In re Sphinx, Ltd.

• Decision Date: 06 September 2006
• Docket Number: No. 06-11760 RDD.,06-11760 RDD.
• Citation: 351 B.R. 103
• Parties: In re: SPEEENX, LTD., et all., Debtors in Foreign Proceedings.
• Court: U.S. Bankruptcy Court — Southern District of New York

351 B.R. 103

In re: SPEEENX, LTD., et all., Debtors in Foreign Proceedings.

No. 06-11760 RDD.

United States Bankruptcy Court, S.D. New York.

September 6, 2006.

COPYRIGHT MATERIAL OMITTED

Kaye Scholer LLP, New York City, by Madlyn Gleich Primoff, Benjamin Mintz, Lovells, Chicago, IL, by Gary Lee, for Kenneth M. Krys and Christopher Stride, as Joint Official Liquidators.

Milbank, Tweed, Hadley & McCloy, by Luc A. Despins, Esq. and Andrew M. Leblanc, Esq., for the Official Committee of Unsecured Creditors of Refco Inc., et al.

Bingham McCutchen LLP, New York, NY, by Tina L. Brozman, Timothy B. De-Sieno, for Marc S. Kirschner, as Chapter 11 Trustee for Refco Capital Markets, Ltd.

MEMORANDUM OF DECISION ON PETITION OF FOREIGN REPRESENTATIVES FOR RECOGNITION OF FOREIGN MAIN PROCEEDINGS UNDER 11 U.S.C. §§ 1515 AND 1517(b)(1) AND REQUEST FOR RELIEF UNDER 11 U.S.C § 1521(a) THAT MAY BE GRANTED UPON RECOGNITION

ROBERT D. DRAIN, Bankruptcy Judge.

On July 31, 2006, Kenneth M. Kays and Christopher Stride (together, the "JOLs"), as Joint Official Liquidators of all but one of the above-captioned debtors and as Joint Provisional Liquidators of the remaining debtor, SPhinX Managed Futures Fund, SPC¹ ("SMFF"; with the other debtors, the "SPhinX Funds" or the "Debtors"), in the SPhinX Funds' voluntary winding up proceedings under the supervision of the Grand Court of the Cayman Islands (the "Cayman Court"), filed petitions in this Court under chapter 15 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq.

On the same day, the JOLs obtained an order (Bernstein, C.J.) scheduling and approving the form of notice of an expedited hearing on their petition for recognition of the Cayman Islands proceedings as "foreign main proceedings" under sections 1515 and 1517(b)(1) of the Bankruptcy Code and their request for additional relief under section 1521(a) of the Bankruptcy Code that may be granted upon recognition (the "Petition"). They also sought a temporary restraining order under section 1519(a) of the Bankruptcy Code pending the hearing on their petition for recognition, but Judge Bernstein denied that request.

On August 16, 2006, the Court held an evidentiary hearing on the Petition and the joint objection thereto of the Official Committee of Unsecured Creditors of Refco Inc., et al. (the "Refco Committee") and Marc S. Kirschner (the "RCM Trustee"), as chapter 11 trustee for Refco Capital Markets, Ltd. ("RCM"), and issued a bench ruling granting the Petition in part, denying it in part and partially taking it under advisement.

More specifically, the Court held that the Cayman Islands proceedings should be recognized as foreign proceedings under sections 1515 and 1517(a) of the Bankruptcy Code but took under advisement whether they should be recognized as foreign main proceedings or, alternatively, foreign nonmain proceedings under sections 1517(b)(1) and (2), respectively. Given the lack of specificity in the JOLs' request for additional relief under section 1521(a) of the Bankruptcy Code, with the exception of a request made at the hearing for which the JOLs had not provided adequate notice, and their related failure to show irreparable harm, the Court denied substantially all of the JOLs' request for additional relief, without prejudice.

This memorandum of decision states in greater detail the rationale for concluding that the Cayman Islands proceedings are foreign nonmain proceedings under 11 U.S.C. § 1517(b)(2), subject, however, to possible modification under 11 U.S.C. § 1517(d).

Facts

A. The SPhinX Funds' Business and Contacts with the Cayman Islands. Each of the SPhinX Funds is either a limited liability company or a segregated

portfolio company ("SPC") incorporated and registered in the Cayman Islands. Declaration of Kenneth M. Kays dated July 31, 2006 ("Krys Decl.") ¶ 6.

The SPhinX Funds are hedge funds whose business consisted of buying and selling, securities and commodities in a manner that tracked, under a license from Standard & Poor's, certain S & P Hedge Fund Indexes. Transcript of hearing on the Petition dated August 16, 2006 ("Tr.") at 34-5; Krys Decl. ¶ 7.

The SPhinX Funds were established as offshore entities apparently to attract non-U.S. and U.S. tax-exempt investors in the light of favorable Cayman Islands tax benefits and regulations. August 2002 Plus-Funds Due Diligence Review ("PlusFunds Review") at 5, attached as Exhibit E to the Declaration of Christopher Stride dated August 15, 2006 ("Stride Decl."); Declaration of Cherry Jane Bridges dated August 14, 2006 ("Bridges Decl.") ¶ 19. Although regulated in the Cayman Islands (with the SPCs subject to more regulation than the other SPhinX Funds), the SPhinX Funds did not conduct a trade or business in the Cayman Islands. Tr. at 34.² They had no employees and no physical offices in the Cayman Islands (or elsewhere, for that matter). Transcript of Deposition of Robert Aaron 32:11-32:15, February 23, 2006 ("Aaron Dep."); Transcript of Deposition of Patrina Farquarson 29:22-29:23, 33:16-33:18, February 16, 2006 ("Farquarson Dep.").³

Indeed, except for corporate books and records (minute books and other statutory documents, not records of operations) required to be maintained under Cayman Islands law, the Debtors apparently have no assets in the Cayman Islands. Tr. at 32-3. At least the JOLs have not alleged the existence of any Cayman Islands assets, and they have acknowledged instead that "substantially all" of the Debtors' assets are in the United States. Krys Decl. ¶ 10. At the hearing, Mr. Stride clarified that at least ninety percent of the SPhinX Funds' approximately $500 million of assets are located in accounts in the United States. Tr. at 45.

From the SPhinX Funds' inception, their hedge fund business was actually conducted under a fully discretionary investment management contract by Plus-Funds Group Inc. ("PlusFunds"), a Delaware corporation located in New York City, Tr. at 34-35, which also was responsible for creating the SPhinX Funds. (Aaron Dep. 56:20-57:3, 224:8-224:12; Farquarson Dep. 233:19-234:1, 53:6-53:8). See also PlusFunds Review; Offering Memorandum for shares of SPhinX Ltd., dated July 1, 2003, a copy of which is attached as Exhibit B to the Stride Decl. ("Offering Memorandum"), at 2, 16 (stating that PlusFunds "sponsors, and acts as investment manager to," each of the SPhinX Funds). PlusFunds is a debtor in this Court, Chapter 11 Case No. 06-10402(JMP). Like the SPhinX Funds, PlusFunds is in a liquidation posture, in the process of winding up, among other things, its investment management contract with the SPhinX Funds, which was expected to be completed by August 31, 2006. Stride Decl. ¶ 33. Most, if not all, of the account managers retained by Plus-Funds to provide services for the SPhinX Funds did so from the United States. Tr. at 35, 44.⁴ Mr. Stride acknowledged that he did not know of any trading in securities or commodities in the Cayman Islands that was engaged in by or on behalf of the SPhinX Funds. Id. at 34.

As noted above, the SPhinX Funds' investment strategy was closely tied to a license with Standard & Poor's, a division of McGra-Hill Companies, Inc., a U.S. company, which permitted the account managers to track certain S & P Hedge Fund Indexes. Id. at 35. Corporate administration of the SPhinX Funds, including net asset value calculation, also was conducted primarily in the United States, out of the Somerset, New Jersey office of Derivatives Portfolio Management, Ltd. ("DPM"), id. at 29-30, although investor subscriptions were received in the Cayman Islands for review by DPM personnel, apparently for purposes of compliance with Cayman Islands anti-money laundering requirements. Id. The SPhinX Funds' auditors were PriceWaterhouseCoopers, an international accounting firm, with a Cayman Islands address listed in the Offering Memorandum, Stride Decl. 7 19, which apparently was a requirement of Cayman Islands law. Tr. at 37. It is not clear how much work the auditors actually performed in the Cayman Islands; Price-WaterhouseCoopers resigned effective July 31, 2006. Stride Decl. ¶ 19.

None of the Debtors' directors resided in the Cayman Islands, and Mr. Stride was not aware of any board meeting that took place there. Tr. at 31-32. The Debtors' boards consisted of Irish,⁵ Bahamian and U.S. residents.

The investors in the SPhinX Funds are located throughout the world; by dollar amount only approximately fourteen percent are located in the U.S. Stride Decl. ¶ 25. The JOLs do not state the percentage of the SPhinX Funds' Cayman Islands investors. Four of the nine members of the Debtors' Liquidation Committee, elected under the Companies Law, are U.S. based; one is Cayman Islands based. Stride Decl. ¶ 26.

With the exception of RCM, whose preference claim, discussed below, would apparently make it the SPhinX Funds' largest creditor (assuming that the prior settlement of that claim were unwound), there appear to be few other material creditors. It is far from clear whether, under U.S. law, the investors in the SPhinX Funds would be viewed, in such capacity, as creditors, and whether claims that they might assert arising from the purchase or sale of their interests in the Debtors would be treated on the same priority as creditors' claims. See 11 U.S.C. § 510(b). Counsel for the JOLs stated at the hearing on the Petition, however, that the investors in the SPhinX Funds could qualify as creditors for purposes of the Cayman Islands winding up proceedings. The Refco Committee and the RCM Trustee's joint objection to the Petition asserted that the SPhinX Funds may be solvent; the JOLs disagree, but, as addressed below, the Court determined that it was unnecessary to address the issue at this time.

B. Background of the Cayman Islands Proceedings and the Petition. RCM and affiliates that did business under the name "Refco" filed chapter 11 petitions in this Court on October 17, 2005. RCM is a Bermuda company that...