Free Status Report - District Court of California - California

Case 3:08-cv-00764-BEN-NLS

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1 DAVID L. OSIAS (BAR NO. 091287) ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP 2 501 West Broadway, 15th Floor 3 San Diego, California 92101-3541 Phone: (619) 233-1155 4 Fax: (619) 233-1158 E-Mail: [email protected] 5 JOSHUA A. DEL CASTILLO (BAR NO. 239015) 6 ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP 7 515 South Figueroa Street, 9th Floor Los Angeles, California 90071-3309 8 Phone: (213) 622-5555 Fax: (213) 620-8816 9 E-Mail: [email protected] 10 Attorneys for Receiver Stephen J. Donell 11 12 13 14 15 SECURITIES AND EXCHANGE COMMISSION, 16 Plaintiff, 17 v. 18 PLUS MONEY, INC. and MATTHEW LA 19 MADRID, 20 Defendants, Case No. 3:08-cv-0764 BEN (NLS) SUPPLEMENT TO FIRST INTERIM REPORT OF RECEIVER, STEPHEN J. DONELL [Declaration of Joshua A. del Castillo filed concurrently herewith] UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

21 THE PREMIUM RETURN FUND LIMITEDLIABILITY LIMITED PARTNERSHIP, ET 22 AL., 23 24 25 Stephen J. Donell (the "Receiver") court-appointed permanent receiver for Defendant Plus Relief Defendants.

26 Money, Inc. and Relief Defendants The Premium Return Fund Limited-Liability Limited 27 Partnership, The Premium Return Fund II Limited-Liability Limited Partnership, The Premium 28 Return Fund III Limited-Liability Limited Partnership, Return Fund, LLC, Return Fund II, LLC,
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1 Return Fund III, LLC, Return Fund IV, LLC, Return Fund V, LLC, Return Fund VI, LLC, and 2 their subsidiaries and affiliates (collectively with Plus Money, Inc., the "Receivership Entities") in 3 the above-captioned matter hereby submits this Supplement to First Interim Report of Receiver, 4 Stephen J. Donell (the "Supplement") pursuant to the Order in Aid of Receivership entered on 5 June 11, 2008. 6 Although the Receiver does not expect to file another full Interim Report until October 31,

7 2008, the Receiver believes that the events reported on herein are of sufficient significance so as to 8 warrant the filing of this Supplement. 9 I. 10 PROCEDURAL BACKGROUND AND RELEVANT FACTS. On April 28, 2008, the United States Securities and Exchange Commission (the

11 "Commission") filed its complaint for violation of the federal securities laws (the "SEC 12 Complaint") against Defendants Plus Money, Inc. and Matthew LaMadrid, and Relief Defendants 13 The Premium Return Fund Limited-Liability Limited Partnership, The Premium Return Fund II 14 Limited-Liability Limited Partnership, The Premium Return Fund III Limited-Liability Limited 15 Partnership, Return Fund, LLC, Return Fund II, LLC, Return Fund III, LLC, Return Fund IV, 16 LLC, Return Fund V, LLC, Return Fund VI, LLC, their subsidiaries and affiliates, Palladium 17 Holding Company, and Donald Lopez. On May 16, 2008, this Court appointed the Receiver 18 pursuant to its Order: (1) Freezing Assets; (2) Appointing a Permanent Receiver; (3) Requiring 19 Accountings; and (4) Prohibiting the Destruction of Documents (the "Appointment Order"). 20 Pursuant to this Court's Preliminary Injunction and Order: (1) Freezing Assets; (2)

21 Appointing a Permanent Receiver; (3) Requiring Accountings; and (4) Prohibiting the Destruction 22 of Documents (the "Appointment Order"), the Receiver has been charged with, among other 23 things, assuming control of the Receivership Entities and their assets (the "Receivership Assets"), 24 performing an accounting of the assets and financial condition of the Receivership Entities, 25 investigating, locating, and recovering Receivership Assets, preparing reports for the Court, and 26 preparing an appropriate claim allowance and investor/creditor distribution plan. The 27 Appointment Order requires all persons or entities in possession of Receivership Assets, including 28 Palladium and Lopez, to transfer them to the Receiver. (See Appointment Order § VII.)
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In the SEC Complaint, the Commission alleged that Defendant Matthew LaMadrid had,

2 though a dba, transferred $10 million in Receivership Assets to Palladium and Lopez, which funds 3 the Receiver is charged with recovering as part of his responsibilities as defined by the 4 Appointment Order. 5 On July 30, 2008, the Receiver filed the First Interim Report of Receiver, Stephen J.

6 Donell, and Petition for Further Instructions (the Receiver's "First Interim Report"). In the First 7 Interim Report, the Receiver reported that, in an effort to recover identified Receivership Assets in 8 the most efficient and cost-effective manner possible, the Receiver, the Commission, and Relief 9 Defendants Palladium Holding Company ("Palladium") and Donald Lopez ("Lopez") had entered 10 into a Stipulation and Request for Order to Amend Preliminary Injunction (the "Palladium 11 Stipulation") so as to allow Palladium and Lopez to disgorge the $10 million identified in the SEC 12 Complaint to the Receiver. (See First Interim Report § III(C).) Pursuant to the terms of the 13 Palladium Stipulation, the transfer of the subject $10 million was to be completed on or before 14 July 31, 2008, as follows: 15 16 17 18 19 20 21 · · · $2,400,000.00 by direct transfer from the account of Palladium with EKN Financial Services, Inc., account number 4419-5861; $7,538,194.88 by wire transfer from another account held by Palladium; and $61,805.12 by direct transfer from the accounts of Palladium and Lopez at Huntington National Bank, which funds had been transferred to the Receiver as of the date of the Stipulation's execution. (Id.) Prior to the filing of the Palladium Stipulation, the Receiver, the Commission, Palladium,

22 and Lopez negotiated the terms of a settlement agreement, subject to Court approval, whereby 23 Palladium and Lopez would disgorge the subject $10 million to the Receiver, the Commission 24 would dismiss its prayer for relief against Palladium and Lopez in the above-captioned matter, and 25 the Receiver would dismiss the Receivership Entities' claims against Palladium and Lopez in a 26 related case pending before the United States District Court, Southern District of California, Case 27 No. 08-cv-0823 (the "Parallel Case"). (Id.) In the First Interim Report, the Receiver noted that, 28 although the contemplated settlement agreement had not been finalized or approved by the Court,
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1 the Receiver, the Commission, Palladium, and Lopez anticipated submitting it for Court approval 2 shortly after Palladium's and Lopez' disgorgement to the Receiver was completed. (Id.) 3 II. 4 5 6 UPDATED SUMMARY OF RECEIVER'S EFFORTS. A. Palladium And Lopez Have Not Disgorged The $10 Million Addressed By The Palladium Stipulation. The Palladium Stipulation was filed with the Court on July 17, 2008. (See Declaration of

7 Joshua A. del Castillo [hereinafter "del Castillo Decl."] ¶ 2, Ex. A.) That same day, counsel for 8 the Receiver provided Anthony L. Leffert, counsel for Palladium and Lopez, wiring instructions in 9 order to enable them to complete the wire transfer portion of he disgorgement, in the amount of 10 $7,538,194.88. (del Castillo Decl. ¶ 3, Ex. B.) That evening, the Receiver's counsel received a 11 call from Mr. Leffert inquiring as to whether the wire transfer had been received. (del Castillo 12 Decl. ¶ 4.) No wire transfer was received on July 17, 2008 from Palladium or Lopez. (del Castillo 13 Decl. ¶ 5.) 14 In the month following the filing of the Palladium Stipulation, Mr. Leffert repeatedly

15 represented ­ to counsel for the Receiver and to the Commission ­ that the subject wire transfer to 16 the Receiver had either been completed or was in process or imminent. (del Castillo Decl. ¶ 6, 17 Exs. C, D, E, and F.) Despite these representations, no wire transfer has been received, and the 18 Receiver has recovered only $2,135,641.15 of the funds addressed by the Palladium Stipulation, 19 including $61,805.12 inadvertently transferred from the accounts of Palladium and Lopez at 20 Huntington National Bank prior to the execution of the Palladium Stipulation and a wire transfer 21 of $2,073,836.03 from EKN Financial Services, Inc.'s agent, Legent Clearing.1 22 On Friday, August 22, 2008, Mr. Leffert approved and accepted a funds turnover demand

23 from the Receiver to EKN Financial, Inc. for the $2.4 million at that institution addressed by the 24 Palladium Stipulation, which turnover demand was delivered to EKN Financial on August 25, 25 26 27 28
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Notably, the Palladium Stipulation required a transfer of $2.4 million from the account of Palladium at EKN Financial Services, Inc. The Receiver's counsel has confirmed with EKN Financial Services, Inc., and its agent, Legent Clearing, that the subject account has contained only $2,073,836.03 since the entry of the Appointment Order. (del Castillo Decl. ¶ 7.) As a consequence, there remains a deficiency of $326,163.97 in connection with the EKN Financial Services, Inc. funds addressed in the Palladium Stipulation.
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1 2008. (del Castillo Decl. ¶ 8, Ex. G.) As noted above, on Tuesday, August 26, 2008, the Receiver 2 received a wire transfer in the amount of $2,073,836.03 from EKN Financial, Inc.'s agent, Legent 3 Clearing. 4 As of the date of this Supplement, there remains a deficiency on the amount of

5 $326,163.97 in connection with the EKN Financial, Inc. funds addressed in the Palladium 6 Stipulation. In addition, the outstanding $7,538,194.88 wire transfer from Palladium has not been 7 received. As a consequence, at this time, over $7.8 million in Receivership Assets remain 8 outstanding from Palladium and Lopez. 9 Palladium and Lopez are thus in non-compliance with the terms of the Palladium

10 Stipulation. Their non-compliance is compounded by the fact that the Appointment Order 11 requires all persons and entities in possession of Receivership Assets to return them to the 12 Receiver. Palladium and Lopez have represented to the Court ­ via the Palladium Stipulation ­ 13 that they remain in possession of at least $7.8 million in Receivership Assets, and are thus 14 obligated to return those funds to the Receiver. Their failure to do so represents not only a 15 violation of the terms of the Palladium Stipulation ­ entered into as an accommodation by the 16 Receiver in an effort to recover the subject funds more quickly and without incident ­ but of the 17 Appointment Order itself. 18 As a consequence, absent sua sponte action by the Court, the Receiver anticipates bringing

19 an appropriate action in this Court to enforce the terms of the Palladium Stipulation in the near 20 future. 21 22 23 B. Palladium's and Lopez' Failure To Disgorge The $10 Million Addressed By The Palladium Stipulation Endangers The Anticipated Settlement Agreement. The Receiver's expectation that a settlement agreement negotiated between the Receiver,

24 the Commission, Palladium, and Lopez would shortly be submitted for Court approval was based 25 upon the expectation that Palladium and Lopez would comply fully with the terms of the 26 Palladium Stipulation, and disgorge the subject $10 million on or before July 31, 2008. As 27 discussed above, this disgorgement has not been completed, and any settlement is necessarily 28 contingent upon Palladium and Lopez complying with the terms of the Palladium Stipulation.
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As a consequence, the Receiver is now unable to provide the Court with any assurance that

2 a settlement will be submitted for approval in the near future. The Receiver entered into the 3 Palladium Stipulation ­ and negotiated the terms of the related settlement agreement ­ in an effort 4 to recover the subject $10 million in Receivership Assets in the most efficient, expedient, and 5 cost-effective manner possible. 6 Palladium's and Lopez' persistent non-compliance with the terms of the Palladium

7 Stipulation has substantially delayed the Receiver's recovery of significant Receivership Assets, 8 and forced the Receiver to incur additional costs in monitoring Palladium's and Lopez' 9 compliance, and in attempting to obtain a commitment from Palladium and Lopez to comply with 10 the terms of the Palladium Stipulation. The fact that the subject funds may not be disgorged in 11 accordance with the Palladium Stipulation, and thus that additional efforts to recover from 12 Palladium and Lopez may be required, suggests that an efficient and expedient recovery is less 13 likely, and thus that there may be a significant delay in submitting a settlement agreement ­ if any 14 ­ to the Court for approval. 15 III. 16 CONCLUSION. As of the date of this Supplement, Palladium and Lopez have persistently failed to comply

17 with the terms of the Palladium Stipulation, and over $7.8 million in Receivership Assets held by 18 Palladium and Lopez ­ and due to be returned to the Receiver pursuant to the Palladium 19 Stipulation ­ remain unrecovered. Despite repeated representations from Palladium's and Lopez' 20 counsel that the subject funds were forthcoming, over $7.8 million has not been received, and the 21 Receiver has recovered only those funds inadvertently released Huntington National Bank and a 22 23 24 25 26 27 28
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1 portion of the funds due from EKN Financial Services, Inc. Given Palladium's and Lopez' 2 persistent non-compliance, and absent sua sponte action from the Court to enforce the terms of the 3 Palladium Stipulation, the Receiver anticipates taking appropriate action to enforce the Palladium 4 Stipulation in the near future. 5 6 Dated: August 27, 2008 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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ALLEN MATKINS LECK GAMBLE MALLORY & NATSIS LLP DAVID L. OSIAS By: /s/ David L. Osias DAVID L. OSIAS Attorneys for Receiver Stephen J. Donell

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