In the latest court filings under the Vesttoo chapter 11 bankruptcy case, it’s become clear that a difference of opinion has emerged between creditors to the estate, with the Official Committee of Unsecured Creditors taking a different tack to the joint provisional liquidators to Aon’s White Rock Insurance (SAC) Ltd.
The joint provisional liquidators (JPL’s) for the Vesttoo reinsurance transaction-linked cells of broker Aon’s segregated accounts and transformer company White Rock Insurance (SAC) Ltd. have again stated that they believe the automatic stay does not apply and that they should be able to pursue discovery and recovery against the cells in question for the benefit of their clients.
Recall that there had been some dispute over the relevance of the automatic stay, which is a common provision in bankruptcy proceedings, with Vesttoo claiming ownership of the White Rock cells, while the JPL’s working on behalf of Aon and the Bermuda regulator said that claim was irrelevant and urged the courts to allow a Bermuda court case to proceed and identify what if any value remained in the cells in an attempt to recover lost value for clients that were affected.
The JPLs and White Rock’s goal is to remedy the issue for clients and cedents involved, by securing access to the cells in question, so that they can be first be protected, then liquidated or restructured and therefore the return of any assets that are available can be secured for the clients / cedents involved.
Vesttoo’s lawyers then filed to have White Rock and the JPLs held in contempt of the bankruptcy court proceeding, saying they should behave as if the automatic stay applies to the cells and not take any action to obtain possession of the cells, their contents, or accounts linked to them.
Which led to a stalemate, of sorts.
Now, Charles Thresh and Michael Morrison of restructuring specialist Teneo, in their capacities as the joint provisional liquidators of White Rock Insurance (SAC) Ltd., have filed with the court to state that, “Vesttoo’s contempt Motion is a prime example of debtors improperly seeking to use the automatic stay as a sword rather than a shield.”
They also explain that, “Vesttoo’s self-portrayal as the victim here is unjustified. Vesttoo has admitted it perpetrated what is likely the largest fraud ever in the Bermuda (re)insurance market through “pervasive and systematic misconduct” as part of a conspiracy among multiple Vesttoo senior officers and directors and others.”
Adding that, “Vesttoo admits responsibility for providing at least $2.2 billion of fraudulent letters of credit to the segregated accounts identified at Annex 1 of the JPL Appointment Order (the “Vesttoo Cells” or “Segregated Accounts”) that were required to collateralize the reinsurance obligations of those accounts.”
Going on to say that, “Knowing the purported collateral they had presented as security did not exist and, therefore, that they were not entitled to any payments from reinsurance premiums, Vesttoo entities nonetheless requested and received what the JPLs understand to be approximately $137 million from premiums funded by the cedents that had been paid into the Vesttoo Cells at White Rock. Accordingly, the real victims here are those Vesttoo Cells, their cedents, and White Rock.”
The JPL’s on behalf of White Rock, go on to state that Vesttoo has no claim to property rights over the cells and that the JPL’s actions in seeking to gain control of the cells and put them into liquidation should not be deemed violations of the automatic stay.
So the JPL’s state that Vesttoo’s contempt motion should be denied, and the interim stay order be vacated, so that they can proceed with their liquidation action as planned.
But, there is now a difference of opinion on the creditor side it has emerged, with a group of other creditors stating that the JPL’s and Aon’s White Rock should abide by the automatic stay.
The Committee of Unsecured Creditors are all entities with claims against Vesttoo, including fronting specialist Clear Blue, Porch insurer Homeowners of America Insurance Company, Markel Bermuda Limited, Corinthian Group’s Proventus Holdings, LP, and United Automobile Insurance Co.
That was the group as of the end of August, others could have since joined.
Aon’s White Rock, or at least all of its clients that have been affected by the Vesttoo fraud and invalid letter sof credit (LOCs), is/are also, of course, creditors to Vesttoo, hence trying to protect and recover the value in the cells.
But Aon’s White Rock has not joined this committee of other creditors, as it had already begun its own actions against Vesttoo on the multiple fronts of New York and Bermuda courts.
The Committee of Unsecured Creditors has filed a response with the bankruptcy court in support of Vesttoo’s motions to enforce the automatic stay on White Rock SAC and the JPL’s, as well as in support of the motion to find White Rock and the JPL’s in contempt of the interim motion enforcing the aforementioned automatic stay.
The Committee of Unsecured Creditors claim conflicts of interest for the JPL’s approach to the White Rock cell liquidation and say that, under the circumstances, the creditors are the “only estate fiduciary which can conduct a truly independent investigation for the benefit of the chapter 11 estates and the unsecured creditors, including the cedents, who are ultimately the victims of the alleged massive fraud.”
Going on to state, “The automatic stay will provide the breathing room and time needed for a thorough investigation, after which the parties in interest can negotiate in an effort to resolve matters consensually – possibly with the assistance of a court-appointed mediator – and return to this Court, if necessary, to reconsider the issues in light of the findings and conclusions of the Committee’s investigation, the status of the negotiations, and the likelihood of a surplus or deficiency in the Segregated Accounts.”
So the Creditor group supports the enforcement of the automatic stay on the Aon White Rock JPL’s, in direct conflict with the goals of the proposed liquidation in Bermuda.
Quite how this leaves Aon positioned now remains to be seen, the bankruptcy court will have to consider both sides pleas and decide on whether the stay is enforced, or whether the JPL’s are allowed to get on with their role of liquidating the cells.
Now, the Creditors have begun their own investigation already and have filed with the bankruptcy court for leave to begin conducting discovery against Vesttoo, with a request for significant amounts of documentation and evidence, to aid their investigation.
“The Committee is deeply concerned that, given the Debtors’ current board and management, the Debtors have conflicts of interest that preclude them from investigating credibly the full extent of the apparent wrongdoing and any failures to detect the same. Accordingly, the Committee seeks to conduct Rule 2004 discovery to analyze independently what misconduct occurred, why it took so long to detect it, and what claims and causes of action the Debtors may have as a result,” they state.
They highlight that Vesttoo had said all culpable parties in the fraud had already been identified and note that Vesttoo’s investigation has been said to be almost complete, when a global fraud of this nature would normally take a significant amount of time to investigate.
The Creditors state, “One potential explanation for the Debtors’ seemingly rushed approach is that members of its current management have personal incentives to stop the investigation before they are implicated. For example, Ami Barlev (“Barlev”), the Debtors’ Interim CEO, has been on the Debtors’ board of directors since June 2021.”
Adding, “To be clear, the Committee has no information to suggest that Barlev was personally involved in fraud related to the LOCs. That does not mean, however, that Barlev and other board members have no liability for failing to detect a massive fraud that permeated the Debtors’ business. Indeed, the Debtors admit that there were deficiencies in their governance and institutional controls, and they are in the process of addressing those deficiencies by taking action including “installing institutional financial security controls[.]” This suggests the fraud was enabled by the unreasonable failure of management and the board to establish and enforce appropriate controls in the first place.”
Going on to say, “The Interim Report confirms that the Debtors are not considering seriously to bring claims against Barlev and other directors and members of management who were not directly involved with the fraudulent LOCs. In the Interim Report, the Debtors describe the litigation they are contemplating bringing and only identify two groups they are targeting: “The first group includes current and former insiders of Vesttoo who have directly been implicated in the massive fraudulent scheme that led Vesttoo to the Bankruptcy Court.” The second group is Yu Po Holdings Ltd., China Construction Bank, and Standard Chartered Bank.
“Notably absent from these two groups are members of the Debtors’ board and management who, even if not directly involved with the fraudulent LOCs, likely failed to fulfill their fiduciary duties, implement and enforce appropriate controls, and detect the fraudulent conduct. After all, in the Debtors words, “red flags abounded as early as 2021.” Thus, the Debtors’ management and board, on whose watch the fraud occurred, are obvious investigation subjects and/or targets. As set forth in prior briefing, the same is true of White Rock
and its parent company Aon, which created, promoted and managed the accounts through which the alleged fraudulent LOCs scheme was effected.”
The Creditor group says that, because of these conflicts of interest, “The Committee in the chapter 11 cases is the only independent fiduciary capable of conducting a thorough and conflict-free investigation.”
Now, with the Creditor group claiming that they should be allowed to perform discovery, while Aon’s White Rock and the JPL’s actions are stayed, this clear difference of opinion could hurt the case against Vesttoo, if parties claiming to be creditors (which they all are, including Aon for its clients) cannot agree on the approach and two avenues of legal proceedings occurred.
As a result, there’s a strong chance the bankruptcy court will try to bring this all together again, as the ultimate goals of all sides are the same, to get to the bottom of what has happened and to recover what value can be found, for the benefit of those now out of pocket and the clients that have lost their reinsurance security.
However, it does feel like the assets of cells should be protected for the benefit of the cedents or beneficiaries of those specific transactions, so Aon’s approach of trying to secure the cells specific to its clients appears a valid one, to us.