Private equity investors in the Cayman Islands-based Port Fund L.P., who claim they have been defrauded, have succeeded in bringing a derivative claim against the general partner of the infrastructure fund on behalf of the exempted limited partnership.
The plaintiffs, Kuwait Ports Authority and The Public Institution for Social Security, filed a re-amended writ on 14 Dec. 2021, three weeks after the Cayman Islands Grand Court allowed the lawsuit to go ahead.
The plaintiffs are both Kuwait state-owned entities and two of 11 limited partners in the fund. They claim that the “deliberate, serial and systematic unlawful conduct” by the general partner Port Link GP Ltd has caused the fund and its limited partners more than $100 million in losses.
The case centres on Port Fund’s sale of its main investment asset Clark Global City, a property development in the Philippines, in November 2017.
The US$496 million net proceeds of the sale were sent to the general partner’s bank account with Noor Bank in Dubai, where the money was frozen following a suspicious activity report.
When the funds were unfrozen in February 2019, the plaintiffs claim the general partner breached its duties to the fund and the limited partners by making numerous payments to third parties, engaged by Port Link GP, in a fraudulent scheme to expropriate money from the Port Fund.
Third-party payments questioned
This allegedly included an almost US$60 million payment to Wellspring Capital Group, Inc, a company run by Mark Williams, a former investment director of the Port Fund.
The amount resulted from a claim by the investment manager of the fund – KGL Investment Cayman Ltd, later renamed Emerging Markets PE Management Ltd – against the Port Fund in Dubai, which was not contested by Port Link.
Williams, who together with Wellspring is a defendant in the proceedings, was also a shareholder of the investment manager for the Port Fund and the incorporator, sole director and 100% shareholder of Port Link Holdings, which has, since 30 May 2018, owned the entire issued share capital of Port Link GP, according to the writ.
Another $36.2 million in fees were charged to a Hong Kong company, Apache Asia Limited, and its Macau subsidy. The plaintiffs allege that even though the company had no track record, its purported fees were between four-and-a-half and seven times higher than the market rates charged by established investment banks for advisory services.
The writ details and alleges several links between Apache and Kuwait-based KGL Investment Company (KGLI), the company that set up the Port Fund in 2007 as sponsor and owner of the fund’s general partner Port Link GP Ltd.
In addition, $2.92 million was allegedly paid as a secret commission to the director of the company that bought the Clark asset and more than $16 million were paid to previously undisclosed recipients in Kuwait, the plaintiffs allege.
According to the writ, a further $55.3 million payment to the buyer of the Clark asset remains unexplained.
Struggle for information
The plaintiffs argue that attempts by limited partners to obtain documents and information from the fund on Port Link’s dealing with the investment assets had been “met by Port Link with obfuscation, prevarication and/or the staunchest refusal”.
Port Link had also not fully complied with a consent order to disclose documents obtained in separate proceedings before the Grand Court.
In these proceedings, another limited partner of the Port Fund, Gulf Investment Corporation (GIC) made an application to receive full information from The Port Fund and its general partner, Port Link, about the fund’s state of business and financial condition.
In that case, Grand Court Justice Raj Parker ruled that the limited partners had the rights to true and full information under Section 22 of the Exempted Limited Partnership Act and did not need to provide a reason for their disclosure requests.
In another discovery application in the US, Gulf Investment Corporation raised questions over the conduct of KGL Investment Company.
Marsha Lazareva, the former chief executive officer of KGLI, and Saeed Dashti, the chairman of the KGL Group of Companies, were former directors of Port Link.
Both have received lengthy prison sentences in Kuwait over the misappropriation of public funds and other charges, which Lazareva’s defence team described as “bogus”.
The plaintiffs in the Cayman lawsuit allege that the Port Fund paid for Lazareva’s and Dashti’s legal fees in these criminal proceedings and for extensive international lobbying efforts calling for Lazareva’s release.
Making these payments was not in the interest of the limited partners of the fund and Port Link had acted in bad faith in making them, the court filing stated.
New legal ground
The case is breaking new legal ground in the Cayman Islands because it is the first time that limited partners have succeeded in bringing a derivative claim on behalf of an exempted limited partnership.
Limited partners are typically passive investors who only have limited liability, whereas the general partner holds the assets, including legal claims, on trust and manages the affairs of the exempted limited partnership.
Under the Exempted Limited Partnership Act, limited partners can bring a derivative action, if the general partner has failed or refused to bring a claim “without cause”.
The general partner functions had in this case been assumed by independent directors of Port Link, who said they had investigated the allegations of wrongdoing but determined that there was cause not to pursue the claims on behalf of the fund, either because they lacked merit or were otherwise not in the interest of the fund.
However, the Cayman Islands Grand Court dismissed their application to strike out the derivative claims, effectively finding that a general partner cannot be impartial in claims against itself or those that arise from its own alleged breaches.
As such the judgment set rules for ELPs that represent a lower bar for indirect claims and are different from the common law principles applied to companies and trusts.
Disclosure order
Kuwait Ports Authority also obtained a disclosure order from a US court on 13 Dec. 2021 for records held by Citibank and E*Trade Financial Corporation.
In its application, the Kuwait Ports Authority said the requested discovery was necessary to provide clear evidence and “to persuade the Cayman court that winding up the Port Fund is the just and equitable result”.
The authority also hopes to find a money trail proving that its disgraced former director of finance, Abdullah Bader Mohammed Al Shamali, engaged in a kickback scheme in 2010 when KPA made its original investment in the Port Fund. This allegedly included improper transfers to his brother via an E*Trade account in the US.
The application called the purported kickback scheme “one of a number of self-dealing schemes that form the basis for additional causes of action that will be pursued” in the anticipated winding-up proceedings.
The plaintiffs last year also brought a claim in Cayman against law firm Walkers for negligence or breach of contractual and common law duties in advising Port Link GP on the claimed fee entitlement of the Port Fund’s former investment manager, Emerging Markets PE Management Ltd., which, according to the writ, was an existing client of Walkers.
The plaintiffs claim that the advice given was contrary to the interests of the fund and the limited partners, because as a result funds were paid to a third party “without proper basis or justification”.
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