UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION - LOS ANGELES

Transcription

1 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 1 of 16 Page ID #: THOMAS C. HEBRANK Permanent Receiver 501 W. Broadway, Suite 800 San Diego, California Phone: (619) Fax: (619) thebrank@ethreeadvisors.com SECURITIES AND EXCHANGE COMMISSION, v. Plaintiff, CHARLES P. COPELAND, COPELAND WEALTH MANAGEMENT, A FINANCIAL ADVISORY CORPORATION, and COPELAND WEALTH MANAGEMENT, A REAL ESTATE CORPORATION, Defendants. UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION - LOS ANGELES Case No R-DTB RECEIVER S FORENSIC ACCOUNTING REPORT #1 Date: June 29, 2012 Ctrm: 8, 2nd Floor Judge: Hon. Manuel L. Real RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

2 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 2 of 16 Page ID #: Thomas C. Hebrank ("Receiver"), the Court-appointed permanent receiver for Copeland Wealth Management, a Financial Advisory Corporation ("CWM"), Copeland Wealth Management, a Real Estate Corporation ("Copeland Realty"), and their subsidiaries and affiliates (collectively, the "Receivership Entities"), hereby submits his Receiver s Forensic Accounting Report #1. This Report provides the Court and all interested parties with the results of the initial forensic accounting that was performed, which focused on 1) ascertaining the validity and accuracy of the financial statements prepared by Defendant Copeland and Copeland Accountancy for the Receivership Entities by reconciling the amounts and transactions to supporting documentation including bank statements, canceled checks and tax returns, 2) reviewing supporting files and other documentation for executed notes receivable, notes payable, investments, loan guaranties, and other information, 3) making a preliminary evaluation of the propriety and collectability of notes and other receivables, and 4) making a preliminary evaluation of the propriety and details of notes and other payables. The Receiver intends to issue two additional forensic accounting reports; the second focusing on the verification of investor/limited partner equity in the Receivership Entities, and the third summarizing financial activities involving Defendant Copeland. In addition, the Receiver summarized the testing of notes receivable in Receiver s Report #3, and the Receiver and his legal counsel are currently in the process of collection on these accounts. I. EXECUTIVE SUMMARY The Receiver performed a forensic accounting review which primarily focused on reviewing the overall accuracy of the financial information, as prepared by Defendant Copeland and Copeland Accountancy Group, in order to determine the propriety of the financial information as it relates to the recovery of assets of the Receivership Estate. Key to the Receiver s investigation of the Receivership Estate 1 RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

3 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 3 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP was a review of the related party transactions and interrelatedness of these entities. The Receiver s key findings include: The Copeland Real Estate Limited Partnerships were dependent upon cash infusions from other Receivership Entities to fund operations, make mortgage payments, pay distributions to investors/limited partners, etc. Funds flowed freely between entities, as needed. The Copeland Real Estate Limited Partnerships loaned out approximately $11.8 million to other related entities, and received loans totaling approximately $30.3 million from related entities. The Copeland Fixed Income Funds loaned out a total of approximately $19 million none of which went for their stated purpose of real estate backed loans and corporate loans, and none went to unrelated third parties, as required by the Limited Partnership Agreements. 40% of the Copeland Fixed Income Funds loans went to the Copeland Real Estate Limited Partnerships, and 33% went to Copeland investors and clients. The remaining balance went to other Receivership Entities, or Defendants (or their related entities). The Copeland Fixed Income Funds paid out approximately $1 million more in distributions than cash flow supported. Original investors were allowed to cash out their investments (contrary to the Limited Partnership Agreements); with new investors thus in part supporting these cash outs and payments of excess distributions. These types of activity are indicative of a Ponzi scheme. The General Partner of the Receivership Entities (Copeland Wealth Management or Copeland Realty, Inc.) treated the Receivership Entities as a collective Piggy Bank with funds flowing freely between entities on an as needed basis. 2 RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

4 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 4 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP II. SCOPE OF TESTWORK FINANCIAL STATEMENTS The accounting for the Receivership Entities was maintained on QuickBooks by Defendant Copeland and Copeland Accountancy. Separate, detailed accountings were available for each Receivership Entity. Separate bank accounts were also maintained for each Receivership Entity. The accounting entries can be broken into two categories: 1) deposits and checks, which represent bank deposits and checks written from the bank accounts, and 2) general journal entries, which represent accounting entries that do not tie directly into the bank account activity. The testwork performed for each category is described below. A. Bank Deposit and Check Activity As mentioned, bank activity is entered as deposits or checks in the QuickBooks accounting system. These entries should tie directly to bank statement transactions. The Receiver (on a test basis) agreed the QuickBooks entries to the deposits, cancelled checks, transfers in and transfers out of a given bank account. The procedures performed included testing transactions over $1,000 for one month in each year for the Receivership Entities still holding real property as well as the Copeland Fixed Income Funds. In addition, in the Receiver s earlier testing of the notes payable, the Receiver verified all cash transactions to the bank statements. These procedures were completed without any material exceptions. B. General Journal Entries The other type of QuickBooks entries that can be made are general journal entries. These are accounting entries that consist of debits and credits that must balance out or equal each other. Journal entries, in this context, are the non-bank account accounting entries. An example of a general journal entry is to record an accrual for interest expense which has been incurred, but not yet paid. In this ///// 3 RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

5 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 5 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP example, a general journal entry is recorded in the QuickBooks accounting system to debit Interest Expense and credit Accrued Interest Payable. General journal entries are not as easily tested or verified they can run the gamut from simple entries to very complicated entries to record the sale of a property. For the Receivership Entities, it is estimated that approximately 4,800 general journal entries were recorded (with each journal entry being comprised of a minimum of two individual line items). The Receivership Entities general journal entries frequently apply to multiple entities, as allocations are made to or crossover to other entities. In many instances, the propriety of such entries is not easily ascertained, and documentation to support the entries in very limited. To provide an indication as to the complexity, ambiguity, and implications of the general journal entries, below are numerous examples of those found in the Receivership Entities financial statements: Entity Date Description Amount CP1 06/25/08 Record Principal Pmt made by CFI2 on behalf of CP1 CP1 08/29/08 Partial Interest on Kohut Note Transferred to Kohut Interest in CFI1 CP2 01/12/08 Reclassify Note Payable CRI to Copeland Private Equity 4 RECEIVER S FORENSIC ACCOUNTING REPORT #1 $50, $78, $821, CP5 02/20/07 To Record PHT Note Payment as NR CRI $6, CP5 08/01/09 Record CP5 Buyout of Racine Interest in CP10 $50, CP6 03/31/08 Transfer CP16 Note Payable to CFI1 $17, CP7 10/31/08 To Reclassify TCG Trust NP to CWM RE NP per Chuck CP8 08/31/09 Transfer Net Note Receivable CP9 & Note Payable CP10 per CPC $42, $14, Case No R-DTB

6 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 6 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP CP9 12/31/05 Record CP7 Advance Pmt to Glenn Goodwin $40, CP9 02/05/07 Reclassify Advance as CP14 Advance $92, CP10 08/31/09 Transfer CP8 Note Receivable to CP9 Note Receivable 5 RECEIVER S FORENSIC ACCOUNTING REPORT #1 $14, CP14 01/01/07 Transfer Activity to CP18 $220, CP15 04/30/10 Reclassify Note Payable to CP12 to Note Payable CWM RE $40, CP16 02/23/09 Reclassify CFI1 Loan as Payment from CP9 $28, CP16 12/31/09 To Reclassify Tax Payments as Contributions $13, CP17 04/30/10 To Reclassify CP12 Payable as CWM RE Payable $1, CP18 06/30/07 To Transfer Liability from CP3 to CRI $423, C. Tax Returns The QuickBooks accounting was traced and agreed to the 2010 federal tax returns for the Receivership Entities with no material exceptions. D. Propriety of Financial Information Our testwork and tracing to supporting documentation did not indicate any irregularities in the financial statements. However, as indicated above, numerous journal entries are noted which may or may not be properly supported or reflect true and accurate transactions. These journal entries primarily appear to be reclassifications between entities and/or different general ledger accounts; and if this is found to be true, would most likely not distort the financials of the Receivership Entities taken as a whole. In addition, we have not analyzed or verified the investor/limited partner equity amounts or the financial activities involving ///// Case No R-DTB

7 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 7 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP Defendant Copeland. Testing related to these two items could potentially identify other irregularities. The Receiver estimates that hours of additional time, at a cost to the Receivership Estate of approximately $25,000 - $30,000, would be needed supplement this report by testing an appropriate level of the journal entities, in order to determine their validity and to ascertain if all entries are true and accurate, and properly reflect upon the appropriate Receivership Entity. In that the Court and parties are sensitive to the administrative costs in this matter, and the Receiver does not believe at this time that the cost versus benefit of such additional work is justified, the Receiver has not conducted an extensive review of these items at this time. The Receiver is prepared to do so; however, upon additional direction from this Court. III. 6 RECEIVER S FORENSIC ACCOUNTING REPORT #1 COPELAND FIXED INCOME FUNDS Three Copeland Fixed Income fund limited partnerships were established (Copeland Fixed Income One ( CFI1 ), Copeland Fixed Income Two ( CFI2 ), and Copeland Fixed Income Three ( CFI3 ); collectively, the Copeland Fixed Income Funds ( CFI Funds ). Each of the Copeland Fixed Income, as per the Limited Partnership Agreements ( LPA ), was to engage in the business of owning real estate backed loans and corporate loans and any activities that are related or incidental to that business. Additionally, the LPAs required the pre-approval by 67% of the limited partners for any transactions that involved a conflict of interest by the General Partner (Copeland Wealth Management). A. The Copeland Piggy Bank Attached as Exhibit A is a Cash Activity Report for each of the CFI Funds showing cash in and cash out greater than $10,000. These reports clearly indicate the early cash contributions from the initial investors, and then the outflows of cash Case No R-DTB

8 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 8 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP to the Copeland Real Estate LPs (which was used to pay distributions, fund operating expenses, pay investor distributions, etc.), to Copeland Realty (including loans to cover payroll expense), to pay off early investors, to make loans to Copeland clients and investors, etc. Nearly all of the Receivership Entities benefitted at one point from loans from the CFI Funds. The Cash Activity Report reflects the General Partner s indiscriminant, pervasive movement of funds, generally with little or no documentation, to entities that required cash flow to maintain their existence and operations. By the time of the Receiver s appointment, the CFI Funds were left holding $10.5 million in Notes Receivable, all from related Copeland Entities, Defendants, Copeland clients and investors, and other related entities. None of the Notes Receivable was to unrelated third parties, and the collectability of much of this balance is uncertain. B. Funding the Real Estate LPs and Other Related Entities In reviewing the QuickBooks accounting for the CFI Funds, we summarized all of the debits to the CFI Funds notes receivable accounts (excluding accrued interest) to provide an indication as to the extent of the total loans made by the CFI Funds since their inception. The following are the total Notes Receivable (money loaned out) by the CFI Fund entities, summarized by recipients: CFI1 CFI2 CFI3 Total CFI Total Total Total Total Amounts Amounts Amounts Amounts Note Receivable - CRI/CWM RE 52, ,127, , ,775, Total Copeland Realty/CWM RE 1,775, Note Receivable - Copeland Fin Adv 41, , Total Copeland Financial Advisory 41, Note Receivable - Private Equity 580, , Total Private Equity 580, RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

9 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 9 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP Note Receivable - CFI1 429, , , Note Receivable - CFI , , Note Receivable - CFI Total Copeland Fixed Income Funds 1,161, Note Receivable - CP1 211, , , , Note Receivable - CP2 844, , , Note Receivable - CP3 67, , , Note Receivable - CP4 3,669, , , ,813, Note Receivable - CP Note Receivable - CP6 91, , , , Note Receivable - CP7 12, , , Note Receivable - CP8 17, , Note Receivable - CP9 221, , , , Note Receivable - CP10 155, , , , Note Receivable - CP12 209, , , , Note Receivable - CP15 25, , , , Note Receivable - CP16 29, , , , Note Receivable - CP17 12, , Note Receivable - CP18 16, , , , Total Copeland Real Estate LPs 7,632, Note Receivable - Charles Copeland 41, , Note Receivable - Andrew Copeland 70, , Note Receivable - The Copeland Group 105, , Note Receivable - The Copeland Group Trust 45, , Total Charles Copeland Entities 261, Note Receivable - RMSC 406, , ,095, Note Receivable - Nulite 100, , , Note Receivable - Serenity 53, , Total Charles Copeland Related Entities 1,273, Note Receivable - Sniecinski 100, , Note Receivable - Taber 250, , Note Receivable - Eure/Inland Eye 180, , Note Receivable - Nizzia 150, , Note Receivable - Dotan 200, , Note Receivable - Hernandez 5, , RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

10 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 10 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP Note Receivable - Ihde 80, , Note Receivable - Gregory 56, , Note Receivable - Watson 34, , Note Receivable - Muraligopal 165, , Total Investors 1,221, Note Receivable - PHT 670, ,025, , ,850, Note Receivable - RMI Industries 71, , , , Note Receivable - SoCal Deli 800, , Note Receivable - Hansberger (SoCal Deli) 230, , Note Receivable - Stauffers Landscaping 260, , Note Receivable - Galleanos 82, , Note Receivable - Lynch 900, , Note Receivable - Huntley 120, , Note Receivable - Baca 7, , Note Receivable - Spraggins 104, , Total Copeland Clients 5,049, Grand Total 7,785, ,626, ,584, ,996, The above detail can be summarized as outlined below. Although the General Partner, Defendant Copeland Wealth Management, was required to invest only in third party real estate backed and corporate loans, none of the CFI Funds went for this purpose. Every penny invested went to related parties and clients, without being disclosed as required by the CFI Fund LPAs. 40% of the Notes Receivable went to the Copeland Real Estate LPs, where these funds were used to provide cash flow in time of need, to fund investor/limited partner distributions, to pay mortgages and operating expenses, etc. Notes Receivable Total Amount Percentage Copeland Realty/CWM RE $1,775,296 9% Copeland Financial Advisory $41,388 0% Copeland Private Equity $580,000 3% 9 RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

11 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 11 of 16 Page ID #: Copeland Fixed Income Funds $1,161,688 7% Copeland Real Estate LPs $7,632,312 40% Charles Copeland Personal $261,000 1% Charles Copeland Related Entities $1,273,736 7% Copeland Investors $1,221,252 6% Copeland Clients $5,049,335 27% Total $18,996, % C. Distributions and Investors Buyouts The CFI Funds LPA states that No Partner may withdraw any portion of the capital of the Partnership and no Partner, General or Limited, is entitled to the return of that Partner s contribution to the capital of the Partnership except on the dissolution of the Partnership and that Partner s compliance with Paragraphs 9.02 and 9.03 of this Agreement. An analysis of the CFI Funds financial statements indicates that approximately $11.8 million in partner contributions were received, and approximately $2.1 million in partner withdrawals were allowed, with no documentation that these were permitted by the LPA. In addition, the limited partners received distributions from the CFI Funds, as summarized below: Interest Income (Cash Received) Cash Distributions Paid Out Deficit 2006 $162,034 ($304,933) ($142,899) 2007 $427,111 ($584,142) ($157,031) 2008 $622,720 ($860,785) ($238,065) 2009 $417,221 ($587,732) ($170,511) 2010 $280,047 ($327,194) ($47,147) 2011 $138,635 ($342,344) ($203,709) LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP 10 RECEIVER S FORENSIC ACCOUNTING REPORT #1 $2,047,768 ($3,007,130) ($959,362) Case No R-DTB

12 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 12 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP As noted, distributions were paid out that exceeded income coming into the CFI Funds. Rates of returns paid to the limited partners frequently exceeded the interest rates being charged on loans. Additionally, distributions were being paid from CFI1 even before any loans were made or any income being earned. A Ponzi scheme is generally described as an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. In that new investor contributions were used in part to cash out existing investor accounts, as well as to pay distributions beyond what cash flow supported this activity in indicative of just such a scheme. IV. 11 RECEIVER S FORENSIC ACCOUNTING REPORT #1 COPELAND REAL ESTATE LPs In total, the Receivership Estate included eighteen (18) named Copeland real estate limited partnerships, named Copeland Properties One through Eighteen. Each entity was a single asset entity. However, only eight are active entities still holding real property (CP2/CP17, CP5, CP7, CP9, CP10, CP15, CP16 and CP18). Two of the limited partnerships were closed out with the sale of the asset (CP1 and CP3), four were lost to foreclosure or to a receiver (CP4, CP6, CP8 and CP12), and three were used as tax transfer vehicles (CP11, CP13 and CP14). As outlined in the above section of this report, the Copeland Properties Real Estate Limited Partnerships ( CP LPs ) benefitted from $7.6 million in total loans from the CFI Funds, with at least $4.7 million remaining outstanding and unpaid (in some cases, loans receivable have been written off for closed out entities, thus reducing the overall balances due). In addition to the CFI Funds being a source of cash to fund the operations and other cashflows of the CP LPs, individual CP LPs and other related entities were lending and borrowing vast sums of money between themselves to fund operations, distributions, to cash out investors, etc. As with the CFI Funds, we summarized all of the related party debits in the CP LPs notes receivable accounts (excluding accrued interest) to provide an indication as to the Case No R-DTB

13 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 13 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP total loans made by the CP LPs since their inception. In addition, we summarized all of the credits to the related party notes payable accounts (excluding accrued interest) to provide an indication as to the total loan proceeds received by each of the CP LPs. It should be noted that a large number of journal entries were noted in the accountings for the CP LPs (discussed in greater detail above) that may not have been actual cash transactions; but rather, reclassifications or other recordings on notes receivable or payable. The following are the total related party Notes Receivable (money loaned out by) and related party Notes Payable (money lent to) the CP LPs entities, summarized on an entity basis. The detailed breakout for each entity can be found in Exhibit B. Total Notes Total Notes Entity Receivable Payable CP1 193, (1,485,663.82) CP2/CP17 622, (4,003,374.25) CP3 2,306, (1,526,141.02) CP4 939, (4,114,147.60) CP5 915, (500,689.70) CP6 669, (912,011.64) CP7 159, (961,900.72) CP8 704, (380,285.91) CP9 1,574, (4,283,655.25) CP10 1,130, (1,190,128.18) CP12 1,592, (3,716,646.19) CP14 253, (2,566,002.26) CP15 91, (964,237.09) CP16 348, (259,201.22) CP18 279, (3,453,507.89) Total 11,780, (30,317,592.74) As indicated above, the CP LPs lent out $11.8 million to related entities, and borrowed $30.3 million from related entities during the time of their existence. 12 RECEIVER S FORENSIC ACCOUNTING REPORT #1 Case No R-DTB

14 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 14 of 16 Page ID #: The above clearly indicates the extent of the commingling of monies between the related party entities, and their interconnectedness and dependency on each other to fund cashflow needs. To provide a further understanding of the extent of the advances from the various Copeland entities to one another to pay for distributions and operating expenses, the following table highlights some of the transfers found in the Receivership Entities financial statements: 7 8 Entity Date Description Amount 9 10 CP1 04/18/08 Advance from FI#2 to pay interest on a note payable. 32, CP1 08/08/08 Advance from FI#3 to pay operating expenses. 2, CP2 08/08/08 Advance from FI#3 to pay operating expenses. 2, CP2 08/27/10 Advance from CP4 to fund a loan to CP17. 18, LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP CP3 11/30/06 Advance from FI#1 to pay mortgage/operating expenses. 13 RECEIVER S FORENSIC ACCOUNTING REPORT #1 38, CP3 12/12/06 Advance from FI#1 to pay operating expenses. 29, CP4 06/09/08 Advance from FI#3, CP8 and CP1 to pay the mortgage. 45, CP4 11/09/09 Advance from CP9 to pay mortgage. 2, CP5 03/13/08 Advance from CP8 to pay mortgage. 27, CP5 01/09/09 Advance from CP8 to pay distributions. 3, CP6 09/09/08 Advance from FI#3 to pay operating expenses. 3, CP6 06/11/09 Advance from CP5 to pay operating expenses. 1, CP7 04/11/08 Advance from FI#1 and FI#2 to pay property taxes. CP7 01/22/09 Advance from Copeland Wealth Management to pay operating expenses. 18, , CP8 07/25/08 Advance from FI#2 to pay operating expenses 4, Case No R-DTB

15 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 15 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP CP8 03/05/09 Advance from CP10 to pay mortgage. 14, CP9 06/18/09 Advance from FI#2 and CP5 to pay operating expenses. 14 RECEIVER S FORENSIC ACCOUNTING REPORT #1 19, CP9 05/04/10 Advance from CP4 to pay the mortgage. 28, CP10 01/08/09 Advance from CP12 to pay the mortgage. 50, CP10 07/16/09 Advance from CP9 and CP16 to pay the mortgage. 7, CP14 06/04/07 Advance from CRI to pay distributions. 9, CP14 09/05/07 Advance from CRI to pay distributions. 12, CP15 12/10/08 Advance from CP10 to pay property taxes. 19, CP15 07/08/09 Advance from CP5 to pay operating expenses CP16 12/24/08 Advance from CP10 to pay the mortgage. 6, CP16 06/25/09 Advances from CP7, CP10, FI#1and FI#3 to cover mortgage payment. CP17 05/15/09 Advance from CP12 to fund an advance of funds to CP18. 9, , CP17 09/11/09 Advance from CP5 to pay operating expenses. 7, CP18 05/01/08 Advance from FI2 to pay distributions. 7, CP18 05/15/09 Advance from CP17 to pay distributions. 1, V. SUMMARY As noted above, the CFI Funds were improperly used, not for their stated purpose to engage in the business of owning real estate backed loans and corporate loans, but rather to provide funding to other related Copeland entities, the Defendants, or Copeland clients and investors. Not one penny was loaned to a true third party. Likewise, the CP LPs, while each owning a real estate property, were used along with the CFI Funds to either loan or borrow money as their cashflow Case No R-DTB

16 Case 2:11-cv R-DTB Document 90 Filed 06/29/12 Page 16 of 16 Page ID #: LAW OFFICES Allen Matkins Leck Gamble Mallory & Natsis LLP needs dictated. When the Receiver was appointed, and the music stopped so to speak, a handful of the CP LPs owned income producing properties. The CFI Funds had been secretly and improperly drained of funds to benefit other Copeland related entities, the Defendants, or Copeland clients and investors. In this environment, winners and losers were arbitrarily chosen. Certain CP LP entities were provided with a financial lifeline, while others were allowed to fail. Providing assistance to one entity was made at the expense or to the detriment of other entities. As discussed earlier in this report, the Receiver intends to issue two additional forensic accounting reports; the second focusing on the verification of investor/limited partner equity in the Receivership Entities, and the third summarizing financial activities involving Defendant Copeland. In addition, the Receiver and his legal counsel are currently in the process of collection on the Notes Receivable accounts of the Receivership Entities, and has listed for sale certain CP LPs properties and is evaluating others for potential disposition in order to liquidate and recover the assets of the Receivership Estate, and prepare them for eventual distribution to the investors and limited partners as determined by this Court. Dated: June 29, RECEIVER S FORENSIC ACCOUNTING REPORT #1 By: /s/ Thomas C. Hebrank THOMAS C. HEBRANK, Permanent Receiver Case No R-DTB

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