Vesttoo: Red flags raised regarding HK / China “investors” as early as 2021

While the industry will spend its time poring over the initial findings of the fraud investigation at Vesttoo, one thing that stands out is the fact internal red flags were raised over the two purported Chinese “investor” groups as early as 2021, while the report also raises a question over whether they are even real investor groups as claimed.

As we were the first to report yesterday, the investigation and audit undertaken within beleaguered insurtech Vesttoo filed an initial report with the bankruptcy court, stating that co-founders Yaniv Bertele and Alon Lifshitz were complicit in the fraud, as well as two executives connected to the network that found capital for the company, Udi Ginati and Josh Rurka.

The report reveals a fraud both sophisticated and at the same time amateur, in its implementation, featuring a tale of faked identities, forged documents, even made up persons, all designed to extract value from clients in the insurance and reinsurance industry, through the provision of fraudulent or forged letters of credit (LOCs) and other documents.

As we said yesterday, questions remain over where the fraud reaches to and who were the real instigators, or masterminds behind it, but the implication of two Vesttoo co-founders appears clear, as well as of Ginati and Rurka, with a digital trail linking them all to the fraudulent activity, the report claims.

Vesttoo’s former CEO Yaniv Bertele has responded to the report, with his lawyers saying their client “strongly rejects all allegations,” again stating that this whole affair and investigation is a Board mission to secure a takeover of the company.

However, unless the report into the Vesttoo investigation is itself falsified, there now appears an abundance of evidence to support its claims, although it’s important to note the actual report from Kroll has not been made available, just the court filing which is a summary, at this stage.

Back to the red flags.

It’s important to remember that, according to reports, the first signs of fraud at Vesttoo are said to have actually emerged back in 2019, with a fake line of credit that appeared to be from Citibank.

That occurrence was not mentioned in yesterday’s report, although we’re told it still stands, but pales by comparison to the much larger fraud that was ongoing through the last few years at Vesttoo, especially once China Construction Bank (CCB) was involved as provider of letters of credit (LOCs).

As we reported yesterday, almost $3.36 billion of standby letters of credit (LOC) are potentially involved in the fraud, with $2.81 billion from China Construction Bank, $362.5m from Standard Chartered Bank and $186m from Santander.

We understand there is one more incident related to Citibank, likely the case reported in the above.

But internal red flags were getting raised, that could have potentially resulted in the fraud being caught much earlier. However, it seems those involved worked hard to cover their tracks and distract those Vesttoo staff that were raising the red flags from pursuing them.

The report states that “red flags abounded as early as 2021,” with due diligence reports from December 2021 and April 2022 revealing that Hong Kong based Yu Po “had a limited profile for an investor with $3 billion of investment capacity.”

Remember, Yu Po had provided the majority of the CCB LOCs, which totalled $2.81 billion, while some $3.1 billion of Vesttoo reinsurance transactions had the investor as the backer.

The report goes on to state that, “In response, Vesttoo’s CFO, Gaurav Wadhwa, noted that “he cannot think of a higher priority task for the company than” further investigation into Yu Po. He further noted that “this issue is existential for us.” Similarly concerns were expressed by others regarding the irregularity of the Yu Po relationship, however, at every turn Bertele, Ginati and other with the scheme declined to take ever a hint of remedial action.”

The report also states, “Although numerous and very serious red flags were raised about Yu Po, including in the face of very substantial evidence that the CCB LOCs, which on their face indicated that they were issued out of New York, were in fact issued out of China, no significant action was taken. Reflecting the dedication of a number of other Vesttoo executives, as early as June 2022 (and perhaps earlier), the CFO of Vesttoo believed Yu Po raised “existential” risks to Vesttoo, but these concerns were disregarded angrily by Bertele and any efforts of others to meet directly with Yu Po without Ginati were blocked.”

Another China based investor, that was named for the first time in yesterday’s filing, Cheng Yuan Holdings, had also raised red flags internally at Vesttoo among some staff, the report states.

Some $586 million of collateral for Vesttoo linked reinsurance transactions were supposed to have been sourced from Chinese investor Cheng Yuan Holdings.

“Significant concerns were similarly raised by numerous employees during the onboarding of new investor Cheng Yuan in 2022. These red flags included that Cheng Yuan’s KYC questionnaire lacked proof of funds, which seemed highly relevant for a firm committing $1 billion,” yesterday’s filed report into the investigation states.

In addition, the report also highlights that there were concerns over the China Construction Bank (CCB) relationship, that led to a Vesttoo staff member trying to find out more.

The report states, “Perhaps nowhere were these red flags starker than with CCB. Curiously, Vesttoo had one single point of contact, an Assistant Relationship Manager. When a Vesttoo executive asked for confirmation that the actual employees signing the LOCs had actual signing authority for both the Shanghai and New York branches, she was informed that “we will not respond to any further correspondence regarding our clients, and we kindly request that you communicate via Yupo Holdings Ltd and refrain from contacting us directly with any such requests.””

Throughout the document there is additional evidence of concerns being raised, by counterparties as well as internally, including delays in funding.

Ample red flags had come up, but unfortunately those behind the fraud appear to have been able to cover their tracks sufficiently to keep things moving, until it came out earlier this summer.

This whole saga will result in some soul-searching within many counterparties that were involved in the chain of security linked to Vesttoo facilitated reinsurance deals, as it seems highly likely the concerns raised will have also been questioned by other counterparts.

But clearly they were satisfied, or had the wool pulled over their eyes sufficiently for Vesttoo to get deals done, backed by the forged documents and this leaves the still unanswered questions of how the industries collateral controls were so undone by this whole affair.

Finally, we said that the initial report on the findings of the investigation “raises a question over whether they are even real investor groups.”

The report states, “Vesttoo made payments to Yu Po totaling $7.88 million, including $3.69 million into accounts in the name of Prime Trust LLC and JC Technologies FL; entities affiliated with Vixipay Ltd., of which Ginati is a partial owner.”

Remember, Yu Po is the “investor” behind the majority of the CCB LOCs, so the above raises a question of whether it is a real entity, or just a front established by those involved in the fraudulent activity at Vesttoo.

Of course, the above also shows where some of the lost money behind these transactions has gone as well, which will greatly interest those creditors in the bankruptcy case.

Really finally, it’s of interest that the report states that Vesttoo has roughly $63 million in capital available to it.

“Such sum comprises (i) approximately $29,000,000 held at Bank Hapoalim in the name of Vesttoo Ltd. and Vesttoo US Inc., (ii) approximately $33,500,000 held at Israel Discount Bank in the name of certain of the Vesttoo Bay limited partnerships, and (iii) approximately $125,000 held at HSBC in the name of Vesttoo UK LTD,” the report states.

While it also states, “Certain funds are also held in trust by Truist Bank for the benefit of the Vesttoo Bay limited partnerships, but are not included above-aggregate amount.”

So, it seems there is some value left, and the funds in trust could be linked to premiums paid. The creditors will no doubt be highly focused now on trying to find what real value there is and what they could recover.

But, the report also says, “It is important to note that not all above amounts are liquid funds— some constitute a deposit for the benefit of active transactions.”

All of which does raise questions over what will actually be found to still exist, or what could have been siphoned off in the fraud.

With huge sums having been passed to the “investor” groups in question, reportedly, the focus now has to shift to securing value for the creditors and clients that found the value was not ever there to support their reinsurance deals, while criminal proceedings accelerate as well.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.