Hong Kong investors lose US$80m in failed Cayman hedge funds
Friday, April 2, 2004
According to recent reports by the Hong Kong Standard, losses to investors in
three failed hedge funds registered in the Cayman Islands are expected to reach
HK$620 million (US$80 million).
Towry Law, the international financial adviser that promoted the three failed
Hong Kong-managed funds, disregarded many serious warnings that the funds were
being mismanaged and discouraged Towry Law consultants from redeeming client
investments, according to former employees with the company.
Towry Law (Asia) was the sole distributor of hedge fund Global Opportunities
Trading (GOT) and leading distributor of Global Diversified Trading (GDT). Both
Cayman Islands companies suspended trading in September 2002 and were
subsequently liquidated. Losses to investors in the two funds are estimated at
HK$400 million (US$51.6 million)
A liquidators' report prepared by Deloitte Touche Tomahtsu for GDT, recently
provided to investors, show that the two funds were part of a financial web of
at least four investment funds that traded in collusion to ramp share prices by
dominating the market in a handful of securities.
The Hong Kong Securities and Futures Commission (SFC) has been investigating
for more than a year whether Towry Law violated local securities laws and
defrauded customers, but has not yet acted.
“I think due diligence was blinded by excessive fees,” said Michael Chaplin,
a former senior account manager for Towry Law in Bahrain.
Chief among the allegations is that former Towry Law International (Asia)
managing director Robert Bull and chief investment officer Peter Woo railroaded
due diligence determinations about the funds in 2002, without consulting Towry
Law's investment committee which, in addition to the investment director, is
comprised of researchers and senior portfolio managers.
There were plenty of signs for Towry Law that the funds were in trouble.
Ernst & Young's auditor's report for the fiscal year ending March 31, 2001, for
GDT showed that more than 95 per cent of the fund was invested in two thinly
traded and potentially loss-making securities - Tack Hsin Holdings and a warrant
on Ngai Lik Industrial Holdings.
Towry Law may also be responsible for the loss of more than HK$220 million
(US$28.4 million) to investors in a third Cayman-registered fund, Circus Capital
Protected-Growth Fund, an open-end fund that invested primarily in insurance
with-profit policies, which reported in a website update in February a loss of
US$28.8 million (HK$224.6 million) to its clients.
Questions have been raised about whether Towry Law, which helped to design
and promote the fund, may have prevented a redistribution of the fund's assets
as early as three years ago, utilising its standing as a nominee shareholder
representing the majority of investors to deflect proposals by the fund's
advisers to reduce Protected Growth's leverage. If Protected Growth's gearing
had been reduced, shareholder losses would have been much less.
Towry Law represented more than 90 per cent of shareholders through its
nominee accounts, making it Protected Growth's de facto controlling shareholder.
The SFC has reportedly received information concerning the possible breach of
fiduciary responsibility but it is unclear whether the regulator is willing to
investigate, in part because Protected Growth is based in the Cayman Islands and
was unauthorised for sale in Hong Kong.
Circus Capital Protected Growth was launched in late 1999 and was marketed as
a moderate risk fund to wealthier clients. Minimum investment was US$10,000.
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