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From the launch of OW Bunker’s ostensibly hugely successful IPO to its spectacular collapse into bankruptcy took but a matter of months, however, the legal repercussions look certain to stretch out over many years to come. Lesley Bankes-Hughes explains how institutional investors and retail shareholders are taking steps to recover their losses following OW’s demise.

As the third anniversary of the bankruptcy of OW Bunker approaches, numerous court cases focused on the fallout associated with its collapse are still underway in many legal jurisdictions around the world. The vast majority of these cases are related to payment for bunkers delivered prior to OW’s sudden exit from the bunker market in November 2014. Physical suppliers, faced with the fact that their contractual counterparty OW is now locked in bankruptcy proceedings, are still doggedly chasing payment for fuel supplied. ING Bank, as the assignee of OW, is proving to be equally tenacious in asserting its right to collect all monies due to the former Danish bunker player. And the fuel purchasers are stuck in a double bind, potentially liable for paying both ING and the physical suppliers for the same parcel of fuel.

However illogical this latter situation may appear to those of us who are not legal, contractual or bankruptcy experts, the fact remains that progress towards a resolution of these multiple disputes is painfully slow, and increasingly costly; interest is mounting on the outstanding unpaid invoices and, in many cases, may prove to be considerably higher than the individual amounts that are being contested.

In terms of the time it may take to decide the outcomes of all the court cases, the OW bankruptcy may become as famous (or should it be as infamous) as the fictional legal tussle at the heart of Charles Dickens’ novel, Bleak House. The fact that the costs associated with the case of Jarndyce versus Jarndyce ultimately swallowed up the value of the estate which was the subject of the original dispute may also have a certain resonance with the protracted real-life discussions over the demise of OW.

However, while much industry and press attention has been focused on the cut and thrust of these battles for payment in the case of OW, other parties who had their own financial interests in the Danish firm have been carefully and methodically building cases against some of those entities who were involved in the initial public offering (IPO) of OW shares in March 2014 – which, at the time, was the second largest IPO in Denmark’s history. And it now appears that two groups of institutional investors are close to bringing independent actions against two banks, Morgan Stanley and Carnegie, who were global coordinators in the IPO and, along with Nordea, joint bookrunners.

As has been well documented, the death knell for OW came when the collapse in oil prices resulted in a loss on oil derivatives of some $150 million; this hole in the company’s finances was compounded with the apparently concurrent discovery of a $125 million loss at its Singapore-based subsidiary, Dynamic Oil Trading, which was largely due to the extension of unsecured credit to Singapore trading partner Tankoil (which subsequently also filed for bankruptcy).

In the immediate aftermath of the OW bankruptcy, industry stakeholders and commentators increasingly raised concerns over the circumstances surrounding the IPO, including the valuation of the company and also potential flaws in statements contained in the prospectus, as well as some perceived omissions.

In June 2015, Danish pension fund ATP announced that a group of 27 institutional investors had launched an investigation into the circumstances of the bankruptcy with a view to determining whether there were grounds for asserting legal liability. At the time, ATP said that the investigation had focused on ‘errors and flaws in the prospectus prepared in connection with OW Bunker’s IPO, liability in connection with the offering and sale of shares in OW Bunker, as well as the management’s liability for OW Bunker’s operations from the IPO until the bankruptcy.’

In the offer document circulated ahead of the IPO, it was asserted that OW’s ‘conservative operating philosophy and corporate culture are reflected in our overall governance approach, including our risk management function.’

With regards to the group’s risk management procedures, the prospectus highlighted that: ‘Our group management has continuous access to information on all of our material positions and our business model is designed to minimise risk by managing exposures centrally with limited risk mandates at the level of individual resellers and profit centres.’

The document also stated that OW had a formal credit authority governance structure in place ‘to ensure a consistent approach to setting credit limits and well-defined and delegated approval levels.’ Credit line limits were defined for the different layers of the company management structure, and, perhaps somewhat prophetically in light of subsequent events at DOT, it was noted that: ‘In addition to the established credit limits, temporary increases can be approved in line with our credit risk management policy by local managers. If a customer exceeds our credit limits, our risk management sales department would typically initiate a margin call to request an offsetting cash payment.’

A detailed and useful commentary on the events surrounding OW’s IPO and, a matter of a few months later, its bankruptcy, was provided at the end of December 2015 with the publication of a report to creditors in the bankruptcy estates of the OW Bunker Group by the appointed ad- hoc trustee, Søren Halling Overgaard.

This extensive 400-page report considered a number of issues, including whether OW used oil derivatives for purposes other than hedging price risks, i.e. were such instruments used speculatively ‘for the purpose of generating separate gains from such transactions’?

Halling Overgaard also pointed out that no reference was made to the existence of DOT in the final version of the prospectus, and he also considered whether OW’s consolidated financial statements for 2013 had provided ‘a true and fair view’ of the company’s financial health.

He drew attention to a failed attempt to sell OW in spring 2013 by investment vehicle Altor, with the assistance of Morgan Stanley. This initiative, called Project Orion, involved the circulation of sales material to 13 prospective buyers with knowledge of the bunker sector. In the event, four indicative offers for OW were submitted to Altor with a price range from $220,000,000 to $400,000,000. Altor subsequently pulled the plug on this sale process, opting for the IPO route instead, but in his report Halling Overgaard points to the wide discrepancy between the price levels of the indicative offers and the almost $1 billion raised through OW’s listing on the Copenhagen stock exchange.

In comments made about the role of Morgan Stanley and Carnegie, Halling Overgaard remarked that, in his opinion, Carnegie ‘was aware that the IPO process could be “tainted” because of the prices that were noted during the previous structured sales process (Project Orion).’

Halling Overgaard also expressed the view that Morgan Stanley and Carnegie ‘should have been aware that a significant proportion of the OW Bunker Group’s income was attributable to trading activities (speculation) with oil derivatives, which thus constituted an independent business area within the OW Bunker Group.’

In April 2016, a consortium of 26 investors lodged claims totalling DKK 767 million ($123.4 million) against the former OW Bunker A/S, the management of OW and the equity fund Altor. A subpoena submitted to the City Court of Copenhagen claimed that the institutions, which included pension funds ATP, PFA and Topdanmark Forsikring, had suffered losses by investing in OW on the basis of its IPO prospectus, which, according to ATP, contained ‘essential points which were deficient in terms of incomplete, erroneous, misleading and excluded and hidden information.’

This case is still in progress at Copenhagen’s High Court, but in September this year, it was also announced that this group of Danish institutional investors is about to bring a $123.4 million claim against the issuing banks, Morgan Stanley and Carnegie.

Speaking on behalf of the consortium, Tomas Kruger Andersen, Head of Legal, Investments, ATP, said that: ‘We believe that the banks knew about OW Bunker’s speculative activities and that the banks contributed to misleading investors. Against this background, we believe that they may be liable to pay damages.’

Speaking to Bunkerspot, Andersen said that the group of investors ‘had become aware of material not seen earlier’ in documents held by the bankruptcy estate. The report by Halling Overgaard had included ‘small quotes from the original documents,’ said Andersen, but subsequently the institutional investors had been given access to much more extensive source material.

‘During the process, we reviewed 10,000 pages of evidence, and this led us to believe that the banks were aware of the speculating on the oil price,’ he explained.

The group will be filing the action against the two banks ‘soon’, said Andersen, adding that the investors are hoping that the new claim and the earlier one lodged in the High Court will be considered as a single case – although this is a decision to be made by the court.

Looking ahead, Andersen said that ‘Carnegie and Morgan Stanley will be given the opportunity to provide a view on the case; written documents will go back and forth and I expect that the first time we will go to court about this will be in 2019.’

Andersen acknowledged that to date there have been very few cases about prospectus liability heard in the Danish courts. The first such involved liability for the insolvency of insurance company Hafnia in 1992. Prior to Hafnia’s eventual collapse, Danske Bank had attempted to raise capital by selling shares to the value of around DKK 2 billion.

In 1999, the Copenhagen Maritime and Commercial Court initially ruled against parties involved with the prospectus, Danske Bank and Hafnia’s auditors, and ordered them to pay damages. However, the decision was appealed and the Supreme Court then ruled in favour of the bank and the auditors.

‘The decision was based on the fact that if investors had looked at [the prospectus] as a whole, they would have been able to assess the risk,’ noted Andersen.

‘Hafnia was engaged in restructuring and facing a very difficult financial situation, which was pointed out in the prospectus, but with OW what was presented to the investors was a success story with significant growth and upside.

‘We are looking to get our complete investment back,’ he stressed. ‘If we had known the facts about the company at the time, we wouldn’t have invested at all.’

Brussels-based Deminor Recovery Services is advising another group of institutional investors who, in early October, filed an $80 million claim against Morgan Stanley and Carnegie in relation to OW’s IPO prospectus.

Deminor Partner Charles Demoulin explained that the company launched its investigations immediately after the collapse of OW, and invited investors to register interest in making a claim from 2015. He noted: ‘When we looked at the findings of the ad-hoc trustee we came to the conclusion that the prospectus was misleading to a very large extent on certain key aspects of the company’s business and results.

‘The investment banks were hired to prepare, conduct and implement the IPO and they have duties with respect to [providing] proper, correct and full information to the market and investors – this is why you hire these banks.

‘For us it is about prospectus liability,’ said Demoulin ‘The breach of duty in the investment banks’ capacity as lead manager, global coordinators and bookrunner in the context of the IPO.

‘This is not the first time that the liability of investment banks has been raised in a case, but when you look at the facts of the case we think the claims are even stronger, considering the role that these banks played in the months ahead of the IPO,’ he emphasised.

‘This was not an IPO that was prepared within a very short amount of time – it took many months to prepare because they had to undertake a complete reorganisation of the group.’

‘And,’ Demoulin continued, ‘before that, Morgan Stanley had been involved in attempts to find a private buyer for the group and so they were perfectly aware of the business.

‘They had information about the indicative offers made by a number of interested parties, and when you compare the amounts offered by the potential buyers and the valuation of the group [ahead of the IPO], you can see there is a huge difference between the two.’

Demoulin believes the IPO valuation was inflated based on the developments in Project Orion and the aborted attempt to sell OW. ‘These investors – potential buyers – had raised many, many questions regarding the activities of OW Bunker which were not clear to them, and it’s no surprise that these questions were raised in connection with the activities in Singapore and the use of derivatives.

‘So, the banks knew perfectly well what was considered to be relevant information for the markets; it makes their duty even stronger.’

While Morgan Stanley and Carnegie are the focus of the recently filed action, Demoulin does not rule out bringing a claim against other parties involved in the preparation of the IPO prospectus.

‘Certainly,’ he said, ‘let’s be clear, we do not yet exclude that the banks were not the only ones responsible for what has happened. Our clients will reserve their rights to also claim damages against other persons and entities, including the auditor [Deloitte].’

He amplified this statement: ‘There is a Danish legal mechanism that is called “notification”, under which you notify the other parties and this means that you preserve your rights to be able to launch in the future the full action against them for damages – so we will make other defendants notified parties.’

Institutional investors were not the only ones to be impacted by OW’s bankruptcy. In February 2016, the Danish Shareholders Association set up a group, the Association of OW Bunker Investors, to seek compensation for losses incurred by retail investors.

Speaking to Bunkerspot at the beginning of October, Niels Mengel, said that the prospects for the 4,500-strong group of investors being able bring a claim are now looking brighter as the Danish government has agreed to provide partial funding for the action.

The shareholder group is looking to mount a DKK 330 million claim against Jim Pedersen, the former CEO of OW who died in March this year, OW’s former management, and the Board of Altor.

Mengel said that the money offered by the government would cover the preparation of the claim; another request would have to be lodged by the shareholder group to cover any subsequent court fees.

He noted that the claim documents had already been lodged with the parties involved, but it could be two years before the action comes before a Copenhagen court, and at that point, ‘the Court will decide which way it will go.’

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