Grand Court rejects U.S. lawsuit against BDO Cayman

Last June, liquidators for the Cayman Islands-based hedge fund Argyle Funds SPC filed a lawsuit in the New York Supreme Court against several branches of the auditing firm BDO Ltd., including the one in the Cayman Islands. The lawsuit sought at least US$86 million from BDO for allegedly failing to spot fraud by two of the fund’s credit advisers, costing Argyle millions of dollars and causing it to enter liquidation as a result.

However, on Tuesday, Grand Court Justice Raj Parker granted BDO Cayman’s request for an anti-suit injunction against Argyle, restraining Argyle from continuing the proceedings against BDO Cayman in the U.S.

BDO Cayman filed the application for an anti-suit injunction last August, and argued at a hearing in January that Argyle’s lawsuit in New York violated its contract with BDO. According to Justice Parker’s judgment, BDO Cayman argued that any disputes between the parties should be settled by a Cayman arbitration tribunal.

Argyle attorney Clare Stanley, QC, said the arbitration clauses were unenforceable for a number of reasons, including that Argyle is in supervised liquidation, and that its liquidators are not bound by the arbitration clauses.

Mr. Parker sided with all of BDO Cayman’s arguments in granting the anti-suit injunction.

“The New York proceedings breach the arbitration and exclusive jurisdiction agreements and the sole recourse clauses contained in the engagement letters between BDO Cayman and Argyle,” he wrote in his judgment. “To the extent that there is any dispute about the meaning of the terms of those agreements or as to the applicability of those terms, if not resolved by the Cayman arbitration tribunal, it is to be resolved exclusively by this court and in accordance with Cayman law.”

Mr. Parker’s judgment also notes that BDO disputes the allegations in Argyle’s New York lawsuit, which claims that the auditing firm “acted with utter disregard for their duties to Argyle and with such extreme recklessness that their conduct rises to the level of gross negligence and/or intentional and fraudulent misconduct.”

Argyle’s claim form details frauds allegedly perpetrated against it by credit advisers hired to build investment portfolios.

According to Argyle’s claim form, one credit adviser represented to Argyle that it had grown the fund’s US$54 million investment to some US$200 million between 2006 and 2011.

However, the credit adviser instead used Argyle’s money “to extend large loans to already bankrupt companies, such as Death Row Records record label and a defunct dried fruit company – entities that are deemed high risk, as the likelihood of ever recovering that investment, let alone making a profit from it, is incredibly low,” the claim form states.

When the credit adviser was discovered to be a scam around 2012, Argyle sued it in the Canadian courts and won a judgment against it. However, as of this month, Argyle has yet to collect an outstanding claim of about US$40 million from the defunct adviser, according to the fund’s claim form. Additionally, fraud on the part of another credit adviser was not discovered until 2016.

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