Some bank failures in Curacao are the consequence of large-scale fraud schemes. A lot of people think they know what happened at Girobank Curacao NV., but they don’t. Among all the versions I have heard, the true story of what unfolded I have not heard clearly till this day. I have taken it upon myself to describe as concisely as possible what happened at Girobank NV.
All information disclosed in this blog is publicly available (mainly Verdicts of NY-district court documents). As I also write fraud-blogs, I chose this subject to recount what happened and shed light on the true events that unfolded in this complex case.
The Genesis of Fraud: IIG’s Establishment and Early Operations
The case of Girobank against International Investment Group (IIG) and its ultimate beneficial shareholders presents a complex narrative of corporate fraud and manipulation in the financial sector. This case, which unfolded in both Curaçao and New York, offers a detailed look at how fraudulent schemes can entangle even well-established financial institutions, leading to significant financial turmoil.
Girobank, a prominent bank in Curaçao, became embroiled in a lawsuit against the owners of IIG Malta, David Hu and Martin Silver. The accusation centered primarily around a $93 million loan scheme. Girobank alleged that Hu and Silver, leveraging their positions in IIG, unjustly enriched themselves by acquiring a controlling interest in Girobank. Their objective, as claimed by Girobank, was to extract loans from the bank without intending to repay them.
Hu and co-conspirator Martin Silver founded IIG in 1994. Hu was a managing partner and the chief investment officer of IIG. IIG, an SEC-registered investment adviser, provided investment management and advisory services, including for three private funds that it operated: (1) the IIG Trade Opportunities Fund N.V. (“TOF”); (2) the IIG Global Trade Finance Fund, Ltd. (“GTFF”); and (3) the IIG Structured Trade Finance Fund, Ltd. (“STFF”). IIG also advised the Venezuela Recovery Fund (“VRF”), a fund that managed the remaining assets of a failed Venezuelan bank. Both TOF and VRF were registered on Curacao.
IIG advertised itself as specializing in global trade financing, particularly in providing trade finance loans to small and medium-sized businesses. IIG’s principal investment advisory strategy, including with respect to the IIG Funds, was investing in trade finance loans that it also originated. Trade finance loans are used by small and medium-sized companies, typically exporters and importers, to facilitate international trade. IIG’s purported expertise was in trade finance loans to borrowers located in Central or South America, and in a variety of industries, with a stated focus on “soft commodities,” such as coffee, agriculture, fishing, and other food products. IIG’s trade finance loans were purportedly secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.
Investments in TOF, STFF, and GTFF were marketed by IIG to institutional investors, such as pension funds, hedge funds, and insurers (including Girobank). In offering memoranda and communications with investors, IIG advertised strict risk controls, such as promises to use diligence to carefully select borrowers or issuers with trusted management and marketable assets, and portfolio concentration limits based on borrower, developing country, and industry.
IIG purported to value the trade finance loans in the IIG Funds on a regular basis. IIG and, in turn, HU, received a performance fee with respect to the IIG Funds, as well as a management fee, which was calculated as a percentage of the assets under management held in the Funds.
A significant aspect of the case involved the Trade Opportunities Fund (TOF), which was linked to IIG and was struggling financially after the 2008 crisis. About 70% of TOF’s investors were demanding redemptions of their investments. To mitigate this financial strain, Hu and Silver reportedly sought a “deep pocket partner” to sell their trade finance loan portfolio, which was largely non-performing, and thereby inject new liquidity into TOF. This is where Girobank got involved.
The Agreement and Manipulation
The Securities and Exchange Commission (SEC) charged David Hu in 2020 with fraud for his role in orchestrating a $60 million Ponzi-like scheme at IIG. This marked a significant turn in the company’s history, as it brought to light the extent of fraudulent activities that had been taking place under the guise of legitimate investment strategies.
The United States Attorney for the Southern District of New York, announced on April 11, 2022, that Hu, former managing partner and chief investment officer of the Manhattan-based investment advisory firm International Investment Group (“IIG”), was sentenced today to 12 years in prison for his role in an over $120 million scheme to defraud IIG’s clients and investors. Hu pled guilty in January 2021 to investment adviser fraud, securities fraud, and wire fraud offenses.
The core of the lawsuit revolved around an agreement between Girobank and TOF. Under this agreement, Girobank was to purchase partial interests in trade finance loans managed by TOF and IIG Capital. Girobank later realized that these participation interests in loans were not performing, suggesting a deliberate manipulation of the bank’s investment decisions.
One notable instance involved a loan made by Girobank to the Ontario Teachers’ Pension Plan Board for €67 million. It was revealed that Girobank was misled into wiring payments ostensibly for the purchase of participation interests from TOF. These payments were benefiting other entities unrelated to Girobank.
The Mechanics of the Fraud
Spanning from at least 2007 through 2019, David Hu orchestrated a sophisticated scheme to defraud investors. Their tactics included:
- Overvaluing Distressed Loans: Loans that had either defaulted or were in distress were falsely marked at their original value plus accrued interest, misleading investors about their true worth.
- Creating Fake Loans: To hide the financial losses, Hu created fictitious loans, complete with fake documentation. They even arranged for sham foreign entities to confirm these loans to auditors.
- Selling Overvalued and Fake Loans: These fraudulent loans were sold to new private funds and a collateralized loan obligation (CLO) trust, including Girobank. The proceeds from these sales were then used to pay off earlier investors, akin to a Ponzi scheme.
- Collecting Fees: Through these deceitful practices, they continued to collect management and performance fees, enriching themselves at the expense of their clients.
Basically, the fraud scheme thus consisted of selling overvalued and fake loans to a collateralized loan obligation trust and new private funds established and advised by IIG, and using the proceeds from those fraudulent sales to generate liquidity required to pay off earlier investors in a Ponzi-like manner. Girobank became the victim of this scheme
IIG was accused of hiding losses and selling millions in fake loan assets to clients. This deceit was not just a one-off event but a systemic practice that spanned several years, demonstrating a profound breach of trust and fiduciary duty.
The Downfall and Legal Repercussions
David Hu’s actions eventually caught up with him, resulting in a 12-year prison sentence after he pleaded guilty to investment adviser fraud, securities fraud, and wire fraud offenses in 2021. Hu admitted to operating a Ponzi-like scheme, which defrauded investors of more than $120 million.
This scandal had profound implications for Girobank. The widespread fraudulent activities significantly deteriorated the bank’s financial position, eventually leading to it being placed under the control of the Central Bank of Curacao and Sint Maarten. The case against Hu and Silver is a reminder of the destructive power of corporate fraud and the intricate methods used by fraudsters to exploit financial institutions.
The IIG case is also a reminder of the complexities and dangers of corporate fraud. It underscores the need for robust internal controls, ethical business practices, and a supportive environment for whistleblowers.
The Girobank-IIG case serves as a crucial lesson in the importance of rigorous due diligence, transparency, and internal controls within financial institutions. It highlights the sophistication with which corporate fraud can be executed and the extensive damage it can cause to stakeholders. For the financial industry, it is a call to strengthen regulatory frameworks and foster a culture of ethical compliance to safeguard against such fraudulent schemes in the future.
Dieudonne (Neetje) van der Veen is a financial and management business advisor. His work and experience are mainly in the field of financial management and structuring of companies in distress and Governance on Planning & Control cycles.
Mr. van der Veen has a master’s degree in business economics (Erasmus University Rotterdam), is a Registered Accountant (Royal Dutch Professional Organization of Accountants), CFE (Certified Fraud Examiner) and CICA (Certified Internal Control Auditor).
Mr. van der Veen writes articles about Governance and Fraud, and actively contributes to the ACFE-DCC community for knowledge-sharing.
