The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Privy Council yesterday ruled that a Bahamian mutual fund was entitled to recover $191 million from companies associated with one of Ecuador’s wealthiest families, following an asset-stripping exercise that saddled it with all their liabilities.

The highest court in the Bahamian judicial system, in what was something of a landmark ruling in an almost 20 year-old case, overturned ‘factual findings’ by the Supreme Court and subsequent a Court of Appeal verdict that affirmed it.

It found that a Bahamas-based accountant, Michael Taylor, who was the IAMF fund’s sole director and investment adviser, breached his fiduciary duty by simply following the Ortega Trujillo family’s instructions even though they “might not be proper”.

Members of the Ortega Trujillo family and their company, Conticorp, were found by the Privy Council to have “dishonestly procured and assisted” Mr Taylor in undertaking three transactions that transferred all IAMF’s assets to Conticorp in return for assets that ultimately proved to be worthless.

And, given that the case has been running in the Bahamian courts since 1996, the prejudgment interest bill is likely to be significant.

While this still has to be calculated, and attorneys’ submissions on the issue are due within the next three weeks, the normal 6-7 per cent rate - and almost 20-year duration - mean that the final award to IAMF could be in the $400-$500 million range.

This, sources familiar with the situation said, would consist of the $191 million in IAMF assets, plus around $230 million in prejudgment interest.

The Privy Council ruling found that while IAMF was held out as a mutual fund “open to any investor”, its only assets came from Ecuadorian depositors via a Curacao bank which the Ortegas and Conticorp ultimately owned.

Its managing shares were held by Ark Ltd, a nominee company established by the then-Ansbacher (Bahamas), which acted as IAMF’s administrator. Mr Taylor was named as the sold director and investment adviser, receiving an annual fee of $2,500 for his services.

“IAMF has at various stages been attributed with a greater or lesser degree of independence from the respondents, which the [Privy Council] concludes on all the evidence that it did not in reality possess,” the judgment said.

All directions with regard to IAMF came from the Ortegas and persons working for them, with Ansbacher merely acting as a conduit and relaying their instructions to Mr Taylor.

The transactions at the centre of the controversy occurred between December 1995 and March 1996, and saw IAMF surrender its $191 million in assets - a mixture of loan, shares and cash - to Conticorp in exchange for so-called Global Depository Receipts (GDRs) issued by the company.

However, the transactions occurred just when Conticorp’s major assets, two banks, were in severe financial difficulties and ultimately had to be bailed out by Ecuador’s central bank.

“IAMF’s current case has always been and is, in essence, that all three transactions s interests, and for the benefit of Conticorp and Conticorp-related companies, whose debts were being in effect largely forgiven, and through them for the benefit of the respondents,” the Privy Council said.

However, both the Supreme Court and Court of Appeal had found in favour of the Ortegas and their companies, determining that the transactions were proper and part of a debt-for-equity swap entered into with the approval of Ecuador’s regulators.

Yet the Privy Council found that the matter was “an exceptional case” that required it to interfere with findings of fact by a lower court - something that appeal courts rarely do.

Describing the Supreme Court and Court of Appeal rulings as “unsustainable”, the Privy Council ruled: “Both courts below erred in law by relying on points which they wrongly viewed as significant, and erred as a matter of process in failing properly to address the factors and issues which were really significant.......

“The Board is however fully satisfied that this is one of the very rare cases where it must interfere with the decisions reached below.

“It has come to the conclusion that all three transactions were, as and when entered into, not transactions which persons in the [Ortegas’] position could in the light of what they knew honestly have considered to be in IAMF”s interests,” the court added.

“The likely explanation of what happened is, in the Board’s view, that no separate consideration was ever given to the interests of IAMF, when the transactions were devised and instructed. IAMF, despite the protestations that it was an independent fund taking its own decisions, was simply regarded as a tool which could be used at Conticorp’s behest and for its purposes.

“However, it also follows that no consideration was given to the depositors whose investments depended on IAMF’s assets.

But it is on the interests of IAMF as the entity with its responsibilities towards such depositors that attention should have been, but the Board concludes cannot honestly have been, focused. It follows that the respondents are jointly and severally responsible for dishonestly procuring and assisting Mr Taylor’s breaches of fiduciary duty in entering into each of the three transactions.”

Referring specifically to Mr Taylor, the Privy Council found that a nominee director was not able to “forego, or surrender to another, any exercise of his discretion, however paltry the amount he may be paid”.

“Mr Taylor was in breach of duty in giving effect, blindly and ignorantly, to others’ instructions,” the Privy Council added. “It was his duty to understand IAMF’s affairs and to apply his own mind to IAMF’s interests.”

The Privy Council added that the Supreme Court was wrong to have accepted Mr Taylor’s evidence that he was relying on Ansbacher to scrutinise the instructions received from the Ortegas.

“The Board regards as extremely improbable that Ansbacher engaged in any such scrutiny, or had a full picture which would enable them to do so,” the Privy Council said. “The Board also adds that Mr Taylor was clearly well aware that the instructions emanated in Ecuador.

“Many of them came on letter paper showing their precise origin. The speed with which they were relayed to him through Ansbacher and required to be implemented adds to the difficulty about accepting his evidence and the judge’s view that Mr Taylor really thought that Ansbacher was undertaking any significant vetting.”

Ferron Bethell and Camille Cleare of Harry B. Sands & Lobosky represented IAMF and its fellow plaintiff, the Central Bank of Ecuador, at the Supreme Court and Court of Appeal stages. Callenders & Co represented the Ortegas and Conticorp.

Ansbacher was not a defendant in the case.