Co-founder of IIG trade finance fund pleads guilty to Ponzi scheme

A managing partner and chief investment officer of New York-based trade finance lender International Investment Group (IIG) has pleaded guilty for his part in a Ponzi-like scheme to defraud funds and investors.

According to a release from the US Department of Justice (DoJ), IIG co-founder David Hu accepted that over the course of more than a decade, he defrauded IIG funds and investors out of more than US$100mn by, “among other fraudulent actions, creating fictitious investments and overvaluing investments used to generate funds,” which were used to pay off earlier investors.

“Hu mismarked millions of dollars of loan assets, falsified paperwork to create fake loans, sold overvalued and fake loans and used the proceeds from those sales to pay off earlier investors, and falsified paperwork to deceive auditors and avoid scrutiny. He now faces a serious term of imprisonment,” says Audrey Strauss, United States attorney for the southern district of New York.

The court case follows a decision by the US Securities and Exchange Commission (SEC) to revoke IIG’s license in late 2019, following what the regulator called at the time “a string of frauds”.

As investment advisor to the Trade Opportunities Fund (TOF), the Global Trade Finance Fund (GTFF), and the Structured Trade Finance Fund (STFF), IIG offered institutions and other investors the opportunity to invest in diversified trade finance portfolios, originally through fund products and subsequently through other types of investment vehicles, such as collateralised loan obligations.

Through its trade finance arm, IIG Trade Finance, the company billed itself as a specialist in providing trade finance loans to small to medium-sized businesses, usually soft commodities exporters based in emerging markets, such as Latin America. These loans typically consisted of US dollar-based structured trade finance credit facilities with a maturity of up to 36 months, supported by numerous individual short-term transactions.

IIG’s trade finance loans were purportedly secured by collateral, such as the underlying traded goods, assets held by the borrowers, or expected payments by third parties.

Prior to having its license revoked by the SEC, IIG touted its risk control strategies on its website and to investors, which include portfolio concentration limits at the borrower, country, and commodity level, as well as a “robust” credit review process for borrowers.

The scheme

Court documents show that between 2007 and 2019, Hu and a co-conspirator – another IIG founder – started the scheme to defraud investors, which in turn allowed the pair to continue collecting management and performance fees.

IIG claimed to value the trade finance loans in its funds on a regular basis, and because of these services, Hu and the company received a performance fee and a management fee – which was calculated as a percentage of the assets under management held in the funds.

Initially, the scheme revolved around IIG’s activities with its TOF Fund. From around 2007, SEC documents show that IIG allegedly hid losses in the TOF portfolio by overvaluing distressed loans and replacing defaulted loans with fake “performing” loan assets.

The DoJ says that, in all, Hu was able to cover up losses caused from defaulted loans in the TOF Fund by replacing them with “tens of millions of dollars” in fabricated loans to purported borrowers in foreign countries.

By Felix Thompson, Global Trade Review, 3 February 2021

Read more at the Global Trade Review

Source: riskscreen.com