analysis in trust for the SJE. The second issue was resolved by providing sufficient ratio and comparative analysis in the report to assist the court and the adversarial parties to get a sufficient understanding of the financial performance of the company and remuneration of the husband. This included an assessment of whether the explanations provided to the SJE for variances and discrepancies were credible or not. This case settled days after the report was released.
Conclusion
Given the nature of tracing and collecting offshore assets, there will be minimal documentation. This frequently means that the information and documentation that is required to pursue certain draconian legal remedies does not exist and that those pre-emptive rights and reliefs are not available. Getting an insolvency practitioner or those with experience and capabilities in tracing and procuring assets could add value to the litigation, by either bringing in higher assets to the victim, lessening the need to continue litigation (and incur the costs related to it) or at a minimum provide peace of mind that what is being offered is the best one can obtain.