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United States Commodity Futures Trading Commission v. Lake Shore Asset Management Limited

March 15, 2010

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF,
v.
LAKE SHORE ASSET MANAGEMENT LIMITED, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

The receiver's motion for approval of a proposed distribution plan and method to be used in calculating disbursements to investors, along with objections from GAMAG Black & White, Ltd., the Royal Bank of Canada, Jose Fernando Hurtado (whose objections are styled as being on behalf of himself and 73 other investors), and Andorra Bank Agricol Rieg. S.A. ("Andbanc") are before the court. For the following reasons, the receiver's motion is granted and all of the objections are overruled.

I. Background

In a nutshell, in this civil commodities fraud case, the court found that the defendants (Philip Baker and numerous intertwined Lake Shore entities) defrauded investors by making material misrepresentations and omissions regarding certain commodity pools. Specifically, the court found that the defendants presented false financial statements and false performance tables to investors that misrepresented the pools' investment performance. Default judgments and permanent injunctions have been entered against all of the defendants.

A. The Receiver

On October 4, 2007, the court appointed Robb Evans to serve as the temporary equity receiver, and on April 24, 2008, the court entered an amended order appointing a receiver (the "Receivership Order") [Dkt. No. 554]. The Receivership Order appointed Robb Evans as receiver for the Lake Shore common enterprise ("LS Common Enterprise"), which was defined to include the following entities:

Lake Shore Asset Management Limited ("LSAM"), Lake Shore Group of Companies, Lake Shore Asset Management Inc., Lake Shore Alternative Financial Asset Account Limited a/k/a Lake Shore Alternative Financial Asset Ltd., Lake Shore Alternative Financial Asset Account I Limited, Lake Shore Alternative Financial Asset Account II Limited, Lake Shore Alternative Financial Asset Account III Limited, Lake Shore Alternative Financial Asset Fund Limited, Lake Shore Alternative Financial Asset Fund II Limited, Lake Shore Alternative Financial Asset Fund III Limited, Geneva Corporation Funds World Limited and/or Genevacorp Funds World Ltd. (formerly known as Lake Shore Alternative Financial Asset Fund IV Limited), Lake Shore Alternative Financial Asset Fund IV US, LLC, Lake Shore Alternative Financial Asset Yen Fund I, Lake Shore Alternative Financial Asset Yen Fund Limited Class II, Lake Shore Alternative Financial Asset Yen Fund Limited Class III, Hanford Investments Ltd., all funds, properties, premises, accounts and other assets directly or indirectly owned, beneficially or otherwise, by the LS Common Enterprise, individually or collectively, including, but not limited to, funds on deposit at Sentinel Management Group, Inc.....

Receivership Order at 2-3.

The Receivership Order also directed the receiver to, among other things, take custody and control of all of the funds, property, accounts and other assets of LSAM in the possession of, or under the control of the LS Common Enterprise, and to marshal, preserve, account for and liquidate all assets of the LS Common Enterprise for purposes of making a distribution to the clients of the LS Common Enterprise (hereinafter referred to as "claimant(s)" or "investor(s)"). See id. at 4-5.

B. Funds Recovered by the Receiver

The total funds under management by LSAM at the time of the receiver's appointment was approximately $273.5M. Since its appointment, the receiver has taken possession and control of $110,285,941.15 in receivership assets. Although the receivership defendants were completely uncooperative, the receiver was able to obtain funds from two sources. First, Sentinel Management Group - the cash manager and subcustodian for the Lake Shore Alternative Financial Asset Funds - filed a voluntary bankruptcy petition on August of 2007 in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (Case No. 07-14987). The receiver is the second largest unsecured creditor in the Sentinel bankruptcy case, and received distributions in the amount of $34,787,915.87, $25,581.03, and $1,048,742.28 from the Sentinel Liquidation Trustee.*fn1

Second, the London Futures Commission Merchants (MF Global UK Limited, Lehman Brothers International (Europe) and Newedge Group SA (formerly Fimat International Banque SA)) paid $76,303,994.75 into the court as a result of the receiver's claim in an interpleader action in the High Court of Justice, London, England.

The receiver has reported to the court that it is pursuing other avenues on behalf of the investors. In addition, Philip Baker, the head of the LS Common Enterprise, is currently a defendant in a criminal case pending in this district, United States v. Baker, No. 10 CR 175. The court takes judicial notice of the fact that Mr. Baker appears to have acknowledged that he possesses funds subject to this court's asset freeze. See United States v. Baker, No. 10 CR 175, Dkt. 17 at 3-4.*fn2 Thus, future distributions of additional funds over and beyond the Sentinel and London FCM funds are possible.

C. The Claims Verification Procedure Order

After the receiver recovered funds from the London FCMs and the Trustee made its initial distribution, the receiver filed a motion seeking an order authorizing a claims verification procedure [Dkt. No. 623]. On January 30, 2009, the court granted the receiver's motion and entered an order approving the claims verification procedure proposed by the receiver (the "Claims Procedure Order") [Dkt. No. 631].*fn3 Pursuant to that order, the receiver notified investors of the claim verification process and claims bar date. The receiver also completed its analysis of all of the claims it received.

II. The Methodology Used by the Receiver to Determine Proposed Claims

Pursuant to the Claims Procedure Order, the receiver employed the following methodology in calculating the proposed claims:

(a) As previously determined by this Court, because funds were commingled, all investors in the identified funds were merged into a single investor claimant class. All claims will be treated similarly and all [c]laimants, regardless of which Fund they invested in, will be entitled to share in all receivership assets subject to this receivership proceeding;

(b) Investor account balances were credited only for funds actually deposited or paid by the [i]nvestor into their accounts ("Deposits");

(c) Any credits characterized as gain on an [i]nvestor's account to increase the account balance were reversed;

(d) Any actual payments of purported interest and actual payments for any other purposes, such as withdrawals of investment amounts and commissions, were treated as a return of capital ("Pre-receivership Payments") and the account balance was reduced accordingly; and

(e) No interest was credited.

Dkt. No. 631. The receiver has done a laudable job verifying information provided by investors, especially given the complexity of the scheme and LSAM's failure to turn over its books and records.

The receiver also submitted a Report of Approved Claim Amounts and Motion for Approval of the Receiver's Calculation of Claims and for Disallowance of Certain Claims (the "Claims Calculation Motion") [Dkt. No. 678]. In sum, the receiver determined that the net investor claims totaled $268,668,762.71 (total deposits of $287,805,165.87 less total pre-receivership payments of $19,136,403.16). In the order approving the Claims Calculation Motion (the "Claims Calculation Order") [Dkt. No. 688] the court disallowed twelve claims totaling $2,729,787 (the "Disallowed Claims") because the investors associated with those claims made total deposits of $813,027.28 and received pre-receivership payments from LSAM totaling $912,176.13. Thus, they received more than a 100% recovery of the amounts invested and are not entitled to any further monies.

The court also disallowed sixteen additional claims based on the failure of the claimants to provide all information required under the terms of the Claims Procedure Order. One of those claimants (Schroder & Co. Bank AG) subsequently provided additional information and is now an allowed claimant. Other Disallowed Claimants are still in discussions with the receiver, who thus proposes that it hold back $1,000,000 as a reserve for Disallowed Claims. The investor accounts for these claimants made total deposits of $3,113,963.16 and received pre-receivership payments of $285,027.31, which is a net deposit of $2,828,935.85.

In the Claims Calculation Order, the court approved the method proposed by the receiver to calculate the approved claims and further ruled that the receiver should calculate its proposed distribution based upon an approved claims base totaling $263,533,203.297 (the "Approved Claims Base"). In particular, under the terms of the Claims Calculation Order, the court held that distribution would be made from a common pool comprised of all receivership assets and that all claimants would be treated as a single investor class.

As noted above, the receiver is currently holding $110,285,941.15 in receivership assets. The receiver currently seeks approval of an initial distribution in the amount of $107,000,000 which consists of a net distribution of $103,915,051.20 to the Approved Claims Base, assuming repayment of the Post Freeze Deposits in the amount of $3,084,948.80 (100% of deposits made after entry of this court's asset freeze order). See Dkt. 692, Ex. 1 (receiver's chart summarizing calculation of initial distribution amount). The receiver further proposes to hold back: (1) $1,000,000 from the receivership assets available for distribution to cover the ongoing costs of the receivership, including payment of previously accrued expenses and future anticipated legal fees, accounting fees and ...


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