united states bankruptcy court southern district of new york - omni agent solutions · 2011. 7....

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re: WEST END FINANCIAL ADVISORS, LLC, et al.,

Chapter 11 Case No. 11-11152 (SMB)

Debtors (Jointly administered)

In re: WEST END CASH LIQUIDITY FUND I, L.P.,


Debtors In re: WEST END DIVIDEND STRATEGY FUND I, L.P.,


Debtors

Expert Report

of Raymond T. Sloane Senior Managing Director

FTI Consulting, Inc.

Submitted on behalf of the Official Committee of Unsecured Creditors July 13, 2011

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TABLE OF CONTENTS

I. Statement of Assignment ...................................................................................................1

II. Executive Summary and Expert Opinion Conclusion ....................................................1

III. Background and Credentials of Expert ...........................................................................3

IV. Background of West End Financial Advisors and Bankruptcy Filing .........................3

V. Procedures Performed and Documents Relied Upon .....................................................4

VI. Substantive Consolidation .................................................................................................7 A. Evidence Weighing in Favor of Substantive Consolidation ................................................8

1. Extensive Commingling of Cash Among the Entities ......................................................8

a) Summaries of Inter-Entity Transfers .............................................................................8 b) Intercompany Balances................................................................................................10 c) Inter-Entity Transfers of Equity (Debt to Equity Conversions) ..................................10 d) Inter-Entity Transfers to Cover Bank Account Overdrafts .........................................11 e) Examples of Commingling ..........................................................................................13

Example 1: Hard Money Fund – Investor #1 Deposit (2009) ................................................14

Example 2: Simco SPV – Investor #2 Deposit (2008) ...........................................................15

Example 3: Hard Money Fund – Investor #3 Deposit (2008) ................................................16

Example 4: Special Opportunity Fund – Investor #4 Deposit (2008) ....................................17

Example 5: Special Opportunity Fund – Investor #5A and Investor #5B Deposits (2005)......................................................................................................................................18

Example 6: Absolute Return Fund – Investor #6 Deposit (2007) ..........................................19

Example 7: Special Opportunity Fund – Investor #7A Deposit (2006) .................................20

Example 8: Benedek Development Group – Proceeds from Real Estate Sale (2007) ...........21

Example 9: Mortgage Opportunity Fund – DZ Bank Loan (2007) ........................................22

Example 10: Investment Partners – Bear Stearns Deposit (2004)..........................................23

Example 11: Amagansett Realty Group LLC – Proceeds from Real Estate Sale (2005)......................................................................................................................................24

2. Alleged Fraud and Misappropriation of Cash .................................................................25

a) Misappropriation of Moneys Held in the Interest Reserve Account ...........................25 b) Fabricated Loans..........................................................................................................26 c) Disbursements to Landberg and Crandall ...................................................................27 d) Third Party Investments ...............................................................................................32 (i) Origin of Funds related to Geneva Financial Corporation ..........................................32

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(ii) Loans to Fusion Telecommunications Int’l., Inc. (“Fusion”) ......................................32 (iii) Purchases of Real Estate ..............................................................................................32

3. Books and Records ..........................................................................................................33

a) Separate General Ledgers ............................................................................................33 b) Cash Movements Recorded in General Ledger ...........................................................35 c) Maintenance of Inter-Entity Account Balances ...........................................................35 d) Interest Expense Accrued ............................................................................................35

4. Promissory Notes ............................................................................................................36

5. Other Factors Weighing in Favor of Substantive Consolidation ....................................37

a) Control / Decision-Making Governed Exclusively by Landberg ................................37 b) Other ............................................................................................................................37

B. Evidence Weighing Against Substantive Consolidation ...................................................37

1. Separate Tax Returns Filed .............................................................................................37

2. Separate Financial Statements Prepared (Some Audited) ...............................................37

3. Monthly Customer Statements ........................................................................................38

4. Documents Exist Describing Specific Business Purpose of Each Entity ........................38

5. Documents Give Landberg Broad Discretion in Investment Decisions .........................39

C. The “Cost-Prohibitive” Consideration of Unwinding the Commingling ..........................39

VII. Expert Opinion .................................................................................................................42

VIII. LIST OF EXHIBITS .......................................................................................................43

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I. Statement of Assignment

FTI Consulting, Inc. (“FTI”) was informed of its selection as the Financial Advisor to the Official Committee of Unsecured Creditors (the “Committee”) in connection with the Chapter 11 filings of West End Financial Advisors LLC and Affiliates (the “Debtors”) (Case Nos. 11-11152 (SMB) through 11-11167 (SMB) (Jointly Administered) and, subsequently 11-12774 (SMB) and 11-13247 (SMB))1 on May 18, 2011, and began its orientation meetings with the Committee, its Counsel, Debtor personnel and their Counsel that same day. FTI’s amended retention application was approved on June 20, 2011, nunc pro tunc to May 18, 2011. FTI was instructed that its immediate priority was to assist the Committee and its Counsel in assessing whether to support or oppose the Debtors’ motion2 pursuant to 11 U.S.C. Section 105 (a) Directing the Substantive Consolidation of the Debtors’ Related Chapter 11 Estates. We were assured that we would receive, and, in fact, have received, the cooperation and assistance of Debtor personnel in providing documents and information necessary to make such assessment, to the extent available. A complete listing of the documents I considered in reaching my conclusion are listed in Exhibit 1 to this report.

II. Executive Summary and Expert Opinion Conclusion

Although at the present time, only 18 entities have filed petitions in Bankruptcy, it should be noted that the West End group of affiliated entities includes more than thirty five (35) Funds (the “Funds”), other investment vehicles, and Special Purpose Vehicles (“SPVs”) (collectively, the “Entities” or individually, an “Entity”)3. Even a cursory review of the partial organization chart provided to us of certain of the Entities4 (Exhibit 3) reveals the web-like structure of the Entities.

In just the brief period of FTI’s involvement, we have reviewed approximately 1,400 transactions whereby cash has been transferred among the Entities, in many cases with apparent disregard for legal restrictions on transfer and differing investment objectives of the Funds.

As we will demonstrate with detailed examples later in this report, moneys were transferred among Entities on a regular basis to cover the cash needs of the receiving Entities as the result of:

1 See Exhibit 2 for a listing of the Debtor Entities. 2 A Supplemental Application was filed by the Debtors on July 6, 2011 to clarify that the relief sought in the original motion is intended to be partial substantive consolidation of the estates at the level below any secured indebtedness against the estates. 3 For the reasons explained in paragraph 25 of the Declaration of Raymond J. Heslin in Support of the Debtors’ Substantive Consolidation Motion, dated May 4, 2011 (the “Heslin Declaration”), it was not necessary or appropriate for the remaining Entities to file petitions in Bankruptcy (other than the two Funds which have since filed). Although not subject to the instant application, the Non-Debtor Entities engaged in numerous transactions with the Debtors. Certain of such transactions were considered by FTI in our analysis, and, while certain of the Non-Debtor Entities may have been party to the cash commingling, there is no economic benefit to substantively consolidating the Non-Debtor entities. Based on the review of the Non-Debtor Entities’ capital structures performed by FTI’s Creditors’ Rights Practice, no creditors or investors would be adversely impacted by not consolidating these Non-Debtor Entities. 4 This organization chart reflects certain of the Entities and their status and relationships subsequent to the Northlight deal in 2009. Our analysis addresses only Entities existing prior to the Northlight deal, not all of which are included on the organization chart.

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• Overdrafts in bank accounts of other Entities and of family members of William Landberg5 (“Landberg”);

• Recurring distributions and redemptions made to investors in other Funds;

• Investments made by, and in, other Entities;

• Operating expenses of other Entities; and

• Payments to Landberg, Louise Crandall (“Crandall”), wife of Landberg, or their family members.

The foregoing uses of moneys transferred among the Entities bear the hallmarks of a Ponzi scheme, albeit one combined with investing activities. The key defining element of a Ponzi scheme is certainly present here in that new moneys were used to redeem and make distributions to earlier investors in order to create the appearance of profitability and thereby attract new investors in order to perpetuate the scheme.

In conclusion, there is no doubt that there has been extensive commingling of funds among the Entities during the period from at least 2004 to 2009.6

We devote a significant portion of the later sections of this report to an exposition and evaluation of the evidence weighing in favor of, and militating against, substantive consolidation under the circumstances found in this case. As is explained in detail throughout this report, FTI’s investigation to date has uncovered extensive levels of commingling of cash among the Entities, as well as instances of incomplete and inconsistent record keeping by the Entities, casting doubt on the ability to disentangle the financial affairs of the Debtors, and to accurately determine the ultimate origin of payments. Based upon the information reviewed and analyzed to date, it is my professional opinion that, though difficult, it might be possible to disentangle the accounts of the Entities. However, even if possible to disentangle such accounts, it would be cost-prohibitive to effectively reconstruct the Debtors’ business records to give effect to their operations as if each Debtor had been segregated and independently operated throughout this period, particularly considering the limited anticipated recoveries to the unsecured creditors and investors.

5 Landberg was the President and Chief Executive of the Funds and had primary responsibility for all the Entities until June 2009. 6 FTI’s review of the activity among the Entities was limited to January 1, 2004 through September 30, 2009. This period was chosen in part because of limited availability of bank and Entity records prior to 2004, as well as governing New York State law, which limits potential recoveries to the previous six years. For the period prior to 2004, only the West End Financial Advisors operating account bank statement was available and no Entity general ledgers were available. It should also be noted that certain of the Entities were not formed or activated until 2004 or later.

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III. Background and Credentials of Expert

I, Raymond T. Sloane, have more than 33 years of financial and consulting experience and, for the past 22 years, have specialized in forensic accounting, damage claims and business valuations. I am experienced in matters involving bankruptcy litigation issues including forensic investigations, solvency determinations, fraudulent conveyances and preferences, as well as white-collar crime, securities fraud litigation, contract disputes, damages, due diligence, allowances and kickbacks, asset securitization, accounting and auditing malpractice, and business interruption claims. In addition to being a Certified Public Accountant (“CPA”) in the State of New York, I am a Certified Fraud Examiner (“CFE”), am Certified in Financial Forensics (“CFF”) by the AICPA, hold three business valuation credentials, and am an attorney admitted to practice in New York.

My Curriculum Vitae, which is attached as Exhibit 4, further describes my professional experience.

FTI was engaged in this matter at hourly billing rates of the individuals assigned. My time is being charged at $660 per hour. Other FTI professionals have worked under my supervision and control to assist me in arriving at my opinion. FTI’s fee is not contingent upon the opinion expressed herein or upon the outcome of these proceedings.

IV. Background of West End Financial Advisors and Bankruptcy Filing

West End Financial Advisors, LLC (“WEFA”) was formed on October 26, 2000 under and pursuant to the Delaware Limited Liability Company Act.7 WEFA was formed and acted as an investment and financial management company.

The L/C Family Limited Partnership is the sole member of WEFA.8

After the formation of WEFA, Landberg purchased the boutique advisory company Sentinel Management Corp. (“Sentinel”).9 Both WEFA and Sentinel received fees from various Entities, with certain Entities paying administration and management fees to WEFA, while Sentinel directly charged some limited partners of various Entities for investment advice.

Subsequent to the initial formation of WEFA, Landberg created or invested in more than thirty five (35) additional Entities. In particular, the West End Mortgage Finance Fund (also known as the “Franchise Fund”) and the West End Mercury Short Term Fund (also referred to as the “Hard Money Fund”) were the primary investment vehicles.10

WEFA was the general partner of both the Franchise Fund and the Hard Money Fund, with Landberg holding primary management and control responsibilities.

In April 2009, after only approximately 10 weeks at the company, Raymond J. Heslin (“Heslin”), WEFA’s then - General Counsel and Chief Compliance Officer, discovered that Landberg had obtained funds in a manner that violated credit agreements with various banks, for his personal benefit, for other potentially improper purposes, and to cover overdrawn Entity bank accounts. Normal operating business activities of the Entities were immediately ceased by Heslin following this discovery.

7 Amendment to West End Financial Advisors Operating Agreement dated October 10, 2002, pg. 1. 8 Id p. 8. 9 Heslin Declaration, Para. 7. 10 Heslin Declaration, Para. 11.

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On May 11, 2009, West LB AG Bank (“West LB”) sent MCC Funding LLC a notice of default under the West LB Credit Facility (in connection with the Hard Money Fund). Additional lenders issued notices of default, including DZ Bank on June 4, 2009, Signature Bank on June 8, 2009 and Century Bank on June 9, 2009.

On June 2, 2009, Heslin was appointed General Partner and Managing Member of WEFA and its related Entities by Crandall. In this position, Heslin has conducted an internal investigation surrounding Landberg’s alleged misappropriation of funds, and has met with the United States Attorney’s Office, the Securities and Exchange Commission, and the Federal Bureau of Investigation to disclose facts of his investigation. I understand that Heslin’s role extended to operational responsibilities of the Entities, including termination of the then-existing office lease, formation of the West End Limited Partner Advisory Committee and pursuit of a lender to repay West LB amounts allegedly misappropriated by Landberg. In addition, Heslin completed account reconciliations for all but two in the investors of the Entities (Landberg and Crandall11 were excluded).

Commencing in January 2010 and continuing until the final closing in February 2010, the Entities negotiated and entered into a nine-party deal12, which ultimately cured the defaults by the Entities. Heslin also negotiated the transfer and ultimate sale of real estate property held by Crandall as well as property held by the Entities.13

On March 15, 2011, sixteen (16) Entities each filed voluntary petitions for relief under Chapter 11 of the United States Code in Bankruptcy Court.

On June 9, 2011, a seventeenth Entity, Cash Liquidity Fund I, LP, also filed. On July 6, 2011, West End Dividend Strategy Fund I, L.P. became the eighteenth Entity filed.

V. Procedures Performed and Documents Relied Upon

In arriving at my conclusion, I and those working under my direction have reviewed the various materials and information listed in Exhibit 1 and performed analyses which are discussed in this report. It is possible that additional documents or information subsequently produced or brought to my attention may affect my opinions expressed herein. I reserve the right to supplement and / or amend this report if additional relevant information becomes available.

A significant portion of our analysis discussed in further detail below was obtained from the banking records of certain Entities at various institutions, in particular Signature Bank. In circumstances of known or suspected misappropriation of cash, it is advisable to place more reliance on third party information sources, such as banking records, than on the company’s books and records which are more susceptible to manipulation to conceal the misappropriation. Extracts of the general ledger accounting software QuickBooks (“QuickBooks”) provided by Debtor personnel were used as a secondary source, and analyzed for identifiable patterns, notations or the recording of the transactions identified on the bank statements.

11 Landberg and Crandall jointly own 100% of L/C Family Partnership Fund. 12 The parties included, in addition to Northlight, the following: West LB, DZ Bank, Merrill Lynch, Somerset, Century Bank, Signature Bank, Perella Weinberg Capital Management LP and Caplease Servicing Corp. 13 Milinia Drive Property in East Hampton, New York.

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Review and Analysis of Banking Records A significant portion of FTI’s analysis is based upon banking records of the Entities to determine the extent and magnitude of inter-Entity activity. The Entities hold 49 accounts at Signature Bank. Additional accounts14 were identified at other banking and brokerage institutions, including JP Morgan Chase, Charles Schwab, and Suffolk County National Bank. A listing of bank statements made available to us as of the date of this report is included within Exhibit 1A.

Historical transactional activity of the Signature Bank accounts of eleven (11) Entities with the greatest volume of activity was analyzed (encompassing more than 6,000 individual transactions).15 These accounts represent significant monetary and transaction volume between 2004 (or post 2004 Entity inception) to 2009. In arriving at my conclusion, I and those working under me performed the following general and analytical procedures:

• Reviewed a selection of Signature Bank Accounts: Physical statements provided by Debtor personnel were reviewed at West End’s offices and specific accounts were selected for further review, based, in part, on transactional and dollar volumes of activity. A complete list of the bank accounts reviewed by FTI is included within Exhibit 1.

• Analyzed Bank Statements: The available bank statements at Debtor’s offices were only available in hard copy format. The Debtors, though responsive and cooperative, are operating with minimal staff, and do not have the resources to download historical transactional activity or convert physical bank statement copies to an electronic format. In order to analyze and collate transactions across accounts, the details of thirteen (13) accounts were manually entered into a database created by FTI for the period from 2004 through 2009. This data entry served as the predicate for our review and tracing of selections.

• Analyzed bank statements and selected transactions for further review: The 13 Signature Bank accounts of the 11 Entities were analyzed to identify unusual transactions or to ascertain the origin of moneys transferred. FTI noted specific patterns within the large transactional population, including:

o Transfers to and from other Entity accounts at Signature Bank comprised a substantial amount of activity each month for certain accounts (e.g., West End Special Opportunity Fund16 and West End Cash Liquidity Fund.17)

o Bank accounts of certain Entities maintained a low or overdrawn balance for extended periods of time (e.g., Milinia Capital Group LLC18, West End SPV I LLC19, West End Cash Liquidity Fund20);

14 Debtor’s personnel provided statements for 35 accounts held at institutions other than Signature Bank (listed in Exhibit 1A). The majority of these accounts maintained minimal balances. 15 Certain Entities hold more than one Signature Bank account. FTI’s review included 13 Signature Bank accounts held by 11 Entities (including two accounts for L/C Family Limited Partnership and two accounts for MCC Funding LLC). 16 Signature Bank account 1500223681. 17 Signature Bank account 1500771506. 18 Statements for the Milinia Capital Group LLC Signature Bank account 1500344152 were reviewed during FTI’s selection of bank accounts for further analysis. FTI noted that the balance for this account from 2006 through 2009 never exceeded $2,000 and there appears to be fewer than ten account transactions during this three year period.

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o Accounts for certain Entities (e.g., Special Opportunity Fund II21) effectively served as “pass-through” accounts, whereby the Entity account would receive cash transfers from one Entity, and subsequently (often on the same day) disburse the cash to another Entity in the same or similar amounts;

o A large deposit into an account was frequently followed by subsequent withdrawals to third parties, investors, or on behalf of other Entities usually on the same day or a few days following the deposit;

o Cash was transferred among Entities to cover overdrawn balances, apparently without regard to business purpose or propriety of transfer; and

o Cash was wired to Landberg’s or Crandall’s personal accounts, purportedly as a loan or distribution. Based on our review of the available bank statements provided by Debtor personnel for accounts held by Landberg or Crandall22, it appears that cash was both received from Entities and returned to Entities. (See Section VI.A.2.c) for complete discussion regarding Landberg loan activity).

• Selected and analyzed bank account transactions: From our transactional analysis, FTI made selections for closer scrutiny where (a) the ultimate disbursement of cash was to Landberg, Crandall or related family members or (b) the starting point of a series of inter-Entity transfers is an investor contribution or proceeds from the sale of an investment property. It should be noted that selections were chosen to demonstrate the extent of commingling; nothing in our report should be interpreted as a legal opinion with respect to the propriety of a particular transfer.

• Traced cash movements through multiple levels involving multiple Entities: Tracing of selected transactions of Entity accounts was done to determine the source of deposit and destination of the subsequent disbursement, including agreement to the investor account statement and recording of the transactions in the general ledger. The details of these transactions are included in the examples in Section VI.A.1.e) of this report, with details contained in Exhibit 8.

Our analysis of bank records enabled us to trace selected transfers between Entity accounts at Signature Bank. Generally, we were able to identify the origination, transactional journey and ultimate distributions of cash within Entity accounts at Signature Bank and to determine the manner in which

19 Statements for the West End SPV I LLC Signature Bank account 1500418164 were reviewed during FTI’s selection of bank accounts for further analysis. FTI noted that the balance for this account ranged from a low balance of $500 to a high balance of $3,000 during 2007 to 2009. During this time frame, there appears to be fewer than ten transactions to or from this account. 20 The West End Cash Liquidity Fund I, LP Signature Bank account 1500418431 was overdrawn for 28 consecutive days in August 2006. The balance during this time period ranged from negative $1,126.94 to negative $10,689.06. 21 From 2007 onwards, the average monthly balance for the West End Special Opportunity Fund II Signature Bank account 1500775811 was less than $500. Account activity largely consisted of transfers in from an Entity with subsequent transfers to another Entity. 22 Banking records for Crandall’s two accounts at Signature Bank and Landberg’s Congressional Bank account were kept onsite at West End’s offices and were provided to FTI by Debtor personnel. Crandall’s Signature Bank accounts reflect that these statements were addressed to the West End offices from October 2006 onwards (as was Landberg’s Congressional Bank account beginning in March 2007). Additional banking records found by Debtor personnel included statements for Crandall’s Signature bank accounts prior to 2006.

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such transactions were recorded in the books and records (i.e., general ledgers, trial balances and journals) of the applicable Entity. Although transfers to Landberg, Crandall and related family members were reviewed, the scope of our current analysis was not designed to determine the propriety of such transactions.

Other Procedures In addition to the funds tracing discussed above, FTI also performed the following procedures:

• Interviewed Debtors’ current employee Janis Barsuk (“Barsuk”), West End Controller,23 and participated in a number of informal discussions with Heslin and Emily de Villa;

• Analyzed QuickBooks (see Section VI.A.3.a)); and

• Reviewed data and business records provided by Debtor personnel, including certain email correspondence of Landberg, credit card statements, and narrative memos prepared by Debtor personnel.

VI. Substantive Consolidation

As part of FTI’s retention on behalf of the Committee, we have been asked to assess the extent of the commingling of funds of both the Debtor and affiliated Non-Debtor Entities, evaluate the various factors relevant to the Debtors’ Supplemental Application for an Order directing the partial substantive consolidation of the Debtors’ estates (i.e., at the level below any secured indebtedness against the estates), and render an opinion with respect to the application of such factors to the facts and circumstances of the instant cases.

In undertaking this analysis, we investigated various aspects of West End’s pre-petition business that are relevant to the substantive consolidation inquiry. We analyzed information assembled and developed by Debtor personnel and information provided by Debtors’ Counsel. Because it is possible that additional documents or information may subsequently be produced, discovered or brought to my attention, I reserve the right to supplement and/or amend this report.

Substantive consolidation is an equitable remedy that combines the assets and liabilities of two or more entities to create a single common pool of assets for the benefit of consolidated groups of creditors. I am informed that in the Second Circuit, bankruptcy courts may order substantive consolidation over the objection of a party-in-interest only when the proponent of such consolidation establishes the existence of at least one of two factors: (i) creditors dealt with the entities to be substantively consolidated as a single economic unit, and did not rely on their separate identities in extending credit (i.e., creditor reliance); or (ii) the affairs of the entities to be consolidated are so entangled that substantive consolidation will benefit all creditors of the consolidated entities (also known as the “hopeless entanglement test”) -- that it is either impossible to disentangle the entities, or the cost to do so would be prohibitive in relation to the asset recoveries likely to be realized by the affected classes of creditors. Determining the presence or absence of these factors involves a fact-intensive analysis of, among other things, whether the Entities at issue share:

• Common ownership

• Common officers and directors

23 An informal interview was held at West End’s offices on June 16, 2011.

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• Common headquarters, office space or physical facilities

• Staff and payroll

• Consolidated cash management systems

• Consolidated accounting systems

• Consolidated financial statements and tax returns

• Intercompany guarantees or other intercompany credit support

In addition, courts consider whether there was:

• Failure to observe corporate and legal formalities

• Failure to keep books, records and bank accounts separate

• Subsidiaries used as mere instrumentalities of parent

• Inadequate capitalization of subsidiaries

• Intercompany loans, transfers or exchanges without adequate consideration or observance of accounting formalities

• Lack of evidence of actual reliance by creditors on separateness of debtor entities

We have considered these indicia of hopeless entanglement in conducting our investigation. For each, there are facts that weigh for and facts that weigh against substantive consolidation. As described more fully below, application of the various factors to the substantive consolidation analysis is not a mere mechanical exercise, and the weight to be accorded to various factors is subject to the Court’s discretion. More importantly, as an equitable remedy, the exercise of substantive consolidation cannot be separated from the financial impact of consolidation on the various creditor interests – in this case, at the level below any secured indebtedness against the estates, as described in the Supplemental Application.

A. Evidence Weighing in Favor of Substantive Consolidation

1. Extensive Commingling of Cash Among the Entities

a) Summaries of Inter-Entity Transfers As explained above, FTI analyzed inter-Entity cash transfers shown on Signature Bank account statements of 11 Entities for the period from 2004 through 2009. Bank account activity for the 11 Entities included deposits from (and transfers to) Entities other than just the 11 Entities for which we performed our detailed analysis. Consequently, our analysis includes over $93 million of deposits (almost 800 transactions) into the bank accounts of the 11 Entities. In addition, our analysis captured disbursements from these 11 Entities to other West End Entities, exceeding $68 million in total. Exhibit 6 provides both the number of transactions (segregated by deposits and disbursements) as well as the full listing of the 31 Entities24 party to these transfers25.

24 The 31 Entities held 38 bank accounts. 25 This summary was prepared from the database created by FTI, described in Section V, above, (second bullet point), which contains only the transactions manually entered by us. Consequently, the database, and therefore the

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To provide an indication of the magnitude of inter-Entity activity, following is a summary of the dollar amounts of the inter-Entity deposits and disbursements of the 11 Entities bank accounts.

DEPOSITS AND DISBURSEMENTS FROM THE 11 ANALYZED ENTITY BANK

ACCOUNTS Deposits

Disbursements

Additional considerations for substantive consolidation are loan balances and equity holdings among the Entities. Based on available documents, FTI has observed substantial intercompany loans and capital contributions among the Entities, with loan balances and equity holdings increasing over time.

summary, does not contain all inter-Entity activity. Accordingly, the total dollar value and number of inter-Entity transactions are even greater than the totals indicated above.

Entity 2004 2005 2006 2007 2008 2009 Total Benedek Development Group LLC -$ -$ -$ 3,895,506$ -$ 1,624,525$ 5,520,031$ L/C Family Limited Partnership 50,000 2,235,200 289,200 1,075,521 595,000 - 4,244,921 MCC Funding LLC 4,747,011 12,560,552 685,502 4,244,921

New Riverhead Realty Holdings LLC 286,619 631,911 198,331 63,100 1,179,961

Southwood Court Properties LLC - - 3,800 267,308 66,100 310,100 647,308 West End Absolute Return Fund I LP 2,348,100 - - - - - 2,348,100 West End Cash Liquidity Fund LP 82,500 102,000 218,300 793,500 1,004,391 82,750 2,283,441 West End Financial Advisors LLC - - - 3,742,114 - 5,693,634 9,435,748

West End Mortgage Finance Fund I, LP Entity formed in

October 2004 5,700 1,053,725 2,063,233 - - 3,122,658

West End Mortgage Opportunity Fund LP - - - 50,000 937,000 5,100 992,100

West End Special Opportunity Fund LP 15,053,102 10,848,000 7,478,871 6,689,983 4,306,124 868,265 45,244,345 Total 17,533,702$ 13,190,900$ 9,330,515$ 23,956,087$ 19,667,498$ 9,332,976$ 93,011,678$

Inter-Entity Deposits to the bank accounts of the 11 Entities:

Entity established in June 2007 Entity est. in Sept 2005 (no activity until 2006)

Entity 2004 2005 2006 2007 2008 2009 Total Benedek Development Group LLC -$ -$ -$ -$ -$ (2,171,220)$ (2,171,220)$ L/C Family Limited Partnership (500) (987,200) - (75,000) (25,650) - (1,088,350) MCC Funding LLC - (12,810,975) (8,724,438) (21,535,413)

New Riverhead Realty Holdings LLC Entity not in

existence (29,000) - - (8,000) (15,575) (52,575) Southwood Court Properties LLC - - - (12,000) - - (12,000) West End Absolute Return Fund I LP (1,762,925) - - - - - (1,762,925) West End Cash Liquidity Fund LP (456,763) (425,000) (1,448,073) (484,000) (646,400) (272,100) (3,732,335) West End Financial Advisors LLC - - - (511,215) - (2,130,150) (2,641,365)

West End Mortgage Finance Fund I, LP Entity formed in

October 2004 - (655,000) - - - (655,000) West End Mortgage Opportunity Fund LP - (1,019,794) (121,066) (5,559,001) (35,310) (5,200) (6,740,371) West End Special Opportunity Fund LP (7,054,999) (6,820,271) (12,339,032) (1,324,700) (418,031) (231,100) (28,188,132) Total (9,275,186)$ (9,281,265)$ (14,563,170)$ (7,965,916)$ (13,944,366)$ (13,549,784)$ (68,579,686)$

Inter-Entity Disbursements originating from the bank accounts of the 11 Entities:

Entity not in existence

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b) Intercompany Balances FTI prepared an intercompany matrix in an attempt to map all balances between Entities, as a further indication of the extent of inter-Entity involvement. As will be demonstrated, this process also served to highlight certain complications, thereby further supporting my conclusion that partial substantive consolidation is appropriate under the circumstances.

We sourced the intercompany balances from general ledgers as of June 1, 2009 provided by Debtor personnel. We reviewed the general ledgers for accounts that appear to reflect intercompany balances, searching for key terms such as: due to/from, intercompany, related party, and loans & exchanges26. We also searched additional accounts that referenced the names of West End Entities and included any balances deemed appropriate. In addition, FTI participated in discussions and e-mail correspondence with Barsuk to discuss the bookkeeping process with respect to intercompany balances, to reconcile balance discrepancies to the extent possible (see below for further detail), and to clarify proper intercompany relationships to the extent there was ambiguity.

As a result of this process, we noted the following limitations with respect to the general ledgers:

• Balance discrepancies were common. Our matrix includes 217 intercompany balances as of June 1, 2009. We noted that 42, or 19%, of those relationships had net balance discrepancies greater than $100,000. As a general rule and to the extent we could not gain greater clarity from Debtor personnel, we selected the higher net balance between the two Entities in each relationship as the governing intercompany balance.

• Interest accruals per the general ledgers of certain Entities were pooled rather than allocated among counterparties. We were typically able to rely upon the general ledgers of counterparties to these Entities to determine appropriate interest accruals.

• We discovered at least five intercompany relationships, totaling $52,000, in which only one West End party was identifiable.

• General ledgers of one Entity included a balance of $26,700 owing to itself.

c) Inter-Entity Transfers of Equity (Debt to Equity Conversions) FTI observed transactions within the Entities’ general ledgers whereby inter-Entity loans were converted to equity (in other words, the loans were re-characterized as capital contributions.

Emails among Barsuk, Steven Gould, (“Gould”) Chief Financial Officer, and/or Landberg indicate that the debt conversions among the Entities were designed to satisfy lender requirements and substantiate intercompany transfers.

FTI analyzed five separate inter-Entity loans, totaling $876,000, whereby the loan balances were transferred to separate Entities and subsequently converted to equity during 2007. Exhibit 5 provides a narrative explanation, copies of relevant emails and general ledger entries.

Emails on the dates of the conversion indicate that the transactions were designed and executed to alleviate increasing debt recorded within the Franchise Fund’s general ledger, whose then-existing agreement with lenders contained covenants with specific maximum thresholds of permitted debt. Barsuk states in an email to Landberg on June 28, 2007:

26 The intercompany matrix does not include balances in investment / equity accounts and does not include balances with 3rd parties (e.g., Landberg) that are classified within intercompany accounts.

11

I have now adjusted any intercompany loans on WEMFF’s [Mortgage Finance Fund] books to [i]nvestments from WESOF [Special Opportunity Fund]. The total limited partner’s equity is now enough to draw down the 50% on everything through today’s funding…

This transaction does not appear to be an isolated incident, as cursory reviews of general ledgers of several Entities reflect several hundred entries to investment accounts, with notations such as:

• “to offset Wear1 against wemo FF, used wemoff equity in wemff to satisfy [truncated description]”27;

• “WECL Equity Redemption”28; and • “to record money transferred back to MCC funding this is treated as a distribution from

WEIS equi... [truncated account description]”.29

Regarding the following description, FTI reviewed an April 18, 2008 email written by Gould and addressed to both Landberg and Barsuk where Gould both expressed concern and devised a strategy to substantiate and reduce the intercompany loan balance between the Income Strategies Fund and the Hard Money Fund30:

WEIS [Income Strategies Fund] lent to [Mercury Short Term Mortgage Fund] roughly 1.8 million….WEIS should be making investments in [Hard Money Fund] as part of the objective of the fund.

Gould’s email implies there was not a substantive business purpose to the $1.8 in transfers.

Gould’s email further outlines the proposed strategy to eliminate the intercompany loans (via distributions, a separate intercompany loan and equity investment in a separate Entity - as noted in Exhibit 5), noting the balance sheet effect is “….WESOF and WEIS clean up the related party loan….nothing except ownership change on WEMFF.”

d) Inter-Entity Transfers to Cover Bank Account Overdrafts Prior to FTI’s engagement in this matter, Heslin and his team reviewed email communications found on West End computers and identified a series of communications between Signature Bank representatives and West End personnel (principally Landberg, Barsuk, and Gould) addressing, on a frequent basis, the overdrafts in the various Signature Bank accounts maintained by the Entities and by Crandall and other Landberg family members. Copies of those emails are included as Exhibit 7.

On any given date (of the sample provided to me) there were overdrafts in 3 to 16 different accounts.

27 April 1, 2009 entry within the WEMO Franchise Fund general ledger [$1,104,444.04 debit to account “26300.2 Interest Rec/Pay – WEAR 1 [Absolute Return Fund],” credit to account “26300.1 – Due to/from WEAR1”]. 28 October 17, 2005 entry within the Special Opportunity Fund general ledger [$100,000 debit to cash, credit to “5510 – Limited Partners’ Capital”]. 29 April 30, 2008 entry within the Income Strategies general ledger [$110,000 debit to account “14021 – West End Mortgage Finance Fund” and credit to account “14011 Investments in Funds – WE Mercury Short Term.”] 30 Gould’s email refers to $1.8 million of loans between the Income Strategies Fund and the Special Opportunity Fund. Review of the general ledger transactions reflects $1.8 million of loans between the Income Strategies Fund and the Hard Money Fund (with minimal loan balances between the Income Strategies and Special Opportunity Funds).

12

Typically, Chris Efstratiou (“Efstratiou”) at Signature Bank would send an email in the morning to West End, detailing which Entities and other related parties were in overdraft positions (including Crandall’s loan account), and insisting that they be brought to positive balances. Based upon an assessment of available cash balances in the Signature Bank accounts of other Entities, Landberg would instruct his staff (typically Barsuk) as to the source accounts from which to transfer funds to cover these overdrafts.

Below are just a few excerpts from a selection of certain of the more illustrative email exchanges:

Email 1: In an email dated August 3, 2007, from Landberg to Efstratiou regarding “Ods,” [overdrafts] Landberg writes:

First, take 2K from 1.c [Crandall] and put into jesses account [son of Landberg] West End Real Estate 30K to west special New Riverhead 16K to west special From Wemo Finance, move $120K into west special From west special move 15K into west fixed From west special move 1K into Benedek From west special move $10K into west end mortgage finance From west special move $5K into west absolute From west special move $25K into west sagaponak From west special move $55 yo [sic] Southwood CT From west private client move $50K into Southwood CT From Amagansett Realty move $40K into Southwood CT From Amagansett Realty move $120K into west financial Will be moving money into bank on Monday or Tuesday, depending on

brokers.…

Email 2: In a December 27, 2007 email from Efstratiou to Landberg and others, before listing nine accounts overdrawn a total of $463,775.00, plus Crandall’s loan balance of $96,573.21, Efstratiou writes:

…Charlie & I were reviewing your accounts and note that account 1500216731 (West End Financial Advisors) has a balance of $201,261.31, which could be used to cover the overdraft of -$168,968.96 in the other West End Financial Advisors (1500418482) account. This account has been overdrawn for 76 consecutive days and must be covered. Charlie has suggested that we move the funds from the 1500216731 account to cover the overdraft, and we will do so unless we hear back from you by 11am today.

Email 3: On January 21, 2009, after being informed by Efstratiou that 12 accounts were overdrawn by a total of $467,205.00 and that “[w]e are returning all checks today. This number is out of control,” Landberg responds: “We will cover checks. DO NOT RETURN as these are investor checks.”

In response thereto, Efstratiou wrote:

What about the ODs [overdrafts] that have been on our books for over 50 days. Sentinel is 63K for 56 days. 1074 pulaski is $64K for 33 days, and Louise is well over $100K forever! At some point those have to be addressed. We can’t keep covering only the in clearing checks and avoiding these ODs.

13

Email 4: In a January 29, 2009 email from Efstratiou to Landberg and others regarding “IMPORTANT ODS!!! RETURNS!” Efstratiou writes:

…We need you to cover Sentinel, Southwood court, & Terrence [another Landberg son] today. … We have allowed you to carry these ods for ridiculously long periods without any attempt by you to pay them down. This includes the fact that you wired $80K to an account in your name at another institution yesterday while we are sitting with a 98K od in your wife’s account for almost three months…

Conclusion: The above emails demonstrate that Landberg managed the cash available throughout the Entities’ myriad of accounts on a group-wide, centralized basis, without regard to the original sources of the funds, or any legal or business restrictions on transfer, or investor expectations as to use of the money upon their investments into the Funds they had selected (based upon subscription agreements and the like).

e) Examples of Commingling The best and most direct way to provide the Court with a flavor of the nature and extent of the commingling of cash among the multitude of Entities is by presenting transactional examples. In order to provide balance to this presentation, we have selected examples from different Entities, ranging in complexity from straight-forward to extensive levels of inter-Entity activity. The starting point of each example is an investor contribution, third-party funding, or proceeds from the sale of an investment property. FTI traced cash transfers among Entities to the destination of subsequent disbursements. FTI observed that the frequency of inter-Entity transfers increased over time; accordingly, more examples are presented from later years.

We selected these examples to demonstrate the extent of inter-Entity activity and to highlight certain types of transactions; nothing in this report or these examples should be construed as a legal opinion as to the propriety of the transfers (e.g., compliance or non-compliance with subscription or other agreements). Each example is briefly described below, followed by a graphical depiction. The full detail for each example, with all available supporting documentation, is included in Exhibit 8.

14

Example 1: Hard Money Fund – Investor #1 Deposit (2009)

A $50,000 contribution from an investor was deposited into the Hard Money Fund and subsequently wired to an account at Heritage Bank for the benefit of Landberg and Kevin Kramer, President of WEFA from 2005 through June 2009 and a limited partner in various Entities.

See Exhibit 8-1 for full narrative explanation, along with charts presenting bank statement activity and general ledger entries, and copies of relevant bank statements and other supporting documentation, to the extent available.

Money Flow ‐ $50K

West End Financial Advisors LLC$50K Money Flow

February 2009

West End Mercury Short Term Mortgage Fund

Investor #1

$50K2/20/2009

$50K2/24/2009

William Landberg & Kevin Kramer

Entity

15

Example 2: Simco SPV – Investor #2 Deposit (2008)

A contribution of $112,000 from an investor to Simco SPV was transferred to seven (7) Entities for either disbursements (two Entities) or to cover overdrawn bank balances (five Entities).


Money Flow ‐ $112k

West End Financial Advisors LLC

$112k Money FlowMay 2008

Simco SPV I LP

$55.5K5/5/2008Caplease

Services Corp

Entity

Investor #2

$112K5/2/2008

West End Special

Opportunity Fund II LP

West End Mercury Short Term Mortgage

Fund

West End Special

Opportunity Fund LP

West End Mortgage

Finance Fund I, LP

MCC Funding LLC

$49K5/5/2008

$16.6K5/5/2008

Ridge Clearing & Outsourcing

MCC Funding LLC for the Benefit of

West LB AG

Cover Overdrawn Balance of 30k

Cover Overdrawn Balance of 8.2k




Sentinel Investment

Management Corp.

$30K5/5/2008

$17K5/5/2008

$8.5K5/5/2008

$4.6K5/5/2008

$1.7K5/5/2008

$1.3K5/5/2008

16

Example 3: Hard Money Fund – Investor #3 Deposit (2008)

A $590,000 investor contribution into the Hard Money Fund is split, with $333,000 disbursed to the West End Mortgage Finance Fund I, LP (the “Franchise Fund”), which in turn, made a payment to DZ Bank; and with $249,700 used to replenish the Interest Reserve Account at month-end. At the beginning of the following month, approximately the same amount was sent to Landberg’s personal account at Congressional Bank.


Money Flow ‐ $590K


$590K Money FlowJune – July 2008

West End Mortgage Finance Fund I, LP

MCC Funding LLC for the Benefit of West LB

AG

$333K6/27/2008

$249.7K6/30/2008

West End Mercury Short Term Mortgage Fund

Investor #3

$590K6/27/2008

$330K6/27/2008

DZ Bank NY

$251K7/2/2008

William Landberg

Entity

17

Example 4: Special Opportunity Fund – Investor #4 Deposit (2008)

A $54,000 contribution from an investor into the Special Opportunity Fund was transferred to replenish the Interest Reserve Account at month-end. At the beginning of the following month, a larger amount was returned from the Interest Reserve Account to the Special Opportunity Fund and ultimately included as part of an outgoing wire to Geneva Financial Corp. (“Geneva”). See Section VI.A.2.d) of the report for a discussion of West End’s investment in Geneva.


Money Flow ‐ $54K

West End Financial Advisors LLC$54K Money FlowJune – July 2008

West End Special Opportunity Fund LP

Investor #4

$54K6/26/2008

Entity

$52K6/30/2008

MCC Funding LLC for the Benefit of West LB AG

Geneva Financial Corp

$73K7/2/2008

$130K7/2/2008

18

Example 5: Special Opportunity Fund – Investor #5A and Investor #5B Deposits (2005)

Contributions totaling $565,000 were deposited into the Special Opportunity Fund by two investors. Shortly thereafter, $575,000 was withdrawn from the Special Opportunity Fund, and according to the Special Opportunity Fund general ledger, transferred to another Entity (possibly Amagansett Realty SPV or Amagansett Realty Group). However, the books and records of these two Entities do not reflect the transfer of these contributions, and they indicate that the moneys may have been disbursed to Mercury Capital Corp, a third-party financing entity.


Money Flow ‐ $565K


$565K Money FlowSeptember 2005

West End Special Opportunity Fund

Investor #5A

Investor#5B

$65K9/20/2005

$500K9/14/2005

$575K9/14/2005

Unidentified Recipient Denoted as a Pre‐Authorized Withdrawal

Entity

19

Example 6: Absolute Return Fund – Investor #6 Deposit (2007)

Contributions from one investor, totaling $1.5 million, were deposited into the West End Absolute Return Fund and the West End Fixed Income Partners Operating Account on the same day. Over the next two weeks, $1,285,500 was then transferred to three (3) other Entities, with amounts ultimately transferred to additional Entities, disbursed to NFA Funding LLC, or used for investor distributions, operating expenses, and a payment to Kevin Kramer. It should be noted that certain Entities had balances prior to the transfers in, or received additional deposits from other sources during this period, which were used to partially fund disbursements.


Money Flow ‐ $1.5M


$1.5M Money FlowJanuary 2007

West End Absolute Return Fund I LP

Investor #6

$215K1/31/2007NFA Funding LLC

$1M1/19/2007

$115.5K1/30/2007Investor Distribution


West End Mortgage

Finance Fund I LP

BenedekDevelopment Group LLC

New Riverhead Realty

Holdings LLC

$10.5K1/19/2007Jonathan D Davis, PC

$8K1/19/2007Kevin Kramer

$3.1K1/30/2007Printelligence

West End Sagaponack

SPV I LLC

$85K1/31/2007Investor Distribution




West End Private Client Income Fund

LP

$31K1/19/2007

$3K1/19/2007

SouthwoodCourt

Properties LLC

$3K1/19/2007

West End Fixed Income Partners

Operating Account

$500K1/19/2007

1/25/2007$500K

$500K1/30/2007

$100K1/19/2007

$210K1/31/2007

$407.1K1/30/2007

West End Special

Opportunity Fund LP

$250K1/30/2007

$640K1/30/2007

$28K, $3K1/19/2007

$192.2K1/30/2007

Entity

$100K1/19/2007

West End Financial

Advisors LLC

$85.5K1/31/2007

20

Example 7: Special Opportunity Fund – Investor #7 Deposit (2006)

An investor contribution of $1,457,280 was deposited into the Special Opportunity Fund. Subsequently, $1,679,564 was transferred from the Special Opportunity Fund over the following two weeks, including $50,000 ultimately disbursed to Crandall via transfers to two separate Entities; $1,550,000 transferred to three additional Entities; and the remaining $79,564 withdrawn for investor distributions, an investor loan (that appears to have been subsequently repaid to Special Opportunity Fund), and for operating expenses of the Special Opportunity Fund. It should be noted that certain Entities had balances prior to the transfers in, or received additional deposits from other sources during this period, which were used to partially fund disbursements.




$1.5M Money FlowSeptember 2006


$2.1M9/19/2006

Capital Lease Funding

Entity

Investor #7

Amagansett Realty SPV I

LLC

$50K

$4.3K

$4.2K

Investor Distribution

$3.2K

$3K

SmallbergSorkin& Co. LLP

$2.1K

$2K

$0.9K

$1.3M9/18/2006

$150K9/7/2006

$100K9/8/2006

$40K9/8/2006

$10K9/8/2006

$69.7K9/6 – 9/14/2006

$150K9/7/2006


West End Cash Liquidity

Fund LP

West End Financial Advisors

$50K9/8/2006

$40K9/8/2006

Louise Crandall

L/C Family Limited

Partnership

$10K9/8/2006

Louise Crandall

Amagansett Realty Group

LLC

$1.5M9/6/2006

West End Real

Estate Fund LLP

$610K9/19/2006

WEMO Franchise

Funding LLC Investor Distribution






Investor Loan

$10K9/8/2006

$10K9/15/2006

21

Example 8: Benedek Development Group – Proceeds from Real Estate Sale (2007)

Proceeds of $4,418,208 from the sale of the 7 Calf Creek property were deposited into the Benedek Development Group Signature Bank account. Over the following six weeks, $4,422,186 was subsequently transferred from the Benedek Development Group account to Landberg and to eight (8) separate Entities for ultimate disbursements to purchase an apartment complex (Burgundy 102 LLC) on behalf of West End Real Estate Fund I LP, fund a loan to JDS Restaurants Inc, purchase equipment from Unified Foodservice Purchasing Co, and for investor distributions and operating expenses.



$730K4/26/2007

$145.2K4/23/2007

BenedekInvestment

GroupWest End Special

Opportunity Fund LP

L/C Family Limited

Partnership

$521K 5/2/2007,

$100K 4/26/2007


$4.4M Money FlowApril – May 2007

$10.3K4/23/2007

$750K4/30/2007

Burgundy 102 LLC

Entity


LLC

$4.4M4/19/2007

NFA Equipment Fund 1 LP

West End Mortgage

Opportunity Fund LP


LLC

$823.5K5/11/2007JDs Restaurants Inc.

WemoFranchise

Funding LLC

$60K5/17/2007

InvestorDistribution

$34.3K4/27/2007ADP TX/Fincl SVC

$24.6K4/27/2007ADP TX/Fincl SVC

$7.5K4/26/2007Stephen Katz –Tucson Land Acct

$5.4K5/7/2007Oxford Health Premiums

$4.2K5/2/2007FID BKG SVC LLC Wemo

Franchise Funding LLC


$250K4/26/2007William Landberg

$250K4/30/2007Wave Crest and West End Development

$250K4/24/2007Sand Dollar Development

$61K4/30/2007Suffolk County National Bank

$51.3K5/24/2007Eseeks, Hefter & Angel, LLP

$37.6K4/19/2007Smallberg Sorkin& Co., LLC

$7.6K5/25/2007Becker, Glynn, Melamed& Muffly LLP

$1.2K4/23/2007The Rubin Group Inc.

$750K4/30/2007

$146.3K5/4/2007/

West End Financial Advisors

Simco SPV I LP

$220.8K5/11/2007

$260.9K4/23/2007

$84.5K4/23/2007

$260K5/9/2007

$289.9K5/10/2007United Foodservice Purchasing Company

$85K4/26/2007

$100.9K 4/23/2007,

$60K 5/17/2007

$604.3K4/23/2007

$823.5K5/11/2007

$30K5/9/2007

$100K5/10/2007

$3.5K4/26/2007

Sentinel Investment

Management Corp

Proceeds from the sale of the 7 Calf Creek property

Amagansett Realty

Holdings LLC

West End Absolute

Return Fund I LP

BenedekDevelopment Group

LLC

$220K5/10/2007

22

Example 9: Mortgage Opportunity Fund – DZ Bank Loan (2007)

Over three months, the Mortgage Opportunity Fund’s Signature Bank account received four (4) deposits totaling $9,699,631. Included within these deposits was a loan of $9,689,011 from DZ Bank. During the same three months, $9,688,426 was subsequently transferred from the Mortgage Opportunity Fund bank account to twelve (12) separate Entity bank accounts (eleven (11) different Entities), with ultimate disbursements to William Landberg, Jesse Landberg (son of William), Caplease Services Corp, Geneva Mortgage Corporation, National Franchise Acceptance Corp, and NFA Funding LLC. Disbursements were also made for a loan payment to Signature Bank, for investor distributions, and for operating expenses. It should be noted that certain Entities had balances prior to the transfers in, or received additional deposits from other sources during this period, which were used to partially fund disbursements.




$9.7M Money FlowOctober – December 2007

* for 8-521 the Benefit of CapLease Services Corp

Entity

DZ Bank AG

Transfers from Mortgage Opportunity Fund: 10/26/2007 – 12/4/2007

$9.7M10/26/2007

$10.6K10/16/200711/16/200712/18/2007

National Franchise Acceptance LLC

$125K11/21/2007Geneva Mortgage Corporation

$67K

West End Cash

Liquidity Fund LP

West End Mortgage Finance

Fund I, LP

$161K11/1/200711/2/200711/14/200711/15/2007NFA Funding LLC

$200K

West End Financial

Advisors LLC

$2.8K12/4/2007Fidelity Brokerage Services

$23K12/4/2007American Express

$24K

$3.2M10/26/2007Signature BankPrin& Int Pymt




$3.9M

$3.5M11/15/2007Sukenik, Segal & Graff PC

West End/Mercury Short Term Mortgage

Funds

$771.4K11/20/2007

West LB AG

$50K11/1/2007Wells Fargo Corp Trust

$3.1M

$2.8M11/1/2007

11/20/2007MCC

Funding LLC


LLC

$20K



WemoFranchise

Funding LLC

$18K11/8/2007West End

Cash Liquidity Fund LP

$60K11/16/2007

SimcoSPV I LP

$78K

$18K11/8/2007West End Absolute Return

Fund I LP


$20K11/2/2007Check #1058

$389.5K

$327K11/2/2007West End Absolute Return

Fund I LP


West End Fixed Income

Partners

$4.5K12/10/2007Jesse Landberg

$50K11/1/2007


LLC

$250K11/2/2007William Landberg

$20K11/7/2007National Finance Acceptance Corp.

$838.5K

$2.3M10/29/2007William Landberg

$505K10/29/200711/1/200711/7/2007Benedek

Development Group LLC


LLC

West End Private Client

Income Fund LP

$125K11/21/2007Geneva Mortgage Corp.

$1K

$41.4K10/30/2007Sonnenschein

Nath & Rosenthal LLP


Fund I, LP *

$500K11/26/2007CapleaseServices Corp.

$56.8K11/2/2007CapleaseServices Corp.

$500K

$120K11/27/2007ADP Clearing & Outsourcing

$590K

West End Special

Opportunity Fund II LP

West End Special

Opportunity Fund LP

$60K11/2/2007

$40K11/2/2007

West End Mortgage Opportunity Fund

23

Example 10: Investment Partners – Bear Stearns Deposit (2004)

A $1,083,332 deposit from Bear Stearns (and presumed investor contribution) into the Investment Partners Signature Bank account is transferred to the Fixed Income Partners Signature Bank account the next day. Subsequently, $1,084,505 was withdrawn over a two week period: $742,500 transferred to the Special Opportunity Fund for transfers to other Entities and to Bank of America Securities; $325,000 disbursed to investors; and $17,005 for other payments. Accounting records for these Entities for the time during and surrounding these transactions were not provided; accordingly, FTI does not have any further details regarding these transactions other than those included in the banking records. It should be noted that certain Entities had balances prior to the transfers in, or received additional deposits from other sources during this period, which were used to partially fund disbursements.




$1.1M Money FlowJanuary ‐ February 2004

Entity

1/28/2004

$260K1/29/2004


West End Investment Partners LP

West End Fixed Income Partners

$1.1M1/29/2004

$5.1K1/30/2004

Katten MuchinZavis Rosenman

$65K1/30/2004Investor

Distribution

$6.9K2/2/2004

Loan Payment

$5K2/9/2004

Pre‐Authorized Withdrawal

$600K2/3/2004

$142.5K2/10/2004

$1.1M

Bear Stearns & Companies Inc

West End Absolute

Return Fund

National Investor Service Corp.

Investor ContributionDeposit

$560.3K2/3/2004

$250K2/5/2004

$225K2/4/2004

$47.9K2/10/2004

West End Financial

Advisors LLC

Bank of America Securities

$300K2/3/2004

$16.4K2/4/2004

$500K2/4/2004

$750K2/10/2004


LP

L/C Family Limited

Partnership

$350K2/3/2004

$1.1M

24

Example 11: Amagansett Realty Group LLC – Proceeds from Real Estate Sale (2005)

Proceeds of $6,967,378 from the sale of Southwood Court Properties LLC were deposited into the Amagansett Realty Group bank account. Of this amount, $1,361,479 was paid directly for costs related to the sale of Southwood Court Properties LLC and for investor distributions/redemptions. An additional $4,104,000 was transferred to five (5) separate Entities, with ultimate disbursements for loan payments, investor redemptions, professional fees, and to NFA Funding LLC and Mercury Capital Corp. It should be noted that certain Entities had balances prior to the transfers in, or received additional deposits from other sources during this period, which were used to partially fund disbursements.


Money Flow ‐ $7M

West End Financial Advisors LLC$7M Money Flow

September ‐ October 2005

$1.5M10/3/2005

Entity

Southwood Court Properties LLC

$7M9/29/2005

$646K10/24/2005Investor Distribution/ Redemption

Amagansett Realty Group LLC

Amagansett Realty Holdings LLC

$300K10/7/2005

$1M9/30/2005

$350K10/13/2005

$250K10/3/2005

$64K10/19/2005


$130K10/4/2005RJD Concrete Construction

$100K10/4/2005Sand Dollar Development

$95K10/18/2005Sonnenschein Nath & Rosenthal LLP


$4.7K10/5/2005Stevens & Lee PC

$1K10/5/2005Alona Kolsnik(Legal Fees)

West End Financial

Advisors LLC

$63.4K10/19/2005

Mercury Capital Corp

BenedekDevelopment

Group


$39.9K10/3/200510/11/2005Southwood Court LLCClosing Costs


Fund I LP

$140K10/25/2005

Amagansett Realty SPV I LLC

$500K10/4/2005

$500K10/3/2005

$20K10/25/2005

New Riverhead Realty

Holdings LLC

$200K10/25/2005

$75K10/3/2005Investor Redemption

$321K10/12/2005Investor Redemptions

$100K10/3/2005

$310K10/13/2005

$100K10/5/2005

$50K10/11/2005

West End Special Opportunity

Fund LP

$1M10/3/2005Signature Bank Loan Payments

$42K10/12/2005Investor Redemption

$24K10/3/2005Investor Redemptions

$2.9K10/13/2005Investor Redemptions

West End Fixed Income

Partners

$420K10/25/2005NFAFunding

LLC

25

2. Alleged Fraud and Misappropriation of Cash

a) Misappropriation of Moneys Held in the Interest Reserve Account

In connection with its borrowing arrangements with West LB AG Bank31, the secured party, West End Mercury Short Term Mortgage Fund, LP, and MCC Funding LLC were required to maintain an account, called the Interest Reserve Account, for the benefit of West LB. Such account was established at Signature Bank New York, account number 1500981888. Certain agreements between the Hard Money Fund and real estate developers required the developers to deposit money into the Interest Reserve Account. West LB was authorized direct access to this account, thereby mitigating risk of nonpayment. According to the terms of the loan agreement (the “Loan Agreement”), West LB was granted a security interest in this Interest Reserve Account, specifically “all checks, drafts, instruments, cash and other items received for deposit…, wire transfers of funds, or other funds deposited in, credited to, or held for deposit in or credit to” the account.

Furthermore, Signature Bank was permitted under the agreement to act upon the instructions of MCC Funding LLC and of the Hard Money Fund, “but only to the extent that such instructions direct the Bank [Signature Bank] to transfer funds from the [Interest Reserve] account into the account described as the “Collection Account” in Exhibit B”32. The account designated in Exhibit B to the agreement as the Collection Account is: Wells Fargo Bank, N.A.33 In addition to the foregoing, the same paragraph of the agreement also instructs Signature Bank “automatically, without the instruction or direction from any party, to transfer any interest or other income that is earned from time to time on the funds in the Account to the Collection Account.”

Notwithstanding the foregoing provisions, from early 2008 (inception of the account was November 2007) through at least January 2009, Landberg regularly caused disbursements to be made to accounts other than to the Collection Account, in direct contravention of the Loan Agreement. In fact, during this approximately one year period, more than 70 transfers, totaling more than $10.8 million dollars, were made out of this Interest Reserve Account to accounts other than the Collection Account -- primarily to Entities and related parties, including at least two separate payments totaling $262,753.83 directly to Landberg’s personal account at Congressional Bank.

An email written on June 2, 2008 by Landberg confirms his knowledge of the restrictions barring any withdrawals from the Interest Reserve Account:

I have $2m in a reserve account I am not supposed to touch. It is the interest reserve on the hard money fund…

It appears that, as and when needed to fund a withdrawal by West LB, certain of these moneys were deposited back into the Interest Reserve Account by the Entities.

It does not appear that any significant level of interest income was automatically transferred to the Wells Fargo Collection Account. It should also be noted that, the running account balance, upon which interest would have been earned, was reduced as a result of amounts transferred out (loaned) to other Entities.

31 West LB is an independent lender and is not part of the Entities. Any similarities in name are coincidental. 32 Paragraph 1 (e) of the Deposit Control Agreement (Interest Reserve Account). 33 ABA No.: 121000248, Acct: 0001038377, Acct. Name: Wells Fargo Corporate Trust.

26

Beginning in June 2008, an interesting pattern emerges with respect to the account balances in this Interest Reserve Account maintained by MCC Funding LLC for the benefit of West LB. The account balances are drawn down to minimal amounts at the beginning of each month, as a result of transfers to other Entities and withdrawals made by West LB, but are fully replenished by other Entities with available cash immediately prior to the end of each month, thereby making them available for the anticipated month-end withdrawal by West LB, as depicted graphically below:

A summary of transactional activity within the Interest Reserve Account as well as Signature Bank account statements from inception through April 2009 are included within Exhibit 9.

b) Fabricated Loans Prior to FTI’s engagement, Heslin retained Daylight Forensic and Advisory LLC (“Daylight”) to perform, among other tasks, forensic accounting services to determine if cash from the Entities was commingled and to trace the loan proceeds related to three questionable loans, referred to as:

• the Benedek Loan $3,948,000 (1/27/09)

• the Fruitville Loan 3,080,000 (3/2/09)

• the Ashley Furniture Loan 1,680,000 (4/17/09)

Totaling $8,708,000

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Res

erve

Acc

ount

Bal

ance

MCC Funding LLC F/B/OWest LB AG.

Interest Reserve AccountSignature Account # 1500981888

Bank Statements

Not Available

27

All three loans were supposed to have been collateralized by property. Based upon interviews conducted and information provided by Debtor personnel, including the QuickBooks data, Daylight concluded that the proceeds from these three loans were not distributed as intended and represented. Rather, they were distributed among other Entities’ accounts. Although Daylight relied primarily upon the QuickBooks data, with limited tracing to bank statements of the Entities, FTI conducted extensive tracing of the cash movements among the Signature Bank statements, substantially confirming the trail pieced together by Daylight and the Debtors’ current management.

Given the abbreviated time period between FTI’s retention and the date by which this report has to filed, and mindful of the professional fees already incurred by Daylight and others, FTI has not repeated a full forensic examination with respect to these three questionable loans. However, the misappropriations and actual usages of the proceeds, as summarized in the amended complaint filed by the Securities and Exchange Commission on May 6, 2011, appear to be consistent with what we have observed to this point.

c) Disbursements to Landberg and Crandall Landberg and Crandall appear to have gained substantial benefits through the Entities, from, among other things, corporate credit cards, increased equity34, distributions and other disbursements from the Entities to their personal accounts. FTI identified disbursements to Landberg and/or Crandall through review of the Entities’ general ledgers and bank account statements, as well as Landberg’s and Crandall’s available banking records related to their personal accounts.

Cash Disbursements to Landberg FTI identified disbursements to Landberg through the analysis of inter-Entity transfers, where the ultimate destination of the transfers were account(s) held by Landberg. (See commingling examples in Section VI.A.1.e)).35 Signature Bank statements of the Entities confirm that at least $3,051,766.91 was disbursed to Landberg from 2005 through 2009. Further, the limited number of statements available for Landberg’s Congressional Bank account36 show that Landberg

34 FTI observed general ledger entries in which Crandall was credited with additional equity in certain Entities (including the Hard Money Fund). 35 See commingling examples 8.1, 8.3, 8.7, 8.8 and 8.9. 36 Congressional Bank Account ending in 6506.

Description Landberg Crandall Family MembersDisbursements from West End Entities (excluding L/C Family) 3,051,766.91$ 50,000.00$ 4,500.00$ Disbursements from L/C Family Partnership - 1,844,000.00 - Additional Disbursements from West End Entities as reflected on banking records for personal accounts (excluding items above) 2,152,691.78 1,857,000.00 -

Total Disbursements from Entities 5,204,458.69$ 3,751,000.00$ 4,500.00$

28

received an additional $2,152,691.7837 in deposits from various Entities over a 25 month period.38 39

Landberg’s Congressional Bank account reflects payments to the Entities during the same 25 month period. Twenty-four (24) checks or wires, totaling $2,170,667, were transferred to the Entities from Landberg’s Congressional Bank account, often the same day or within a few days following a deposit from an Entity. Although it appears that Landberg is returning money to the West End estate ($2.1M), one would first have to obtain details with respect to the 32 deposits into his account with no further identification as to source, before any conclusion can be reached.

The Entities recorded these transactions as loans between the Entity and Landberg (and in certain cases, third party loans with an additional Entity (refer to the chart below)). Barsuk explained that Landberg would direct transfers from the Entities to his personal bank accounts and to accounts for Crandall or family members. Barsuk would then record these transactions as loans within the “due to/from” general ledger account within the Entity40. The ending balances of the “due to/from” accounts reflect aggregate loans and repayments over time: a debit balance represents moneys owed to the Company. FTI’s review of these general ledger accounts reflects an accumulating balance of over $1 million owed to the Entities from Landberg as of June 30, 2009: further investigation (and documentation) would be necessary before concluding as to the accuracy of any balance purportedly owed to or from Landberg.

37 This amount excludes two transactions previously included within the $3,051,066.71 total of disbursements to Landberg identified from Entity banking records (see commingling examples 8.3 ($251,400 disbursement) and 8.8 ($250,000 disbursement)). 38 Including the Hard Money Fund, Sentinel, Income Strategies Fund, WEFA, Mortgage Finance Fund, Special Opportunity Fund, WECE, MCC Funding LLC. Also included are deposits denoted as “West End direct deposit.” 39 In addition to the deposits directly identified from West End, there are an additional 32 deposits to this account that were identified only as “deposit” on the bank statements. Additional deposits from the Entities to Landberg’s Congressional Bank account were identified through review of the general ledger, banking records of the Entities and dates of these unidentified deposits. 40 Barsuk explained she recorded entries in the “due to/from” Landberg accounts at the direction of Landberg. Gould also had the ability to record items in these accounts, as evidenced by an October 17, 2008 email between Landberg and Gould, with Landberg directing Gould to “move the due to willliam landberg into dr crandalls account por favor.”

GL Account Debit Credit

Net Balance Due to the Company /

(Due to Landberg) Due From William Landberg 916,020$ -$ 916,020$ Due To William Landberg 3,516,043 4,291,683 (775,640) Due to/from William Landberg 2,354,334 1,454,884 899,450 Loan Payable- William Landberg 9 - 9 Advance - W. Landberg 22,521 1,012 21,509 Balance as of June 30, 2009 6,808,926$ 5,747,578$ 1,061,347$

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Considering the fraud and misappropriations allegedly engaged in by Landberg, the pattern and timing of loans and repayment activity of Landberg, Crandall and the Entities is suspicious. Many instances follow a similar pattern: Loans were advanced by one party around the time an account became overdrawn. Cash was advanced to cover the overdraft, a loan was recorded through a series of inter-Entity transfers, and later purportedly repaid. FTI has begun an analysis of transactions recorded in general ledger “due to/from” account(s) specific to Landberg. Although we see the “repayment” made and recorded in QuickBooks, FTI has not completed the exercise to determine the ultimate source of the moneys used to effectuate the intercompany transfer to accomplish the repayment. 41 Completing such an exercise would require a full forensic investigation to determine the original source of loans between Landberg and the Entities, with no guarantee that the source of funds could be identified.

Below are examples of certain of these instances:

Landberg’s $251,312.67 transfer to/from the Interest Reserve Account On June 30, 2008, Landberg wrote two checks to MCC Funding42 for $101,312.67 and $150,000. The $251,312.67 was recorded as a loan from Landberg to MCC Funding within the general ledger.43

On this same date, an email trail reflects Barsuk asking Landberg, in relevant part:

I need an additional $150k [for a transfer]. I already wrote a check from your Congressional acct for $101k. Should I write another check for the additional funds?

On July 2, 2008, these checks created an overdraft of $234,622.62 in Landberg’s account. On that same day, $251,700 was wired from the Interest Reserve Account to Landberg’s Congressional Bank account as a purported repayment of the June 30, 2008 loan.

Landberg’s $650,000 transfer to/from MCC Funding and the Hard Money Fund On October 2, 2008, a $650,000 check written by Landberg to the Interest Reserve Account cleared Landberg’s Congressional Bank account. This was recorded as a loan from Landberg on the books and records of the Hard Money Fund.44 On the same day, Landberg received two wires from the Hard Money Fund bank account: $200,000 and $650,000. The Hard Money Fund recorded these transactions as loans within its general ledger: $650,000 repaid by MCC Funding to Landberg, $200,000 advanced to Landberg as a separate loan.45 Although these transactions were recorded as separate transactions within the general ledger, the funds were disbursed as a lump sum of $850,000 to Landberg’s account. Further, the $200,000 loan was one of a series of loans between Landberg and the Entities: the $200,000 advanced as a loan was subsequently repaid by Landberg at the same time he deposited moneys from a separate purported loan.

41 A forensic investigation to determine the source of funds for transfers among Entities and Landberg would include subpoenaing all banking and brokerage records for Landberg and related individuals. Transactions within these accounts would be analyzed to determine whether the deposited funds originated from a third-party source or another bank account. 42 As previously discussed (See Section VI.A.2.a)), the timing of this deposit to the Interest Reserve Account coincides with the overall pattern of infusing cash to this account immediately prior to withdrawals by West LB. 43 This loan was recorded within the general ledger of the Hard Money Fund account “20100 – Due to William Landberg.” 44 Recorded within the Hard Money Fund’s general ledger as a $650,000 credit to account “21001 – Due to William Landberg” on 9/30/08. 45 $650,000 recorded as a debit to account “12010 MCC Funding Investment” and credit to account “21001 – Due to William Landberg”; “$200,000 recorded as debit to account “21001 – Due to William Landberg”, credit to cash.

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Landberg’s $100,000 transfer to/from the Income Strategies Fund and West End SPV 1 Landberg’s January 2009 Congressional Bank statement reflects that he wrote a $100,000 check to West End SPV1. We could not identify this transaction as being recorded in West End SPV1’s general ledger. The check cleared Landberg’s account on January 27, 2009.

On January 27, 2009, $100,000 was transferred from the Income Strategies Fund to Landberg. The Income Strategies Fund recorded this transaction as a loan to Landberg. This money was deposited to Landberg’s account, and purportedly repaid within a few weeks.

Crandall account activity Louise Crandall held at least two accounts at Signature Bank and received a minimum of $3,751,000 from various Entities over a five year period.46 Subsequent repayments, if any, from Crandall to the Entities were not identified within the Crandall’s bank statements.47 (See Exhibit 10)

Crandall “loans” and “distributions” to/from the Entities A review of certain Landberg emails available for review indicates that cash was disbursed between the Entities and Crandall, with certain transactions recorded to appear as if Crandall had provided a loan to one of the Entities -- Simco SPV1. The transactions obscure the fact that the source of funding of the purported Crandall loan was the Entities’ own funds. The transactions are presented in the following diagram and referenced in the emails that follow.

Transactions on February 9, 2006:

46 Debtor personnel provided statements for Signature Bank account ending in 2205 for available months spanning March 2004 through May 2009 [missing months of May 2005, July 2008, and August 2008] and statements for Signature Bank account ending in 1115 for available months spanning June 2006 through June 2009 [missing months of September 2006 and March 2009]. 47 Four checks were written from Crandall’s Congressional Bank account ending in 0614 on January 31, 2007, payable to various Entities. While bank statements for these Crandall accounts were not available for review, copies of checks were provided by Debtor personnel. The checks from this account include: $252,000 paid to Southwest Court Properties, $250,000 paid to New Riverhead Realty Holdings, $151,000 paid to Benedek Development Group and $250,000 paid to Amagansett Realty SPV I.

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In early 2006, Landberg instructed Chris Efstratiou of Signature Bank to execute the following transactions for the following Entity accounts:

Email 1: In an email dated February 9, 2006, Landberg48 directs Efstratiou of Signature Bank to perform the following transfers, with each transaction in the same amount of $1,250,000:

“kindly move as follows:

$1250000 from cash liquidity to west end spv 1 (mistake by lafferty, should have gone to spv 1). 49 [Lafferty is a broker dealer which held investment accounts for both the Entities and the investors]

$1250000 from west end spv 1 to amagansett holdings (repay note)

$1250000 from amagansett holdings to l/c (distribution to l/c to louise as lp)

$12500000 [sic] from louise Crandall to simco spv 1 llc (loan @8% interest per annum)

….

k/j [Katie/Janis] please keep a record of this transaction”

Email 2: In furtherance to email 1, Landberg writes:

“katy

I forgot to add

l.c. to louise for 1250000 (lp dist)

b”

The Signature Bank statements reflect that the transactions requested in Landberg’s e-mail were completed and recorded within each Entity’s general ledger. Crandall received a $1,250,000 deposit to her personal account on February 9, 2006, presumably from L/C Family Partnership.50 Crandall’s bank account statement further corroborates Landberg’s instructions, with $1,250,000 immediately transferred from Crandall’s account to Simco SPV 1.51 Although there was essentially one cash transaction transferred among the Entities, journal entries were recorded across five general ledgers for transactions including correction of a funds transfer error, a loan, repayment of a loan, distribution to Crandall and a subsequent loan from Crandall to Simco SPV 1.

Despite the convoluted series of transfers and journal entries, the transfers executed at Landberg’s direction would seem to indicate that the transfers and loan between Crandall and Simco SPV1 originated from the existing moneys of the Entities. There is no discernable economic substance to these transfers, except to give the appearance of moneys advanced by Crandall.

48 This email was sent from an aol account and addressed to Efstratiou at Signature Bank and Katie Weyhrauch and Barsuk at WEFA. 49 The Cash Liquidity Fund’s Signature Bank account statement reflects a $1,250,000 deposit from West End SPV 1 LLC from Lafferty (denoted as ADP Clearing & Outsourcing Serv on the bank statement) on February 9, 2006. The balance of this account prior to the deposit was $297.19. 50 The LC Family Partnership Signature Bank statement reflects a corresponding withdrawal on the same date, February 9, 2006 for $1,250,000. The withdrawal was denoted only as “Pre-Authorized WD [withdrawal].” 51 Denoted only as “Pre-Authorized WD” on the February 2006 Signature Bank statement for account ending in 2205 held by Crandall.

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Although Crandall purportedly loaned money to Simco SPV 1 (through the above series of transactions), FTI has not completed the exercise to determine the original source of the moneys used. Completing such an exercise would require a full forensic investigation to determine the original source of loans between Crandall and the Entities, with no guarantee that the ultimate source of funds would be identified.

d) Third Party Investments In addition to the foregoing, the Entities loaned moneys to and/or invested in third-parties, certain of which are described briefly below. The source of such funds was generally inter-Entity transfers; however, the determination of the specific origin of these funds is difficult to ascertain because of the extensive commingling of cash among the Entities prior to such lending or investing.

(i) Origin of Funds related to Geneva Financial Corporation

Through discussions with Debtor personnel, I understand that payments to, or on behalf of, individuals associated with Geneva Financial Corporation may have occurred. FTI’s analysis of the Geneva Financial Corporation transaction is limited to the origin of the West End’s investment.

In early 2008, Landberg caused a total of $4,060,000 to be advanced by four Entities52 to Geneva Financial Corporation as a loan.

In fact, under Landberg’s direction as general partner of WEFA, more than 25 separate transactions involving sixteen different Entities were made through a series of inter-Entity transfers. As illustrated in Exhibit 11, the bank account balances of the four Funds which purportedly invested in Geneva were insufficient for each Entity to have funded this investment independently prior to the series of inter-Entity transfers.

(ii) Loans to Fusion Telecommunications Int’l., Inc. (“Fusion”)

The Special Opportunity Fund II’s investment in Fusion was comprised of a combination of loans and stock purchases. During a seven month period (September 2008 through April 2009), the Special Opportunity Fund II advanced $1,710,000 to Fusion via thirteen separate loans. Of these thirteen loans, six were funded by transfers (totaling $800,000) from six separate Entities. Exhibit 12 provides details with respect to on these inter-Entity transfers53.

(iii) Purchases of Real Estate I understand that the investment holdings of certain of the Entities54 included real estate property, specifically apartment complexes. On four separate occasions, Landberg accomplished the Entities’ purchases of apartment complexes via inter-Entity transfers. The source of the funds for these inter-Entity transfers were then-recently deposited investment sale

52 The Special Opportunity Fund, the Absolute Return fund, the Cash Liquidity Fund and the Private Client Fund. 53 The purchase of Fusion stock was largely funded by the residual balance within the Special Opportunity Fund II’s Signature Bank account. From May 2008 through March 2009, there were 11 separate transactions relating to the purchase of Fusion stock, including conversions of loans to stock, purchase of 850,000 shares from an individual [Roger Karam] for $144,500 on December 17, 2008 and wire transfers to Fusion, denoted as “investment” within the general ledgers of the Special Opportunity II Fund, Income Strategies Fund and Cash Liquidity Fund. 54 Mortgage Opportunity Fund, West End Real Estate Fund, and the Special Opportunity Fund.

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proceeds or investor contributions deposited just prior to the inter-Entity transfer. Exhibit 13 provides an illustration of the inter-Entity transfers related to the separate purchases of four apartment complexes.

3. Books and Records

Among the factors to be considered in making the substantive consolidation determination is the extent to which separate records are maintained for individual Entities, as opposed to on a consolidated basis for the entire combined group. In a typical Augie/Restivo55 assessment of factors to be weighed when determining whether the circumstances warrant substantive consolidation, the following considerations would, at first glance, militate in favor of not consolidating the entities. However, for the reasons explained below, each one in this section VI.A.3 and 4 would, in fact, auger in favor of substantive consolidation.

a) Separate General Ledgers Separate sets of books and records are maintained on QuickBooks for each Entity and Special Purpose Vehicle. However, as a countervailing factor, the books and records of the Entities are incomplete and inconsistent.

FTI was provided with extracts prepared by Barsuk from the version of QuickBooks residing on the West End network.56 Barsuk provided data extracts for each of the 32 general ledgers57 maintained by West End. It should be noted that the general ledger for L/C Family, the sole member of WEFA, was not maintained within QuickBooks.58 The QuickBooks data extracts provided by Debtor personnel were believed to contain all general ledger information for each Entity from January 1, 2004 (or post-2004 Entity inception) through June 30, 2009.

Upon receipt of the general ledgers, FTI reconciled selected transactions appearing on the Signature Bank account statements to the general ledgers. A preliminary analysis prepared by FTI indicated that the identified cash transactions were recorded within the appropriate general ledgers.

Upon further review and analysis of non-cash accounts, however, FTI noted several discrepancies and limiting factors of the QuickBooks data that was provided, including:

• Separate general ledgers were maintained for 32 Entities without uniformity across the ledgers. To demonstrate the inconsistencies across accounting records, I reference general ledger accounts from various Entities with the following observations:

• Different account numbering for accounts within each of the general ledgers.

o For example, the Franchise Fund recorded loans with Landberg as a current asset within account “1400 – Due to/from William Landberg.”

55 In Re: Augie/Restivo Baking Company, Ltd, 860 F.2d 515 (2d Cir.1988) Comment 8) Page 37-38. 56 The initial request by FTI to obtain a copy of the QuickBooks program was denied, as Debtor personnel did not have the resources to generate a copy. 57 In some cases, transactions for several Entities were included within one general ledger. For example, transactions related to 5 Calf Creek were recorded within the Benedek Development Group’s general ledger (5 Calf Creek is wholly owned by the Benedek Development Group). 58 Barsuk stated that she was unaware whether a general ledger for L/C Family was maintained, and believed that Landberg’s personal accountant maintained bookkeeping related to this Entity.

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o The Special Opportunity Fund did not establish a “due to/from William Landberg” account, and recorded such loans within the “Suspense” account.59 60

o The Absolute Return Fund recorded loans with Landberg as a current liability within account “2810 Due to William Landberg.”

• Some accounts have a number prefix, others do not. To illustrate, current liability accounts in the Mortgage Finance Fund general ledger include over 30 accounts beginning with various numbers and the account name and one lone account titled “Loan Payable – VPR.” Barsuk explained that she and Gould had authority to establish and classify general ledger accounts.

• As noted previously in Section VI.A.1.b), accounting entries were made without supporting documentation.

o FTI observed discrepancies in Sentinel’s interest payable general ledger account. Specifically, FTI asked Barsuk to identify interest payments for intercompany loans between Sentinel and four other Funds. Barsuk’s email response stated “Steven [Gould] did these [interest] calculations – I do not have any back up to substantiate.”

• FTI also noted specific entries absent from the general ledger:

o A May 5, 2008 entry recorded the disbursement of cash from Sentinel to an investor and referenced “Transfers” as the other side of the journal entry.

o First, it should be noted that it was not common practice for Sentinel to disburse money to investors because Sentinel primarily collected investment advisory fees from certain investors.

o Second, FTI could not identify this May 5, 2008 entry in the general ledger account “Transfers.” The first entry to the “Transfers” account does not appear until October 31, 2008 (almost six months later).61

59 There was one transaction (cash disbursement to Landberg) from the Special Opportunity Fund on December 1, 2008 for $50,000. The memo field notes “L and E” (which is shorthand for loans and exchanges). 60 According to Barsuk, suspense accounts are not viewed as permanent general ledger accounts, but rather are designed as a “holding place” for journal entries that may require additional information. 61 This entry was subsequently identified by Barsuk after applying a “custom” view in QuickBooks.

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o As discussed earlier within commingling Example 5, $575,000 was withdrawn from the Special Opportunity Fund, and according to the Special Opportunity Fund general ledger, transferred to another Entity (possibly Amagansett Realty SPV or Amagansett Realty Group). However, the general ledgers of these two Entities do not reflect the transfer of this amount.62 When FTI requested this entry from Barsuk, she also could not locate it within the general ledger, and noted that bookkeeping for Amagansett Realty SPV and for Amagansett Realty Group was done by an outside accounting firm prior to 2006.

Following these discoveries, FTI requested and received permission from Debtor personnel and Debtors’ Counsel to duplicate the computers and corresponding data for the available period. FTI obtained a copy of this preserved data on June 24, 2011. Because of the proximity between the discovery of the data discrepancies, data collection, and the report deadline, an analysis of this data has not been performed.

b) Cash Movements Recorded in General Ledger FTI was generally able to trace cash movements per the bank statements to the general ledgers of each of the Entities; however, there were unexplained exceptions noted in our commingling examples in Exhibit 8, and in the description of the incompleteness and inconsistency of the books and records, above.

c) Maintenance of Inter-Entity Account Balances Although extensive in both their volume and magnitude, transactions among the Entities have been recorded in “Due From / Due To” accounts (i.e., intercompany receivables and payables) or to “Investment” accounts in the general ledgers. It should be noted, however, that merely because the transactions are recorded in the books and records, does not mean that they were appropriately authorized, consistent with legal agreements, or recorded accurately. A significant amount of additional forensic accounting investigatory work would still be necessary to help make such determinations. (Also, see discussion of Intercompany Balances at Section VI.A.1.b) for limitations and issues observed.)

d) Interest Expense Accrued As another appearance of “arm’s-length” separateness, interest income and expense are accrued on inter-Entity balances, as well as on the balance shown as owing by Landberg to certain Entities. A determination would still have to be made, however, as to whether such accrued interest was actually paid, or merely included as part of other subsequent transfers of cash among the related party entities. Impeding this determination is the incompleteness and inconsistency of the books and records, as well as the difficulty in ascertaining the ultimate source of purported repayments of loans and payments of interest.

62 Special Opportunity recorded the transfer to general ledger account “2397 – Due from ARG SPV I.” It should be noted that there is no such Entity as ARG SPV1 (rather there is an Amagansett Realty Group LLC and an Amagansett Realty SPV I, LLC)

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4. Promissory Notes

Another factor that would ordinarily weigh against substantive consolidation is the fact that promissory notes were prepared in support of certain cash transfers among the Entities for certain periods63.

Greatly reducing the weight that might otherwise be accorded the existence of promissory notes documenting transfers among the Entities, however, are the following observations with respect to those promissory notes that FTI reviewed:

• The promissory notes are short form, “fill in the blank” templates generated by a word processing program, with the same sparse level of detail for a multi-million dollar note as for one for $19.01.

• Regarding signatures on the promissory notes:

o Most (more than 55%) were not signed;

o Landberg was apparently the authorized signatory for virtually every Entity;

o It is apparent that certain of the signatures were applied by means of a signature stamp (approximately 15% of total), which may indicate a lack of control and raises questions of authenticity;64

o There is evidence that certain of the promissory notes were apparently back-dated. As part of a thorough forensic investigation, it would be advisable to examine the meta-data65 with respect to when certain of these notes were generated. In at least one case, it is apparent that the back-dating occurred in April of the following year, likely in order to provide documentation to satisfy the independent auditors. The full forensic investigation would also involve email reviews for the corresponding periods.

Barsuk explained that when she joined West End in January 2006, there was neither a formal procedure nor a file system for the promissory notes. She confirms that the system that she established was borne, in part, in response to inquiries made by independent auditors seeking documentation for inter-Entity loans. Barsuk explained that she created the template for the promissory notes and maintained a concurrent log. However, in practice, the system was difficult for her to maintain. She stated that Landberg was not always forthcoming with details, such as the terms of the promissory notes, nor did he make himself available to execute the paperwork. Because the number of inter-Entity transfers was increasing, Barsuk found it exceedingly more difficult to keep the promissory notes and log current. Consequently, she ceased following this procedure in approximately August 2007 and, to the best of her knowledge and recollection, this procedure was not continued by anyone else at West End, during Landberg’s tenure.

63 We have only seen promissory notes for the period from early 2006 through approximately August 2007 (with isolated exceptions). 64 Of the total number of promissory notes reviewed by FTI, fewer than 30% appear to have been manually signed by Landberg. 65 Meta-data refers to context and contents of electronic data files such as time a document was last accessed, or who created the document.

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5. Other Factors Weighing in Favor of Substantive Consolidation

a) Control / Decision-Making Governed Exclusively by Landberg

Based on discussions with Debtor personnel employed at West End at the time Landberg was still West End’s President and Chief Executive, he exercised complete control over the activities of each individual Entity in which West End had a majority interest. Examples cited by Debtor personnel include:

• Landberg instructed employees to transfer funds to banks to avoid overdrafts on a frequent basis; (see SectionVI.A.1.d) for further details.)

• There were no independent Boards of Directors or investment committees at the Entities, including at the parent, West End Financial Advisors; and

• There existed a common staff of officers and employees among the Entities, all of whom ultimately answered to Landberg.

b) Other

• Policies and procedures were not documented; and

• All Entities operated from the same business location.

B. Evidence Weighing Against Substantive Consolidation

In the case of the West End Funds and affiliated Entities, the following are all factors weighing against substantive consolidation:

1. Separate Tax Returns Filed

Separate tax returns appear to have been filed for each of the Entities, and forms K-1 were apparently issued to the investors.

2. Separate Financial Statements Prepared (Some Audited)

Financial statements for certain Entities were audited by independent Certified Public Accounting firms. Debtor personnel have provided us with copies of all such financial statements that they have located to this point, according to Heslin. A full list of those financial statements is included within Exhibit 1.

In summary, we have received copies of audited financial statements, for certain years, for the following Entities:

• West End Absolute Return Fund I

• West End Absolute Return Fund, L.P.

• West End Fixed Income Partners, L.P.

• West End Mortgage Opportunity Fund I, L.P.

• West End Special Opportunity Fund, L.P.

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• West End Special Opportunity Fund II, L.P.

• West End Private Client Income Fund, L.P.

• West End Mortgage Finance Fund I, L.P. and Subsidiary

Further investigation with respect to the actual auditing procedures employed by the independent auditors for certain of these Funds might prove helpful for other aspects of a forensic investigation and should be considered.

3. Monthly Customer Statements

Another factor militating against substantive consolidation is the fact that Monthly Customer Statements were apparently sent to the individual investors in each Fund, according to Debtor personnel.66 Such statements would depict the opening balance for the month, as well as monthly activity (and year to date totals) including contributions, distributions, and the investor’s allocable share of earnings for the period. Based upon the testing conducted by FTI to this point, it appears that the cash activity was accurately reflected on these monthly customer account statements. With respect to cash activity (contributions and distributions) only, Debtor personnel prepared investor reconciliations and obtained consensus from each limited partner.67

However, given the fraud and misappropriations allegedly engaged in by Landberg and others, the income and expenses / earnings and losses reflected on such statements, are suspect for most, if not all, of the Entities; Accordingly, further forensic investigation and analysis would be necessary before final conclusions can be drawn.

4. Documents Exist Describing Specific Business Purpose of Each Entity

We reviewed documents describing a specific business purpose for each Debtor Entity and seventeen (17) Non-Debtor Entities. We reviewed at least one of the following documents for each Entity:

• Operating agreement

• Private offering memorandum

• Certificate of incorporation

• Articles of organization

• Limited partnership agreements

• LLC agreements

For the remaining Non-Debtor Entities, we did not receive any documents in which one could reasonably expect to identify a specific business purpose.

66 The Debtor provided monthly customer statement information (in excel) to FTI. FTI did not take steps to attempt verify that the statements now generated from such Excel files accurately represented the statements received by investors. 67 Reconciliations were prepared for and agreements reached for 119 of the 121 limited partners (Landberg and Crandall were excluded).

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5. Documents Give Landberg Broad Discretion in Investment Decisions

Any restrictions surrounding the application of cash from investor contributions or Entity earnings would typically be addressed in the documents noted in Section VI.B.6. The documents we reviewed gave Landberg broad discretion to use cash as he saw fit; that is, the documents do not incorporate explicit restrictions on the use of cash. Any restrictions are implicit in the specific business purposes described in the documents; however, those descriptions are quite broad. But, the formation and operating agreements of many of the Entities68 do provide that Landberg would not perform any act that “would make it impossible to carry on the ordinary business” of the Entity (e.g., the Hard Money Fund). As noted in Section VI.A.2.a), however, the Loan Agreement between the Hard Money Fund and MCC Funding and West LB explicitly restricting the use of cash for a specified purpose (additional security for the West LB), was not adhered to by Landberg. Such violation, as well as the fabricated loans described in Section VI.A.2. b), would breach this overarching covenant.

C. The “Cost-Prohibitive” Consideration of Unwinding the Commingling

As in many cases, the substantive consolidation factors do not all line up on one side of the ledger. Rather, as discussed above, certain factors weigh in favor of substantive consolidation, and others against, and no single factor is dispositive. However, even within factors weighing against substantive consolidation, there are strong countervailing, off-setting factors as discussed at length above.

In my opinion, the magnitude and pervasiveness of the commingling (Landberg operated as if there were a centralized cash management/treasury function for the entire group of Entities), combined with the misappropriation and fraud considerations, should be weighted most heavily in the consideration in favor of substantive consolidation.

However, the existence of separate books and records and the tracking of the intercompany receivables and payables allow for the possibility that a complete, exhaustive forensic accounting investigation might enable us to disentangle the cash transfers among Entities. But the inquiry and investigation does not stop there -- all assets and liabilities of all of the Entities would have to be parsed out, as would actual income and expenses / gains and losses. Such investigation would also need to explore the possibility of misappropriation of corporate opportunity from one Entity to another, or to Landberg and his family members. How would fraud and theft losses be allocated under a pure stand-alone approach? Effectively, the business activity of the entire group of Entities would have to be reconstructed.

68 For example, “Agreement of Limited Partnership of West End Absolute Return Fund I, LP” dated February 9, 2006; “Amended and Restated Agreement of Limited Partnership of West End Income Strategies Fund LP” dated January 15, 2008; and “Agreement of Limited Partnership of West End/Mercury Short-Term Mortgage Fund, LP” dated June 26, 2007.

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The cost and practical effect and consequences have to be evaluated in light of likely recoveries available to the creditors and investors in evaluating whether such undertaking is cost-effective. In making such an assessment, it is common for forensic accounting experts to rely upon a recovery model analysis prepared by an expert. I have consulted with experts within FTI’s Creditors Rights practice. Against the potential recovery, I must weigh the likely professional fees associated with, and flowing from, the attempted disentangling of the Debtors’ estates, as well as the subsequent reconstruction of the books and records of all of the Entities as of various points in time. In order to properly apportion income and expense gains and losses, it would be necessary to ensure that only those Entities entitled to share in such returns were allocated percentages. Such percentages can only be properly determined once the investments are accurately recorded.

As alluded to above, there are many factors to consider in arriving at an estimated cost. Much forensic accounting investigation and analysis would still have to be done, as discussed at various points throughout this report.

Chief among the areas where significantly more forensic accounting effort would be required is the detailed review and analysis of the inter-Entity / related-party transactions to assess the completeness, accuracy and propriety of the myriad transfers. In my professional opinion, this aspect of the investigation alone could easily require 4 to 6 weeks of four professionals’ time at an estimated cost of approximately $400, 000 to $600,000 due to the sheer volume and complexity of the transactions.

Banking and brokerage account records of Landberg and other individuals and entities would have to be subpoenaed and carefully analyzed to determine secondary and tertiary levels of subsequent transfers of funds and profits / losses on transactions. (Estimated cost: approximately $250,000 to $375,000.)

Detailed reviews of the books and records, financial statements and tax returns would still have to be completed. The imaged and copied computer hard drives and servers would have to be reviewed for evidence of transactions, spreadsheets, emails, and meta-data. (Estimated cost: approximately $300,000 to $450,000.)

Transactions with less than majority-owned entities affiliated with Landberg and West End and principals of entities with whom Landberg has or had known relationships would have to be analyzed.69

Consideration should be given to investigating the work performed by independent auditors and tax accountants to glean additional insight and information.70

As mentioned above, once all this work has been done to disentangle the inter-Entity transactions, the books and records of each of the Entities would have to be reconstructed as of various points in time, with appropriate re-allocations of income and expenses / gains and losses, management fees and administrative costs. (Estimated cost: approximately $400,000 to $750,000.)

69 This category of inquiry and analysis, though potentially illuminating, is primarily geared toward development of claims and recovery of assets, rather than the ability to disentangle accounts and reconstruct books and records on a stand-alone basis; accordingly, I have purposefully not included fee estimates for this area. 70 As with the prior category, investigation of the work performed by the auditors and accountants is primarily geared toward development of claims and recovery of assets, rather than the ability to disentangle accounts and reconstruct books and records on a stand-alone basis; accordingly, I have purposefully not included fee estimates for this area.

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My best estimate of the total additional cost of pursuing the full forensic investigation necessary to accomplish the disentanglement and reconstruction of the Debtors’ business records to give effect to their operations as if each Debtor had been independently operated throughout the relevant periods, if such could be accomplished, is approximately $1.5 - $2.2 million, but could easily exceed $2.5 million. Such estimate does not include the associated legal fees for assessments, guidance, and interviews performed by counsel.

Although each case is unique, I have been actively involved in conducting portions of the forensic investigations of recent Ponzi Schemes, involving hedge funds and similar businesses, and am familiar with others in which my partners are involved, and FTI’s fees for those cases have ranged from $1 million to $3.5 million (and continuing), not including the fees on the Madoff matter in which I am also involved.

In fact, in the West End case itself, I am informed that the following forensic and restructuring firms have incurred fees as indicated: Daylight - approximately $500,000; Goldin Associates, LLC - approximately $41,000; and Mark Radke - approximately $300,000.

FTI’s fees for the first 6 weeks of its involvement in this case are approximately $850,000.

There is at least one further potential consequence of not substantively consolidating the Debtors’ estates below any secured indebtedness against the estates – the resultant reconstituted financial results of separate Entities potentially sets up competing interests, requiring each constituency to retain its own legal and financial experts, the fees for which further deplete recoveries otherwise available for distribution to creditors and investors. In other words, once FTI were to complete its forensic investigation, the end product would be restated financial positions and results of operations for each of the Debtor Entities. Those results would probably benefit certain Debtors (and their creditors) at the expense of others in the allocation and distribution of the anticipated less-than-full recoveries. Consequently, each constituency would likely retain its own legal and financial advisors, at additional cost.

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VIII. LIST OF EXHIBITS

Exhibit 1 – Listing of Documents Relied Upon in Reaching Expert Conclusions

Exhibit 1A – Listing of Entity Bank Statements Provided by Debtor Personnel Exhibit 2 – Listing of West End Affiliated Entities Exhibit 3 – West End Organization Chart (Partial) Exhibit 4 – Curriculum Vitae of Raymond T. Sloane Exhibit 5 – Example of Debt to Equity Conversions Exhibit 6 – Summary, by year, of Inter-Entity Transfers Exhibit 7 – Debtors’ E-mails Addressing Bank Account Overdrafts Exhibit 8 – Specific Examples of Commingling

Exhibit 8.1 Example 1: Hard Money Fund – Investor #1 Deposit (2009) Exhibit 8.2 Example 2: Simco SPV – Investor #2 Deposit (2008) Exhibit 8.3 Example 3: Hard Money Fund – Investor #3 Deposit (2008) Exhibit 8.4 – Example 4: Special Opportunity Fund – Investor #4 Deposit (2008) Exhibit 8.5 – Example 5: Special Opportunity Fund – Investor #5A and Investor #5B Deposits (2005) Exhibit 8.6 – Example 6: Absolute Return Fund – Investor #6 Deposit (2007) Exhibit 8.7 – Example 7: Special Opportunity Fund – Investor #7 Deposit (2006) Exhibit 8.8 – Example 8: Benedek Development Group – Proceeds from Real Estate Sale (2007) Exhibit 8.9 – Example 9: Mortgage Opportunity Fund – DZ Bank Loan (2007) Exhibit 8.10 – Example 10: Investment Partners – Bear Stearns Deposit (2004) Exhibit 8.11 – Example 11: Amagansett Realty Group LLC – Proceeds from Real Estate Sale (2005)

Exhibit 9– Summary of Activity within the Interest Reserve Bank Account

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Exhibit 10 – Landberg/Crandall Account Analyses

Exhibit 10.1 Summary of Landberg Account – Transactions with Entities Exhibit 10.2 Summary of Crandall Accounts – Transactions with Entities Exhibit 10.3 Copies of Checks

Exhibit 11 – Advances to Geneva Financial Corporation Exhibit 12 – Loans to Fusion Telecommunications Int’l., Inc. Exhibit 13 – Purchases of Real Estate