The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Two Bahamas-based financial services providers have become embroiled on opposite sides of a lawsuit relating to the alleged “gross mismanagement” of a former $100 million investment fund.

Old Fort Financial, the Lyford Cay-based provider, is among a host of investors in The Wimbledon Fund’s Class TT portfolio who are suing Swiss Financial Services (Bahamas), in its capacity as the investment fund’s administrator, for alleged breach of fiduciary duty and negligence.

In a December 2012 lawsuit filed in the New York State Supreme Court, investors in the Class TT portfolio are alleging that their investments were “wrongfully converted” from a multi-billion dollar hedge fund to unsecured promissory notes issued by Swartz IP Services Group.

Old Fort Financial and its fellow investors are claiming that “no due diligence” was done on Swartz IP before $17.7 million of their assets were invested in it. The latter fell into insolvency nine months later, and could not repay the Class TT portfolio investment.

Despite this, the lawsuit alleged that Old Fort Financial was approached several times to increase its investment in the Class TT portfolio, even after it was unable to satisfy redemption requests.

Swiss Financial Services (Bahamas) is not alone on the defendant side, as Old Fort Financial and its fellow plaintiffs are also suing - for collective damages in excess of $17.7 million - The Wimbledon Fund’s investment manager and its top executives, plus Societe Generale Private Banking Suisse, which acted as custodian.

The lawsuit alleged that The Wimbledon Fund, which currently has about $50 million in assets under management, is divided into five separate investment portfolios.

The Class TT Portfolio is one of these, and Old Fort Financial owns 9 per cent of the class’s shares in the Fund.

Apart from Swiss Financial Services, the other defendants are The Wimbledon Fund’s managers, New York-based Weston Capital Asset Management and Weston Capital Management, and their senior officers - Albert and Jeffrey Hallac, and Keith Wellner.

Outlining their complaint, Old Fort Financial and other investors alleged that there had been “gross mismanagement” of the Class TT portfolio.

Claiming that they represented the majority Class TT shareholders, they said the portfolio had acted as a ‘feeder fund’ that invested in a multi-billion dollar hedge fund, Tewksbury Investment Fund.

This fund was “renowned for its stability, diversified holdings, consistent returns and proven track record”, but Old Fort Financial and its co-investors alleged that in November 2011, “without any notice virtually all” the Class TT portfolio’s investments were converted into the Swartz IP unsecured promissory notes.

Swartz IP was said to be affiliated with Jerome Swartz, a prominent investor and entrepreneur, but the returns offered by the promissory notes - despite their “highly speculative nature” - were only a 1 per cent premium above those achieved from Tewksbury.

“Incredibly, defendants conducted no due diligence whatsoever into Swartz IP prior to purchasing $17.7 million worth of its so-called reference notes and, instead, appeared to base their entire investment decision on Swartz IP’s alleged affiliation with Mr Swartz,” Old Fort Financial and its co-investors alleged.

The lawsuit further claimed that Weston, and the Hallacs, had recently acquired a major online jewellery retailer with Swartz IP’s principals as their joint venture partner.

Alleging that they had suffered “severe damages”, Old Fort Financial and its fellow investors claimed: “In direct violation of their fiduciary duties and contractual obligations, and demonstrating staggering levels of incompetence and self-dealing, defendants wrongfully converted plaintiffs’ stable and secure investments into unsecured promissory notes issued by an unknown entity without any meaningful assets.

“In one fell swoop, defendants’ egregious decision liquidated plaintiff’s secure and substantial investments, and left plaintiffs holding worthless interests in unsecured loans with no collateral.”

As the fund’s administrator, Swiss Financial Services (Bahamas), which is based at One Montague Place on East Bay Street, served as “the liaison” between the fund managers and investors.

The lawsuit added that it calculated and reported the monthly value of Class TT portfolio shares to investors, a vital function in helping the latter to decide whether to maintain their holdings.

It was alleged, though, that Albert Hallac contacted both Old Fort Financial and another Class TT portfolio investor in August-September 2011, urging them to increase their investment on the grounds that ‘additional capacity’ had become available in Tewksbury.

Old Fort Financial declined. This, though, was at the time when the alleged Swartz IP scheme was already ‘in motion’.

The lawsuit alleged that Swiss Financial Services (Bahamas), after investigating the Swartz IP notes, on November 16, 2011, found them to “be suitable for our situation” as an investment.

“Under the circumstances, there is no rationale, good faith basis upon which defendants could have reached such a conclusion,” Old Fort Financial and its co-investors alleged.

The Class TT portfolio’s position ultimately changed from one in 2006 where 91 per cent, or $112.915 million of its $124.067 million assets were invested in Tewksbury, to where just 18 per cent - or $4.129 million out of a total $22.945 million - were with the hedge fund.

The lawsuit alleged that during the first eight months of 2012, Weston behaved as if there was no change in the Class TT portfolio’s strategy.

“During this time, Jeffery Hallac even approached representatives of Old Fort, once again encouraging it to increase its position in the Class TT portfolio,” the lawsuit alleged.

“At no point during these discussions were Old Fort’s representatives advised of the Swartz IP note transaction, or led to believe that the Class TT portfolio consisted of anything other than a direct investment in Tewksbury.”

In late August 2012, the Class TT portfolio and Swartz IP were unable to meet a redemption request, and such capital returns to investors were suspended.

“In a final act of desperation, on the same day his father issued the above letter advising the Class TT shares were now worthless, Jeffrey Hallac approached Old Fort and, once again, attempted to solicit an additional investment into the Class TT portfolio,”

the lawsuit alleged.

It was further claimed that in an October 11, 2012, conference call with Old Fort Financial, Albert Hallac made admissions that the Swartz IP deal was a bad transaction, with no due diligence conducted or collateral/guarantees obtained.