Liquidators of four Cayman Islands companies that were extorted in a huge Ponzi scheme have won a civil court case that will see the victims recoup US$95 million.
The US District Court for the Southern District of Florida entered a judgment against Deutsche Bank AG on 25 April in favour of FFP, which represented 13 companies in total.
Although they lost on seven of eight counts filed against the bank and its subsidiaries, the plaintiffs said it was the most significant development for victims in recovering funds.
“This is one of the most complex and wide-ranging frauds ever uncovered,” said Paul Kennedy, partner at Campbells LLP, Cayman Islands counsel to the joint official liquidators.
Florida-based scam
A Ponzi scheme is an investment fraud in which returns are paid to earlier investors using the capital contributed by newer investors.
These schemes, which are illegal in most countries, can collapse when the operator is unable to attract new investors or when a significant number of investors try to cash out.
In this case, Florida-based South Bay Holdings and Biscayne Capital International initiated a Ponzi scheme using the second company’s office as its headquarters.
They created note issuers – special purpose vehicles that issued and sold notes to investors claiming that real estate assets were sound collateral for the notes.
In reality, the properties supposedly backing the notes were already heavily leveraged, so the notes were unsecured because there was no real collateral supporting them.
They used the proceeds generated through the issuance of notes to offset losses in real estate investments, cover liabilities, enrich themselves, and more.
When they failed to generate revenue to pay debts, they raised new funds by issuing more notes or by increasing borrowing caps.
To date, two people have pleaded guilty to federal criminal charges in connection with the scheme. Other criminal cases and investigations are ongoing.
A global fraud
In their complaint, the Cayman-registered liquidators said they brought action to recover damages from the Deutsche Bank AG and its subsidiaries for participation in the global fraud.
This resulted in hundreds of millions of dollars of investor losses, looting of the companies affected on a massive scale, and the creation of staggering liabilities for the companies, they alleged.
“Defendants were aware of the purposes and investment objectives for which the funds raised through this fraudulent scheme were supposed to be spent,” the complaint read.
“Defendants also knew that little or none of the money raised through the scheme was actually used for those purposes.”
Instead, the funds were transferred to accounts in the names of other entities and individuals who had no legal right to these assets, the plaintiffs claimed.
“Defendants… perpetuated the fraud through numerous strategies designed to raise new money to repay liabilities to investors or extend the maturity of pre-existing debt obligations.
“This prolonged the scheme’s duration and enabled theft on a massive scale in what defendants knew or recklessly disregarded was a classic Ponzi scheme,” FFP wrote.
Even worse, they said in their complaint, the defendants provided coaching and instruction as to how to avoid their own ‘know your customer’ and anti-money laundering policies.
Defendants were Germany’s Deutsche Bank AG and its subsidiaries Deutsche Bank Luxembourg SA, Deutsche Bank Switzerland and Deutsche Bank Trust Companies Americas.
Guilty of negligence
The complaint was filed to the court in September 2021, seeking relief on eight counts, including fraudulent trading, breach of contract and breach of fiduciary duty, among others.
US District Judge Beth Bloom delivered the final judgment.
She said of the four counts tried before a jury during a three-week trial, only one count of negligence against Deutsche Bank AG was entered in favour of the plaintiffs.
According to the count, Deutsche Bank AG failed to fulfil its duty of care by enabling ‘swap’ transactions – financial agreements between two parties to exchange financial instruments.
The bank created accounts for the Cayman-based and other affected note issuers without making them a party to the relevant agreements, the count read.
And it instructed the Ponzi scheme operators in how to avoid the bank’s own policies and assisted them in transferring the affected companies’ assets into sub-accounts.
The count detailed that the bank failed to complete investigations into “obviously inappropriate or suspicious transactions”.
Instead, on multiple occasions, it alerted wrongdoers of their concerns while encouraging them to take steps to end scrutiny into the transactions.
“The companies were damaged as a direct and proximate result of Deutsche Bank’s negligence,” the count read in the plaintiff’s complaint.
The Cayman-based companies that were among those that were defrauded included Diversified Real Estate Development, GMS Global Market Step Up Note, Preferred Income Collateralized Interest and SG Strategic Income.
The note issuers – legal entities that develop, register and sell debt securities – were placed into liquidation in 2018 following the revelation of the Ponzi scheme.
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