Midland Leichner Entities
U.S.B.C. Consolidated Case No. SV03-13981GM

INTRODUCTION

On May 8, 2003, involuntary bankruptcy petitions were filed against Midland Euro Exchange, Inc., Midland Euro, Inc., Midland Group, Inc., Moshe Leichner and Zvi Leichner (the “Debtors”), consolidated bankruptcy case number SV03-13981GM. On May 16, 2003, the U.S. Bankruptcy Court granted emergency motions for the appointment of an interim trustee and appointed Christopher R. Barclay as chapter 7 trustee. On June 18, 2003, the court granted the involuntary bankruptcy petitions filed against the Debtors.

This website has been posted to keep creditors and interested parties up to date and advised regarding the status of the Debtors’ consolidated bankruptcy cases. This website will be updated periodically with significant case developments and recent court filings. The following information is available for review / reference:

 

CASE BACKGROUND

IMPORTANT DISCLAIMER: ALL INFORMATION ON THIS WEBSITE CONCERNS PENDING LITIGATION INVOLVING DISPUTED ISSUES OF FACT AND LAW. ALL STATEMENTS MADE ON THIS WEBPAGE SHOULD BE REGARDED AS THE PERSONAL OPINIONS OF THE TRUSTEE AND NOT AS ASSERTIONS OF UNDISPUTED FACTS.

Involuntary Petition and Appointment of Trustee

The bankruptcy case comprises five debtors and commenced involuntarily on May 8, 2003. On May 9, 2003, Safe Harbor Capital Management, LLC and Standing Stones, LLC filed an emergency motion for an order appointing an interim trustee. An order shortening time was granted on May 12, 2003 whereby the court set a hearing date of May 16, 2003 on the motion for appointment of an interim trustee. At about the same time, a motion for substantive consolidation was filed. At the conclusion of the hearing on May 16, 2003, the court directed the Office of the United States Trustee to appoint an interim chapter 7 trustee. The court also entered an order substantively consolidating the bankruptcy estates of Moshe Leichner, Zvi Leichner, Midland Euro, Inc., Midland Euro Exchange, Inc., and Midland Group, Inc. ("Debtors").

On May 16, 2003, the United States Trustee appointed the applicant, Christopher R. Barclay, as interim chapter 7 trustee. The Notice of Appointment and Acceptance of Trustee was filed with the court on May 20, 2003. Also on May 16, 2003, the court entered an order denying the motion filed by Mr. David Tilem, a pre-petition custodian, to excuse turnover pursuant to 11 U.S.C. sec 543(d). On May 21, 2003, the trustee obtained a turnover of certain assets of the Debtors on May 21, 2003 from an attorney who was serving as trustee of a trust created by the Debtors. To the bankruptcy trustee, it appeared that, pre-petition, the Debtors created this custodianship as part of a scheme to hinder and/or delay creditors. The trustee believed that the custodianship was mostly harmful to creditors and not beneficial to the estate; as a result, the trustee pursued objections to motions filed by the former custodian to obtain payment of fees and expenses from the estate for services detrimental to the estate and creditors. Those objections were ultimately settled and the custodian and his professionals were paid a reduced sum. On June 18, 2003, the court entered an order for relief in the chapter 7 case and ordered the Debtors to file schedules and statements within 15 days. Thereafter, the Debtors requested and obtained an extension of time to file schedules and statements until July 25, 2003. The Debtors filed consolidated schedules and statements on or about that date, however, the schedules and statements they filed were substantially incomplete. The Debtors alleged that they were unable to file complete schedules and statements due to the incarceration of Messrs. Leichner. On February 20, 2004, the Debtors filed amended schedules. On February 27, 2004, the trustee filed objections to the Moshe Leichner's claims of exemption. A copy of the Debtors’ Bankruptcy Schedules and Statement of Financial Affairs can be found in the Documents section below.

On June 19, 2003, the trustee filed an inventory pursuant to Federal Rules of Bankruptcy Procedure Rule 2015.

Notice of the 341(a) hearing was entered on the docket on June 20, 2003. On July 29, 2003, the 341(a) hearing in this matter was concluded. Instructions for contacting the Office of the United States Trustee to obtain a copy of the transcript can be found in the Documents section.

On September 25, 2003, the court entered orders approving stipulations, between each of Moshe and Zvi Leichner on the one hand and the trustee on the other, which provide for denial of their discharge. Copies of the Stipulation to Denial of Discharge by Moshe Leichner and Stipulation to Denial of Discharge by Zvi Leichner can be found below in the Documents section.

Through review of the debtor's schedules, information obtained from creditors or information obtained at the Debtors' 341(a) meeting or otherwise, the case appeared to the trustee to have assets and/or potential avoidance actions that might be liquidated for the benefit of creditors. Accordingly, on October 7, 2003 the trustee filed a Notification of Asset Case. The bankruptcy court established a deadline of January 5, 2004 for creditors to timely file claims in the case. More than $100,000,000 in claims have been filed in this case, including what appear to be duplicative claims.

With court approval, the trustee retained counsel (Gumport|Reitman; order entered June 18, 2003) and forensic accountants (Mack|Barclay Inc.; order entered June 18, 2003; LECG, LLC; order entered July 21, 2006) and commenced an investigation into the financial affairs of the Debtors, with an eye toward locating and recovering assets of the Debtors wherever situated. The complex nature of the Debtors' prepetition operations and conduct and the multitude of claims filed in this case, including competing claims for interests (secured and otherwise) in the Debtors' assets are such that significant litigation has proven to be necessary to recover assets and sort out competing claims to the assets recovered.

Pursuant to an order entered on February 14, 2005, the case was transferred from Honorable Arthur Greenwald to Honorable Geraldine Mund. In concert with this reassignment, the case number was changed from SV03-13981AG to SV03-13981GM.

CASE TIMELINE

Year One: Difficult From the Beginning
  • By the time of the trustee’s appointment, the Debtors’ enterprise had been shuttered for a number of months and substantially all of its key records were in custody of the Federal Bureau of Investigation while the United States Attorney pursued the federal government’s criminal prosecution of the Leichners and investigated the involvement of other parties. At the outset, the trustee had few leads to start with and no records. The trustee was helped some at the beginning by a turnover of discovery conducted by certain of the petitioning creditors who had been in litigation with the Debtors prepetition in Federal District Court. As helpful as these records and documents were, they were woefully incomplete and insufficient to the trustee’s efforts to trace and explain the disposition of the more the $100 million of investor money raised by the Debtors prepetition.
  • Accordingly, the trustee and his counsel began a painstaking process of piecing together the Debtors’ transactions by conducting discovery of bank and other records through Rule 2004 examinations. Starting in September 2003, certain witnesses subject to the trustee's Rule 2004 motions filed objections in an effort to delay and limit the trustee's Rule 2004 motions. The trustee successfully defeated those objections, although the objections of those witnesses did have the effect of delaying the progress of the trustee's investigation. In January 2004, Messrs. Attia and Schnapp sued the trustee. On the trustee's motion, that lawsuit against the trustee was dismissed without prejudice. This litigation delayed the trustees’ litigation.
  • With much persistence, the trustee and his counsel and forensic accountants obtained, reviewed and analyzed thousands of pages of bank records and other documents relating to Debtors' prepetition asset transfers, including their Ponzi scheme involving investors located all over the world.
  • With assistance from his counsel, the trustee recovered funds on deposit from a number of sources, including: the prepetition private trustee; law firms who were provided retainers prepetition (McKenna, Long & Aldridge; Christie, Parker & Hale); domestic bank and investment/savings accounts of the Debtors (First Federal; Charles Schwab & Co.; First Allied Securities); foreign bank and investment/savings accounts of the Debtors (Man Financial; Swiss Finance).
  • The trustee also identified potential interests of the Debtors in automobiles, real estate, aircraft and certain stock or other interests in non-bankrupt corporations or business enterprises. The trustee retained real estate brokers (Coldwell Banker and Dilbeck-Gibson; order entered August 13, 2003) to assist with the liquidation of the real estate assets, an automobile broker to assist with selling automobiles (Hilborn Motor Car Interiors; orders entered August 11, 2003 and October 22, 2003) and an aviation broker (Jet Traders, Inc.; orders entered August 13, 2003 and October 21, 2003) to assist with the liquidation of certain aircraft assets.
  • On July 9, 2003, the trustee filed a Motion and Notice of Motion by Trustee for Authority to Abandon One Sea Ray Boat. Legal title was held by a non-debtor at the time. The trustee's investigation revealed that contrary to initial contentions by some parties in the case, the boat had no equity and was of no value to the Debtors' bankruptcy estate. On August 5, 2003, the court entered an order granting the trustee's motion to abandon any interest of the Debtors in the boat.
  • The trustee successfully recovered and sold three residences with court approval. These efforts too were not without challenges. In one instance, the trustee obtained a court order authorizing him to terminate a lease with a tenant. The trustee gave notice of termination of the lease to the tenant. The tenant filed suit against the trustee, the trustee’s accounting firm and his realtors. While the suit was ultimately dismissed and the tenant agreed to vacate the property pursuant to a settlement approved by the court by order entered on January 28, 2004, it did succeed in complicating the trustee’s liquidation of the residence and contributed to the cost of administration in the case.
  • Efforts to recover the Osborne residence met with stiff opposition from members of the Leichner family. The trustee commenced litigation to compel cooperation of the Leichner family. On September 11, 2003, the trustee filed a Motion for Order to Show Cause Re: Civil Contempt against Vered Leichner, the wife of Moshe Leichner. On November 3, 2003, the court issued its Order to Show Cause Re: Civil Contempt and Sanctions Against Vered Leichner and set the matter over for hearing. On April 23, 2004, the trustee filed a Motion for Order (1) Establishing Procedures for Marketing 18023 Osborne Street Property and (2) Determining What Items are "Fixtures" That are Included in any Sale. After not insignificant delay and a mediation with Judge Bluebond as mediator, the trustee reached a settlement with the Leichner family concerning the Osborne Residence and other disputed matters involving the OSC re Contempt. The bankruptcy court approved the settlement on September 22, 2004. Under the proposed settlement, the bankruptcy estate's interest in the Osborne Residence was sold to the Leichners subject to the existing first trust deed on the property with an unpaid balance of more than $315,000 and certain other liens and for a cash payment of approximately $360,000 to the bankruptcy estate. The transaction closed in October 2004.
  • The trustee successfully recovered and sold five automobiles and a motorcycle pursuant to orders authorizing the sale of such vehicles by the trustee's court approved vehicle broker. In 2003, the trustee recovered the proceeds of a sixth automobile that had been sold by Zvi Leichner's spouse.
Year Two: The Trustee’s Investigation Continues and More Litigation Ensues
  • During the period from September 1, 2004 through August 31, 2005, the trustee, with assistance from professionals retained with court approval, continued his efforts to identify, locate, recover and liquidate the Debtors assets.
  • Soon after his appointment, the trustee identified that one or more of the Debtors had interests in certain airplanes that were transferred prepetition. The trustee successfully negotiated recovery of title to the airplanes for the benefit of the bankruptcy estate. On October 21, 2003 the court granted the trustee's request for an order authorizing the trustee to terminate a lease regarding the same airplanes. The trustee served notice of termination of the lease to the lessee and requested turnover of the airplanes at termination of the lease. The lessee (Simon Katzman/Continental Flight Center) refused the trustee's request to turnover the planes. The lessee later sued the bankruptcy estate claiming an ownership interest in the planes. The trustee filed a cross-complaint. A short while later, the trustee also filed a request for an injunction grounding the airplanes pending the outcome of the trial concerning the dispute with the lessee. On May 20, 2004 the court granted the trustee's request for a preliminary injunction and ordered the planes be grounded.
  • The trustee learned that the flight records related to the airplanes were removed by the lessee and were allegedly missing. The dispute surrounding this adversary proceeding went for mediation before Judge Bluebond (as mediator) on October 25, 2004, but settlement proved elusive.
  • Litigation resumed over ownership of the airplanes and the bankruptcy estate's claims for damages arising from the withholding of the airplanes and the loss of certain flight and maintenance logs. Trial commenced for these proceedings in August 2005, and on August 29, 2005, the court entered a preliminary memorandum of opinion after trial, finding that the trustee holds title to nine of the airplanes, and that the trustee and Simon Katzman are each a 50% owner of the tenth plane. The court reserved further proceedings to determine the estate's damages arising from the defendant's secreting of the logbooks for these planes, and for violating the preliminary injunction and automatic stay. An evidentiary hearing on damages was set for December 2, 2005. In the interim, the defendants refused to turnover the airplanes. Notwithstanding, the parties engaged in settlement discussions and ultimately resolved the matter resulting in payment to the estate of more than $300,000.
  • On a different front, the trustee filed a lawsuit in 2003 in bankruptcy court to recover certain prepetition transfers to or for the benefit of a creditor named "Al Baraka". Early on, the dispute with Al Baraka required that the trustee monitor proceedings in the U.K. and later to file an application to freeze funds on deposit in the U.K. The trustee was assisted in this matter by U.K. counsel (Kendall Freeman; order entered June 18, 2003) who were retained and paid retainers with court approval (orders entered June 16, 2003; December 4, 2003; and, May 12, 2004). The trustee determined it not beneficial to the estate to intervene in the ongoing U.K. proceeding. The trustee elected instead to pursue recovery of the funds transferred through commencement of an adversary proceeding in the bankruptcy case, coupled with an application for a new freeze order in the U.K. In doing so, the trustee successfully terminated the ability of Al Baraka to apply to the U.K. court for release from the existing freeze order and for withdrawal of monies from the frozen account to fund its ongoing cost of defense in the existing U.K. action. The trustee’s actions ended the dissipation of the funds by Al Baraka.
  • The U.K. court required the trustee post a bond in support of the trustee's application for a freezing order. On February 18, 2004, the bankruptcy court entered an order authorizing the trustee to post a 77,000 U.K. Pounds bond in support of the asset freeze order sought by the trustee. A short while later, Al Baraka withdrew its opposition to the trustee's application for a freeze order resulting in a substantial reduction in the required bond. The U.K. court granted the trustee's request for a return of the portion of the bond no longer required, which funds were then returned to the bankruptcy estate via the trustee's U.K. counsel.
  • Ultimately, summary judgment was entered by the bankruptcy court on December 6, 2004 granting the trustee's claim to avoid and recover a fraudulent transfer from Al Baraka in the principal sum of $2,750,000 plus pre- and post-judgment interest and costs. The trustee received $1,075,612 in April, 2005. The collectability of the balance of the judgment is doubtful by reason of the defendant's location in Qatar.
  • In the meantime, the trustee continued to investigate the Debtors' prepetition financial affairs. The trustee's investigation revealed that, having operated a Ponzi scheme prepetition and having made other prepetition transfers to hinder, delay and defraud creditors, much of the Debtors' property interests were held by third parties as of the petition date. From November 2004 through May 2005, before the time when the statute of limitations for bringing avoidance actions expired and with assistance from his legal and accounting professionals, the trustee issued nearly 350 letters to investors, brokers, and other third party transfer recipients to request written contracts or promissory notes that support the relationship between each party and Midland/Leichner, and also to demand return of those funds received from Midland/Leichner that were recoverable by the bankruptcy estate pursuant to the provisions of the bankruptcy code. The trustee and his professionals investigated and corresponded with these same investors, brokers, and other transfer recipients and the trustee settled certain claims.
  • The result of the detailed and lengthy investigation, including the trustee’s written communications with the transfer recipients, was the trustee’s decision to file lawsuits to recover prepetition transfers, including broker commissions and fictitious profits, within the four-year period prior to the date of the involuntary petition. In making this decision, the trustee established parameters for determining the targets of litigation so that such litigation would focus the estates resources on those parties who benefited from the scheme, namely insiders of the Debtors; investors who received payments from the Debtors in excess of their payments to the Debtors (i.e. fictitious profits), but only to the extent of such “profits”; and, brokers who received commissions.
  • The trustee filed nearly 150 adversary proceedings between April and June 2005 against brokers, investors, and other transfer recipients. Those proceedings sought recovery of over $47.0M in prepetition transfers made by the debtors to insiders and other parties pursuant to the transfer avoiding powers of the bankruptcy code.
Year Three: Large Settlements and an Important Trial on Ponzi Issues
  • During the third year, the trustee's activities were principally devoted to overseeing the transfer avoidance litigation commenced by the trustee in year two. The trustee's claims are disputed by the defendants. The merits of the claims will be determined by the bankruptcy court. The trustee cannot predict when the merits of the complaints will be determined. Notwithstanding, initially, the trustee anticipated that such litigation might take between 18 to 36 months to complete at a minimum. It is now apparent that the time required to complete this litigation will be at the high end of the range and possibly longer. This is because not all matters have settled and trial will be necessary to resolve some of the disputes and at least one bankruptcy court decision has been appealed and other appeals are possible.
  • Notwithstanding the foregoing, an issue common to substantially all of the pending adversary proceedings, if not all of them, is the issue of whether the Midland/Leichner Entities operated a Ponzi scheme and the sub-issue of when that Ponzi scheme began. On July 28, 2006, the Bankruptcy Court entered an order consolidating for trial the Ponzi scheme issues in the more than 100 adversary proceedings filed by the Trustee. The court consolidated substantially all of the Midland adversary proceedings (there are a few who have been permitted to opt out) for the purpose of conducting a single trial on the Ponzi scheme issues. During July-September 2006, all pre-trial discovery on those issues was completed. On October 16-20, 2006, the Bankruptcy Court conducted a five day trial of those issues. Persons testifying at trial included Grant Newton (the Trustee's accounting expert), Moshe Leichner, Zvi Leichner, Michael Cardenas (who asserted his Fifth Amendment privilege), Oded Simha, Amotz "Bobby" Frenkel, and Yossi Attia. The defendants will submit a post-trial brief in November 2006. A decision is expected early in 2007. Copies of pleadings, motions, and trial briefs are available for viewing under the Documents section. The trustee is hopeful that the estate will prevail at trial on the Ponzi scheme issues and thereafter be in a position to bring motions for summary adjudication to expedite obtaining judgments against remaining defendants.
  • In the interim, the trustee continued to investigate the merits of the litigation, including the ability of defendants to respond to possible judgments. Consistent with these efforts, the trustee pursued settlements with parties willing to enter into settlement discussions. During the period from September 2005 to August 2006, the trustee settled with parties named in more than 18 of the adversaries filed by the trustee resulting in collections by the estate in the amount of approximately $4.6 million. With court approval, the trustee abandoned approximately 16 other adversary proceedings and actions against certain specifically-named defendants in other adversary proceedings, after determining that the defendants had filed bankruptcy or were otherwise judgment proof. Finally, the trustee also continued to conduct discovery regarding the Debtors' assets and prepetition financial affairs.
Year Four: Completion of Ponzi Scheme Trial and Pending Settlements in Related Class Action
  • During 2007, the trustee's activities continued to be principally devoted to overseeing the transfer avoidance litigation commenced by the trustee in year two and that was the subject of a bifurcated trial (as to the common Ponzi scheme issues) and post-trial proceedings during October 2006-April 2007.
  • During October 2006, the bankruptcy court conducted a one-week trial of the Ponzi scheme issues involved in the trustee's avoidance litigation. Witnesses at the trial included Moshe Leichner, Zvi Leichner, Michael A. Cardenas, Yossi Attia, Amotz Frenkel, Oded Simha, and Grant Newton (the trustee's expert accountant). Following the trial, the bankruptcy court required post-trial briefing and argument concerning the Ponzi scheme issues. Post-trial briefing and argument concluded in February 2007.
  • On April 9, 2007, the bankruptcy court entered its judgment and amended findings that there was a Ponzi scheme beginning in August 1999 and continuing through February 2003. The bankruptcy court found that the Ponzi scheme was operated by Moshe and Zvi Leichner through their companies Midland Euro, Inc. and Midland Euro Exchange, Inc.
  • During April 2007, two of the many defendants sued by the trustee filed appeals from the bankruptcy court's judgment on the Ponzi scheme issues, and the trustee filed a protective cross-appeal. The parties who filed appeals were Avraham "Avi" Cohen and Ling-Chi Chu. During September-October 2007, Mr. Cohen entered into a court-approved settlement with the trustee; pursuant to that settlement, Mr. Cohen will pay approximately $99,999 in installments and will dismiss his appeal (and the trustee will dismiss his cross-appeal). In September 2007, Ling-Chi Chu dismissed her appeal in return for the trustee's agreement not to seek costs. As a result, all appeals from the bankruptcy court's ruling on the Ponzi scheme issues were resolved by October 2007. Mr. Cohen and Ms. Ling-Chi Chu dispute the trustee's claims and deny any wrongdoing.
  • During the trial of the Ponzi scheme issues in the bankruptcy court, former Midland investors pursued an uncertified class action against Lloyds TSB Bank (a depository formerly used by Midland), Man Financial (a trading house formerly used by Midland), and Kaplan Swicker & Simha (an accounting firm formerly used by Midland) in the U.S. District Court for the Central District of California. That class action is entitled Ralph Gonzales et al. v. Lloyds TSB Bank et al., USDC No. 06-1433 VBF. By order dated May 4, 2007, following a hearing on April 30, 2007, the district court certified the class action by reason of the commonality of issues arising from the fraudulent investment scheme conducted by the Midland entities. The trustee is not a party to the class action, although he provided extensive information to the parties to the class action. The plaintiff class consists of investors allegedly defrauded by the Ponzi scheme conducted by Midland. During July 2007, the district court granted preliminary approvals of settlements between the plaintiff class and the defendants. All the defendants deny liability and are settling without any admission of wrongdoing. Pursuant to the pending proposed settlements of the class action, the defendants will collectively pay approximately $17 million (of which the bulk of the funds will be provided by Lloyds TSB Bank). The deadline for claimants/plaintiffs to submit claims was October 10, 2007. A final hearing on the proposed settlements is scheduled for October 24, 2007. For further information about the class action settlement, see www.gilardi.com/midland.

  • Michael A. Cardenas was in-house counsel for various of the Midland entities. During the trial of the Ponzi scheme issues in 2006, Mr. Cardenas refused to answer questions and asserted his Fifth Amendment privilege against self-incrimination. On February 9, 2007, Mr. Cardenas entered into an agreement with the U.S. Attorney to plead guilty to federal fraud, tax evasion, and bankruptcy fraud charges. In March 2007, Mr. Cardenas entered his guilty plea before U.S. District Judge Gary Feess. Subsequently, Mr. Cardenas turned over to the trustee approximately 55 boxes of previously withheld Midland files. Mr. Cardenas also submitted to two days of deposition during July 2007 by the trustee and counsel for various defendants sued by the trustee. The prosecutor in Mr. Cardenas' criminal case is Assistant U.S. Attorney Julie Werner-Simon in the Los Angeles office of the U.S. Attorney's office. To arrange access to the documents turned over by Mr. Cardenas to the trustee, please contact Victor Rivera at Aptara (formerly Whitmont Copying) at (213) 452-4901 or email the trustee's counsel Leonard L. Gumport at lgumport@grlegal.com. By reason of the volume of documents involved, all copying expenses must be paid by the party seeking inspection.
  • Following the completion of the Ponzi scheme trial, the trustee continued to litigate and pursue resolution of pending avoidance litigation. Many of the remaining defendants are brokers or investment advisers. On or about June 14, 2007, defendant Safe Harbor Capital Management, LLC filed a motion for summary judgment against the trustee in Adv. No. 05-01351. Safe Harbor and its co-defendants dispute the trustee's claims and deny any wrongdoing. Safe Harbor and its co-defendant Standing Stones, LLC have asserted, among other things, that they have multi-million dollar attachment liens on funds held by the trustee. On June 11, 2007, the trustee filed his opposition to Safe Harbor's summary judgment motion. The trustee's opposition included a declaration from Nicholas J. Weir, a forex expert, containing extensive information that will likely be relevant to other adversary proceedings involving brokers or investment advisers. Mr. Weir's declaration supplemented information previously provided by Mr. Weir and posted on the trustee's website. The trustee's June 11th opposition also included a declaration from Grant Newton, an accounting expert, and voluminous appendices relating to the financial affairs of the Leichners. On August 1, 2007, the bankruptcy court denied Safe Harbor's summary judgment motion and posted a detailed ruling on the docket of Adv. No. 05-01351. Both before and after that ruling, the parties have engaged in extensive settlement negotiations. Trial of the dispute, if it is not settled, is scheduled to begin on December 20, 2007.
  • The Midland companies were headquartered in the California, and raised funds from investors in the US and other countries. Many of the funds were deposited in UK bank accounts controlled by the Leichners in California. One of the issues in the Midland case is the extent to which US laws apply to transfers made from the UK bank accounts of the Midland companies. In one case, the trustee sought to recover funds transferred, via an account in the US, to a UK entity named Swiss Finance Company. In 2006, the bankruptcy court granted the motion to dismiss of Swiss Finance Company. In May 2007, following further litigation between the trustee and Swiss Finance in the bankruptcy court, Swiss Finance entered into a court-approved settlement with the trustee and paid him $75,000.
  • In August 2007, in the U.S. District Court for the Western District of Washington, the SEC and CFTC filed civil enforcement proceedings against Joseph C. Lavin, Global Asset Partners, LLC, and Global Currency Trading Group, all of whom are defendants in avoidance litigation filed by the trustee. Mr. Lavin and his companies deny all wrongdoing and dispute all liability. Further information about the enforcement proceedings of the SEC and CFTC is available on their websites. The website of the SEC is at www.sec.gov, and the website of the CFTC is at www.cftc.gov.
  • Throughout 2007, Moshe Leichner continued to withhold records of his identified foreign bank accounts, including accounts that he maintained at Bank Leumi and Bank Hapoalim in Israel. On August 23, 2007, the trustee and other parties took the deposition of Moshe Leichner. At the deposition, he refused to testify on Fifth Amendment self-incrimination grounds. Moshe Leichner recently filed a petition for a writ of habeas corpus.
  • On or about October 3, 2007, defendants Galina Kubrak and 18607 Ventura Associates, Ltd. filed a motion for summary judgment against the trustee in Adv. No. AD 04-1390. Ms. Kubrak and 18607 Ventura deny all wrongdoing and dispute all liability. On October 17, 2007, the trustee filed opposition papers. The motion will be heard by the bankruptcy court on November 7, 2007.
  • At a hearing on October 29, 2007, U.S. District Judge Valerie Baker Fairbank granted the motions of the class plaintiffs for approval of their settlements with defendants Lloyds TSB Bank, Man Financial, and Kaplan Swicker & Simha. As a result of those settlements, the defendants, without admitting any wrongdoing, will collectively pay approximately $17 million. At the October 29th hearing, Judge Fairbank also approved fees and costs totaling approximately $4.6 million, leaving substantially in excess of $10 million for distribution to victims from the settlement fund.
  • On November 2, 2007, Joe Lavin, the manager of Global Asset Partners and Global Currency Trading, pleaded guilty in the U.S. District Court in Seattle to wire fraud and money laundering charges in connection with a fraudulent investment scheme. For information about this matter from the U.S. Attorney for the Western District of Washington, please see www.usdoj.gov/usao/waw/press/2007/nov/lavin.html.
  • In November 2007, the last of the appeals from the April 2007 judgment in the trial of the Ponzi scheme proceedings in MP Number 06-MP-00101-GM was resolved. That April 2007 judgment determined that the Midland companies operated a Ponzi scheme beginning in August 1999 and continuing through 2003. During April 2007, two defendants filed appeals from that judgment, and the Trustee filed a protective cross-appeal. During September-November 2007, the appellants dismissed their appeals and the Trustee dismissed his cross-appeal. One appellant dismissed his appeal as part of a court-approved settlement to pay the Trustee a total of $99,999 in installments in return for a release from the Trustee. The other appellant dismissed her appeal in return for the Trustee's agreement not to seek costs on appeal against that appellant. The dismissal of those appeals means that, in the consolidated adversary proceedings tried by the Bankruptcy Court during October 2006-April 2007, the issue of whether the Debtors operated a Ponzi scheme has been determined for all subsequent proceedings in the bankruptcy case. This facilitates the resolution of the Trustee's claims by means of summary judgment motions.
  • On November 7, 2007, the Bankruptcy Court conducted a hearing on the summary judgment motion filed October 3, 2007 in Adv. No. AD 04-1390 by defendants Galina Kubrak and 18607 Ventura Associates, Ltd. The Trustee’s opposition included information provided to the Trustee by Michael A. Cardenas following his guilty plea to federal fraud charges. Before the hearing on the summary judgment motion, the Bankruptcy Court posted a tentative decision indicating that the motion would be denied. At the hearing, the moving parties and the Trustee agreed to continue the hearing pending settlement discussions.
  • In December 2007, subject to Bankruptcy Court approval, the Trustee entered into a settlement agreement with defendants Galina Kubrak, 18607 Ventura, Ltd., and Josh Michaely. As part of the settlement, and without any admission of wrongdoing, the settling parties exchanged releases with the Trustee, certain of the settling parties agreed to pay $250,000 to the Trustee, and 18607 Ventura agreed to release its claim to an additional approximately $200,000 in segregated funds held by the Trustee. On December 17, 2007, the Trustee filed a motion for approval of the settlement. Following a hearing on January 16, 2008, the Bankruptcy Court entered an order approving the settlement. The settling parties have funded the settlement, resulting in a recovery by the Trustee of approximately $450,000, plus the withdrawal of a $2.2 million proof of claim filed by Ms. Kubrak.
  • On December 12, 2007, in USA v. Cardenas, USDC Case No. 2:07-CR-00088- GAF, U.S. District Judge Gary Fees sentenced Michael A. Cardenas, former general counsel to the Midland companies, to six months in a community corrections center and a five year term of probation. As part of his plea agreement (and prior to sentencing), Cardenas turned over substantial information (including more than 30 file boxes) to the Trustee, resigned from the State Bar of California and stipulated to revocation of his bankruptcy discharge. Mr. Cardenas' surrender date was January 18, 2008.
  • December 20, 2007 was the scheduled date for the trial of the Trustee's claims against Standing Stones, LLC, Safe Harbor Capital Management, LLC, and affiliated entities in Barclay, Trustee v. Standing Stones etc. et al., Adv. No. AD 05-01351. In that adversary proceeding, the Trustee sought to recover in excess of $2 million from the defendants in that adversary proceeding and to subordinate or disallow the defendants' proofs of claim, which included a purported attachment lien on funds held by the Trustee. The defendants disputed the Trustee's claims. On December 17, 2007, following pre-trial discovery and extensive negotiations, the parties entered into a settlement, subject to Bankruptcy Court approval. The settling parties, including Standing Stones, Safe Harbor, and their principals did not admit any wrongdoing. On December 21, 2007, the Trustee filed a motion for approval of that settlement. The settlement addressed more than 100 overlapping proofs of claim, totaling more than $120 million, against the bankruptcy estate.
  • During December 2007-January 2008, more than 100 consents by Midland creditors (including former clients of Standing Stones and Safe Harbor) were filed in connection with the Trustee's proposed settlement of Barclay, Trustee v. Standing Stones etc. et al., Adv. No. AD 05-01351. On January 31, 2008, the Bankruptcy Court entered an order approving that settlement. That order, and the underlying settlement, had the following results: (1) Safe Harbor and Standing Stones released their claims, including their administrative claims and their attachment liens on approximately $1.5 million in segregated cash held by the Trustee, in return for a payment of approximately $250,000; (2) Standing Stones and its affiliates agreed to entry of a judgment avoiding the transfers received as identified by the Trustee in his complaint, and (3) more than $120 million in claims were analyzed and allowed in the approximate amount of $43 million in accordance with the formula (money-in-less-money-back; brokers and money- managers excluded) to be utilized in administering the Midland class action fund. Other claims remain pending and unresolved by the settlement.
  • During November 2007 through June 2008, in addition to court-approved settlements with Kubrak, Michaely, 18607 Ventura, Standing Stones, and Safe Harbor as described above (collectively resulting in recoveries of more than $1.9 million and the withdrawal of millions of dollars of proofs of claim), the Trustee obtained court approval of other adversary proceedings, including settlements with NK, Fleishon et al. in Adv. No. AD 05-1390 ($200,000 and withdrawal of more than $1 million in proofs of claim), Langerveld in Adv. No. AD 05-1137 ($ 100,000), Ballan in Adv. No. AD 05-01239 ($42,000), Lowder and Henninger in Adv. No. AD 05-01237 ($85,000), Beeley and Performance Management in Adv. No. AD 05-01344 ($66,000), JODA in Adv. No. AD 05-01349 ($40,000), Zarubi and X-Change Reciprocal in Adv. No. AD 05-01355 ($33,325), Haaf in Adv. No. AD 05-1260 ($18,000). Several settlements are payable over time, with higher amounts due in the event that the settling party fails to promptly pay the discounted settlement amount.
  • Through November 1, 2007, in the class action entitled Gonzales et al. v. Lloyds TSB Bank et al., USDC. Case No. 06-1433 VBF, the defendants in that action collectively paid a total of approximately $17 million to settle that action, which had been filed by a class of former Midland investors. The defendants named in the class action were Lloyds TSB Bank (a Midland depository), Man Financial (a forex trading house utilized by Midland), and Kaplan Swicker & Simha (an accounting firm used by Midland and the Leichners). In settling the class action, none of the defendants admitted any wrongdoing. Although the Trustee is not a party to the class action, the Trustee cooperated in providing information to representatives of the former Midland investors. The bulk of the settlement was paid by Lloyds TSB Bank, which paid approximately $12.5 million into the settlement fund. After deduction of court-approved fees and costs of class action counsel, there remains a settlement fund of approximately $12 million available to pay former Midland investors who have filed valid claims in that class action. In the Midland class action, two former Midland investors filed appeals from the District Court's order approving the settlement of the class action. In January 2008, those investors dismissed their appeals.
  • As of June 2008, the claims allowance process is ongoing in the Midland class action (i.e., USDC No. O6-1433 VBF). The District Court has appointed accountants to assist in evaluating the claims made on the approximately $12 million settlement fund. During 2008, the accountants completed their evaluation of the claim forms and supporting documentation. In connection with that evaluation process, the Trustee provided information and analysis about the related claims made in the Midland bankruptcy case, totaling more than $100 million. A retired judge appointed by the District Court to oversee the claims distribution process in the class action will send notices to claimants in the next several weeks of the preliminary determinations of their claims; claimants will then have the opportunity to contest the preliminary determination of their claims. The retired judge will then hold a hearing to consider any objections and will then forward his final recommendations to the District Court for final approval. Under the terms of a court-approved settlement between the Trustee, Safe Harbor Capital Management, and Standing Stones LLC, and various of their investors, distributions made from the Midland class action settlement fund will reduce claims against the Midland bankruptcy estate on a dollar-for-dollar basis. Additional information about the status of the Midland class action may be obtained by contacting counsel for the class plaintiffs. The Trustee and his counsel do not represent the class. Counsel for the class include Andrew Esbenshade, Esq., of Caldwell Leslie & Proctor at esbenshade@caldwell-leslie.com.
  • During November 2007 through 2008, the Trustee and his professionals have continued to evaluate claims and pending adversary proceedings based on information obtained through formal and informal discovery, including debriefings of Cardenas and turnover of files and information by him subsequent to his plea agreement. As part of that process, the Trustee has abandoned and settled various claims after obtaining Bankruptcy Court approval as required.
  • On March 20, 2008, the Trustee filed a Notice of Motion and Motion by Trustee to Abandon Claims for Relief Asserted in Eighteen Adversary Proceedings. No opposition was filed to this motion, and the Bankruptcy Court granted the motion in April 2008. The Trustee is continuing to evaluate claims and pending adversary proceedings with the goal of completing the administration as quickly as possible.
  • In March 2008, the U.S. District Court in Seattle sentenced Joe Lavin, the manager of Global Asset Partners and Global Currency, to 54 months in prison on wire fraud and money laundering charges. Shortly before sentencing, Mr. Lavin authorized the U.S. Department of Justice to turn over to the Trustee copies of records that the FBI previously seized from Mr. Lavin. These records included documents that Mr. Lavin had not produced in response to discovery requests propounded by the Trustee in the Midland bankruptcy case. For further information about the sentencing of Mr. Lavin, please see http://seattle.fbi.gov/dojpressrel/2008/pr032108a.htm.
  • During January-May 2008, the Trustee began filing summary judgment motions against various defendants in the remaining unresolved adversary proceedings. On January 18, 2008, the Trustee filed a motion for summary judgment against Larry Lowder and Martha Jeanne Henninger for $200,870 in Adv. No. AD 05-01237. Mr. Lowder and Ms. Henninger disputed the Trustee's claims. In April 2008, subject to Bankruptcy Court approval, this motion was settled in return for the defendants' agreement (without any admission of wrongdoing) to pay $85,000 in installments, with a larger amount due if this discounted amount is not paid. On February 5, 2008, the Trustee filed a motion for summary judgment against Charles E. Lauderdale in Adv. No. AD 05-01236 for the principal amount of $197,598. Mr. Lauderdale disputed that motion; during March 31-April 2, 2008, the Bankruptcy Court issued a tentative decision indicating that it would grant in part and deny in part the Trustee's motion. Thereafter, without any admission of wrongdoing, Mr. Lauderdale entered into a proposed settlement of the Trustee's claims for $84,000; after the Bankruptcy Court tentatively ruled that the settlement was too low, the Court scheduled a further hearing on the settlement (and summary judgment motion) for July 16, 2008. On February 6, 2008, the Trustee filed a motion for summary judgment against George A. Saffas, Kathleen Saffas, and Specialized Building Maintenance in Adv. No. AD 05-01246. They deny any wrongdoing. On April 11, 2008, following a hearing, the Bankruptcy Court entered a judgment for the principal amount of $ 212,693 against the defendants, who dispute the Bankruptcy Court's ruling. On May 23, 2008, the Trustee filed a motion for summary judgment against Dustin James Clarke and Robin Denise Clarke in Adv. No. 05-01183. The Clarkes dispute the Trustee's claims and deny any wrongdoing. On May 27, 2008, the Trustee filed a motion for summary judgment against Harry Sabatini in Adv. No. AD 05-01248. Mr. Sabatini disputes the Trustee's claim and denies any wrongdoing. Hearings on the Trustee's motions against the Clarkes and Mr. Sabatini are set for July 16, 2008.
  • During the remaining portion of 2008, the Trustee plans to settle, abandon, or resolve by summary judgment as many of the remaining adversary proceedings as possible so that the administration of the case can be completed in 2009. The extent of distribution to Midland investors and other claimants will not be known until resolution of the claims in the Midland class action and further resolution of litigation in the Midland bankruptcy case. The creditor bodies will be similar, although not necessarily identical. The distribution from the class action settlement fund will be substantially more than the distribution from the bankruptcy case, because the settlement fund in the class action is approximately $12 million, while the funds held by the bankruptcy estate are currently approximately $2 million. The amount available for distribution in the Midland bankruptcy case depends on ongoing litigation and administrative expenses.
  • During 2009, the Trustee and his professionals have continued to evaluate claims and pending adversary proceedings. To this end, the Trustee has obtained court approval of a number of adversary cases and approval to abandon others where no prospects for recovery were evident. These efforts by the Trustee and his counsel are ongoing.
  • The Trustee anticipates that a distribution to unsecured creditors with allowed claims in the Midland bankruptcy case is likely; however, the amount of the distribution will not be known until final administrative claims are determined and all pending litigation is resolved. It is expected that the distribution to unsecured claimants in the Midland bankruptcy case will be substantially less than the distribution in the Midland Class Action case.
  • The Trustee has also commenced efforts to resolve disputed claims. These efforts have involved communications with creditors to request that they amend or withdraw their claims. Where necessary, the Trustee has begun the process of filing claim objections. The Trustee is hopeful that all objections will be presented and ruled on by early 2010, after which time the Trustee anticipates submission of his final report. At the hearing on the Trustee’s final report, the court will consider the Trustee’s final request for compensation as well as those of other professionals employed in the case. The court will also be asked to approve the Trustee’s proposed distribution to creditors.

TRUSTEE’S EXPENDITURES

In keeping with the trustee's efforts to recover assets and liquidate them for the benefit of creditors, the trustee has filed with the court motions under Local Bankruptcy Rule 2016-2 for authority to make disbursements. The trustee's first cash disbursement motion covering the period through July 31, 2004 was filed on August 19, 2003, with a declaration of non-opposition and approved by the court on August 19, 2003. On January 8, 2004, the trustee filed an amended cash disbursements motion, with a declaration of non-opposition, to seek court approval of additional expenditures relating to real property recovered by the trustee for the benefit of creditors. The court approved the trustee's amended cash disbursements motion on January 13, 2004.

On September 20, 2004, the trustee filed a new cash disbursements motion for the period through August 31, 2005. That motion was opposed by Mr. Tilem, the prepetition custodian. The court calendared a hearing on the trustee's motion for October 8, 2004 and it was later approved by order entered on October 22, 2004.

The court approved the trustee's motion for authority to make disbursements under Local Bankruptcy Rule 2016-2 for the period September 1, 2005 through August 31, 2006 by order entered on October 7, 2005.

The trustee has also paid the estate professionals’ fees and costs pursuant to court orders authorizing such payments.

CURRENT CASE POSTURE / STATUS

The trustee has recovered more than $11 million in assets to date and made disbursements from the recoveries pursuant to court orders.

There is significant unfinished work in this case. First, there is completion of the remaining litigation. The trustee is hopeful that many of the cases remaining at the bankruptcy court level will soon be postured for summary judgment. However, there is no certainty in the outcome of such motions. In any event, it is possible that some of any judgments obtained will be appealed. Resolution of the active litigation matters will require some amount of time and, while the trustee is hopeful that the estate will prevail, the trustee cannot predict with certainty either the ultimate outcome or how much more time will be involved in completing the litigation.

Second, assuming the estate is successful in obtaining final judgments, in all likelihood there will be attendant costs and time associated with collection of any judgments obtained.

Finally, a number of claims have been filed in the case. The trustee has not completed a comprehensive review of the claims filed and does not presently know the full extent of claims resolution work that will be necessary. However, the trustee does anticipate that completion of the litigation will encompass some of the necessary claim objections.

Because of the nature of this case as a Ponzi scheme involving more than an estimated $100,000,000 raised (and disbursed) from the investors and associated pre- and postpetition efforts to secret and conceal assets, the trustee anticipates that this case will likely continue to involve significant investigation and litigation. The claims asserted in the adversary actions commenced by the trustee are disputed by the defendants for the most part and the litigation involves complicated discovery and factual matters. The trustee anticipates that the litigation will take an extended period of time to resolve and involve significant administrative expenses before all assets have been administered and all claims have been adjudicated. The ultimate distribution to creditors, if any, is unknown at this time.

Alleged victims of the Ponzi scheme of Midland Euro filed a class action entitled Ralph Gonzales et al. v. Lloyds TSB Bank, plc, et al., United States District Court Case No. CV 06-1433-VBF (C.D. Cal.). On May 2, 2007, following a hearing on April 30, 2007, the U.S. District Court granted the plaintiffs' motion for class certification. On or about June 1, 2007, the plaintiffs filed a motion for preliminary approval of settlements with defendants Lloyds TSB Bank and Man Financial. Pursuant to the proposed settlements of the class action, Lloyds TSB Bank will pay $12,500,000 and Man Financial will pay $4,140,000. In settling the class action, Lloyds TSB Bank and Man Financial deny that they have any liability and dispute all allegations of wrongdoing. Filing a proof of claim in the Midland bankruptcy case does NOT protect your rights to recovery in the class action, and you will have to comply with whatever procedures are approved by the U.S. District Court. For further information about the pending proposed settlements of the class action, please go to www.gilardi.com.

On September 26, 2007, the plaintiffs in the Midland Euro class filed a motion for final approval of $17 million. in settlements with class defendants Lloyds TSB Bank, Man Financial, and Kaplan Swicker & Simha. At the same time, class action counsel filed a motion for attorney's fees consisting of 25% of the fund ($4,260,000) plus reimbursement of costs of approximately $520,000. The motions will be heard by U.S. District Judge Valerie Fairbank at 9:30 a.m. on October 24, 2007 in Courtroom 9 of the U.S. District Court, 312 North String Street, Los Angeles, California 90012. Unless otherwise ordered by the Court, objections must be filed and served at least 14 days before the hearing date. For further information, please go to www.gilardi.com/midland.

DOCUMENTS AVAILABLE FOR VIEWING / DOWNLOAD

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HELPFUL LINKS

PACER

 

Public Access to Court Electronic Records (PACER) is an electronic public access service that allows users to obtain case and docket information from Federal Appellate, District and Bankruptcy courts, and from the U.S. Party/Case Index. Please log on to http://pacer.psc.uscourts.gov/ for additional information regarding electronic review and download of bankruptcy case information and filings and for information regarding obtaining a PACER login and ID which will allow access to additional documents filed in this case (for a fee).

United States Bankruptcy Court for the Central District of California, San Fernando Valley Division

 

Court records and pleadings filed in this case can be reviewed for free at the courthouse; charges apply for copied documents.

Contact and address information for the bankruptcy court for the San Fernando Valley Division of the bankruptcy court for the Central District of California follow:

CONTACT

All inquiries should be directed to the Trustee’s attorney as follows:

Leonard Gumport, Esq.

 

 

Gumport | Reitman

 

Telephone: (213) 452-4900 x 4901

550 S. Hope St., # 825

 

Facsimile: (213) 623-3302

Los Angeles, CA 90071

 

lgumport@grlegal.com