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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