SEC Seeks To Move TelexFree Bankruptcy To Massachusetts

Citing a "coordinated effort to avoid the Massachusetts courts," the Securities and Exchange Commission filed a motion in a Nevada bankruptcy court seeking to transfer venue of the TelexFree bankruptcy to a Massachusetts bankruptcy court.  In its Motion for Change of Venue (the "Motion"), the Commission alleged that the overwhelming facts and circumstances warranted the transfer of the pending bankruptcy filed by three TelexFree entities from Nevada to Massachusetts.  

According to the Commission, TelexFree, Inc., TelexFree, LLC, and TelexFree Financial, Inc. (collectively, "TelexFree") "hastily filed their Chapter 11 petitions the evening of Sunday, April 13, 2014."  Despite the fact that only TelexFree, LLC was a Nevada limited liability company and maintained a "rent-a-space office" in Las Vegas, the bankruptcy petitions claimed that venue was proper in Nevada.  The bankruptcies appeared extremely coordinated, with a flurry of motions accompanying the petitions - including a motion for court approval to "reject" hundreds of millions of dollars in obligations to "promoters" under old and current compensation plans.  Approximately 36 hours after the filing of the bankruptcy petitions, both the Massachusetts Securities Division ("MSD") and the Commission filed civil complaints against TelexFree in Massachusetts.  

In its Motion, the Commission stressed the overwhelming evidence it alleged supported a finding of venue for the bankruptcies in Massachusetts rather than Nevada.  This included the fact that:

• All of Debtors' physical assets are located in Massachusetts (or in Florida);
• Most of TelexFree's bank accounts are located in Massachusettts;
• The 50% owners and only directors of TelexFree reside in Massachusetts;
• One-third of the 30 largest creditors listed by TelexFree reside in Massachusetts, while none reside in Nevada; and
• Both the MSD's administrative complaint and the Commission's emergency enforcement action are pending in Massachusetts courts.

The federal statute governing venue in a bankruptcy case specifies that venue is proper in the district in which "the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the 180 one hundred and eighty days..." prior to commencement of the bankruptcy proceeding.  28 U.S.C. 1408.  Further, Nevada caselaw provides a six-factor test to determine whether a case should be transferred for the convenience of the parties:

• proximity of creditors of every kind to the court;
• proximity of the debtor;
• proximity of witnesses necessary to the administration of the estate;
• location of the assets;
• economic administration of the estate; and
• necessity for ancillary administration if liquidation should result.

In re B.L. of Miami, Inc., 294 B.R. 325, 329 (Bankr. D. Nev. 2003).   Reviewing these factors, the Motion indicated that, while preliminary data shows that only 205 victims may be located in Nevada, more than 2,500 victims were located in Massachusetts.  Additionally, both TelexFree's principal place of business and its owners are located in Massachusetts.  These owners are also primary witnesses in the case.  Interestingly, the Commission also alludes to the possibility under current law that entry of any orders in fraudulent transfer actions against any of the individual defendants or other non-claimants will have to be coordinated with the Nevada district court - whereas the Commission's civil enforcement action is currently pending in the District of Massachusetts and thus the Court there will already be familiar with the facts and circumstances of the case.  Finally, the Commission also indicates that the current Chapter 11 status of the case is in doubt, hinting that "liquidation of the estate may become necessary".  In that event, the Commission argues that liquidation in Massachusetts would complement the establishment of a distribution fund that would likely be under the auspices of the Massachusetts District Court.  As the Commission argued, the factors heavily weighed towards a transfer of venue to Massachusetts bankruptcy court.  

Previous Ponzitracker coverage of TelexFree is here.

A copy of the Motion is below:

Transfer Motion

Rothstein Trustee Files Clawbacks Seeking Funds Spent on Jewelry and Cars

Herbert Stettin, the bankruptcy trustee appointed to recover assets for the benefit of victims defrauded by Scott Rothstein's $1.4 billion Ponzi scheme, filed several more clawback suits seeking the return of funds spent by Rothstein on expensive jewelry and exotic automobiles.  The clawback suits, known in bankruptcy parlance as preference actions, seek the return of funds transferred from Rothstein prior to the filing of the petition putting Rothstein's law firm, Rothstein Rosenfeldt Adler, P.A. ("RRA") into bankruptcy.  

Stettin is proceeding under the Florida Uniform Fraudulent Transfer Act ("FUFTA") and the Bankruptcy Code, which allow avoidance of preferential transfers made with actual intent to defraud or that were constructively fraudulent and thus made without reasonably equivalent value.  While bankruptcy laws provide for the avoidance of these transfers within two years of the bankruptcy petition filing date, its FUFTA counterparts extend this "lookback" period to four years from the filing date.  The latest round of clawbacks seek over $10 million from the following six entities:

• Levinson Jewelers - $9.8 million
• Braman Motors of Miami - $1.5 million sought;
• Recovery Racing, LLC - $560,000 sought;
• Euro Motorcars - $177,000 sought;
• Thunder Cycle - $69,000 sought; and 
• Muhammed Sohail's Ultimate Cigars - $57,500 sought

The majority of funds sought relate to Rothstein's affinity for expensive jewelry and cars.  Stettin is seeking the return of nearly $10 million from Levinson Jewelers, whose owners were allegedly close friends with Rothstein.Stettin is also seeking the return of funds from Braman Motors used to purchase a 2009 Bugatti Veyron, which was sold at auction last year for nearly $900,000.  

Rothstein is currently serving a 50-year sentence in federal prison.  

The suits filed by Stettin can be found here.

Judge: Cayman Islands Lawsuit Against Madoff Trustee is Void

A Bankruptcy Court Judge issued a strongly-worded order holding that a lawsuit recently filed in the Cayman Islands against the Madoff trustee was void and could not proceed any further.  Irving Picard, the court-appointed trustee for Bernard L. Madoff Investment Securities ("BLMIS"), sued Maxam Absolute Return Fund, Ltd ("Maxam"), seeking the return of nearly $100 million in fraudulent transfers made in the six years preceding the bankruptcy filing of BLMIS.  After answering that complaint, Maxam then filed an action in the Cayman Islands (the "Cayman Action") seeking a declaration that Maxam was not liable for the transfers.  According to Judge Lifland, that action is forbidden by the Bankruptcy Code and other federal laws, and constitutes a "clear attack on this Court’s exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination."

While such an action would normally be allowed, the act of filing for bankruptcy triggered provisions in the Bankruptcy Code that forbid actions by third parties to recover or obtain assets in the bankruptcy estate. Specifically, section 362 of the Bankruptcy Code contains what is known as an "automatic stay" provision that forbids:

the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor,” or “any act to obtain possession of . . . or to exercise control over property of the estate.

Additionally, BLMIS's membership in the Securities Investor Protection Corporation ("SIPC") resulted in the bankruptcy being subject to the provision of the Securities Investor Protection Act, which contains similar prohibitions.  In the Cayman Action, Maxam sought 

a declaration that Maxam Limited is not liable to the Trustee for either the $25 million Maxam Limited received from Maxam Fund within the period of 90 days prior to the Filing Date or any amounts in excess of the $25 million that Maxam Limited received from Maxam Fund within the period of two years prior to December 11, 2008.

However, according to Judge Lifland, the Bankruptcy Code and SIPA prevent such an action from continuing. Noting that Picard would be forced to essentially relitigate the merits of the clawback lawsuit, Judge Lifland opined that unneeded time, expenses and resources would be expended.  Additionally, the suit interferes with the Bankruptcy Court's exclusive jurisdiction over the property of Madoff's brokerage firm.  Finally, Judge Lifland also noted that the suit violated the Barton Doctrine, which is a judge-created rule that before a court-appointed receiver or trustee can be sued, the petitioning party must first seek leave of the court.  

Under Section 105 of the Bankruptcy Code, a Bankruptcy Court is granted equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code].” Noting the ramifications should each foreign individual or entity sued by Picard be permitted to seek relief in their own country, Judge Lifland utilized these powers by issuing an injunction preventing Maxam from continuing the Cayman Action.   

A copy of the Order is here.

Madoff Trustee Seeks Over $200 Million in Latest Round of Clawback Lawsuits

The trustee overseeing the liquidation of Bernard Madoff's defunct brokerage firm continued his quest to recover funds from investors of Madoff's largest feeder fund, filing five lawsuits seeking over $200 million from five entities.  Irving Picard, the court-appointed trustee, is seeking over $1 billion from entities who invested with Madoff through Fairfield Sentry.  Picard reached a settlement with Fairfield Sentry earlier this year that allowed him to pursue clawback claims against Fairfield customers.  Fairfield received over $3 billion during its relationship with Madoff, $1.6 billion of which was subsequently transferred to Fairfield customers.  Picard has now filed suits seeking over $1 billion of the $1.6 billion allegedly transferred from Fairfield to investors.  

Today's suits seek the return of funds from ABN AMRO Bank, Bank Luxembourg, Lighthouse Investment Partners, Nomura International PLC, and KBC Investments Limited.  In total, the latest round of suits seeks nearly $220 million consisting of the following amounts from each entity:

• ABN AMRO Bank - $25,469,129
• Bank Luxembourg - $50,082,651
• Lighthouse Investment Partners - $11,165,251
• Nomura International PLC - $21,449,920
• KBC Investments Limited - $110,000,000     

These clawback actions derive their authority from various federal and state laws.  Under Sections 550 and 551 of the Bankruptcy Code and various sections of the New York Debtor & Creditor Law, initial and subsequent transfers from a debtor within the six-year time period preceding the filing of a bankruptcy petition are subject to avoidance.  

Copies of each complaint can be found here:  ABN AMRO, Bank Luxembourg, Lighthouse Investment Partners, Nomura, and KBC.

Related Ponzitracker coverage:

Madoff Trustee Seeks $189 Million in Clawback Suits

Madoff Trustee Files Seven Clawback Lawsuits Against Feeder Fund Investors

Madoff Trustee Fires Next Salvo of Clawback Lawsuits

Madoff Trustee Files Five More Clawback Lawsuits Against Feeder Fund Investors Seeking Nearly $100 Million

Madoff Trustee Seeks $300 Million From Abu Dhabi Investment Arm

Utah Man Claims he is Running 'Legal Ponzi Scheme'

A Utah man facing scrutiny after his businesses filed for bankruptcy protection has taken the position that he was running a 'legal Ponzi scheme', and thus should not be subject to oversight.  Dee Allen Randall, of Kaysville, Utah, filed Chapter 11 bankruptcy in December 2010, which allows a debtor to propose a plan of reorganization while holding creditors at bay.  However, after allegations of fraud surfaced, authorities sought the appointment of an independent bankruptcy trustee to conduct an investigation and oversee the bankruptcy process.

Randall operated several Utah businesses, including Horizon Mortgage & Investment, Horizon Financial & Insurance Group and Horizon Auto Funding.  The US Trustee overseeing the bankruptcy has identified at least twenty entities through which Randall did business, 12 of which are currently active.  He advertised to potential investors, many of whom were retirees, that he could protect their retirement funds through investments in real estate, auto leases or insurance products.  These various investments were conducted through the use of private placement memorandums ("PPMs"), which are detailed disclosures to potential investors of a securities offering that often outline a myriad of potential risk factors.  Apparently, included in these offering documents was language to the effect that, while not described as a"Ponzi scheme", Randall would be transferring investor funds from company to company to meet obligations.  

United States Bankruptcy Judge Joel Marker appointed a forensic accountant as the US Trustee, who has taken control of Randall's finances and is conducting an investigation.  According to the Trustee, Randall has been less than cooperative with the investigation, soliciting investments after he sought bankruptcy protection and using funds without court permission.