Leadenhall sues 777 Partners & related persons/entities over collateral fraud

Leadenhall Capital Partners LLP, the London-headquartered specialist insurance-linked securities (ILS) and reinsurance linked investment manager, has filed a lawsuit accusing investment firm 777 Partners, its co-founders and related entities of fraud, stating that collateral pledged for a lending agreement it provided was double-pledged or did not even exist.

The lawsuit lists Leadenhall Capital Partners LLP and one of the managers life insurance-linked investment strategies, the Leadenhall Life Insurance Linked Investments Fund PLC, as the plaintiffs who between them state that 777 Partners and its entities owe $350 million for collateralised notes.

Leadenhall is seeking damages after it transpired that collateral was not posted according to the terms of a transaction it had entered into with 777 Partners.

According to court documents, Leadenhall Capital Partners entered into a secured credit facility agreement with a group of limited liability companies owned by 777 Partners and other entities managed by its co-owners Josh Wander and Steven Pasko.

Under the terms of the agreement, the borrowers (777 Partner entities) were required to pledge collateral to secure the debt notes, with that collateral supposed to be “free and clear” of any other security interest.

The lawsuit states, “To induce Leadenhall to fund their operation, Wander, along with his group of alter ego entities, “pledged” over $350 million in assets as collateral to Leadenhall, knowing all along that the assets either did not exist, were not actually owned by Wander’s entities, or had already been pledged to another lender.”

The complaint features details taken from recorded meetings between Leadenhall and 777 Partners co-owner Wander, in which he admitted there had been a “screwup” regarding assets pledged to Leadenhall backed deals.

Wander said the issue was “the result of 777 Partners and the Borrowers’ failure to recognize, upon allocating certain assets to Leadenhall, that those assets had already been allocated.”

His comments appear to acknowledge that fault lies with 777 Partners for the collateral assets being already having been pledged to other security interests and even admits to breaches in the transaction agreements.

The complaint is detailed and explains how Leadenhall received an anonymous tip that Wander had either never owned or already pledged the assets that were supposed to be used to secure the loan to another lender, which triggered their investigation into 777 Partners and its web of entities.

The complaint states, “After receiving the anonymous tip, Leadenhall launched an investigation and requested information from 777 Partners to determine whether this outstanding debt from the lenders to Wander’s companies—totaling well into the hundreds of millions of dollars—was in fact secured.

“Unfortunately for Leadenhall, the tip accusing Wander of criminal activity proved to be true. In March 2023, a third-party lender to 777 Partners called Credigy shared with Leadenhall a list of assets that 777 Partners had ostensibly pledged for the exclusive benefit of Credigy pursuant to a separate credit arrangement with 777 Partners.

“By reviewing the list of assets pledged to Credigy, Leadenhall discovered that over 1,600 assets worth approximately $185 million, which 777 Partners had purportedly pledged to Leadenhall, had in fact been “double-pledged”—i.e., the same collateral had been pledged to both Credigy and Leadenhall.”

Leadenhall then accuses Wander of lying to cover up a “broader scheme” saying that he assured them the collateral shortfall was due to “a recording glitch that could and would be easily remedied.”

In great detail, Leadenhall’s complaint explains how insurance group A-Cap (Advantage Capital Holdings LLC), whose owner Kenneth King is also a named defendant in this case, sat at the heart of a financial web that provided “the “financial firepower” to fuel 777 Partners’ dealmaking.”

The complaint also accuses the defendants that “Wander-affiliated borrowers had submitted forged financial statements to Leadenhall” in an attempt to prevent the ILS investment manager from confirming that collateral had been double-pledged.

The accusations state that 777 Partners is propped up by A-Cap and that A-Cap holds senior rights to collateral associated with 777, leaving other lenders (such as Leadenhall) prioritised below where their loan agreements stated they should sit.

A-Cap itself offered Leadenhall a lower-priority position on assets related to a 777 Partners company, seemingly as a way to ward-off legal action, but Leadenhall declined.

Remember though that, under the terms of the debt arrangement, collateral was supposed to be “free and clear” of any other security interest.

It’s suggested that insurance group A-Cap controls the financing at 777 and is intrinsically supportive of its ability to do deals.

Wander himself admitted, “They [A-CAP] control what we sign because they have the power of the purse right now, and we have to keep the organization going and operating so we can solve all of our problems and deal with all of our obligations. And they are the ones that are doing that.”

With this legal action Leadenhall is seeking to protect the interests of its investors, after it transpired the loan it provided was not backed by collateral in the manner that it should have been, or that collateral never existed as a first lien behind the lending facility in the first place.

Collateral is a vital component of this industry, both for traditional reinsurance and in insurance-linked securities (ILS) or related investments. In this case, if the counterparty has not fulfilled its obligations under the debt agreement, which it appears Wander has already admitted to, then Leadenhall’s strong claims against him and his firm 777 seem well-founded.

Leadenhall Capital Partners provided the following statement, “Leadenhall’s primary consideration has been and continues to be maximizing return for our investors, which is why we are taking formal legal action on behalf of our investors against 777 Partners and its affiliated companies as supported by the extensive timeline and facts outlined in the Complaint.”

You can access a copy of the complaint filed with the New York court here.

We are told that there may be other investment firms in the insurance sector with exposure to 777 and its entities, via loans or transactions where that company borrowed against its future cash flows.

The case has made mainstream headlines over the weekend, largely due to 777 Partners interests in football clubs around the world. The company had already been facing questions over its ability to close on a planned investment in UK club Everton.

Commentators had questioned the ability of 777 to finance and close the deal, asking where the funding was coming from and what role 777’s insurance and reinsurance company interests played in supporting its ability to make investments.

There have also been questions about how assets were being used to shore up the balance-sheet of re/insurance entities and how, in reverse, re/insurance entities were propping up other parts of the 777 Partners web of companies.

AM Best recently downgraded the credit ratings of 777 Re, the Bermuda-based reinsurance entity of investment firm 777 Partners, citing a “very weak” balance-sheet and concerns over “a significant exposure to less liquid affiliated investments.”