Between: Fortunate Drift Ltd Plaintiff v Canterbury Securities, Ltd Defendant
| Jurisdiction | Cayman Islands |
| Judge | Justice Kawaley |
| Judgment Date | 17 August 2023 |
| Court | Grand Court (Cayman Islands) |
| Year | 2023 |
| Docket Number | CAUSE NO: FSD 227 OF 2018 (IKJ) |
The Hon. Justice Kawaley
CAUSE NO: FSD 227 OF 2018 (IKJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Brokerage agreement in relation to shares-plaintiff claims for breach of duty/breach of contract/conversion/unjust enrichment-defence and counterclaim based on illegality/unclean hands/contractual indemnity rights/unlawful means conspiracy/allowance in equity
Mr Stephen Atherton KC instructed by Ms Katie Pearson, Claritas Legal Limited, for the Plaintiff (“FDL”)
Mr Ben Tonner KC and Ms Sally Bowler, McGrath Tonner, for the Defendant (“CSL”)
The present case entails two competing narratives about how what appeared on its face to be a comparatively straightforward brokerage and secured financing arrangement unravelled over an approximately 6-month period between July and December 2018. The Conclusion to the ‘Plaintiff's Written Closings’ (which run to more than 240 pages) summed up the case in the following manner:
“ 548. The reality of this case is that, despite an appearance of complexity, it is simple: CSL refused to return, upon lawful demand being made by FDL, property belonging to FDL worth (at the time) more than US$50 million. CSL proceeded to sell US$20m worth of that property without any lawful basis for doing so, kept the proceeds, and is continuing to hold on to the Proceeds of Sale and FDL's remaining YRIV shares.”
The Introduction to the ‘Defendant's Closing Submissions for Trial’ sets out the following highlights of the Defendant's narrative:
“ 6. On the strength of the (false) information provided to it, which CSL relied upon (to its detriment) from both a commercial risk perspective, and in satisfaction of its statutory anti-money laundering obligations, CSL agreed to provide FDL with brokerage services. In this way, FDL deceived one of the CIMA regulated gatekeepers of the Cayman Islands financial system and secured for itself access to the secondary trading market. From the very inception of the relationship, FDL induced CSL to provide financial services to it on false pretences…
8. It was only after the US$10m cash was received by FDL from PFS (circa 31 August 2018), that PFS and CSL began to understand the true nature of the persons they were dealing with. First, FDL revealed its true colours by seeking to transfer the Collateral Shares out of CSL's and PFS's control, before the ink was dry on the SPA. Second, investigative accounts started to be released (such as the Barron's reports) which reported on the allegedly dubious background, disclosures, filings and prospects of YRIV and its controllers and founders (which included Coleman and Sin)…”
Mr Tonner KC in his opening oral submissions suggested that the commercial context of this case was similar to the terrain covered by the documentary ‘ The China Hustle’, which exposed the way in which some Chinese companies listed on the US Stock Market fraudulently exploited the greed of Western investors hoping to make easy profits through investing in China. Putting fraud to one side, that allusion seems an apposite one. The present case very much revolves around shares in a Chinese-owned company with few real assets apart from highly uncertain plans for potentially lucrative infrastructure projects in China; shares which are both listed on a US Stock Exchange and being used to raise money from Western investors. However the commercial terrain which emerged through the evidence appeared to be not entirely transparent on all sides. On the ‘Chinese’ side, the ‘game’ appeared to entail, on one view, limiting the volume of publicly held shares to artificially sustain the share price of the listed company. On the ‘Western’ side, the ‘game’ seemed to entail, on one view, buying the shares while the value was high and profiting from ‘shorting’ them; betting on the price going down, and then deliberately driving the price down. At first blush it seemed easier to suspect than prove that either of these extreme narratives reflected objective reality.
Against this background it is easy to see why, as the dispute developed, FDL suspected CSL of facilitating a ‘shorting’ of the relevant shares and CSL suspected FDL of market manipulation. The somewhat hazy picture which emerged was a context in which all players kept their cards close to their chest and did not conduct business in what a stranger to this somewhat rough and tumble part of the financial world would consider to be an entirely straightforward manner. All parties were worldly-wise. There were no angels or choristers here. That said, CSL was obviously embedded in the mainstream financial services world. FDL, with legal links to the British Virgin Islands (“BVI”) and commercial links to China and the USA, seemed somewhat like a travelling salesman whose true provenance and character were inevitably somewhat unclear. Before briefly considering the procedural history, the pleaded issues, the governing law and the evidence, an introduction to the main ‘players’ will first be given.
FDL was incorporated in the BVI in or about 2015. Its initial owner is said to have been Mr Chen Linyu (“Mr Chen”). Although this was not reflected in FDL's corporate records until near the end of that year, it is said that pursuant to a 31 January 2018 Share Swap Agreement, Mr Chen agreed to transfer the sole issued share in FDL to Mr He Jielin (“Mr He”). What the true beneficial ownership position was when FDL contracted with CSL in the summer of 2018 is controversial.
FDL's sole asset is said to be its shares in Yangtze River Development Ltd (“YRIV”). It is common ground that one of FDL's directors since 10 February 2018 has been Mr Dominic Sin.
Mr Sin is one of the Founding Investors in what became YRIV, together with Mr Hu Van Ling (“Mr Ling”), Mr Zhao Long (“Mr Long”), Mr James Coleman (“Mr Coleman”), Mr Chen and Mr Xiang Yao Liu (“Mr Liu”). Their focus was development projects in Wuhan City, the capital of Hubei Province in China. Mr Sin says the “Founding Investors” invested through Energetic Mind Limited (“EML”), a BVI company, and his own investment vehicle was Start Well International Limited and his stake a mere 3%. FDL's stake was just under 10%. Mr Sin claims to have been close friends and business partners with Mr Chen, Mr He and Mr Liu (and Mr Liu's wife) for more than 18 years.
Mr Sin says that he was asked to manage FDL in January 2018 before he was appointed a director because he spoke English, and Mr Chen and Mr He did not. He is the face of FDL in the present proceedings.
YRIV was formed in the following way. In December 2015, EML effected a reverse merger with Kirin International Holdings Ltd (“Kirin”), the shares of which were traded in the US on the over-the-counter bulletin board with a view to obtaining a full NASDAQ listing. The Founding Investors exchanged shares in EML for shares in Kirin, which was renamed YRIV on 8 February 2018. Between August and early December 2018 when the damning Hindenburg Report was published, YRIV shares were trading at an average price in the region of US$11.60 per share. Soon after 6 December 2018 when CSL sold many of the YRIV shares it was holding, on terms which are not agreed, the share price collapsed and never recovered. YRIV was delisted by NASDAQ as of 20 August 2019, according to an 8-K filing YRIV made on 19 August 2019. It was warned by the NASDAQ Hearing Appeals Panel on 16 August 2019 that delisting would occur on this date after applicable appeal rights had been exhausted.
CSL is a Cayman Islands company. It has, since 2020, been a “registered person” under the Securities Investment Business Act (2020 Revision). Through a Corporate Account Opening Form completed by FDL on 9 May 2018, CSL agreed to hold stocks and shares for FDL (“Brokerage Contract”). In response to FDL's wish to raise US$10 million, a few months later CSL introduced FDL to PFS Management Limited (“PFS”) which entered into a Stock Purchase Agreement with FDL dated 16 August 2018, but which actually took effect on 23 August 2018. PFS agreed to purchase 1,144,584 YRIV shares from FDL, subject to a Put Option exercisable by PFS within a three month long Put Period commencing on 23 November 2018. It became embroiled in a dispute with FDL after FDL purported to terminate the Brokerage Contract and complained that PFS had waived the Put Option.
Ms Erin Winczura is the CEO, owner and founder of CSL. Born and raised in Canada, she founded Canterbury in early 2015 and has worked in investment banking, trading and brokerage services and operations for over 15 years. She is also the majority owner of PFS. She was the individual with the primary interface between CSL and FDL and also between FDL and PFS. She is the face of CSL in the present proceedings but also owns PFS.
The main averments in the ASOC may be summarised as follows:
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(a) CSL agreed to provide FDL with a brokerage trading platform on the terms of the Brokerage Contract on or about 9 May 2018;
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(b) FDL transferred 6,000,000 YRIV shares to CSL on or about 3 August 2018 pursuant to the Brokerage Contract;
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(c) as a matter of law or implication, CSL owed a fiduciary duty to FDL to (1) act in good faith in relation to its property and/or (2) not to use FDL's property for its own purposes;
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(d) CSL was involved in negotiating the SPA between FDL and PFS and introduced PFS to FDL. As a result, CSL assumed the further fiduciary duties to FDL of (1) acting in good faith and (2) not placing itself in a position of conflict of interest;
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(e) in early September 2018, FDL discovered that some of the Purchased Shares had been moved out of CSL. Some were sold...
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