Commodities

After the fraud | Global Trade Review (GTR)

The International Investment Group began with a noble aim: bringing trade finance to South American commodity producers that struggled to secure loans from large banks. The business model attracted big name investors and almost US$400mn in assets, but the laudable exterior disguised a lengthy fraud which ended in prison terms for the founders and a mire of bad loans – some real, others non-performing and many outright fake. A wave of litigation in New York courtrooms is now underway, aiming to pick through the mess and hoover up any remaining value for swindled investors. Jacob Atkins reports.

 

In 2007, a South American coffee producer stopped making payments on a US$30mn loan it owed to a fund managed by the International Investment Group (IIG), an investment firm specialising in trade finance assets.

The default sent a ripple of consternation through IIG’s offices in New York’s iconic Times Square. David Hu and Martin Silver, who founded the firm in 1994, fretted that the loss would spook investors and trigger a wave of redemptions, jeopardising the management and performance fees that were IIG’s lifeblood.

IIG had attracted hundreds of millions of dollars from investors with what it described as low-risk bets on Latin American soft commodity producers. The mid-size firms, exporters of produce such as soybeans, cotton, coffee and beef, were prepared to pay higher interest rates because traditional trade finance banks were reluctant to lend to them.

But instead of relying on the credit of these little-known borrowers in countries such as Peru and Colombia, the loans would be repaid directly by blue-chip off-takers who would purchase their commodities to sell on the global market. IIG touted the lending as over-collateralised, so if a loan went awry, its funds could quickly liquidate the collateral and cover the default.

The loss of US$30mn – around 10% of the asset value of IIG’s Trade Opportunities Fund at the time – would cast serious doubt on all these claims.

It could also endanger support from the likes of the Inter-American Development Bank, a prestigious multilateral lender which extended a US$75mn credit facility to IIG just a year earlier.

Instead of writing off the loan’s value and coming clean to investors, Messrs Hu and Silver made a fateful call: they simply valued the loan as if it was performing, factoring in the anticipated interest they knew would no longer be forthcoming.

When scrutiny by auditors threatened to expose the cover-up, IIG pulled the coffee producer’s loan from its books and replaced it with fake loans to companies controlled by an associate, supported by a fabricated paper trail.

For the two co-founders, who met while working together at American Express in the 1980s, it was a fork in the road. What happened from then on is chronicled in the voluminous court proceedings relating to IIG that have unfolded since 2019, from which this account is drawn.

Perhaps emboldened by the fact that investors and auditors failed to spot the deception, IIG followed a similar playbook the next time a loan flopped. Over the next 10 years, Hu – and at times Silver, although he denied knowledge of much of IIG’s wrongdoing during his plea hearing – devised ever more elaborate schemes to make IIG’s funds appear as thriving investments in commodity trade finance.

A network of shell companies was established in Panama to serve as “borrowers” of money provided by investors, with IIG secretly controlling the proceeds and using them to plug holes elsewhere in the loan book.

In 2010, IIG acquired a controlling stake in Curaçao lender Girobank. Following IIG’s collapse, the bank sued Hu and Silver, accusing them of causing the lender to make doomed investments in IIG’s ailing portfolio of trade finance funds to cover bad loans.

But all this chicanery was kept well hidden.

 

Investors wooed

On the surface, IIG’s polished narrative of stepping in to lend to small and medium-sized commodity producers wooed many sophisticated investors. It was an early effort to close the so-called trade finance gap, long before that phrase became a staple of trade finance marketing material.

In 2013, the development financing arm of Opec, the oil cartel, tipped in an extra US$25mn alongside the Inter-American Development Bank-led credit facility. The same year, IIG clinched investments from blue-chip asset managers KKR, BlueMountain Capital Management (later purchased by Assured Asset Management) and Tennenbaum Capital Partners (now part of BlackRock).

By early 2018, IIG outwardly appeared in rude health, reporting US$373mn of assets under management.

Outwardly, Hu epitomised the American dream. Raised in an ethnically Chinese, middle-class household in Guatemala, he moved to the US in the 1970s to complete an MBA in Arizona. Stints at Mellon Bank – where he became acquainted with the world of trade finance – as well as American Express and Nomura followed.

But that dream came crashing down when the Securities and Exchange Commission (SEC), the US’ feared financial watchdog, began probing IIG’s affairs in 2018. In June that year, Hu and Silver were forced to reveal they had received subpoenas from the agency.

By the time IIG’s fraud came unstuck, its funds and related entities, extending to Malta, Curaçao, the Cayman Islands and beyond, were carrying a hodgepodge of assets both real and imaginary.

 

Litigation from paradise

Christopher Kennedy and Alexander Lawson, of the Cayman Islands office of Alvarez and Marsal – the same company that was left to liquidate the remains

of Lehman Brothers in 2008 – got the job of trying to sort fact from fiction and extract any remaining liquidity from IIG’s assets.

Their office has become a production line of lawsuits against a slew of companies they believe are holding funds rightly belonging to IIG, or have some degree of liability for the fraud. In return for their endeavours, they receive an hourly fee.

Kennedy and Lawson’s efforts to sift through the wreckage of IIG and reclaim some money for the jilted investors serve as a testament to the enduring task of squeezing some value from the remnants of a fraudulent trade finance empire, long after the headlines about SEC complaints and guilty pleas have faded.

Since May 2021, Kennedy and Lawson have filed at least five lawsuits in the US courts, attempting to claw back around US$270mn from a range of defendants. These include previous IIG investors; Deutsche Bank, which provided securities services to IIG; and borrowers who, despite having taken out legitimate loans, are refusing to pay them back.

Even though many of the loans comprising IIG’s funds were fake, the company also originated new lending from legitimate borrowers in the Latin American commodities sector.

One of those is a New York claim seeking to recover some US$61.5mn from an Argentinian dairy company, Sancor Cooperativas. An IIG fund originated the loan in 2009, before selling participation agreements to several IIG-linked entities and the TriLinc Global Impact Fund, an unrelated investment fund.

The deal was structured as a typical IIG investment. The loan proceeds were disbursed to the borrower as pre-export capital, and would be repaid directly by companies that bought Sancor’s produce.

Sancor entered a restructuring agreement with an IIG fund in early 2019 but paid only one interest instalment before ceasing repayments altogether, according to a complaint by the liquidators. A legal representative for Sancor told GTR the company is not aware of the liquidators’ suit and at press time it had not filed a response.

The liquidators have already notched up at least two wins in their legal war. In April last year, a New York judge ordered San Agustin Energy Corp, a Colombian oil company, to pay IIG US$24mn in repayments and interest under a 2014 loan agreement it signed with an IIG fund to finance the acquisition of oil fields.

San Agustin stopped making repayments on the loan to IIG funds in January 2020 after being told by Hu that IIG was being liquidated. It argued that various legal and procedural deficiencies meant the loan agreement was no longer valid. The company, which could not be reached for comment, has appealed the judge’s decision. In January it filed for insolvency and has since entered an emergency restructuring in Colombia, according to a document published by local media.

In another dispute that began in late 2021, IIG’s liquidators contested the division of almost US$23mn of funds recouped from borrowers in Argentina’s Vicentin Group. Vicentin had been a long-time borrower from IIG, but in the years leading up to the collapse, the relationship soured and the two were in legal tussles over the loans, which escalated to competing criminal complaints in the Argentinian courts.

A settlement on the Vicentin debt was later reached, but the liquidators disagreed with TriLinc, the administrators of Girobank and the Dutch bankruptcy trustee of an IIG fund over the distribution of proceeds. In July last year the parties settled, with two IIG entities netting almost US$20mn – a welcome boost to the creditors’ returns.

Other legal efforts include a lawsuit against Israel’s Bank Leumi, which held some IIG funds. The case was resolved in the liquidators’ favour in 2022.

Kennedy and Lawson’s recovery exercise kicked into high gear in September 2023, when they filed a lawsuit in New York against former investors in an IIG collateralised loan obligation (CLO), and Deutsche Bank, which structured it.

KKR, BlueMountain, Tennenbaum and Elanus Capital Management invested US$220mn in notes issued by the CLO in 2013. Deutsche Bank acted as the CLO’s trustee, collateral manager and cash management bank.

The noteholders were paid US$169.6mn in mid-2017 when the loans were sold to three new investors, who were under the impression they were investing in newly originated assets.

The liquidators accuse Deutsche Bank and the noteholders of ignoring red flags in IIG’s conduct – such as the use of Panamanian shell companies – and helping market the fraud-addled loan book to the new investors, who lost their entire investment when IIG collapsed.

Deutsche Bank and the noteholders have filed motions to dismiss the liquidators’ claim, arguing the liquidators have not provided sufficient evidence to meet the various legal tests required. The complaint, the bank’s lawyers say, “lacks [the] substance, plausibility and the particularity required of valid fraud claims”.

The new investors IIG convinced to come onboard in 2017, and to whom they sold the loans recycled from the ailing CLO, were Finnish asset manager Aktia, the UK’s AGC Equity Partners and LAM Enhanced Trade Finance Fund I LP, a Cayman Islands entity.

The last entity was by far the biggest contributor, tipping in some US$190mn and coming on board as the sole investor in one of the two new funds that replaced the CLO. Its involvement would ensure that the fallout from IIG’s collapse spread far beyond New York and all the way to South Korea, helping fuel a massive financial scandal.

 

The chaos spreads

The LAM Enhanced Trade Finance Fund I was created by Lime Asset Management, a major South Korean investment firm. It garnered significant inflows from retail inventors and reportedly had US$4.6bn of assets under management at its peak. Its investment in IIG was managed by its broker, Shinhan Financial Group, one of the country’s top three banks.

In late 2018, Shinhan received the kind of letter from IIG that every investor dreads. The directors

had decided to wind down the funds “given the market conditions in South America and other factors, coupled with the SEC inquiry”. Worse still, the directors wrote, “various factors have resulted and will likely result in significant impairment to the value of the portfolio in an amount that we cannot currently determine”.

All redemptions from the funds were stopped.

Over the next few months, the situation steadily deteriorated as the independent consultant put in charge of winding down the IIG funds informed Shinhan that US$40mn of its investment had been written off and a further US$40mn was in default.

But Lime, according to several Korean media reports that cite statements by South Korea’s Financial Services Commission, initially failed to pass that information on to investors. Instead, the company reportedly manipulated data to present the IIG investments as growing in value, and even continued marketing the trade finance fund to new investors.

In early 2019, according to an affidavit from a Shinhan employee filed in a Cayman Islands court, Lime thought it had found an exit. The company struck a deal to sell its interest in the IIG funds to Singapore company Triterras Asia Pte Ltd, since renamed Antanium Global, which the filing said was “experienced in managing distressed loans held by trade finance funds”. But the deal was scuppered when another investor, Aktia, filed a winding up petition against one of the funds.

In August 2019, Shinhan and Lime discovered what would, in 2023, become the nub of the liquidators’ case against Deutsche Bank and the old CLO investors: that the bulk of their investment had gone to paying off the old noteholders, rather than originating new loans. Moreover, most of those loans had been in default for years and “no material interest payments appear to have been made on the loans since their acquisition”.

A couple of months after receiving this news, Lime began replacing restrictions on investor redemptions. It was the beginning of the end for the company. The South Korean regulator suspended Lime’s licence in December 2020, amid much wider allegations of misconduct at the firm, including mis-selling and embezzlement. In 2021 a former Lime vice-president was sentenced to 15 years in prison.

Shinhan was eventually fined Wn5.71bn (US$4.39mn) for violations of local laws regarding its work for Lime, and its head of prime brokerage services was arrested and charged with fraud. Shinhan says in its most recent annual report that it has introduced a swathe of measures to ensure “that there is never a recurrence” of the scandal. The company did not respond to questions from GTR.

As for IIG’s two founders, their business model of helping finance underbanked commodities producers in Latin America ended in misery.

In 2022, Hu entered a medium-security prison in Lompoc, southern California, to begin a 144-month sentence after pleading guilty to wire fraud, securities fraud and conspiracy to commit investment advisor fraud following the SEC probe. Silver received a 13-month sentence.

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