Continuing our exclusive coverage of the bankruptcy of Australian Retail FX and CFDs broker USGFX, FNG has viewed the latest report to creditors issued by USGFX administrator-turned-liquidator BRI Ferrier indicating that fairly little progress has been made in sorting things out and recovering millions of missing client funds since the last USGFX bankruptcy update report was issued at the end of September.

Ahead of today’s latest creditors meeting, BRI Ferrier issued an update report in which it led off by stating that this would be a “complex liquidation”. BRI indicates that it has hit a virtual brick wall in almost every direction it has turned, from trying to get the cooperation of USGFX group controlling shareholder Soe Hein Minn, who is said to reside in Myanmar, to attempts to monetize some of USGFX’s assets such as the company’s MT4 and MT5 licenses, its client list, and its prepaid sponsorship of English Premier League football club Sheffield United FC.

The liquidator also confirmed what we had posted in our earlier update on USGFX – that is, that about $157 million of client money is missing (up from a $137 million estimate in our last report) from supposed high-interest deposits USGFX offered to its clients (against the terms of its license) while spiriting the money outside the country and into China. And, that $14 million in client money is missing at UPay, a Chinese payment processor which BRI said may be a sham in which the operations are actually controlled by the USG group’s controlling shareholder Soe Hein Minn.

BRI did say that it has recovered around AUD $550,000 from offshore money processors, i.e. Neteller UK, although Neteller first disputed the company’s entitlement to these funds, but eventually relented and released the funds without BRI having to commence legal proceedings. That brings total recoveries from payment processors to date to about AUD $900,000. However that “progress” over a more-than-two-month period is just a drop in the proverbial bucket, given how much client and other creditor money seems to be missing here.

Another note made by BRI is that it has issued demands on the broader USG group, in respect of their unauthorised misappropriation of company assets – in particular the transfer of clients. BRI is claiming that the company has kept the USGFX Australia client lists and data, and has been soliciting those clients to move to other USGFX entities. The USG Group has an FCA licensed arm in the UK, and offshore arm in Vanuatu, and recently received an FSCA license in South Africa.

Regarding the sale of other assets, BRI stated that clauses within the MetaQuotes licensing agreement prohibits the transfer of MT4 and MT5 licenses to other parties. However, the liquidator said that it understood that a sale of the company’s business would enable a third party to obtain control over the licenses. But with a sale of the company off the table with the company in liquidation, BRI said that USG UK have made an offer to acquire the licenses subject to a transfer being permitted by MetaQuotes. At this stage, however, MetaQuotes have indicated that they are not prepared to arrange for the transfer of licenses and therefore it is unlikely that a sale will occur.

While BRI is still trying to sort out who is owed what (in addition to dealing with asset recoveries), it indicated a three-tier possibility tree for return of client funds. In the “high” recovery scenario, BRI believes that trust creditors (mainly clients who made “regular” deposits in their USGFX trading accounts) could get up to 92 cents on the dollar, while unsecured creditors of the company – including those who invested via USGFX in high-interest deposits – would get at most 47% of their money back. In the “low” recovery scenario (which BRI indicated is most likely, based on how the past few months have gone), trust creditors would get only 2 cents on the dollar, and unsecured creditors between 0-1%.

Here below are some excerpts of the BRI Ferrier report from today:

USGFX cash position leading up to the bankruptcy

The cash position includes client trust funds. The cash position deteriorated significantly from $66M as at 30 June 2019 to $26M as at 30 June 2020, reflective of significant cash outflows due to a combination of factors including reduced trading activity and increased client withdrawals.

The Trade & Other Receivables also includes the balances held in overseas “money processor” accounts totaling $15.6M at 30 June 2020. Of this balance, a large majority relates to funds allegedly held by “UPay” for approximately $14M. Our investigations to date indicate that “UPay” may be a sham in which the operations are actually controlled by the Shareholder and as such, this asset should not have been reported in the balance sheet.

Sheffield sponsorship

The Company is a sponsor of the Sheffield United Football Club (“SUFC”), a football team in the English Premier League, entitling the Company, amongst other things, to have its “USG” logo emblazoned on the front of the teams jersey. The Company and USG UK are parties to the SUFC Sponsorship Agreement entered into on 21 May 2019 and pursuant to the Agreement, the Company prepaid a sum of C.$15m which included a Value Added Tax (“VAT”) in accordance with the contract and UK tax laws. From our review of Company email correspondence, USG UK had reached agreement with UK Tax authorities about VAT relief of c. $500k relating to the SUFC sponsorship to be refunded to the Company. Furthermore, the correspondence also shows that USG UK had retained the services of accounting firm Grant Thornton UK for advice on the refund generally and to liaise with UK Tax authorities to seek a greater refund of c. $800k on the basis that the Company is a foreign entity.

We have written to USG UK seeking an update on the timing and quantum of any VAT refund due to the Company and providing assistance from the Company to achieve this end. The response from USG UK was that they were not authorised to comment on “the tax and financial affairs of a different company” claiming that the matter is complex and has many facets. At this stage, the status of the VAT refund is unclear given a refund will more than likely require the co‐operation/ assistance of USG UK which to date has not been forthcoming. The refund may need to be pursued directly via Grant Thornton UK and/or the UK Tax Authorities.

At this stage it is unlikely that we will be able to sell or assign sponsorship agreement.

ASIC civil proceedings

ASIC is proceeding with an application to seek leave of the Court to commence civil proceedings against the Company and others in relation to the allegations of misconduct by the CARs, which if ultimately successful, requires that the Company return the net deposits to clients, adding back any profits made by the Company. At this stage, the value of such a claim against the Company is unknown, but is likely to be a significant value that would materially impact the creditor pool. We note that ASIC is also seeking penalties, however these are generally not provable debts in a liquidation.

Given the limited value to creditors of participating and incurring costs for these proceedings, we have determined that the best approach is to not object at this stage, whilst preserving the ability intervene later should it be necessary and in the creditors best interests.

Issues with other USG group companies transferring clients

We also received evidence that some of the investor clients accounts, continue to have interest/bonuses credited. The Company has not processed any such credits, as the Company is not authorised for these products, and no repayments have been made from the Company’s frozen trust accounts to Investor clients after 8 July 2020. Neither the Shareholder, USG UK or USG Vanuatu has recognised the existence or liability of the investor creditors to us or the Company. We find this to be an implausible position given the quantum of claims and the marketing and related documents provided to us by a number of Investor clients.

Accordingly, we have issued a demand on the Shareholder, USG UK and USG Vanuatu in respect of their unauthorised and uncommercial transfer of the Company’s clients. That demand extended to the parties behind those entities, who with imputed knowledge, willfully caused loss to the Company. We have received a response from lawyers acting for those parties, which does not meaningfully respond to our demand or propose any compensation for the Company. Again, the evidence appears incontrovertible, as supported by numerous creditor claims in this Liquidation. We are currently considering this response and seeking advice as to next steps on any recovery proceedings.

It is unclear what value will result for the Company. However, we note that it is open to those entities to make an offer of compensation to the Company (and its clients), that involves cash consideration and/or the assignment of the debts owed to those clients by the Company, given that the Company (during our appointment) has not transferred any trust capital. This concept could extend to the investor clients, where the validity of liabilities are yet to be determined from the Company’s perspective.

Whilst these issues are complex and will likely require legal determination, we anticipate that any assignment of liability will require the clients’ consent. In this regard, there could be real credit risks associated with the financial capacity of the Shareholder, USG UK and/or USG Vanuatu to discharge those claims upon withdrawal, given the conduct of the group in the months leading to our appointment and recently. Therefore the investors may, quite reasonably, refuse any form of assignment, and simply pursue their claims in the Liquidation.

The full BRI Ferrier report on USGFX can be seen here.