Clients of Cayman broker OneTRADEx have expressed concern that the fees charged by the Cayman Islands Monetary Authority-appointed controllers of the business may exceed any cash reserves and assets the company has and would have to be covered by client funds.
They say the controllers of the discount broker, which was taken over by the regulator on 18 July, have indicated in writing that client funds would not be off-limits to recover fees and expenses, even though those funds should be held in segregated accounts.
Speaking on the condition of anonymity, one client told the Cayman Compass that broker account holders in this case would not only face direct losses, but by being forced to sell client-held securities to cover fees and debts of the business, there could also be a serious knock-on effect for leveraged positions. Any liquidated securities that were bought with debt or on margin could amplify the losses, if these positions are underwater at the time of the trade, especially if account holders are not able to control the timing.
Cayman’s financial services regulator placed OneTRADEx under controllership on 18 July. CIMA cited a section of the Securities Investment Business Law that gives it the authority to take control of a licensee if it appears likely that the company will be unable to meet its obligations.
There is, at this stage, no indication of wrongdoing by the directors of the company, Colin I. Wilson and Rich Ellison.
CIMA-appointed controllers Kenneth Krys and Angela Barkhouse of KRyS Global have all the powers needed to assume control of the affairs of the brokerage, including the power to terminate the securities investment business, the authority said in a notice published 19 July. The controllers are also responsible for assessing the financial position of the company and to submit a report to CIMA.
In a letter to clients sent on the same day, the controllers explained that they have two objectives: to continue with the operations of the company and maintain its viability as a business; and to conduct investigations and inquiries into the business’s compliance with laws and regulations.
During the period of controllership, clients were retaining the ability to trade, but are not allowed to transfer their securities or funds or close their accounts.
In an update to clients on 24 July, the controllers noted that they were receiving cooperation and assistance from the company’s directors and service providers. They explained that their priorities were now to review the conduct of management and staff at OneTRADEx and its business activities, to determine whether the funds and assets of clients were segregated and accounted for, and to ascertain the financial position of the company.
In a further update to clients on 26 Aug., the controllers advised they had filed two confidential interim reports on their investigations to CIMA, but that they were not able to share their findings and recommendations under confidentiality clauses of the Monetary Authority Law.
Meanwhile, the moratorium on closing accounts and transferring assets remains in place.
The controllers said they would issue a final report no later than 18 Oct., or sooner if there are material new developments they are allowed to disclose.
OneTRADEx customers are adamant that their personal investments should not be at risk. They argue that CIMA’s action of allowing the controllership to charge significant fees will most likely be a contributing cause of forcing the company into liquidation, which would trigger significant additional fees.
They also point to controller Kenneth Krys’ involvement in the liquidation of another Cayman Islands securities broker, Segoes Services Ltd. In this case, creditors received only a fraction on claims of US$9.8 million after liquidation and legal fees took the lion’s share of the $4 million that were recovered.
Segoes, however, was a fraud case, and involved a seven-year liquidation process.
So far, the controllers have been unable to give the discount broker’s clients any assurance about their assets, other than the opportunity to be heard by the court if client securities have to be sold to cover fees or debts of the company.
Krys told the Cayman Compass that the controllers are unable to comment on OneTRADEx clients’ concerns at this time. CIMA did not respond to questions and a request for comment by press time.