Commercial Fraud Task Force Committee

ABI Committee News

The Anti-Social Aspects Of Tracing

There’s a chap who sits at the end of the bar in my favorite pub, just around the corner from my brother’s Thames-side flat in London, who knows everything. He’s the sort who wears a tweed cap, a wool tie and cavalry twill trousers (pants to you) and can go on at length on the merits of standard SU carburetors versus the Webber 45DCOE on a 1965 MGB, discuss the winning goal and name the members of the Uruguay team when they won the soccer World Cup in 1930, and will give you precisely the reasons for the failure and sale of Beas Stearns. Irritatingly, I have never known him to be wrong, but he is incredibly dull and I avoid him like the plague. However, like the plague, he can still catch up with you despite your best efforts.

Last time I was there, quietly sipping on a pint of Fullers London Pride (highly recommended), waiting for my brother (he is artistic with scant regard for the time), I made the mistake of making a small grin of recognition, really the merest of nods and perhaps a grimace rather than a smile, to the chap at the end of the bar. Frankly, I thought it was the sort of small grin and nod that said, I may know you, but why don’t you keep to your end of the bar and I will keep to mine. Wrong. The next thing I know, he’s next to me with his foot on the rail, leaning on the bar in a companionable way, small whiskey and soda in hand, launching a monologue about the price of cheese in China. Well, it probably wasn’t, but in might as well have been, as I had no interest in the price of cheese in China, either.

But I have now staked my claim to privacy at my end of the bar anytime I am back in London. I stumped him when I turned the conversation to tracing. Not just the thing we forensic guys so love to do when we follow funds round and about, over hill and over dale, into and out of way-point assets to their final resting place – but also the legal process, using the remedy of tracing to extract the funds for the benefit of the deprived.

This may be a very simple issue within the United States, but for me working as I do from a variety of non-U.S. countries, and with few exceptions, into other non-U.S. countries, this has been a voyage of discovery and wonderment that still surprises, especially where there are mixed funds and insolvency. And that’s were the fun starts, especially in conversation with a chap who puts soda into fine Scottish Whiskey.

Simplistically, the rule in the British-based jurisdictions I typically frequent follows the Hallett’s Estate principle that you can trace into a mixed fund, but where the mixed fund total drops below the value of the traced funds, this creates a limitation even when the total mixed fund balance later goes up. Sometimes, and not quite accurately, this is called the Lowest Intermediate Balance principle. I think this has been around in English law since the time King Alfred, the first King of England to whom Elizabeth II traces her roots, famously “burnt the cakes” while hiding out from a bunch of marauding Vikings in 878 AD or thereabouts. (I would check the precise date with the chap in the pub, but he’s not speaking to me). On another note, the royal proclivity to burn things seems to continue today as Windsor Castle, the Queen’s favorite home, suffered major fire damage to its kitchens and dining halls only a few years back. I don’t know if she was baking at the time, but it’s possible. However, I digress.

Now try explaining this principle to a prosecutor in Belgium who is blocking my attempts to gather funds traced into a bank there. His view of tracing is that I need to provide the documentation that shows where individual investors put funds into the scheme, how each investor’s money moved from Dominica to Belgium and, despite various drawings by the crooks and other diversions to other accounts, how each of those individual investments relate to the balance he controls—fundamentally an impossible task because the reality is that they don’t. I am hoping, based on recent submissions, that I have changed his mind, but I don’t have the money yet. I was successful in resolving a very similar difficulty in Switzerland through the use of a local bankruptcy, a process I then used in Austria for the same problem. However, the Austrian process has been derailed for reasons relating to the date the EU adopted rules for recognition of foreign proceedings. Nothing is ever easy in this business!

In Bermuda, a tracing claim is being asserted against the assets of a bank of which I am liquidator. In that case, there were efforts to abandon the Hallett’s Estate principle as antiquated and unfair, and other arguments were at one point presented for tracing “churned” funds—that is, money that left the mixed fund, used for stock trading or other purposes, and then returned in a reduced amount to the mixed fund. It is not clear how a limitation from the application of the lowest intermediate balance principle would fit in with this theory. There is no ruling on this yet.

In the Bahamas, funds traced through parties related to the fraudster into a property were recovered from the sale of the property. In the same matter, funds traced on exactly the same basis, into a Louisiana property, are being defended on the ground that there is no such thing as a tracing remedy. A trial is still some time away.

There is a British-based creditor/depositor rights activist who tells me I have it all wrong. Never mind tracing, that’s a waste of time, I should be arguing constructive trust. As I understand it, these remedies are “cousins” with different applications, relying on different facts. Either way, she has my creditor committee all confused. To top it off, in yet another matter, senior legal counsel asked on the eve of trial if he could be taken through the “tracing thing” again as he wasn’t sure he got it.

No wonder the chap in the pub was bewildered.