david r. zaro (bar no. 124334) ted fates (bar no ......1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18...

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DAVID R. ZARO (BAR NO. 124334) TED FATES (BAR NO. 227809) TIM C. HSU (BAR NO. 279208) ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP 515 South Figueroa Street, Ninth Floor Los Angeles, California 90071-3309 Phone: (213) 622-5555 Fax: (213) 620-8816 E-Mail: [email protected]

[email protected] [email protected]

Attorneys for Receiver THOMAS SEAMAN

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v. STEVE CHEN, USFIA, INC., ALLIANCE FINANCIAL GROUP, INC., AMAUCTION, INC., ABORELL MGMT I, LLC, ABORELL ADVISORS I, LLC, ABORELL REIT II, LLC, AHOME REAL ESTATE, LLC, ALLIANCE NGN,INC., APOLLO RIET I, INC., APOLLO REIT II, LLC, AMKEY, INC,, US CHINA CONSULTATION ASSOCIATION, and QUAIL RANCH GOLF COURSE, LLC,

Defendants.

Case No. 2:15-cv-07425 RGK-PLA RECEIVER'S SECOND REPORT AND RECOMMENDATIONS

Case 2:15-cv-07425-RGK-PLA Document 53 Filed 02/26/16 of 46 Page ID #:1795

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TABLE OF CONTENTS

Page

839638.01/SD (i)

LAW OFFICES

Allen Matkins Leck GambleMallory & Natsis LLP

I. EXECUTIVE SUMMARY ............................................................................. 1

II. SUMMARY OF RECEIVER'S ACTIVITIES ............................................... 2

A. Company Offices .................................................................................. 3

B. Hills Garden Hotel ................................................................................ 3

C. Other Real Properties ............................................................................ 4

D. Funds Recovered to Date ...................................................................... 4

E. Law Firm Retainers ............................................................................... 5

F. Li Zhao and Ally Investors ................................................................... 6

G. Affiliated Entities .................................................................................. 7

H. Territorial Jurisdiction Over Receivership Assets ................................ 9

I. Investor Communications ................................................................... 10

J. Receivership Accounting .................................................................... 10

III. PRELIMINARY RECOMMENDATIONS .................................................. 11

A. Document Recovery Efforts ............................................................... 11

B. Receivership Asset Recovery Efforts and Investigation .................... 11

C. Accounting .......................................................................................... 11

D. Repatriation of Overseas Assets ......................................................... 12

E. Maintain Operations of the Hotel, Apartment Building, and Single Family Residential Properties ........................................... 12

F. Investor Communications and Claims Process ................................... 12

G. Asset Sales .......................................................................................... 12

IV. CONCLUSION ............................................................................................. 13


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Thomas A. Seaman ("Receiver"), Court-appointed receiver for Defendants

USFIA, Inc., Alliance Financial Group, Inc., Amauction, Inc., Aborell

Mgmt I, LLC, Aboreall Advisors I, LLC, Aborell REIT II, LLC, Ahome Real

Estate, LLC, Alliance NGN, Inc., Apollo REIT I, Inc., Apollo REIT II, LLC,

Amkey, Inc., US China Consultation Association, Quail Ranch Golf Course, LLC,

and their subsidiaries and affiliates (collectively, "Receivership Entities"), hereby

provides his second interim report and recommendations. This report contains a

summary of the Receiver's activities thus far and a financial report on the receipts

and disbursements for the receivership estate through December 31, 2015.

I. EXECUTIVE SUMMARY

This receivership involves a complex and wide ranging group of enterprises

and assets which appear to have been funded with the fruits of the fundraising

scheme at the heart of the action filed by the Securities and Exchange Commission

("Commission"). The Receiver has taken control of bank accounts identified in the

Appointment Orders as well as additional accounts identified through the Receiver's

investigation of documents and information found at the various locations where the

Receivership Entities conducted business. As of December 31, 2015, the gross

receipts were $21,945,974.51, primarily comprised of funds turned over to the

Receiver from financial institutions at the outset of the case or otherwise turned over

to or seized by the Receiver. As of that date, the Receiver had made disbursement

of $692,802.79 for necessary operating expenses of the Receivership Entities and

was holding cash in the amount of $21,253,171.72.

As previously reported, the Receiver has also identified and taken control of

the USFIA office building in Arcadia, a hotel in Rancho Cucamonga, an apartment

building in Alhambra, a warehouse, several single family homes, and parcels of

undeveloped land, including a proposed golf course site in Moreno Valley. The

Receiver has also obtained evidence of several additional pieces of real estate


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purchased with funds of the Receivership Entities and is further investigating these

transfers.

At this point, due to the volume of electronic data and disorganized manner in

which it was kept by the Receivership Entities, the Receiver has not yet been able to

identify the entire scope of the USFIA enterprise, the number of investors, or

specific amounts invested by investors and distributed to them. The Receiver's work

to analyze and better understand the investor data, with the assistance of his forensic

computer specialist, is ongoing. The Receiver has reviewed and analyzed certain

Quickbooks files and hard copy business documents. The Receiver has now

obtained most of the relevant bank records and is commencing his review of

accounting records and banking records to, among other things, trace assets and

prepare an accounting in accordance with the Appointment Order.

At this point, there is no indication there was any legitimate Gemcoin or other

viable business operated by the Receivership Entities. Aside from some income

generated by the hotel and rental properties, the Receivership Entities had no

significant source of income other than money raised from investors. The Receiver

has verified that virtually none of the assets described in online and written

marketing materials actually exist. Instead of mines located around the world,

millions of dollars in precious gems, and houses and cars available to be awarded to

investors, the Receiver has found only costume jewelry, boxes of rocks, and bins

filled with tens of thousands of little rings of nominal value.

As discussed in Section IV below, the Receiver recommends the receivership

continue in order to identify, marshal, and preserve the assets of the Receivership

Entities pending the outcome of the litigation and further orders of the Court.

II. SUMMARY OF RECEIVER'S ACTIVITIES

As discussed in his First Report and Recommendations (Dkt No. 19), the

Receiver secured and took possession of all known real and personal property assets

of the Receivership Entities promptly upon his appointment. Given that the assets


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of the Receivership Entities were not being used for any viable business purpose, the

Receiver is preparing a motion for approval of procedures for the sale of the real

property and personal property assets of the Receivership Entities.

A. Company Offices

In conjunction with and with assistance from the U.S. Marshals and the

Arcadia Police, the Receiver took control and possession of the premises located at

135 E. Live Oak, Arcadia, California ("Company Offices"), an approximately

18,000 square foot, two-story office building. All employees were terminated. The

Receiver has retained a security company to guard the Company Offices and is

reviewing books and records of the Receivership Entities located at company

offices. There is no mortgage on the Company Offices. The Receiver recommends

listing the property for sale, subject to overbid and Court confirmation. The

Receiver is in the process of determining the value of the property.

B. Hills Garden Hotel

The Receiver took possession of the Hills Garden Hotel located on Ostrem

Boulevard in Rancho Cucamonga. The 112 unit hotel was formerly a Days Inn, but

lost its flag shortly before the Receiver's appointment. The Receiver is in financial

control of the hotel and manages the hotel with the assistance of the on-site

employees, many of whom had been employed by the hotel for many years prior to

its purchase by the Receivership Entities on August 1, 2015. The Receiver

confirmed that adequate insurance for the hotel is in place. It appears the hotel was

going to be used by Defendants to conduct fundraising activities. Several rooms

were converted to meeting rooms, jewelry show rooms, and offices. As a result, the

hotel is operating at a loss. The Receiver is attempting to increase revenue and

reduce costs, and hopes to bring operations to a cash break-even level in the near

term. The Receiver recommends marketing the hotel for sale and is currently in the

process of determining the value of the hotel and the best means of marketing it for

sale.


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C. Other Real Properties

The Receiver also took possession of the following real properties:

A 36-unit apartment building located in Alhambra. The Receiver is collecting the rents and paying appropriate operating expenses. The building is 100% occupied and all tenants are paying rent to the Receiver. The Receiver recommends selling the apartment building.

A mansion located in Bradbury that was not used as a residence and appears to have been used for fundraising and investor relations. The home is apparently called the "Clubhouse." The Receiver recommends that the home be sold and is obtaining broker opinions of value.

A single family home and a condominium, both located in Arcadia. There are tenants in the properties who are not paying rent. Eviction actions are pending for both properties and the Receiver recommends marketing the homes for sale when the evictions are completed.

Approximately 860 acres of vacant land near Moreno Valley, California that could be used for a golf course. The Receiver recommends that the land be sold and is in the process of determining its value and an effective means of marketing the land for sale.

Finally, the Receiver has also identified several other single family homes

purchased with funds from the Receivership Entities and vested in other individuals

or entities. The Receiver intends to file fraudulent transfer actions to return the

assets to the Receivership Entities.

D. Funds Recovered to Date

As noted above, the Receiver has taken control of numerous bank accounts

and funds of the Receivership Entities. To date, the Receiver has taken possession

of approximately $21,664,410.87 comprised primarily of funds turned over to the

Receiver by financial institutions as a result of the Court's TRO and freeze order,

and includes cash in the amount of $67,952.45, as well as the return of unused legal

retainers of $574,250. The Receiver also collected $106,121.90 in rental income,

and received $175,441.74 in revenue from the hotel. Total receipts as of

December 31, 2015, were $21,945,974.51. The Receiver also collected

$5,636,402.69 from the United States Treasury in January which will be reflected in

the Receiver's first quarter accounting report.


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The Receiver continues to investigate and trace funds with regard to various

transfers made prior to entry of the TRO. Large payments to companies outside the

United States, including companies in China, Vietnam, Mexico, and the Dominican

Republic, have been identified in company accounting records.

E. Law Firm Retainers

The Receiver learned that two law firms that had been engaged to represent

Defendant Steve Chen ("Chen") and one or more of the Receivership Entities had

received large retainers from an affiliated entity located in Singapore, USFIA

Singapore PTE, Ltd. ("USFIA Singapore"). After investigating the matter further,

the Receiver learned that Chen owns 80% of USFIA Singapore and that USFIA

Singapore is simply the "Asia Headquarters" of USFIA, Inc. Nevertheless, an

attorney located in Singapore who purported to represent USFIA Singapore sent

several communications to the Receiver's counsel claiming USFIA Singapore was

unrelated to USFIA, Inc. and that the transfers to the two law firms were loans made

to Chen at his request in violation of Singapore law. When asked for documents to

support the claim that USFIA Singapore is unrelated to USFIA, Inc., the Singapore

attorney provided none.

The Receiver demanded that the two law firms turn over the balance of the

retainers in their possession that was unused as of the date of the Receiver's

appointment. One of the firms - Bird, Marella, Boxer, Wolpert, Nessim, Drooks,

Lincenberg & Rhow PC ("Bird Marella") - agreed to do so. The balance turned over

by Bird Marella was $574,250.60. The other firm - Wellman and Warren LLP

("Wellman") - in light of the claim raised by the Singapore lawyer, stated it will not

turn over the balance of $128,307.77 in unused retainer funds until there is a Court

order directing it to do so. Accordingly, the Receiver recently filed a motion for

order directing Wellman to turn over the funds ("Turnover Motion"). Dkt. No. 43.

The Turnover Motion is set to be heard on March 7, 2016. Although Wellman had

previously indicated it intended to interplead the funds, after meeting and conferring


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with the Receiver's counsel regarding the Turnover Motion, Wellman confirmed it

does not contest the motion. Wellman filed a notice of non-opposition on

February 11, 2016. Dkt. No. 45.

F. Li Zhao and Ally Investors

As discussed in the First Report, in response to the TRO, Bank of America

froze a custodial account (known as a UTMA account), as well as a safety deposit

box, under the name of Jennifer Zhao aka Li Zhao ("Zhao"). The bank also froze

and turned over to the Receiver a total of $3,034,930.10 that was in accounts under

the name Ally Investors, LLC ("Ally"). The Ally accounts were frozen by Bank of

America in response to receiving the TRO. The Ally account balances were then

turned over to the Receiver in response to a request by the Receiver that Bank of

America turn over all balances in accounts of the Receivership Entities.

The facts and circumstances surrounding the relationships and transfers

between Zhao, Chen, Ally, and the Receivership Entities are described in the Court's

Order Granting in Part and Denying in Part Zhao and Ally's Motion to Intervene, to

Direct the Receiver to Return Assets, and to Clarify Orders ("Order"). Dkt. No. 38.

As provided in the Order, the Court allowed Zhao and Ally to intervene but

determined Ally Investors to be an affiliated entity and therefore within the scope of

the receivership, and on that basis, denied Zhao and Ally's request to direct the

Receiver to return the balances that had been in the Ally accounts, their request to

unfreeze the safe deposit box, but granted their request to unfreeze the UTMA

account.

On a related note, in November 2015, the Receiver issued document

subpoenas to Zhao and Ally, to which Zhao and Ally objected. Despite several meet

and confers and attempts to resolve the objections, Zhao and Ally did not produce

any documents in response to the subpoenas. Accordingly, on January 20, 2016, the

Receiver filed a Joint Stipulation Re Thomas A. Seaman's Motion to Compel

Compliance by Non-Parties Li Zhao and Ally Investors with Subpoenas for the


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Production of Documents ("Motion to Compel"). Dkt. No. 39. On February 4,

2016, Magistrate Judge Abrams granted the Motion to Compel as to all documents,

other than emails already in the Receiver's possession and denied Zhao's request to

shift the costs of production to the receivership estate. Dkt. No. 44. The Court gave

Zhao until February 25, 2016, to produce the subpoenaed documents. On

February 25, 2016, Zhao produced documents, which the Receiver and his counsel

are in the process of reviewing.

Separately, the Receiver discovered that a luxury home currently held by

Zhao was paid for entirely by the Receivership Entities. Specifically, on April 3,

2015, the property located at 2857 Gainsborough Drive, San Marino, California was

purchased for approximately $2,335,000, all of which funds were transferred

directly to escrow from the Receivership Entities Amkey, Inc. and Ahome Real

Estate LLC. The Receiver has demanded that Zhao turn over the Gainsborough

Property. For the time being, Zhao and the Receiver have agreed to try and reach a

global resolution of issues and have agreed to defer such discussions until the

Receiver has performed additional accounting work and completed discovery. If a

resolution of the Gainsborough Property issue is not reached during those

discussions, the Receiver will take necessary and appropriate steps to recover the

Gainsborough Property.

G. Affiliated Entities

It appears Chen was associated with a large number of companies in the

United States and abroad, and the Receiver is continuing to investigate and locate

companies affiliated with Chen and/or the Receivership Entities. Through his initial

investigation and review of records and the Commission's filings, the Receiver has

identified the following entities, which appear to be affiliated with Chen and/or the

Receivership Entities:

Aborell Advisors I, LLC Aborell Investment Associates I, LLC


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Aborell Management I, LLC Aborell Realty Advisors LLC

Aborell Realty Corporation

Aborell REIT II, Limited

Aborell REIT II, LLC

AFG Holding Company

Ahome Real Estate, LLC

Ahome Real Estate USA LLC

Ahomeland, Inc.

Alhambra Gardens LLC

Alliance Financial Group, Inc.

Alliance NGN, Inc.

Ally Investors LLC

Amauction, Inc.

Ameritra, Inc.

Amkey Global Corporation

Amkey, Inc.

Ammine, Inc.

Apollo Real Estate Investments I, LLC

Apollo REIT I, Inc.

Apollo REIT II, Inc.

Apollo Investors LP

Chenne Corporation

China-US Consultation Association

First Investment Holding Company

Great Wall Mountain LLC

Hills Garden Hotel Inc.

Hills Garden Hotel LLC

International Gemstone Mining Association

L'BE Group

LH Investment LLC

One World Currency Fund


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Quail Ranch Golf Club, LLC

Quail Ranch Golf Course, LLC

Quail Ranch Golf Club, LP

Steamfont Capital Investment Group, LLC

Steamfont Investment Group, LLC

The New World Currency Fund

To Quang Duan

US Fovictor Jewel Investment LLC

US-China Consultation Association Liaison/Consulting Services

USFIA, Inc.

USFIA Singapore PTE Ltd. (discussed above)

Weimar International Group, Inc.

The Receiver also continues to investigate the ties and relationships between

the entities listed above and the Defendants in order to identify and secure their

assets. If necessary, the Receiver will seek an order clarifying their status as

subsidiaries or affiliates, and therefore Receivership Entities.

H. Territorial Jurisdiction Over Receivership Assets

By filing the Complaint and the TRO with other federal district courts in the

United States, the territorial jurisdiction of this Court over receivership assets is

extended to such districts. 28 U.S.C. § 754, see also Haile v. Henderson Nat'l Bank,

657 Fed. 2d 816, 822 (6th Cir. 1981). Based on information obtained to date

regarding property owned by Receivership Entities or in which they may have a

security interest and in conformity with section 754 and the federal law, the

Receiver has filed the Complaint and the TRO in the United States District Courts

for the Northern, Eastern, and Southern Districts of California as well as the District

of Nevada. The Receiver has also caused the Complaint and TRO to be recorded in

the property records for each county in which the Receivership Entities are believed

to own real property or have a security interest in real property. As additional


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information becomes available, the Receiver will file and record the Complaint and

the appointment order in additional districts and counties.

I. Investor Communications

The Receiver has established a website to provide case information, regular

updates, and answers to frequently asked questions to investors and creditors. The

Internet address for the webpage is www.usfiareceiver.com. Due to the large

number of Chinese-American investors, the website also provides a tab to view the

website in Mandarin. In addition, as noted above, the Receiver continues efforts to

generate a comprehensive list of investors and their contact information. Depending

upon the number of investors and their location, the Receiver will determine how

best to provide notice and information to investors and parties of interest in this

matter. In the meantime, the website provides a means to send emails to the

Receiver's staff.

J. Receivership Accounting

Attached as Exhibit A are a Profit and Loss Statement, Balance Sheet, and

Detailed General Ledger, which provide an accounting of the receipts and

disbursements to and from the receivership estate through December 31, 2015.

To date, the Receiver has seized or taken possession of approximately

$21,664,410.87 in funds turned over to the Receiver by financial institutions as a

result of the Court's TRO and freeze order, cash on hand in the amount of

$67,952.45, and return of unused legal retainers of $574,250. The Receiver also

collected $106,121.90 in rental income, and received $175,441.74 in revenue from

the hotel. Total gross receipts to date as of December 31, 2015, were

$21,945,974.51.

As set forth on the Profit and Loss Statement, Balance Sheet, and General

Ledger, the Receiver has disbursed $692,802.79. The primary categories of

disbursements are hotel operating expenses of $265,623.28, property taxes of

$165,061.86, insurance expenses of $42,049.19, and security expenses of


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$101,002.00. The Receiver was holding cash in the amount of $21,253,171.72 as of

December 31, 2015.

III. PRELIMINARY RECOMMENDATIONS

The Receiver's efforts to marshal, preserve, and protect assets of the

Receivership Entities and gather relevant documents and records are ongoing.

Although the Receiver has gathered and reviewed a substantial amount of

documents and information, more information necessary to gain an understanding of

the Receivership Entities' financial affairs and transactions with third parties is being

gathered as sources are identified. The Receiver and his professionals make the

following recommendations with regard to the ongoing administration of the

receivership estate and their efforts to understand and document the financial

activities of the Receivership Entities.

A. Document Recovery Efforts

The Receiver will continue to obtain records from all financial institutions

where the Receivership Entities maintained accounts as well as from attorneys and

accountants formerly engaged by the Receivership Entities. The Receiver has

served subpoenas on certain institutions, individuals, and entities, in response to

which a significant amount of records have been produced, and intends to continue

with these efforts to obtain documents, assets, and information. It may also be

necessary to take the depositions of certain individuals to obtain a complete picture

of the enterprise.

B. Receivership Asset Recovery Efforts and Investigation

The Receiver will seek to locate any presently unaccounted for receivership

assets that may exist. The Receiver will take appropriate steps to secure such assets

and preserve their value as they are identified.

C. Accounting

The Receiver has begun a forensic accounting of those bank accounts that

contained funds when the TRO was issued. The purpose of the accounting is to


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identify assets and potential sources of recovery, as well as forming a basis for a

claims process. The accounting will analyze sources of funds obtained by the

Receivership Entities and where these funds were later transferred or to whom these

funds were paid, after they were received by the Receivership Entities.

D. Repatriation of Overseas Assets

The Receiver will investigate what, if any, assets are located in overseas

banks and institutions. The Receiver will then report to the Court and advise on

proposed measures that may be taken in order to repatriate these assets.

E. Maintain Operations of the Hotel, Apartment Building, and

Single Family Residential Properties

As noted above, the Receivership Entities own a hotel and an apartment

building. The operations of these properties generate revenue and the underlying

properties have significantly more value as operating businesses. Accordingly, the

Receiver proposes to continue operations of these properties to preserve their value

in the short term and marketed for sale in accordance with sales procedures

approved by the Court.

F. Investor Communications and Claims Process

As discussed above, the Receiver is continuing to analyze data regarding the

identities of investors and their contact information, and evaluating ways to

disseminate information to them. He anticipates that communications with investors

will be through direct emails and the receivership website. The Receiver anticipates

developing and filing a motion for approval of a claims process in the next quarter.

G. Asset Sales

The Receiver has evaluated both the real and personal property assets that

have been recovered. Given the cost of holding the assets and the possibility that

certain of the assets may depreciate over time, the Receiver intends to file a motion

for approval of procedures for the sale of both real and personal property. In the


EXHIBIT A

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