The liquidators of a “Ponzi-like” trade finance firm have accused Deutsche Bank and a slew of asset managers of allegedly failing to raise the alarm about the fraud and helping sell the company’s suspect loan book to new investors.

The New York-headquartered International Investment Group (IIG), founded in 1994, originated and securitised trade finance loans to corporates in Latin America. Following an investigation by US authorities in 2018, it emerged that many of IIG’s loans were fictitious or wildly inflated in value, and its two co-founders were later jailed.

Asset managers KKR, BlueMountain Capital Management, Tennenbaum Capital Partners and Elanus Capital Management invested in US$220mn of notes issued by a collateralised loan obligation (CLO) offered by IIG in 2013. Deutsche Bank acted as the CLO’s trustee, collateral manager and cash management bank.

The noteholders were paid US$169.6mn in mid-2017 when the loans were sold to three new investors – Finnish asset manager Aktia, the UK’s AGC Equity Partners and the LAM Enhanced Trade Finance Fund I LP. The liquidators are now trying to recover the money, arguing the sale proceeds were “actual or constructive fraudulent transfers”.

The Cayman Island liquidators of IIG in September filed a lawsuit against the noteholders and Deutsche Bank, accusing them of ignoring red flags in IIG’s conduct and helping market the fraud-addled loan book to the new investors, who lost their entire investment when IIG collapsed.

The liquidators, Christopher Kennedy and Alexander Lawson of Alvarez & Marsal, allege in a complaint filed in a New York court that Deutsche Bank “knew that those loans were fictitious and that IIG was misappropriating the proceeds. It had access to an abundance of information making that clear”.

The complaint alleges Deutsche Bank opened repayment accounts for companies that were purported to be commodity producers but all had the same address in an office building in Panama associated with company registration agents. The bank allegedly misrepresented the location of the borrowers as being in other countries in order to circumvent geographic risk controls in the CLO.

The complaint says the lender transferred proceeds of loans not to borrowers, but to IIG itself, which then used the funds to pay off other investors and hide losses on ailing loans. The liquidators allege the bank was aware that principal and interest on many loans was being repaid by IIG, instead of directly from the purported borrowers or offtakers.

In a motion to dismiss the liquidators’ case, filed this week, Deutsche Bank says the liquidators have failed to prove that it knew or was in a position to know of IIG’s fraud.

“The liquidators simply fail to set forth a plausible scenario that Deutsche Bank aided, abetted, or otherwise had a reason to conspire with IIG”, the response says. The bank says the complaint “lacks [the] substance, plausibility and the particularity required of valid fraud claims”.

Deutsche Bank says it was a “mere conduit” for the movement of funds associated with the CLO and “had no discretion or control over those funds”. The bank says it “had no independent authority beyond following the direction of IIG and the noteholders”.

Referring to the liquidators’ allegations that the bank helped structure IIG accounts to avoid know-your-customer checks, Deutsche Bank says it is not obligated to run those checks on IIG’s borrowers.


‘Forced sale’ of underperforming loans

The liquidators allege that when it became clear that the CLO was woefully underperforming and would not be able to repay the notes, the original noteholders sought to help IIG repackage and sell the loans to new investors.

The loans in the CLO were due to mature in October 2016, however at that time only US$600,000 of principal had been repaid against an outstanding balance of just over US$210mn, according to the liquidators’ filing.

After failing to clinch new financing, IIG began efforts to solicit new investors. In early 2017 it created a teaser for potential investors, shared with the noteholders and Deutsche Bank, which falsely depicted the loans as strong and secure assets.

“Instead of exposing the material misrepresentations they had learned of, each of the noteholders and [Deutsche Bank] responded to the ‘teaser’ by forcing IIG to proceed with the solicitation of potential new investors,” the liquidators allege, and “offered suggestions, guidance, and direction on how IIG should go about approaching potential investors”.

A former executive of IIG is quoted as saying that the noteholders “wanted to make sure they got their money out of the CLO and got taken out by new investors”.

Employees of KKR and BlueMountain – later bought by Assured Asset Management – joked about the teaser in emails, redacted excerpts from which are included in the complaint. “Can’t believe [IIG] asked us if we want in,” remarked a KKR credit analyst.

In a joint response submitted to court, the noteholders say the liquidators have failed to allege that they “were involved in reviewing any materials provided to the actual new investors in the actual investment vehicles that occurred… or were involved in any other way in the solicitation of those new investors”. The noteholders say they were never shown the teaser that was ultimately circulated to potential investors.

The noteholders have also asked the court to throw out the liquidators’ claim, arguing that it fails to make out specific claims against each company and does not meet any of the tests required under relevant laws.

“The paucity of any allegations tying any of the noteholder managers to IIG’s underlying fraud” leaves the investors and liquidators “with nothing but a blank canvas”, the noteholders say in a November 6 filing.


Deal awry from the outset

The filings show that the noteholders quickly grew worried about the quality of lending underpinning the CLO.

The complaint said overdue loans were a common theme of the trustee reports provided by Deutsche Bank from “early on”, which particularly worried the noteholders because the loans were supposed to be short-term transactional lending repaid by blue-chip offtakers.

A KKR credit analyst quoted in the complaint said that Deutsche Bank and IIG “had difficulty producing accurate trustee reports,” as ”there were times where numbers wouldn’t match up to previous reports”.

A Tennenbaum employee wrote in a March 2015 email, also cited in the complaint: “what’s frightening is that neither [Deutsche Bank] or IIG understands the deal to which they signed up just a few months ago!”

In June last year IIG’s founder David Hu, who pleaded guilty, was sentenced to 12 years in prison while his co-founder Martin Silver received a 13-month sentence in February this year.

IIG’s liquidators have also launched several lawsuits against recipients of IIG loans who allegedly failed to repay the proceeds after the company’s demise.

All parties in the case were contacted for comment but either declined or did not respond.