Medley’s Indonesia Cars Bet Led to FBI, Legal Saga

(Corrects story published on Feb. 27 to say Medley Opportunity Fund made the investment, not Medley Capital Corp., in first paragraph. Adds Medley relationship in seventh paragraph.)

Medley Opportunity Fund Ltd.’s $20 million bet on an auto-financing business in Indonesia soured when the money vanished in 2007. Five years later, the fund managed by New York-based Medley Capital LLC is still trying to find a way to recover its stake, while avoiding Indonesian courts.

The fund’s former Indonesian partners, including Robert Soeharsono, conspired to commit fraud and came up with “far- fetched excuses” for not returning the money, Andrew Fentress, a managing partner at Medley Capital, said in a lawsuit filed in Singapore. A closed hearing is scheduled for March 1.

The Medley fund, which has turned to the Federal Bureau of Investigation, the U.S. Ambassador, Indonesian police, and courts in the U.K. and now Singapore for help, hasn’t sued in Indonesia (IDRAGDP), where all 14 defendants are based. While Southeast Asia’s largest economy’s credit rating returned to investment grade in recent weeks, for the first time since 1998, investors avoid local courts.

“The interest to invest in Indonesia is certainly increasing but the main hesitancy is there’s no legal certainty and trust in the courts,” said Frans Winarta, a Jakarta-based lawyer who advised Medley Capital in 2008. “Medley’s case in choosing to use legal systems outside of Indonesia demonstrates this.”

Indonesia is ranked 100th out of 183 nations on Transparency International’s corruption perception index, at the same level as Gabon and Djibouti. President Susilo Bambang Yudhoyono has said Indonesia needs at least 15 years before it can achieve a government as clean as Singapore’s or Hong Kong’s, rated 5th and 12th respectively on the corruption index.

Transparency Perceptions

“Foreign investors are generally advised to avoid local courts as much as possible because of a perceived lack of transparency in judicial decision-making,” said Jim Castle, a former president of the American Indonesia Chamber of Commerce who has lived in Indonesia since 1977.

Fentress and Medley Capital didn’t respond to four e-mails or return two phone calls seeking comment. Medley Capital LLC is an affiliate of MCC Advisors LLC, the investment manager to Medley Capital Corp.

In June 2007, the Medley Opportunity Fund agreed to invest about $20 million in Soeharsono’s PT Artha Persada Finance for the “sole purpose” of providing loans for Honda Motor Co. (7267) vehicles sold in Indonesia, according to the lawsuit.

Hillside Apex Fund Ltd (THAHIAI). invested $20 million about the same time with the same intent, Medley Opportunity Fund said in its complaint. Hillside was managed by Thames River Capital, which has been acquired by London-based F&C Asset Management Plc. (FCAM)

‘Not Conducive’

Three months later, the Medley fund sought the return of its investment after Artha Persada’s president Soeharsono said Indonesia’s economic climate wasn’t conducive for the auto- financing business, according to the complaint.

Instead, Soeharsono, his sister Effy, her husband Alfons Irawan and Ang Hoey Tiong of auto dealer PT Istana Mobil Surabaya Indah, who’s married to a Soeharsono relative, used family-run businesses to unlawfully divert the money to buy shares in oil drilling firm PT Mitra International Resources (MIRA), Fentress said in his filing. Hillside and Mitra aren’t parties to the lawsuit.

“The claim is baseless and wholly without merit,” said Siraj Omar, a lawyer who represents Artha Persada, the Soeharsonos, Irawan, Ang and PT Indo Dana Persada.

Apart from the legal wrangle with the Indonesians, Medley Capital LLC and three of its principals were sued Feb. 2 in New York by Fintan Partners LLC. The lawsuit was dropped on Feb. 10, with no reason given.

Asset Transfer

Fintan, an investor in Medley Opportunity Fund, accused Medley Capital LLC’s principals, including Fentress, of self- dealing and profiting from a transfer of $76.3 million of income-generating assets out of the fund. The transfer to Medley Capital Corp., which later sold shares in an initial public offering, reduced the value of Fintan’s investment, according to the complaint.

Robert Soeharsono denies any wrongdoing.

Medley Opportunity Fund didn’t place any restrictions on the interim use of the money and it knew about the investment in Mitra, which was considered an investment-grade stock at that time, Robert Soeharsono said in court documents.

Mitra last traded in June at 160 rupiah, down 84 percent from its peak of 1,010 rupiah in September 2008.

Artha Persada, and the others represented by Omar, sought in a Jan. 4 filing to have a freezing order on their assets lifted by the Singapore High Court. The defendants claim the court lacks the jurisdiction to issue the order and say the lawsuit wasn’t properly served. The fund hasn’t served the lawsuit on the other 8 defendants, according to court papers.

The six including the Soeharsonos are also represented by Davinder Singh, chief executive officer of Drew & Napier LLC.

‘Settlement Pressure’

Medley Opportunity Fund served the freezing order on banks including HSBC Plc and then “kept quiet, content that this would pressure the defendants into coming to a settlement,” they said in court papers. The defendants have bank accounts with HSBC, Standard Chartered Plc and Citigroup Inc. (C) in Singapore, according to the complaint.

The fund sought other means in pursuit of its money before turning to Singapore’s courts in September. Fentress reached out to the Soeharsono siblings, requesting the return of the investment.

They came up with “inconsistent and far-fetched excuses, the most notable of which was that the invested amount was frozen in the Bank Century account due to an embezzlement scandal at the bank,” Fentress said in his court filing. “I did not believe them.”

Police Probe

Rebuffed, Fentress turned to lawyers at Sidley Austin LLP (1119L) in Singapore and Jakarta-based Frans Winarta & Partners to recover the money. The fund also filed complaints with Indonesian police in 2009 against Artha Persada Finance, the Soeharsonos, Irawan and Ang, accusing them of money laundering and fraud.

Robert Soeharsono said in his filing the police probe was “exhaustive” and concluded no criminal acts were committed.

The Medley fund contacted the FBI bureau in New York in an attempt to pursue criminal investigations against the Soeharsonos, Irawan and Ang, leading to a probe, according to the lawsuit.

Peter Donald, a spokesman for the FBI in New York, declined to comment.

Fentress and Bryan Boches, a Medley Capital LLC managing director, also met with then U.S. Ambassador to Indonesia Cameron R. Hume in a bid to enlist the help of the U.S. government in resolving the dispute, Fentress said in court papers.

“The embassy regularly works with U.S. companies that are seeking to raise issues with the Indonesian government,” said Troy Pederson, spokesman for the U.S. Embassy in Jakarta, declining to comment specifically on Medley’s case.

U.K. Settlement

In August 2009, both the Medley fund and Hillside sued in the U.K. seeking the return of a total of $40 million, claiming Artha Persada breached terms of their agreements. They settled the dispute out of court in May 2010.

Medley Opportunity Fund said it followed up with the Singapore lawsuit because it discovered the fraud after the settlement.

By suing in Singapore, the Medley fund breached the agreement and “deliberately concealed” that the pact contained a jurisdiction clause in favor of English courts, Soeharsono said in his filing.

“We’re waiting for our day in court,” Soeharsono’s lawyer Omar said.

The case is Medley Opportunity Fund Ltd v PT Artha Persada Finance & Ors S654/2011 in the Singapore High Court.

To contact the reporter on this story: Andrea Tan in Singapore at atan17@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net

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