OneTRADEx clients told to expect a loss

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Originally posted on Cayman Compass

Clients and creditors of discount broker OneTRADEx, which was put into provisional liquidation last week, heard they should expect to lose “less than 10%” of their trade account holdings at a liquidation meeting on Tuesday.

However, this estimate was only given in reference to a hypothetical consensual solution with minimised legal costs, in which everyone shared losses and costs equally.*

According to people who attended, the meeting turned “a bit unruly” at times as the broker’s clients were highly critical of the notion that they should be on the hook for any of the company’s debts.

The meeting was organised by the provisional liquidators Kenneth Krys and Angela Barkhouse of KRyS Global to address questions by OneTRADEx clients and creditors and to elect a creditors committee.

Several clients of the broker said they were told the controllership alone had amassed about US$700,000 in fees, including legal fees, with eight people working on the case. Krys said he is personally billing US$820 an hour but his fellow provisional liquidator and team members are charging lower rates. This would make the liquidators, who were previously the controllers, one of the largest creditors of the company.

Clients of the broker argue that as clients, rather than investors or creditors, their account holdings should be off-limits for the debts of the company, including those resulting from controllership and liquidation fees, because their funds were held in segregated accounts.

Most of the broker’s clients are retail investors. One OneTRADEx customer told the close to 100 people attending the meeting that he was holding his entire pension savings in his trading account at the broker.

A registered investment professional, who spoke on the condition of anonymity, told the Cayman Compass that there was a vital principle at stake. “If client assets at OneTRADEx are segregated and this principle is violated, then this is hugely dangerous for anyone with an account at any custodian or broker on island, including every large bank,” he said. The message would be that “your money isn’t safe in a segregated account in the Cayman Islands”.

“If that’s the outcome,” he said, “then investors need to very carefully think about the new risk this creates, and genuinely should actively consider moving their assets out of the Islands.”

Krys confirmed in an email to the Compass that the liquidators would make an application to the court for directions as to whether client accounts should be treated differently than creditors of the company.

However, he noted in a separate email that it was explained at the meeting that client assets, in fact, may not have been segregated, as client funds were commingled and, in some accounts, company monies and client monies were commingled.

In a client update on 4 Sept., the liquidators said “clients will be provided with the details of the applications being made and will have an opportunity to be heard at any hearing”.

OneTRADEx was taken over by the Cayman Islands Monetary Authority and put under controllership on 18 July. The controllers, who are now the liquidators, reported to the regulator “serious” breaches of the Securities Investment Business Law and related regulations by the broker. The main purpose of the provisional liquidation is to facilitate the sale of certain parts of the business that the company has through a white-label relationship with US-based Interactive Brokers.

The liquidators reported at the meeting that the prospective buyer is Tradeview, a Cayman Islands-registered broker-dealer. Clients would be able to have their trading accounts transferred to Tradeview, once the sale is agreed and approved by the regulator and the court.

*EDITOR’S NOTE: The article was amended to incorporate clarifications provided by the provisional liquidator Ken Krys that the statement regarding client losses of “less than 10%” was in reference to a hypothetical scenario and not an estimate of actual loss, nor was it intended to reflect what clients of OneTRADEx might expect to lose. A previous version of the article stated the provisional liquidators are billing an hourly rate of US$800. Krys’s personal rate is US$820, but lower rates apply to the other provisional liquidator and team members. A sentence was added to reflect that client monies may not in fact have been segregated.