Guernsey Clamps Down on Abuse in Financial Services Sector

Simon Davies Ogier Guernsey Partner and Head of Litigation 21 June 2006

Guernsey Clamps Down on Abuse in Financial Services Sector

US, English and offshore law firms have worked closely together to bring a landmark receivership case to the Royal Court of Guernsey in a $1...

US, English and offshore law firms have worked closely together to bring a landmark receivership case to the Royal Court of Guernsey in a $121 million international securities fraud scheme.

The Roy Terry & DuretteBradshaw v Butterfield Bank (Guernsey) Limited case is the first time a US receivership of a foreign company has been recognised in Guernsey, setting a precedent for all common law jurisdictions. It is a clear demonstration that the Royal Court of Guernsey will not tolerate those who attempt to misuse the financial services industry in Guernsey for illegal or improper purposes.

Simon Davies, partner and head of litigation of the Guernsey office at Ogier, one of the world’s largest, leading offshore legal and administration service providers, acted on behalf of US attorneys DurretteBradshaw, and its receiver Roy Terry, along with Paul Clements, partner and head of the dispute resolution department at English solicitors Rooks Rider, to recover the assets of Vavasseur Corp, a company incorporated in the Bahamas to hide money swindled from investors through out the world.

A $121 million International Fraud Scheme
Vavasseur was controlled from the US by a Terry Dowdell who orchestrated an international fraud scheme which raised more than $121 million from investors across the world through the sale of fictitious securities.

In March 2001 Dowdell represented to the United States Securities and Exchange Commission that Vavasseur had terminated its relationship with himself and had ceased doing business in the US.
Shortly thereafter, Dowdell transferred the ownership of Vavasseur to a corporation controlled by a UK citizen but later admitted that he retained overall control of Vavasseur with the aid of two other UK citizens who were partners in an English accountancy firm.

The SEC sought the appointment of receivers for Vavasseur pursuant to the general equitable powers granted to a federal district court with respect to violations of the Securities Exchange Act 1934.

On 14 February 2003 the United States District Court for the Western District of Virginia, Charlottesville Division, made a receivership order, empowering DuretteBradshaw and Mr Terry to recover assets for the benefit of defrauded investors wherever in the world those assets may be found.

Co-operation Agreement
On 7 April 2004 a Co-operation Agreement (thought to be the first of its kind) was drawn up by the receivers’ English Solicitors, Rooks Rider, and was entered into between the receivers and the English liquidator of the accountancy firm incriminated in the Vavasseur fraud.

The Co-operation Agreement was subsequently approved and sanctioned by the English High Court on 8 April 2004 and then by the US District Court on 26 April 2004.

In the course of investigating the whereabouts of Vavasseur assets the receivers identified deposit accounts held at a bank in Guernsey. DuretteBradshaw instructed Rooks Rider and Guernsey advocates Ogier to seek recognition in Guernsey of the US receivership order, so as to enable recovery of the monies.

The Existing Law
Under the current state of Guernsey corporate law the concept of receivership is restricted to a few very specialist fields, notably protected cell companies. Furthermore, in no previous case had the Guernsey courts recognised a receiver appointed by a foreign court.

The leading (English) case in this area is Schemmer and Others v Property Resources Limited [1975] Ch 273, a decision of Goulding J. in the English High Court.

In this case a receiver was appointed by the US District Court for the Southern District of New York to take possession of the assets of a company incorporated in the Bahamas.

On the facts of that case as they were presented to him Goulding J held that there was no “sufficient connection” with the jurisdiction of the US Court such as to entitle the English Court to justify recognition of the appointment of the receiver.

He further held that the 1934 Act was a penal statute and, in the absence of legislation founded on a treaty, unenforceable for that reason in the United Kingdom.

“Sufficient Connection”
As far as the concept of “sufficient connection” was concerned, Goulding J held that there was clear authority to support the proposition that an English Court would recognise the appointment of foreign receivers where the country of incorporation of the company was the same as the jurisdiction in which the receiver was appointed, or where the company had submitted to the jurisdiction of a foreign court.

Goulding J further considered, although he expressed no view as to materiality of these circumstances, that it might be relevant to the question whether a sufficient connection exists if the appointment of the receiver would be recognised by the courts of the country in which the company was incorporated and if the order appointing the receiver was made in a country where the company had its central management and control or was where the company carried on business.

The receivers in this case could not bring themselves within the terms of the first two Schemmer limbs. Therefore they had to rely on Goulding J’s further suggestions.

Citing the latter two limbs of the Schemmer test, supported as these are by eminent commentators , the receivers adduced affidavit evidence that Dowdell had been the central mind and management of Vavasseur, which had conducted its operations from Charlottesville. They also supplied the Royal Court with expert legal opinions to the effect that the appointment by the US Court or for themselves as receivers over the assets of Vavasseur would be recognised in the Bahamas and in the United Kingdom.

The Bahamas opinion further noted that, since Vavasseur was an international business company, and therefore required to carry on its business outside of the Bahamas, there would be no reason for the Bahamian Courts to become involved in the receivership.

As to the civil, criminal or penal nature of the receivership order, the receivers produced evidence that the main purpose of the receivership order was to compensate defrauded investors and that there was no prospect the receivers would ever recover sufficient assets to enable Vavasseur investors to be fully reimbursed, there being therefore no real risk that any of the monies held by the bank in Guernsey would ever be paid to the US Treasury.

The First Schemmer Decision
On the facts, the Deputy Bailiff of Guernsey was satisfied under the principles set out in Schemmer that the Royal Court had the power to make a recognition order and that this was an appropriate case in which to do so.

This is believed to be the first occasion on which the Schemmer decision has been deployed before a British jurisdiction in order successfully to obtain the recognition of a United States receivership over a non-US company.

As such it will be welcomed by legal and insolvency practitioners alike and is a major advance in the Vavasseur receivership.

This judgment is a clear demonstration that the Royal Court of Guernsey will not tolerate those who attempt to misuse the financial services industry in Guernsey for illegal or improper purposes.

The receiver has subsequently made a successful application to the Royal Court for the monies to be paid into an account to be operated in accordance with the terms of the Co-operation agreement.

This article was co-written by Paul Clements, Head of Dispute Resolution at Rooks Rider Solicitors

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