Watch out for these two (or more) fraudsters offering ‘non-recourse stock loans’

To protect yourself from fraud, make sure you go through every single detail before signing a contract.
 
If you are thinking about borrowing money for your companies, new ventures, or any other ambitions, remember these two names: Raymond Lau Yean Liang and Morgan James Wilbur IV – and be cautious when you deal with them. Otherwise, you might end up falling victim to an elaborate fraud. Here we will look at two cases to help you stay alert.
 
How they did it: legal grey area exploited
Back in 2017, Hong Kong-based investment firm CPIT Investment Limited entered a ‘stock secured financing agreement’ with Lau and Wilbur, who were back then promoters of an Asia-based family office named Qilin World Capital. A HKD31.25 million non-recourse loan secured by 25 million shares in Hong Kong-listed Millennium Pacific Group was provided via Qilin to CPIT under the agreement.
 
The loan was for a term of 36 months. While Qilin was obliged to return the pledged shares upon repayment of the loan, the repayment could only take place after the first 18 months. In parallel, the parties entered a ‘control agreement’ that gave Qilin complete control over the pledged shares until its security interest terminated.
 
Little did CPIT know, Qilin sold most of the pledged shares in the market within a month. The family office refused to return the pledged shares to CPIT, claiming that there was a default under the loan agreement as a result of a sharp decrease in the price of the collateral. CPIT brought claims against Qilin in the Singapore International Commercial Court in response. However, the investment firm eventually lost its suit in the Singapore Court of Appeal because the Court found that the control agreement permitted Qilin to sell and deal with the pledged shares during the loan term. CPIT was left without recourse.
 
The same duo, the same tactic, yet with a different company
In 2019, an Asia-based investment firm (Victim) represented by a US law firm, namely, Goldstein & Russell, PC (Goldstein) experienced something akin to what CPIT underwent. Again, according to Goldstein, the Victim entered into a stock secured financing agreement and a control agreement with Fullerton Capital Limited, another special purpose vehicle of Lau and Wilbur. A non-recourse loan of CAD103 million secured by 7.2 million shares in The Stars Group Inc., a NASDAQ- and TSX-listed company, was provided to the investment firm this time.
 
To make themselves appear more trustworthy and credible, Wilbur claimed that Fullerton was a UK-incorporated company regulated by the Financial Conduct Authority. Yet what he said was far from the truth. Fullerton was an unregulated British Virgin Islands entity with no independent finances. It actually sold the pledged shares right away to raise the capital it needed to fund the loan. The Victim was completely kept in the dark about this.
 
According to Goldstein, when the Victim sought to redeem the loan after a one-year lock-up period, all it got was utter silence from Fullerton. The worried borrower informed the lender that it would withhold its interest payments until it got an answer for the request. Shockingly, Fullerton accused the investment firm of failing to fulfil its obligations under the loan agreement on the ground of its non-payment and refused to return the pledged shares. This has led the Victim to commence proceedings against Lau, Wilbur and Fullerton in the Singapore High Court. The case will be heard shortly.
 
Better safe than sorry – protect yourself from frauds
Judging from the above two cases, such systematic and sophisticated fraud schemes can’t be carried out by just one or two people or companies. There is every reason to believe that Lau and Wilbur are merely the face of a vast network. The masterminds behind are arguably veterans and even experts in this type of frauds. They know exactly how to circumvent the law and where to manoeuvre so that their victims can’t notice their unusual behaviour while they are looking for buyers to dispose the pledged shares.
 
These fraudsters have made staggering amount of money by taking advantage of legal loopholes over the years. The two examples mentioned here are probably just the tip of the iceberg. While they have not been duly sanctioned yet, it is important to alert the market and the public to such lending companies and form of financing.
 
The best way to avoid financial frauds is to keep your guard up. Take the trouble to perform a complete background check before signing any contract with anyone from any company. As the saying goes, the devil is in the details. Be sure to go through the terms in great detail to better protect your legitimate rights and interests. It is better to be safe than sorry.
 
If anyone is in a similar situation or has encountered something similar, never hesitate to speak up and take the legal action that is necessary to let justice be done. Don’t let those outlaws get away with it.