Arena Capital and BlackfortFX ponzi scheme: FX firm bilked customers for $7 million, and took $249,000 in deposits AFTER asset freeze

Six months have passed since authorities in New Zealand caught up with insolvent company Arena Capital and its associated entity BlackfortFX, which, steered by sole director Jimmie Kevin McNicholl, was subject to an asset freeze in August last year.

At the time that the New Zealand FMA obtained a court order which allowed the regulator to instruct Arena Capital and BlackfortFX to cease operations and to freeze the company’s assets, the firm owed a total of $7 million (NZD) to its 1,110 clients, and only had a cash position of $728,000.

The company went into receivership in May 2015, at which time the Serious Fraud Office began to investigate what it suspected had been a Ponzi scheme operated by the firm, which led to the seizure of assets in August the same year.

Although it has taken some six months, this week a court decision has been made, and the finer detail of the Ponzi scheme have been revealed by the Christchurch Registry of the High Court of New Zealand.

Since the company’s liquidator KordaMentha stated in August last year that the company had made reference itself in its marketing approach that it was an FX brokerage, co-liquidator Neale Jackson’s perspective was that there had been no evidence that Arena Capital or BlackfortFX had traded in FX markets at all, nor that any profits for clients had been generated.

This analysis suggested that the funds belonging to the company’s 1110 clients had been misappropriated and that the firm had duped clients into believing that they had invested in managed accounts. The liquidator also stated that clients were told by the company that they had earned profits, however investigations into this matter had suggested that any earnings were ‘fictitious.’

Last week, the case arrived at the High Court of New Zealand,where Justic e Cameron Mander concurred that the company did not make any trades at all.

The court is now tasked with making a decision as to how deposits which were made after the assets of the company were frozen are treated.

Company took $249,000 in deposits AFTER the assets were frozen

The company continued to take deposits after its assets were frozen, which is particularly interesting for two reasons.

Firstly, this means that, as an insolvent entity which was under the control of receivers, and as a firm whose assets had been seized by the authorities, Arena Capital and BlackfortFX did not close its payment gateway, remove its advertising, or state on its website that it can no longer trade.

Reports on the matter purely state that the court is deciding how to deal with the $249,000 that has been deposited by 17 clients after the seizure, but the interesting point is that this was allowed to happen and it has not been made clear as to whether this was intentional or not.

Secondly, the reason for freezing assets when a suspected Ponzi scheme comes about is to protect the remaining company assets between that time and the time that a court case is brought about, in order that a purpertrator does not withdraw the cash and disappear.

In this case, the $728,000 of company funds which is subject to the asset freeze is one matter, however the $249,000 that was deposited after the asset freeze is more of a liability, as extra bureaucracy and litigation could be required to ensure that this amount is protected, as the original asset freeze applied to the firm’s position as of August, and therefore only includes assets up to that date.

In a hearing which took place on February 5 this year and was brought to the High Court by Robert Grant Graham and Neale Jackson, a judgement ensued on Feruary 17 this year.

“A good mate” said friends

Interestingly, at the time of the seizure of assets by the New Zealand FMA, friends of Mr. McNicholl spoke in his favor.

In May last year, some of Mr. McNicholls friends publicly stated that they were sure he was innocent.

One acquaintance, who had claimed to had had a long friendship with Mr. McNicholl, who operated his scheme from the prestigious Vero Center in Shortland Street, Auckland, said ”

“I’m very confident it will be sorted out. I’m not concerned. He’s very upfront and close to family and friends. He’s going through the grill at the moment.”

Another friend stated that Mr. Nicholl was “a good mate” and believed that there must have been some mistake and that he would be vindicated.

At that time, Mr. McNicholl resided at a private house in Spreydon, Christchurch, New Zealand, the home being owned by his partner, at a time during which clients of Arena Capial and BlackfortFX had understood that their accounts had grown by 200% in just over one month.

Were the deposits held on Trust?

According to the court judgement, it is not contested that monies paid by all Arena Capital and BlackfortFX investors are, in the circumstances, subject to a statutory trust as a result of the effect of securities legislation.

The Financial Markets Conduct Act 2013 (FMCA) for New Zealand came into force on December 1, 2014, however, the effect of transitional provisions means that aspects of the Securities Act 1978 continue to have application to certain offers of securities until 1 December 2016. Arena’s activities straddle the commencement of the FMCA, however, the effect of these transitional provisions is immaterial.

Whether under the previous or current legislation, the effect of the relevant provisions is the same was another point for determination by the court.

The judgement states that it is undisputed that the arrangements between Arena Capita and BlackfortFX and its investors constituted a financial product being either a debt security, a managed investment product or a derivative.

Arena Capital and BlackfortFX also did not discharge its disclosure obligations and investors, therefore, had a right to have any monies paid reimbursed or any derivative withdrawn. In any event, the money paid was never invested and so was required to be held in trust by the company pending its investment or repayment.

Articles within the Financial Markets Conduct Act 2013, ss 39, 50, 54 and 87; Securities Act 1978, s 36A state that a remedial constructive trust is a potential remedy which New Zealand Courts have acknowledged may be available where equity requires a proprietary remedy in the absence of recognized situations giving rise to an institutional constructive trust or an express or resulting trust.

During the court hearing, Justice Mander said

“The investment activity, which the company purported to operate, was a fraud. The monies deposited by all the investors were not used for the purpose for which they were provided and, to that extent, all the investors share that common complaint.”

Part of the ethos of the firm’s operation was to use client funds to pay ‘wins’ in order to create the impression that the firm was trading to profit, when in fact no trading took place at all.

Justice Mander explained during the hearing that the order to freeze assets, which in New Zealand is known as an Asset Preservation Order (APO) created a “material change of circumstances” which altered the position of the post-freeze investors and the status of their deposits, in that any subsequent deposits were quarantined by the existing order.

Justice Mander continued:

“An intended effect of the regulator obtaining the APOs [asset preservation orders] was to prevent the bank account from being further utilised for the purpose of the fraudulent operation…the objective and effect of those orders cannot be doubted, namely to prevent any further fraud from being committed and any further loss to innocent investors.”

Distribution: What will customers get back?

According to the judgement, a finding that monies paid to Arena Capital and BlackfortFX by investors were subject to a trust does not, in itself, assist the depositors who paid money into the company after the asset freeze.

These customers must distinguish their position from the pre aseet freeze depositors and justify why the deposits they made on or after May 15 should be repaid in full, in priority to any distributions by the liquidators to other investors.

The post-asset freeze depositors submitted that the critical distinguishing factor is that their deposits can be traced, whereas the pre-APO depositors’ funds cannot.

In oral argument, that submission was refined by acknowledging that should pre-asset freeze depositors be able to trace their deposits, they too are entitled to have such monies repaid in priority to other investors’ claims. The tracing issue is therefore the pivotal issue in dispute between the liquidators and the post-asset freeze depositors.

The post-asset freeze depositors submitted that the same approach recognised by Ronald Young J in Re Waipawa Finance Company Ltd (in liq) should be applied to  the present case. Having found under the Securities Act that funds recovered by the liquidators from the defunct investment company were held on trust for the benefit of the investors, the Court addressed the issue of distribution.

The court first posed the question of whether any money could be traced to individual investors. Having identified that the money held by the liquidators belonged to the investors, Ronald Young J observed “where there can be tracing there should be tracing”. The post asset freeze depositors submitted this question is an essential preliminary step required to be addressed after determining that funds held by Arena Capital and BlackfortFX were subject to a trust.

The full court document can be read here.