The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

CIBC Trust Company (Bahamas) is battling a notorious hedge fund adviser whose scheme allegedly cost one of its trust clients a potential $15 million profit, Tribune Business can reveal.

The Bahamas-based institution is fighting a legal action in the New York State Supreme Court against Philip Falcone and his Harbinger Capital Partners firm, who last week “admitted wrongdoing” and agreed to pay the Securities & Exchange Commission (SEC) $18 million in a separate case relating to the improper use of $113 million in hedge fund assets.

The CIBC Trust (Bahamas) action, launched in its capacity as trustee of the Bahamas-domiciled Titan Trust, concerns a scheme that was central to the SEC action - Falcone inspired move to manipulate bonds issues by a Canadian manufacturer, MAAX Holdings.

Falcone, the Bahamian trust company is alleging, sought to restrict the supply of the MAAX bonds by acquiring the available supply and forcing all other holders to sell to him, driving up demand and the price.

CIBC Trust (Bahamas) then claimed that Falcone conspired with Titan Trust’s Florida broker, Richard Fels, to purchase MAAX bonds with a face value of $25 million on the Bahamian trust’s account.

However, it was alleged that Fels agreed not to re-sell Titan’s bonds until Falcone gave permission, and trades in them were not agreed to by the Bahamian trust.

“Despite the opportunity to sell Titan’s [bonds] for a substantial profit, Fels did not sell Titan’s bonds for a substantial profit in compliance with Harbinger and Fels corrupt agreement,” the CIBC Trust (Bahamas) lawsuit alleges.

“Fels sold the bonds on Titan’s account many months later, for little more than he had purchased them, into an account owned (or for the benefit of) his wife.

“If Harbinger and Fels had not conspired to conceal from Titan that the MAAX [bonds] could be sold for many times the purchase price, Titan would have earned a multi-million dollar profit by selling the bonds at the same price level at which Harbinger was selling its own MAAX [bonds].”

CIBC Trust (Bahamas) alleged that Fels purchased the MAAX bonds, on Titan’s behalf, on December 24, 2007, at a price of $0.01 per $100 of face value - effectively paying $2,500 for bonds with a face value of $25 million.

Fels allegedly falsified records to hide the dealings from Titan, as Harbinger was selling the MAAX bonds for $60 per $100 of face value.

“Had Fels sold the MAAX [bonds] he purchased on Titan’s account at the then-prevailing market price of $60 per $100 of face value, Titan would have earned a profit of approximately $15 million,” CIBC Trust (Bahamas) alleged.

Some six months later, on June 17, 2008, Fels allegedly sold Titan’s bonds at $0.1875 per $100 of face value, despite the prevailing market price being higher.

Yet Falcone and Harbinger, in attempting to get the CIBC Trust (Bahamas) complaint against them dismissed, argued that Titan and its Bahamian trustee were both “sophisticated investors”.

And they alleged:”In June 2008, Fels sold Titan’s MAAX bonds at $0.19 per bond, netting a $40,000 profit for Titan - a 1,600 per cent return in a mere six months.

“Titan now claims that Fels should have sold its MAAX [bonds] in January 2008, a mere month after he bought them, and that he should have demanded $60 per $100 of face value such that Titan would have made approximately $15 million on its $2,500 investment.

“According to Titan, Harbinger was able to obtain the ‘inflated’ price of $60 per $100 face value in January 2008 by engaging in an illegal ‘short squeeze’, and Titan comes to this court because ‘Titan would have earned a profit of up to $15 million’ if Fels had engaged in the same allegedly illegal conduct on Titan’s behalf.”

In effect, Falcone and Harbinger are alleging that CIBC Trust (Bahamas) and Titan have “decided that the $40,000 profit it had made on its $2,500 investment was not enough”, and that they had failed to benefit enough from the scheme.