Arbitrium Proposal
Arbitrium Capital Partners put forward a proposal that would have involved Arbitrium taking control of Keystone and using the approximately $180 million listed equity investments, which are the substantial remaining liquid asset of the Shield Master Fund, predominantly to buy a hotel in Venice.
Based on the Deloitte report, Macquarie concluded that the proposal was not in the best interests of members because:
- there were significant legal obstacles in relation to the implementation of the proposal;
- a Colliers valuation of the Venice hotel was based on assumptions that couldn’t be proven. In addition, a Deloitte valuation indicated that the Venice proposal would likely lead to significant further losses for unit holders and investors;
- it required investors' money in Shield to be unavailable for 12 to 18 months, whereas in a liquidation, there are assets, principally the listed equity investments, that can be sold to return money to creditors and investors sooner;
- it would mean giving up or settling important claims that a liquidator and the receivers could otherwise pursue and could result in returns for investors and/or creditors.
Filippini Proposal
Mr Filippini (the owner of City Built) put forward a proposal that would have involved a company controlled by Mr Filippini paying $75 million to Keystone, using the money that had been paid to Mr Filippini by Shield in the first place, to buy out loans made by Keystone to companies controlled by Paul Chiodo. The loans have a book value of about $298 million. Deloitte has started proceedings regarding $158 million paid by Chiodo Corporation to Robert Filippini and City Built Pty Ltd (of which Filippini is the sole director and shareholder). Of this $158 million, bank accounts holding $110 million have been frozen by the Federal Court.
The proposal required Keystone to release its claims for $158 million against Mr Filippini and City Built.
Based on the Supplementary Deloitte Report, Macquarie concluded that the proposal was not in the best interests of members because:
- it would involve compromising $158 million of claims against Mr Filippini for $75 million;
- it would involve receiving $75 million for loans with a book value of $298 million; and
- investigations undertaken so far by ASIC and Deloitte have identified serious misconduct and potential claims against numerous parties including Mr Filippini and his related parties. It’s in the best interests of creditors and unit holders that those claims are properly investigated and prosecuted by a liquidator.
Chiodo Proposal
Mr Chiodo and Chiodo Corporation put forward a proposal that involved a company controlled by Mr Chiodo taking control of Keystone.
Keystone had previously paid to Chiodo Corporation Pty Ltd, a company controlled by Mr Chiodo, approximately $265 million. Chiodo Corporation had previously made payments from this amount including:
- for specific project costs: $108 million
- to lead generators, who marketed Shield to new investors: $65 million
- for shared project costs: $36 million
- to three companies associated with Mr Chiodo and Mr Frolov (Marsi, Malana, Nextform): $17 million
- for Mr Chiodo's personal use: $7 million
Based on the Second Supplementary Deloitte Report, Macquarie concluded that the proposal was not in the best interests of members because:
- there was a high level of uncertainty with the proposal and it was dependent on the actions of third parties, including Mr Filippini;
- it would involve Keystone selling loans with a book value of $298 million for only $75 million and selling them to Mr Filippini, who would buy them using money that had been paid to Mr Filippini by Shield in the first place;
- the proposal included a business plan to complete certain property developments. That business plan can be progressed by Deloitte as well, if Deloitte determines that this will produce a sufficient return; and
- investigations undertaken so far by ASIC and Deloitte have identified serious misconduct and potential claims against numerous parties, including Mr Chiodo and his related parties. It’s in the best interests of creditors and unit holders that those claims are properly investigated and prosecuted by a liquidator.
Liquidation
The alternative to the proposals above was placing Keystone into liquidation. A liquidator has significant powers to identify and recover assets for the benefit of creditors, unit holders and underlying investors, including a power to conduct public examinations.
Deloitte states that, based on its investigations so far, it appears that the former directors of Keystone have failed to comply with their duties as directors of Keystone and may have acted dishonestly and/or fraudulently. A liquidator would investigate the potential breaches in more detail.
It also states that its investigations have identified a large number of potentially unreasonable director-related transactions, which it will investigate as liquidator, including companies associated with Paul Chiodo and Ilya Frolov.
Macquarie reviewed each of the proposals and met with Arbitrium to understand its proposal better. We determined that we agreed with Deloitte’s recommendation to wind up Keystone, as we believe this action is in the best financial interests of our members.