Nearly half of the cash from a pyramid scheme in which thousands of victims allegedly lost an estimated $300 million may have passed through the Bank of Bermuda's Cayman subsidiary.

Three employees who were fired from the bank had "personal financial involvement'' in the scheme or were involved with individuals in the operation.

This is according to Bank of Bermuda's six months report which claims that a filing by a court-appointed receiver in the United States said that $140 million "may have passed through the Bank of Bermuda (Cayman) Ltd.'' The Bank of Bermuda (Cayman) Ltd has been named as one of eight defendants in the class-action lawsuit in the US by the investors in Cash 4 Titles scam.

And the bank said that as soon as it became aware of the ponzi scheme, it conducted an investigation and fired three members of staff from Cayman.

The bank is involved in three separate actions filed by the investors who put money into the ponzi scheme between 1996 and 1999. The claims were made between 1999 and 2000.

The bank, in its annual report, reiterated its intention to "defend the cases vigorously''. It has denied any wrongdoing Details of the actions are contained in the six monthly report. Annual and interim reports of this kind have to contain information on actions which may have a financial impact on the company.

The report said: "Except as outlined in the following paragraphs, management believes, based upon the advice of counsel, that the actions and proceedings and losses, if any, resulting from the final outcome thereof will not be material in the aggregate of the bank's financial position or results of operations.'' These exceptions are the three lawsuits and have unstated amounts for which the bank is being sued.

The bank states: "At this early stage of the litigation, management has concluded that it is too early to determine the ultimate outcome of the actions or the ultimate impact on the bank's financial condition and results of operations.'' The two pages of notes on the cases are on page 18 and 36 and state: "The outcome of these proceedings cannot be predicted at this stage.

However we believe that we have meritous defences to the claims asserted.'' It states: "During the six months ended 31 December 2000, The Bank of Bermuda Ltd and/or two of its Cayman-based subsidiaries were together with a number of other parties, named as defendants in three civil actions, two filed in the US Federal District Courts and one filed in the Grand Court of the Cayman Islands.

"These actions allege that we were involved in a scheme to defraud investors in to business called Cash 4 Titles... Two individuals not associated with the bank are alleged to have largely perpetrated the scheme.

"These individuals were charged by the US Attorney's office with criminal conduct and entered guilty pleas.'' It added that the individuals have also been charged by the US Securities and Exchange Commission with civil violations, including fraud.

There are also separate criminal proceedings against others involved with the scheme in the Cayman Islands. The bank states that none of these individuals are bank employees.

It goes on to say: "The two US civil findings do not set forth a specific damages amount. Estimates of the total amount invested in Cash 4 Titles and/or the alleged fraud have been contained in the filings with the court.

Filings in connection with the US criminal proceedings against the two individuals not affiliated with us indicate that in excess of $300 million may have been invested in Cash 4 Titles. According to a report to the court submitted by the court-appointed receiver for Cash 4 Titles, forms have been submitted by 1,911 investors, reflecting claims totalling $189 million.

Bank warns it could face loss over ponzi scheme "Some of the funds raised by investors were allegedly deposited in accounts established by Cash 4 Titles-related at Bank of Bermuda (Cayman) Ltd and some or all of those funds were allegedly fraudulently transferred to accounts owned or controlled by Cash 4 Titles defendants.

"A court filing by the court-appointed receiver for Cash 4 Titles states that approximately $140 million may have passed through Bank of Bermuda (Cayman) Ltd.'' A pyramid scheme is a form of business which is illegal in Bermuda and uses the money of new investors to pay returns to older investors until the money runs out, leaving newer investors with little or nothing.

The Miami lawsuit also named the Bank of Bermuda (Cayman) Ltd. as playing a primary role in Cash 4 Titles, by allegedly soliciting money for the business and wiring money and sending cheques to financial institutions in the United States to perpetuate the business.

The scheme was allegedly the brainchild of businessman Michael E Gause, who was indicted in the US in October 1999 on conspiracy, securities fraud and international money laundering.

Forty-five year-old Gause said he "transferred much of the ($300 million) to an offshore account at the Bank of Bermuda.'' According to the complaint, Gause and his partner Charles Horna raised funds from investors from the mid 1990s to October 1999, by offering returns of two to five percent per month or 24 to 60 percent annually.

Cash 4 Titles was allowed to charge its US customers loan interests of up to 25 percent per month. This fact made investors in the scheme believe that the returns touted were achievable. But instead of using the monies raised to fund the high interest short term loans as they had purported, Gause and Horna were charged with using the money for themselves.

The US complaint stated that senior officers of the Bank of Bermuda (Cayman) were also early investors in the scheme and had made "handsome returns on their investments''.

It alleged that officers personally met with prospective investors, to assure them of the legitimacy of the scheme.

The bank report states: "As soon as the bank became aware of the Cash 4 Titles scheme, the bank conducted an internal investigation. Three officers of our Cayman subsidiary were subsequently discharged for violating the bank's policies and procedures. Each of these employees denied knowing of any alleged fraud or any other wrongdoing on the part of the Cash 4 Titles principals.

"The Cayman subsidiary did, however, determine that these employees had personal financial involvement with Cash 4 Titles or related individuals.

"The bank has co-operated fully with criminal and other authorities and regulatory agencies investigating the matter, both in the United States and the Cayman Islands.''