TECHNICAL PAPER RE: IN-FLIGHT TRANSACTIONS TO PWC, EY, LAWYERS

  • guttered
  • 10/10/08 31/05/09
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Posted: Sun, 19/10/2008 - 14:40

(Moderator)
The following was posted elsewhere and has been moved to this separate topic here because it is important
Also note that this subject relates somewhat to the thread "HOPPER's Legal action on in-flight transfers"

TECHNICAL PAPER RE: IN-FLIGHT TRANSACTIONS TO PWC,EY, LAWYERS

All,

attached is a technical paper that Ii have drafted, which includes Hoppers review and amendments. please can you read and provide any additional thoughts that strengthen our case. I plan to email this document to pwc, ey (uk), lawyers etc.

Thanks


TO: Mike Simpson (Provisional Liquidator), Seth Caine (Cains Lawyers), EY UK partners

FROM: KSF IOM In-Flight Customers

ISSUE: Legal Status of In-Flight Transactions initiated prior to the suspension of KSF IOM’s banking licence

DATE: 19 October 2008


Background

On Wednesday 8 October 2008 the Kaupthing Singer & Friedlander Ltd Transfer of Certain Rights and Liabilities Order (“the Order”), made under the Banking Special Provision Act (2008), came in to force at 12.15pm BST. This Order transferred rights and liabilities relating to “Edge” Accounts to a publicly owned company and then onto ING Direct N.V. Immediately following this action, the remainder of Kaupthing Singer & Friedlander Limited (“KSF UK”) was placed into administration. These actions taken by HM Treasury on behalf of the UK government directly contributed to the suspension of the KSF Isle of Man (KSF IOM) banking licence on Thursday morning 9 October 2008 BST. KSF IOM, a sister company of KSF UK, was unable to continue to operate as a going concern, given that its banking activities were dependant on the going concern of its sister company KSF UK. In particular, approximately 60% of the assets backing the deposits of KSF IOM were held in a segregated account at KSF UK. At the point KSF UK went into administration, KSF IOM no longer had access to these assets.

The purpose of this technical paper is to summarise the legal status and proposed outcome that we believe that Cains Lawyers should take relative to KSF’s IOM in-flight transactions.

The definition of an in-flight transaction is “any transaction which was initiated by a KSF IOM customer prior to the default event (i.e. suspension of banking licence) on Thursday morning 9 October 2008 BST.”

The definition of a payment in transit is “is any transaction which follows a specific demand by a KSF IOM customer to immediately withdraw his moneys. As a consequence such moneys become no longer part of the general asset pool available to KSF IOM, given that the moneys have been specifically identified and segregated by the demand call placed by the KSF IOM customer. Upon such a demand call, the moneys immediately become separately identifiable and ring fenced, due to the fact that such moneys are allocated an individual and unique transaction reference number, which identifies the customer’s KSF IOM bank account details and the bank accounts details that the moneys are to be transferred too.”

Two questions have arisen relative to the status of KSF IOM’s in-flight transactions:

1) What is the status relating to those transactions which were initiated by a KSF IOM customer but never actioned by a KSF IOM employee? Should those initiated transactions be allowed to continue to its intended destination or remain as part of the assets of KFS IOM?

2) What is the status relating to those transactions which were initiated by a KFS IOM customer which resulted in the identified transaction becoming a payment in-transit? Should these transactions be allowed to continue to the identified beneficiary destination or be returned to the KSF IOM?

KSF IOM’s Banking Process relating to BACS and CHAPS transactions

Following conversations with several KFS IOM employees the process relating to when a transaction is initiated by a customer to when the moneys finally arrive in the beneficiary’s nominated account is summarised as follows:

• The customer provides a demand notice to KSF IOM to withdraw his moneys. It is important to note that at this point in the process that the customer’s moneys have been called upon and should not be used by KSF IOM for any other general banking activities. This demand request by the customer means that the moneys referred to essentially change legal status and title from been part of the bank’s general pool of deposits to being held in trust by KSF IOM on behalf of the customer.
• Once the demand notice has been actioned by an employee of KSF IOM, the employee will “debit the customer’s account”, and key the specific, identifiable and unique transaction reference either into the BACS / CHAPS system, depending on whether the customer asked for BACS or CHAPS transfer. At the point that the customer’s KSF IOM account has been debited the transaction becomes a “payment in transit” given that KSF IOM no longer has legal title to the moneys. Instead, KSF IOM acts as an express trust on behalf of the customer.
• There is no legal or operational difference between a CHAPS and BACS transfer, apart from the fact that a CHAPS has a faster payment system given that a CHAPS transfer will take on average up to one day to action, whereas a BACS transfer could take up to three working days.
• The input of the separately identifiable and unique transaction reference by the KSF IOM employee on BACS / CHAPS system includes the documentation of a reference number, and the customer’s KSF IOM bank account details along with the bank details of the beneficiary account. A unique BACS / CHAPS reference number is allocated along with the customer’s account details to ensure that the moneys reach the intended nominated account. At no point during the in-flight process do the moneys lose their separate, ring fenced legal status given that it will always be traceable via the allocated reference details. This process ensures that the funds are separate in nature to the general funds of the bank.
• Accordingly from the moment the customer’s account is debited, all payments in transit are separately identifiable as the payment makes it way via the respective clearing banks, namely RBS and HSBC, and finally on route to the beneficiary’s nominated account.

BACS and CHAPS transactions

The banker-customer relationship

The banker-customer relationship has long been held to be based on a contract between the parties. A person becomes a customer of a bank when an account is opened for him, at the same time a contract is formed. In Foley vs Hill, it was held that when a customer pays money into his account, the bank becomes a debtor to the customer creditor. The money becomes the property of the bank given that the bank has borrowed the money from its customer.

Certain important matters flow from the principles that deposited money becomes the property of the bank.
• First, the bank is free to do what it likes with the money and is not bound to account its customers for what it does with it. The bank is only liable to repay this money to the customer when he demands it.
• Second, if the bank fails to repay on customer’s demand, the customer ranks only as an unsecured creditor in any claim against an insolvent bank.

The earliest reported case to deal with the generality of implied terms in the banker-customer contract was Joachimson vs Swiss Bank Corporation. They included:
a) The bank will receive the customer’s deposit and collect his cheques.
b) The bank will comply with written orders issued by its customers, assuming that there is sufficient credit in the account
c) The bank will repay the entire balance on the customer’s demand at the account-holding branch during banking hours
d) The bank will give reasonable notice before closing a customer’s account at least if is in credit
e) The customer will take reasonable care when writing his cheques.

In Libyan Arab Foreign Bank v Bankers Trust, L has Eurodollar deposits amounting to over $300 million with the bank. The bank refused to repay the deposit on L’s demand as a US Presidential order had sought to freeze the accounts. It was decided in applying Joachimson term [c] above, L was entitled to demand the balance held on the London account in cash.

In the English law of contract, any implied term can normally be negated or altered by an express agreement between parties to the contract. This and other important issues arose in Tai Hing Cotton Mill v Liu Chong Hing Bank, a case which underlines the implied term that a bank must only act on its customer’s valid instructions.

A bank’s liability under an express trust

Banks commonly act as trustees appointed as such under an express trust set up by the customer. In this event the bank is subject to all the general law concerning powers, duties and liabilities of trustees and includes the duty to take care of the trust property to the standard of a prudent business person. It has been held, however, that a bank trustee is under a greater duty as it holds itself out as a trustee with a special degree of care and skill.

Constructive trusts

The constructive trust is a general principle which is not confined to banking law. It arises when a person who has not been appointed to act as a trustee becomes involved in the affairs of the trust and thus becomes liable to the beneficiaries of the trust in the same way as an appointed trustee who acts in breach of trust. It can also arise when there is no formal trust but a fiduciary duty is owed, for instance by a partner to his other partners.

In the banking context, it has been seen that a bank is liable as a debtor to a customer for the balance of his account, and it is not normally liable as trustee unless it has been appointed as such. In the case of KSF IOM, the specific demand request by KSF IOM’s customer to withdraw moneys, KSF IOM becomes a trustee via this appointment made by its customer’s demand call for his moneys.

The circumstances which would render a bank liable as constructive trustee for assisting in a breach of trust are listed as follows:
• There must have been a breach of some fiduciary trust.
• The bank must have assisted in the breach, such as by accepting money into the an account and subsequently paying it away,
• The bank must have acted dishonestly.

In the case of KFS IOM, it can demonstrated that the bank is in breach of its fiduciary trust given that it failed to deliver the moneys to the intended beneficiary’s account.

“Quistclose Trusts” and “Quistclose Claim”

A Quistclose trust “is a means by which a lender of money can retain a security interest in loan moneys by inserting a clause into a loan contract which provides that the borrower may use those loan moneys only for specified purposes.” The purpose of the Quistclose trust is to keep the deposit moneys separately from KSF IOM’s estate which will be divided among the borrower’s unsecured creditors.

This form of trust is particularly significant as a means of protecting the lender against the borrower’s insolvency because loan moneys are treated as being held on trust for the lender and therefore are not distributed in the insolvency proceedings as part of the insolvent borrower’s estate. Even if the borrower remains solvent after lending the money then the lender has a right under Quistclose trust to recover the loan moneys or to trace those loan moneys into the hands of any third party who has received them in breach of the loan contract.

Somewhat similar to the constructive trust is a Quistclose Trust which arises when money is paid to a bank which, to the bank’s knowledge, is to be used for a special purpose. In the case of KFS IOM in flight transactions it is evident that the initiation of the customer’s demand for payment becomes a Quistclose claim and accordingly the funds should be permitted to continue to the beneficiary’s account based on the following rationale:
• Further to the Joachimson vs Swiss Bank Corporation case the bank should repay the entire balance on the customer’s demand.
• The actions by the KFS IOM employee such acknowledging the withdrawal instruction, debiting or closing the account proves that the moneys are no longer part of the bank’s general banking activity given that the funds become separately ring fenced and identifiable and are now held by KSF IOM on trust and on behalf of the customer. Such specifically identifiable moneys should not be used for any other purpose instead to arrive in the intended beneficiary account, given that the funds legal status and title of the money has changed hands from KSF IOM to the customer intended beneficiary account.
• The allocation of a unique BACS / CHAPS reference number to the money transaction being keyed individually into the BACS / CHAPS system, means that the moneys are held separately and identifiable and can be traced by the reference number, customers KSF IOM account details or intended beneficiaries nominated account. These moneys now become held for a specific purpose and KSF IOM does not have the legal title ownership of the moneys. The title of the moneys have passed away from KSF IOM back to the customer given that there is now a condition attached to the purpose of the funds i.e. the condition is that the moneys should be sent to the beneficiary’s intended nominated account.
• Via the initiation of a demand call by the customer (i.e. payment in transit) at the time of the suspension of the banking licence KSF IOM was in process of honouring its customer demand, hence the legal title to the moneys has passed back to the customer, but the bank retains the beneficial interest in the money. This retained beneficial interest in the money is the subject of the resulting trust. At the time of the suspension of the banking licence KSF IOM was holding the in flight moneys on trust on behalf of its customer.
• Given that the KSF IOM failed to honour the conditions of the trust given that the moneys did not reach the intended destination, this means that KSF IOM is in breach of a fiduciary duty, giving rise to a constructive trust and accordingly all in-flight transactions should be allowed to continue to the intended destination and not be returned back to KSF IOM.
• Should the lawyers fail to action in a timely manner to ensure that such moneys do indeed continue to the intended destination, and then the lawyers are liable.
• The time sequence in a Quistclose transaction is understood to be operating in the following way:

Diagram

Stage 1
Stage 2
(Time prior to Thursday 9th October 2008) Stage 3
Thurs morning 9 Oct 2008 Stage 4
Quistclose claim
Deposit contract entered into between customer and KSF IOM Customer demands moneys from KSF IOM. KSF IOM breaches the term in deposit contract by using the money for an unspecified purpose. Customer seeks to recover his deposit as a result of the breach of the term in the contract via a Quistclose claim

• Stage 1 – KSF IOM holds the legal title of the moneys at stage 1.
• Stage 2 – The moneys are legally transferable to the customer as a direct consequence of the customer demand call for the withdrawal of his moneys, KSF IOM initiation of the transfer of moneys by debiting the customers KSF IOM bank account and record of the moneys transfer on the BACS/CHAPS System. Both the legal title and equitable interest of the moneys are now back transferred to the customer, accordingly the customer becomes the absolute owner of the money. The rights of the customer arise under the contract and therefore pre-date the transfer of moneys.
• Stage 3 - KSF IOM is now in breach of a fiduciary duty, giving rise to a constructive trust and accordingly all in-flight transactions should be allowed to continue to the intended destination and not be returned back to KSF IOM.
• Stage 4 - The resulting trust will be able to bite given that the moneys are still separately identifiable and traceable.

Conclusion

Based on the above arguments and reference to specific case law, given that KSF IOM failed to honour the conditions of the customer demand call for his moneys, KSF IOM is in breach of a fiduciary duty, giving rise to a constructive trust and accordingly all KSF IOM’s in-flight transactions should be allowed to continue to the intended destination and not be returned back to KSF IOM.

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Diagrams

  • Nixi
  • 20/10/08 31/05/09
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  • Tue, 02/12/2008 - 16:35

This has been posted to the main site.. but in both places, the diagrams have got lost in cyberspace.. If anyone can point me to them, I'd be grateful. Then they can go on the front site.


Has this technical paper been

  • Pauper74
  • 13/10/08 31/05/09
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  • Mon, 20/10/2008 - 12:05

Has this technical paper been sent to PWC yet?
I need to send Mike Simpson a letter and would like to attach it in order to back up some of my points??


Technical Paper

  • Anonymous
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  • Mon, 20/10/2008 - 11:48

As I understand it, a Quistclose Trust may arise where one person (the "Customer") lends money (the "Deposit") to another person (the "Bank") on the condition that the Bank use the Deposit only for a specified purpose, and the Bank then places the Deposit in a separate account. In such circumstances, the Bank cannot then use the Deposit for another purpose, for example, to lend it to other customers.

It is not clear to me that the conditions for a Quistclose Trust to arise are established merely when an existing customer sends withdrawal instructions to a bank. It seems more likely that in such circumstances the bank is merely in breach of its contract with its customer if it fails to act on such instructions.

The main effect of the approach your technical paper is advocating is to treat some customers better than others, depending on whether withdrawal instructions were received prior to some cut-off point or whether (in the case of "on demand" deposits) the customer had an immediate right withdraw money.

This would go against the general approach in a winding-up, where customers with, say, "on demand" deposits would be treated in the same way as customers with, say, 90-day deposits.

I would expect the key question to be whether the bank (the "Sending Bank") has acted on the customer's instruction to transfer money and has taken every step required of it to give effect to such instruction. If it has, and the money has left the Sending Bank (i.e. the Sending Bank's account with another institution has been debited), it is difficult to see how the Sending bank (if the winding-up petition is not successful) or the liquidator (if it is) could claw back the money from such other institution (and have its account with such other institution re-credited), unless its agreement with such other institution provides otherwise.

It is difficult to identify exactly what the position of a KSF IOM customer whose account with KSF IOM has been debited is, without seeing all the various agreements involving the various financial institutions and having familiarity with the applicable provisions of both English and Isle of Man law. I doubt, however, that the outcome depends on the law of trust.


amendments

  • Anonymous
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  • Mon, 20/10/2008 - 07:10

If these amendments are supposed to bring in those depositors whose transfers were not initiated by the bank after receiving instructions from the client, then it appears that your conclusion does not encompass that class of depositor.


In Flight Transfers Are Held In A Suspense Account On IOM

  • Angela
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:25

I spoke to Michael White last week, he told me my Chaps transfers (that I did online on the 7th) had left my account. When I asked him where it was he said it could be frozen in 1 of 2 clearing banks - RBS or Natwest, he said it was not held up in Kaupthing UK. I continued to push him on the subject and he also "mentioned" it might be in a suspense account - this is the first time I'd heard this, so I quizzed him further and was told the suspense account is an KSF account on the Isle Of Man. I could not get any more information from him apart from the fact that his team were working flat out to locate the in-flight transfers. I looked up "suspense" account, the definition is:-

"An account that is used to store short-term funds or securities until a permanent decision is made about their allocation.Notes: These accounts are required in instances when the decision process is lengthy."

My thinking is that all of our in-flight transfers left our bank accounts but are held up in Kaupthing IOM's suspense account. Accounts holders of Kaupthing UK were told last week that frozen in-flight transfers would be released and forwarded by the end of the week and I have read that several people received their money by the close of business on Friday (but there are still a few others waiting). Did anyone from KSF IOM receive anything by close of business? - if our in-flight transfers were frozen by Kaupthing UK then I would presume at least 1 person would have had their money by close on Friday.

I do not believe that the money ever left the IOM and that talk of funds being frozen in clearing banks/Kauthing UK is just a diversion. I also don't believe there is "team" of people at Kaupthing IOM working flat out trying to "locate" our in-flight transfers, it certainly wouldn't take a bank 5 days to locate a Chaps transfer, the money is tracked every step of the way. They are buying time while their lawyers research and advise them. I was told that Mike has no power whatsoever regarding the final outcome of these transfers and that a team of lawyers were working on what should be done with them, Michael White confirmed that the lawyers were local IOM which again leads me to believe the in-flights are still in IOM and under their juristiction.

Has anyone called RBS or Natwest and had any positive feedback? - I will call tomorrow but from what I have read from other contributors to this site RBS & Natwest have no knowledge of any frozen in-flight transfers.

I was also told that there were potential buyers but that negotiations were pointless as Kaupthing UK was holding about 600m pounds of IOM's assets and without that there was no viable business to be sold, which is probably why Mike included the following in his statement:

"As reported at the meeting held in the Isle of Man on 9 October 2008, I have entered preliminary negotiations with parties intereested in PURCHASING PARTS OF THE BUSINESS, and have instructed lawyers in London and Iceland to assist me in attempting to receive assets of the bank currently held in those locations."

The bank cannot be sold as a whole right now and they are doing their best to break it up and sell what can be sold ie. the loan book. Kaupthing UK is in administration and as far as I know if it is liquidated then Kaupthing IOM will become a creditor and will have to wait for the return of those funds, which will take time but from what I understand will receive in full - other banks take precedent over retail/business account holders in the liquidation process. The British Government will want a very quick liquidation process because of the amounts of money local councils have tied up in the bank, so I would imagine that the money would be returned in the not too distant future. This of course would mean that Kaupthing IOM would be forced into liquidation because it can't be sold without that 600m being returned. However when the funds are returned (in time) and bearing in mind that Mike already has around 100m, we are probably looking at worse case scenario 80p in the pound. I know it's not 100% but it certainly feels better than what we have now. Again - this is the worst case scenario and I hope this doesn't come across as negative, I am just trying to read between the lines based on the information I have directly received and what I have read. I felt quite calm yesterday and I was able to step back and assess the situation - this is just my personal opinion and of course I hope that I am wrong and that we have good news on Friday.

I would also like to add that Michael White at Kaupthing IOM said that if the company is liquidated they would work on early INTERIM hardship payments and considering they have retrieved 100m Pounds so far I would presume at the very worst they would be 10p in the pound which would certainly help us get through the short term cash flow problems we are all experiencing.

BTW - Ernest and Young have said early estimates indicate around 50p in the pound for Kaupthing UK.


chaps in flight transfer

  • Kenman
  • 12/10/08 31/05/09
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  • Mon, 20/10/2008 - 08:44

My transfer was actioned and authorised at 8.37 a.m. on 7/10/08. ( I had put the request in the day before).
On Friday 10/10/08 I personally called at my beneficiary bank, Nat. West. Douglas complete with all paperwork relating to the transaction. They took all the documents and after around ten minutes said they would ring Monday 13th. which they did. They said they did not hold my money in their suspense account, and that I should go to HSBC which they said was the bank used for the transfer. I made a personal call to HSBC again with all paperwork, they said they had only been used as the referrer and did not hold any money. I asked where the money had gone to, they suggested I should go to the IOM government.


80% return calculation

  • klauseriksen
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 08:41

Angela,
The worst case calculation you made with 80% return assumes that the UK branch is currently holding all the 600 Million that was transferred to them. The big question is what happened to that money after they were transferred to the UK. Presumably most of those funds were invested and are currently not available for a quick transfer back to IoM. The other question is how much the potential loss is on those investments and thus how much of it we are likely to get back


suspense account

  • rippedoff
  • 12/10/08 31/05/09
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  • Mon, 20/10/2008 - 06:26

Angela, interesting points and I guess we don't know at this stage where that money is. As someone said earlier, there is no actual money , its all numbers on screens. I guess no info will come easily from RBS/Natwest as none of us has any contractual relationship with them. Not quite following how you calculate 80p in the pound.

By the way, we all realise that we are living in a complex area of law here but why is it that if you have a loan from a bank and it goes under you still have to pay that loan back; whereas if they have a "loan" from us (as depositors) they don't have to pay us back?

Captain paramoid.


Ripped off, I agree with your

  • guttered
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 07:21

Ripped off, I agree with your comments. When one first deposits your savings in KSF IOM ...i beat you that it DOES NOT stay on the ISM, instead the money can be used for anything -- basically used to earn a higher rate of interest than what they are paying the customer, so for eg our deposits changes its form into another investment which has the aim to earn more money for KSF.

I agree - all you have is an electronic message that is ringfenced etc


In flight transfers are held in a suspense account

  • two time loser
  • 10/10/08 21/06/09
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  • Mon, 20/10/2008 - 05:40

In answer to your question has anyone asked their receiving bank about their in-flight monies the email below was rec'd from my relationship managet at Natwest in London on 15 Oct.'08. Not vey helpful but this is what they are saying.

Sent: 15 October 2008 19:12
Subject: RE: Kaupthing Singer & Friedlander (Isle of Man) Ltd

Hi ........

Ok, I have spoken to our legal department. They say that if there is an asset freeze, then strictly speaking the funds should be returned to where they originated until the matter is sorted out.

However, I also know a couple of people who transferred funds as it happened and whilst the funds did not arrive in a timely fashion, they did turn up eventually - probably a backlog in the middle bank due to the volume of transactions.

I cannot tell you what will happen to your funds. They will either be returned, or they will turn up but I have no way of finding out which or tracing the funds. That MUST be done from Kaupthing's end.

Not what you want to hear but this is as much as I can tell you.


in flights

  • rippedoff
  • 12/10/08 31/05/09
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  • Mon, 20/10/2008 - 06:14

TT loser, I also have in flight's. My beneficiary bank told me they could not look "up the pipe" as it were to see if there were incoming funds stuck.

Regarding the advice your bank gave about the inflights being returned to origin, this is contrary to most of the postings on this site yesterday (see technical paper) and I suspect not properly research. I hope therefore its wrong.

Since none of us can say for sure what will happen, there is one theoretical possibility which you have not considered; the inflight funds may not more forwards or backwards, but may get absorbed by E&Y as admistrators of KSF UK. I hope that doe not happen of course.


Your source

  • Done like a Kipper
  • 10/10/08 n/a (free)
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  • Mon, 20/10/2008 - 02:50

We have spoken with Michael White several times both prior to the suspension of its licence and since. I really wouldn't take too much of what he says as gospel. We have found that each time we speak he changes the story and certainly misled us over the KSF IOM Terms & Conditions. We have subsequently spoken with John Cannon (Ops Manager KSF IOM) who appears to be pretty straightforward.


Michael White

  • cold-dose
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:53

It wouldn't be Michael White who would be liquidating the company - he wouldn't be making those decisions.


credibility

  • Anonymous
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  • Mon, 20/10/2008 - 03:17

I think it would be safest to ignore information offered by the bank other than express statements of balances


Reply To Cold Dose

  • Angela
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 03:14

Correct. It's Mike Simpson. Probably confusing because I used Mike (as in Simpson) & Michael (as in White.)


Technical paper and compensation

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:04

I was just reading the "COMPENSATION OF DEPOSITORS REGULATIONS 2008", and came across this bit:

9. (1) An eligible protected deposit liability is the total liability of the participant to the
depositor in respect of the principal and accrued interest on sterling and foreign currency
deposits in the name of the depositor at the time of the default and made with an Isle of Man
office of the participant.

Q - If in-flight transfers are held-up in clearing banks elsewhere, do they still count as an "eligible protected deposit liability"?


That...

  • cold-dose
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:31

That is a very good question. The FSC have been suggesting that they would, but don't appear to be giving an unequivicable answer.


I just called FSC to ask

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 09:59

I just called FSC to ask this, wouldn't give me a straight answer.
I also called KSFIOM, also couldn't give definite answer, though said they would call me back.


re TECHNICAL PAPER RE: IN-FLIGHT TRANSACTIONS TO PWC, EY, LAWYER

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:53

A lot will come down to wire - do we know exactly when IoM banking licence was withdrawn, as that should be used even in the example as "the cut off time". Then it can be stated categorically that KSF IoM was in operation as a bank up to XX.XX hrs BST on XX.XX.XXXX as with anything it's dangerous to assume, and could seriously affect some parties claim. Everyone knew there would be a cut off and some would in others out but actual time is paramount. We also need to know and clearly state the time zone on the automatic system usualy this is GMT and as such throughout the year.

I have a seen legal case and had to read up on it a few years ago as thought we were going down a similar route, unfortunatly (or fortunatly) it didn't and although bits stuck in the old grey matter, the really important parts for this purpose didn't, hence can't put some case law / precedence against it. The gist was a failure of a process system and the legal went along the lines where an automated system is deployed the automatic system is classed as an "employee" of the employer, when a "call" (event) is received by the automated system this is the "initiation time" of the "call" (event) not when a human monitors the initiated call (event) of the automatic employee.

Have spent the last few hrs searching for anything similar on the net but it was several years ago and I can't remember all the details, nor can I access any of the legal sites to do an in depth search, but the same principles can be applied to any automatic 24 hr 7 day a week operation whether it a bank or a.n. other logged "call" (event) system.

Reasoning and from best memory substituting your chart and banking bits for the engineering system on how the automated "employee" generated a unique and identifiable time stamped log of the "call" (event) :-

accepted fact ksf IoM advertised and operated an instant access 24 hr banking service therefore the automated system is the electronic teller or employee of the company. It can be simply argued that the computer and its program is as an automatic teller or "employee of the bank".

The customer demands moneys via the automatic "teller" (employee) stage 2 is activated the monies are ring fenced and legally ownership transferred to the customer as the "teller" identifies the customer, the customers account and validity of the transfer request, the automated "teller" (employee) generates a unique and identifiable code to the transaction, this unique transaction is transferred to the customers account as "pending payment". Therefore at any stage up to the withdrawal of the banking licence the automatic "teller" accepted, identified and initiated the payment on the "employers" behalf, from that point on the ownership of moneys are transferred to the customer. 3 rd stage payment is simply a human check and confirmation that the automatic "teller" has correctly identified and initiated the customers demand, the human employee then directs the customers demand to the forwarding system.


Withdrawal of Licence

  • Done like a Kipper
  • 10/10/08 n/a (free)
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  • Mon, 20/10/2008 - 01:50

I have an email timed at 4.47pm BST 8 October which states that the board of KSF IOM were actually meeting at that time to decide the future of KSF IOM given that KSF UK had been placed into administration.


automatic tellers

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:53

That's some interesting arguments re: the times and automatic systems.
If you are correct it wouldn't matter what KSFIOM did, so long as instruction was received prior to bank-licence being suspended.
However, whether the funds were actually transferred out of KSFIOM may well affcet the jurisdiction and to whom you'd have to bring a case. See cold-dose's comments below on that.


another possibility

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:07

It could also be argued that up to the point the servers were shut done and the site could not be accessed ie - a place of business or trade closing it's physical doors to customers - it was still trading - it would then be a argument on whether KSF was continuing to offer banking services to it's customers by virtue of the fact the virtual doors were open and therefore it's services were unaffected and that any transactions up to the point the virtual doors were closed should be honoured (about 11.00 am if I remember correctly).

Could pull a few more in under the wire... :-)


Terms and conditions

  • cold-dose
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  • Mon, 20/10/2008 - 02:04

It is possible that the bank's terms and conditions might have some bearing on this, if they alter the normal legal situation, i.e by stating that all withdrawals must be checked by by a person before being agreed.

It has become increasingly common for companies to protect themselves against errors by web systems following some of the e-commerce websites getting caught out (e.g. selling TVs for 1p, and the ordering system replying with an email accepting the order...)


Not entirely clear

  • cold-dose
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  • Mon, 20/10/2008 - 02:54

In terms of Internet banking, they do state that the system is not automated, plus they also reserve the right to later reject a transaction. That would imply that merely sending a transaction through the website doesn't mean it has been accepted by the bank.

However, it does say the time of the request is the time that their computer system logs it at.


T&C's

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:10

Cold dose
do we have a copy of their T&C's to check.


T&Cs are in

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:13

Thx occams

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:30

downloading Thx


re automatic tellers

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 01:52

Correct, but online only of course - being the only way to generate the automatic teller, but don't have access to all my old notes etc,. not even sure I still have them - but there has to be other tested legal cases out there with a similar background info - but I get held up at login page on the sites frustrating. If anyone has access - automated process systems / multi zone fire alarms / even possibly an actual ATM which would be great. (got to be at least one of them gone wrong)

Read through and yes I can see that Manx law as Scottish law will be different even if only slightly to English so possible and would depend on how many automatic systems on the Island if this has ever come up there before... so could be dipping toes into uncharted waters - or do they always follow precedence from UK if prior here.

use the banks systems back at them in an easy way for anyone to understand and again that's where the above argument comes in -

taking an example of a standard ATM - card goes in / get your money out anytime day or night anywhere in the world - the account is deducted that amount at that specific time (date & time stamped GMT on account if bank in UK), not 5 or 6 hrs later or the date & time where you (the receipt is) are but at that specific time the call came into your account - therefore as soon as you key in your request - the money's are effectively in flight to the called bank, might take a couple days to get to that bank.


Manx law

  • cold-dose
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  • Mon, 20/10/2008 - 01:55

Manx law is somewhat related to English common law, although with a basis in Norse law (the hangovers from that are today mostly relating to issues of land).

Precedents from the English courts are not binding on Manx courts, but are considered relevant and persuasive. (Just as precedents from Commonwealth countries/the US can be persuasive on English courts).

As for automated systems - are you thinking about the laws of formation of contracts?


Re Manx law

  • skintagainnow
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 02:25

I'm not legal at all - engineer can do JCT contract and a few other bits but that's about it.

The case I was looking at, was where a failure had occurred at a fully automated process plant - something had gone astray and the company were trying to claim various damages ~ losses against the manufacturers / installers or anyone else they could sue. Most of the legal jargon I'm afraid went straight over my head - just really the engineering bits stuck where it was relevant to our situation.
Which in our case as normal turned out to be operator/s disabling half the system because they didn't want to investigate a couple of spurious alarms.


Strong paper

  • cold-dose
  • 11/10/08 31/05/09
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  • Sun, 19/10/2008 - 23:22

Very strongly written paper. There are however a couple of small complications (aren't there always?)

Whilst there appears to be an arguable case for constructive trusts on unactioned withdrawal requests, they would have to be looked at under Manx law, which is distinct from and subtly different from English law. Litigation in the Isle of Man also requires a Manx advocate - English solicitors and barristers are not automatically able to practice law in the Island. (n.b. Hopper's barrister IS a licensed Manx advocate).

There also appear to be a few transfers held up in the Douglas branch of HSBC (used for insular transfers by KSF IOM), which would also fall under Manx law.

SWIFT transfers to other parts of the world are quite possibly held up in foreign banks (e.g. Deutsch Bank NY), in which case they'd have to be dealt with under the laws of that country.

That said, for people with money that's been held up in the UK - whether in KSF UK, RBS or Natwest - this is all very relevant, and things are definitely looking up. That's no guarantee however, and this won't necessarily get sorted out quickly either.


in-flight jurisdiction

  • occams razor
  • 10/10/08 31/05/09
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  • Sun, 19/10/2008 - 23:38

Let's assume the paper's arguments are correct and the law... and KSFIOM is a trustee under a constructive/Quistclose trust, and the funds are currently held up in a KSFIOM clearing account in RBS or Natwest in the UK... then why couldn't the action be taken against RBS/Natwest in the UK? Or if the funds were first passed to KSFUK, then indeed Ernst & Young in the UK? Wouldn't any intermediary bank also effectively be holding the funds under constructive trust if title and beneficiary interest has indeed passed to the customer?
Re: the SWIFT, I'm particularly interested in this personally, and for USD. I'm wondering what the route to Deutsche Bank NY is? Do you know if it went KSFIOM > KSFUK > Deutsche Bank, or KSFIOM > KSFUK > Some other bank e.g. RBS/Natwest > Deutsche Bank?
Either way, if the funds are held in clearing accounts held in the names of UK banks, presumably the UK bank or E&Y can release them themselves, if it was lawful for them to do so, therefore even if the USD are sitting in NY clearing account of RBS/Natwest/KSFUK, wouldn't the action to be taken be against E&Y UK to force them to authorise the banks to release them?

Just thinking out loud....


Sorry, maybe I misread...

  • occams razor
  • 10/10/08 31/05/09
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  • Sun, 19/10/2008 - 23:44

Sorry, maybe I misread... when you say "unactioned withdrawal requests" are you talking only about transfers that were requested but never initiated by KSFIOM to KFSUK, and are not including in-flights that were sent to KFSUK and beyond?

And while I'm here, when the hell are we ever going to find out the exact status of our transfers and where that money finally stopped? Who's responsibility is it to tell us? And is there any way to pressure someone to tell us?


I would have thought it must

  • mikepapa
  • 10/10/08 n/a (free)
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  • Mon, 20/10/2008 - 00:30

I would have thought it must be Mike Simpson's responsibilty to tell us the status of our transfers - who we can certainly pressure - by contant questions.
[unless corrected by cold-dose :-) ]


Yes

  • cold-dose
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:35

Yes, but that might take time.


USD SWIFTs

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:02

Re: USD SWIFTs.
KSFIOM told me this morning that USD SWIFT transfers go direct to Deutsche bank NY, without passing through KSFUK or any UK clearing banks. Does that sound plausible that KSFIOM would have their own clearing account with Deutsche bank NY?


occams razor

  • malc
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:10

usually for a swift transfer they give you the option of choosing your own correspondent bank or allow KSF IOM to choose it for you.

I made three separate swift transfers, one on Monday, and two on Tuesday..........none arrived. I have the tx printouts and I checked the online account, all deducted from the balance....

malc


USD SWIFT coming back

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:15

Malc - I have just had a long call with KSFIOM.
I initiated a USD SWIFT transfer on 6th October that was debited from my account but did not arrive.
KSFIOM today told me this money is currently sitting in a KSFIOM suspense account in the clearing bank Deutsche Bank New York... AND that the liquidator is trying to unfreeze it specifically TO BRING IT BACK to Isle of Man.
Damn.


USD Swift

  • podather
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:33

I actioned a USD swift transfer on Monday 6th for $370,000
I was told the opposite, though this was a couple of days ago, that the transfer was going to carry on as and when it was unfrozen.
I will call again now for clarification
Going to be gutted if it comes back


occams razor: s**t, I had

  • malc
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:21

occams razor:

s**t, I had hoped that when unfrozen it would continue. Unfortunately, i had two small biz accounts and a personal account...guess where the money was...... (:-(

malc


I am going to try and call

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:32

I am going to try and call them later today:

Deutsche Bank
60 Wall Street
New York, NY, USA
Telephone: +1(212)250-2500


Swift Transfers - Occams Razor

  • podather
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:48

OR , just called and spoke to Kate, she advised me that they don't know in which direction the funds will be directed.
that the information you received nor the info i was given are correct. They are looking at the legal obligations as to Where they have to direct it.....
I called Deutsche Bank in New York last week and spoke to the department that traces wires.
They refused to speak to me as I wasn't another bank, upon explaining our predicament the best she offered was to look to see if they had processed a wire of my value, I told her they exact sum and she advised one of that value had not been processed..
Good luck buddy, let me know if you have any luck with it


USD SWIFT new thread

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 11:09

podather, I've now created a dedicated thread for discussion of in-flight USD SWIFT transfers.
Let's continue the discussion there


am i going mad?

  • rippedoff
  • 12/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:28

Re; in flights. Can't find the bloody thing now but there was a mail from Simpson posted on this site where he explained quite clearly his intentions on in flights. I understood that if they have left IOM he will administer a laxative and the funds will go in the direction intended - i.e. to beneficiary.


No, he said he was trying to

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 10:30

No, he said he was trying to unfreeze them to go where they "legally" should go.


Yep

  • cold-dose
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  • Mon, 20/10/2008 - 00:16

That's the point, if the money never left the Isle of Man then it's there.

The constructive trusts would in turn fall upon whichever UK bank holds the money - i.e. you could go to them directly, certainly be an idea to put them on notice that you consider the money to be held in trust (well, in reality you'd probably want a solicitor to do that).

As for the overseas transfers, where there was a correspondent bank (like Deutsch Bank in NY) they would have had a direct relationship with KSF (either UK or IoM, afraid I don't know which). These correspondent banks were located in the world's major financial centres.

Other parts of the world, like Indonesia (came up in someone else's question earlier!) would route through a correspondent bank, possibly RBS in London.


more questions

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:26

Thanks for clarifying... a few more questions (as always!)
1. If the amounts were shown as debited from our accounts and were never recredited to KSFIOM account, can we assume they have left KSFIOM and must be at KSFUK or beyond?
2. How can we know which bank to go to when we don't know where the money is, and no-one will so far tell us?
3. Whose responsibility is it to find out and give us the information as where the money currently is, PWC? What is the best way for an individual to obtain this info?


More (non) answers

  • cold-dose
  • 11/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:34
  1. No, you can't assume that. The money might be held in the central account at KSFIOM, with the staff not having actioned the actual transfer.
  2. Unfortunately, at present there isn't an easy way to know.
  3. Ultimately PwC and the UK administrators would have to do this. However, it would be wise to not leave it entirely up to them. At the very least, take all the details you have about the transfer (amount, destination bank+account, reference number, time and date requested) and write to the UK banks (KSF and RBS/Natwest) saying that you think they have your transfer and ask them to confirm or deny that. Use registered post. Anything beyond that gets more complicated and would probably need a lawyer involved.

weary

  • occams razor
  • 10/10/08 31/05/09
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  • Mon, 20/10/2008 - 00:40
  1. Sigh, I'm getting weary of all this. I was starting to think we were nearing the beginning of the end, now I'm inclined to think we're only at the end of the beginning. What a mess. Thanks for the continued insight though, much appreciated.

getting weary

  • Dismayed
  • 12/10/08 31/05/09
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  • Mon, 20/10/2008 - 01:19

Tomorrow my Princess and I will stand at the edge of the abyss, the monster won’t be mammon. But a fearful Demon, 1000 times greater, the big C. If the diagnosis is good and we come through this test, we will fight with you and we’ll win this battle. We have all become such a close family, and all we need to do is to stand together and we will succeed. I hope we will be able to stand with you, and when we win this battle what a hell of a party we’ll have.
All the very best for tomorrow, oh it’s today already.
Keep the faith you are all an inspiration.

“Never bear more than one kind of trouble at a time.

Some people bear three
all they have had,
all they have lost,
and all they hope to recover”.
Sleep in peace
Neil