Investors suing a Jefferies fund over its financing of First Brands have requested details of its relationship with Radiant World, including its fraud controls, historic exposure and communications with other lenders.
Two British Virgin Islands entities, collectively referred to as Eugenia, filed a lawsuit in February against Jefferies, along with its trade finance-focused unit Leucadia Asset Management (LAM) and private credit fund Point Bonita Capital.
The Eugenia entities, which had invested US$25mn in LAM’s factoring programmes, alleged in a New York court they had been misled by the fund about the safeguards applied to repayments by First Brands’ buyers. Jefferies has denied the allegations and has applied to dismiss the lawsuit.
Separately, Jefferies also has nearly US$500mn of exposure to iron ore trader Radiant World, and has secured a worldwide freezing order against the company and its founder, Pinkesh Nahar. Radiant World is facing fraud allegations from several lenders and traders, but denies the claims and has filed a Singapore lawsuit against former counterparty Glencore.
Eugenia has now applied to the New York court to have LAM disclose details of its financing arrangements with Radiant World, as well as with the reportedly affiliated company Sapphire Minmetals, according to documents filed this week.
The disclosure request includes Jefferies’ review of its exposure to Radiant World, including discrepancies identified in invoices, purchase orders and bills of lading, as well as communications with other lenders such as Intesa Sanpaolo regarding Radiant World’s creditworthiness.
The request also covers due diligence processes, including how trade finance counterparties were verified, and any documents concerning potential claims, complaints or litigation by other investors in the fund.
The Jefferies companies have yet to file a response and did not comment when contacted by GTR. Radiant World did not immediately comment.
The discovery application follows Eugenia’s allegations that as part of LAM’s financing of First Brands, the fund provided documents showing it had “cash dominion” over repayments from obligors, meaning any double pledging by First Brands would have been immediately visible.
But in its dealings with First Brands, Eugenia said LAM “never had this foundational safeguard” in place. Instead, First Brands would itself transfer funds to the Point Bonita fund when they fell due, meaning LAM “appointed the proverbial wolf… to run the hen house”, it alleged.
It added that Eugenia “would not have invested in the fund” if it had been aware of these arrangements, and is seeking damages of around US$18.5mn, the amount it estimated would have been realised in an alternative investment portfolio.
Jefferies has applied to dismiss the lawsuit, saying documentation provided to Eugenia made clear that suppliers themselves could service payments due.
It cited a document provided to Eugenia that said “there can be no assurance that a servicer would not misappropriate payments received… or act fraudulently”, and that the fund’s investment manager had no ability to independently verify a servicer’s actions.
In response to a question from Eugenia about this arrangement, Point Bonita said “most” deals operated in this way, according to the Jefferies filing.
In July response, Eugenia argued that a Point Bonita executive oversaw the repayments made by First Brands while claiming to “maintain dominion of cash”, which amounted to a false representation.
It also argued that a “high level deal process” document provided by Jefferies showed that funds would flow directly from the obligor to Point Bonita’s collection account, bypassing the supplier.
But Jefferies said last month the Eugenia entities are “straining to allege that they relied on general statements about how factoring ‘typically’ works, when they received and read specific disclosures making clear that sellers could at times be responsible for collecting receivables”.
“The fund was therefore at risk that those sellers would commit fraud,” it said.
Representatives for First Brands did not comment when contacted. Founder Patrick James has denied allegations of fraud.
