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Oeloitte.
August 25,2014
Cause No. FSD 97 of 2011 (AJEF)
Grand Court of the Cayman Islands Financial Services Division 3rd Floor, Kirk Building, Albert Panton St. George Town, Cayman Islands
Re: American Pegasus SPC - in Official Liquidation ("the Company") Court update letter
Deloitte & Touche Citrus Grove Building P.O. Box 1787 Grand Cayman KY1-ll09 Cayman Islands
Tel: + 1 (345) 949 7500 Fax : + 1 (345) 949 8258 [email protected] www.deloitte.com
Pursuant to paragraph 5.1 of the Grand Court of the Cayman Islands ("the Court") order dated July 9,2012 (copy attached), the Joint Official Liquidators, Messrs. Stuart Sybersma and Michael Penner ("the Liquidators"), write to provide an update to the Court regarding the liquidation of the Company.
The Liquidators note that an update dated February 24, 2014 was previously filed with the Court and provided to the liquidation committee of the Company. The liquidation continues to be chronically underfunded with limited realisations and it is clear that the pre-liquidation reported values of the Company's assets were significantly overstated.
Auto loan portfolio update
By way of reminder, the Liquidators have been continuing to realise the Company's auto loan portfolio during the course of the liquidation. As at the date of the Liquidators' appointment the Company's portfolio consisted of approximately 6,000 Deficient Loans with a purported face value of approximately $60 million. The Liquidators have determined the deficient loans to be effectively worthless and collection efforts with respect to these loans were discontinued from very early on in the liquidation process. By definition, deficient loans relate to loans where the underlying security, the vehicle, has already been repossessed or destroyed, and the deficient loan represents a residual balance with little or no recourse to pursue.
The Liquidators therefore focused their efforts on the "open loans" during the liquidation. Of the 1,238 "open" loans that were originally deemed collectible by the Company, it transpired that a total of 901 were in fact uncollectible due to various issues such as borrower disputes, non-paying status of borrowers and low vehicle values, making repossession not viable.
The Liquidators' debt collection agent, First Associates, have continued to collect the remaining debts during the liquidation. First Associates have commented on the poor quality of the loan portfolio and have reported that delinquencies are six times higher than what they have experienced on other portfolios.
At the date of the last report to the Court, there remained 191 debts being serviced by First Associates. The Liquidators had instructed First Associates to repossess vehicles in connection with 97 accounts and write off 16 accounts as the cost of repossession would outweigh the vehicle value.
An updated summary of the auto loan portfolio held by the Company from the commencement of the liquidation to date is shown below. As shown, of the 191 loans remaining at the date of the last update to the Court, 17 have been settled in full and 50 are being paid . Repossessions of 50 cars are taking place and are expected to be finalised within the next three months. A total of 16 loans have already been
Member of Deloitte Touche Tohmatsu
Oeloitte. returned to the Company as they are deficient, and it is expected that a further 55 loans will a lso be returned to the Company shortly.
:Status Number
Total loans at appointment
Less deficient loans
Open loans at liquidation date
Less:
Loans paid/settled in full
Loans legally discharged
Loans returned to the Company
Open loans at February 24, 2014
Less:
Loans paid/settled in full
Loans being paid
Repo in progress
Loans returned to the Company
Deficient loans at August 22, 2014
7,835
(6,597)
1,238
(58)
(88)
(901)
191
(17)
(50)
(53)
(16)
55
Net collections in the period from January 1, 2014 to June 30, 2014 after the deduction of First Associate collection costs are $18,080. Collections have now slowed considerably and the Liquidators do not expect future realisations from this source to be material. Total realisations to date from auto loan collections are $859,256. First Associate collection costs total $503,783 resulting in a net return to the Liquidation of $355,473. This represents approximately 1.4% and 0.6% of the original expected return on a gross and net basis respectively.
Legal claims
Pursuant to an order granted by the Court dated September 3, 2013, the Liquidators were given sanction to commence proceedings on behalf of the Company in the United States District Court, Northern District of Georgia to recover certain fraudulent transfers made from the American Pegasus Auto Loan portfolio. The defendants in this action are The Clear Skies Holding Company, LLC, James A. Torchia, Marc A. Celello, Celello Law Group, LLC, and Jaro, LLC.
The Liquidators' US Counsel, Reid, Collins & Tsai ("ReT") and Alston & Bird LLP are continuing to pursue claims against the parties involved in the fraudulent transfer. It has recently been established that it is not in the best interest of the proceedings to continue pursuing the claim against Jaro, LLC. RCT and the Liquidators believe that the claim is not as strong as those claims against the other parties and therefore do not want it to jeopardize the credibility of the other claims.
The deadline for the end of the discovery period was extended to June 30, 2014. On May 20,2014 Stuart Sybersma, one of the liqUidators, was deposed as an expert witness responsible for valuing a number of promissory notes along with an underlying entity's financial condition, solvency and ability to repay the notes, all in connection with the alleged fraudulent transfers. A number of other parties were also deposed prior to the end of the discovery period.
At the end of July 2014, the defendants filed a motion for summary judgment on all claims, along with a statement of facts that they contend are uncontested. RCT are in the process of preparing a response to
Member of Deloitte Touche Tohmatsu
Oeloitte. the motion for summary judgment and a response that will contest and supplement the Company's statement of alleged facts . After a decision is made in respect of the motion for summary judgment the parties will have 30 days to submit pre-trial materials .
Counsel for both parties also engaged in court-mandated settlement discussions in late June 2014. As part of these discussions, the defendants' legal counsel indicated that the defendants have limited financial resources from which they would be able to pay a judgment, in the event of the Company's legal proceedings being successful. RCT subsequently requested certified financial statements for the defendants to confirm their assertions and to help inform what might be an appropriate and defensible settlement.
To date, the defendants have not yet provided the certified financial statements and it is unclear whether they will do so.
Creditor/investor correspondence
As noted in the last update to the Court, all of the Official Liquidators' reports are provided to creditors and investors via the Liquidators' secure website, http://www.americanpegasusliquidation.com.
The Liquidators continue to receive queries from investors following the issue of the report, but note that the volume of correspondence has slowed since the early stages of the liquidation. This is to be expected due to the time elapsed since the appointment of the Liquidators, as well as investors becoming increasingly aware that it is unlikely any future payments will be made in respect of their investment.
Should you have any questions please do not hesitate to contact Mike Green of this office on +1 345 814 2223 or [email protected].
Liquidation costs
During the period March 1, 2014 to July 31, 2014 the Liquidators have incurred time costs totalling $67,143 which is mainly in connection with the ongoing litigation.
Including the above, Liquidators' time costs for the period from the commencement of the liquidation to July 31,2014 total $1,449,191 . To date, payments of $125,909 in respect of Liquidators' fees have been drawn, leaving an unpaid balance totalling $1 ,323,282.
In accordance with an Order dated September 3, 2014 the Liquidators are not required to seek Court approval for the payment of the balance of their fees until such time as there are sufficient cash recoveries to reasonably justify the making of a further application to Court for fee approval.
Yours sincerely
S'{~f5-L~ Stuart Sybersma 7 Joint Official Liquidator
Member of Deloitte Touche Tohmatsu
IN THE GRAND COURT OF THE CAYMAN ISLANDS FINANCIAL SERVICES DIVISION
In Chambers 9th July 2012 Before the Honourable Mr. Justice Foster
CAUSE NO. FSD 97 OF 2011(AJEF)
IN THE MATTER OF THE COMPANIES LAW (2010 REVISION)
AND
IN THE MATTER OF AMERICAN PEGASUS SPC (IN OFFICIAL LIQUIDATION)
ORDER
UPON THE SUMMONS dated 18 May 2012 (the "Summons")
AND UPON reading the Second Affi,davit of Michael Pearson sworn on the 14th day of June 2012.
AND UPON hearing counsel for the Joint Official Liquidators ("JOLs") of American Pegasus SPC (in official liquidation) (the "Company")
IT IS HEREBY ORDERED AND DIRECTED that:-
1. The Company having now been certified by the JOLs as insolvent, the JOLs are not required to hold a first meeting of contributories of the Company;
2. The JOLs are to send a letter, written in English, to all known creditors and contributories (the "JOLs Letter") which shall contain:
2.1 information on how to access the website set up by the JOLs, being www.americanpegasusliquidation.com. which contains all reports and updates regarding the liquidation of the Company:
lof3
•
2.2 details of the dedicated enquiry email address, [email protected], at which the JOLs can be contacted;
being
2.3 notice to all creditors of the date and time of a creditors meeting of the Company at which the JOLs shall seek to establish a liquidation committee in accordance with paragraph 4 below.
3. The JOLs Letter shall be delivered to the creditors and contributories of the Company .as follows:
3.1 to the creditors by email and post;
3.2 to the contributories by email (if available), failing which by courier to each courier office in each country in which contributories are respectively resident and then by post from within such country.
4. The JOLs shall seek to establish a liquidation committee of creditors of the Company which shall include, if reasonably possible, at least one creditor of either of the following segregated portfolios of the Company;
• American Pegasus Auto Loan Fund Segregated Portfolio • American Pegasus Auto Loan Fund (Dist) Segregated Portfolio
And, if reasonably possible, at least one creditor of any of the following segregated portfolios of the Company:
• American Pegasus Fixed Income Fund - Series II Segregated Portfolio • American Pegasus Fixed Income Fund - Series IV Segregated Portfolio • American Pegasus Fixed Return Fund Segregated Portfolio • American Portfolio Life Fund Segregated Portfolio • American Portfolio Perpetual Income Fund Segregated Portfolio
5. In light of the lack of funds available to the JOLs for the winding up of the Company, paragraph 6 of the winding up order of this Court dated 20 July 2011 shall be discharged and instead:
5.1 the JOLs shall agree the basis and rates of their remuneration in accordance with Part IV of the Insolvency Practitioners Rules 2008 (as amended) within 3 months of the date of the appointment of any liquidation committee and failing the appointment ofa liquidation committee shall revert to the Court.
5.2 the JOLs shall provide a report to the Court and any the progress of the liquidation at least every six months from of the said lack of funds such report may be in the form of a ,nulH ll,UI
the Court unless the Court otherwise orders.
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5.3 the JOLs shall only be required to seek Court approval of their remuneration at such time as there are sufficient available funds to warrant such an application, provided that the JOLs shall seek approval of their remuneration in the event no such approval has been sought within 1 year of the date of this order, unless the Court otherwise directs in the interim.
6. The costs of and incidental to this application shall be paid out of the assets of the Company as an expense of the liquidation.
DATED the 9TH day of JULY 2012
FILED the /3 Y4 day of JULY 2012
THE HON. . JUSTICE FOSTER JUDGE OF THE GRAND COURT
THIS ORDER was issued by SOLOMON HARRIS of 3,d Floor, FirstCaribbean Bank, P.O. Box 1990, Grand Cayman, KYl-lI04, Cayman Islands, Attorneys-at-Law for and on behalf of the Applicants whose address for service is that of their said Attorneys-at-Law
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AMERICAN PEGASUS SPC (IN OFFICIAL LIQUIDATION) OFFICIAL LIQUIDATORS’ SECOND REPORT August 26, 2013
STRICTLY PRIVILEGED AND CONFIDENTIAL
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Contents 1 INTRODUCTION .................................................................................................................................. 6
1.1 Basis of Report ............................................................................................................................ 6 1.2 Purpose and Use of Report ......................................................................................................... 6 1.3 Sources of Information and Appendices ...................................................................................... 6 1.4 Prior Reporting ............................................................................................................................. 7 1.5 Limitation ...................................................................................................................................... 7 1.6 Currency ...................................................................................................................................... 7
2 EXECUTIVE SUMMARY ..................................................................................................................... 8
2.1 Background .................................................................................................................................. 8 2.2 Summary of SEC Findings .......................................................................................................... 9 2.3 Events Leading to the Appointment of the Liquidators .............................................................. 11 2.4 Overview of Company’s Operating History ................................................................................ 12 2.5 APLDG and Chapter 15 Recognition ......................................................................................... 12 2.6 Asset Recovery Efforts .............................................................................................................. 13 2.7 Company’s Financial Position and Future Recoveries .............................................................. 15 2.8 Creditors and Investors .............................................................................................................. 16 2.9 Conclusion and Next Steps ....................................................................................................... 17
3 COMPANY STRUCTURE AND OBJECTIVES ................................................................................. 18
3.1 Legal Structure .......................................................................................................................... 18 3.2 Governing Documents ............................................................................................................... 18 3.3 Share Capital Structure ............................................................................................................. 19 3.4 Company Objectives .................................................................................................................. 20 3.5 Auto Loans ................................................................................................................................. 20 3.6 Life Settlement Policies ............................................................................................................. 21
4 KEY SERVICE PROVIDERS (PRE-LIQUIDATION) ......................................................................... 22
4.1 Investment Manager .................................................................................................................. 22 4.2 Directors ..................................................................................................................................... 22 4.3 Administrator and Custodian ..................................................................................................... 23 4.4 Auditors ...................................................................................................................................... 24 4.5 Marketing Agents ....................................................................................................................... 24 4.6 Other Service Providers ............................................................................................................. 24 4.7 Bank Accounts ........................................................................................................................... 25 4.8 Review of Company’s Operating History ................................................................................... 25
5 PERIOD 1 - INCEPTION TO OCTOBER 2007 .................................................................................. 26
5.1 Overview .................................................................................................................................... 26 5.2 Investor Activity .......................................................................................................................... 26 5.3 Auto Loan Activity ...................................................................................................................... 26 5.4 Life Settlement Activity .............................................................................................................. 26 5.5 Acquisition of Synergy Acceptance Corp. ................................................................................. 27
6 PERIOD 2 - OCTOBER 2007 TO OCTOBER 2010 .......................................................................... 30
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6.1 Overview .................................................................................................................................... 30 6.2 Investment Manager .................................................................................................................. 30 6.3 Investor Activity .......................................................................................................................... 30 6.4 Legal Advisors ........................................................................................................................... 31 6.5 Director Activity .......................................................................................................................... 31 6.6 Marketing Agents ....................................................................................................................... 32 6.7 Service Provider Agreements .................................................................................................... 32
7 PERIOD 3 - SEC INVESTIGATION ................................................................................................... 33
7.1 Overview .................................................................................................................................... 33 7.2 SEC Auto Loan Findings ........................................................................................................... 33 7.3 SEC Life Settlement Findings .................................................................................................... 35 7.4 Subsequent Disclosure of Acceptance Transaction .................................................................. 36 7.5 Investor Misrepresentations ....................................................................................................... 36 7.6 Overall Findings and Penalties .................................................................................................. 37
8 PERIOD 4 - NOVEMBER 2010 TO JUNE 2011 ................................................................................ 38
8.1 Overview .................................................................................................................................... 38 8.2 Appointment of US Trustee over Acceptance ........................................................................... 38 8.3 Appointment of Provisional Liquidators ..................................................................................... 39
9 JOLs’ INVESTIGATIONS .................................................................................................................. 41
9.1 Overview .................................................................................................................................... 41 9.2 Cash Activity .............................................................................................................................. 41 9.3 Henry Carter and APLDG .......................................................................................................... 44 9.4 Dealings with Benjamin Chui ..................................................................................................... 45 9.5 Stipulation Agreement with US Trustee ..................................................................................... 45 9.6 APLDG’s Actions after Termination of the IMA ......................................................................... 46 9.7 United States Chapter 15 Recognition ...................................................................................... 47 9.8 Automotive Loan Data ............................................................................................................... 48 9.9 Open Loan Servicing ................................................................................................................. 49 9.10 Deficient Loan Collection ........................................................................................................... 53 9.11 Life Settlement Policies ............................................................................................................. 54 9.12 Sun Trust Garnishment .............................................................................................................. 55 9.13 Lifestyle Design Group .............................................................................................................. 56 9.14 Qvest LP .................................................................................................................................... 58
10 OTHER LIQUIDATION ACTIVITY ..................................................................................................... 60
10.1 Rule 2004 Discovery .................................................................................................................. 60 10.2 Claim in Acceptance Bankruptcy Proceedings .......................................................................... 60 10.3 Governing Documents ............................................................................................................... 60 10.4 Bank Account Termination ......................................................................................................... 61 10.5 Review of Audited Accounts ...................................................................................................... 62 10.6 Intercompany Loans .................................................................................................................. 63 10.7 Grand Court Applications and Updates ..................................................................................... 65
11 LIQUIDATION COMMITTEE ............................................................................................................. 67
11.1 Grand Court Order ..................................................................................................................... 67 11.2 Statutory Obligations ................................................................................................................. 67 11.3 Non-Disclosure Agreement ........................................................................................................ 68 11.4 Remuneration Agreement .......................................................................................................... 68
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12 CREDITORS AND INVESTORS ........................................................................................................ 70
12.1 Adjudication Process ................................................................................................................. 70 12.2 Creditor Correspondence .......................................................................................................... 70 12.3 Petitioner Claim ......................................................................................................................... 70 12.4 Advertisement in the Cayman Islands Gazette ......................................................................... 71 12.5 Unsecured Creditors .................................................................................................................. 71 12.6 Redeemed Unpaid Investors ..................................................................................................... 71 12.7 Shareholders ............................................................................................................................. 72 12.8 Liquidation Website ................................................................................................................... 72
13 RECEIPTS AND DISBURSEMENTS ................................................................................................ 73
13.1 Cash at Bank at Date of Appointment ....................................................................................... 73 13.2 Receipts and Disbursements and Current Cash Position ......................................................... 73 13.3 Outstanding Costs of the Liquidation ......................................................................................... 74 13.4 Statutory Priorities of Return to Investors .................................................................................. 75
14 LIQUIDATORS' REMUNERATION ................................................................................................... 76
14.1 Overview .................................................................................................................................... 76 14.2 Remuneration Agreement .......................................................................................................... 76 14.3 Remuneration Rates .................................................................................................................. 77
15 NEXT STEPS ..................................................................................................................................... 78
15.1 Liquidators’ Future Actions ........................................................................................................ 78
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APPENDICES
1. SEC Cease and Desist Order 2. Orders of the Grand Court of the Cayman Islands re: Official Liquidation 3. APAL Fund IMA Termination Letter 4. Etsior Solicitor Agreement 5. Torchia’s Resignation Letter 6. APAL Fund (Dist.) Offering Memorandum 7. Acceptance US Trustee’s Adversary Complaint 8. Copy of email from Torchia to Chui dated February 27, 2007 9. Copy of email from Chui to Torchia dated May 8, 2007 10. APIM and APLDG Merger Letter 11. Paramount Capital Introduction Amended Agreement 12. APAL Fund Marketing Fee 13. Copy of email from Tagliapietra with Draft Stock Purchase Agreements dated May 30, 2007 14. Copy of email from Tagliapietra with Draft Deal Documents dated June 27, 2007 15. Promissory Note 16. July 2007 APAL Fund Account Statement 17. Copy of letter from American Pegasus SPC dated May 24, 2011 18. Copy of Motion filed by American Pegasus SPC dated June 6, 2011 19. Copy of Order by United States Bankruptcy Court dated June 14, 2011 20. Copy of Winding up Petition dated June 1, 2011 21. Bank Account Review 22. Liquidator Remuneration Agreement 23. SEC Auto Loan Findings – Chart 24. Engagement Letter – Locke Lorde 25. Company’s Legal Counsel (Appointed after Liquidation Date)
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1 INTRODUCTION
1.1 Basis of Report
1.1.1 Messrs. Stuart Sybersma and Michael Pearson of the Cayman Islands firm of Deloitte & Touche
(“Deloitte”) were appointed joint provisional liquidators of American Pegasus SPC (“Company”)
by Order of the Grand Court of the Cayman Islands (“Grand Court”) dated June 20, 2011.
1.1.2 Following their appointment as provisional liquidators, Messrs. Sybersma and Pearson were
appointed as joint official liquidators on July 20, 2011 (“Liquidation Date”).
1.1.3 Mr. Pearson resigned from Deloitte during June 2012 and, following approval from the Grand
Court, was replaced by Michael Penner as an official liquidator on June 28, 2012. As from June
28, 2012 Messrs. Sybersma and Penner are the Joint Liquidators (“Liquidators” or “JOLs”) of
the Company. A copy of the Order of the Grand Court is attached as Appendix 2.
1.2 Purpose and Use of Report
1.2.1 This, the Liquidators’ Second Report and Accounts (“Second Report”) sets out the background
to, and current status of, the Company’s affairs, the steps taken by the Liquidators during the
course of the Company’s liquidation, the outcome of the Liquidators’ review and enquiries to date
and the next steps in the liquidation process.
1.2.2 A copy of this Second Report, which is confidential to the intended recipients and contains
information which is privileged, will be provided to:
(i) The Grand Court;
(ii) Creditors; and
(iii) Shareholders.
1.2.3 Recipients of this Second Report should not disclose this Second Report, or any information
contained herein, to third parties other than their professional advisors (who are also bound to
keep the Second Report confidential) without the prior express written permission of the
Liquidators.
1.3 Sources of Information and Appendices
1.3.1 In preparing this Second Report, the Liquidators have reviewed documents pertaining to the
Company and have held meetings with a number of key individuals with knowledge of the
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Company’s affairs. Details of the sources of information used and relied upon are referred to
throughout this Second Report.
1.3.2 Where the Liquidators refer in the Second Report to legal advice which they have received or
other communications with their legal advisors, they do not intend to and do not waive privilege in
respect of such advice or communications or generally.
1.4 Prior Reporting
1.4.1 This Second Report should be read in conjunction with the Joint Provisional Liquidators’ report
dated July 19, 2011 (“Provisional Liquidators’ Report”) as well as the Liquidators’ First Report
dated March 30, 2012 (“First Report”).
1.4.2 Additional update letters were provided to the Grand Court on September 28, 2012 and January
29, 2013.
1.5 Limitation
1.5.1 In completing their work, the Liquidators have relied on the accuracy of the information and
documents supplied. Although the Liquidators have sought to cross check information from
different sources to confirm its accuracy, they have not independently verified all of the
information and documentation upon which they have relied when preparing this Second Report.
The Liquidators have not performed an audit or a review made in accordance with International
Standards on Auditing, and consequently, no such assurance is expressed.
1.5.2 The Liquidators’ Second Report contains factual matters and whilst the Liquidators believe all of
the information in this Second Report to be a true and accurate account, they reserve the right to
amend this Second Report should additional information come to light which, had they known it at
the time of writing the Second Report, would have caused them to amend the Second Report.
1.5.3 Although narrative in the Second Report has been updated to include material events occurring
up to the date of issuance of the Second Report, financial information in the Second Report,
including the time costs of the Liquidators is as of May 31, 2013.
1.6 Currency
1.6.1 All references to currency in this Second Report are quoted in United States Dollars (US$) unless
otherwise stated.
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2 EXECUTIVE SUMMARY
2.1 Background
2.1.1 The Company is an open-ended investment vehicle which was incorporated in the Cayman
Islands on June 16, 2004 as an exempted Segregated Portfolio Company (“SPC”) with multiple
underlying sub-funds or Segregated Portfolios (“SP”). The SP’s were intended to invest in distinct
strategies either sub-prime auto loans or insurance life settlement products. The SP’s themselves
are not separate legal entities; instead, they represent separate share classes within the
Company. As an SPC, the assets and liabilities of each SP are supposed to be separated from
each other and do not form the general assets and liabilities of the SPC.
2.1.2 Unlike most open ended companies, the Company paid dividends to some investors in
accordance with the relevant SP’s offering documents. Such dividends were marketed on the
basis of being guaranteed rates of return and paid high rates compared to going market interest
rates. Various external parties were used to market the Company to investors, with such parties
paid a high rate of commission for every investor subscription that they solicited. In certain
aspects the Company operated like a Ponzi scheme, where new investors’ money was used to
pay out dividends and redemptions to older investors.
2.1.3 The Liquidators have determined that the value of the Company’s assets in the various
segregated portfolios were grossly overvalued and realisations will be far less than the purported
net asset value of the various sub-funds that were calculated prior to the Liquidation Date. The
findings of the Liquidators call into question the conduct and competence of the former
investment manager, as well as raise questions with respect to certain transactions entered into
by the Company with certain third parties which are discussed further in this Second Report. The
Liquidators note that the former investment management team and principal of the investment
manager put their personal interests ahead of the interests of the Company’s investors and
misused Company assets in doing so.
2.1.4 Mr. Benjamin Chui (“Chui”) was principal and director of the Company’s investment management
company, American Pegasus LDG, LLC (“APLDG” or the “Investment Manager”), as well as a
director of the Company. The Investment Manager was registered as an investment advisor with
the Securities Exchange Commission (“SEC”) in the United States.
2.1.5 The Investment Manager was subject to inspection by the SEC in 2010. That inspection resulted
in further investigation into the Investment Manager and eventually led to sanctions and a cease
and desist order against Chui, Ms. Triffany Mok (“Mok”), and Mr. Charles Hall Jr. (“Hall”);
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respectively the Chief Executive Officer, portfolio manager and general counsel of the Investment
Manager.
2.1.6 The SEC findings concluded that Chui, Mok and Hall had (1) failed to disclose their purchase of
Synergy Acceptance Corporation (“Acceptance”), the company which originated and serviced
automotive loans belonging to the Company, and the resulting conflict of interest; (2) had
misused the Company’s assets to purchase Acceptance and to support related parties; (3) had
improperly retired Acceptance’s debts through improper self-dealing; and, (4) had made
misrepresentations to investors.
2.1.7 The SEC cease and desist order, issued in December 2010, resulted in Chui, Mok and Hall being
barred from association with any investment adviser for a period of five years. Since that date,
Chui, Mok and Hall have been excluded from, and not been involved with, the management of the
Company or the Investment Manager. Chui did however manage to continue to control and
manage Acceptance until a trustee in bankruptcy was appointed over Acceptance in June 2011.
2.2 Summary of SEC Findings1
2.2.1 Acceptance was the former servicer of auto loans owned by the Company and the sole supplier
of subprime automotive loans to the largest segregated portfolio, American Pegasus Auto Loan
Fund Segregated Portfolio (the “APAL Fund”). The controlling shareholder of Acceptance, prior
to its acquisition by Chui, was Clear Skies Holding Company LLC (“Clear Skies”). The principals
of Clear Skies are two individuals by the names of Mr. James Torchia (“Torchia”) and Mr. Marc
Cellelo (“Cellelo”). In addition to controlling Clear Skies, Torchia worked for the Investment
Manager as a senior portfolio manager until he resigned on or about June 29, 2007. According
to an offering memorandum for one of American Pegasus’s sub funds, Torchia had “specific
responsibilities in the portfolio management of the life settlement and auto loan divisions”.
2.2.2 In 2007, a holding company owned by Chui, Mok and Hall purchased Acceptance. Rather than
use their own money to finance this transaction, the holding company used approximately $18.5
million of the Company’s cash to pay for the purchase. Acceptance was unprofitable from the
date of purchase and the holding company used additional money from the Company to maintain
its operations.
2.2.3 The money advanced by the Company to allow Chui to acquire Acceptance was funded from the
APAL Fund, the largest segregated portfolio in the Company that invested in subprime auto
1 Virtually all of the information in Section 2.2 below is taken directly from the SEC Cease and Desist Order dated December 21, 2010 (see Appendix 1).
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loans. Of the money advanced by the APAL Fund to pay Clear Skies and Acceptance’s note
holders, Clear Skies distributed $9 million to Torchia and Cellelo.
2.2.4 The SEC investigation concluded that the monies advanced by the Company for the purchase of
Acceptance were unquestionably fraudulent as to the APAL Fund. The SEC noted that Chui and
Hall failed to disclose the transfers to, or sought approval of the clearly related-party transactions
from the Company’s independent directors. Rather, Chui and Hall went to great lengths to
conceal the transfers from the Company’s independent directors and investors.
2.2.5 After purchasing Acceptance, Chui, Hall and Mok had a fundamental conflict of interest because
they stood to gain by having the Company continue using Acceptance over any other service
provider that might have better served the Company. Further, they failed to disclose this conflict
of interest to the Company’s independent directors and investors for nearly two years. In addition
Chui falsely claimed to prospective investors that the APAL Fund only used finance companies
that were independent of the Investment Manager.
2.2.6 After they acquired Acceptance, Chui, Hall and Mok withheld loan collections that belonged to the
Company and allowed Acceptance to run up large debts to the APAL Fund. Chui also caused the
Company to make approximately $12 million in undisclosed loans to the separate life settlement
segregated portfolios in order to cover those sub funds’ operating costs (in contravention of how
a segregated portfolio company is allowed to operate under Cayman Islands’ law).
2.2.7 According to its offering memorandum, the APAL Fund invested primarily in subprime auto loans.
By December 2008, however, approximately forty percent of the APAL Fund’s assets consisted of
debts and other obligations owed to various related entities controlled by Chui, with APLDG
charging the Company fees to manage these same assets.
2.2.8 In an early 2009 effort led by Chui2, much of this related party debt was purportedly forgiven
through a transaction where Acceptance bought a distressed auto loan portfolio for $12 million3
and immediately sold it to the APAL Fund for over $38.2 million, a mark-up of over 300 percent.
The consideration for the purchase to be paid by the APAL Fund was forgiveness of the debt
owed to it by Acceptance. Chui directed and approved all aspects of this transaction. Hall and
Mok also understood the transaction and participated in it by drafting, reviewing, signing and/or
processing documents used to effect the transaction.
2 The timing of this transaction resulted in a note in the December 31, 2008 APAL Fund audited financial statements (issued August 5, 2009) that “the loan was repaid in full after December 31, 2007”. The Liquidators note that there was no mention of the Acceptance transaction or related loan in the December 31, 2007 APAL Fund audited financial statements even though that audit opinion was dated March 16, 2009. 3 The SEC noted that approximately half of these loans were non-performing loans consisting of “deficiency balances” i.e. loans where the borrower was already in default. The SEC Order also noted that even though Acceptance was purportedly buying the loan portfolio, $10 million of the purchase was guaranteed by the Company.
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2.2.9 In December 2009 the Company rescinded the APAL Fund’s purchase of the auto loan portfolio,
and Acceptance agreed to refund the $21.5 million it charged the APAL Fund for the balances.
Acceptance, which was struggling financially and had minimal assets, had no ability to repay the
refund and the amount remains payable to the Company.
2.3 Events Leading to the Appointment of the Liquidators
2.3.1 Subsequent to Chui, Mok, and Hall’s removal from the management of the Company, the affairs
of the Company were overseen by Mr. Henry Carter (“Carter”). The Liquidators understand that
Carter had originally been retained by Chui as a compliance officer of the Investment Manager,
but over the course of the SEC’s investigation his duties with the Investment Manager expanded
to that of CEO, General Counsel, and Chief Compliance Officer. The Liquidators note that Carter
was not subject to any adverse findings within the SEC investigation.
2.3.2 Carter took steps to terminate the Company’s contract with Acceptance and for the APAL Fund
to take control of the servicing of its auto loan portfolio. In response to this, on or around May 3,
2011, Chui filed to place Acceptance into Chapter 11 (debtor in possession) bankruptcy
proceedings, of which he intended to control. The implication of this filing was that it afforded a
stay to Acceptance that prevented the Company from being able to terminate its auto loan
servicing contract with Acceptance.
2.3.3 During May, 2011, Carter contacted certain investors to request funding to intervene in the
Acceptance bankruptcy proceedings to appoint an independent Chapter 11 trustee in the
Acceptance proceedings and seeking the termination of the loan servicing agreements to allow
the Company to gain control of the servicing of the auto loan portfolio. A motion was
subsequently filed by Carter on June 6, 2011 to appoint an independent trustee over Acceptance
and to reject the contracts between Acceptance and the Company. On June 13, 2011 the
Company4, Acceptance and the United States’ Trustees office filed a stipulation order wherein the
parties agreed to appoint a Chapter 11 bankruptcy trustee (the “US Trustee”) and to provide the
Company with viewing access to Acceptance’s records. On June 29, 2011 Ms. Lynn
Schoenmann was appointed as US Trustee over Acceptance.
2.3.4 On June 1, 2011 two shareholders in the Company filed a petition in the Grand Court of the
Cayman Islands (“the Petition”). The Petition was filed to seek the winding up of the Company
pursuant to Section 92(e) of the Cayman Islands’ Companies Law (2010 Revision) (“Companies
Law”). Pursuant to the Petition, the Grand Court ordered the Company into provisional
liquidation on June 20, 2011. The Petition was not opposed by the Company or any other party
4 Controlled by Carter.
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and Messrs. Sybersma and Pearson were appointed as joint provisional liquidators as of that
date. Details of the provisional liquidators’ preliminary investigations and findings can be found in
the Provisional Liquidators’ Report.
2.3.5 Following their appointment as provisional liquidators, Messrs. Sybersma and Pearson were
appointed as joint official liquidators on July 20, 2011. Since their appointment the Liquidators
have corresponded with the US Trustee on several occasions to coordinate recovery efforts of
the auto loan portfolio. The Liquidators have also filed an unsecured claim on behalf of the
Company in the Acceptance bankruptcy proceedings and understand that such claim is the
largest in that estate. The US Trustee has advised, however, that to date there are insufficient
realizations in the bankruptcy of Acceptance for any distribution to creditors to be made.
2.4 Overview of Company’s Operating History
2.4.1 The Company’s operating history can be split into four distinct time periods of operation prior to
the Liquidation Date:
(i) Inception to October 2007 when a third party owned Acceptance (“Period 1”);
(ii) October 2007 to October 2010 when Chui had ownership interests in both the
Company and Acceptance (“Period 2”);
(iii) The SEC Investigation culminating in a Cease and Desist Order against Chui and
other management of the Company (“Period 3”); and
(iv) November 2010 to June 2011 when Carter led the Company (“Period 4”).
2.4.2 A detailed summary of the activity in each period is detailed in Sections 5 to 8 below.
2.5 APLDG and Chapter 15 Recognition
2.5.1 Carter5, the acting CEO of APLDG initially assisted the Liquidators in servicing the Company’s
automotive loan portfolio (“Auto Loan”) and responding to their information requests. However,
Carter subsequently did not fully cooperate with the Liquidators’ representatives, resulting in the
Liquidators terminating the Investment Management Agreement (“IMA”) with APLDG on October
31, 2011.
2.5.2 After terminating the IMA, the Liquidators were made aware of APLDG’s unapproved efforts to
continue collecting proceeds from auto loan borrowers on behalf of the Company. The
5 Full background details concerning Carter’s involvement and role at APLDG are provided in the Provisional Liquidators’ Report at Appendix II.
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Liquidators were forced to take action to protect the Company’s remaining assets, and in that
regard filed for recognition under Chapter 15 of the United States’ Bankruptcy Code in order to,
amongst other things, obtain recognition of their powers to control the Company’s assets.
2.5.3 On December 22, 2011, the United States Bankruptcy Court of the Northern District of California
(“Bankruptcy Court”) granted the Liquidators with recognition as a foreign main proceeding
pursuant to Section 1517(b)(1) of the United States’ Bankruptcy Code, and directed all parties in
possession of the Company’s property to promptly deliver such information to the Liquidators.
2.5.4 The Liquidators subsequently received information held by Carter and APLDG including all the
Company’s physical and electronic records. The Company’s physical records are currently
located in a secure storage facility in San Francisco and the electronic files are also under the
control of the Liquidators.
2.6 Asset Recovery Efforts
2.6.1 The Company’s assets can broadly be split into two main categories: automotive loans and life
settlement polices.
2.6.2 The Company’s auto loan portfolio can be further categorized into two different types of loans;
open loans and deficient balances. Open loans are classified as loans where the borrower is still
in possession of the vehicle, and therefore the loan is secured by an asset (“Open Loans”). On
their appointment the Liquidators were informed that the Company’s portfolio consisted of
approximately 1,200 Open Loans with a purported face value of approximately $15 million. The
Liquidators subsequently determined that the majority of the Open Loans were not performing
prior to the Liquidation Date and monthly payments were either not being made, or were in
arrears. Deficient loan balances are defined as those loans where the vehicle has been
previously repossessed, or by some other mechanism the customer no longer held the vehicle as
security (”Deficient Loans”). The Liquidators were informed that the Company’s portfolio
consisted of approximately 6,000 Deficient Loans with a reported face value of approximately $60
million. In reality, the quality of the deficient loans is so poor that the Liquidators have determined
the value of the portfolio of deficient loans to be worthless.
2.6.3 The Liquidators findings with respect to the quality and purported carrying value of the
Company’s auto loan portfolios raises numerous unanswered questions about the probity and
conduct of the Investment Manager.
2.6.4 The method of collecting Open Loans and Deficient Loans differs; therefore, since termination of
the IMA, two separate national debt collection entities have been engaged by the Liquidators.
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The Liquidators have contracted with First Associates Loan Servicing, LLC (“First Associates”)
to service the Open Loans and NCO Financial Systems, Inc (“NCO”) to collect the Deficient
Loans.
2.6.5 The collection processes properly started in January 2012 after both loan collection entities
uploaded the Company’s auto loan information into their databases and began performing “skip
tracing” 6 exercises to obtain missing borrower contact details.
2.6.6 The Liquidators’ findings are that the majority of the auto loans are non-performing and that cash
flow and recoveries from such actions is extremely limited. It is also apparent that many of loans
appear to be improperly originated, or improperly accounted for, resulting in incorrect or false
balances owing. Both First Associates and NCO have noted that this is the worst performing auto
loan portfolio either has ever encountered, and that projected recoveries for a sub-prime portfolio
of this size are unusually low. At the time of writing this Second Report, First Associates has
made gross recoveries of approximately $720,659 (net recoveries are currently $241,183) on the
Open Loan portfolio and NCO has made net recoveries of just $5,743 on the Deficient Loan
balances.
2.6.7 Evidence to date has shown that the majority of auto loan borrowers either dispute the account
altogether, dispute the balance or have incorrect contact details on file which has prevented the
loan servicing agencies contacting them.
2.6.8 The Liquidators’ investigations into the Company’s investment in life settlement policies are also
ongoing. Based on information provided by the Investment Manager the JOLs understand that
approximately 85 policies were acquired by the Company, of which 82 were sold, or left to lapse,
prior to the JOLs’ appointment. The Liquidators have investigated, and attempted to sell, the
policies which were identified by APLDG as active, however the JOLs’ determined that only one
policy with a face value of $100,000 remains, and that the other policies were also transferred
from the Company, or left to lapse.
2.6.9 The purchasing party, Credit Nation Lending Services, LLC (“Credit Nation”), of one specific life
insurance policy currently owes the Company $393,000. Credit Nation appears to be one of the
parties that originally sold most, if not all, of the life settlement policies to the Company. Clear
Skies also appears to have sold and then bought the life settlement polices back from the
Company, often at a substantially discounted price from the original purchase price. Both of
these entities were controlled by Torchia7. It is uncertain if there are any other life insurance
6 The process of locating a person's whereabouts by debt collection agencies. 7 Torchia worked for APLDG and/or APIM as a senior portfolio manager until he resigned on or about June 29, 2007. According to an offering memorandum for one of the Company’s sub funds, Torchia had “specific responsibilities in the portfolio management of the life settlement and auto loan divisions”.
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assets beyond the $393,000 identified, and it seems unlikely that this amount can be recovered
without taking legal action in the United States.
2.6.10 Based on the Liquidators’ investigations to date, with the exception of the minimal auto loan
collection receipts on a monthly basis, there does not appear to be any likelihood of significant
recoveries without initiating litigation against various parties.
2.7 Company’s Financial Position and Future Recoveries
2.7.1 The Company lacks financial resources and there is currently less than $95,000 in the
Company’s bank account to fund the liquidation. Further realizations from the auto loan portfolio
are difficult to estimate at the time of writing this Second Report, however are expected to be in
the region of $5,000 to $20,000 per month (net of fees) and will gradually diminish to zero over
the coming 18 months. The JOLs time costs to May 31, 2013 are $1,020,409, which remain
unpaid.
2.7.2 As a result of the lack of funding the Liquidators initiated discussions with various litigation
funding entities as well as contingent fee lawyers to determine if terms could be agreed whereby
future litigation and investigations are funded, or completed, by third parties on a contingent fee
basis.
2.7.3 On September 28, 2012 the Liquidators informed the Grand Court that they had engaged Reid
Collins & Tsai LLP (“RCT”) as legal counsel to perform a review of potential claims including
conduct of pre-litigation discovery pursuant to the powers provided to the Liquidators by Chapter
15 recognition in the Bankruptcy Court. The powers provided include discovery and interviews
with former parties prior to filing any complaints. If RCT’s initial assessment found that there
were strong claims as well as assets to recover, the Liquidators agreed to seek leave of the
Grand Court prior to commencing any litigation. On January 21, 2013, the Bankruptcy Court,
having reviewed and considered the Liquidators Motion to Amend Order Granting Recognition of
Foreign Main Proceeding, granted the relief request as outlined in that motion. The Liquidators
therefore informed the Grand Court on January 30, 2013 that they may shortly be seeking relief to
conduct examinations, take evidence, seek production of documents, and take delivery of
information concerning the assets and affairs of the Company.
2.7.4 Those initial legal assessments and investigations have now been completed by RCT and the
Liquidators find the strength of the potential claims against various counterparties persuasive.
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Accordingly, the Liquidators are in the process of seeking the approval of the Grand Court to
commence litigation proceedings against certain parties.
2.8 Creditors and Investors
2.8.1 The Liquidators have not adjudicated any claims in the liquidation to date; however, they have
received proofs of debt totaling approximately $7.9 million. In order to save costs the Liquidators
will only formally adjudicate these claims if, and when, the Company receives sufficient
realizations that will result in funds being available to enable a distribution to creditors.
2.8.2 The Liquidators have identified approximately 1,800 shareholders of the Company, the majority of
which are located in Asia. The Company maintained physical mailing addresses for such
investors but did not have complete e-mail or electronic contact details for all investors.
2.8.3 The number of investors and their geographic location has caused the Liquidators certain
logistical problems in notifying the shareholders of their appointment, since the Company lacks
sufficient financial resources to mail such a large number of notices to foreign jurisdictions.
2.8.4 The Liquidators sought the Grand Court’s direction to send a one page letter to all known
investors directing them to the liquidation website8 for further information and updates; dispense
with the first meeting requirements, and; to form a liquidation committee from certain creditors
who had already contacted the JOLs. A number of these letters have been returned undelivered
and the Liquidators have therefore not yet been able to send notice of their appointment to all
shareholders, nor to hold the first meeting of creditors and contributories.
2.8.5 Despite these circumstances the JOLs have provided informal updates by e-mail to
approximately 315 known investors, and have also held two informal conference calls with those
investors they have been able to contact.
2.8.6 The Liquidators convened the first Liquidation Committee (the “Committee”) on October 29,
2012. Subsequent to convening the Committee, the Liquidators provided a non-disclosure
agreement and proposed remuneration agreement to each of the five appointed Committee
members for execution.
2.8.7 At the date of this Second Report a remuneration agreement has not been agreed with the
Committee. The Liquidators note that realizations in the liquidation to date are insufficient to
cover liquidation costs and the Liquidators have significant time costs (in excess of $1 million)
outstanding which have not been paid. The Liquidators intend to continue to invoice their time at
the proposed rates in the hope that one day realizations will be sufficient to pay liquidation costs
8 www.americanpegasusliquidation.com
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and make a return to creditors. In the event that future realizations are sufficient to pay the
liquidation costs and the remuneration terms are still not agreed with the Committee, the
Liquidators will revert to the Grand Court to seek an order for remuneration.
2.9 Conclusion and Next Steps
2.9.1 The value of the Company’s assets at the Liquidation Date were grossly overstated and costs of
the liquidation far exceed the limited realizations of the Company’s assets to date.
2.9.2 The Company currently lacks sufficient assets to pay liquidation expenses. In the current
circumstances no distribution is expected to be made to creditors or investors in the Company.
The Liquidators have retained attorneys on a contingent basis to investigate and, if appropriate,
pursue claims against parties who were either negligent in their duties to the Company or who
benefitted inappropriately from their dealings with the Company.
2.9.3 In this regard, the Liquidators will be seeking approval of the Grand Court to proceed with claims
against Clear Skies Holding Company, LLC., James Torchia and Marc Cellelo. Assuming the
Liquidators receive Grand Court approval they will immediately instruct RCT to pursue these
recoveries.
2.9.4 The Liquidators also note that Chui has declared personal bankruptcy in the United States
asserting that he has no assets. The Liquidators have filed a claim in Chui’s personal bankruptcy
in the amount of $93,875,141 and are asserting that such claims should not be discharged on the
basis of the bankruptcy trustee’s findings that there are no assets available for distribution to
Chui’s creditors.
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3 COMPANY STRUCTURE AND OBJECTIVES
3.1 Legal Structure
3.1.1 The Company is an open-ended investment vehicle and was incorporated in the Cayman Islands
on June 16, 2004 as an exempted Segregated Portfolio Company with multiple underlying sub-
funds or Segregated Portfolios. The SP’s themselves are not separate legal entities; instead,
they represent separate share classes within the Company. As a SPC, the assets and liabilities of
each share class are supposed to be separated from each other and do not form the general
assets and liabilities of the SPC.
3.1.2 The registered office of the Company at the Liquidation Date was located at ATC Trustees
(Cayman) Limited, PO Box 30592, Landmark Square, 3rd Floor, 64 Earth Close, Georgetown,
Grand Cayman, KY1-1203, Cayman Islands. The Liquidators have subsequently changed the
registered office of the Company to c/o Deloitte, PO Box 1787, George Town, Grand Cayman,
KY1-1102, Cayman Islands.
3.1.3 The Company was initially setup with an open ended number of SP’s. Throughout the life of the
Company there were 25 separate SP’s opened. As at the Liquidation Date there were 9 SP’s
active with the remaining closed and all assets distributed.
3.1.4 The Company was not registered with, and hence was not regulated, by the Cayman Islands
Monetary Authority.
3.2 Governing Documents
3.2.1 The Company’s Memorandum and Articles of Association was registered and filed on June 16,
2004.
3.2.2 The Company executed separate offering documents for each SP which is consistent with the
Liquidators’ understanding of a SPC structure. The Liquidators have received the following
offering documents:
(i) American Pegasus Fixed Return Fund Segregated Portfolio (“AP Fixed Return
Fund”) dated July 12, 2004
(ii) APW Fund Segregated Portfolio (“APW Fund”) dated April 2005
(iii) American Pegasus Long Short Fund Segregated Portfolio (“AP Long Short
Fund”) dated August 2005
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(iv) American Pegasus Fixed Income Fund IV Segregated Portfolio (“AP Fixed
Income Fund IV”) dated August 2005
(v) American Pegasus Auto Loan Fund Segregated Portfolio (“APAL Fund”) dated
October 2006
(vi) American Pegasus Life Fund Segregated Portfolio (“AP Life Fund”) dated
September 2008
(vii) American Pegasus Auto Loan Fund (Dist) Segregated Portfolio (“APAL Fund
(Dist)”) dated March 2009
(viii) American Pegasus Fixed Income Fund II Segregated Portfolio (“AP Fixed
Income Fund II”) dated March 2009
(ix) American Pegasus Perpetual Income Fund Segregated Portfolio (“AP Perpetual
Income Fund”) dated March 2009
3.2.3 The offering document dates vary significantly and the Liquidators have attempted to locate all
original offering documents. The offering documents dated in 2008 and 2009 are amended
versions from 2004-2006 after the transfer of investment management companies. The original
documents have not been located.
3.2.4 The investment objective of the SP’s varied. As an example, the investment objective of APAL
Fund (Dist) was “to provide investors with periodic income in the form of quarterly dividends with
the additional possibility of capital gain opportunities through investing its assets in the APAL
Fund” while the APAL Fund investment objective was “to earn a steady return by purchasing sub-
prime auto loans issued in the United States and by selling such loans in the secondary market”.
3.2.5 The investment objective of AP Fixed Income Fund II was “to generate stable, predictable
periodic distributions to its investors, through investing the Portfolio’s assets in Senior Life
Settlement insurance policies issued by investment grade insurance companies located in the
United States.”
3.3 Share Capital Structure
3.3.1 The Company operated nine different SP cells of participating shares (“Participating Shares”)
and one class of Voting Shares (“Voting Shares”).
3.3.2 The Voting Shares are wholly owned by the Company’s investment manager, American Pegasus
LDG, LLC.
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3.3.3 The SP cells consist of nine cell/share classes with approximately 1,800 underlying investors,
mainly resident in China, Hong Kong, Taiwan and Europe.
3.3.4 The Company’s articles provide guidance and governance on the redemption process.
3.4 Company Objectives
3.4.1 The Company was setup to invest in subprime auto loans and life settlement policies. The auto
loan investments were made in the APAL Fund while the APAL Fund (Dist) invested in the APAL
Fund; therefore, only one SP had auto loan assets.
3.4.2 The life settlement policies were purchased by five of the SP’s namely AP Fixed Income Fund II,
AP Fixed Income Fund IV, AP Fixed Return Fund, AP Life Fund, and AP Perpetual Income Fund.
3.4.3 The AP Long Short Fund was a portfolio that used an online trading account to invest in various
long and short opportunities. The AP Long Short Fund did not invest or share in any profits of the
APAL Fund or the life settlement portfolios.
3.4.4 The APW Fund invested in all areas of the Company.
3.5 Auto Loans
3.5.1 The Company’s auto loan portfolio can be categorized into two different types of loans; open
loans and deficient balances.
3.5.2 Open loans are classified as loans where the borrower is still in possession of the vehicle, and
therefore the loan is secured by an asset. At the Liquidation Date the Company’s portfolio
consisted of approximately 1,200 loans categorized as Open Loans with a purported face value of
approximately $15 million. The Liquidators note that the majority of the Open Loans were not
performing prior to the Liquidation Date and monthly payments were either not being made, or
were in arrears.
3.5.3 Deficient loan balances are defined as those loans where the vehicle has been previously
repossessed, or by some other mechanism the customer no longer holds the vehicle as security.
At the Liquidation Date the Company’s portfolio consisted of approximately 6,000 Deficient Loans
with a reported face value of approximately $60 million. The Liquidators have determined this
value to be grossly overstated and realizations to date are less than one cent on the dollar.
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3.6 Life Settlement Policies
3.6.1 Based on information provided by APLDG the Liquidators understand that 85 policies were
acquired during the life of the Company with the vast majority sold, or left to lapse, prior to the
JOLs’ appointment. At the Liquidation Date the Company had just one life settlement policy
registered in its name with a policy payout value of $100,000.
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4 KEY SERVICE PROVIDERS (PRE-LIQUIDATION)
4.1 Investment Manager
4.1.1 American Pegasus Investment Management, Inc (“APIM”) is a Delaware limited liability company,
and was registered with the SEC in 2005. APIM was the investment manager of the Company
from June 1, 2005 to July 31, 2008. The sole owner and CEO of APIM was Chui.
4.1.2 The IMA between the Company and APIM outlined the services to be provided and fees to be
paid. APIM received approximately $8.7 million for the services they provided as investment
manager to the Company from June 1, 2005 to July 31, 2008.
4.1.3 The contractual relationship with APIM was formally terminated on July 31, 2008 when APLDG
took over as the Investment Manager. See Appendix 3 for a copy of one of the IMA termination
letters.
4.1.4 APLDG was the investment manager of the Company from August 1, 2008 until the Liquidation
Date. The Company signed new agreements with APLDG. The Liquidators have identified the
following agreements with the SP’s.
(i) APW Fund dated April 1, 20059.
(ii) APAL Fund (Dist) dated August 1, 2008.
(iii) APAL Fund dated August 1, 2008.
(iv) AP Life Fund dated September 1, 2008.
(v) AP Long Short Fund dated December 1, 2008.
(vi) AP Fixed Income Fund II dated January 1, 2009.
(vii) AP Fixed Income Fund IV dated January 1, 2009.
(viii) AP Fixed Return Fund dated January 1, 2009.
(ix) AP Perpetual Income Fund dated January 1, 2009.
4.2 Directors
4.2.1 In addition to Chui, Mr. David Bree and Mr. Aldo Ghisletta from DMS Management Ltd (“DMS”)
were appointed as directors of the Company in October 2004. In August 2005, Messrs Bree and
9 The Liquidators are unable to locate an IMA between the APW Fund and APLDG. The only IMA located was with APIM.
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Ghisletta resigned and were replaced by Mr. Blair Brinkley (“Brinkley”) and Ms. Tammy Seymour
(“Seymour”), also of DMS.
4.2.2 Following concerns raised by the SEC inspection, Chui caused the Investment Manager to use its
voting power to appoint Mok and Ms. Pauline Lee (“Lee”) as additional directors of the Company
on May 21, 2010. Following these Chui controlled director appointments, Brinkley and Seymour
resigned on May 24, 2010 noting that there were strong differences on how the board should
proceed and they did not find their situation tenable.
4.2.3 Mok resigned on October 1, 2010 (following the issuance of the SEC’s Cease and Desist Order)
and Lee resigned on March 9, 2011.
4.2.4 Ms Kathy Levinson and Mr. Isaac Hunt Jr. were appointed as directors on October 12, 2010
following Chui and Mok’s removal from the board of directors in conjunction with the SEC’s
Cease and Desist Order.
4.3 Administrator and Custodian
4.3.1 ATC Fund Services (Curacao) N.V. (“ATC” or the “Administrator”) is a Netherlands Antilles
Limited Liability Company and was appointed as the Company’s administrator and custodian
pursuant to an administrator agreement dated July 2004 (“Administration Agreement”).
4.3.2 The Administrator was tasked to provide certain financial, accounting, corporate, administrative,
investor and other services on behalf of the Company.
4.3.3 The Administration Agreement, signed on behalf of the Company by Chui and Brinkley, notes the
underlying SP’s for which the agreement applies. The Liquidators reviewed the Administration
Agreement and noted that all nine active SP’s were included as part of the Administration
Agreement.
4.3.4 The Liquidators have not formally terminated the Administration Agreement with the Administrator
as the Liquidators require the Administrator’s assistance in collecting and analyzing books and
records of the Company. The Administrator has been cooperative in this regard even though
they have currently over $500,000 in unpaid invoices for which they have filed a claim in the
liquidation as an unsecured creditor.
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4.4 Auditors
4.4.1 KPMG (Curacao) (“KPMG”) were the auditor of the Company and seven of the nine active SP’s.
The Liquidators understand that each underlying SP signed separate audit engagement letters on
an annual basis.
4.4.2 The last set of financial statements audited by KPMG varied by SP and the audited financial
statements are discussed further in Section 10.5.
4.5 Marketing Agents
4.5.1 APLDG executed a Solicitor Agreement with ETSIOR Sarl on June 12, 2006 to sell interests in
the investment portfolios in Switzerland. Rates include 6% commission on sale plus 5% of the
management and performance fee of the Investment Manager. A copy of the agreement is found
at Appendix 4.
4.5.2 APLDG also executed a Capital Introduction Agreement with Paramount Investment
Management Limited dated December 12, 2008 to solicit the SP’s to institutional and private
investors (See Appendix 11). Marketing fees ranged from 65-75% of total gross fees per
segregated portfolio for all existing and new assets under management.
4.5.3 The Liquidators suspect that there may have been other marketing arrangements in place,
particularly in Asia, however, documentary evidence of these arrangements has not been found.
4.6 Other Service Providers
4.6.1 The Liquidators have also identified several other agreements with regard to APAL Fund only as
follows:
(i) Consulting Agreement dated January 1, 2009 with Corporate Resource Advisors Inc.
(“CRA”).
(ii) Auto Repair Pre-Purchase Agreement dated December 30, 2007 for the pre-purchase of
$4.5 million of auto repairs from Acceptance.
(iii) Loan Servicing and Repossession Administration Agreement dated December 30, 2007
with Acceptance.
(iv) Processing Agreement dated October 1, 2009 with CSC Logic Inc to provide backup data
processing services to assist Acceptance on certain duties.
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4.6.2 The Liquidators have terminated all agreements that were active at the Liquidation Date that were
no longer necessary to assist in the liquidation of the Company. Certain legal agreements and
banking arrangements were kept active until such time that the services could be transferred, at
which time the agreements were terminated.
4.7 Bank Accounts
4.7.1 The Liquidators identified Northern Trust as the Company’s main bank account provider. Each
SP had a separate account setup to collect subscriptions, make redemption payments and invest
the funds into the appropriate portfolio. The Northern Trust bank accounts were setup in 2006
and the Liquidators have received electronic statements containing all transactions for the history
of each account.
4.7.2 Prior to Northern Trust the Company used accounts at ABN Amro. The Liquidators identified that
most ABN Amro accounts were open from 2004 to 2007; however, electronic records were not
available. The Liquidators have requested bank statements but to date have not received a
complete set of company accounts for the ABN accounts.
4.7.3 In addition to the main accounts held at ABN Amro and Northern Trust the APAL Fund also had
separate accounts setup at Sun Trust and First Caribbean International Bank (“FCIB”) in
Curaçao.
4.8 Review of Company’s Operating History
4.8.1 The Company’s operating history can be split into four distinct time periods of operation prior to
the Liquidation Date:
(i) Inception to October 2007 when a third party owned Acceptance;
(ii) October 2007 to October 2010 when Chui had ownership interests in both the
Company and Acceptance;
(iii) The SEC Investigation culminating in a Cease and Desist Order against Chui and
other management of the Company; and
(iv) November 2010 to June 2011 when Carter led the Company.
4.8.2 A detailed summary of the activity in each period is detailed in Sections 5 to 8 below.
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5 PERIOD 1 - INCEPTION TO OCTOBER 2007
5.1 Overview
5.1.1 The Company was formed in June 2004 under the laws of the Cayman Islands and operated as
an open-ended investment fund with peak assets purportedly valued at approximately $150
million.
5.1.2 Since inception the Company operated as many as twenty five (25) SP’s which invested in sub-
prime auto loans and life insurance policies. The SP’s had approximately 1,800 shareholders
with the majority invested in the auto loan SP’s.
5.1.3 The Company purportedly operated in compliance with its articles during the period, transacting
at arms-length with a third party servicer of auto loans. The individual transaction values have
not been investigated in-depth, however, the Company’s cash position during this time period
suggests that performance was not reflective of expectations.
5.2 Investor Activity
5.2.1 During the period, subscriptions from investors totaled approximately $120 million while
redemptions totaled approximately $3.8 million and $10 million in dividends were paid.
5.3 Auto Loan Activity
5.3.1 The Company purchased $51 million of auto loan accounts during the period and received in
return $4.8 million in cash receipts from Acceptance that can be traced directly to the Company’s
bank statements.
5.3.2 Pursuant to the SEC Report, "Acceptance was the sole finance company providing auto loans
and loan servicing to the Company and Acceptance derived virtually all of its income from the
Company". All auto loans purchased by the Company in the period for $51 million were
purchased from Acceptance.
5.4 Life Settlement Activity
5.4.1 With the exception of $2.4 million in policy sales and $5.4 million in premium payments, all life
settlement purchases and sales occurred prior to 2007. In total, $26.1 million of life settlement
policies were purchased in the period with $12.6 million received from policies sold.
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5.4.2 As noted previously, the Liquidators have not been provided all the Company’s bank statements
for the years 2004 to 2006 and believe that additional life settlement purchases up to $22.8
million may have occurred. The missing statements are required in order to confirm this.
5.5 Acquisition of Synergy Acceptance Corp.
5.5.1 As noted above, the Company appeared to operate at arms-length until February 2007 when the
controlling shareholder of Acceptance, Clear Skies Holding Company LLC, offered to sell its
controlling stake in Acceptance to Chui. The principals of Clear Skies are two individual by the
names of Mr. James Torchia and Mr. Marc Cellelo.
5.5.2 Torchia worked for APLDG and/or APIM as a senior portfolio manager until he resigned on or
about June 29, 200710. According to an offering memorandum for one of the Company’s sub
funds, Torchia had “specific responsibilities in the portfolio management of the life settlement and
auto loan divisions”11.
5.5.3 Torchia and Cellelo controlled virtually all of Acceptance’s stock through Clear Skies, a holding
company wholly owned by Torchia and Cellelo. Acceptance’s only other shareholders, Robert
Smith (“Smith”) and David Kagel (“Kagel”), together held less than 0.06 percent of Acceptance’s
outstanding shares12.
5.5.4 In February 2007, Torchia offered to sell Clear Skies’ controlling stake in Acceptance to Chui
and/or the Company13.
5.5.5 Torchia and Chui reached an agreement on the key terms of an acquisition by early May 2007:
Chui and Hall would form a new entity, Synergy Equity LLC (“Equity”), which would acquire Clear
Skies’ controlling stake in Acceptance for approximately $20 million (the “Acquisition”)14. But
instead of paying for the Acquisition with his own funds, Acceptance would effectively finance the
Acquisition with its anticipated future earnings. As outlined in a term sheet (the “Term Sheet”),
Acceptance would first re-purchase all of its shares from Clear Skies in exchange for a $20
million note payable over three years. Acceptance would then issue new shares to Equity for
nominal consideration, giving Chui and Hall full control over Acceptance15.
10 See Torchia’s Resignation Letter (see Appendix 5).
11 See APAL Fund (Dist.) Offering Memorandum at pg. 10 (see Appendix 6).
12 Acceptance US Trustee’s Adversary Complaint pg.’s 4-5 (see Appendix 7).
13 See February 27, 2007 email from Torchia to Chui (see Appendix 8).
14 See May 8, 2007 email from Chui to Torchia (term sheet attached) at Appendix 9.
15 May 8, 2007 email from Chui to Torchia with term sheet attached (see Appendix 9).
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5.5.6 In the ensuing weeks, Cellelo and lawyers from his firm, The Cellelo Law Group, prepared the
necessary documents16. The stock purchase agreements drafted by Cellelo’s firm largely tracked
the two-step structure outlined in the Term Sheet. In two separate stock purchase agreements,
Acceptance agreed to purchase the 600 shares owned by Smith for $11,610 (the “Smith SPA”)
and the 999,400 shares owned by Clear Skies for $19,338,390 (the “Clear Skies SPA”)17. Then,
in a third stock purchase agreement, Acceptance agreed to sell 600 shares of common stock to
Synergy Equity for $11,610, thereby giving Synergy Equity full ownership and control of
Acceptance (the “Synergy Equity SPA”)18.
5.5.7 The Clear Skies SPA, as contemplated by the Term Sheet, called for Acceptance to make
payments to Clear Skies over a three-year period: $5,096,940 within five business days of
closing (the “Initial Payment”)19 and three additional installments of $4.75 million on the first,
second, and third anniversaries of the Acquisition20. To secure its payment obligation under the
Clear Skies SPA, Acceptance further agreed to issue a non-negotiable promissory note to Clear
Skies for the full purchase price21.
5.5.8 The parties closed the Acquisition at Cellelo’s Atlanta office on June 29, 200722. Torchia signed
each of the stock purchase agreements on Acceptance’s behalf as its president, and Torchia and
Cellelo signed the Clear Skies SPA as Clear Skies’ members23. Torchia also executed the
promissory note on Acceptance’s behalf24.
5.5.9 Although Acceptance had agreed to pay Clear Skies approximately $5 million shortly after the
Acquisition closed, Acceptance lacked the funds needed to make the Initial Payment. In fact, as
reflected in an adversary complaint filed by Acceptance’s bankruptcy trustee, Acceptance was
insolvent as early as May 2006 and consistently losing money. Acceptance’s general ledger
16 May 30, 2007 email from Tagliapietra with first drafts of stock purchase agreements attached (Appendix 13).
17 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). Also refer to Acceptance Trustee’s Adversary Complaint at pg. 5 (see Appendix 7). The Trustee’s complaint notes that it is unclear what happened to the 100 shares owned by Kagel.
18 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14).
19 The parties executed two amendments to the Synergy SPA. The first, dated July 9, 2007, gave Acceptance an additional five business days to make the Initial Payment. The second, dated July 12, 2007, changed the Clear Skies’ account into which the Initial Payment would be wired.
20 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14).
21 Promissory Note (see Appendix 15).
22 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). 23 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). Also refer to Acceptance Trustee’s Adversary Complaint at pg. 5 (see Appendix 7).
24 Promissory Note (see Appendix 15).
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showed negative equity of $764,385 as of May 31, 2006, and its 2006 income tax return showed
that it lost almost $650,000 in 200625.
5.5.10 To come up with the funds needed to make the Initial Payment and payments under the Lease,
Chui and Torchia, who remained on as Acceptance’s president and CEO, arranged for the APAL
Fund to “prepay” $6 million in purported loan origination fees to Acceptance26. The APAL Fund
wired $6 million to Acceptance’s bank account on July 5, 200727. Acceptance then wired the
Initial Payment to Clear Skies’ bank account at the Bank of North Georgia on or about July 13,
200728.
5.5.11 Although the Acquisition was executed on June 29, 2007, after several further amendments it
wasn’t until October 2007 that the transaction was completed. Further details of the transaction
are explained further in the summary of the SEC investigation at Section 7 of this Second Report.
25 Acceptance US Trustee’s Adversary Complaint pg. 4. (see Appendix 7).
26 Acceptance US Trustee’s Adversary Complaint pg. 6. (see Appendix 7) and the SEC Cease-And-Desist Order at pg. 4 (see Appendix 1).
27 July 2007 APAL Fund Account Statement at pg. 9 (see Appendix 16).
28 Acceptance US Trustee’s Adversary Complaint pg. 8. (see Appendix 7).
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6 PERIOD 2 - OCTOBER 2007 TO OCTOBER 2010
6.1 Overview
6.1.1 The period from October 2007 to October 2010 is the time period when Chui was an owner of
both the Company and Acceptance. The purchase of Acceptance was not disclosed by Chui to
the Company’s independent directors or shareholders. The arrangement created an
independence issue between the two entities and, as per the SEC Report, Chui’s ownership
(through Equity) of Acceptance “created a pervasive conflict of interest”.
6.2 Investment Manager
6.2.1 During the period, the investment manager changed from APIM to APLDG.
6.2.2 The change was the result of a potential merger which was announced on May 6, 2008 between
APIM and APLDG. The Liquidators understand that the principal of Lifestyle Design Group
(“LDG”), Mr. Thomas Quinlin (“Quinlin”), and Chui were going to merge their management
companies. The negotiations appear to have fallen through, and although the name was
registered as APLDG, Quinlin had no formal involvement with APLDG. Attached at Appendix 10
is the notice letter informing investors of the merger.
6.2.3 Chui is the majority owner of APLDG while former employees Mok (1.6%) and Hall (22.5%) were
minority owners.
6.2.4 APLDG received $8.1 million in fees during the period it served as investment manager of the
Company from August 1, 2008 to the Liquidation Date.
6.3 Investor Activity
6.3.1 Pursuant to resolutions passed at a meeting of the board of directors held on October 22, 2008
and written resolutions of the board dated December 30, 2008, the Company suspended
redemptions effective September 30, 2008 after significant redemptions were received for the
months ending August 31 to November 30, 2008.
6.3.2 During the period subscriptions from investors totaled approximately $35 million, redemptions
totaled approximately $31.4 million and $12.8 million in dividends were paid. The final batch of
subscriptions was received by the Company in March 2009 with one final subscription for
$190,000 received in March 2010; some 6 months after redemptions were suspended. The last
batch of redemption payments was made April 2009 with a single final redemption paid in
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November 2009. The final batch of dividends was paid in August 2009. There were no dividends
paid after redemptions were suspended.
6.4 Legal Advisors
6.4.1 The Liquidators identified two different US firms engaged by the Company during the period.
6.4.2 An engagement letter was identified between the Company and Chamberlain, Hrdlicka, White,
Williams & Martin (“Chamberlain”) dated July 22, 2009 for legal services with respect to recovery
of vehicle repossession expenses. The Liquidators do not understand the requirement to engage
legal counsel at the Company level for tasks that should be completed by the auto loan servicing
agent.
6.4.3 The Liquidators have received no correspondence from Chamberlain with regard to their
engagement and have not received a claim in the liquidation despite notifying Chamberlain of the
Liquidators appointment.
6.4.4 There is no further legal work on going with Chamberlain and the legal services with regard to
recovery of vehicle repossession expenses, if any, has not been pursued by the Liquidators.
6.4.5 The Sparer Law Group (“Sparer”) was engaged on April 10, 2009 by Chui on behalf of the
Company, APAL Fund, and APLDG. The initial engagement was to act on behalf of the
Company with regard to the claim by Tradex Global Advisors LLC. Although the Liquidators have
not been provided with any additional formal engagement letters, the Liquidators understand that
Sparer’s involvement expanded to several other issues including a claim against the Company by
LDG, SEC involvement with the AP Long Short Fund and representing Chui personally.
6.4.6 The Liquidators spoke with Sparer initially to understand their involvement, however, after Sparer
continued to represent Chui the Liquidators terminated any further involvement.
6.4.7 Sparer has a claim in the liquidation for unpaid legal fees from representing the Company as well
as Chui.
6.5 Director Activity
6.5.1 As noted in the Section 4.2, the directors remained unchanged until May 2010. Two new board
members, Lee and Mok, who were both employed with APLDG, were appointed in May 2010.
Following these Chui controlled director appointments, Brinkley and Seymour resigned on May
24, 2010 noting that there were strong differences on how the board should proceed and they did
not find their situation tenable
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6.6 Marketing Agents
6.6.1 APLDG continued to use marketing agents throughout the life of the Company and executed a
Capital Introduction Agreement with Paramount Investment Management Limited (“PIML”) dated
December 12, 2008 to solicit the SP’s to institutional and private investors (See Appendix 11).
Marketing fees ranged from 65-75% of total gross fees per segregated portfolio (listed in
Schedule B of Appendix 11) for all existing and new assets under management. An example of
the marketing fee schedule is found at Appendix 12.
6.7 Service Provider Agreements
6.7.1 Several additional service providers were engaged by the Company after Chui took over control
of Acceptance.
6.7.2 A Consulting Agreement dated January 1, 2009 was executed with Corporate Resource Advisors
Inc. (“CRA”). CRA was engaged to assist in reviewing the operations and identifying areas for
improvement29.
6.7.3 An Auto Repair Pre-Purchase Agreement dated December 30, 2007 for the pre-purchase of $4.5
million of auto repairs from Acceptance was signed. This agreement resulted in the transfer of
$4.5 million in cash from APAL Fund to Acceptance for work to be performed in the future. There
is no evidence to show that this work was ever completed, however, this was identified by the
SEC Report and previously disclosed.
6.7.4 A Processing Agreement dated October 1, 2009 with CSC Logic Inc to provide backup data
processing services to assist Acceptance on certain duties. It is unclear what data processing
services were required.
6.7.5 The Liquidators have terminated all agreements that were still active at the Liquidation Date that
were no longer necessary to assist in the liquidation of the funds.
29 CRA recommended the services of First Associates, the debt collection service provider engaged by the Liquidators, to the Investment Manager, however, the Investment Manager chose not to take CRA’s advice.
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7 PERIOD 3 - SEC INVESTIGATION
7.1 Overview
7.1.1 As noted above, prior to 2007 the Company and Acceptance had separate ultimate ownership. In
2007 Chui purchased Acceptance, however, it wasn’t until 2010 that the purchase of Acceptance
was made known to investors and the independent directors when the Acquisition was disclosed
in the Company’s audited financial statements.
7.1.2 The SEC cease and desist order issued in December 2010 resulted in Chui, Mok and Hall being
barred from association with any investment adviser for a period of five years. Since that date,
Chui, Mok and Hall have been excluded from, and not been involved with, the management of the
Company or the Investment Manager. Chui did however continue to control and manage
Acceptance through a holding company he created and controlled called Equity.
7.1.3 The SEC findings concluded that Chui, Mok and Hall had (1) failed to disclose their purchase of
the Company’s key supplier (Acceptance) and the resulting conflict of interest; (2) had misused
the Company’s assets to support related parties; (3) had improperly retired debt of Acceptance
through improper self-dealing; and, (4) had made misrepresentations to investors.
7.2 SEC Auto Loan Findings30
7.2.1 The primary findings from the SEC were that Chui, Mok and Hall “failed to disclose conflicts of
interest, misused client [Company] assets, and engaged in improper self-dealing”.31
7.2.2 In June 2007 Chui, through Equity, purchased Acceptance using approximately $18.5 million from
the APAL Fund. The transaction was funded with Chui prepaying loan origination fees “knowing
that about $5 million of that money [$6 million] would go immediately to the seller of
Acceptance”.32 Chui, over 3 separate transactions transferred an additional $13.575 million33
from the APAL Fund to Equity to complete the purchase of Acceptance.
7.2.3 The Liquidators have found evidence showing the transfer of the $13.575 million from APAL Fund
into an escrow account. From the escrow account the funds were wired directly to Clear Skies for
completion of the purchase of Acceptance.
7.2.4 Chui, Mok and Hall as new owners of Acceptance created a conflict of interest as they “had an
incentive to use [Acceptance] over any other finance company that might better serve the
30 See chart – SEC Auto Loan Findings at Appendix 23. 31 See paragraph 10 of the SEC Order at Appendix 1. 32 See paragraph 10 of the SEC Order at Appendix 1. 33 The Liquidators have vouched these payments plus an additional $3 million as paid by APAL Fund to Equity.
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[Company]. This incentive was particularly acute because Chui and Hall planned to use
Acceptance’s earnings to pay back [Equity’s] $13.5 million in loans from the [Company].34”
7.2.5 Chui’s motivation to acquire Acceptance is unclear to the Liquidators and the purchase price
agreed for the transaction lacks commercial rationale. Prior to the transaction Acceptance was
unprofitable, in fact as early as March 2006 Acceptance was in financial difficulty with its general
ledger showed negative equity as of May 31, 2006 and its 2006 income tax return showed a net
loss. As a result, Acceptance was unable to generate earnings to repay the $13.5 million and in
fact required additional money to cover operating costs. “To help cover its operating costs,
Acceptance retained auto loan payments it collected for the [APAL Fund] and other money it
owed the [Company]. Also, Chui directed the [APAL Fund] to prepay $4.5 million in repossession
costs to Acceptance (in addition to the prepaid loan origination fees described above).”35
7.2.6 “Chui, Hall and Mok knew or were reckless in not knowing that Acceptance was unprofitable and
running up millions of dollars in debts to the [Company] during 2007 and 200836.” By December
2008 the APAL Fund was due $15.7 million from Acceptance for prepaid fees and costs. In
addition, Equity still owed $13.575 million for the Acceptance purchase loan. In total, by February
2009 the APAL Fund was due over $33.8 million37 from Equity and Acceptance. Neither of these
entities had the funds available to pay the amounts due.
7.2.7 In order to attempt to settle the debts between the companies Chui structured a deal whereby the
APAL Fund would exchange the debts due for an auto loan portfolio. As noted below, however,
the value of the portfolio was not reflective of the debt due. “In February 2009 Acceptance
bought an auto loan portfolio for $12 million. Acceptance agreed to pay the seller $2 million in
cash at closing and $10 million over time. As authorized by Chui and known to Hall, the APAL
Fund agreed to act as a guarantor that was obligated to pay the $10 million if Acceptance did
not.”38
7.2.8 In addition to having the APAL Fund guarantor for the original purchase of the auto loan portfolio,
Chui had the APAL Fund buy the portfolio from Acceptance for $38.2 million which resulted in a
very large profit for Acceptance. “On the same day that Acceptance completed its purchase of the
portfolio for $12 million, it sold the portfolio to the Auto Loan Fund for approximately $38.2 million,
i.e., for over three times what Acceptance paid for it.”39
34 See paragraph 12 of the SEC Order at Appendix 1. 35 See paragraph 14 of the SEC Order at Appendix 1. 36 See paragraph 15 of the SEC Order at Appendix 1. 37 See paragraph 24 of the SEC Order at Appendix 1. 38 See paragraph 22 of the SEC Order at Appendix 1. 39 See paragraph 23 of the SEC Order at Appendix 1.
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7.2.9 The Liquidators also note the SEC’s findings that the majority of the auto loans purchased
(roughly half) were already delinquent or deficient (i.e. remaining balances on loans where the
borrowers were already in default), prior to the Acquisition.
7.2.10 To pay for the above transaction the APAL Fund released the debt due from both Equity and
Acceptance and also advanced Equity and Acceptance a further $4.4 million in consideration to
make up the purported difference between the purchase price and the debts forgiven.
7.2.11 In December 2009, subsequent to the sale of the portfolio noted above and the release of debt,
Chui and Hall reversed the transaction in regard to the deficient loan balances which represented
approximately $21.5 million. However, as both Chui and Hall would have known, “Acceptance,
which was struggling financially and had minimal assets, had no ability to pay the refund.”40 The
loans advanced by the APAL Fund to Equity and Acceptance remain outstanding.
7.2.12 Chui had approved all aspects of the transaction. However, during the entire process noted
above, both the purchase of Acceptance and the release of liability, the independent directors
were not consulted or even notified that the transactions had occurred.
7.3 SEC Life Settlement Findings
7.3.1 In addition to the above, “Chui also used the Auto Loan Fund's assets for the benefit of the
Advisers' other hedge fund clients. Chui served as the portfolio manager for the life settlement
funds in the [Company]. From April 2007 through May 2009, Chui had the Auto Loan Fund make
approximately 60 loans totaling $12 million to several of the life settlement funds. These interfund
loans were unsecured and payable on demand with low interest rates. The life settlement funds
used the borrowed money to cover investor redemptions, premiums on the insurance policies in
which the funds invested, and sales commissions. Thus, Chui treated the assets of the Auto Loan
Fund as available to fund the operations of the life settlement funds.”41
7.3.2 The loans were another example of a conflict of interest with Chui acting on behalf of all SP’s as
the lending SP would have benefited from higher rates while the borrower would have benefited
from lower rates. There was insufficient segregation of duties at APLDG to perform the
necessary negotiations at each SP to act in the best of all investors.
7.3.3 The Liquidators note that the transfer of assets between the various SP’s is contrary to the stated
investment objectives of the APAL Fund and the legal manner in which SPC’s are supposed to
operate.
40 See paragraph 26 of the SEC Order at Appendix 1. 41 See paragraph 16 of the SEC Order at Appendix 1.
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7.4 Subsequent Disclosure of Acceptance Transaction
7.4.1 Chui, Mok and Hall did not disclose the 2007 purchase of Acceptance to the Company’s
independent directors until approximately March 2009 which coincided with the release of the
2008 financial statements in August 2009 which disclosed the transaction to investors and users
of the statements. The Liquidators are unsure why the transaction was not disclosed in the 2007
audited financial statements and note that the December 31, 2007 financial statements were not
released until 2009.
7.4.2 The result of the transactions noted above was that the APAL Fund was no longer compliant with
its offering document and the Company’s corporate documents. “The offering memorandum
used to sell shares in the [APAL] Fund stated that the [Company’s] "investment objective" was ‘to
earn a steady return by purchasing sub-prime auto loans issued in the United States’. The
offering memorandum further stated that the Advisers expected to invest the [Company’s] assets
only in subprime auto loans, U.S. Treasury securities, and interest-rate derivatives for hedging.
As a result of the conduct above, however, by December 2008, roughly 40 percent of the [APAL]
Fund's assets consisted of debts and other obligations owed to the Fund by Equity, Acceptance,
and the life settlement funds.”42
7.4.3 In addition to not being compliant with its investment objective, the Investment Manager was also
receiving management and performance fees on the APAL Fund assets. However, as noted
above, “a substantial portion of the fees the [Investment Manager] charged the APAL Fund were
for ‘managing’ what were simply debts and obligations that were generated by and benefited
related parties…”.43
7.5 Investor Misrepresentations
7.5.1 Subsequent to the purchase of Acceptance and the interfund loans the Company continued to
seek additional investors. Chui informed prospective investors that the APAL Fund “used several
finance companies that were all independent of the advisors. These statements were false
because Acceptance, a company [Chui] owned with [Mok] and [Hall] through [Equity], was the
sole finance company used by the [Company].”44
7.5.2 In addition to failing to disclose the purchase to current and prospective investors, the offering
memorandum was not amended to reflect the change in asset base for the APAL Fund as well as
42 See paragraph 19 of the SEC Order at Appendix 1. 43 See paragraph 20 of the SEC Order at Appendix 1. 44 See paragraph 27 of the SEC Order at Appendix 1.
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the fees taken at each SP. The original corporate documents note that that the Investment
Manager would earn fees calculated using the Company’s net assets, however, it failed to
disclose the level of fees to be earned for related party debts and interfund debts.
7.5.3 Investors have the opportunity look to SEC filings to determine a fund’s performance and
operations, however in Form ADV filed by APLDG and APIM, depending on the time period, the
form “did not disclose that the Fund obtained all of its auto loans and loan servicing from a related
party (Acceptance). It also disclosed the preceding five years of "business background" for key
personnel of the Advisers including [Chui], [Hall], and [Mok], but omitted any mention of their
affiliation with Acceptance.”45
7.5.4 However despite having the ability to disclosure this information to investors, Chui continued with
his deceptive behavior and failed to properly inform investors of these transactions.
7.6 Overall Findings and Penalties
7.6.1 The SEC found, among other violations, that “APLDG, APIM Chui, and Hall willfully violated
Section 207 of the Advisers Act which makes it "unlawful for any person willfully to make any
untrue statement of a material fact in any registration application or report filed with the
Commission ... or willfully to omit to state in any such application or report any material fact which
is required to be stated therein.”46
7.6.2 The penalties and fines handed down are detailed in paragraph 39 of the SEC Cease and Desist
Order.
7.6.3 A curious and unfortunate outcome of the SEC sanction of Chui was that although he was barred
from continued management of the Company he continued to be able to manage Acceptance
until the successful petition for the appointment of a bankruptcy trustee by Carter in June 2011.
45 See paragraph 30 of the SEC Order at Appendix 1. 46 See paragraph 37 of the SEC Order at Appendix 1.
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8 PERIOD 4 - NOVEMBER 2010 TO JUNE 2011
8.1 Overview
8.1.1 Subsequent to Chui, Mok, and Hall’s removal from the management of the Company as a result
of the SEC investigation, the affairs of the Company were overseen by Mr. Henry Carter. Carter
had originally been retained by Chui as a compliance officer of the Investment Manager but over
the course of the SEC’s investigation his duties with the Investment Manager expanded to that of
CEO, General Counsel, and Chief Compliance Officer. Carter was not subject to any adverse
findings of the SEC investigation.
8.1.2 Between Chui’s removal in December 2010 and May 2011, Carter was in the process of
reconciling historic data and the auto loan borrower accounts.
8.1.3 Carter's efforts also led to the appointment of two new independent directors, Ms. Kathy Levinson
(“Levinson”) and Mr. Isaac Hunt (“Hunt”) who were invited to join the board in October 2010
pursuant to a request from Carter. Chui and the other directors that were affiliated with APLDG,
Mok and Lee, all resigned after issuance of, and in compliance with the terms of, the SEC Cease
and Desist Order.
8.2 Appointment of US Trustee over Acceptance
8.2.1 According to Carter, on or around May 3, 2011 the Liquidators understand that Chui attempted to
terminate Carter’s contract with immediate effect, requesting his immediate departure from the
premises of the Investment Manager. Carter noted that Chui’s request was a violation of the SEC
cease and desist order and refused to adhere to Chui’s demands. The Liquidators understand
that Carter noted his intention to terminate Acceptance’s servicing contract with the Company and
Chui left the premises, taking with him various computers and records purportedly belonging to
Acceptance which shared the office space with the Investment Manager.
8.2.2 On or around May 3, 2011 Chui filed to place Acceptance into Chapter 11 (debtor in possession)
bankruptcy proceedings, of which he intended to control. The implication of this filing was that it
afforded a stay to Acceptance that prevented the Company from being able to terminate its
servicing contract. The filing was also perceived by Carter as a means of frustrating ongoing
investigations of the Company into the conduct of Chui and Acceptance, and amounts owed by
them to the Company.
8.2.3 On May 24, 2011, Carter contacted certain investors to request funding to intervene in the
Acceptance bankruptcy proceedings to appoint an independent Chapter 11 Trustee in the
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Acceptance proceedings and seeking the termination of the loan servicing agreements to allow
the Company to gain control of the servicing of the auto loan portfolio. See Appendix 17 for a
copy of the letter to investors.
8.2.4 On June 2, 2011 Mr. Jeffrey Golden (“Golden”) of Weiland, Golden, Smiley, Wang Ekvall &
Strok, LLP was retained as US legal counsel to the Investment Manager, the Company and the
APAL Fund.
8.2.5 Pursuant to Golden’s engagement, a motion was filed by the American Pegasus parties on June
6, 2011 to appoint a US Trustee over Acceptance and to reject the contracts between
Acceptance and the Company which would result in the servicing of the loan portfolios being
returned to the Company. See Appendix 18 for a copy of the motion.
8.2.6 On June 13, 2011 the Company, Acceptance and the United States Trustee’s office filed a
stipulation order wherein the parties agreed to appoint a Chapter 11 trustee and to provide the
Company with viewing access to Acceptance’s books and records. On June 15, 2011 the Court
approved the June 13 stipulation (see Appendix 19 for a copy of the order) and on June 29, 2011
Ms. Lynn Schoenmann was appointed as the US Trustee over Acceptance.
8.3 Appointment of Provisional Liquidators
8.3.1 On June 1, 2011 two shareholders in the Company (the “Petitioner”) filed a petition in the Grand
Court of Cayman Islands. See Appendix 20 for a copy of the Petition. The Petition was filed to
seek the winding up of the Company pursuant to Section 92(e) of the Cayman Islands’
Companies Law (2010 Revision).
8.3.2 Pursuant to the Petition, the Grand Court ordered the Company into provisional liquidation on
June 20, 2011 and Messrs Sybersma and Pearson were appointed Joint provisional Liquidators
(“Provisional Liquidators”). The Petition was not opposed by the Company or any other party.
8.3.3 Upon appointment the Provisional Liquidators advised the Company’s directors and the
professional service providers of their appointment and in accordance with their statutory duties
took control of the Company's assets including, where possible, the Company's books and
records. On June 22, by telephone call, the Provisional Liquidators received an update from
Carter regarding the status of various litigations. The Provisional Liquidators also advised Carter
that his powers as a director of the Company were suspended and that he no longer had the
authority to bind the Company without the prior permission of the Provisional Liquidators. Carter
pledged his co-operation and arrangements were made for one of the Provisional Liquidators, Mr.
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Pearson, to visit Mr. Carter at the Investment Manager’s offices in San Francisco the following
week.
8.3.4 Pursuant to s.102(1) of the Companies Law, the Provisional Liquidators also commenced an
investigation into the background of the Company and its business, dealings and affairs. The
Provisional Liquidators were required to file a report with the Grand Court outlining the progress
of the provisional liquidation and outcome of their investigations no later than September 30,
2011 and this requirement was complied with by issuance of the Provisional Liquidators’ Report
on July 19, 2011.
8.3.5 On July 20, 2011 the Grand Court ordered the Company be placed into official liquidation and
Messrs. Sybersma and Pearson were appointed as Liquidators.
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9 JOLs’ INVESTIGATIONS
9.1 Overview
9.1.1 The Liquidators notified relevant parties of their appointment as Provisional Liquidators on June
20, 2011. Subsequent to their appointment as Official Liquidators the Liquidators notified all
parties again on August 4, 2011.
9.1.2 The Liquidators held several meetings with key individuals including Carter, as detailed in the
First Report, prior to his passing in early 2012.
9.1.3 On October 12, 2011, the Liquidators instructed the board of directors, and Chui (former director)
to complete a statement of affairs as the Liquidators understood that these individuals would have
the most intimate knowledge of the Company. The Liquidators have also requested a statement
of affairs from the former administrator. To date the Liquidators have yet to receive any of the
statement of affairs from any board member or Chui. The Liquidators have received records from
the Administrator but have been informed that the records provided are incomplete.
9.2 Cash Activity
9.2.1 The Liquidators undertook an exercise to recreate the records of the Company to show the
receipts and disbursements from the Company’s inception to the Liquidation Date.
9.2.2 The Liquidators understood from the Administrator that several cross portfolio transfers were
made and as a result, an investigation of the accounts focused on the transfers to determine if
reversal of the transactions was feasible.
9.2.3 Anecdotally the Liquidators were led to believe that nearly $50 million was used to purchase life
settlements and $100 million was used for auto loans. The Liquidators have found evidence to
support $26 million in life settlement purchases plus $13 million in premium payments and only
$66 million for auto loan payments, not including the approximate $20 million payment for the
purchase of Acceptance. The Liquidators prepared a full accounting from inception to investigate
whether the cash flow of the Company supported the information provided by former
management. The full table can be found at Appendix 21. The summary of significant sources
and uses of cash is found in the tables below.
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Subscriptions 155,500,000
Redemptions paid (35,000,000)
Dividends paid (22,800,000)
Net Cash Available for Operations 97,700,000
9.2.4 It is noted from the table that approximately $155 million was received from investors and of that
amount approximately $58 million has been returned by way of redemptions or dividend
payments. Dividends were paid to investors up to the second quarter of 2006. It is understood
that investors in certain SP’s were “guaranteed” dividend payments for four years from the date of
their subscription. Therefore, there was $97.7 million of funds available to the Investment
Manager not including earnings. The Liquidators have traced $19.5 million for the purchase of
Acceptance47 therefore, the funds that were available for investment or costs were approximately
$78.2 million.
9.2.5 The Liquidators identified $29.4 million paid for various expenses including management and
performance fees.
Management and Performance Fees (16,800,000)
Commission Fees (6,900,000)
Legal Fees (1,700,000)
Administration Fees (1,300,000)
Consulting Fees (700,000)
Miscellaneous Fees (2,000,000)
Total Fees Paid (29,400,000)
47 The Liquidators note that the amount they have been able to trace for the purchase of Acceptance differs from the $18.5 million noted in the SEC Report.
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9.2.6 $66 million was used for APAL Fund auto loan purchases, of which $26.5 million of the auto loans
were recovered in collections.
Auto Loan Purchases (66,000,000)
Auto Loan Collections 26,500,000
Net Auto Loan Activity (39,500,000)
9.2.7 Of the purported $50 million in life settlement purchases, the Liquidators have identified $26
million of purchases not including premium payments. This is offset by $29.6 million in sales of
the life insurance policies. A complete record of early bank statements has not been located;
therefore, there may be additional life settlement purchases that have not been reconciled by the
Liquidators.
Life Settlement Purchases (26,100,000)
Life Settlement Premiums (13,300,000)
Life Settlement Sales 29,600,000
Net Life Settlement Activity (9,800,000)
9.2.8 The other transactions identified netted close to zero, therefore, had little effect on the overall
cash balance.
Bank Interest Earned 2,900,000
Operating Loan Proceeds 2,700,000
Unknown transactions (5,700,000)
Net Other Activity (100,000)
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9.2.9 The net cash positions of all payments and receipts noted above is as follows.
Total Fees Paid 29,400,000
Net Auto Loan Activity 39,500,000
Funds Diverted to Purchase Acceptance 19,500,000
Net Life Settlement Activity 9,800,000
Net Other Activity (500,000)
Total Cash Activity 97,700,000
Based on the above reconciliation of transfers it is clear that the majority of the Liquidators’
collection efforts would be centered on auto loans, however, there is also a significant balance
requiring investigation on the life settlement portfolios when factoring in premium payments.
9.3 Henry Carter and APLDG
9.3.1 As noted in prior reports APLDG initially assisted the Liquidators by responding to their
preliminary information requests and aiding their efforts to service the APAL Fund’s auto loan
portfolio.
9.3.2 Given the limited financial resources available to the Company to oversee the auto loan servicing
and collection process the Liquidators were desirous of implementing the most cost efficient
process as possible. Therefore the Liquidators engaged the services of Carter and certain staff
members retained by him to administer the loan servicing process through a revised investment
management agreement (the “Carter IMA”). Under the terms of the Carter IMA, Carter agreed to
report to the Liquidators on this process and all collections from the loans would be deposited into
accounts controlled by the Liquidators from which Carter would be paid for his services. Carter’s
efforts were closely monitored by the Liquidators and his involvement was conditional on his full
cooperation and transparency.
9.3.3 Carter’s working relationship with the Liquidators deteriorated significantly as time progressed;
primarily due to a lack of communication from Carter, his refusal to substantively engage with the
Liquidators, and differences in opinion as to how the liquidation should be progressed.
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9.3.4 Despite repeated requests for cooperation, the Liquidators were provided with very little
information with regard to the Company’s affairs during the first six months of their appointment.
Ultimately APLDG refused to provide any further information to the Liquidators until outstanding
debts due from the Company to Carter’s consultancy firm were paid in full. On October 31, 2011,
given the Company’s limited financial resources, the Liquidators terminated the Carter IMA
between APLDG and the Company.
9.4 Dealings with Benjamin Chui
9.4.1 The Liquidators were first introduced to Chui during the US Trustees’ initial creditor meeting, at
which time there was an opportunity to ask questions of Chui. Chui was unable to recall
substantial information on Acceptance or the affairs of the Company.
9.4.2 Chui’s legal counsel submitted invoices to the Liquidators for work they had performed on behalf
of Chui that they believed were covered under the indemnity clause of the IMA. The Liquidators
refused to pay the invoices and as such, Chui’s counsel was forced to resign. Subsequent to
Chui’s counsel’s resignation, Chui filed for personal bankruptcy protection.
9.4.3 A trustee was appointed over Chui’s bankruptcy and after the trustee’s initial review, released
findings that no assets were available to satisfy claims.
9.4.4 The Liquidators have filed a claim in Chui’s personal bankruptcy in the amount of $93,875,141
and are asserting that such claims should not be discharged on the basis of the bankruptcy
trustee’s findings that there are no assets available for distribution to Chui’s creditors.
9.4.5 The Liquidators continue to review potential claims against Chui, however, the leading factor will
be whether there are assets to recover. Based on the trustee’s findings, there may not be any
value in pursuing claims against Chui.
9.5 Stipulation Agreement with US Trustee
9.5.1 The Liquidators gained control of the Company’s underlying auto loans by working with the US
Trustee and negotiated a transfer of the servicing of the auto loans from Acceptance to the
Company.
9.5.2 On July 8, 2011 the Bankruptcy Court agreed a stipulation order (the “Stipulation Agreement”)
that, amongst other things, ordered that the loan servicing contract between Acceptance and the
Company be terminated. The termination of Acceptance’s loan servicing contract was a
necessary step in facilitating the Company taking on direct responsibility for this function.
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9.5.3 The Liquidators attended meetings with representatives of the US Trustee, Acceptance, Chui and
Carter in San Francisco on July 14, 2011. At these meetings the Liquidators were informed by
Chui that there were in fact four auto loan portfolios that were being serviced by Acceptance. The
first portfolio belongs to the Company, the second portfolio purportedly belongs to Acceptance,
the third purportedly belongs to a company controlled by Chui and the fourth purportedly belongs
to a company which the Liquidators are told is independent of Chui. The Stipulation Agreement
provided for the transfer of the servicing of the Company and Acceptance48 auto loan portfolios.
The position of the US Trustee was that the transfer of the servicing of the loans from the
remaining two portfolios is not provided for in the Stipulation Agreement and Chui was not
agreeable to the transfer of such loans.
9.5.4 Information and banking arrangements with respect to the different portfolios was not segregated
by Acceptance and this caused certain complications in the transfer of the servicing of the loans
of the first two portfolios which the Liquidators have subsequently addressed with the US Trustee.
9.5.5 Subsequent to receiving the auto loan portfolios of Acceptance and the Company, the Liquidators
were informed that the US Trustee also held cash collections that were potentially due to the
Company. The Liquidators were informed that the US Trustee was unable to determine what
portfolio receipts represented the cash held in Acceptance’s bank account. As a result, the
Liquidators and the US Trustee agreed to a 50/50 split of the monies in the Acceptance account
on the understanding that if the source of the funds was determined at a later date, then the
appropriate party would receive the correct balance(s) due. As a result of the agreement the US
Trustee sent the Company $75,000, less certain auto loan collection setup fees for the Company.
To date, the source of the funds has not been identified and it is the Liquidators’ understanding
that they will likely remain unknown.
9.6 APLDG’s Actions after Termination of the IMA
9.6.1 After terminating the Carter IMA, the Liquidators were made aware of APLDG’s unauthorized
efforts to continue collecting proceeds from auto loan borrowers on behalf of the Company. The
Liquidators were provided with a letter dated November 2, 2011, two days after the Investment
Manager’s effective termination, instructing borrowers that APLDG had taken over servicing of
the auto loans and that future payments should be made to APLDG.
48 In the case of the Acceptance auto loan portfolio the Stipulation Agreement provides that monies collected on account of the Acceptance loans will be remitted to the US Trustee, less a servicing fee, and subject to possible claims which may be asserted by the Company and the US Trustee with respect to these loans.
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9.6.2 The Liquidators received evidence that APLDG had collected approximately $120,000 from the
auto loan portfolio since the United States Court stipulation order dated July 8, 2011. APLDG did
not transfer any of these collections to the Company and the Liquidators intend to net these
recoveries against the creditor claim submitted by APLDG, which currently exceeds the amount
collected.
9.6.3 The Liquidators were forced to take immediate action against APLDG and Carter in order to
protect the Company’s remaining assets. At that time the Liquidators had no standing or
jurisdiction in the United States to have a US Court enforce any action against APLDG. The
Liquidators were therefore left with no alternative but to file for Bankruptcy Court recognition in
order that they could enforce the necessary legal remedies against the Investment Manager and
Carter. A more detailed summary of the Liquidators’ successful application under Chapter 15 of
the United States’ Bankruptcy Code is provided in Section 9.7 below.
9.6.4 Following the Liquidators’ Chapter 15 application and subsequent recognition order by the United
States Bankruptcy Court of the Northern District of California, APLDG and Carter became more
cooperative with the Liquidators and, in accordance with the court order, delivered all the
Company’s books and records to the Liquidators’ representative in San Francisco.
9.6.5 In January 2012 APLDG moved out of the Company’s San Francisco office space and its
involvement in the Company’s liquidation from that date was minimal.
9.7 United States Chapter 15 Recognition
9.7.1 The Liquidators engaged Michelson Law Group (“Michelson”) to represent the interests of the
Company and to prepare their Chapter 15 application. The Liquidators’ Chapter 15 petition was
heard before the United States Bankruptcy Court of the Northern District of California. In addition
to seeking recognition of the Cayman Islands liquidation as foreign main proceedings, the
Liquidators also applied for relief pursuant to Sections 1519, 1521 and 105(a) of the United
States Bankruptcy Code.
9.7.2 Given the time-sensitive circumstances with APLDG holding records and auto loans not being
serviced, the Liquidators elected to file an expedited hearing of the Chapter 15 application in
order to prevent further erosion of value in the auto loan portfolio. APLDG opposed this
expedited hearing, however the Bankruptcy Court rejected this opposition and the Chapter 15
hearing was held on December 22, 2011.
9.7.3 The Bankruptcy Court granted the Liquidators with recognition as a foreign main proceeding
pursuant to Section 1517(b)(1) of the United States’ Bankruptcy Code on December 22, 2011 and
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afforded the Liquidators all reliefs available as a foreign main proceeding under the United States
Bankruptcy Code. The Liquidators were established as the exclusive representatives of the
Company with authority to administer the assets and affairs of the Company in the United States.
9.7.4 The Bankruptcy Court further directed all parties in possession of the Company’s property to
promptly deliver such property to the Liquidators which included all information in the possession
of Carter. The Liquidators subsequently received information held by Carter and APLDG
including the Company’s physical and electronic records.
9.7.5 The Company’s physical records are currently located in a secure storage facility in San
Francisco and the electronic files are also now in the control of the Liquidators. The records
obtained by the Liquidators were provided by Carter. The Liquidators cannot vouch for the
completeness of such records and note that further records may still be under the control of Chui
or others.
9.8 Automotive Loan Data
9.8.1 The Liquidators’ assessment, based on the recovery work performed to date, is that the value of
the auto loan portfolios were grossly overstated and significant write-downs will be required.
9.8.2 The auto loan servicing has required a lengthy reconciliation process due to the history of the
loan portfolio and the multiple servicing platforms used over time. A servicing platform is a
computer program that servicing companies use in order to store all customer data and payment
information. The APAL Fund data was serviced by Acceptance using several platforms prior to
the Liquidation Date. The first platform used at the incorporation of the Company (2004) was a
company by the name of AMS. During the transition of Acceptance to Chui the platform changed
to an entity by the name of ACS. From ACS, data was then transferred to Deal Pack, the system
in place at the Liquidation Date.
9.8.3 The Liquidators have attempted to contact AMS and ACS, however, neither of these entities has
records indicating that they ever performed work on behalf of the Company, the APAL Fund or
Acceptance. Representatives at Deal Pack have confirmed with the Liquidators that their data
retention policy is that two months after terminating a client relationship their servers are wiped of
that client’s data; therefore, it is reasonable that AMS and ACS do not have any records
available. The Liquidators have not been provided with a set of data that corresponds to AMS or
ACS data and therefore, they are unable to reconcile the old data to the current data with issues.
9.8.4 Despite the lack of records the Liquidators understand that AMS was the initial loan servicing
agent for Acceptance. When Acceptance was purchased by Chui a decision was made by Chui
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to terminate with AMS and engage ACS as the servicing platform. Carter informed the
Liquidators that the transition from AMS to ACS was completed incorrectly and the borrower data
did not reconcile in ACS. The resulting data after the transfer had errors including incorrect loan
values and incorrect addresses. The reconciliation of data did not occur at ACS and shortly after
the transfer to ACS the auto loan data was transferred to Deal Pack.
9.8.5 Upon receipt of the information and being made aware of the reconciliation issues Deal Pack
management agreed to assist APAL Fund and Acceptance in reconciling the data and they were
part way through the process when Carter became involved with the Company. There was no
report from Deal Pack with regard to how far the reconciliation process was from complete,
however, after Carter’s involvement the Acceptance staff working on the reconciliation were
released from employment.
9.8.6 Despite the issues with the data, the Company has contracted First Associates to service the
Open Loans and NCO to collect the Deficient Loans.
9.8.7 The Liquidators provided both First Associates and NCO with the Deal Pack data and the
background knowledge that considerable reconciliation would be required. Both First Associates
and NCO performed separate reconciliation exercises prior to initiating collection efforts.
9.8.8 Prior to selecting First Associates the Liquidators spoke with two other national debt collection
agencies. The Liquidators entered non-disclosure agreements with the other collection agencies;
however, after the collection agencies reviewed the APAL Fund portfolio they did not submit a
proposal to service the portfolio. The Liquidators therefore only received a proposal from First
Associates. There were no other parties identified that would collect the Deficient Loans other
than NCO.
9.9 Open Loan Servicing
9.9.1 As noted in the First Report the Liquidators engaged auto loan servicers to collect the Open
Loans and the Deficient Loans. The Liquidators engaged First Associates on December 12, 2011
to collect the Open Loans. The Liquidators provided the electronic information that they had in
their possession. Based on this information First Associates sent introductory notices to
borrowers on December 22, 2011, and made preliminary efforts to collect these balances. First
Associates efforts were, however, restricted due to the incomplete information with which they
had been provided and the lack of original loan copy files which they required to make vehicle
repossessions. The physical Open Loan files that were recovered from APLDG were sent to First
Associates during the week of January 16, 2012 which enabled them to pursue their recovery
efforts more vigorously.
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9.9.2 The Open Loans were extensively reviewed by First Associates and after 12 months of servicing
and investigation First Associates returned all non-performing loans to the Liquidators
9.9.3 First Associates identified many issues with the Open Loan portfolio, which increased the loan
collection times over this period, as well as reduced the face value of the portfolio. These factors
include:
• Incorrect or incomplete contact information, which has required extensive “skip tracing”49
to obtain more accurate account information;
• Evidence that many borrowers had never in fact held a loan with Acceptance or the
Company, and that the account balance shown in the Company’s records may never
have been a valid account;
• Evidence that certain borrowers showing a balance due to the Company never
purchased a vehicle to generate the loan, and claim they only ever took the vehicle in
question for a test drive (First Associates have identified at least 20 borrowers to date
whose loan balances appear to have been subjected to this suspected fraud);
• Loan accounts that have been paid off in full, with adequate supporting evidence
provided by the borrowers, which were still being shown as active Open Loans. To date
First Associates has identified over 35 loans in this category, representing over $200,000
of overstatement in the Open Loan portfolio; and
• Evidence that the recorded opening loan balance was greater than what the borrower
originally signed up to borrow. Furthermore there are many instances of disputes
regarding the payment terms, which are alleged to differ from the original financing
agreements.
• Until reconciled, these borrowers are refusing to make further payments.
9.9.4 The Liquidators were in regular contact with First Associates to review the number of loan
accounts that are serviced under the monthly account fee structure in order to ensure that First
Associates identified those accounts that are generating positive cash flows. After concluding
that loans are non-performing, or cannot be collected for other reasons, these deficient accounts
were returned to the Liquidators.
9.9.5 As of the date of this Second Report, First Associates continue to hold and service 247 loans.
The returned loans were deemed uncollectible and were returned to the Liquidators on the basis
that they were a Deficient Loan and required a separate collection agreement which First
Associates was not interested in pursuing. The loans were deemed uncollectible for lack of ability
49 The process of locating a person's whereabouts by debt collection agencies.
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to find the borrower, the borrower filed bankruptcy or there is no ability to repossess the vehicle.
Bankrupt borrower collection requires a Court process and First Associates required additional
payment for those services. The Company did not have the funding to support the additional
costs and as such, the loans were returned to the Liquidators. The table below represents the
categories for returned loans.
Open Loans at liquidation date 1,236 Total loans paid/settled in full (118) Total loans legally discharged (18) Total loans actively paying (247) Total loans returned to the Company (see below) 854 Returned loans classified as follows: Uncollectible 624 Deficient prior to appointment 98 New vehicle owner identified (deficient) 30 Repo action taken prior to appointment 102 Total loans returned to the Company 854
9.9.6 First Associates reported in January 2013 that they exhausted all efforts to locate many
borrowers and deemed the loans uncollectible. According to First Associates, they performed an
in-depth evaluation of each loan to determine if it was worth pursuing. In addition, First
Associates identified all cars that were valued below $500 and returned those loans as
repossession of the vehicles would result in no net recovery to the Company. The loans,
although secured by a vehicle, would be considered deficient due to the limited value of the
vehicle.
9.9.7 First Associates found evidence of suspected fraudulent activities on several accounts where
accounts were paid off but not recorded or loan balances were incorrect. The Liquidators have
collected all of this information for further support of the Company’s claim against Acceptance.
9.9.8 An example of one particular loan that was flagged as potentially fraudulent was when an
insurance notification from United Services Automobile Association listed a borrower (“Borrower
A”) of Jasper, GA as the lienholder on a vehicle and referenced a vehicle identification number
(“VIN A”).
9.9.9 Upon review, the vehicle is recorded in the APAL Fund records under Borrower A of, Ellijay, GA
as an Open Loan. However, there is also a loan listed in APAL Fund’s deficient records showing
a vehicle with VIN A with a separate borrower listed of Scranton, PA (“Borrower B”).
9.9.10 While it is a possibility that the above vehicle was legitimately repossessed from Borrower B and
sold to Borrower A using Acceptance financing, this does not appear to be in the normal course
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of business for the Company and it is a possibility that the information has been created
fictitiously to inflate the value of the auto loan portfolio.
9.9.11 The Liquidators continue to hold periodic update calls with First Associates to monitor their Open
Loan recovery efforts. First Associates have indicated on these calls that recoveries from the
Company’s auto loan portfolio are unusually weak for the size of portfolio and that this is the
worst performing auto loan portfolio they have come across in the company’s 25 years of loan
collections.
9.9.12 Despite the difficulty faced, the collection from First Associates has continued throughout the
period of their engagement and has resulted in net collections of $241,183. The collections have
fluctuated significantly during the collection period as noted in the following table. As noted
above, First Associates have now returned all loans that are deemed uncollectible and therefore
the monthly expenses are expected to remain consistently lower than the early part of 2012.
Cash Received Expenses Paid Net Cash Setup Fee 0.00 (10,000.00) (10,000.00)January 2012 21,650.57 (40,903.37) (19,252.80)February 2012 52,443.23 (36,091.96) 16,351.27 March 2012 59,835.21 (34,817.17) 25,018.04 April 2012 60,942.74 (36,643.19) 24,299.55 May 2012 46,338.51 (35,023.70) 11,314.81 June 2012 43,565.73 (40,150.18) 3,415.55 July 2012 32,533.92 (27,919.81) 4,614.11 August 2012 98,419.38 (39,300.81) 59,118.57 September 2012 37,257.94 (24,556.46) 12,701.48 October 2012 66,557.67 (22,393.45) 44,164.22 November 2012 40,698.78 (44,550.77) (3,851.99)December 2012 20,905.51 (20,802.46) 103.05 January 2013 33,915.95 (22,402.25) 11,513.70 February 2013 41,121.96 (18,066.72) 23,055.24 March 2013 33,238.04 (13,267.52) 19,970.52 April 201350 23,906.64 (9,111.22) 14,795.42 720,658.72 (479,475.99) 241,182.73
9.9.13 The fluctuating revenue was primarily related to the number of repossessions and resulting sale
of the vehicles. In addition, early in the servicing process there were several individuals seeking
full settlement of their accounts. The resulting gross cash flows were higher. As an example, in
August and October 2012 First Associates repossessed and sold vehicles at auction, 45 and 12
vehicles, respectively, which increased the monthly collection for those particular months
significantly.
50 Net cash received from May, 2013 collections totaled $26,005.23. This amount was deposited into the Company’s bank account in June, 2013.
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9.9.14 Further lump sum payments from borrowers are not expected in 2013 and there are no
repossessions in process for 2013 as all non-performing loans were returned to the Company,
therefore, no vehicles will be sold at auction.
9.9.15 First Associates estimates that cash flow from the 247 loans will continue for another 12-16
months before it will be cost prohibitive to continue.
9.10 Deficient Loan Collection
9.10.1 As noted in the First Report, the Liquidators contracted NCO on a contingent basis to seek
recovery of deficient loan balances with their fee based of 30% of gross collections. Initial
notification letters of NCO’s appointment were sent to Deficient Loan borrowers on or around
December 15, 2011.
9.10.2 Due to the same data inconsistency issues identified by First Associates for the Open Loans, and
a general lack of contact information contained in the electronic information, NCO were forced to
identify and locate many of the underlying borrowers through “skip tracing” and various other
investigation processes.
9.10.3 NCO identified several crucial issues in the portfolio:
• Over 1,000 of the borrowers have filed for bankruptcy;
• Over 300 borrowers are deceased;
• Approximately 1,200 accounts have incomplete and inaccurate information to the point
that NCO was unable to identify or contact the borrower; and
• It appears that some borrowers, dating back as far as 1989, purchased cars from
dealerships that promised them certain financing terms, often with very little, if any,
money down. The borrower would take the car and wait for the financing terms to come
days or weeks later. According to the borrowers, the financing terms were substantially
different from the terms they had agreed, and they would give the car back on the
understanding that they never actually purchased the vehicle. It appears that the
dealerships considered the vehicle sold and received the financing, though they held the
car to sell again. The loan was instantly a deficiency balance and when Acceptance
purchased or financed these loans they likely had no monetary value and were likely
valueless and uncollectible from the start.
9.10.4 Total cash realizations on the Deficient Loans were extremely poor. NCO recovered, net of fees,
$5,743 and have made payment of this amount to the Company.
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9.10.5 NCO informed the Liquidators that they had never encountered such a poor quality loan portfolio
and that on a $60 million portfolio51 they would typically expect to see cash flow generation within
30 days, even at a discounted level. According to NCO’s collection agents, many borrowers are
vigorously disputing their loan balances and even when offered substantial discounts on the
purported loan balance, there is no willingness to make payment.
9.10.6 NCO was unable to gain any further traction with borrowers and on May 31, 2012 returned the
Deficient Loan portfolio to the Liquidators.
9.10.7 The Liquidators held the Deficient Loans and did not pursue collection until further investigation
could be completed on former affiliated parties of the Company. That investigation is now
complete and the Liquidators accepted an offer from an individual with connections to the
Company52 to review the Deficient Loans. The Liquidators have received no response on their
proposal as at the date of this Second Report with regard to a possible second effort of
collections. The Liquidators note that, to the extent an agreement can be reached to revisit the
Deficient Loans, any collection efforts completed on the Deficient Loans will be on a purely
contingent basis and will be at no cost to the Company.
9.11 Life Settlement Policies
9.11.1 The Liquidators have reviewed a limited amount of information regarding the Company’s life
settlement policies. Based on verbal reports from APLDG, 85 policies were acquired by the
Company with the vast majority sold, or left to lapse, prior to the Liquidators’ appointment. The
records received to date have not allowed the Liquidators to verify this number of policies.
9.11.2 The Liquidators have found evidence of one policy with a face value of $100,000 that remains
active, and a second policy with an amount due from the purchasing party. There is no
opportunity in the market to sell the single policy due to its small size.
9.11.3 The purchasing party on the second policy that currently owes $393,000, Credit Nation, appears
to be one of the parties that originally sold most, if not all, of the life settlement policies to the
Company. Clear Skies also appears to have sold and then bought the life settlement polices
back from the Company, often at a substantially discounted price from the original purchase
price. Both of these entities are commonly controlled by Torchia. It is uncertain if there are
further recoveries beyond the $393,000 identified, and it seems unlikely that this amount can be
recovered without taking legal action in the United States.
51 The deficient loan portfolio provided to NCO had a face value of $60 million. The original purchase price of the deficient loan portfolio is unknown, however, the Liquidators are aware that the portfolio includes the deficient loan payments as discussed in Section 9.2.6. 52 Thomas Quinlin.
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9.11.4 As previously noted in this Second Report, Torchia worked for APLDG and/or APIM as a senior
portfolio manager until he resigned on or about June 29, 200753. According to an offering
memorandum for one of the Company’s sub funds, Torchia had “specific responsibilities in the
portfolio management of the life settlement and auto loan divisions”54.
9.11.5 Based on the review to date there will be no recoveries from life settlements without legal activity.
9.12 Sun Trust Garnishment
9.12.1 Early in the liquidation the Liquidators were notified of a garnishment summons against APAL
Fund55 and an account at Sun Trust bank. The garnishment summons was dated June 30, 2011
and is in the amount of $135,073. It is understood that the proceedings relate to a lease taken
out by Acceptance for a car lot in Georgia. The car lot was required by Acceptance to store
vehicles repossessed for non-payment on auto loans. It is further understood that the lease
required a guarantor which was provided by Mok acting on behalf of APLDG.
9.12.2 The copy of the commercial lease guarantee reviewed by the Liquidators is between Blue Fin
Properties, Georgia (“Blue Fin”) and Acceptance, guaranteed by APLDG (Mok), dated July 17,
2008. The Liquidators have reviewed a corporate resolution signed by Chiu as Director of APAL
Fund on July 24, 2008 in which it was resolved to guarantee the lease between the Blue Fin and
Acceptance. It is further noted that Mok was authorized to execute the lease as guarantor on
behalf of APLDG, and not APAL Fund as the commercial lease guarantee indicates.
9.12.3 The Liquidators have reviewed the affidavit for garnishment between Blue Fin and APAL Fund
and noted that the service address was the former address of Acceptance, not the Company.
9.12.4 Initial investigations into this matter were undertaken by legal counsel engaged by Carter and the
Liquidators were of the view that the garnishment should be challenged on following grounds:
(i) Service – the Company was not properly served as the documents were sent to the mailing
address of Acceptance and not APAL Fund. These documents are noted by the United
States Postal Service as returned to sender as addressee was unknown.
(ii) Invalid guarantee – The Liquidators understand that investigations by the investment
manager revealed that the witnesses were not present when the guarantor (Ms. Mok) signed
the document, an act which questions the validity of the guarantee under Georgia law.
53 See Torchia’s Resignation Letter at Appendix 5.
54 See APAL Fund (Dist.) Offering Memorandum at pg. 10 (Appendix 6).
55 The Summons was against American Pegasus Auto Loan Fund SPC. This is not a legal entity and formed part of the defense against the garnishment.
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9.12.5 Prior to challenging the garnishment Sun Trust Bank in Canton, Georgia was served with the
garnishment and that funds representing loan payments to APAL Fund in the amount of $7,402
were garnished and paid to Blue Fin.
9.12.6 After the initial garnished amounts the Liquidators informed Sun Trust of the challenge to the
garnishment and requested all further funds be paid into a US Court trust account. Sun Trust
confirmed and the Liquidators were provided evidence that all further funds were deposited into a
US Court.
9.12.7 Kitchens New Cleghorn LLC (“Kitchens”) was the legal counsel engaged by APLDG on the
matter to pursue and recover the garnished funds. However, Carter ceased updating Kitchens
with information and provided no instruction with regard to the garnishment. The Liquidators did
not formally engage Kitchens and as a result, on November 6, 2011 Kitchens formally resigned
from representing APLDG in the matter.
9.12.8 The Liquidators, familiar with other counsel in the area that had represented the Company in the
past, engaged Locke Lord LLP (“Locke Lord”) to complete the garnishment appeal. After filing
several motions and appeals, Locke Lord successfully removed the garnishment and recovered
all garnished funds (in the amount of $15,550). The total legal costs incurred to remove the
garnishment were $11,880; therefore, the process only generated a recovery of $3,670 to the
Company’s estate.
9.12.9 Locke Lord had liquidation claims exceeding the $15,550 and in recognition of their efforts, the
Liquidators agreed that all recoveries from the garnishment would be used to pay down a portion
of the outstanding claim due to Locke Lord.
9.13 Lifestyle Design Group
9.13.1 Quinlin, the principal of LDG, has a purported long history with the Company. Early in the
liquidation Quinlin contacted the Liquidators offering his assistance. The Liquidators discussed
his involvement with the Company and his former connection with the Investment Manager. The
Liquidators understand that Quinlin was a former associate of Chui and was intended to be part
of the new management company representing the LDG portion of APLDG.
9.13.2 Based on discussions with Quinlin the following connections have been identified:
(i) Managing member of Qvest III Master Fund, LP (“Qvest LP”), a partnership which owes the
APAL Fund $300,000 plus interest;
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(ii) Investment manager to 31 individuals who have claimed potential secured creditor status with
regard to loans made by Quinlin on their behalf to assist with the operating costs of APAL
Fund in 2008 and 2009;
(iii) A debt collector by profession, Quinlin has offered his assistance on a few occasions to
collect the deficient loan balances56; and
(iv) A member of the Liquidation Committee as voted in by the general creditor group.
9.13.3 There has been significant correspondence received from Quinlin throughout the liquidation. The
initial discussions were a result of Quinlin representing potentially secured creditors, who, in
personal capacities loaned money to the APAL Fund for operating costs. Based on the initial
review of the claims, the security may not be valid and the creditors may rank equal with other
unsecured creditors, however legal advice will be required before a final determination can be
made on these claims.
9.13.4 Another particular point of discussion was the auto loan collections. Due to Quinlin’s debt
collection experience he proposed to take on the collection of the auto loans on behalf of the
Liquidators. In Section 5.5 of the First Report the Liquidators discussed an alternative for the
deficient loan collections if NCO would not continue.
9.13.5 Although Quinlin’s proposal appeared well thought out and detailed, the startup costs and
monthly operating costs of his proposal were prohibitive to the Liquidators moving forward. In
addition, the proposal required the involvement of several individuals who had prior involvement
with the Company, one of which was subject to the SEC cease and desist order. As a result, as
noted in the First Report the Liquidators engaged NCO to recover the Deficient Loans and First
Associates to collect the Open Loans.
9.13.6 Subsequent to NCO resigning, Quinlin requested access to the data to reconcile the information
and begin collections. The Liquidators made it clear that if Quinlin was authorized to pursue the
delinquent loan balances, such collection efforts would be on a contingent fee approach and
there would be no payment for collections unless realizations were received.
9.13.7 Pursuant to correspondence with LDG on March 7, 2013 the Liquidators provided data from Deal
Pack in relation to the Company’s non-performing auto loan accounts. The Liquidators informed
LDG that there were known deficiencies and errors in the data which appeared to stem from,
amongst other things, pre-liquidation transfers of the data between different loan collection
service providers.
56 The Liquidators provided Quinlin with all deficient auto loan borrower information. To date, Quinlin has not provided a response to the Liquidators with regard to his desire and ability to collect the outstanding amounts on the loans.
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9.13.8 The Liquidators provided LDG with access to the 854 Open Loans returned to the Company by
First Associates as well as the 6597 Deficient Loans returned by NCO.
9.13.9 The Liquidators provided the data on a confidential basis and on the condition that upon
completion of LDG’s analysis results will be reported to the Liquidators. Prior to any further action
including loan recoveries, debtor contact, or forwarding information to start the collection process
the Liquidators will discuss the process with LDG and provide authorization. Quinlin has not
provided a plan or proposal for collection of the Company’s debt at the date of this Second
Report.
9.14 Qvest LP
9.14.1 As noted above, Quinlin also controlled an entity by the name of Qvest LP. Qvest LP borrowed
$300,000 from APAL Fund pursuant to two loan agreements dated in March 2009. The loan
agreements were for $200,000 and $100,000 each and interest accrued at 12% and 6%
respectively. Both loans were due in 365 days after which default interest began accruing at 18%
per annum.
9.14.2 The Liquidators identified the loans were outstanding shortly after the Liquidation Date and sent a
notice of default to Qvest LP and Quinlin on August 4, 2011.
9.14.3 The initial response from Qvest LP discussed a loan agreement between Quinlin and Chui
whereby both individuals were in the process of setting up a joint venture through their respective
management firms. Quinlin noted that to capitalize the joint venture both individuals were
expected to contribute $300,000.
9.14.4 The Liquidators have not been able to confirm, however, it is understood that Quinlin deposited
his $300,000 but Chui was not able to contribute his portion. Quinlin agreed to fund the full
$600,000 (both his and Chui’s portion) and Chui would repay the funds to Quinlin.
9.14.5 Based on review it appears that instead of repaying funds from his personal account, Chui paid
the money to Quinlin from the Company, recording such transaction by way of the loan
agreements to Qvest LP. According to Quinlin, the loan agreements were intended to be repaid
by Chui or APLDG, therefore, Qvest LP refutes its obligation to repay the funds. There is no
record of such an agreement and based on the documentation, Qvest LP is the only loan
recipient on the agreements.
9.14.6 After confirming receipt of the Liquidators default notice and providing a response within 10 days,
Quinlin subsequently wound up Qvest LP without providing notice to the Liquidators. The
Cayman Islands gazette notice of Qvest LP’s dissolution, dated January 3, 2012, was identified
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by the Liquidators and a search of the Registrar of Companies noted that Qvest LP was dissolved
effective January 4, 2012, nearly 4 months after the default notice was sent.
9.14.7 Quinlin asserts that Qvest LP should not be responsible for re-paying the loan and in any event it
allegedly lacks the funds to do so. The Liquidators questioned Quinlin on this sequence of events
noting the requirement for the general partner of an entity to settle all debts prior to winding up an
LP. In addition, Quinlin was informed that the Liquidators were forwarding the collection from
Qvest LP to their legal counsel. The Liquidators note that the legal counsel engaged to collect
these funds are engaged on a purely contingent fee basis, therefore, if there are no collections,
the Company does not incur any further cost.
9.14.8 The Liquidators have calculated the interest and principal due as at the date of this Second
Report as $468,575.
9.14.9 At the time of writing this Second Report legal counsel have not submitted their recommendation
for the course of action in pursuit of the receivable.
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10 OTHER LIQUIDATION ACTIVITY
10.1 Rule 2004 Discovery
10.1.1 The Liquidators have engaged contingent fee counsel, RCT, to investigate claims against former
counterparties as well as former individuals and related parties that benefited from the Company
and the SP’s.
10.1.2 RCT has sent notices and requests pursuant to a Rule 2004 Examination. Rule 2004 of the
Federal Rules of Bankruptcy Procedure allows any “interested person” (in this case the
Company) to require someone else to testify and produce documents on matters related to the
Company’s bankruptcy. The 2004 Exam can cover a broad range of issues, including:
(i) The Company’s actions, conduct or property;
(ii) The Company’s debts and financial condition;
(iii) any issue that relates to the Company’s bankruptcy assets; and
(iv) any matter that affects the right to a discharge.
10.1.3 RCT sought Rule 2004 depositions for Torchia, Clear Skies, Torchia’s counsel, Celello and
several other parties with prior knowledge of the Company. In response to the requests, parties
have provided documents which have assisted the Liquidators and RCT in their investigations.
10.2 Claim in Acceptance Bankruptcy Proceedings
10.2.1 The Company is the overwhelming majority creditor in the Acceptance bankruptcy having
submitted a claim for $19,592,991, representing 91.5% of the total unsecured claims
($21,405,650). The Liquidators have the ability to amend the Company’s claim in the future if
additional claims are identified.
10.2.2 The Liquidators have spoken with the US Trustee of Acceptance who has noted that they have
filed claims against counterparties in Acceptance’s bankruptcy proceedings.
10.2.3 There have been no results from Acceptance at this time and the Liquidators will continue to
monitor the progress through periodic updates from the US Trustee.
10.3 Governing Documents
10.3.1 The Liquidators have not been able to recover a full set of the Company’s books and records.
Based on discussions, the Administrator did not believe they had a complete set and that the only
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complete set would be with the former investment manager, APIM. The Liquidators attempted to
recover a complete set from APIM and have taken copies of servers that were available. The
Liquidators identified four servers in total, two of which were damaged and required repair prior to
copying data. The Liquidators repaired the servers and identified a large portion of previously
deleted data that they were able to recover. The Liquidators have received over two million
pages of documents in raw format but due to funding constraints have not been able to process
the data to a reviewable format. The Liquidators have reviewed some specific pieces of data and
the information reviewed to date is summarized below.
10.4 Bank Account Termination
10.4.1 As noted previously, the Company’s primary bank accounts were controlled by the Administrator
at Northern Trust and FCIB. The Liquidators have also obtained electronic records of the
Company’s cash activity since mid-2006 from Northern Trust, which has enabled them to perform
a preliminary analysis of the receipts and disbursements relating to the Company. Prior to
Northern Trust the Company used accounts at ABN Amro. The Liquidators identified that most
ABN Amro accounts were open from 2004 to 2007; however, electronic records were not
available. The Liquidators have requested bank statements but to date have not received a
complete set of company accounts for the ABN accounts.
10.4.2 There were additional accounts and lock boxes in the name of the Company at SunTrust bank in
California; however the Liquidators were unable to take control of these accounts due to Sun
Trust not recognizing the Liquidators appointment. The Sun Trust accounts were setup to collect
auto loan repayments. The accounts included a lock box for cheque payments as well as the
capabilities to receive credit and debit card payments over the phone.
10.4.3 After the Chapter 15 Order was received SunTrust indicated to the Liquidators legal counsel that
they will not provide account statements, or access to the accounts, without being subpoenaed
through the United States’ legal system, which is cost prohibitive given the Company’s current
financial situation. SunTrust has verbally indicated to legal counsel that the SunTrust accounts
are empty and consequently the Liquidators intend to take no further action regarding these
accounts. Sun Trust has instruction that they will not release any funds to any parties without the
express written consent of the Liquidators; however, there is no expectation that any further
amounts will be deposited in the Sun Trust collection account.
10.4.4 The Liquidators, subsequent to their appointment and after understanding the former requirement
for the numerous accounts, have since closed all of the bank accounts noted above and opened
a Liquidator controlled bank account at HSBC Bank (Cayman) Limited (“HSBC”).
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10.5 Review of Audited Accounts
10.5.1 The Liquidators have identified 2006, 2007 and 2008 audited financial statements all of which
were accompanied by unqualified audit opinions. The unqualified audit opinions for the 2007 and
2008 years were post-dated and not released until 2009. An explanation for this delay has not
been provided to the Liquidators. The Liquidators have identified the following final sets of audited
financial statements:
(i) APAL Fund (Dist) – December 31, 2008
(ii) APAL Fund – December 31, 2008
(iii) AP Fixed Income II Fund – March 31, 2007
(iv) AP Fixed Income IV Fund – March 31, 2007
(v) AP Fixed Return Fund – March 31, 2007
(vi) AP Long Short Fund – December 31, 2007
(vii) AP Perpetual Income Fund – March 31, 2007
10.5.2 The purchase of Acceptance was identified in the APAL Fund 2008 financial statements while the
transaction occurred in October 2007. The Liquidators have not investigated why the transaction
was not included in the 2007 audited financial statements.
10.5.3 The audited financial statements for 2007 and 2008 were released from 2008 to as late as August
2009; however, the Liquidators have not been provided a reason for the delay. The Liquidators
have reviewed the engagement letters with KPMG and note that “the [Company] agrees to
release and indemnify KPMG and its personnel from any claims, liabilities, costs and expenses
relating to the services under the engagement letter attributable to any fraudulent acts, omission
or willful default by management and any misrepresentation in the representation letter referred to
above and, in general, for providing incorrect or incomplete information”. The engagement letter
goes on to establish “KMPG’s liability for each event causing damage is limited for audit
engagements to three times the fees agreed or invoiced”.
10.5.4 The Liquidators have not been able to identify all financial statements and the corresponding
engagement letters. The following engagement letters have been identified:
(i) APAL Fund (Dist) –2009 engagement letter signed
(ii) APAL Fund – 2009 engagement letter signed
(iii) AP Fixed Income II Fund – no engagement letter
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(iv) AP Fixed Income IV Fund– 2007 engagement letter
(v) AP Fixed Return Fund – 2006 engagement letter
(vi) AP Long Short Fund – 2006 engagement letter
(vii) AP Perpetual – 2006 engagement letter
10.5.5 The 2009 statements appear to have been started for the auto loan funds however it appears that
the audit of the 2009 statements have not been completed or signed off by the Auditor and the
Liquidators will not be instructing this to be done.
10.6 Intercompany Loans
10.6.1 The records the Liquidators received indicated that there were numerous intercompany loans
between the various SP’s. The transfer of funds between the SP’s is inconsistent with the proper
operating of a SPC whereby each SP is intended to operate independently and the assets of
each cell segregated to cover the liabilities. If a cell is unable to pay its debt that particular
portfolio or share class needs to be repurchased by the Company and the activities of that cell
terminated or the share class needs to be re-capitalized.
10.6.2 Pursuant to the individual offering documents of each SP, it notes that “although the [Company] is
a single legal entity, the assets and liabilities of the [Company] held within or on behalf of each
[SP] it may have are segregated from the assets and liabilities of other [SP’s] and from the
general assets and liabilities of the [Company] and are only available to meet the liabilities of the
[Company] attributable to that [SP]. Therefore as a matter of Cayman Islands Law only, there
should be minimal cross liabilities between [SP’s].”
10.6.3 According to Section 220 of the Companies Law (2010 Revision) (“the Law”) SP assets “shall
only be available and used to meet liabilities to creditors of the [SP] company who are creditors in
respect of that [SP]”. In addition, pursuant to Section 219(6)(c) of the Law it is the duty of the
directors to ensure that assets and liabilities are not transferred between SP’s otherwise than at
full value.
10.6.4 Based on the Liquidators investigation it was determined that more than $135 million was
transferred between cells in aggregate. The largest transfer was for investment from APAL Fund
(Dist) to APAL Fund which represented $66 million and was supported by the offering document
of APAL Fund (Dist) whereby the investment objection of APAL Fund (Dist) was to invest all
assets into APAL Fund.
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10.6.5 The remaining $69 million of inter-portfolio transfers is not supported by any contractual obligation
the Liquidators have been provided and based on the Liquidators investigation; the transfer of
cash for a corresponding inter-portfolio receivable was not completed at full value. The
corresponding receivable from the transfer date was impaired as the transfers appear to have
been made to cover operating expenses of the receiving portfolio. Therefore, the assets of the
portfolio were insufficient to cover liabilities, making the receivable less likely to be paid in full.
10.6.6 Based on the review the Liquidators identified the following portfolio net transfers in/(out) at the
respective portfolio:
(i) AP Fixed Series 5 Fund – ($1.06 million)
(ii) AP Fixed Return Fund - $4.05 million
(iii) AP Fixed Series Fund II - $0.56 million
(iv) AP Fixed Series Fund III - $0.20 million
(v) AP Fixed Series Fund IV – ($4.99 million)
(vi) AP Income Fund – ($1.10 million)
(vii) AP Long Short Fund - $0.71 million
(viii) AP Perpetual Fund – ($3.37 million)
(ix) APW Fund - $2.77 million
(x) APAL Fund – ($44.45 million)
(xi) APAL Fund (Dist) - $51.52 million
10.6.7 The above amounts are based on nearly 2,000 separate transactions resulting in a number of
final balances due to and due from the various portfolios57. The Liquidators note that the records
received from the Administrator do not reconcile with the recreated bank transactions when
referencing inter-portfolio transfers. The Liquidators have not investigated the difference further
at this time.
10.6.8 The Liquidators have also not reviewed the individual transactions in detail to determine whether
transfers were supported by contractual obligations or whether transfers were used to cover
liabilities and operating costs. The Liquidators have identified approximately 60 loans totaling
$12 million between the life settlement portfolios. The loans appear to be unsecured and payable
on demand with low interest. The Liquidators have concern with the validity of the loan
documents due to the conflict of interest with the Investment Manager and its employees acting 57 The Company financial statements appear to net inter-portfolio payables and receivables resulting in the APAL Fund due amounts from the life settlement funds. The Liquidators have not confirmed the ability to offset inter-portfolio transfers at this time.
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for both the lender and the borrower in the documents. The negotiation of the agreements is
flawed as the lending fund would benefit from high interest while the borrowing fund would benefit
from low interest. The Investment Manager would not be able to adequately represent either
portfolio or the investors’ best interest.
10.6.9 Until such time that realizations are sufficient to pay down the costs of the liquidation as well as
the unsecured creditor costs, the Liquidators do not propose to spend time on determining the
correct order of inter-portfolio payables. If realizations are sufficient to pay shareholders, the
Liquidators will take a cost/benefit view whether to perform the investigation into inter-portfolio
transactions or simply treat all portfolios as co-mingled and pay pari passu distributions to
shareholders as an entire group.
10.7 Grand Court Applications and Updates
10.7.1 As discussed in the First Report the Liquidators sought the direction of the Grand Court with
regard to the formation of the Committee as well as holding the first meeting of creditors and
contributories.
10.7.2 The Liquidators held a hearing with the Judge assigned to the liquidation on July 9, 2012 to
discuss the Committee and the first meeting of creditors and contributories. During the hearing
the Liquidators filed a revised classification of solvency to “insolvent”, as it was determined that
realizations will be insufficient to satisfy creditors in full. As a result of the revised status, the
Liquidators have no further obligation to report to the Company’s contributories.
10.7.3 The Grand Court provided directions following the Liquidators recommendations of forming the
Committee out of (1) Two creditors from the claimed (but not adjudicated) secured creditors; (2)
Two creditors from the unsecured creditors; and (3) One redeemed investor, noting that the
Liquidators were approved to send a one page letter to all creditors and contributories notifying
them of the appointment as well as providing them website and email contact information. The
Grand Court also approved the Liquidators to hold the first meeting with creditors only.
10.7.4 With regard to the Committee the Grand Court agreed that one committee was sufficient and the
Liquidators would seek to ensure creditors across all segregated portfolios would be represented
on the committee, if possible.
10.7.5 The Liquidators provided the Grand Court with an update on the liquidation by way of an update
letter on September 28, 2012.
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10.7.6 A further update letter, dated January 29, 2013, was send to the Grand Court outlining difficulties
the Liquidators were facing finalizing a remuneration agreement with the Liquidation Committee,
discussed further in Section 11.4 of this Second Report.
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11 LIQUIDATION COMMITTEE 11.1 Grand Court Order
11.1.1 Pursuant to Grand Court Order dated July 9, 2012 the Grand Court approved the Liquidators to
setup one liquidation committee (“Liquidation Committee”) which “shall include, if reasonably
possible, at least one creditor of either of the following segregated portfolios of the Company;
• American Pegasus Auto Loan Fund Segregated Portfolio
• American Pegasus Auto Loan Fund (Dist) Segregated Portfolio
And, if reasonably possible, at least one creditor of any of the following segregated
portfolios of the Company:
• American Pegasus Fixed Income Fund Series II Segregated Portfolio
• American Pegasus Fixed Income Fund Series IV Segregated Portfolio
• American Pegasus Fixed Return Fund Segregated Portfolio
• American Pegasus Life Fund Segregated Portfolio
• American Pegasus Perpetual Income Fund Segregated Portfolio”
11.1.2 The Liquidators convened the Liquidation Committee on October 29, 2012. The Liquidation
Committee is comprised of five members, two of the members have interest in the overall
Company and therefore, represent all above noted portfolios.
11.1.3 Subsequent to convening the Liquidation Committee, the Liquidators provided a non-disclosure
agreement and proposed remuneration agreement to each of the five Committee Members for
execution. These agreements remain outstanding.
11.2 Statutory Obligations
11.2.1 The Committee is established to assist the Liquidators in decision making and courses of action.
In addition, it the Committee is tasked with approving the Liquidators fees, however, the ultimate
approval of the Liquidators’ fees rests with the Grand Court.
11.2.2 The Liquidators have a duty to report to the Committee unless there are insufficient assets to
comply with the request. The Liquidators have met with the Committee and exchanged
correspondence; however, due to the lack of assets in the Company, they have not proposed any
further meetings at this time.
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11.2.3 If creditors would like to speak with their Committee please contact the Liquidators and we will
forward your request and contact details and we will provide details of the elected
representatives.
11.3 Non-Disclosure Agreement
11.3.1 To date, only two of the five Liquidation Committee members have returned copies of the non-
disclosure agreements. The Liquidators have requested on two separate occasions to those
Liquidation Committee members that have not yet returned the non-disclosure agreement to do
so as soon as possible. The Liquidators have also informed the Liquidation Committee that they
are unable to release information to Liquidation Committee members that do not sign the non-
disclosure agreement.
11.3.2 The Liquidators received a response from one of the Liquidation Committee member’s
representative who has yet to return the non-disclosure agreement. The response from the
representative informed the Liquidators that they are unable to sign the non-disclosure agreement
stating that they have a “legal obligation to provide updates to [all] their clients” and that “it is
possible that those updates to clients would need to include confidential information.” The
representative is a law firm representing 31 potentially secured creditors of the Company but only
representing one of the potentially secured creditors as a Liquidation Committee member. The
Liquidators have asked the Liquidation Committee member to appoint a new representative or
step down if they cannot sign the non-disclosure agreement.
11.4 Remuneration Agreement
11.4.1 At this time, the Liquidators’ remuneration terms are not agreed with the Liquidation Committee.
11.4.2 The Liquidators have received one executed remuneration agreement from Liquidation
Committee members to date. The Liquidators have also been in contact with a Liquidation
Committee member who has yet to return a signed remuneration agreement. This Liquidation
Committee member advised the Liquidators that they would review the remuneration agreement
and would execute a copy of the agreement in due course. The Liquidators therefore expect this
Liquidation Committee member to return a signed remuneration agreement.
11.4.3 Two Liquidation Committee members have requested that the Liquidators amend the
remuneration agreement to a contingent fee approach. The Liquidators are not agreeable to a
contingent remuneration approach in this engagement, however, as the process is currently
academic until such time that realizations are sufficient to pay liquidation costs, the Liquidators do
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not propose to enter into the negotiation of remuneration with these Liquidation Committee
members at this time.
11.4.4 The Liquidators note that realizations in the liquidation are insufficient to cover liquidation costs
and the Liquidators have not been paid for the majority of the work they have done to date. The
Liquidators intend to continue to invoice their time at the proposed rates in the hope that one day
realizations will be sufficient to pay liquidation costs and a return to creditors. In the event that
future realizations are sufficient to pay the liquidation costs and the remuneration terms are still
not agreed with the Liquidation Committee, the Liquidators will revert to the Court to seek an
order for remuneration.
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12 CREDITORS AND INVESTORS 12.1 Adjudication Process
12.1.1 Due to the limited funds in the liquidation the Liquidators have not yet formally completed the
adjudication process of claims, and therefore, the amounts noted in this report may be amended
upon a complete review of the claims.
12.1.2 The adjudication process has not been completed due to the fact that until realizations are
sufficient to discharge all liquidation expenses the cost of adjudicating such claims would far
exceed the benefits of doing so given there is no funding currently available to pay such claims.
12.2 Creditor Correspondence
12.2.1 On July 25, 2012 after receiving Grand Court approval verifying the method of communication,
the Liquidators wrote to the entire creditor and shareholder group advising them of their
appointment as well as directing all shareholders and creditors to the electronic communication
methods available.
12.2.2 To communicate more efficiently with the various creditors and shareholders of the Company, the
Liquidators established a dedicated email inbox to receive and send information in relation to the
liquidation. The Liquidators have continually maintained and monitored this email inbox from the
date of establishment and all creditors and shareholders should now have details of this email.
12.2.3 In addition to the dedicated email address the Liquidators opened a website to post updates. The
website is updated infrequently as the Liquidators have been focusing their attention on recovery
efforts.
12.3 Petitioner Claim
12.3.1 A Winding Up Petition was entered in the Grand Court of the Cayman Islands on June 1, 2011 by
the Petitioner.
12.3.2 As outlined in Section 141 of the Cayman Islands Companies Law (2011 Revision), any fees
incurred by the Petitioner as a result of petitioning to wind-up a company will rank preferentially to
other creditor claims.
12.3.3 As at the Liquidation Date, the Petitioner had outstanding fees relating to the petition to winding-
up the company that totaled approximately $56,860.
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12.3.4 The Liquidators have partially paid this outstanding amount. The source of the funds to partially
settle this outstanding amount was received by the Liquidators from the collections of the
outstanding auto loans that are currently being serviced by First Associates.
12.4 Advertisement in the Cayman Islands Gazette
Notice of the appointment of the Liquidators was advertised in the Cayman Islands Government
Gazette on August 15, 2011. The advertisement invited any creditors and contributories to come
forward and state their claim in the Company.
12.5 Unsecured Creditors
12.5.1 The Liquidators sent a letter notifying the creditors and contributories on August 5, 2011 that the
Company was placed into Official Liquidation. The letter explains that the Liquidation process
involves the realizations of the Company’s assets, quantification of liabilities and distribution of
the proceeds of the assets to creditors and contributories. In the letter, the Liquidators also
request that knowledge of any information regarding specific concerns relating to the Company
and its operations prior to the Liquidation be forwarded to the Liquidators for their review.
12.5.2 The Liquidators have received numerous claims from various unsecured creditors stating their
claim in the Company as part of the Liquidation process which total approximately $7,503,584.
The amount noted is primarily represented by the two largest unsecured creditors for claims of
$4,082,975 and $2,063,553 respectively.
12.5.3 The Liquidators note that the unsecured creditor claiming approximately $4.082 million has
submitted a claim as a secured creditor, on the basis that its loans to the APAL Fund were
secured by the assets of the Company. As noted above, the claims have not been adjudicated
by the Liquidators and therefore, the validity of the secured claim is unknown at this time.
12.5.4 Due to the Company being insolvent and there being insufficient funds, it is unlikely that any of
the unsecured creditors will be paid in full.
12.6 Redeemed Unpaid Investors
12.6.1 Proofs of debt received in the liquidation suggest that the objective to “provide investors with
periodic income in the form of quarterly dividends” as noted in Section 3.2.5 was documented as
guaranteed income in the form of dividend schedules provided to investors at the date of
subscription. The Liquidators have received numerous proofs of debt with similar guaranteed
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returns between 8% and 12% per annum. The Liquidators note that based on the speculative
nature of investments of each portfolio, there was no ability to guarantee any return.
12.6.2 Redemption requests made on or after September 30, 2008 were suspended by the Company’s
Investment Manager until such time that sufficient liquidity returned to the secondary markets in
auto loans sector. As at September 30, 2008 there were several investors who redeemed out of
the Company prior to the Investment Manager suspending all redemptions and remain unpaid. To
date these investors have not been fully and properly redeemed. The Liquidators have not
investigated this matter further and have not performed any verification into the total number of
outstanding redeemed but unpaid investors. This due to the fact that the Company is insolvent
and there are insufficient funds to cover such redemptions or investigation at this time. It is
unknown whether any of the redeemed unpaid investors will be paid in full.
12.7 Shareholders
12.7.1 The Liquidators wrote to the Shareholders of the Company on August 5, 2011 and July 25, 2012
informing them that the Company was placed into Official Liquidation.
12.7.2 The Liquidators 2011 letter outlined the procedures that will be performed by the Liquidators, as
well as current information known to the Liquidators at the time of appointment related to the SEC
investigation relating to the Investment Manager.
12.7.3 The 2012 letter directed the shareholders to the website and the email address for any further
questions. It also noted that no further correspondence would be sent via regular mail.
12.7.4 Based on the findings detailed throughout this Second Report it is unlikely that the shareholders
will receive a payment in the Liquidation, and unless requested, no further updates will be
provided.
12.8 Liquidation Website
12.8.1 The Liquidators have setup a website, www.americanpegasusliquidation.com and will be directing
all creditors and investors to that website for future updates.
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13 RECEIPTS AND DISBURSEMENTS
13.1 Cash at Bank at Date of Appointment
13.1.1 As at the Liquidation Date, the Liquidators arranged to transfer the amounts held at Northern
Trust and ABN AMRO (Curacao) to a new bank account in the Cayman Islands at HSBC. As at
the Liquidation Date, the Company held a cash balance of $23,752.
13.2 Receipts and Disbursements and Current Cash Position
13.2.1 A summary of the combined cash receipts and disbursements during the liquidation from the
Liquidation Date to May 31, 2013 is provided in the table below:
USD
CASH AT BANK (Liquidation Date) $23,752.21 RECEIPTS
Open Loan Auto Receipts 720,658.72
Synergy – Realizations 70,906.36Proceeds From Auction of Vehicles 28,351.41Loan Revenue 17,750.85
Recovery from Sun Trust Garnishment 15,550.27
Deficient Loan Balance Collection 5,743.65
Other 1,196.02
883,909.49
PAYMENTS
First Associates Loan Servicing 479,475.99 Legal Fees 147,339.07 Liquidators Remuneration 40,000.00 Liquidators Disbursements 34,275.00Advisory Fees 21,014.38 Petitioner Costs 20,000.00Legal Fees – not approved 13,564.60Record Storage 12,525.47 Bank Charges 10,510.40Investment Manager - Fees 8,528.91 Deal Pack Fees 3,630.00
790,863.82
CASH AT BANK (May 31, 2013) $93,045.67
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13.2.2 As noted in Section 9.9 the Liquidators engaged First Associates to provide certain services in
relation to the collection and servicing of outstanding auto loans of the Company. First Associates
has been able to collect $720,659 in outstanding auto loans payments and has charged fees in
relation to collecting these outstanding amounts which total $479,476. The funds received by the
Liquidators after all related expenses were paid for servicing the auto loans is $241,183 which
was deposited into the Company bank account held at HSBC.
13.2.3 Legal fees noted in the above table include services rendered by Michelson. The Liquidators of
the Company engaged Michelson to represent them in the US Bankruptcy Grand Court in regards
to filing a Motion for Recognition of Foreign Proceedings under Chapter 15 of the US Bankruptcy
Code.
13.2.4 Travel fees reflected in the table above relate to meetings held in San Francisco, California. The
purpose of these meeting was for the Liquidators to discuss the operations of the Company with
the former investment managers Chui and Carter and to gain a better understanding of the
events which transpired and eventually led to the SEC investigation and liquidation of the
Company.
13.2.5 The Liquidators obtained a large number of the Company’s physical documents as a result of
their travel to San Francisco, California. Due to the limited amount of funds available for the
liquidation the Liquidators determined that the most cost effective way to store the physical
documents was to utilize storage facilities in San Francisco.
13.2.6 As reflected in the table above after beginning with an opening cash balance in the liquidation of
$23,752, the Liquidators have collected receipts of $860,157 while paying out $790,870 in
disbursements which nets a cash balance of $93,046 at May 31, 2013.
13.3 Outstanding Costs of the Liquidation
13.3.1 The table above represents the receipts and payments in the liquidation on cash basis; however,
it does not accurately represent the total costs to May 31, 2013 that have been incurred, which
are detailed below. Outstanding costs of the liquidation include Liquidator remuneration as well as
service provider costs.
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Total Costs
to Date Payments to
Date Total
Outstanding %
Outstanding
Official Liquidator fees 1,178,211 40,00058 1,138,211 96.61%Official Liquidator disbursements 41,454 34,27559 7,179 17.32%Legal Fees – Not approved 295,366 13,56460 281,802 95.41%Legal fees 321,063 244,29861 76,765 23.91%Advisory fees 29,104 21,01462 8,161 28.04%Operating expense fees 525 - 525 100.00%
Total Costs of the Liquidation 1,865,723 353,151 1,512,643 81.08%
The legal fees noted above as “Not Approved” were submitted by APLDG as costs incurred after
the Liquidation Date by Carter, however, the Liquidators did not engage the respective legal
counsel. The Liquidators do not consider these invoices as costs of the liquidation, however, until
such time that the Liquidators formally deny the claims, they continue to be accounted for as a
potential liability.
13.4 Statutory Priorities of Return to Investors
13.4.1 Any funds in the Liquidation available for distribution, from the excess of cash after all outstanding
costs of the Liquidation have been paid will be distributed to creditors and investors in the
following order of priority pursuant to Cayman Islands law:
• To the potentially secured creditors of the Company if their claim proves valid, the total
balance of which is $4,082,975;
• To the unsecured creditors of the Company, the balance of which totals $3,420,609 based on
Proofs of Debt and outstanding invoices received during the liquidation process; and
• To the redeemed but unpaid investors of the Company, the total balance of which is currently
estimated at $1,196,653, however, the Liquidators continue to receive proofs of debt that
have not been reviewed for value.
13.4.2 As noted earlier in this Second Report it is highly unlikely that there will be sufficient funds to pay
the creditor groups noted above, therefore, the shareholder values have not been reviewed at this
time 58 Liquidators’ Remuneration – see receipts and disbursements at Section 13.2.1. 59 Liquidators’ Disbursements – see receipts and disbursements at Section 13.2.1. 60 Legal Fees (not approved) – see receipts and disbursements at Section 13.2.1. 61 Legal Fees - payments for Liquidators’ approved legal fees totaled $244,298. Of this amount $96,959 was collected from contingent fee lawyers upon settlement of actions and was offset against recoveries (hence not showing as cash receipts in the receipts and disbursements table). The remaining $147,339 (see receipts and disbursements at 13.2.1) was paid by the Liquidators to settle the outstanding legal fees. 62 Advisory Fees – see receipts and disbursements at Section 13.2.1
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14 LIQUIDATORS' REMUNERATION
14.1 Overview
14.1.1 The charge out rates as set out below are the prescribed rates of remuneration for Official
Liquidators as set out in the Insolvency Practitioners (Amendment) Regulations, 2010 of the
Cayman Islands.
Grade of staff Minimum (US$) Maximum (US$)
Partner /Official Liquidator $500 $900 Director $425 $680 Senior Manager $350 $575 Manager $275 $475 Assistant Manager $200 $350 Senior Accountant $50 $200
14.1.2 As noted in Section 11.4 these charge out rates still need to be formally approved by the
Lliquidation Committee.
14.2 Remuneration Agreement
14.2.1 The Liquidators sent remuneration agreements to the Funds’ respective liquidation committee
members prior to this Second Report dated December 28, 2012 (“Remuneration Agreements”)
which detailed fees for the engagement. An example copy of one of the Remuneration
Agreements is attached at Appendix 22. As noted in the Remuneration Agreements, the
Liquidators fees will be charged on a time and materials basis based on hourly rates as detailed
in Section 14.3 below. These rates are discounted from the standard hourly rates that the
Liquidators would normally charge on engagements of this nature and fall within the mid-range of
the approved range of rates set out in the Cayman Islands Insolvency Practitioner’s Regulations
2010.
14.2.2 As noted in the Remuneration Agreements, the Liquidators are required to obtain approval from
the Committee on the basis of their remuneration. This approval has only been received from
one of the Committee members.
14.2.3 In accordance with the Cayman Islands Companies Winding-Up Rules, the Liquidators’ policy is
to draw down and pay 80% of their invoice amount when the invoice is rendered, and to seek
approval from the Grand Court and the Committee prior to drawing the final 20%. As noted
above, however, there have been insufficient assets to draw down and pay the Liquidators’ fees
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incurred to date, and less than 4% of such fees have been paid. The Liquidators intend to submit
a copy of this Second Report in support of a separate fee application to the Grand Court. The
Liquidators note that this application is largely academic given the significant shortfall of assets
available in the estate to pay outstanding liquidation costs.
14.2.4 If the Committee does not approve the fees the Liquidators are required to provide full support of
their fees to the Grand Court, the costs of which are to be paid as an expense of the liquidation.
Therefore, the Liquidators recommended that the Committee raise any issues they may have
regarding the fees of the Liquidators prior to the Grand Court application so that additional costs
of the liquidation are avoided. As detailed in Section 13.3 above, the total amount of fees to May
31, 2013 is $1,060,409. The Funds’ realizations to date have not allowed for payment of the initial
80% of the Liquidators’ fees and consequently less than 4% of these fees have been paid at the
Second Report date.
14.2.5 The majority of time incurred by the Liquidators in the liquidation has been incurred to secure
records and address issues raised by former management of the Company. If the Liquidators
had been provided with a full detail of accounts from the Date of Appointment, the time incurred
to date would be significantly reduced. The Liquidators will take this into account when
adjudicating claims of the former investment manager.
14.3 Remuneration Rates
14.3.1 The tables below provide a summary of the agreed hourly rates and percentage of realizations to
be paid to the Liquidators:
Grade of staff Hourly Rate
(USD) Partner or Liquidators $700
Director $565
Senior Manager $500
Manager $400
Assistant Manager $350
Senior Accountant $295
Administrator $140
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15 NEXT STEPS 15.1 Liquidators’ Future Actions
15.1.1 Based on the investigations to date, with the exception of the minimal auto loan collection
receipts on a monthly basis, there does not appear to be any likelihood of substantial recoveries
without the involvement of legal counsel and possible litigation. The review of records and
investigation by the Liquidators’ is now complete and contingent fee legal counsel has been
engaged to pursue recovery from a legal aspect.
15.1.2 The Liquidators are in the process of seeking sanction from the Cayman Court to commence
proceedings against certain parties.
15.1.3 Further updates will be provided by the Liquidators in due course.
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APPENDIX 25 - COMPANY’S LEGAL COUNSEL (APPOINTED AFTER LIQUIDATION DATE)
15.2 Solomon Harris (Cayman Counsel)
15.2.1 The Liquidators have not formally retained Cayman Islands’ counsel to advise generally in
relation to the liquidation of the Company in order to reduce costs to the estate.
15.2.2 Solomon Harris was engaged by ABN AMRO Global Custody Services N.V.(the Petitioner) to file
the winding up petition to appoint the Liquidators. Based on their prior knowledge of the
Company and the issues that supported a winding up petition, the Liquidators have engaged
Solomon Harris on a limited and ad hoc basis to assist with certain filings and applications to the
Grand Court, however Solomon Harris has not been consulted in relation to the liquidation of the
Company generally. .
15.2.3 The Liquidators understand that in any matters that relate to the adjudication of claims, or the
distribution of the assets of the Company, Solomon Harris will not be able to advise the
Liquidators because of their ongoing engagement by the Petitioner.
15.3 Kitchens New Cleghorn LLC (US Counsel)
15.3.1 The law firm of Kitchens New Cleghorn LLC was introduced to the Liquidators by Carter.
Kitchens was known to Carter previously and was approached based on their location in Atlanta
and their ability to attend hearings quickly and with less expense than other counsel engaged by
the Company at that time. It was envisioned prior to their appointment that they would act as the
Company’s Georgia based counsel.
15.3.2 The Liquidators provided instruction to Carter to retain Kitchens. An engagement letter was
prepared and agreed to by Kitchens with Carter acting on behalf of APLDG. The Liquidators were
not involved in the preparation or execution of this engagement letter.
15.3.3 Kitchens were initially engaged to investigate and defend the lien collection matter from a former
auto loan repossession storage lot. See Section 9.12 for further information. Unfortunately, due
to non-payment of invoices by APLDG, Kitchens provided notice of their resignation to the
Liquidators on November 6, 2011. Kitchens referenced non-responsiveness from APLDG and
Carter as well as the lack of payment on outstanding invoices.
15.3.4 The Liquidators attempted to renegotiate terms with Kitchens in order to have them continue the
defense of the garnishment, however, without immediate payment of fees, Kitchens would not
continue.
15.3.5 Kitchens currently have a claim in the liquidation for unpaid legal fees.
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15.4 Locke Lord LLP (US Counsel)
15.4.1 Locke Lord was former US Counsel to the Company who provided advice in relation to the life
settlement policies owned by the Company. Brian Casey (“Casey”) was the lead counsel and
Carter provided the Liquidators with his contact information.
15.4.2 Locke Lord was not acting on behalf of the Company at the Liquidation Date however a proof of
debt was submitted for unpaid legal invoices.
15.4.3 Locke Lord is located in Atlanta, Georgia and as such, the Liquidators contacted Casey to
discuss re-engagement for the specific task of completing the garnishment case that Kitchens
resigned from previously.
15.4.4 Locke Lorde was engaged on November 29, 2011 by the Liquidators. A copy of the engagement
letter is found at Appendix 24.
15.5 A Weiland, Golden, Smiley, Wang Ekvall & Strok, LLP (US Counsel)
15.5.1 The Liquidators were notified by Carter that Weiland, Golden, Smiley, Wang Ekvall & Strok, LLP
were engaged pursuant to an engagement letter dated May 20, 2011.
15.5.2 Carter, on behalf of APLDG, APAL Fund and the Company, engaged Golden to assist with the
recovery of assets and to provide support during the number of US Court applications to prevent
Chui from retaining control of Acceptance as well as the pursuit of certain claims in regard to the
bankruptcy case between the Company and Acceptance.
15.5.3 The Liquidators informed Golden of their appointment on July 9, 2011 after several requests to
Carter to provide a formal introduction went unfulfilled.
15.5.4 Golden continued to work as counsel to the Company until Carter refused to cooperate with the
Liquidators’ representatives, resulting in the JOLs terminating the investment management
agreement with APLDG. The Liquidators felt there was a conflict of interest with Golden acting
on behalf of APLDG and the Company and therefore, engaged Michelson Law Group as the
Company’s legal counsel as noted below.
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15.6 Michelson Law Group (US Counsel)
15.6.1 Michelson was engaged by the Liquidators on October 25, 2011 as the Liquidators general US
counsel. The lead counsel, Randy Michelson, assisted the Liquidators in securing Chapter 15
recognition as well as securing the records of the Company.
15.6.2 Michelson services include providing assistance to the Liquidators as well as assisting in
protecting the assets of the company that are located in the United States.
15.7 Reid Collins Tsai LLP (US Counsel)
15.7.1 The Liquidators engaged Reid Collins & Tsai LLP on September 27, 2012 to investigate possible
claims available to the Company. RCT was appointed by the Liquidators to investigate and
pursue the Company’s claims against former counterparties and recipients of fraudulent transfers
or preferences from the Company. RCT has undertaken tasks in its judgment necessary to
analyze and pursue possible claims.
15.7.2 The Liquidators engaged RCT on a fully contingent basis with no cost to the estate until such time
there are realisations.
15.7.3 The terms of engagement are a three phase approach. Phase one is the pre-litigation
representation of the Company and RCT will receive 25% of any gross recoveries obtained prior
to phase two. In phase one, Reid Collins is tasked to complete the following:
(i) Review the evidence and law related to the possible claims;
(ii) Investigate claims and perform pre-litigation discovery by way of Rule 2004 document and
deposition requests and examinations;
(iii) Prepare detailed draft complaints deemed viable;
(iv) Pursue pre-suit settlement in connection with any claims deemed viable
15.7.4 In the event that pre-suit settlement discussions are unsuccessful and a suit is filed with respect
to any of the claims identified then RCT will move to phase two which includes filing claims as
well as briefing and arguing motions. The remuneration of phase two increases the amount paid
to RCT to 33% of gross recoveries obtained post-suit but pre-discovery.
15.7.5 Phase three of the engagement begins during post-discovery in relation to any claim and RCT
representation of the Company during that process and all subsequent involvement until
judgment and collection. The remuneration for phase 3 is 40% of gross proceeds.
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15.7.6 RCT required a local counsel in Georgia to pursue certain parties and recommended that the
Liquidators engage Alston & Bird LLP to represent the Liquidators in the state of Georgia.
15.8 Alston & Bird LLP (Georgia Counsel)
15.8.1 Due to the location of many counterparties being located in the Georgia area it was necessary
that the Liquidators appoint local counsel in that region. RCT recommended the firm of Alston &
Bird LLP (“Alston”) who had successfully worked with RCT in the past. The Liquidators
engaged Alston on February 25, 2013 as Georgia co-counsel with RCT.
15.8.2 The services include the pursuit of certain claims on behalf of the Company against
counterparties identified by RCT through their investigation.
15.8.3 For their services, Alston agreed with the Liquidators that any services performed will be
compensated based on a shared percentage of recoveries along the terms agreed with RCT,
therefore their appointment comes at no additional cost to the Company.
Member of
Deloitte Touche Tohmatsu
Deloitte & Touche Citrus Grove Building P.O. Box 1787 Grand Cayman KY1-1109 Cayman Islands Tel: + 1 (345) 949 7500 Fax: + 1 (345) 949 8258 [email protected] www.deloitte.com
July 25, 2012 Dear Creditors and Shareholders, Re: American Pegasus SPC – in Official Liquidation (“the Company”) Appointment of Liquidators We write to inform you that the Company was placed into Official Liquidation pursuant to an Order from the Grand Court of the Cayman Islands (the “Court”), dated July 20, 2011 (the “Order”). The Order, a copy of which is available on the website, http://www.americanpegasusliquidation.com, also sets out the appointment of Messrs Stuart Sybersma and Michael Pearson of Deloitte & Touche, Cayman Islands as Joint Official Liquidators of the Company (the “Liquidators”). You are receiving this letter as the Company records indicate you are a creditor or shareholder of the Company or one of its underlying segregated portfolios. Communication with Liquidators The Liquidators have a statutory obligation to report to creditors of the Company and pursuant to an order from the Court, the Liquidators are approved to post all past and future liquidation updates to the following website:
www.americanpegasusliquidation.com The Liquidators refer all creditors and shareholders to this website for all future updates. Please note all communication will be in English only. If you have questions that are not addressed on the website please send an email to the Company’s designated email address, where we will periodically respond to enquiries:
[email protected] Projected Outcome of Liquidation and Timeline For reasons outlined in the Liquidators’ Reports, which are available on the website, the Liquidators currently anticipate that the liquidation will take several years to complete. The future conduct of the liquidation is dependent on funding to pursue litigation against certain parties who have improperly benefited from their dealings with the Company. In the absence of both litigation funding and a successful outcome of that litigation, there is no projected return to stakeholders from the liquidation. Information for Creditors Creditors of the Company will be receiving further instructions by email with regard to meetings in the liquidation as well as nomination forms if they wish to become an elected member of the liquidation committee. The liquidation committee will be established at the first meeting of creditors to be held on August 22 at 11:00am EDT. Please inform the Liquidators at the above email address if you are a creditor and have not received notice of the liquidation meetings. Creditors are also directed to the website for a copy of the proof of debt form for you to submit to the above email address. Original copies by mail are not required. Please submit the proof of debt form
Member of
Deloitte Touche Tohmatsu
along with all supporting documents to support your claim as a creditor, or a redeemed but unpaid shareholder. Information for Shareholders Please note that as per direction of the Court, the Liquidators will not be sending any further correspondence by post and will be reporting to shareholders by email and by website updates only; therefore if not previously completed, please provide the Liquidators with your email address and monitor the website on a quarterly basis for all future liquidation updates. If you are a shareholder that did not redeem from the Company prior to the Liquidation Date you do not need to submit a proof of debt. Should you have any queries, please do not hesitate to contact us at the above email address. Yours faithfully, For and on behalf of the Company
Stuart Sybersma Joint Official Liquidator