Free Receivers Financial Report - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-cv-645-JLK SECURITIES AND EXCHANGE COMMISSION Plaintiff, v. KENNETH ROY WEARE a/k/a ROY WEAVER, J&K GLOBAL MARKETING CORPORATION, and AAA-AUCTION.COM, INC., Defendants.

RECEIVER'S SEVENTH QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2007

Patten, MacPhee & Associates, Inc., the Court-appointed Receiver, submits its quarterly report for the calendar quarter ended June 30, 2007, outlining the current status and progress of its efforts to establish and administer the claims process for investors, as set forth in the Court's Order Appointing Receiver dated October 26, 2005. This quarterly report summarizes activities undertaken by the Receiver from April 1, 2007 through June 30, 2007. The Receiver reports the following:

Background 1. On December 6, 2006, the Court entered its order granting the Receiver's Unopposed

Motion to Establish Procedures and Deadline for Filing Claims, to Approve Manner of Notice to Potential Claimants, and to Establish Claims Review Procedures ("Motion to Establish Procedures"),

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which outlined in detail the process to be followed by the Receiver in administering claims submitted by investors in J&K Global Marketing Corporation ("J&K Global") and AAA-Auction.com, Inc. ("AAA-Auction.com"). 2. As set forth in detail in the Receiver's Sixth Quarterly Report for the Quarter Ended

March 31, 2007 ("Sixth Quarterly Report"), the Receiver then posted at its website .pdf files of all relevant documents, including the Court-approved Proof of Claim Form and Claims Bar Date Notice. On or about December 22, 2006, the Receiver sent a broadcast e-mail containing electronic links to the posted documents to all potential claimants who had previously registered their current contact information with the Receiver. At the same time, paper copies of the documents were mailed to all potential claimants who had expressly requested postal delivery of documents from the Receiver. 3. Additional e-mail notices were sent by the Receiver on January 17, January 31,

February 6, February 8, February 15, February 20, February 27 and March 6, 2007 to those potential claimants who had not yet submitted a Proof of Claim Form. The Receiver also continued to mail claim documents to potential claimants subsequently requesting them or about whom the Receiver could not confirm receipt of the e-mail notice sent on December 22, 2006. In addition, the Receiver modified its website to include FAQ's and other information regarding the claims administration process and the deadline for submitting claims. 4. The Court's December 6, 2006 Order established midnight, March 12, 2007 as the

deadline for the Receiver to have received timely-filed claims from investors. By that date, the Receiver had received a total of 1,863 timely-filed claims, representing approximately 4,600 investments in J&K Global and at least 22 investments in AAA-Auction.com. The total amount -2-

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claimed was approximately $5.025 million. Included in those totals, however, were a substantial number of duplicate claims, as well as several large claims, for as much as $200,000 each, with no apparent basis for the dollar amount claimed. In addition, as discussed below, the Receiver had received a significant number of claims for amounts lost in other investment scams. 5. Prior to the beginning of the period covered by this quarterly report, the Receiver's

staff had preliminarily reviewed more than 1,760 claims, or roughly 95% of the timely-filed claims submitted to the Receiver. Of the claims reviewed through March 31, 2007, the Receiver had allowed more than 65% of them for the entire amount claimed. At the same time, the Receiver had disallowed as many as 7% of the preliminarily reviewed claims in their entirety because there was no record of the claimant being an investor in J&K Global or AAA-Auction.com or, more frequently, because the claimant appeared to have made money as an investor. The Receiver had partially allowed/disallowed the remaining claims reviewed through that date, or had reached no decision and was awaiting further information from the claimants. 6. As noted in the Sixth Quarterly Report, through March 31, 2007, the Receiver had

also received approximately 50 Late-Filed Claims, as that term is defined in the Motion to Establish Procedures. The Receiver also stated its intention to continue receiving, reviewing and validating such claims, while still recognizing their "subordinate" position given their late filing. If, as the Receiver anticipated at that time, the total dollar amount of allowed claims did not exceed the amount held in the registry of the Court, the Receiver also anticipated asking the Court to include the Late-Filed Claims in its proposed plan of distribution.

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Receiver's Progress During the Most-Recent Calendar Quarter 7. During the calendar quarter covered by this report, the Receiver has received an

additional 47 Late-Filed Claims from investors in J&K Global and 1 additional Late-Filed Claim from an investor in AAA-Auction.com. These additional claims represent at least 123 investments and total approximately $118,000. The primary source of these additional claims appears to be "friends and family" of existing claimants. In addition, a handful of late-filing claimants have represented to the Receiver that they only recently learned of this receivership matter. A few attribute their lateness to, finally, retrieving their documents from the garage or basement. 8. Between April 1 and May 11, 2007, the Receiver finished its review of all but a few

complex claims, for which the Receiver was awaiting additional information from the claimants. On May 11, 2007, the Receiver sent a Determination Notice to all but those few claimants, in accordance with the Motion to Establish Procedures. 9. At the time of sending Determination Notices on May 11, 2007, the Receiver had

allowed the entire amount claimed for more than 1,390 claims, or approximately 75% of the nonduplicate claims considered at that time. At the same time, the Receiver had denied fewer than 180 claims, or less than 10% of all considered claims, in their entirety because either there was no record of the claimant being an investor in J&K Global or AAA-Auction.com or because the claimant appeared to have made money as an investor. Pursuant to Paragraph 23 of the Motion to Establish Procedures, the amount of each claim is to be limited to the "Unpaid Principal Balance." "Unpaid Principal Balance" is defined in Paragraph 22 as "the principal amount of an investment, net of any return on, or of, the investment received by an Eligible Claimant."

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10.

As of May 11, 2007, the Receiver had partially disallowed the remaining 300, or so,

claims either because the claimant had received some money back from J&K Global or AAAAuction.com or because the Receiver could not confirm the entire amount claimed to have been invested from documents supplied by the investor or the records provided to the Receiver by the SEC. 11. In accordance with the Motion to Establish Procedures, claimants having all or part

of their claim disallowed by the Receiver could request reconsideration of their claim by submitting a written request and documents supporting their position to the Receiver. Given the questionable quality of the data upon which the Receiver was required to rely in order to validate claims and the relatively large number of claims which the Receiver had been unable to validate through that data, the Receiver anticipated receiving a substantial number of requests for reconsideration. 12. Through June 30, 2007, the Receiver had received 149 requests for reconsideration

from claimants. That number represented approximately 8% of the non-duplicate claims considered by the Receiver. 13. A substantial percentage of the requests for reconsideration submitted to the Receiver

related to claims that the Receiver disallowed because the transaction database provided by the SEC, and relied upon by the Receiver in validating claims, indicated a return of all, or a portion, of the claimant's investment by J&K Global. In many instances, the claimant's written request expressed outrage at the suggestion that the claimant had received monies from J&K Global. Others seemed to acknowledge the receipt of some monies, but disputed the amount alleged by the Receiver. Subsequent investigation and analysis by the Receiver indicated that certain payments reflected in

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the transaction database provided by the SEC may, in fact, have been mere book entries by the Defendants to mislead at least some investors into believing that they had earned the promised return. In a few instances, the Receiver discovered that the recorded payment was made by a check that subsequently bounced. 14. As a result of that newly discovered information, the Receiver proposed to the SEC

that all claims previously disallowed by the Receiver, in whole or in part, based on payment information contained in the transaction database be reviewed and confirmed through J&K Global bank records, even if the claimant did not request reconsideration of his or her claim. The Receiver believed that such additional effort was appropriate and necessary to preserve accuracy and fairness in the claims process. 15. Given the substantial number of requests for reconsideration and the transaction

database issue discussed above, the Receiver filed a Motion for Extension of Time to Issue Final Determination Notices and to File Status Report ("Motion for Extension of Time") with the Court on June 8, 2007. The Court granted the Motion for Extension of Time, granting to the Receiver an extension of time until June 29, 2007 for the Receiver to issue a Final Determination Notice to all claimants seeking reconsideration of the disallowance of all or part of their claims and until July 30, 2007 for the Receiver to file with the Court the status report required pursuant to Paragraph 54 of the Motion to Establish Procedures. 16. On June 20, 2007, the Receiver sent a Corrected Determination Notice to 56

claimants, who had not requested reconsideration of their claims, thereby increasing the amount allowed for each claim as a result of the Receiver's verification of all payments to claimants through

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J&K Global bank records as well as the transaction database. Adjustments related to claims for which reconsideration had been requested by the claimant were made in the Final Determination Notices. 17. On June 29, 2007, the Receiver sent a Final Determination Notice to the 149

claimants who had sought reconsideration of the Receiver's prior disallowance of all or part of their claims. As a result of these "de novo reviews" by the Receiver, the amount allowed by the Receiver was increased with respect to 101 claims, or roughly 2/3 of the claims for which reconsideration had been requested. The Receiver did not change the amount allowed with respect to the remaining 48 claims. 18. The 48 claims for which the Receiver did not change the amount allowed included,

among others, 9 claims totaling $1,922,500, for which the records provided to the Receiver showed an investment by the claimants of $375 each, or a total of $3,375. With respect to those 9 claims, the Receiver requested proof of the amount invested from each claimant. None was ever provided; however, two of the claimants told the Receiver that $200,000 represented the amount they expected their $375 to return. 19. The 48 requests for reconsideration completely denied by the Receiver also included

a number of claims for which bank records confirmed that the claimant had made money on his or her investment in J&K Global Marketing. For example, one claim for $4,875 from a family in Louisiana was initially denied by the Receiver because the transaction database indicated that the investor made money on his investment. In a strongly worded request for reconsideration, the claimant, insisting that he only wanted to "get our money back," indicated that he had contacted legal

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counsel and accused the Receiver of improper conduct. Yet, J&K Global bank records confirmed that the claimant's family received payments of $18,600 on their total investment of $4,875, a more than 300% return. In accordance with Paragraph 23 of the Motion to Establish Procedures, the claimant's request for reconsideration was completely denied by the Receiver. 20. Finally, at least 14 of the 48 requests for reconsideration completely denied by the

Receiver related to claims made for amounts invested in other scams. For example, the pastor and several members of a church in the Baltimore, Maryland area and related individuals in South Carolina, have insisted throughout the claims process that their investments in scams such as Bankers International Trust, BIT Nutritional Limited and others, should be allowed because Defendant Kenneth Weare was also associated with those scams. Yet, a thorough investigation by the Receiver has found no such connection. Similarly, 4 claims were filed for amounts lost to a company named E.T.S. PayPhones, Inc. ("E.T.S."), apparently because one those investors also invested in J&K Global. Again, the Receiver found no connection between E.T.S. and any of the Defendants here. 21. In accordance with the Motion to Establish Procedures, claimants who object to the

Receiver's Final Determination Notice may seek the Court's review by filing a Motion for Review with the Court on or before July 19, 2007. To facilitate that process, the Receiver prepared and included with each Final Determination Notice a form Motion for Review by Court. A copy of that form motion is attached hereto at Exhibit A.

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Status of Claims Process at June 30, 2007 22. Through June 30, 2007, the Receiver had reviewed and considered a total of 1,866

claims, after eliminating a substantial number of duplicate claims and/or consolidating certain claims for administrative convenience. Attached at Exhibit B is a schedule summarizing the number of timely and late claims considered by the Receiver, as well as the dollar amounts claimed and allowed/disallowed by the Receiver with respect to those claims. In addition, the Receiver received one Late-Filed Claim on Saturday, June 30, 2007 that had not been considered by the Receiver as of that date and, therefore, is not included in Exhibit B. Exhibit B further divides all claims considered by the Receiver into 3 categories: (1) those allowed by the Receiver in their entirety; (2) those disallowed in their entirety; and, (3) those partially allowed and partially disallowed. 23. As reflected in Exhibit B, through June 30, 2007, the Receiver had considered and

allowed in their entirety a total of 1,466 claims, or 78.6% of all claims considered. Of those claims, 1,413 were timely and 53 were submitted after the Claims Bar Date. The total dollar amount allowed for all claims allowed in their entirety is $1,760,855. It should be noted that the amount allowed for this category of claims exceeds the amount claimed in Exhibit B because the Receiver received and considered as many as 263 claims with no specified amount. In many cases, the claimant expressly stated that he/she no longer had any documentation evidencing his/her investment from seven or eight years ago, and therefore must rely on the records provided to the Receiver by the SEC. 24. Exhibit B also reflects that, through June 30, 2007, the Receiver had considered and

disallowed in their entirety a total of 99 claims, or 5.3% of all claims considered. The total amount

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disallowed for claims falling into this category is $358,786. As noted above, claims disallowed in their entirety consist primarily of investors who actually made money on their investment in J&K Global and claimants seeking amounts lost in other investment scams. 25. The balance of Exhibit B relates to the 301 claims that the Receiver partially allowed/

disallowed. As reflected in Exhibit B, a total of $3,133,934 was claimed by those 301 claims. Yet, the Receiver allowed only $374,250 with respect to those claims, thereby disallowing $2,759,685. While that amount may seem substantial at first blush, it should be remembered that the 9 claims discussed in Paragraph 18, alone, account for $1,919,125, or approximately 70% of that difference. 26. The total dollar amount of claims allowed by the Receiver, as of June 30, 2007, is

$2,135,105. While the total dollar amount allowed by the Receiver may change going forward ­ primarily, as the result of the Receiver considering one or more new claims or additional supporting documentation from one or more claimants ­ the Receiver does not expect any such change to be material. Therefore, the Receiver fully anticipates that funds will still be remaining in the registry of the Court after all allowed claims are paid. 27. As a result, the Receiver anticipates a hotly-debated issue for the Court to be the

extent to which, if any, claimants should receive "interest" on their claims. Not surprisingly, the Receiver has already heard from a number of claimants voicing their view that "interest" should be paid. In addition, one European investor has suggested that foreign investors should receive an additional amount due to the substantial decline in the U.S. dollar during the seven years since the SEC first brought this action.

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28.

At the same time, during the period covered by this quarterly report, the Receiver was

contacted by Virginia Grady, Defendant Weare's criminal attorney, regarding the use of any excess funds to pay Defendant Weare's criminal restitution obligation. It is the Receiver's understanding that Judge Nottingham may have issued an order recently staying the collection of criminal restitution from Defendant Weare, pending a determination as to the amount of funds to be paid to investors through this receivership. 29. In accordance with Paragraph 54 of the Motion to Establish Procedures and the

Court's order granting the Motion for Extension of Time, the Receiver will file with the Court, on or before July 30, 2007, a status report containing a proposed distribution plan that addresses these issues in greater detail. 30. As of the date of this quarterly report, the Receiver has not been served with a copy

of any Motion for Review by Court. However, pursuant to the Motion to Establish Procedures, the time period for a claimant to file and serve his or her Motion for Review by Court does not expire until July 19, 2007. WHEREFORE, the Receiver respectfully submits this quarterly report this 11th day of July, 2007.

s/ Leslie A. Patten Leslie A. Patten, President Patten, MacPhee & Associates, Inc. 1775 Sherman Street, Suite 2900 Denver, Colorado 80203 Telephone: (303) 296-2900 Fax: (303) 296-4475 E-mail: [email protected]

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DATED this 11th day of July, 2007.

s/ Michael D. Burns Michael D. Burns, #11631 1775 Sherman Street, Suite 2900 Denver, Colorado 80203 Telephone: (303) 296-2900 FAX: (303) 296-4475 E-mail: [email protected] Attorney for Receiver

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CERTIFICATE OF SERVICE I hereby certify that on July 11, 2007, I electronically filed the foregoing RECEIVER'S SEVENTH QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2007 with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to the following e-mail addresses:

Leslie J. Hughes [email protected] Christine J. Jobin [email protected] Thomas J. Krysa [email protected],[email protected]

s/ Michael D. Burns Michael D. Burns, #11631 Attorney for Receiver 1775 Sherman Street, Suite 2900 Denver, Colorado 80203 Telephone: (303) 296-2900 FAX: (303) 296-4475 E-mail: [email protected]

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