UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

Transcription

1 DIAMOND McCARTHY LLP Attorneys for Sheila M. Gowan, Chapter 11 Trustee for Dreier LLP 620 Eighth Avenue, 39th Floor New York, New York Tel: (212) Fax: (212) Howard D. Ressler, Esq. Stephen T. Loden, Esq. J. Benjamin King, Esq. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : In re: : : DREIER LLP, : Chapter 11 : Debtor. : Case No (SMB) : : SHEILA M. GOWAN, CHAPTER 11 : TRUSTEE FOR DREIER LLP, : Plaintiff, : v. : Adv. Pro. No.: 10- : WESTFORD ASSET MANAGEMENT LLC, : SGS ASSET MANAGEMENT, : STAFFORD TOWNE, LTD., BENNINGTON : INTERNATIONAL HOLDINGS, LTD., : WESTFORD SPECIAL SITUATIONS : MASTER FUND L.P., ADAMS : INTERNATIONAL TRADING, LTD., : CARSTON SPIRES, LTD., WESTFORD : GLOBAL ASSET MANAGEMENT LTD., : EPSILON GLOBAL MASTER FUND, LP, : EPSILON GLOBAL MASTER FUND II, LP, : WESTFORD SPECIAL SITUATIONS FUND, : LTD., and EPSILON DISTRESSED : STRATEGIES MASTER FUND, LP, : Defendants. : x ORIGINAL COMPLAINT v2

2 Plaintiff, Sheila M. Gowan (the Trustee ), Chapter 11 trustee for Dreier LLP ( DLLP ), as and for her Original Complaint against Westford Asset Management LLC ( WAM ), SGS Asset Management ( SGS ) (WAM and SGS collectively referred to as the Westford Advisors ), Stafford Towne, Ltd. ( Stafford ), Adams International Trading, Ltd. ( Adams ), Carston Spires, Ltd ( Carston ), Bennington International Holdings, Ltd. ( Bennington ), Westford Special Situations Fund, Ltd. ( WSSF ), and Westford Special Situations Master Fund L.P. ( WSSMF ) (Stafford, Adams, Carston, Bennington, and WSSMF collectively referred to as the Westford Parties ), Epsilon Global Master Fund, LP ( Epsilon ), Epsilon Global Master Fund II, LP ( Epsilon II ), Epsilon Distressed Strategies Master Fund, LP ( Epsilon Distressed ) (Epsilon, Epsilon II, and Epsilon Distressed being collectively referred to as the Westford Agented Funds ), Westford Global Asset Management Ltd., ( WGAM ), and Steve Stevanovich ( Stevanovich ) (all defendants collectively referred to as Westford ), alleges as follows: Nature of this Action 1. This is an action seeking to avoid and recover pre-petition transfers of DLLP assets to Westford made as part of Marc S. Dreier s ( MSD ) confessed criminal Ponzi scheme. As described herein, Westford received avoidable transfers from DLLP totaling at least $137,648,574 in the course of MSD s Ponzi scheme. When Westford received these transfers, it knew, or was on inquiry notice, that the transfers were made as part of MSD s Ponzi scheme. As set forth below, MSD caused DLLP to make these transfers to Westford to prevent DLLP assets from being available to satisfy claims of DLLP s creditors and other investors. These transfers were made to, or for the benefit of, various Westford entities. The Trustee seeks to avoid and recover these transfers for the benefit of the DLLP Chapter 11 estate v2 2

3 Jurisdiction and Venue 2. This Court has jurisdiction pursuant to 28 U.S.C. 157 and 1334, 11 U.S.C. 544, 548 and This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), (H), and (O). 4. This is an adversary proceeding pursuant to Fed. R. Bankr. P This Court has venue pursuant to 28 U.S.C. 1409(a). Parties 6. The Trustee, plaintiff herein, is the court-appointed Chapter 11 trustee for Dreier LLP. 7. Defendant WAM is a Delaware limited liability company with its principal place of business during the time period relevant hereto at 7280 Palmetto Park Road, Suite 310, Boca Raton, FL or at First Canadian Place, 100 King Street West, Suite 5715, Toronto, Ontario, M5X 1C9, Canada. Stevanovich was the founder, president, and manager of WAM at all relevant times. 8. Defendant SGS is a Cayman Islands exempt company with its principal place of business at First Canadian Place, 100 King Street West, Suite 5715, Toronto, Ontario, M5X 1C9, Canada. SGS is an investment manager that succeeded or supplemented WAM as the investment manager for the Westford Investment Funds investments. On information and belief, Stevanovich was the founder and manager of SGS at all times relevant to the claims stated herein, and SGS stands for Steven G. Stevanovich. The Westford Advisors (WAM and SGS) directed Westford s investments and participation in MSD s Ponzi scheme. 9. On information and belief, defendant Stafford is a company organized under the laws of the British Virgin Islands v2 3

4 10. On information and belief, all Westford defendants maintained their principal places of business at the same location as the Westford Advisors. 11. On information and belief, defendant WSSF is a company organized under the International Business Companies Act of the British Virgin Islands and registered to do business in the Cayman Islands. The registered agent of WSSF is HWR Services Limited, Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands. On February 11, 2010, the Eastern Caribbean Supreme Court in the High Court of Justice of the British Virgin Islands appointed a liquidator of WSSF. On information and belief, the liquidation proceedings of WSSF have since been terminated, and WSSF is no longer the subject of insolvency or liquidation proceedings. WSSF was a party to some of the transactions described herein, and it received transfers from DLLP. 12. On information and belief, defendant WSSMF is a limited partnership formed under the laws of the Cayman Islands with its registered office at Maples and Calder, P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands. WSSMF was a party to some of the transactions described herein, and it received transfers from DLLP. 13. The Westford Parties (Stafford, Adams, Bennington, Carston, WSSF, and WSSMF) were the signatories to the documents governing Westford s investments in MSD s Ponzi scheme, and Westford Advisors directed DLLP to make transfers of principal, interest, and fees to those entities. However, correspondence between DLLP and the Westford Advisors indicates that Stafford, Adams, Bennington, and Carston may have been administrative agents for the Westford Agented Funds Epsilon, Epsilon II, and Epsilon Distressed and WSSMF (WSSMF was also a direct counter-party to some transactions). Thus, WSSMF and the Westford v2 4

5 Agented Funds may have been actual investors in MSD s Ponzi scheme and the ultimate recipients of the transfers from DLLP. In such circumstances, WSSMF and the Westford Agented Funds would be liable as subsequent transferees of the transfers to the Westford Parties, as described herein. 14. On information and belief, defendant WGAM is a Cayman Islands company with its registered office at Maples and Calder, P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands. WGAM is the general partner of WSSMF. On information and belief, at all times relevant hereto, WSSMF maintained a principal place of business at the same location as the Westford Advisors. 15. On information and belief, defendant Epsilon is a limited partnership formed under the laws of the Cayman Islands with its registered office located at Maples and Calder, PO Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands. Correspondence between DLLP and Westford Advisors indicates that Stafford, while the actual signatory to transaction documents relating to Westford s investments in MSD s Ponzi scheme, served as the administrative agent for Epsilon with respect to at least one transaction. Thus, Epsilon received transfers from DLLP either directly or as a subsequent transferee. 16. On information and belief, defendant Epsilon II is a limited partnership formed under the laws of the Cayman Islands with its registered office located at Maples and Calder, P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands. Correspondence between DLLP and Westford Advisors indicates that Bennington, while the signatory to transaction documents relating to Westford s investments in MSD s Ponzi scheme, served as the administrative agent for Epsilon II on at least one v2 5

6 transaction. Thus, Epsilon II received transfers from DLLP pursuant to that scheme either directly or as a subsequent transferee. 17. On information and belief, defendant Epsilon Distressed maintained a principal place of business at the offices of the Westford Advisors. Correspondence between DLLP and the Westford Advisors indicates that Carston, while the signatory to transaction documents relating to Westford s investments in MSD s Ponzi scheme, served as the administrative agent for Epsilon Distressed. Thus, Epsilon Distressed received transfers from DLLP pursuant to that scheme either directly or as a subsequent transferee. 18. Defendant Steve Stevanovich is a citizen of the United States of America, with the last known address of 7521 Isla Verde Way, Delray Beach, FL Stevanovich claims to be a resident of Florida as recently as August 26, In his capacity as an founder, owner, officer, director, and manager of the Westford entities, Stevanovich directed, approved, and benefited from the transfers received by the Westford Parties and the Westford Agented Funds from DLLP. 20. The transfers from DLLP described herein originated from a DLLP bank account in New York, New York, were made to Westford accounts in New York City. In addition, DLLP s transfers were made in connection with and based on documents executed in New York City. Factual Allegations 21. On December 4, 2008, in United States of America v. Marc S. Dreier, Case No. 08 Mag (JSR), the United States Attorney for the Southern District of New York filed a criminal complaint charging MSD with securities and wire fraud violations (and, in a superseding indictment (9 Cr. 085 (JSR)), money laundering), and the case was assigned to v2 6

7 United States District Court Judge Jed S. Rakoff. Federal authorities arrested MSD on December 7, Prior to his arrest, MSD was the sole equity partner of DLLP. 22. On December 8, 2008, in SEC v. Dreier, Case No. 08-Civ (MGC), the United States Securities and Exchange Commission ( SEC ) charged MSD with violations of the federal securities laws by selling, and offering to sell, fictitious notes purportedly issued by a New York City-based real estate development company. Mark F. Pomerantz (the Receiver ) was appointed as receiver of MSD s assets, including MSD s interests in DLLP and certain of its affiliated entities. 23. On December 16, 2008 (the Petition Date ), the Receiver, on behalf of DLLP, commenced a voluntary case under Chapter 11 of the Bankruptcy Code (the Chapter 11 Case ), which was assigned to United States Bankruptcy Judge Stuart M. Bernstein. The Receiver operated DLLP s business and managed DLLP s assets pending appointment of a Chapter 11 trustee. 24. On December 30, 2008, the United States Trustee for the Southern District of New York appointed the Trustee as the Chapter 11 trustee for DLLP s estate, which appointment was approved by the Court on January 9, A. Background to the Note Fraud 25. Prior to the Petition Date, DLLP was a law firm employing over 100 attorneys with its headquarters in New York, New York. The Trustee s knowledge of MSD s confessed criminal Ponzi scheme to sell fictitious promissory notes to hedge funds and use the sale of notes to subsequent investors to pay off prior investors (the Note Fraud ) is based upon, among other materials, a review of documents seized from DLLP s offices by the United States Attorney for the Southern District of New York, documents filed in connection with the criminal case against v2 7

8 MSD (including, inter alia, MSD s admission in a July 7, 2009, letter sent to the U.S. District Court in connection with his criminal sentencing that he operated a massive Ponzi scheme ), review of internal DLLP documents, review of documents produced by various scheme participants, and interviews with MSD. 26. The essence of the Note Fraud was MSD s sale of fraudulent promissory notes with above-market interest rates and on extremely favorable terms to investors. MSD told most potential investors that a long-standing DLLP client, Solow Realty and Development Corp. ( Solow ), was interested in borrowing millions of dollars from investment firms at abovemarket interest rates to fund Solow s purchase of unspecified real estate investments. Westford was one of those investors, transferring $115,000,000 to DLLP purportedly as an investment in the Solow note program through a series of loans between 2004 and Like a classic Ponzi scheme, MSD primarily used the principal obtained from later note purchasers to pay off the principal and interest due prior note purchasers. 27. MSD delivered information packages to interested potential investors that contained purported Solow financial statements and other information about the investment. In reality, the Solow financial statements were fabrications created by MSD and sometimes accompanied by fake audit opinion letters on the letterhead of Berdon LLP ( Berdon ), an accounting and auditing firm that, to the Trustee s knowledge, did not know that MSD was using its name as part of the Note Fraud. While MSD attempted to make the Solow financial statements look similar to real financial statements he had seen, the fake financial statements contained glaring irregularities and certain information that would cause a reasonable investor or any reasonable and prudent person to inquire further v2 8

9 28. For example, the financial statements purported to be consolidated financial statements, yet they did not disclose which entities financial reports were actually being consolidated. Some investment firms asked detailed questions about the Solow financial statements, and some even asked to speak with Berdon and to see the Berdon audit work papers. Upon information and belief, Westford never made such requests, and Westford never spoke with Berdon. 29. Had Westford taken the reasonable step of contacting Berdon, Westford would have realized (if it did not know already) that the Solow notes were fake. Indeed, MSD s fraud came to light when another hedge fund Whippoorwill Associates, Inc., which was considering investing in the Note Fraud contacted Berdon with questions about the fake Solow financial statements. Berdon informed Whippoorwill that it had not audited the Solow financial statements. Whippoorwill did not purchase any notes, and it informed the government of its concerns about MSD s activities. Had Westford made a similar inquiry, MSD s fraud would have been stopped in its tracks. 30. The fake financial statements also showed that Solow supposedly had hundreds of millions of dollars in cash and liquid assets on hand, thus making it implausible that Solow would take on relatively small amounts of debt when Solow had ample cash and liquid assets to fund further real estate investments. It made no sense that Solow would agree to the abovemarket interest rates required by the fake notes. 31. In addition to buying fake notes, the investors executed Term Loan Agreements relating to the purported notes. The Term Loan Agreements contained the following, unusual language: The Borrower hereby authorizes the Lender to rely upon the telephone or written instructions of any person v2 9

10 identifying himself or herself as an authorized officer of the Borrower and upon any signature which Lender believes to be genuine, and the Borrower shall be bound thereby in the same manner as if the officer were authorized or such signature were genuine. In other words, Solow purported to bind itself to the actions of any person(s) who claimed to be an authorized officer of Solow as long as the lender believed it. Despite the fact that such a provision would be highly unusual in transactional documents such as these, on information and belief, Westford never inquired about it. 32. Moreover, the Term Loan Agreements directed investors to deal only with MSD: all legal notices, billing statements, payments, or communications of any kind whatsoever pursuant to the notes were to be sent to: Solow Management Corp c/o Dreier LLP 499 Park Avenue New York, NY Attn: Marc S. Dreier While transaction documents often require the parties to copy counsel on communications, it is unusual for such documents to direct communications only to counsel, without a copy sent to the client. 33. Also unusual was the way in which investments from and payments to Note Fraud investors were made. Investors were directed to wire their investments to DLLP account number (the 5966 Account ), a DLLP account at Chase Bank, N.A., entitled Dreier LLP Escrow Account. Payments to the investors were also made from the 5966 Account. Although it was titled an escrow account, in reality the 5966 Account was used for purposes far beyond holding DLLP client escrow funds. Indeed, none of the investors in the Note Fraud including Westford Investment Funds executed any documents creating an express trust v2 10

11 governing how their deposits would be handled. Nor did Westford raise any questions about receiving payments from an attorney s trust account. 34. In addition to deposits from investors in the Note Fraud, legitimate client funds, and DLLP operating funds, funds from other DLLP accounts were deposited in and/or transferred to the 5966 Account. Similarly, funds held in the 5966 Account were transferred from that account for many purposes. For example, funds were transferred to return escrow funds to DLLP clients. In addition, payments to investors in the Note Fraud were transferred from the 5966 Account directly to each investor, including Westford Investment Funds. Funds were also transferred from the 5966 Account to MSD personal accounts or accounts held by entities MSD controlled, including DLLP operating accounts. As a result of the multiple sources of the deposits and the volume of transfers in and out of the 5966 Account, the account was hopelessly commingled. B. Westford s Introduction to the Note Fraud 35. The Note Fraud was brokered in part by Kosta Kovachev ( Kovachev ), who pleaded guilty to conspiracy in connection with MSD s Ponzi scheme in the case captioned United States v. Kovachev, No. 08-MAG-2676 (S.D.N.Y. 2008). MSD paid Kovachev a commission if he found note purchasers for the Note Fraud. Westford knew that Kovachev received a commission. 36. On or before December 31, 2003, Kovachev, as part of his role in brokering the Note Fraud, spoke with George Zombek ( Zombek ), then an employee of WAM, regarding a potential loan to Solow. Westford, upon information and belief, expressed interest and Kovachev provided Zombek with information on Solow and served as an intermediary between Westford and MSD in the exchange of the initial transaction documents v2 11

12 37. At the same time Kovachev was attempting to broker notes to Westford, Kovachev was also defending a securities fraud complaint brought by the SEC, SEC v. Ballinger, No. I:03-CV-1659 (LJM) (WTL) (S.D. Ind. 2003) (the 2003 Kovachev Ponzi Case ). Upon information and belief, DLLP represented Kovachev in that matter. The SEC s complaint accused Kovachev of participating in a $28 million boiler-room Ponzi scheme that marketed fake timeshares to the elderly. According to the complaint, Kovachev was responsible for preparing forged documents used to trick victims into investing in the scheme. The complaint says that Kovachev cited his Fifth Amendment right against self-incrimination in refusing to answer nearly all of the SEC s questions during its investigation. Shortly after filing its complaint, the SEC also obtained an order freezing Kovachev s assets and limiting his ability to spend his income. 38. This information about Kovachev was pending, public and, on information and belief, available on the SEC s website during Westford s dealings with Kovachev. The SEC also made all of the claims described above in a press release issued on November 10, 2003, which was public information during the time Kovachev dealt with Westford. (See Westford had actual knowledge of Kovachev s past activities or was on inquiry notice. On information and belief, Kovachev and Stevanovich knew one another. In a December 31, from Kovachev to Robert Miller, who also participated in the Note Fraud, Kovachev referred to Stevanovich as my friend and senior partner. Kovachev remained involved in the transaction between Westford and MSD until at least the point in time when Westford had committed to and made its first investment v2 12

13 C. Westford s Participation in the Note Fraud 40. Despite the warning signs described above, Westford Advisors, under the management of Stevanovich, negotiated and directed seven separate loan transactions as part of the Note Fraud. In each transaction, the Westford Parties were the named parties in the transaction documents. However, for at least one loan, Westford Advisors indicated to MSD that Stafford would loan $600,000 as agent for Epsilon; Bennington would loan $6,000,000 as agent for Epsilon II; Adams would loan $11,300,000 as agent for WSSMF; and Carston would loan $2,100,000 as agent for Epsilon Distressed. Epsilon, Epsilon II, Epsilon Distressed, and WSSMF may have been the source of the funds transferred to DLLP in all the transactions, and the ultimate recipients of DLLP s subsequent transfers to Westford. 41. Both prior to Westford s initial purchase of fake Solow notes, and on multiple occasions thereafter, MSD provided fake Solow financial statements to Westford. In light of the information in the fake financials, the transactions made no commercial sense for Solow. For example, the fake financials indicated that Solow had $386,937,000 in net income for 2003 and $615,205 million in net income for A company with these resources would have no need to borrow from Westford, particularly on the terms MSD negotiated. 42. Westford received exorbitant interest rates on the fake Solow notes it purchased. The nominal rates on most of the notes were 10% or 11% (one was 15%), which are high for a company with the tremendous liquidity shown on the fake financial statements MSD provided Westford. But on top of the nominal interest rate, Westford also received origination fees ranging from 2% to 3.5%, thereby raising the effective interest rates to 12% to 14.5%. Moreover, on at least one transaction, as described herein, the interest rate rose to 18% when the maturity of the note was re-extended v2 13

14 43. Beyond receiving exorbitant rates and fees, in connection with the final two transactions, Westford received facility fees that provided for an additional 10% or more in interest. Thus, for one loan, Solow was purportedly paying, in effect, a 22% interest rate. 44. These deals made no financial sense for Solow, as it was represented to Westford in the fake financial statements. However, rather than make reasonable inquiries that would have revealed the fraudulent nature of MSD s scheme such as contacting Berdon, or demanding a face-to-face meeting with Solow representatives Westford participated in the Note Fraud. 45. Westford invested a total $115,000,000 in the Note Fraud but received payments of principal, interest, and fees totaling over $137,648,574. Because Westford received the full return of the principal it invested, the transfers it received from Account 5966 that purported to represent interest and fees, which totaled at least $22,648,574, constituted profit to Westford. 46. DLLP was insolvent at the time of each of these transfers, and each of them was made as part of a Ponzi scheme and with actual fraudulent intent. 1. January 2004 Deal 47. On January 7, 2004, Westford made its initial investment in the Note Fraud (the January 2004 Deal ). Pursuant to the January 2004 Deal, MSD forged one-year Solow notes, bearing a 10% interest rate, payable to the following entities in the following amounts: WSSF ($2,500,000), Bennington ($7,500,000), and Stafford ($5,000,000). WAM signed a Term Loan Agreement on behalf of these entities. 48. DLLP paid WSSF, Bennington, and Stafford each a 2% origination fee (for a total payment of $300,000) at the time they made the loan, further increasing the above market return received on the investment v2 14

15 49. DLLP s books and records show that, between the issuance of the notes and their maturities, DLLP paid WSSF, Bennington, and Stafford interest under the January 2004 Deal totaling at least $775,001. However, a total of $1,500,000 should have been paid in interest under the January 2004 Deal. On information and belief, DLLP paid an additional $775,000 (for a total of $1,500,000) to these Westford entities such that they received the total amount owing under the January 2004 Deal. 50. On January 7, 2005, DLLP repaid the principal invested by each of WSSF, Bennington, and Stafford in the January 2004 Deal. 2. June 2004 Deal 51. On June 24, 2004, Westford made its second investment in the Note Fraud (the June 2004 Deal ). MSD forged one-year Solow notes, bearing a 10% interest rate, payable to the following entities in the following amounts: WSSMF ($750,000), Bennington ($10,500,000), and Stafford ($3,750,000). WAM signed a Term Loan Agreement on behalf of these entities. 52. DLLP paid WSSMF, Bennington, and Stafford each a 2% origination fee (for a total fee of $300,000) at the time they made the loan, further increasing the above market return they received on their investment. 53. Although the June 2004 Deal notes were to mature in June 2005, Westford repeatedly extended the maturities. In the Third Addendum to the June 2004 Deal, the interest rate on the notes was increased to 18%. While there was no legitimate business reason for a company with the financial assets of Solow to undertake the original June 2004 Deal, it was obviously unreasonable that it would agree to an 18% interest rate. 54. Over the time period of the June 2004 Deal notes, DLLP paid WSSMF, Bennington, and Stafford interest and fees totaling at least $5,331, v2 15

16 55. On December 29, 2006, DLLP transferred to WSSMF, Bennington, and Stafford at total of $15,000,000, representing a return of those entities principal invested in the June 2004 Deal. 3. January 2005 Deal 56. On January 14, 2005, Westford made a third investment in the Note Fraud (the January 2005 Deal ). MSD forged one-year Solow notes, bearing a 10% interest rate, payable to the following entities in the following amounts: WSSMF ($2,000,000), Bennington ($10,000,000), and Stafford ($18,000,000). WAM or WGAM signed a Term Loan Agreement on behalf of these entities. In addition, DLLP paid WSSMF, Bennington, and Stafford each a 3.5% origination fee at the time they made the loan (for a total fee of $1,050,000), further increasing the above market return they received on their investment. 57. DLLP paid WSSMF, Bennington, and Stafford a total of $3,066,668 in interest pursuant to the January 2005 Deal notes. 58. On January 17, 2006, DLLP transferred to WSSMF, Bennington, and Stafford a total of $30,000,000, representing a return of those entities principal invested in the January 2005 Deal. 4. February 2006 Deal 59. On February 10, 2006, Westford made a fourth investment in the Note Fraud (the February 2006 Deal ). MSD forged one-year Solow notes, bearing an 11% interest rate, payable to the following entities in the following amounts: WSSMF ($250,000), Bennington ($3,500,000), and Stafford ($1,250,000). WAM or WGAM signed a Term Loan Agreement on behalf of these entities. In addition, DLLP paid WSSMF, Bennington, and Stafford each a 2% v2 16

17 origination fee (for a total fee of $100,000) at the time they made the loan, further increasing the above market return they received on their investment. 60. DLLP paid WSSMF, Bennington, and Stafford a total of $591,403 in interest pursuant to the February 2006 Deal notes. 61. MSD and Westford agreed that Solow would pay off the February 2006 Deal notes early. On December 29, 2006, DLLP transferred to WSSMF, Bennington, and Stafford a total of $5,000,000, representing a return of those entities principal invested in the February 2006 Deal. 5. June 2006 Deal 62. On June 29, 2006, Westford made a fifth investment in the Note Fraud (the June 2006 Deal ). MSD forged a single one-year, $10,000,000 Solow note bearing an interest rate of 15% in favor of WSSMF. Unlike the other Solow notes in which Westford invested, which required quarterly interest payments, the June 2006 Deal note required the payment of an entire year s worth of interest at maturity. 63. The Term Loan Agreement signed by Stevanovich for WSSMF also required the payment of a 3% origination fee, further increasing the above-market return it received on the investment. On June 29, 2006, DLLP paid WSSMF the $300,000 origination fee. 64. On June 29, 2007, DLLP transferred $11,520,833 to WSSMF as payment of principal and interest due under the June 2006 Deal note. 6. December 2006 Deal 65. On December 29, 2006, Westford made its sixth investment in the Note Fraud (the December 2006 Deal ). MSD forged a total of eight one-year Solow notes, each bearing a 10% interest rate. Carston, Bennington, Stafford, and Adams each received two notes. Their v2 17

18 total investments were as follows: Carston, $2,100,000; Bennington, $6,000,000; Stafford, $600,000; and Adams, $11,300,000. Westford s total investment in the December 2006 Deal was $20,000, In addition to the 10% interest rate, Solow purportedly agreed in the Term Loan Agreements to pay a 2.5% per quarter facility fee. In effect, this resulted in Solow s agreement to pay a 20% per year interest rate on the notes. On top of the interest rate and the facility fee, DLLP also paid Carston, Bennington, Stafford, and Adams each a 2.5% origination fee (for a total origination fee of $500,000) at the time they made the loan, further increasing the above market return they received on their investment. No reasonable investor in Westford s position could have believed that Solow was willing to pay such exorbitant rates. 67. DLLP paid Carston, Bennington, Stafford, and Adams a total of $4,022,224 in interest and facility fees, and $500,000 in origination fees, pursuant to the December 2006 Deal. 7. March 2007 Deal 68. On March 30, 2007, Westford made its seventh investment in the Note Fraud (the March 2007 Deal ). MSD forged one-year Solow notes, bearing an 11% interest rate, payable to the following entities in the following amounts: Adams ($9,000,000), Bennington ($7,000,000), and Stafford ($4,000,000). 69. DLLP paid Adams, Bennington, and Stafford each a 2.75% origination fee (for a total of $350,000) on March 30, The Term Loan Agreement for the March 2007 Deal also required the payment of quarterly facility fees. For the first three quarters of the life of the notes, Solow agreed to pay a facility fee of 2.75%. For the last quarter, Solow agreed to pay a facility fee of 2.5%. DLLP v2 18

19 paid these facility fees. The origination fee and the facility fees increased the effective interest rate on the notes to over 22%. 71. DLLP paid $4,440,779 in interest and facility fees, on top of the $350,000 origination fee, pursuant to the March 2007 Deal. 72. On April 1, 2008, and April 15, 2008, DLLP repaid the principal Adams, Bennington, and Stafford invested in the Note Fraud. Prior to this principal repayment, Westford may have reassigned some of the right to interest, facility fees, and principal repayment under the March 2007 Deal notes and Term Loan Agreement to Carston and/or WSSMF because some of the DLLP transfers made in connection with the maturity of the notes were made to accounts elsewhere associated with Carston and WSSMF. F. The Relationships Amongst The Westford Entities 73. Westford Advisors were the investment managers for the Westford Parties and the Westford Agented Funds. The Westford Advisors involvement in the various loans is apparent from the transaction documents and the correspondence among the parties. Employees and agents of the Westford Advisors including Stevanovich signed the transaction documents on behalf of the Westford Parties. Similarly, Westford Advisors provided the wire instructions for the transfers that were ostensibly made from Solow to Westford. The address for notices to the Westford Parties under the Term Loan Agreements was the same address for Westford Advisors. Count I State Transfers New York Law Fraudulent Conveyance 11 U.S.C. 544 and 550 and N.Y. DEBT. & CRED. 276, 276-a, 278, and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein v2 19

20 75. Each transfer to the Westford Investment Funds from the 5966 Account, totaling at least $137,648,574 (collectively, the State Transfers ) constituted a transfer of an interest of DLLP in property. 76. All of the State Transfers were made within six years of the Petition Date. 77. At all relevant times there have been one or more creditors who have held and still hold matured or unmatured unsecured claims against DLLP that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e). 78. The State Transfers were each made with the actual intent to hinder, delay, or defraud entities to which DLLP was or became indebted to or after the date each transfer was made. MSD caused DLLP to make each transfer to, or for the benefit of, Westford and in furtherance of a fraudulent scheme. 79. At the time of the State Transfers, Westford was aware or on inquiry notice of the Note Fraud and MSD s fabrications, and thus Westford received the State Transfers without good faith and with knowledge of their avoidability. 80. Pursuant to N.Y. Debt. & Cred. 276, 276-a, 278, and 279, and 11 U.S.C. 544 and 550, the Trustee is entitled to judgment: (a) avoiding the State Transfers, (b) directing that the State Transfers be set aside, (c) requiring Westford, as the recipient of the State Transfers, or the entity for whose benefit the State Transfers were made, or a subsequent transferee of the State Transfers, to return the State Transfers, or the value thereof, to the Trustee for the benefit of the DLLP Chapter 11 estate, and (d) recovering attorneys fees from Westford v2 20

21 Count II State Transfers New York Law Fraudulent Conveyance 11 U.S.C. 544 and 550 and N.Y. DEBT. & CRED. 273, 278 and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein. 82. The State Transfers each constituted a transfer of an interest of DLLP in property. 83. At all relevant times there have been one or more creditors who have held and still hold matured or unmatured unsecured claims against DLLP that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e). 84. DLLP did not receive fair consideration for the State Transfers. 85. DLLP was insolvent at the time it made each of the State Transfers or, in the alternative, DLLP became insolvent as a result of each of the State Transfers. 86. At the time of the each of the State Transfers, Westford was aware of or was on inquiry notice of the Note Fraud and MSD s fabrications, and thus Westford received the State Transfers without good faith and with knowledge of their avoidability. 87. Pursuant to N.Y. Debt. & Cred. 273, 278, and 279, and 11 U.S.C. 544 and 550, the Trustee is entitled to judgment: (a) avoiding the State Transfers, (b) directing that the State Transfers be set aside, and (c) requiring Westford, as the recipient of the State Transfers, or the entity for whose benefit the Transfers were made, or the subsequent transferee of the State Transfers, to return the State Transfers, or the value thereof, to the Trustee for the benefit of the DLLP Chapter 11 estate v2 21

22 Count III State Transfers New York Law Fraudulent Conveyance 11 U.S.C. 544 and 550 and N.Y. DEBT. & CRED. 274, 278 and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein. property. 89. The State Transfers each constituted a transfer of an interest of the DLLP in 90. At all relevant times there have been one or more creditors who have held and still hold matured or unmatured unsecured claims against DLLP that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e). 91. DLLP did not receive fair consideration for the State Transfers. 92. At the time DLLP made each of the State Transfers, DLLP was engaged in, or was about to engage in, a business or transaction for which the property remaining in its possession after each of the transfers constituted unreasonably small capital. 93. At the time of each of the State Transfers, Westford was aware of or was inquiry notice of the Note Fraud and MSD s fabrications, and thus Westford received the State Transfers without good faith and with knowledge of their avoidability. 94. Pursuant to N.Y. Debt. & Cred. 274, 278, and 279, and 11 U.S.C. 544 and 550, the Trustee is entitled to judgment: (a) avoiding the State Transfers, (b) directing that the State Transfers be set aside, and (c) requiring Westford, as the recipient of the State Transfers, as the entity for whose benefit the State Transfers were made, or the subsequent transferee of the State Transfers, to return the State Transfers, or the value thereof, to the Trustee for the benefit of the DLLP Chapter 11 estate v2 22

23 Count IV State Transfers New York Law Fraudulent Conveyance 11 U.S.C. 544 and 550 and N.Y. DEBT. & CRED. 275, 278 and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein. property. 96. The State Transfers each constituted a transfer of an interest of the DLLP in 97. At all relevant times there have been one or more creditors who have held and still hold matured or unmatured unsecured claims against DLLP that were and are allowable under section 502 of the Bankruptcy Code or that were and are not allowable only under section 502(e). 98. DLLP did not receive fair consideration for the State Transfers. 99. At the time DLLP made the State Transfers, DLLP had incurred, was intending to incur, or believed that it would incur debts beyond its ability to pay them as the debts matured At the time of the each of the State Transfers, Westford was aware of or was on inquiry notice of the Note Fraud and MSD s fabrications, and thus Westford received the State Transfers without good faith and with knowledge of their avoidability Pursuant to N.Y. Debt. & Cred. 275, 278, and 279, and 11 U.S.C. 544 and 550, the Trustee is entitled to judgment: (a) avoiding the State Transfers, (b) directing that the State Transfers be set aside, and (c) requiring Westford, as the recipient of the State Transfers, or the entity for whose benefit the Transfers were made, or a subsequent transferee of the State Transfers, to return the State Transfers, or the value thereof, to the Trustee for the benefit of the DLLP Chapter 11 estate v2 23

24 Count V Federal Transfers Actual Fraudulent Conveyance 11 U.S.C. 548(a)(1)(A) and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein The transfers Westford received from Account 5966 after December 16, 2006, totaling $80,294,253, constituted transfers of interests of DLLP in property (collectively, the Federal Transfers ) The Federal Transfers were made within two years of the Petition Date The Federal Transfers were made with the actual intent to hinder, delay, or defraud entities to which DLLP was or became indebted to on or after the date of each payment At the time of each of the Federal Transfers, Westford knew or should have known of the Note Fraud and MSD s fabrications. Thus Westford received the Federal Transfers without good faith and with knowledge of their avoidability. Accordingly, Westford is not entitled to a replacement lien pursuant to 11 U.S.C. 548(c) Pursuant to 11 U.S.C. 548(a)(1)(A) and 11 U.S.C. 550, the Trustee is entitled to judgment: (a) avoiding the Federal Transfers, (b) directing that the Federal Transfers be set aside, (c) requiring Westford, as the recipient of the Federal Transfers, and/or the entity for whose benefit the payments were made, and/or a subsequent transferee of the Federal Transfers, to return the Federal Transfers, or the value thereof, to the Trustee for the benefit of the DLLP chapter 11 estate, and (d) denying Westford a replacement lien pursuant to 11 U.S.C. 548(c) v2 24

25 Count VI Federal Transfers Constructively Fraudulent Conveyance 11 U.S.C. 548(a)(1)(B) and The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein. property. Transfers The Federal Transfers each constituted a transfer of an interest of DLLP in 110. The Federal Transfers were made within two years of the Petition Date DLLP received less than reasonably equivalent value in exchange for the Federal 112. DLLP was insolvent on the date the Federal Transfers were made or became insolvent as a result of the Federal Transfers The Federal Transfers were each made as part of a Ponzi scheme. As a result of the Federal Transfers, DLLP was engaged in business or a transaction or was about to engage in business or transaction for which any property remaining with DLLP constituted unreasonably small capital As a result of the Federal Transfers, DLLP intended to incur or believed that it would incur debts that would be beyond its ability to pay as such debts matured At the time of the Federal Transfers, Westford was aware of the Note Fraud and MSD s fabrications. At the least, Westford knew or should have known of the Note Fraud and MSD s fabrications. Thus Westford received the Federal Transfers without good faith and with knowledge of their avoidability. Accordingly, Westford is not entitled to a replacement lien pursuant to 11 U.S.C. 548(c) v2 25

26 116. Pursuant to 11 U.S.C. 548(a)(1)(B) and 11 U.S.C. 550, the Trustee is entitled to judgment: (a) avoiding the Federal Transfers, (b) directing that the Federal Transfers be set aside, (c) requiring Westford, as the recipient of the Federal Transfers, and/or the entity for whose benefit the Federal Transfers were made, and/or a subsequent transferee of the Federal Transfers, to return the Federal Transfers, or the value thereof, to the Trustee for the benefit of the DLLP chapter 11 estate, and (d) denying Westford a replacement lien pursuant to 11 U.S.C. 548(c). Count VII Westford Claim Equitable Subordination 11 U.S.C. 510(c) 117. The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein When Westford received the State and Federal Transfers, Westford knew they were made pursuant to a fraudulent scheme. Once Westford returns the State and Federal Transfers to DLLP, Westford may be entitled to a general unsecured claim against the DLLP Chapter 11 estate pursuant to Bankruptcy Code 502(h) (the Westford Claim ). For the reasons discussed above, however, allowing the Westford Claim pari passu with other unsecured creditors would ignore Westford s inequitable conduct and further injure those other creditors who, unlike Westford, may not have been on actual notice of the Note Fraud. Under these circumstances, equitable subordination of any Westford Claim would not be inconsistent with general bankruptcy principals which allow the Bankruptcy Court, as a court of equity, to equitably subordinate the claims of creditors who come to the Court with unclean hands v2 26

27 119. For these reasons, pursuant to 11 U.S.C. 510(c) the Trustee is entitled to judgment equitably subordinating any Westford Claim to the claims of all other innocent general unsecured creditors of the DLLP Chapter 11 estate. Count VIII Liability of General Partners 120. The Trustee re-alleges and fully incorporates the allegations pleaded in paragraphs 1 through 73 as if fully set forth herein WGAM is the general partner of WSSMF and is therefore jointly and severally liable with WSSMF for the relief sought against WSSMF based on the foregoing claims. PRAYER WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favor of the Trustee and against Westford as follows: (a) On Count I, pursuant to 11 U.S.C. 544 and 550, and N.Y. DEBT. & CRED. 276, 276-a, 278, and 279: (i) avoiding and preserving the State Transfers; (ii) directing that the State Transfers be set aside; (iii) recovering the State Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; and (iv) recovering attorneys fees; (b) On Count II, pursuant to 11 U.S.C. 544 and 550, and N.Y. DEBT. & CRED. 273, 278 and 279: (i) avoiding and preserving the State Transfers; (ii) directing that the State Transfers be set aside; and (iii) recovering the State Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; (c) On Count III, pursuant to 11 U.S.C. 544 and 550, and N.Y. DEBT. & CRED. 274, 278 and 279: (i) avoiding and preserving the State Transfers; (ii) directing that the State Transfers be set aside; and (iii) recovering the State Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; v2 27

28 (d) On Count IV, pursuant to 11 U.S.C. 544 and 550, and N.Y. DEBT. & CRED. 275, 278 and 279: (i) avoiding and preserving the State Transfers; (ii) directing that the State Transfers be set aside; and (iii) recovering the State Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; (e) On Count V, pursuant to 11 U.S.C. 548(a)(1)(A) and 550: (i) avoiding and preserving the Federal Transfers; (ii) directing that the Federal Transfer be set aside; and (iii) recovering the Federal Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; (f) On Count VI, pursuant to 11 U.S.C. 548(a)(1)(B) and 550: (i) avoiding and preserving the Federal Transfers; (ii) directing that the Federal Transfer be set aside; and (iii) recovering the Federal Transfers, or the value thereof, from Westford for the benefit of the DLLP Chapter 11 estate; (g) On Count VII, pursuant to 11 U.S.C. 510(c), equitably subordinating the Westford Claim to the claims of all other innocent general unsecured creditors of the DLLP Chapter 11 estate; (h) On Count VIII, pursuant to principals of federal and state common law, finding that WGAM is jointly and severally liable with WSSMF for the relief sought against WSSMF based on the foregoing claims. (i) On all Counts, pursuant to federal common law and N.Y. CPLR 5001 and 5004, awarding the Trustee prejudgment interest from the date on which the Transfers were received; (j) On all Counts, establishment of a constructive trust over the proceeds of the State Transfers and the Federal Transfers in favor of the Trustee for the benefit of the Dreier LLP Chapter 11 estate; v2 28

29 (k) Awarding the Trustee all applicable interest, costs, and disbursements of this action; and (l) Awarding the Trustee such other relief that this Court deems just and proper. DATED: December 15, 2010 New York, New York Respectfully submitted, By: /s/ Stephen T. Loden Howard D. Ressler, Esq. Stephen T. Loden, Esq. J. Benjamin King, Esq. (pro hac vice) DIAMOND MCCARTHY LLP 620 Eighth Avenue, 39th Floor New York, New York Tel: (212) Fax: (212) Counsel for Sheila M. Gowan, Chapter 11 Trustee of the Estate of Dreier LLP v2 29