Vesttoo reinsurance transaction funds said co-mingled, depleted. Unclear what is left

At a Vesttoo Chapter 11 bankruptcy case hearing, counsel for the official creditor committee said that in working to identify and trace funds remaining from reinsurance transactions implicated in the letter of credit (LOC) fraud, these investigations, which are ongoing, suggest funds were drawn from debtor structures and co-mingled, then used to pay company expenses.

It’s a further sign of the value destroyed by the extensive fraud undertaken by certain parties within or linked to Vesttoo. Suggesting again that, there could be far less value than hoped for that is available to be recovered by cedents damaged by the fraudulent activity and other creditors.

We wrote last year that court documents showed that any eventual recovery of value for unsecured creditors to Vesttoo’s bankruptcy may be minimal.

At that time, estimates for how much in funds may be available to be recovered ranged from approximately $77 million to as much as just over $88 million.

But, the work undertaken by lawyers and financial advisers for the official creditor committee suggests the remaining funds may be considerably lower, which could mean even less chance of much value being available for distribution, no matter which way the case goes, in terms of a consolidated approach to a bankruptcy settlement, or one that follows the segregated ownership of funds in different reinsurance vehicles used for transactions affected by the fraud.

The counsel for the creditors said, during the hearing earlier this week, that in attempting to trace or identify funds for the Vesttoo Bay debtor entities, by analysing banking records, it appears that as early as in May or June 2023, most, if not all of the funds received by those Vesttoo Bay entities (of which there are 21) were upstreamed from their accounts to the parent company Vesttoo Ltd’s consolidated general account.

Here these funds were held for several weeks and co-mingled with Vesttoo funds from a range of sources and used to pay operating expenses for the debtor, before being repaid in whole or part to the Vesttoo Bay accounts, the counsel explained.

While this co-mingling of funds took place, the value in the Vesttoo Ltd. account fell to as little as $3 million or less, the counsel for the creditors said.

The counsel did not give any idea how much may have been repaid to the Vesttoo Bay accounts, but it seems the belief is that there is less available than had been thought, before this still ongoing forensic investigation work identified these transfers that occurred back even prior to the news breaking about the LOC fraud.

The counsel warned that, if the bankruptcy plan cannot be agreed, with the parties now participating in mediation, then there may not be sufficient funds in the bankruptcy estate to sustain the administrative expense and burning of cash, in which case a conversion to Chapter 7 would be likely.

All of which suggests that creditor recoveries, if the bankruptcy is agreed, may not be as substantial as though even just weeks ago.

The counsel said a conversion to Chapter 7 would be a disaster for all involved, especially cedents and creditors and that the hope is the mediation can “avoid a looming train wreck.”

The situation surrounding the bankruptcy does appear to be coming to a head and if additional forensic analysis of bank accounts and other evidence can be completed, with greater clarity of what value remains secured, it is possible the mediation can speed the process and minimise more value being eroded.

But, if the recoveries from the bankruptcy estate are far more minimal than originally hoped for, then creditors may be forced to look elsewhere to secure value, which raises the chances of further litigation, or potentially settlements.

If mediation cannot speed a resolution, then the value will likely continue to be eroded and Chapter 7 could be unavoidable.

In addition, if more information comes to light about the transfer of funds out of the Vesttoo Bay debtor entities and if any funds have been siphoned off, or never made it back into those entities, it also raises the potential of further legal action, criminal or otherwise.

If the funds are all but gone, a scenario that also seems possible given the way this saga has played out, the claims some creditors have against specific entities may no longer be worth pursuing, in which case (again) recovery of value may be pursued elsewhere.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.