• Supreme Court told $2m hole has doubled

• Just $500,000 assets to cover $4.74m liabilities

• 16 breaches of Securities Act are alleged in report

• Public offering ‘against company’s own rules’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ first-ever crowd funding platform is suffering from a near-$4m insolvency, its provisional liquidators have asserted, as they prepare to report “multiple criminal infractions” to the police.

Ed Rahming, the Intelisys (Bahamas) principal, and Cheryl Simms, the Kikivarakis and Company accountant, in their February 22, 2024, report to the Supreme Court revealed that ArawakX’s insolvency has almost doubled from the Securities Commission’s initial $2m estimate after they wrote-off more than $1m in assets listed on its balance sheet.

This leaves the platform and its parent, MDollaz Ltd, with just $508,665 in assets to cover $4.474m in total liabilities, thereby producing a $3.965m deficit with the provisional liquidator duo warning this gap is only likely to increase since “significant sums [are] owed to third parties”.

Mr Rahming and Ms Simms said it was also impossible to cure MDollaz/ArawakX’s “criminal violation” of the Securities Industry Act as a result of the unauthorised public offering that persuaded 134 investors to inject capital into the crowd-funding platform. Those investors are now in peril of losing much, if not all, of their investment as the provisional liquidators have received a legal opinion saying they should be treated as unsecured creditors (see other article on Page 1B).

The duo’s report also alleged there was “substantial commingling” of funds belonging to ArawakX itself and those entrusted to it by investors in the share issues it facilitated. The latter should have been held separately by the crowd-fund platform, which would have been acting in a trustee or fiduciary capacity, but Mr Rahming and Ms Simms are alleging that “over $1m of fiduciary cash was used on company expenses”.

Their first Supreme Court report identified no fewer than 16 purported breaches of the Securities Industry Act, its accompanying regulations and rules by ArawakX, whose principals are D’Arcy Rahming senior, the former Bahamas International Securities Exchange (BISX) chief operating officer, and his son, D’Arcy junior.

The alleged violations, according to the provisional liquidators, ranged from failing to safeguard, segregate and maintain proper controls to secure client funds; not obtaining Securities Commission approval for Board and corporate governance changes; and not paying distributions to investors on time or returning investor monies from failed crowd-fund issues.

However, the most serious allegation concerns MDollaz/ArawakX’s “public offering” which was held even though the company’s own Memorandum of Association stipulated that “the company shall be a private company and, accordingly, no shares nor any class of shares of the company shall be offered to the public for subscription”.

“The joint provisional liquidators have found that the company is insolvent, having a net deficit of $3.965m with significant sums owed to third parties,” Mr Rahming and Ms Simms told the Supreme Court. “This amount is likely to increase after further investigation by the joint provisional liquidators and a creditor adjudication process.

“It is our view that the company has no viable prospects of continuing as a going concern.” Describing the findings from their investigation as “very serious”, the duo said they had chosen to “highlight two”, and added: “We found the commingling of company cash with fiduciary cash as a matter of course at the company. We found that over $1m of fiduciary cash was expended on company operational expenses.

“The Company conducted a ‘public offering’ without seeking the approval of the Securities Commission of The Bahamas. This finding is irremediable and consists of multiple criminal infractions which will be reported to the Royal Bahamas Police Force.”

Providing more details on the public offering, which raised $817,712 from 134 investors including some foreigners, the provisional liquidators alleged: “Our review found that the company held a ‘public offering’ of its shares in contravention of Section 97 of the Securities Industry Act.

“Given the number of investors, the marketing materials shared with potential investors, and repeated comments of an organised ‘white gloved’ treatment of targeted investors in issuers, it is our view that this was a ‘public offering’. One hundred and thirty-four subscribers were found to have signed subscription agreements with the company.

“No approval was sought from the Securities Commission for the ‘public offering’ of company shares or the subscribers. The cash provided by the subscribers was spent by the company and no share certificates were issued... The joint provisional liquidators will provide their findings on the ‘public offering’ to the Royal Bahamas Police Force.”

The Rahmings have previously vehemently denied, and rejected, all concerns and allegations of wrongdoing in relation to how MDollaz and ArawakX were operated and managed. D’Arcy senior, in a September 27, 2023, affidavit filed with the Supreme Court, asserted: “For the avoidance of doubt, the respondent rejects that it is insolvent in the sum of at least $2.4m.

“The respondent is not the subject of any financial claims or demands as at the date hereof. The respondent also denies that it has committed breaches under the ‘Securities Industries Act that warrant criminal penalties’.”

However, the provisional liquidators’ report supports the initial Securities Commission findings that persuaded Sir Ian Winder to approve and order the duo taking control of ArawakX in early November last year. Their findings will now be used as evidence by the Bahamian capital markets regulator to push for the crowd-fund platform’s full wind-up during a two-day Supreme Court hearing set for March 11-12.

“Given the issues found at the company and summarised above, we support the winding-up petition of the Securities Commission of The Bahamas,” Mr Rahming and Ms Simms wrote. “Applying for the liquidation of the company to be placed under the supervision of the court is in the public’s best interest.

“It will permit the joint provisional liquidators to continue with their investigations, address the reconciliation of the issuers’ capital raises, assess asset recovery options including what company assets can be sold while ensuring no claims can be brought against the company without the leave of the court...

“In assessing the best interest of the clients and creditors, the joint provisional liquidators have sought to balance the overall cost and negative fallout of winding0up the company against the risk of allowing it to continue to the detriment of even more parties. It is our view that the overall cost and fall-out of the winding-up of the company is less than the negative impact of allowing the company to continue its operation.”

The provisional liquidators warned that it is “too early to predict the likely eventual return to customers and creditors” from efforts to recover and realise ArawakX’s assets, although the extent of the near-$4m solvency gap - and the fact it is likely to increase - means many will probably incur significant losses.

Turning to the four crowd-funding issues that were successfully completed via ArawakX’s platform, the Supreme Court was informed that only one - the first, concluded by Pinnacle Franchise Brands, the Red Lobster franchisee - was provided with its share register, which showed some 868 investors had acquired a collective 74,054 shares for a total $90,384 outlay.

The other three - Tropical Gyros (Chef Kevin Culmer), Footcare Rx (Dr Daniel Johnson), and Nassau Gas & Tanks, whose principal is Mark Newell - have yet to receive their share registers. “There are discrepancies with the share registers - investors are missing on the registers, etc,” the provisional liquidators alleged. “We found irregularities with the four completed issuer raises.

“Investors have not received their share certificates, and the Issuers were assessed additional fees by the company not shown in their listing agreement. We have started a verification/reconciliation process for one issuer to ensure completeness of its share register and will undertake a similar exercise for the remaining issuers.

“Upon completion of this exercise, we will provide the updated share registers to the Bahamas Central Securities Depository to act as the registrar and transfer agent for the issuers.” For Tropical Gyros, some 30,236 shares were acquired by investors with an outlay of $218,193; some $190,346 was spent on 24,064 FootCare RX shares; and $122,287 invested in 14,830 shares in Nassau Gas.

While adding the caveat that they have had limited time in which to conduct their investigations, given that they have only been in place for just over three months, the ArawakX provisional liquidators added: “We found that pertinent books and records were missing for all the years the company was in operation. For example, professional indemnity insurance was not obtained for two of the three years in operation...

“The joint provisional liquidators found that an affiliated company, Mdollaz Technology Ltd, was used in the operation of the company (MDollazLtd/ArawakX) for over two years. This company was not regulated by the Securities Commission. Mdollaz Technology Ltd is to be a subsidiary of the company but the shares were not transferred to the company.”

When they were appointed, Mr Rahming and Ms Simms said they found ArawakX with just over $10,000 in its bank accounts with MDollaz Ltd holding $7,993 and MDollaz Technology Ltd possessing $2,437. A $140,000 certificate of deposit was held with the Bahamas Development Bank, but this has yet to be transferred to the duo’s control.

“We were informed that due to delays experienced in opening the bank accounts at Bank of The Bahamas in the name of MDollaz Ltd, the company decided to have MDollaz Technology Ltd open bank accounts at Bank of The Bahamas and use those bank accounts to conduct the business of the company,” the provisional liquidators said.

“We understand that MDollazLtd was awaiting an operating licence from the Securities Commission in order to open the bank account and MDollaz Technology Ltd, which is not regulated by the Securities Commission, did not have this requirement.”

The duo alleged that there was “significant commingling” of funds provided by investors to purchase shares in the multiple crowd-funding issues that took place on the ArawakX platform with the company’s own cash and revenue/income streams - something that should not have occurred.

“We found significant commingling of the company’s cash with fiduciary cash in the bank accounts of MDollaz Technology Ltd,” the provisional liquidators said. “We found that a total of approximately $1m of fiduciary cash went into the fiduciary account and $100,000 of fiduciary cash went into the general operations account.

“Approximately $1m of fiduciary cash was then disbursed from the two bank accounts for company operational expenses.” Mr Rahming and Ms Simms alleged that similar happened with the Bank of The Bahamas accounts in MDollaz/ArawakX’s name.

“We found that a total of approximately $38,000 of fiduciary cash went into the general operations account and approximately $367,000 of fiduciary cash went into the fiduciary account. Approximately $91,900 of the fiduciary cash was disbursed for company operational expenses,” they asserted.

When it came to asset write-offs and write-downs, the provisional liquidators said they have taken a 100 percent provision against $51,159 in accounts receivables said to be due to ArawakX plus a combined $155,000 in deposits and pre-paid expenses.

“From our review we saw no evidence of the company having filed the required VAT returns with the Department of Inland Revenue (DIR), and therefore those documents will be submitted as we seek settlement of this balance from the DIR,” Mr Rahming and Ms Simms said, referring to a $35,369 VAT receivable.

“Fixed assets, which represent IT infrastructure, furniture, equipment computers land and buildings, have a carrying value in the accounting records of $351,958. Through our review of these assets, we have assessed a liquidation value of $322,867....

“We noted that the company recorded a financial deficit of $2.909m,” the provisional liquidators continued. “Through our review of the collectability of the assets we recorded a total provision of $1.014m and adjusted the ‘due to Bank of The Bahamas’ balance to reflect its present balance, thereby increasing the company’s deficit to $3.965m

“It should be noted that we have not issued any request to creditors for the submission of their proof of debt in respect of amount owing to them, and therefore we anticipate that the amount recorded will be adjusted and may result in an increase in the financial deficit.”