Liquidators launch class action over CSA debacle

Writ seeks US$206 million in costs and compensation on behalf of 1,300 investors of the collapsed hedge fund

Liquidators launched a group action yesterday to gain US$206.67 million in compensation for 1,300 investors who lost money in the collapse of CSA Absolute Return Fund in one of Hong Kong's highest-profile hedge fund scandals.

They issued writs against the fund's custodian, HSBC Institutional Trust Services (Asia), its administrator, Bank of Bermuda, and its auditor, Ernst & Young.

CSA Absolute Return Fund went into liquidation two years ago after the Securities and Futures Commission launched an investigation and police charged fund manager Charles Schmitt with the theft of US$930,000 from the fund.

Two PricewaterhouseCoopers partners were appointed liquidators of the fund. Yesterday, they sought compensation on behalf of the investors amounting to US$198.37 million and costs of US$8.3 million.

According to the writ, CSA in October 2001 appointed Bermuda Trust (Far East) - which was acquired by HSBC in 2004 and renamed HSBC Institutional Trust Services (Asia) - as the custodian for subscription monies from investors to the funds.

At the same time, it also appointed Bank of Bermuda to perform various administrative tasks.

The writ alleges HSBC and the Bank of Bermuda failed in their duty to safeguard investors' money, allowing Schmitt to transfer money to various 'shadow funds'.

'The shadow funds never traded, never operated a bank account or otherwise owned any assets. The sole purpose of the shadow funds was to be part of a scheme devised by Charles Schmitt by which he could misappropriate the subscription monies paid to the company [CSA] by the investors,' it alleges.

A spokesman for HSBC declined to comment on the case.

The writ against Ernst &Young, appointed as CSA's auditor in July 2002, alleges that the auditor gave the fund a clean bill of health and that it had failed to uncover Schmitt's alleged misappropriation of clients' assets.

The writ claims Ernst &Young 'should have obtained but failed to obtain sufficient audit evidence of the rights and obligations of the company in the investments that it made'.

A spokesman for Ernst &Young said the accounting firm would defend itself against the claims.

'Ernst &Young is aware that the liquidators have filed a writ. Ernst &Young is confident that their work for CSA complied with all applicable standards and that the firm will successfully defend any claims pursued by the liquidators,' the spokesman said.

In June 2004, police charged Schmitt, a US citizen, with stealing US$930,000 from a fund he managed.

In December last year, Schmitt filed at the High Court to declare himself bankrupt.

According to the fund's website, Schmitt was a former senior business manager at the New York Stock Exchange, where he helped manage the NYSE pension fund. He also managed funds for Citibank, Chase Manhattan Bank, Lehman Brothers and John Hancock Life Insurance.

Writ large

CSA went into liquidation in 2004 amid a flurry of investigations

HSBC unit, Bank of Bermuda accused of failing in their duty

Writ alleges Ernst & Young gave hedge fund a clean bill of health