Fraud Investigations and Complex Asset Recovery in 2020: A Q&A With Mintz Cross-Border Asset Recovery Co-Chairs Dan Pascucci and Joe Dunn

With courts and government agencies around the world enacting emergency measures in response to the Covid-19 pandemic – ranging from complete shutdowns to delays and limitations – advancing the ball in dispute resolution is more challenging than ever.  Because fraud investigations and complex asset recovery matters are typically managed by litigation counsel and often follow litigated claims, clients have a tendency to see the effort through a litigation lens.  Under current circumstances, this may lead to a perception that asset recovery goals are impacted by the same court restrictions and limitations as in-court disputes.  However, the collective response to the global pandemic presents a far more fluid situation for asset recovery than courtroom litigation.  We met (virtually) with Dan Pascucci and Joe Dunn, Co-chairs of the Mintz Cross-Border Asset Recovery practice, to discuss the importance of a tactical asset recovery approach to clients looking to maximize return on cash holdings, and several emerging dynamics playing into efforts to enforce judgments and arbitration awards.

To start, what exactly is Cross-Border Asset Recovery and when is your team typically involved?

In a nutshell, we specialize in enforcement of high-value judgments and arbitration awards around the world.  When a client has a dispute with a Fortune 100 company with assets in the same jurisdiction as the dispute, enforcing the judgment or award usually is not an issue; the defendant knows you can seize its accounts, put a lien on its property, or appoint a receiver to collect receivables.  That debtor can and will typically pay up once judgment is final. 

But the world has become a small place and our clients are increasingly finding that, when they have claims against foreign or multinational defendants without deep connections to the US (or wherever the case is pending), it is fairly common to see those defendants move and conceal assets as a backstop against recovery if they lose the litigation.  That’s where we come in.  Over the past 15 years, we have assembled a team of experts from our litigation, bankruptcy and commercial practices, among others, and developed robust methodologies to investigate and find those sheltered assets and recover them – often from dark corners of the globe.

Are there common hallmarks in a dispute that flag the need for asset recovery expertise?

We see several common starting points to these investigations: 

• a high-dollar-value claim that has been litigated or is in active litigation;
• a debtor (or related enterprise) with an international footprint;
• the debtor typically does not have readily attachable assets in the jurisdiction where the claim was filed;
• there is typically some threat or even evidence the debtor has or will move assets to avoid collection; and
• there is some level of uncertainty over the ability to locate sufficient assets in a suitable jurisdiction to satisfy the judgment or award.

How has the Coronavirus pandemic impacted Cross-Border Asset Recovery?

Creditors in active litigation are seeing their cases on hold or at least slowed due to interim emergency court rules and other government shutdowns.  The halted progress in court can be very frustrating and is often a game changer.  That frustration is only made worse by knowing the debtor largely remains free to move assets and take other steps to prevent enforcement. 

Even before the pandemic, commerce had become so globalized and digitized that debtors seeking to hide assets could quickly, efficiently and often remotely deploy asset-protection schemes.  Holding companies, often used as shells or conduits, can be created with a click of a mouse or a call to remote counsel.  Funds can be transferred with equal fluidity.  In some privacy-focused jurisdictions, nominee directors and shell entities can be established without leaving home. 

To take one example, in Samoa, a shelf corporation can be acquired within days.  The incorporator has the option of appointing a nominee director and shareholder, so there is no public record connecting the company to the debtor.  Other offshore jurisdictions offer similar arrangements.  And with regulators and trade partners globally embracing the need to do business remotely, debtors looking to move assets have a lot of tailwind.  Add to that a significant reduction in judicial involvement, and it’s a recipe to embolden debtors to move or shield assets – and seeking court intervention to block it is not always feasible. 

For the most part, asset recovery efforts are far less impacted.  We don’t need court involvement to investigate and trace a debtor’s asset moves.  And while discovery enforcement may be stalled, we can often help trial counsel by providing insights from our investigation that, in turn, help shape depositions and written discovery to identify evidence that will later prove valuable in enforcement efforts.  Many times, the best evidence is in the hands of third-parties who, even without active courts, will respect a subpoena or preservation letter.

Ultimately, the pandemic and shut downs mean a creditor chasing assets that may move offshore needs to be more proactive and nimble than ever before.  But many of the same developments that embolden furtive debtors are providing us robust and unique recovery opportunities:

• The world has suddenly become much more comfortable doing business remotely.  People in a wide range of industries are engaging in conversations on Zoom and WebEx that historically would only happen in person. 
• Investigation is a large component of what we do.  Public records and electronic databases can be searched remotely; that’s not new, but the last mile historically required in person contact –a conversation with a regulator, an interview with a former employee of a debtor, or meeting trade partners to paint a picture of asset movement.  Now those people are working from home and getting comfortable doing business over Zoom or WebEx.  Many of them also have more availability than usual. 
• Pressing the accelerator on these types of contacts now while virtual is the new in-person can speed up data collection, reduce costs and yield intelligence that otherwise might never be discovered.  Simply put, it’s much easier for our investigators to make one more call to an overseas source than it is to make one more in-person visit. 

Much of the work of the Cross-Border Asset Recovery team focuses on post-judgment enforcement.  Do you find that you are typically brought in after a judgment is issued, and is that the best time to start the recovery effort?

Typically, we are engaged at one of two phases.  Most often, the verdict or award is at hand or in hand, the judgment creditor turns its sights to collection, recognizes the challenges involved and looks to bring in recovery expertise.  Less often, proactive creditors will build attention to recovery strategies into the litigation from the start.  There are experienced litigants who recognize that strategic collaboration between recovery experts and trial counsel offers a high ROI by identifying potential pre-judgment freeze orders, attachments or other mechanisms to aid enforcement.  But they are certainly the exception.

There’s a third entry point that is a rare situation – analyzing asset recovery while negotiating the start of a business relationship, before a dispute even arises.  It may be stating the obvious to say we can do the most good when the clay is softest, but pre-dispute dynamics really do present unique opportunities to prevent losses or set up later recoveries.  One situation where we do see the pre-litigation analysis is with third-party litigation funders.  Funders want to know there’s a path to enforcement and most consider the question a fundamental tenet of their fund/no-fund decision.  We sometimes serve as diligence counsel to funders and, by analyzing asset recovery at the inception – particularly in cases where the assets are not in the same country as the litigation – funders have two advantages.  They can identify strong collection paths where they might otherwise pass on an opportunity, or they can identify enforcement problems where they might otherwise make a bad investment. 

But even this analysis, when it happens, happens after a deal has gone sideways and litigation is being considered.  We are not yet seeing routine consideration of asset recovery or prevention of dissipation efforts in earlier stages like negotiation and implementation of high-value contracts.

How can consideration of asset recovery tactics help negotiate or implement a better business relationship? 

There is a lot that can be done before a dispute arises, when the parties are still working together to build something.  Of course, negotiating leverage and dynamics have to be factored in and one size does not fit every contract, but some examples of what can be done would include:

• The creditor can confirm location of the debtor’s assets – either by investigation or with voluntary disclosure by a motivated debtor.  This, in turn, can help shape a deal where a minimum level of unencumbered assets will be maintained in an enforcement-friendly jurisdiction;
• Where maintaining specific asset locations is too big of an ask, asset movement can be monitored to serve as an early red flag of a problem;
• Guarantor relationships can be put in place.  So, for example, if a contract is being signed by an affiliate with minimal assets or assets only in a difficult jurisdiction, a guarantor parent or affiliate with assets in an enforcement-friendly jurisdiction is tremendously valuable;
• Dispute resolution provisions are a tremendous factor.  Depending on where enforcement will need to occur, it often is better to elect arbitration.  Clients are often surprised to learn that, in many instances, it’s easier and faster to enforce an arbitration award across borders than a court judgment;
• That said, we have seen firsthand that the best ally in cross-border investigations is a US district court.  The US courts have interpreted their long-arm jurisdiction very broadly and have supported highly-effective discovery efforts around the globe.  So, where we can build a sufficient nexus to trigger US district court jurisdiction, or convince a counterparty to agree to that jurisdiction up front, it can pay tremendous dividends in enforcement proceedings;
• Where US jurisdiction is not available, carefully considering and negotiating for jurisdiction by strong enforcement courts, like the UK, is highly valuable; and
• With closely-held companies, particularly where part of a high-dollar family enterprise, it is critical to get as much information as possible up front about the affiliation of the various entities involved in the operation, and the individuals who own and/or control decision-making.  This information typically proves critical in exposing fraudulent intercompany transfers, self-dealing by insiders, and other hallmarks of alter ego liability – a valuable tool for exerting leverage over those who often have the most to lose.

With the current state of economic uncertainty, we’re in an environment where, for many clients, every dollar spent or risked is more important than ever.  The types of contractual relationships that lead to multinational enforcement efforts invariably carry large investments.  It is more critical than ever to ensure that those investments are protected with structural terms that will serve the client’s interests for both good and bad times.

When the Mintz Cross-Border Asset Recovery team is brought into matters during a pending litigation, what does that mean for existing litigation counsel?

The asset recovery and litigation roles are highly complementary of each other.  When the risk of asset sheltering is identified early, the combination of a team focused on winning the case and a team focused on the end-game is an ideal mix. 

When we work with trial counsel, we invariably find synergies that advance both the trial work and the enforcement work.  Our investigation may help shape discovery that leads to evidence that helps both the trial and the asset tracing work.  Good trial counsel armed with the fruits of our asset investigation will often hone in very effectively on a deponent or trial witness to adduce better evidence of fraudulent conveyances, alter-ego relationships or other dubious asset-related transactions.  Unveiling such efforts can impact witness credibility, lead to stronger liability or damages facts, and even pressure better settlement dynamics. 

Last, but certainly not least, identifying and understanding asset moves and risks during litigation can often support the issuance of freeze orders, attachments, liens and other provisional remedies issued during trial to protect later enforcement.  It probably comes as no surprise but, ultimately, the claimant who focuses on the complete picture from the start typically arrives at a better resolution faster. 

For clients who are carefully conserving cash during the economic downturn, how does asset recovery factor in?

Ultimately, asset recovery efforts need to be cash positive.  That is the whole point of undertaking the effort.  And typically, it’s highly asymmetrical.  It would be pointless to spend more than you expect to recover or, frankly, even too large a portion of what you expect to recover.  A critical part of the analysis we do early in our investigations is getting a handle on the level of assets actually recoverable.  A billion-dollar judgment may be valueless if the debtor is insolvent and there is no strong path to attach liability to a deeper pocket or void fraudulent transfers.  The best advice might be to cut losses.  That usually is not the case, but we need to pressure test for that early, before a significant investment.  When done right, asset recovery should be an investment with a very high ROI.

The current focus on cash also underscores the importance of an asset recovery strategy during the contract or relationship-building stage.  Addressing the issues we discussed earlier at the beginning of a relationship involves a very small fraction of the costs of investigating and piercing a fraudulent scheme to enforce a judgment after the fact.  Just compare, for one example, the cost of negotiating an appropriate guaranty with the cost of investigating and trying an alter ego case after the fact. 

Lastly, for companies with strong claims but cash concerns, third-party funding often is the right option.  That is true now more than ever.  Litigation funds have been flush with cash for several years, and because they are non-correlating investments largely immune to market fluctuations, with present stock market volatility and bond returns basically at zero, we expect banks and other institutional investors to increase their appetite for litigation fund investments. The funders are looking for deals and it’s probably easier now than ever to secure funding for good claims.

That coincides nicely with some other trends we see toward funding as a way of reducing risk or shifting how expense tracks on balance sheets.  Third-party funds used to be utilized primarily when the client could not fund the legal expense.  But more and more we are seeing well-capitalized companies using it as a management tool, either to reduce overall expense at the cost of reduction in future gains, or as a tool to shift the cost of the recovery from a legal budget to the business unit that suffered the initial loss.  Regardless of the motive, the opportunity is as strong as ever to liquidate valuable claims while carefully managing the expense of doing so.

For more information about the Mintz Cross-Border Asset Recovery Practice please contact Dan Pascucci or Joseph Dunn and visit the practice page at https://www.mintz.com/industries-practices/cross-border-asset-recovery

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