The matter of SEGOES Services Ltd. is to be back in Grand Court next Monday to determine if the official liquidators can use any of the assets held in what it called fully disclosed accounts.
The insolvent financial brokerage and investment company was put into liquidation in May after claims of the misappropriation of millions of dollars.
SEGOES primarily had two types of clients: those that had their investments placed by SEGOES into fully disclosed broker accounts bearing their name; and those that invested anonymously through SEGOES Trust or SEGOES Bond Fund.
Much of the money invested through the Trust and Bond Fund was misappropriated, said Ken Krys, one of the joint official liquidators working with RSM Cayman Ltd.
At issue is the funding of the liquidation. ‘It’s a matter of who’s going to pay,’ said Mr. Krys.
‘The bulk of the (remaining) assets are in disclosed accounts. There’s very little left otherwise.’
The joint official liquidators will seek direction from the Court concerning the distribution of assets from disclosed accounts and whether any of those assets can be used by the liquidators.
In some cases, even with the fully disclosed accounts, Mr. Krys believes investment funds were co-mingled in an operating account first, making it difficult if not impossible to ascertain if an individual investor’s funds were actually the funds credited to his or her account.
Mr. Krys also said some fully disclosed clients were credited with inflated values for the proceeds of sales of stock share.
‘(SEGOES) was selling shares at less than what it paid for them,’ he said.
Mr. Krys gave an example of a client that would tell SEGOES to sell some shares they held at $25, and then SEGOES would sell the shares for $20 and credit the client’s account as if they sold for $25.
Since the company was in an overall debt position when absorbing these losses, it could be argued that some SEGOES creditors were given preferential treatment over others.
The SEGOES Creditors Committee supports the pooling of assets as a whole, but there is some dissention among its ranks.
Committee member Jack Benz opposes the pooling of the proceeds of disclosed and undisclosed accounts.
In a letter to creditors posted on RSM’s website concerning SEGOES, Mr. Benz argues that fully disclosed accounts were not the same as the undisclosed Trust and Bond Fund accounts and that it would be unfair to treat them as such.
‘(The fully disclosed funds) were invested in securities, stocks, bonds and other instrumentalities, in your names, and under your direct control. This is why they could not and were not misappropriated by SEGOES.’
Mr. Benz is putting together a group of fully disclosed SEGOES investors to oppose the liquidator’s pooling proposal.
‘If you wish to join us, we propose to retain consul jointly and therefore keep expenses for representation to a minimum,’ he wrote in his letter.
As of Monday, Mr. Benz said from London that he had yet to retain an attorney to handle the matter.
‘We haven’t settled that issue yet, but we expect to tomorrow or in two days at the latest,’ he said. ‘We will have an attorney going into court to represent at least 10 or 11 disclosed creditors.’
Mr. Benz revealed that one argument that could be made concerns whether a Cayman court even has jurisdiction to hear the proposal to pool the fully disclosed funds, which are all invested in the United States.
‘All of the fully-disclosed clients signed agreements that gave jurisdiction to the United States in the case of disputes,’ Mr. Benz said.
Gene Hoffman, Jr., the chairman of the SEGOES Creditors’ Committee believes pooling the accounts is the only practical way of moving forward, partially because there would likely be no other way to fund the liquidation.
Mr. Hoffman noted that it would take a very expensive and time consuming forensic accounting exercise from the liquidators to determine which investment accounts were co-mingled and which ones were not.
‘The goal here is to have as many people as possible getting as much as they can back,’ he said.
Mr. Benz was out-voted in the creditors’ committee teleconference Monday concerning the pooling proposal.
‘It was a biased vote,’ he said. ‘(The other creditor committee members) have undisclosed accounts, and there’s hardly any money left in those accounts, so they want the assets pooled. I had a disclosed account, so I took the opposite position.’
The whole issue could be put on hold on Monday if attorney Clyde Allen, who represents SEGOES owner John Kaweske Jr., get his way.
Mr. Allen said he will argue the matter should be postponed pending the outcome of other court actions concerning SEGOES in the United States.
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