The Grand Courts of the Cayman Islands has decided to supervise the liquidation of two companies that formed a material part of the structure of the infamous Bear Stearns hedge funds, which collapsed in 2007 leaving investors facing an aggregate loss of US$1.6 billion.
The decision was part of a judgment handed down by the Hon. Anthony Smellie, Chief Justice of the Grand Court of the Cayman Islands, on 22 February 2008. The Chief Justice also appointed Geoffrey Varga and William Cleghorn of Kinetic Partners as liquidators of the funds, replacing Simon Whicker and Kris Beighton of KPMG.
Following the collapse of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd. (collectively the "Feeder Funds"), investors voted to replace the board of directors (which comprised employees of Bear Stearns Asset Management Inc ("BSAM") and Walkers Fund Services) with a truly independent board to investigate the former management. However, shortly before the meeting to appoint the new directors took place, the Feeder Funds were put into voluntary liquidation: this meant that when the new directors were duly appointed, they had no powers (since these passed automatically to the liquidators).
The investors, represented by Appleby, petitioned the Cayman Court on the basis that the resolution to put the Feeder Funds into voluntary liquidation was passed for an improper purpose, namely to thwart the proposed removal of the board and the appointment of directors whose task it would be to investigate BSAM and others. Alternatively the investors asked for new liquidators to be appointed, citing perceived independence issues and potential conflicts of interest.
Although the Chief Justice formed "an irresistible impression that the manner of the conduct of the directors, trustee and the lawyers advising them over the resolutions for winding up was clandestine and suspicious" he did not have to make a definitive finding on this issue. That is because such a finding would technically have taken the Feeder Funds back out of liquidation, whereas he considered that the Funds must remain in liquidation, albeit with the interests of those having the real financial stake in the outcome (i.e. the investors) being properly secured. As a matter of discretion, he considered the appointment of new liquidators to be in the better interests of those investors.
Mssrs. Varga and Cleghorn, whose firm has offices in five countries around the world including the Cayman Islands, will co-ordinate and conduct an investigation into the causes of the Feeder Funds' downfall in an attempt to maximise realisations for all stakeholders in the Feeder Funds.
Since the collapse of the Feeder Funds last year, numerous law enforcement and regulatory investigations have been commenced in the United States. The new liquidators have now commenced proceedings against BSAM and others in New York, seeking the recovery of over US$1 billion in damages.
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