Insolvent!

The Government is moving to shut down scandal-scarred investment firm Stocks & Securities Limited (SSL), as the regulator, the Financial Services Commission (FSC), is arguing that the company does not have enough money to pay its debts.

The wind-up under the Companies Act is reportedly being sought because the FSC believes SSL is “insolvent” on the basis of findings from Temporary Manager for SSL, Kenneth Tomlinson, whom the regulator installed on January 17, seven days after receiving reports of a multibillion-dollar fraud.

Up to January 31, SSL had assets of $1.1 billion and liabilities of $1.2 billion, according information obtained by The Sunday Gleaner. Losses for the year so far amounted to $184 million in addition to negative equity of around $29 million. Loans totalled $623 million.

Reports are also emerging that $29.2 billion in assets found on the company’s off-balance sheet covers the original investments of the 8,000 active clients of the beleaguered 50-year-old private firm, this newspaper’s probe found.

A shortfall of close to $200 million exists when liabilities of around $29.4 billion are subtracted.

A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity, while the off-balance sheet includes assets and liabilities such as loans that are not recorded on a company’s balance sheet.

In SSL’s case, the assets and liabilities on its off-balance sheet are reportedly not owned by the company.

Tomlinson has reportedly verified over 98 per cent of the assets on the off-balance sheet.

It is not clear whether the amounts that allegedly disappeared from at least 40 clients, including sports legend Usain Bolt, are included. The alleged fraud stretches back at least 13 years.

Some of the findings are being used by the FSC to seek permission from the Supreme Court to submit a request to wind up or liquidate SSL. An application was filed in early March.

Liquidation refers to the process through which the affairs of a limited company are wound up or brought to an end, and the assets and property of the company distributed to its creditors; and if any remains, to its members.

This turn of events also backs up a previous Sunday Gleaner report that SSL has not been paying its taxes. Up to January 30, SSL owed the State $40 million, some representing deductions from employees’ wages.

‘Uncollectable funds’

It has also emerged that some 62 per cent of SSL’s assets are monies due from “related party companies”. That amount is approximately $710 million.

Those funds are “uncollectable at this time”, noted one source.

According to the source, the remaining 32 per cent of assets that total $432 million, which, “if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of SSL’s obligations, that are due and accruing”.

The matter concerning connected party transactions is a major focus in the multi-agency law enforcement probe involving the Financial Investigations Division, the police Fraud Squad and the United States’ Federal Bureau of Investigation.

British firm Kroll Associates has been engaged as forensic auditors.

The application by the FSC for permission to seek a wind-up of SSL is to comply with Part C of the Third Schedule of the FSC Act.

It says within 60 days of taking temporary management of an entity, the FSC shall apply to the court for an order confirming the vesting in the commission of full and exclusive powers of management of an entity.

Determining whether to continue or discontinue a company’s operations is among the powers of the FSC.

Within the same period, the law also requires the FSC to determine whether to restore the company to its board of directors or owners, present a winding-up petition to the court or propose a compromise or arrangement between the company and its creditors.

APPLICATION REJECTED

The FSC’s push to wind up SSL on the claim that it is insolvent follows a declaration of solvency made by SSL’s directors when the company filed for a members’ voluntary wind-up in January.

Three of four then directors wrote the Companies Office on January 16, declaring that SSL was in a position to pay “in full” its debts, and that this could be done “within a period of 12 months from the commencement of the winding-up”, documents obtained by this newspaper revealed.

The Companies Office rejected the application because it “did not accord to the provisions” of the law.

The application was accompanied by a statement of SSL’s assets and liabilities. It showed net assets of $1.3 billion and total liabilities at $1.1 billion as at June 30, 2022. It was signed by SSL founder Hugh Croskery, Laurence Adamson, and Peter Knibb, who have since resigned their directorship.

Caydion Campbell was appointed trustee effective January 16, a day before the FSC named a temporary manager and four days after the FSC put SSL under enhanced oversight. A trustee is a person or firm that manages property or assets for the benefit of a third party.

However, the FSC halted the work of the trustee when it obtained an injunction on January 25, barring SSL or its agents from disposing of or dealing with SSL’s assets. That injunction is being challenged by SSL and a ruling is expected on April 20.

SSL later issued a statement denying that it sought to dissolve its operations.

It said the trustee was appointed to reorganise the company, an effort that included pursuing a now seemingly failed $441 million-takeover bid by Spectrum Capital Partners, the investment arm of UCC Group.

The FSC has countered, arguing that SSL and its directors “are refusing to cooperate; effectively hindering the claimant (FSC) in carrying out its functions” and that the appointment of a trustee “will have serious repercussions” for clients.

Knibb, who resigned on January 22, said the June 30, 2022 audited financial statement which showed the company as “solvent” was approved by the board on January 9, 2023, according to a court filing.

“It became apparent… that although SSL was solvent, the capital base was diminished due to accumulated losses and the company, at the current rate of losses, would become insolvent in the current financial year,” he said, adding that the discovery of the fraud “frustrated” attempts to get a capital injection.

Knibb said after the discovery of the fraud and because “trading while insolvent was not an option”, it was determined that a trustee should be appointed. He said that led to the board executing a declaration of solvency to allow shareholders to approve the application for winding up.

The FSC is now proposing its own trustee because it does not believe it would be prudent to hand over management of SSL to the persons who were involved in a declaration of solvency, said a source.

Court documents sealed

The FSC has not commented publicly on its intentions and Sunday Gleaner questions submitted on March 16 have not been answered.

The SSL-appointed trustee has declined to comment, while Croskery directed queries to the FSC.

King’s Counsel Caroline Hay, who represents SSL and Campbell, said yesterday that she could not speak on the case before Monday.

Access to court documents in both cases has been restricted because of a seal imposed by the court at the request of the parties, said a spokesperson of the Court Administration Division.

The Sunday Gleaner’s series of investigations into SSL affairs and the role of the FSC has brought to light the company’s documented history of swinging in and out compliance with regulations.

In 2009, the FSC accused SSL of “possible fraudulent misrepresentation” over inaccurate statements on clients’ contracts; flagged its struggles to find money to operate and the use of almost $200 million in ‘client funds’ to support connected party companies as well as to fund its operations.

Eight years later, the regulator threatened to suspend SSL’s licence after branding it a “problem institution” that operated a “culture of non-compliance and mismanagement of client funds”. Up to 2020, the FSC was forced to take action though never pulling the licence.

“With the benefit of hindsight, it seems clear that the FSC did not exercise sufficient rigour in its oversight of SSL and tolerated significant breaches for far too long – over 13 years,” Finance Minister Dr Nigel Clarke conceded in his Budget presentation on March 7.

He has announced a series of planned reforms.

editorial@gleanerjm.com