The defunct Cayman-registered Argyle Funds SPC Inc. has issued a demand for arbitration against BDO Cayman Ltd. for allegedly failing to spot fraud by two of the fund’s credit advisers, Argyle attorney Clare Stanley QC said on Monday during an appeals hearing involving the two parties.
Argyle, which is in liquidation, originally sued BDO Cayman and several of its affiliates in the Supreme Court of the State of New York for at least US$86 million, because the fund said filing to spot the frauds cost it millions of dollars and caused it to enter liquidation as a result. BDO Cayman and its affiliates have denied these claims, and Grand Court Justice Raj Parker has called some of Argyle’s allegations “weak claims.”
In February, Justice Parker granted BDO Cayman’s request for an anti-suit injunction against Argyle, restraining Argyle from continuing the New York proceedings against BDO Cayman and its affiliates – the Trinidad-based BDO Trinity was subcontracted by BDO Cayman to do some of the auditing work, and other affiliates BDO USA and Schwartz & Co. LLP were also allegedly involved in the process.
The contract between BDO Cayman and Argyle stipulated that disputes should be handled in a Cayman legal venue against BDO Cayman, Justice Parker stated. And while there were contractual exceptions for proceedings founded on allegations of “fraud or willful misconduct,” Mr. Parker said that such allegations made by Argyle in the New York court were “weak claims.”
Argyle has not appealed Mr. Parker’s order against suing BDO Cayman in New York – the fund is instead pursuing its claims via arbitration – but the fund did appeal the order against suing BDO Cayman’s affiliates.
Ms. Stanley said Argyle should be able to sue BDO Cayman’s affiliates in New York because the lawsuits involve allegations of fraud or willful misconduct. While Justice Parker called these allegations “weak” in his order, he should only prevent the New York lawsuit if the allegations meet the threshold of “vexatious” or “bogus and absurd,” Ms. Stanley argued.
Ms. Stanley also said the United States is likely the only venue where her client could sue the affiliates.
“If I’m not allowed to sue the affiliates in New York, I can’t get an enforceable judgment against them anywhere – unless they submit [to this jurisdiction], and there’s been no indication that they will submit,” she said.
BDO’s attorney, Graham Chapman QC, countered that even if it were the case that Argyle could not get the BDO Cayman affiliates to submit to this jurisdiction, that was a risk the fund ran when it signed its contract.
Mr. Chapman also said the contract between Argyle and BDO Cayman clearly stipulates that disputes should be handled here, and that Justice Parker was right in issuing his anti-suit injunction.
The two attorneys spent most of Monday making these and other detailed arguments. Justice of Appeal Sir Alan Moses said at the end of the hearing that the “judgment will be written and handed down in the usual way.”
Since Argyle’s dispute against BDO Cayman will be disputed in a confidential arbitration hearing, it is unlikely that the outcome of the matter will be made public.
Argyle’s claim form in New York details the frauds that BDO allegedly failed to detect, perpetrated against the fund 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, Argyle claims.