Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 DAVID L. OSIAS (BAR NO. 0) ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP 0 West Broadway, th Floor San Diego, California 0- Phone: () - Fax: () - E-Mail: dosias@allenmatkins.com JOSHUA A. DEL CASTILLO (BAR NO. 0) ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP South Figueroa Street, th Floor Los Angeles, California 00-0 Phone: () - Fax: () 0- E-Mail: jdelcastillo@allenmatkins.com Attorneys for Receiver Stephen J. Donell UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA 0 SECURITIES AND EXCHANGE COMMISSION, v. Plaintiff, PLUS MONEY, INC. and MATTHEW LA MADRID, Defendants, THE PREMIUM RETURN FUND LIMITED- LIABILITY LIMITED PARTNERSHIP, ET AL., Relief Defendants. Case No. :0-cv-0 MMA (NLS) SECOND INTERIM REPORT OF RECEIVER, STEPHEN J. DONELL, AND PETITION FOR INSTRUCTIONS Declaration of James T. Schaefer filed concurrently herewith Stephen J. Donell, the court-appointed permanent receiver (the "Receiver") for Defendant Plus Money, Inc. and Relief Defendants The Premium Return Fund Limited-Liability Limited Partnership, The Premium Return Fund II Limited-Liability Limited Partnership, The Premium Return Fund III Limited-Liability Limited Partnership, Return Fund, LLC, Return Fund II, LLC, 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 Return Fund III, LLC, Return Fund IV, LLC, Return Fund V, LLC, Return Fund VI, LLC, and their subsidiaries and affiliates (collectively with Plus Money, Inc., the "Receivership Entities"), appointed pursuant to this Court's Preliminary Injunction and Order: () Freezing Assets; () Appointing a Permanent Receiver; () Requiring Accountings; and () Prohibiting the Destruction of Documents (the "Appointment Order"), entered on May, 00, hereby submits this Second Interim Report of Receiver and Petition for Instructions (the "Report") pursuant to Local Rule.(e) and the Order in Aid of Receivership entered on June, 00. Pursuant to the Appointment Order and law governing federal equity receivers, the Receiver has been charged with, among other things, assuming control over the Receivership Entities and their assets ("Receivership Assets"); performing an accounting of the assets and financial condition of the Receivership Entities; investigating, locating, and recovering Receivership Assets; preparing reports for the Court; and preparing an appropriate claim allowance and investor/creditor distribution plan. While the Receiver continues to obtain Receivership Entity documents and records (including from the sources identified in this Second Interim Report), his document analysis and recovery efforts remain incomplete. As described more thoroughly in this Second Interim Report and in the First Supplemental Forensic Accountant's Report filed concurrently (see Declaration of James T. Schaefer [hereinafter "Schaefer Decl."], Ex. A), the documents and records obtained to date provide a partial explanation of the past and present financial condition of the Receivership Entities, including the financial transactions and business in which they engaged. Due to the volume and nature of the information acquired to date, the nature and complexity of the matters and transactions analyzed by the Receiver and his professionals, and the need for significant additional information, this Second Interim Report is preliminary. The Receiver may need to materially modify its contents after further investigation and consideration. As discussed below, although the Receiver and his professionals continue to make significant progress in their investigation and recovery efforts, a great deal of work remains to be done. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 I. EXECUTIVE SUMMARY. Since the filing of the Receiver's First Interim Report and Petition for Instructions (the "First Interim Report") on July 0, 00, the Receiver, his counsel, and forensic accountants (collectively, the Receiver and his "Professionals") have concentrated their efforts on the following tasks: A. Receivership Entity Document Review, Recovery, And Analysis. The Receiver has served document subpoenas upon five banks, one corporation, and one individual believed to be in possession of significant Receivership Entity financial records and supporting documents. Since filing his First Interim Report, and as of the date of this Second Interim Report, the Receiver has recovered approximately,000 pages of bank and brokerage account statements, reflecting thousands of discrete transactions, as well as additional tax documents and materials reflecting the possible transfer of over $ million in Receivership Assets to All States ATM, Inc., as a possible investment. The Receiver's forensic accountant and his staff are diligently logging each recovered document, inputting its contents into a database, and incorporating any information learned into their analysis and accounting of the Receivership Entities' business and financial activities. B. Accounting For The Receivership Entities' Business And Financial Activities. As noted above, information obtained from recovered Receivership Entity documents and records is used by the Receiver's forensic accountant in his analysis and accounting of the Receivership Entities' business and financial activities. To date, thousands of transactions have been accounted for, and the Receiver's forensic accountant has successfully documented in excess of $ million in Receivership Assets paid out to unknown entities, in addition to significant commingling of funds between the Receivership Entities, and approximately $. million in margin interest charged against a number of Receivership Entities in connection with systematic borrowing against their respective securities portfolios. This margin interest represents an unrecoverable loss to the Receivership Entities. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 C. Assembling A Reliable List Of Receivership Entity Investors And Creditors. The Receiver has assembled a preliminary list of investors and creditors, from a variety of sources, including data retrieved from Receivership Entity records, correspondence from investors, and other sources. In addition, investors and creditors may have and may continue to register at the Receiver's website, allowing for the development of an improved investor and creditor list. At this state of his investigation, the Receiver has not identified all investors and creditors of the Receivership Entities or determined their allowed respective claims. D. Recovering Receivership Assets. In his First Interim Report, the Receiver reported negotiating a prospective settlement agreement with the Securities and Exchange Commission (the "Commission"), and Relief Defendants Palladium Holding Company ("Palladium") and Donald Lopez ("Lopez") for the return of $0 million in Receivership Assets. As of the date of this Second Interim Report, the Receiver has received approximately $,,. of these funds. Palladium and Lopez have to date failed to disgorge the balance of the $0 million, despite multiple representations that the funds were forthcoming. The Magistrate Judge administering the case has recently submitted a recommendation that sanctions be imposed upon Palladium and Lopez. The Receiver's accounting has, to date, not identified the location of significant additional Receivership Assets. However, tips from investors have recently identified a number of potential sources of recovery, which will be addressed in a later report. 0 II. PROCEDURAL BACKGROUND. The Court and any interested parties are directed to the following materials for a general summary of the relevant facts underlying the above-captioned case and the previous activities of the Receiver and his professionals: Stipulation and Request for Order to Amend Preliminary Injunction and Order (filed July, 00, Docket. No. ) (the "Palladium Stipulation"); Receiver's First Interim Report (filed July 0, 00, Docket No. ); All identified materials may be viewed at the Receiver's website, www.fedreceiver.com. 00.0/LA Case No. :0cv-0 MMA (NLS) --
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 III. Supplement to First Interim Report of Receiver (filed August, 00, Docket No. ); Order Following Show Cause Hearing re: Sanctions; Order Requiring Wire Transfer of Funds by Relief Defendants into Segregated Account of Court- Appointed Receiver (entered September, 00, Docket No. ); Report Regarding Relief Defendants Palladium Holding Company and Donald Lopez Payment Activities Following September, 00, Show Cause Hearing Re: Sanctions (filed September, 00, Docket No. ); Statement of Plaintiff Securities and Exchange Commission re Objections to Magistrate's Report and Recommendations; Declaration of John M. McCoy III (filed October, 00, Docket No. ); Supplemental Report of Receiver, Stephen J. Donell, Regarding Payment Activities of Relief Defendants Palladium Holding Company and Donald Lopez (filed November, 00, Docket No. ). RECEIVER'S ACTIVITIES AND EFFORTS SINCE FILING OF FIRST INTERIM REPORT. A. Assertion of Jurisdiction. The territorial jurisdiction of this Court and thus of the Receiver is extended to any 0 district of the United States where Receivership Assets are believed to be located. U.S.C. ; see also Haile v. Henderson Nat'l Bank, F.d, (th Cir. ). Based on information obtained by the Receiver since the date of the First Interim Report, the Receiver filed the SEC Complaint and registered the SEC Complaint and Appointment Order in United States District Courts in Delaware, Florida, Nevada, and Texas, in conformity with U.S.C. and applicable federal law. As additional information becomes available, the Receiver may file/register the SEC Complaint and Appointment Order in other districts. The Receiver previously filed and registered the SEC Complaint and Appointment Order in District Courts located in Colorado, Pennsylvania, and Wyoming. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 B. Document Recovery. As of the date of the Appointment Order, none of the Receivership Entities operated a physical office, and the Receiver has not discovered any single, complete repository of the business documents and records relating to the Receivership Entities. As a consequence, the Receiver has been required to obtain documents and records from a variety of sources, including, but not limited to the following:. Documents Obtained from the CMRA. Subsequent to his appointment, and efforts to reroute all Receivership Entity mail, the Receiver learned from the United States Postal Service of an entity identified as a Commercial Mail Receiving Agency (the "CMRA") located in El Cajon, California that is owned and operated by Mr. Ken Kaghazchi. On or about August, 00, the Receiver served a document subpoena on the CMRA, requesting the production of any and all Receivership Entity mail. As of the date of this Second Interim Report, the CMRA has produced a number of Receivership Entity bank and brokerage statements, including statements for Bank of America and Schwab brokerage accounts. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by the CMRA.. Documents Obtained from Banks. On or about July, 00, the Receiver served a document subpoenas upon Bank of America, California Bank & Trust, Wells Fargo Bank, US Bank, and Charles Schwab, Inc., requesting the production of all Receivership Entity account statements and underlying materials. (a) Bank of America. As of the date of this Second Interim Report, Bank of America has produced thousands of pages of Receivership Entity account statements and other materials referring or relating to financial transactions entered into by the Receivership Entities. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by Bank of America. (b) California Bank & Trust. As of the date of this Second Interim Report, California Bank & Trust has produced thousands of pages of Receivership Entity account statements and other materials referring or 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 relating to financial transactions entered into by the Receivership Entities. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by California Bank & Trust. (c) Wells Fargo Bank. As of the date of this Second Interim Report, Wells Fargo Bank has produced a limited number of Receivership Entity account statements. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by Wells Fargo Bank. (d) US Bank. 0 As of the date of this Second Interim Report, US Bank has not produced any Receivership Entity documents to the Receiver. US Bank has asserted, in response to the Receiver's documents subpoena, that it does not possess or control any documents, statements, or other account materials relating to the business of the Receivership Entities. (e) Charles Schwab, Inc. 0 As of the date of this Second Interim Report, Charles Schwab, Inc. has produced thousands of pages of Receivership Entity account statements referring or relating to financial transactions entered into by the Receivership Entities. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by Charles Schwab, Inc. In addition, the Receiver's counsel has recently communicated with Charles Schwab, Inc., to request a supplemental production of additional materials relating to those already produced.. Documents Obtained from Roland Cobb, CPA. On or about September, 00, the Receiver served a document subpoena on Roland Cobb, CPA, an accountant who had assisted the Receivership Entities with preparing certain 00 tax documents. As of the date of this Second Interim Report, Mr. Cobb has produced certain 00 tax documents generated for a Receivership Entity. In addition, Mr. Cobb recently produced a number of additional documents. The Receiver's forensic accountant is currently reviewing and analyzing the materials produced by Mr. Cobb. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0. Documents Obtained from All States, ATM, Inc. On or about September, 00, the Receiver served a document subpoena on the registered service agent for All States ATM, Inc., an entity in which Receivership Assets may have been invested. In response to the subpoena, All States ATM, Inc. has produced a limited number of general, spreadsheet documents purporting to show investments from and payments to Relief Defendant Return Fund IV, totaling approximately $. and $. million, respectively. No supporting documents have been produced to date. The Receiver's counsel has recently requested a supplemental production from All States ATM, Inc., and the documents produced to date are currently being reviewed and analyzed by the Receiver's forensic accountant. 0 IV. RECOVERY OF RECEIVERSHIP ASSETS. As of October, 00, the most recent date for which a full accounting is available, the 0 Receiver had recovered approximately $,,. in Receivership Assets, including interest, and approximately $. million received from the accounts of Palladium and Lopez, as described further below. Pursuant to the terms of the Palladium Stipulation, the funds from Palladium and Lopez remain segregated. A. Receivership Entity Investments. Pursuant to the Appointment Order, the Defendants and Relief Defendants were required to file detailed and complete schedules of their assets, including all real and personal property exceeding $,000 in value, and all bank, securities, futures, and other accounts, identified by institution, branch address, and account number. The accountings were to include a description of the source(s) of all such assets. As of this date, Defendant LaMadrid has not provided such an accounting, and, as referenced in the First Interim Repot, delivered a letter to the Court requesting a clarification of the Appointment Order or an exemption from this requirement in connection with his decision to exercise his Fifth Amendment right against self-incrimination. In response, and as a result of LaMadrid's failure to provide the Receiver with sufficient documentation to enable him to provide the Court with an accounting of Plus Money, Inc.'s assets, other than as presented in connection with the Initial Forensic Accountant's Report, the Receiver's counsel requested on September, 00 that LaMadrid identify any and all third parties, 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 including but not limited to, individuals, corporations, partnerships, or other investment vehicles to whom Receivership Assets had been transferred. Through his counsel, La Madrid again invoked his Fifth Amendment privilege against self-incrimination, refusing to provide the requested information. Nonetheless, the Receiver has been successful in identifying a number of recipients of Receivership Assets. In addition to the banks identified in the Appointment Order and First Interim Report, the Receiver has identified the following entities as likely recipients of Receivership Assets:. All States ATM, Inc. As described above, All States ATM, Inc. has produced a limited number of documents reflecting investments from and payments to Relief Defendant Return Fund IV, totaling approximately $. and $. million, respectively. In addition, there are indications that other Receivership Entities likewise invested in or otherwise transferred funds to All States ATM, Inc. By example the First Supplemental Forensic Accountant's Report identifies a 00 transfer of $00,000.00 to All States ATM, Inc. (Schaeffer Decl., Ex. A). Neither this transfer nor any of the previously identified transfers have been fully documented to date, and the Receiver's counsel has recently demanded that All States ATM, Inc. produce materials documenting its receipt and use of all Receivership Assets.. Vision Quest Investments. As initially reported in the First Interim Report, the Receiver's preliminary accounting has identified a number of transfers of Receivership Assets to Vision Quest Investments, a dba of LaMadrid. The First Supplemental Forensic Accountant's Report likewise identifies payments of at least $. million in Receivership Assets to Vision Quest Investments, in addition to a $00,000.00 payment directly to LaMadrid. (Schaeffer Decl., Ex. A).. Unknown Payees. The First Supplemental Forensic Accountant's Report identifies in excess of $ million in Receivership Assets paid out to unknown entities. (Schaeffer Decl., Ex. A). These funds may have been invested, transferred from one Receivership Entity account to another, or delivered to a 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page 0 of 0 0 0 third party. The Receiver's forensic accountant's accounting and analysis is ongoing, and aims to identify the recipients of these funds.. Receivership Asset Commingling. As initially reported in the First Interim Report, the Receiver's preliminary accounting has identified significant commingling of Receivership Assets within the various Receivership Entities. As noted in the First Supplemental Forensic Accountant's Report, such commingling is notable because investors tend to be distinct from entity to entity. (Schaeffer Decl., Ex. A). Ordinary business practices and the stated investment objectives of the Receivership Entities would militate against commingling. In addition, such commingling makes a complete accounting of all Receivership Assets particularly difficult. B. Recovery from Palladium and Lopez. As reported previously, shortly after his appointment, the Receiver entered into discussions with the Commission and counsel for Palladium and Lopez in connection with the Commission's allegation in the SEC Complaint that Palladium and Lopez had been the recipients of a $0 million transfer of Receivership Assets. As a result of these discussions, the Commission, the Receiver, Palladium, and Lopez negotiated the terms of a settlement agreement, subject to Court approval, whereby Palladium and Lopez would disgorge to the Receiver $0 million, the Commission would dismiss its prayer for relief against Palladium and Lopez in the abovecaptioned matter, and the Receiver, on behalf of the Receivership Entities, would dismiss the Receivership Entities' claims against Palladium and Lopez in a case pending in the United States District Court for the Southern District of California (La Madrid, dba Vision Quest Investments, a sole proprietorship; Premium Return Fund Limited Liability Limited Partnership, LLLP, a Nevada Domestic Limited Partnership; Premium Return Fund II Limited Liability Limited Partnership, LLLP, a Nevada Domestic Limited Partnership; Premium Return Fund III Limited Liability Limited Partnership, LLLP, a Nevada Domestic Limited Partnership; Plus Money, Inc., a Nevada Domestic Corporation v. Heriberto Lopez Perales, an individual; Donald E. Lopez, an individual; Hreidar Bjornsson, and individual; Maarten Van Leenen, an individual; H&W Price Less, Inc., a 00.0/LA -0- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 Texas Corporation; Palladium Holding Company, a Colorado Corporation; and Does -0, Case No. 0-cv-0) (the "Parallel Case"). The Palladium Stipulation, which ratified the key terms of this prospective settlement, was filed on July, 00. Pursuant to its terms, Palladium and Lopez were to disgorge the entire $0 million to the Receiver by July, 00. As identified in the Receiver's August, 00 Supplement to First Interim Report and September, 00 Report, Palladium and Lopez have failed to disgorge at least $,,. of the subject $0 million. recovered approximately $,,. of the subject $0 million. To date, the Receiver has 0 0 On September, 00, the Court entered an Order Requiring Wire Transfer of Funds, directing Palladium and Lopez to transfer $,,. to the Receiver by September 0, 00, or face possible sanctions. When Palladium and Lopez filed to comply with the Court's Order, the Court issued a September, 00 Report and Recommendation to the Presiding Judge, recommending that sanctions be imposed upon Palladium and Lopez, including the issuance of an arrest warrant for Lopez. As of the date of this Second Interim Report, no decision on sanctions has been rendered, and the balance of the subject $0 million remains unpaid. Absent the transfer of the balance of the $0 million, no settlement with Palladium or Lopez will be finalized or submitted to the Court for approval. V. FINANCES AND BUSINESS OPERATIONS OF RECEIVERSHIP ENTITIES. The Receiver's accounting of the Receivership Entities remains preliminary. Nonetheless, the Receiver's forensic accountant, James Schaefer, has been able to continue his accounting of the Receivership Entities, based upon the thousands of documents recovered to date. Although his accounting does not yet provide a complete overview of all funds raised and disbursed by the The Court has granted the Receiver an extension to December, 00 to serve the Complaint in the Parallel Case. Counsel for Palladium and Lopez has identified two Bank of America accounts purportedly containing the unpaid balance of the subject $0 million. On October, 00, the Receiver served a revised document subpoena on Bank of America in connection with that representation. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 Receivership Entities, the Receiver's forensic accountant made substantial progress and documented: Multiple large cash and non-cash transfers from the Receivership Entities to third parties; Losses to the Receivership Entities as a result of margin interest on brokerage accounts; and Significant commingling of Receivership Assets. These findings are discussed in greater detail below, and in the First Supplemental Forensic Accountant's Report, attached to the declaration filed concurrently herewith. (Schaefer Decl., Ex. A.) A. Cash Transactions. The accounting performed to date by the Receiver's forensic accountant suggests that significant cash withdrawals in excess of $ million were made from the accounts of the Receivership Entities. These withdrawals are significant given that the stated investment 0 objective of the Receivership Entities was to engage in so-called covered call option trading. Call option trading is typically carried out through a brokerage account, and does not ordinarily involve large cash withdrawals. Nonetheless, the Receiver's forensic accountant has documented multiple large cash withdrawals from the accounts of the Receivership Entities. For example, during the first half of 00, a total of at least $,,0.00 in cash was withdrawn from the accounts of The Premium Return Fund, LP. (Schaefer Decl., Ex. A.) Additional large withdrawals are identified in the First Supplemental Forensic Accountant's Report. B. Other Large Withdrawals / Transfers. The accounting likewise suggests that other large, non-cash withdrawals or transfers were made from the accounts of the Receivership Entities. As described above, the records reflect large transfers of Receivership Assets to Vision Quest Investments, a dba of LaMadrid, to All States ATM, Inc., and to LaMadrid himself. (Schaefer Decl., Ex. A.) As with the cash transactions These transactions may have taken the form of cashier's checks, wire transfers, or other withdrawals. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 of interest described above, these transactions are significant because they cannot be easily reconciled with the stated business purpose of the Receivership Entities. C. Margin Interest. Based upon materials received from Charles Schwab, Inc., it appears that individuals controlling the various brokerage accounts of the Receivership Entities engaged in systematic borrowing against the securities in the securities portfolios of, at least, The Premium Return Fund, LLLP, The Premium Return Fund II, LLLP, and the Premium Return Fund III, LLLP. Put simply, margin borrowing allows an entity to borrow against the securities in its portfolio by placing a trade with or withdrawing cash from the entity's brokerage account. These withdrawals bear interest (as loans), and the Receiver's forensic accountant has identified at least $,,0.0 in interest charged against the brokerage accounts of The Premium Return Fund, LLLP, The Premium Return Fund II, LLLP, and the Premium Return Fund III, LLLP. (Schaefer Decl., Ex. A.) The interest charged against the brokerage accounts reflects a discrete, likely unrecoverable loss to the Receivership Entities. The $,,0.0 loss identified to date does not include the actual cash withdrawn from the accounts. D. Commingling of Receivership Assets. As discussed above, the Receiver's forensic accountant has documented numerous instances of commingling of Receivership Assets within the various Receivership Entities. As noted in the First Supplemental Forensic Accountant's Report, such commingling is notable because the entities themselves purport to be distinct, and investors can vary from one entity to another. (Schaeffer Decl., Ex. A). As a consequence, ordinary business practices and the stated investment objectives of the Receivership Entities would militate against commingling. Nonetheless, as the First Supplemental Forensic Accountant's Report documents, hundreds of thousands of dollars were transferred between, at least, The Return Fund IV, LLC, The Premium Return Fund II, LLLP, and the Premium Return Fund III, LLLP. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 E. Third Party Entity Transfers. The Receiver's forensic accountant has also documented a number of transfers from previously identified entities of interest to the Receivership Entities, including from E&M Property Management, and the Real Estate Investment Group. These transactions suggest a financial relationship between the Receivership Entities and other entities previously identified as "of interest" to the Receiver, in addition to substantiating investor tips regarding the transfers. F. Supplemental Impressions Of The Business Of The Receivership Entities. The documents obtained and analyzed to date, including those discussed in the First Interim Report, create the impression that: The Receivership Entities kept no reliable accounting of reported profits and losses arising in connection with their call option trading or other activities; Distributions to investors may have been made from funds recovered by later investors; There was significant commingling of assets among the Receivership Entities; The Receivership Entities' accounts were significantly out of balance ; Funds in excess of $ million were transferred from the Receivership Entities to Vision Quest Investments, a dba of LaMadrid; Funds in the amount of at least $00,000.00 were transferred from the Receivership Entities to LaMadrid; Significant cash withdrawals were made from the accounts of the Receivership Entities; Individuals controlling the various brokerage accounts of the Receivership Entities engaged in systematic borrowing against the securities in the securities portfolios of the Receivership Entities, subjecting them to at least $,,0.0 in interest. This issue was addressed in the First Interim Report. Specifically, the Receivership Entities books were out of balance such that Gaines & Welsh, an accounting firm engaged to perform tax services for the Receivership Entities, resorted to using a "plug" or gap-filler of $ million in order to balance the entities books. These withdrawals included wire transfers and cashier's checks. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 Because the Receiver's investigation and document recovery efforts are ongoing, the conclusions presented are tentative, and may require modification after further investigation and consideration. VI. CREDITORS AND CLAIM AMOUNTS. At this state of his investigation, the Receiver has assembled a preliminary list of investors 0 0 and creditors, from a variety of sources, including data retrieved from Receivership Entity records, correspondence from investors, and other sources. In addition, investors and creditors have registered (and may continue to do so) at the Receiver's website, www.fedreceiver.com, thereby providing an additional source of information to develop an improved investor/creditor list. As noted above, the Receiver has recovered a total of approximately $,,., inclusive of interest and funds received from Palladium and Lopez. Pursuant to the terms of the Palladium Stipulation, Palladium retains certain rights as against those funds. The balance of the $0 million addressed by the Palladium Stipulation remains unpaid. At this time, it is unclear whether the Receiver will recover additional funds from Palladium and Lopez, although recovery efforts continue. In addition, the Receiver has undertaken efforts to recover Receivership Assets from sources other than Palladium and Lopez. As noted above, recently received documents suggest that All States ATM received in excess of $. million in Receivership Assets. Although All States ATM claims to have returned approximately $. million, supporting documents have not been forthcoming. Investor tips and recently recovered documents have likewise alerted the Receiver to possible additional sources of funds, which sources will be addressed in future reports. Given the preliminary nature of the Receiver's list of investors and creditors, and the uncertain nature of any recovery and eventual distribution to investors and creditors, the Receiver defers to a subsequent report any discussion of claim amounts, or a claims process or plan for distribution. VII. RECOMMENDED FURTHER INVESTIGATION AND ACTIVITY. The Receiver's efforts to recover relevant Receivership Entity documents and records are ongoing, and, although significant, the materials obtained to date do not provide a complete 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 understanding of the Receivership Entities' history and financial activities, or the location and amounts of remaining Receivership Assets. In part, the Receiver's document recovery efforts have been hampered by LaMadrid's failure to provide original documents or explanations, his failure to provide the Court with an accounting of his assets, and his failure to identify any third parties to whom Receivership Assets had been transferred. In addition, neither LaMadrid nor the Receivership Entities appear to have kept regular, coherent, or comprehensive financial records. A lack of direct access to the individual likely to be the greatest source of information on the Receivership Entities requires that the Receiver and his professionals continue to assemble a collection of relevant materials and thereby develop a complete understanding from a variety of third party sources. Nonetheless, the Receiver is confident that such an assembly is possible, and that an appropriate and thorough documentation of the Receivership Entities' history and financial activities, their assets, and likely investor and creditor claims will be developed. In the near term, the Receiver and his professionals make the following recommendations in connection with their efforts to better understand and document the financial condition and activities of the Receivership Entities: A. Continue Document Recovery Efforts. Despite significant progress, the Receiver's document recovery efforts remain incomplete. As an example, although Charles Schwab, Inc. produced thousands of pages of brokerage account statements, it has not produced any documents reflecting the underlying transactions identified in the statements, e.g. imaged check, deposit and withdrawal receipts, etc. Without these documents, the Receiver and his professionals cannot provide a complete accounting of the Receivership Entities financial transactions. Likewise, analysis of the additional documents produced by Bank of America and Roland Cobb has only recently begun. The Receiver has served document subpoenas upon numerous financial institutions believed to have held Receivership Assets, including those recently identified by Palladium and Lopez in connection with the funds addressed by the Palladium Stipulation, in an effort to better document the Receivership Entities' history and financial activities. In addition, the Receiver has served document subpoenas upon additional third parties believed to be in possession of 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 0 0 Receivership Entity documents or assets. These efforts should continue. In addition, the Receiver reserves the right to depose any individual or entity believed to possess information relevant to his charge, as defined by the Appointment Order. B. Continue Receivership Asset Recovery Efforts. As noted above, Palladium and Lopez have to date failed to comply with the terms of the Palladium Stipulation, and approximately $. million remains outstanding. Even assuming that these funds are ultimately disgorged, the investigation performed to date by the Receiver's forensic accountant suggests that a total in excess of $ million in the aggregate was invested in the Receivership Entities, and that a minimum of $ million of the investments remain unaccounted for. As additional documentary evidence is acquired, it may be possible to better identify the location of outstanding or currently unaccounted for Receivership Assets. Once located, the Receiver will proceed with recovery efforts, including the initiation of claims against third parties in possession of Receivership Assets. C. Maintain and Expand Lists of Individuals and Entities of Interest. Investors in the Receivership Entities have provided the Receiver with unsolicited information regarding additional business ventures allegedly overseen or managed by LaMadrid or other affiliated individuals or entities. A complete and evolving database relating to these individuals and entities could prove an invaluable tool in uncovering and accounting for additional Receivership Assets. D. Prepare Appropriate Tax Documents. As noted in the First Supplemental Forensic Accountant's Report, the Receiver has been in contact with the Internal Revenue Service in connection with the Receivership Entities' tax obligations. Based on these contacts, it appears that income tax and other returns are due from Plus Money, Inc. for 00, 00, 00, 00, and 00. (Schaeffer Decl., Ex. A). The Receiver therefore recommends preparing and submitting all appropriate tax documents as soon as practicable. 00.0/LA -- Case No. :0cv-0 MMA (NLS)
Case :0-cv-00-MMA-NLS Document 0 Filed //00 Page of 0 VIII. FEE APPLICATIONS. The Receiver and his professionals have worked without compensation since the inception of this case. The Receiver and his professionals filed their First Interim Fee Applications (the "Fee Applications") (for the period from May, 00 through July, 00) on October, 00. As of the date of this Second Interim Report, no objections to the Fee Applications have been filed, and the Receiver respectfully requests that the Court enter an order approving the Fee Applications, in their entirety, as soon as possible. The Receiver and his professionals anticipate filing their Second Interim Fee Applications in December 00, as authorized by the Appointment Order and Order in Aid of Receivership. 0 IX. CONCLUSION. Based on the Receiver's preliminary investigation and findings as described above, the 0 Receiver recommends and requests that the Court order that the receivership continue pursuant to the Appointment Order and any supplemental orders issued by the Court. The Receiver requests that the Court approve his continuing investigation and this Interim Report. The Receiver will file another report updating the Court of further findings in approximately 0 days, pursuant to the Order in Aid of Receivership. Dated: November, 00 By: /s/ David L. Osias DAVID L. OSIAS ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP Attorneys for Receiver Stephen J. Donell 00.0/LA -- Case No. :0cv-0 MMA (NLS)
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