Vesttoo case: Cell control & responsibility for collateral security raised again

It’s increasingly clear that the ongoing difference of opinion over ownership or control of property rights to segregated cells and accounts linked to them, that were used for reinsurance deals facilitated by Vesttoo where letters of credit (LOC) were found to be fraudulent or forged, will need a definitive court ruling to be decided.

It’s important to remember here that this is a case of fraud involving billions of dollars of reinsurance collateral that has been found to be fake and have zero value.

As a result, there are numerous parties facing financial losses and significant pressure to their businesses, with those parties and their advocates seeking to recover what they can.

At the same time, Vesttoo has issued its own version of an interim report after an investigation into the fraud, identifying two co-founders and a number of capital introducer or investor finders, saying they were behind the crimes that have taken place.

There has not been any visibility of the actual investigation report from Kroll and lawfirms involved, only the Vesttoo version filed with the courts. It’s also worth recalling here that Vesttoo said it now has a plan in development to try and rescue its business so it can trade forwards, in some form.

But still, no criminal charges have been filed, that we know of, although Vesttoo did secure an asset injunction in a Tel Aviv court against some of the persons it blames for the fraud.

At the heart of the continued disagreement in the bankruptcy case is the issue of segregated cell ownership and control.

As of yesterday, the latest was that the joint provisional liquidators (JPL’s) to the segregated cells of the Aon White Rock SAC vehicle that have been affected by the fraud issues, had said arguments made by Vesttoo and the creditor committee objecting to their application for Chapter 15 relief are “meritless”.

Unsurprisingly, Vesttoo’s lawyers in the Chapter 11 bankruptcy case have fired back, suggesting the opinion of the JPL’s is not aligned with Bermuda insurance law.

The filing from Vesttoo’s lawyers states, about the JPL’s position, “They assert that the Debtors’ beneficial interest “does not represent an interest in specific property in the Cell”. This is a stunning position for JPLs – appointed at the request of the Bermudian insurance regulator – to take.

“To be sure, the Bermudian insurance market is upset over the Debtors’ acts and omissions, but this position will be equally stunning to current and potential investors in Bermudian Segregated Accounts.

“The JPLs have danced around the issue of property of the estate and now they make an argument that is contrary to their initial positions; however, the Debtors have a property interest in the Segregated Accounts and the Debtors’ evidence and Bermuda law fully support this contention.”

To say the Bermuda market is “upset” is a massive under-representation of the very strong feeling being expressed over the way this whole fraud debacle was allowed to happen.

These strong feelings extend far beyond Bermuda, with the impacts of the fraud felt globally and a determination building that such an event should never be able to happen again.

The latest Vesttoo filing also states that their agreements with Aon’s White Rock vehicle, for certain collateralized reinsurance agreements that have been affected by the fraudulent LOC issue, show that Vesttoo and its entities had cell ownership and control. A further clear disagreement between sides involved on this key issue.

These latest moves are going to accentuate the focus on cell ownership and control, bringing the letter of the law into focus, as the courts look to identify who has control and whether the cells and their contents fall under the debtors (Vesttoo’s) bankruptcy estate.

Vesttoo is also explicitly suggesting that collateral security obligations may not have been honoured.

But, as we said right back at the very start of this scandal, numerous parties had not spotted issues with the LOC collateral in question and, as long ago as July 21st, we said this whole episode comes, at least in part, down to a failure of security controls and KYC processes across many parties in the chain.

Over two months later and this same issue is now being trotted out as an accusation in the courts.

In addition, Vesttoo is accusing White Rock of not providing it with information related to the affected segregated accounts, saying that it should still be obligated to do so and that by not doing so it may constitute taking some level of control, which the insurtech says may violate the court’s stay.

Vesttoo claims that White Rock and the JPL’s have gone silent in response to requests about the cells, saying, “The longer White Rock and the JPLs delay in responding and providing information, the greater the risk of claims against the Debtors’ Estates growing in number and value.”

What’s clear is that this disagreement and dispute over the key issue of control or ownership of the segregated cells involved in fraud-affected reinsurance deals is not going away.

As a result, it appears the courts will have to decide on this one and to do so may need to get further into the weeds of the laws governing those cells and the specific agreements (which we understand, in some cases, had been highly customised) surrounding them.

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