Turtle Farm deal slammed

AG says Cayman paid too much

Auditor General Dan Duguay’s report on the debt financing arrangements for the Boatswain’s Beach project states there was a ‘wanton disregard’ of the use of public funds.

More than US$2.8 million of fees was paid to four companies with regard to arranging the financing. Mr. Duguay believes as much as US$1.65 million of those fees had little or no value to the residents of the Cayman Islands.

‘In the course of almost 30 years of government auditing, I have difficulty thinking of any situation which showed such a cavalier attitude of expenditure of such sums,’ Mr. Duguay wrote in his report. ‘Numerous firms were paid vast sums that were either a gross exaggeration of the value of their services or well beyond what would normally be spent in a similar situation.’

The Turtle Farm borrowed US$46.6 million through a direct bond placement agreement with William Blair and Company in March 2004. The loan came after an uncompleted agreement had been signed with GC Ventures Corp. Ltd. in May 2003. That loan would have been for US$36 million.

The original proposal for the failed financing deal came from a company called Prospect Ventures Inc., which was represented at the presentation meeting by Suresh Prasad and David Berry.

In a letter to the editor of the Caymanian Compass in October 2006, Minister of Tourism Charles Clifford called Mr. Prasad a close acquaintance of Leader of the Opposition McKeeva Bush, and Mr. Berry a ‘business partner’ of Mr. Bush, but qualified that statement by stating ‘Mr. Bush prefers to call him a business associate or real estate agent working in his firm Cambridge [Realty]…’

Mr. Bush was chairman of the board of the Cayman Turtle Farm when the financing was arranged. Mr. Clifford was also on the board in his capacity at the time as Permanent Secretary in the Ministry of Tourism.

The financing agreement arranged by Prospect Ventures and subsequently two other companies, GC Ventures and QuadCaptial Advisors proposed to lend the money for the project through another company, a special purpose entity. Under that proposal, the Turtle Farm and the Government would have owned the SPE, which would have built and developed the Boatswain’s Beach facility. The Turtle Farm would have leased the property from the SPE for 25 years, after which the property would have been transferred to the Turtle Farm for a nominal amount.

‘If the SPE arrangement had been executed as contemplated, the debt of the Boatswain’s Beach project would not appear on the balance sheet of the Turtle Farm, and by extension the consolidated balance sheet of the Cayman Islands Government,’ Mr. Duguay wrote in his report. ‘This off balance sheet approach appeared to be a prime motivation for the project to be funded in this manner.’

However, the original financing agreement was never finalised on the request, in November 2003, of ‘government officials representing the shareholders of the Turtle Farm’.

Mr. Duguay believes the decision not to go through with the original financing arrangement was ‘a good one… that saved millions of dollars in financing charges’.

‘As such, I applaud the officials who made the decision at the time,’ he wrote. ‘However, it is important to note that it is my opinion that such a decision should never have had to have been made if the board had done some due diligence before signing the original [financial advisory service agreement].’

Because the original agreement had been signed, GC Ventures, and other companies with which it was associated – Prospect Ventures Inc., QuadCaptial Advisors, Live Oaks Capital Ltd – were paid fees totalling US$1,387,677.

Mr. Duguay states in his report that the fees paid to GC Ventures were ‘grossly excessive’, and he based the opinion on two documents.

One of the those documents was a memo dated 22 March, 2004, from Carson Wynne, who had previously been a director of GC Ventures until his resignation on 2 August 2003. In that memo to Turtle Farm Managing Director Ken Hydes, Mr. Wynn wrote that he had personally spent 1,242 hours on the original Phase 1 of the financing deal.

‘FYI Suresh [Prasad] and David [Berry] spent zero hours in Phase 2 and I would think that it reasonable to assume they could legitimately claim 60-100 hours in Phase 1, combined for the two of them,’ Mr. Wynne wrote. ‘Even that might be overly generous.’

GC Ventures billed 1,524 hours at a rate of $375 per hour for its services.

The other document Mr. Duguay referred to was a copy of the minutes of the Extraordinary General Meeting of the shareholders of the Turtle Farm on 27 February, 2004.

The shareholders, who were represented by then Chief Secretary James Ryan, then Financial Secretary George McCarthy and long-time civil servant Kearney Gomez, placed on record their concerns on the excessive fees paid to all parties to the original failed loan transaction. During the meeting, it was noted that fees had been renegotiated and ‘$0.4 million to GC Ventures/Live Oaks Capital (for setting up the deal)’ were payable.

In the end, however, GC Ventures was paid US$571,000 in direct fees plus $23,948 in other fees. In addition, Live Oaks Capital was also paid US$333,000 in direct fees, plus $51,895 in expenses.

Mr. Duguay does not believe the Turtle Farm should have paid anything at all to Live Oaks, which ostensibly had some sort of deal with GC Ventures.

‘I find it incomprehensible why these payments were made to Live Oaks by the Turtle Farm,’ Mr. Duguay stated in his report. ‘Live Oaks was never a party to any agreement signed by the Turtle Farm and therefore the Turtle Farm was under no legal obligation to make payments directly to them.

‘Even if it is true that GC Ventures had entered into some fee splitting agreement with Live Oaks… the only proper course of business action would be for the Turtle Farm to make any and all payments to GC Ventures.’

Mr. Duguay also did not agree with the payment of the US$51,895 in expenses to Live Oaks.

‘I am at a loss to understand why any of these amounts were paid,’ he said. ‘In no way was the Turtle Farm responsible for these expenses and in my opinion, they should not have been paid.’

The final US$110,000 payment made to Live Oaks was based on a general release, which Mr. Duguay also criticised.

‘The simple question I ask is ‘release from what?’,’ he stated. ‘Again, Live Oaks had no contractual obligation with the Turtle Farm.

‘It literally seems as if Live Oaks told the Turtle Farm it would release it from future claims if they paid US$110,000 and the Turtle Farm agreed.

‘In my opinion, there was no basis to make this payment and the management of the Turtle Farm failed in its fiduciary obligations to the people of the Cayman Islands when it made this payment.’

The successful financing arranged by William Blair and Company attracted another US$1,439,065 in fees and expenses. The minimum fee aspect of the loan was one percent of the loan amount. Mr. Duguay found the fee reasonable, but at the high end of such transactions.

As per the loan agreement, William Blair was also due an incentive fee if it secured a better interest rate than envisioned. That rate was indeed secured, which entitled William Blair to a US$1.178 million incentive fee. Mr. Duguay did not agree that an incentive fee should have been offered at all because other government borrowings around that time negotiated similarly advantageous rates with out incentive fees.

William Blair, however, did not charge US$221,032 of its fees because it believed it was ‘adequately compensated for its efforts and wished to provide the residents of the Cayman Islands a gesture of good faith’, according to letter the company sent to Mr. Duguay.

‘I applaud such generosity and am grateful that the financing fees were not even higher than they actually ended up being,’ Mr. Duguay wrote in his report.

Mr. Duguay also felt the Cayman Islands did get a good deal from the loan arranged by William Blair and Company, although he maintains the country did not need to pay such high fees for that financing.

In the end, Mr. Duguay stated that he thought the more than US$1.65 million of the US$2.8 million in fees paid for financing of the Turtle Farm – including the failed arrangement – was ‘of little value to the residents of the Cayman Islands.’

‘I believe the entire handling of the financing arrangements for the Boatswain’s Beach project was handled in a very cavalier manner and with little regard for financial probity.’

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