Malta bank off the hook but $93 million New York suit hangs on IIG owners

The owners of the international bank IIG Malta are implicated in a multi-million lawsuit in a New York court, accused by a bank in the Caribbean island of Curacao of unjust enrichment in a $93 million loan ‘scheme’.

Until recently, IIG Malta was itself implicated in the case, accused of having acquired a line of credit from Girobank without paying back the money being loaned.

But since the case got underway, IIG Malta is no longer directly one of the defendants, and instead it will be its ultimate beneficial shareholders – David Hu and Martin Silver – who have to answer to the accusations of Girobank.

The bank says that Hu and Silver, as owners of the Internal Investment Group LLC – and directors of the Malta bank – acquired a controlling interest in Girobank, to extract loans from the bank without paying the money back.

As a result of the “widespread fraudulent scheme”, Girobank says that its financial position significantly deteriorated, and was placed under an emergency measure and finally under control of the Central Bank of Curacao and Sint Maarten.

The bank says that IIG Group made false representations in a bid to have its investment fund.

Trade Opportunities Fund (TOF) and a subsidiary, acquire a controlling stake in Girobank, to use the bank’s liquidity for loans and pay out TOF’s own creditors.

Girobank says that although touted as its flagship fund, IIG’s TOF had struggled after the 2008 financial crisis and approximately 70% of its investors were demanding their investments to be redeemed.

“To improve TOF’s financial position… Hu and Silver sought a deep pocket partner to which they would sell their trade finance loan portfolio, much of which was stale and defective, and reinvigorate TOF with new liquidity to pay off TOF’s disgruntled investors.”

Crucial in the prospective sale was Girobank director Eric Garcia, who wanted to sell the majority shareholder Totalbank’s stake in Girobank, to IIG.

Since then, Garcia, 78, has been sentenced to four years in a Curacao prison for the embezzlement of $11 million, forgery and money laundering in a phoney mortgage scheme and for preparing a false bankruptcy report.

Apart from Totalbank’s ownership (58%) of Girobank, the bank was owned by the Curacao civil servants pension fund, and the Stip foundation. Garcia brokered the 2010 meeting in which IIG convinced Girobank shareholders of its trade finance loan portfolio and its strict controls and extensive due diligence.

Based on these representations, Girobank shareholders and the Central Bank approved the acquisition.

The heart of the court case is the agreement between Girobank and TOF, for the bank to purchase partial interests in the trade finance loans that TOF and IIG Capital managed. According to Girobank, Garcia used his influence to overrule Girobank’s account managers when they started to realise that TOF and IIG Capital were buying participation interests in loans that Girobank managers had rejected.

Girobank later discovered a letter written by IIG owner Martin Silver from June 2010, in which he explained that the Girobank acquisition would provide “rapid liquidity” to repay investors in TFP – a Panamanian company which shared investments with the TOF fund.

Indeed, one of Girobank’s loans was made to a TPF investor, the Ontario Teachers Pension Plan Board, for a total €67 million. “Specifically, defendant Mr Hu instructed Girobank to wire payments to Ontario ostensibly for the purchase of participation interests from TOF… Girobank did not understand that it was paying an investor in a separate hedge fund on a separate debt… in this way Mr Silver’s statements on the June 2010 letter were realised: by arranging for Girobank to pay Ontarioa, Mr Silver, Mr Hu, TFP, IIG LLC, and others used Girobank’s liquidity or cash, to benefit Ontario and TFP, entities with whom Girobank has never done business and who are complete strangers to the bank.”

Girobank also accused Hu and Silver of having advanced loans to borrowers in Venezuela, a very risky jurisdiction; and that many of the borrowers had defaulted without IIG Capital having given notice of the defaults, without Girobank allowed to seize any collateral for the default.

Girobank also claimed that the defendants used the Malta bank to secure a credit line from Girobank to purchase trade finance loans for IIG Capital. Yet since then IIG Bank’s lawyers have said that they have reached an agreement with the plaintiffs to discontinue their case against the Malta bank.

The Malta bank had denied being involved in any alleged scheme and said that it did not participate in the transactions at issue. Malta Bank said that it and several other entities are wrongly named in the proceeding as defendants.