NZ foreign exchange firm was running a 'simple Ponzi scheme'

Justice Cameron Mander said Arena capital did not conduct any foreign exchange trades. File photo / NZPA

Christchurch-based Arena Capital, which owes clients $7 million, was running a "simple Ponzi scheme", says a High Court judge.

Arena Capital, which traded as BlackfortFX, has been in receivership since last May after the Financial Markets Authority (FMA) froze its assets and was put into liquidation last August. The firm is being probed by both the FMA and the Serious Fraud Office.

Liquidators from insolvency firm KordaMentha said last August that the firm marketed itself as a foreign exchange trader and had around 1110 clients.

Co-liquidator Neale Jackson also said that he had not identified any evidence that Arena has traded in foreign exchange markets, or that it has generated profits for itself or clients.

He also said clients were told they had earned profits and that investigations so far suggested these earnings were "fictitious".

As of last August clients were owed $7 million, while only $728,000 was in the company's bank account. The liquidators have signalled they may try to claw back these allegedly "fictitious profits".

Justice Cameron Mander, in a High Court stoush over how to treat funds deposited in Arena's accounts after its assets were frozen, said the company did not conduct any trades.

" 'Profits' the clients were led to believe existed were in fact fictitious. Monies disbursed to clients to maintain the facade of an active operation were paid out from deposits from other clients. Arena was operating in essence a simple Ponzi scheme," the judge said.

In the dispute, Jackson and co-liquidator Grant Graham sought directions from Justice Mander that $249,000 deposited after Arena's assets were frozen be treated in the same way as the rest of the money in the company's bank account.

The liquidators argued the 17 post-freeze clients were no different to any other investors with Arena.

The 17 investors, however, claimed their $249,000 worth of deposits were capable of being identified and can be directly traced to funds in Arena's bank account. They argued this money should be paid to them first, before others got any money.

The investment activity, which the company purported to operate, was a fraud. The monies deposited by all the investors were not used for the purpose for which they were provided and, to that extent, all the investors share that common complaint.

Justice Cameron Mander

Justice Mander, in his decision, said the post-freeze depositors had a "common complaint" with other out-of-pocket investors.

"The investment activity, which the company purported to operate, was a fraud. The monies deposited by all the investors were not used for the purpose for which they were provided and, to that extent, all the investors share that common complaint," the judge said.

But Justice Mander said the freezing orders - technically called asset preservation orders - created a "material change of circumstances" which altered the position of the post-freeze investors and the status of their deposits.

The judge said the freezing orders effectively "quarantined any subsequent deposits".

"An intended effect of the regulator obtaining the APOs [asset preservation orders] was to prevent the bank account from being further utilised for the purpose of the fraudulent operation...the objective and effect of those orders cannot be doubted, namely to prevent any further fraud from being committed and any further loss to innocent investors," the judge said.

The post-freeze deposits, the judge said, could be traced without difficulty and should be paid to the 17 investors in priority to any other distribution.

Arena Capital's sole director is Jimmie Kevin McNicholl.

Read the full decision here: