23 July 2013

Guernsey court denies US regulator access to Guernsey litigation

The Royal Court of Guernsey has confirmed that non-parties seeking to be joined to current litigation need to satisfy various criteria before being allowed to join proceedings.

The joint liquidators of a number of BVI and Anguilla-incorporated hedge funds, represented by Carey Olsen’s litigation team, are seeking to repatriate assets held in accounts in Guernsey to the BVI and Anguilla in order that the liquidations can progress.

The ultimate aim is to distribute the surplus assets of those entities forced into liquidation to their respective creditors and investors. The US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC) were seeking to cut across the hedge funds’ liquidations and have those same assets repatriated to the US in an effort to pay back creditors and investors in different entities also involved in an allegedly fraudulent scheme.

EFG Private Bank (Channel Islands) issued interpleader proceedings as a means of determining the competing rights and claims over the assets it holds in Guernsey on behalf of the hedge funds.

Two civil complaints, brought by the SEC and the CFTC in the US, gave rise to the need for interpleader proceedings. Both regulators filed similar complaints against Nikolai Battoo (and a number of entities owned or controlled by him) as a consequence of the allegedly fraudulent scheme which aimed to mask losses incurred in certain feeder funds’ investments to the Bernard Madoff Ponzi scheme and others; Mr Battoo allegedly induced investors to plough further funds into the investment portfolios, or not to redeem their investments, on the back of misleading investment performance reports.

The CFTC appointed a receiver over Mr Battoo’s assets and entities and liquidators were appointed in the Bahamas over two Panamanian entities named in the US proceedings (the Bahamian liquidators).

The joint liquidators' attempts to repatriate the hedge funds’ assets and to progress the liquidations (including the consideration of any claims to the assets) have been delayed by the US Receiver and the Bahamian liquidators on the basis that some of the investors in the Battoo entities may also have claims over some of the assets. However, despite asserting such claims in correspondence, no evidence or detail of these claims has yet been filed with the Royal Court or, more properly, in the liquidations four months after proceedings started and nearly a year after the receiver was appointed.

Belatedly, the SEC applied to join the proceedings; this application gave rise to the current judgment.

Applying the test set out in the Guernsey case of Gresh, the Deputy Bailiff considered that the SEC had failed to persuade the court that it met two of the three elements of the test and also failed to persuade the court to exercise its discretion to allow it to be joined to the proceedings.

The Royal Court ruled that the SEC was not asserting any direct claims to the assets and that its position could adequately be presented by existing parties to the proceedings. It was relying on a freezing order obtained in the US in circumstances where there was no equivalent order in Guernsey and its interest in the proceedings was not sufficient to justify it being joined.

Carey Olsen Advocate John Greenfield said that the decision provided further certainty and additional guidance as to the requirements for joinder (the process by which a non-party is joined to existing proceedings) and those which needed to be taken into account by the court in a case like this.

“It sends a clear message that, no matter who you are, those wishing to become involved in proceedings should have a substantive interest in the subject matter and not simply seek to act as ‘cheerleader’ for an existing party to proceedings,” Advocate Greenfield said.

“It was also an interesting reminder that parties having the benefit of foreign injunctions should take the necessary steps to obtain mirror orders in Guernsey should they wish to progress litigation efficiently here in the future.”