What’s Happening?

Apologies for the silence on the news flow as of late.  Things at the Robie household have been challenging, much more so than usual.  Since we don’t have much to share from our side, who’s got something to share with the group?

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38 thoughts on “What’s Happening?

  1. Starting with the R.E. Loans bankruptcy case in Dallas.

    This week there is a hearing before Judge Houser that seeks approval of the attorney and professional fee bills for the case up to the Plan. Wells Fargo has paid some of these fees under the debtor in possession order allowing payment up to a certain amount. As I have mentioned before, every filed document is posted on the R.E. Loans case website. You can download all of the fee applications for free and read them at your leisure.

    Based on those documents, there is somewhere between $20,000,000 and $21,000,000 in fees, total so far. The current fee applications are supported by detailed and summarized hourly billing records.

    An aside –

    Hourly billing of fees can be very dishonest. There is a hidden motive in favor of dishonesty. New lawyers want to achieve partner status and this decision is often based upon their hourly billing. Bonuses are awarded for production based upon hourly billing. Attorneys are not perfect. Other motives for dishonest billing that I have seen are: drug and alcohol abuse, gambling abuse, and greed.

    Hourly billing records can be dishonest in numerous ways. Hourly billing is on a .1 or 6-minute basis. A 3-minute phone call can be billed at .1, .2, or .4 hours without question. This padding also applies to document review, document update, and related, “I was thinking.” Hourly billing can be used for “phantom” work. This usually occurs when a high billing attorney bills the client for work actually assigned to lower associate or law clerk. The associate or the clerk does the work, but it is billed to the client at the highest rate. In one firm, a high billing attorney billed this “phantom” work and his billed hours per day generally exceeded 24 hours. Hourly billing can be used for “copy and paste” work. Long before computers, lawyers used “past” fully-paid-for work product and then reused and rebilled it over and over and over as “present” work product at the full rate. In one firm, they had sets and sets of interrogatories. The attorney would merely direct the legal secretary to “Send out Set No. 6,” a .1 task. The legal secretary would type a face sheet “To Plaintiff “X” and send out the set. The client would be billed 5.5 hours for “Preparation and Review, Interrogatories” by the attorney, or the legal secretary would enter 5.5 hours directly in the attorney’s billing record.

    As an example of hourly bill padding, I worked on a case as an hourly-billing defense attorney paid by an insurance company. There was another defendant in the case represented by another firm paid by the same insurance company. When the case was over, the claims manger called my supervising partner and said that my hourly bill for virtually identical work was 1/3 of the other firm. Our firm was praised for my honesty, but behind the scenes I was criticized for under billing the file.

    How do you determine if the $20,000,000 to $21,000,000 that you have paid and will pay for the hourly billing up to the Plan, total so far, is honest or dishonest?

    There are several indirect ways to determine if a bill is honest. If a bill has a significant number of “N/C” or “No Charge” entries, then this is may be a good sign of honesty. N/C entries usually refer to work done on the file but not of direct value to the client. Here is an example. I met with Mr. Brinkman for lunch at Bo’s Barbecue in Lafayette to discuss several Mortgage Fund ’08 issues: the Red Mountain settlement, the purchase and sale of the Angelakis note and deed of trust, the Ponzi scheme transfer of “new” money from Mortgage Fund ’08 to “old” investors in R.E. Loans, and others. (Don’t ask: I paid for the lunch; we had the brisket.) Mr. Brinkman had the “right” to charge: “Travel to Lafayette,” “Meeting with Robert Brower,” and “Travel from Lafayette.” In his hourly billing fee application, Mr. Brinkman billed all of this as: “No Charge.” This was an honest charge; any benefit to the Mortgage Fund ’08 investors from this meeting was indirect. There are a significant number of other no-charge entries on his firm’s bill.

    Referring back to my comment above, and as another example of a sign of honesty, the Brinkman bill has significant and substantial assignments referred to and billed by lower-fee associates.

    The size of a bill may also be a sign of honesty. Most attorneys, including the honest and the dishonest, have a right to charge for a “reaction” when there is an “action.” Phone calls must be answered or returned; e-mails and correspondence must be read and answered. When someone does something in a case, there is usually a reaction.

    For example, the Liquidating Trustee for Mortgage Fund ’08 filed a motion to have the court order R.E. Loans to pay her bills and her attorney bills for negotiating the $5,000,000 settlement for unsecured creditors, like Mortgage Fund ’08. The motion was made on the basis that the Liquidating Trustee’s work made a substantial contribution to the unsecured creditors recoveries and her bill should be reimbursed. This was the “action.” The Committee has filed significant opposition papers, the “reaction.” [If you are a Mortgage Fund ’08 investor and an R.E. Loans investor, you will be paying for both sides of this skirmish.]

    In looking at the pending fee applications, there are many “action” and “reaction” entries. It appears to me that there were significant billable “reactions” to “actions” from Development Specialists, Inc. (DSI), your collateral agent. Without doing the math, these reaction billings to DSI actions for all the attorneys and professional may be hundreds of thousands of dollars, or more. If DSI had not acted, then all of this part of the reaction billing would not exist.

    [Your Committee has now settled all of the DSI “actions”. The Committee has agreed to pay $725,000 to DSI as a Class 9 claim. This means that you have paid substantial fees as “reactions” to DSI ‘s actions and then you will pay $725,000 to make DSI go away.]

    There is another way that merely the size of the bill may be a sign of honesty. If you look at the Armanino McKenna audit report for 2007, you will see the fees charged by the Ng Family and Bruce Horwitz for management and servicing of the R.E. Loans fund and portfolio. They billed $14,219,019. The Armanino McKenna audit report for 2008 was never published but a draft states that the same fees for 2008 were $12,592,941. Although these fees were based upon a percentage of the amounts in the fund, they give an indication of the value for managing the fund and servicing the portfolio. It is important to add, there is no evidence that any investor ever objected to these fees. $20,000,000 to $21,000,000, total so far, may be in the ballpark.

    [OK, OK – management of the fund? Walter did nothing, played golf and lied to the investors, Bruce “worked” part-time and played computer solitaire, answered investor phone calls and lied to the investors, and Kelly knew nothing about the operation, lied about what he did know, and coached the volleyball team.]

    What can you do? Given the size of the bills, the cost to have the Committee attorneys and professional prepare a line-by-line objection would be staggering with the benefit of a line-by-line objection unclear. Instead the Committee filed an objection raising some of the points that I have stated here. The objection came to me in an automatic e-mail from the court; I hope that it will be posted for you on the website on Monday. You should read it, document no. 1094. Hopefully, your Committee can use the mere existence of the objection as a tool to negotiate a better deal for you.

    But does it really matter? I have contended in postings here that the net recovery from the portfolio to you will be zero. The Committee still claims that the net recovery from the portfolio will be 4 to 7%. Either way, the jobs were outsourced and your money went to Los Angeles and Dallas, with little or nothing benefitting our local economy.

    My next post will discuss the status of Diamond McCarthy’s efforts to obtain money for you from third parties within the bankruptcy case.

    • Moving on to Diamond McCarthy:

      Diamond McCarthy with attorney Eric Madden at the helm was retained by the Committee to do several things. Primarily, I think, Diamond McCarthy accepted the assignment to investigate and prosecute civil claims, initially the case against Wells Fargo.

      Wells Fargo went first because, and I might be wrong about this, there was some kind of time limitation on determining whether or not Wells Fargo should be sued in the bankruptcy court. Diamond McCarthy prepared a draft complaint against Wells Fargo, but the Committee nixed that idea. [Equitatus posted the draft complaint and this has lead to an investigation to find out the source of the leak. You are paying for this investigation, but there has been no report posted anywhere so far.]

      With Wells Fargo off the hook, Diamond McCarthy has embarked on an ambitious plan to uncover any other third party liability, get that money and put it in the bankruptcy case for you. The plan starts with document review and depositions.

      This week Diamond McCarthy filed an agreed-upon order that allows them to get documents and take depositions. (Document no. 1090, filed 9/19.) The 14 first round targets are: (a) Walter Ng; (b) Bruce Horwitz; (c) Kelly Ng; (d) Barney Ng; (e) B-4 Partners, LLC; (f) Bar-K, Inc.; (g) Cushman Wakefield; (h) George P. Smith Partners; (i) Greenberg Traurig LLP; (j) R.E. Loans, LLC; (k) R.E. Future, LLC; (l) Capital Salvage, a California corporation; (m) Stein & Lubin LLP; and (n) Armanino
      McKenna LLP.

      In my experience, getting all the documents first promotes truth telling at the deposition. And the process boils down to this: Tell us everything you know, so that we can decide if we want to sue you.

      Using the information from documents produced by these 14 targets and their depositions, Diamond McCarty can get authorizations for second-round targets and so on.

      Who are the prime candidates for a lawsuit? From my perspective on the facts as I know them, Stein & Lubin are in trouble. In an unpublished document, the auditors for Armanino McKenna told Stein & Lubin that R.E. Loans was potentially liable for violating the SEC rules and regulations. Stein & Lubin never relayed this concern to the mangers of the fund.

      In his deposition, Bruce Horwitz testified that he was never told about these potential violations from Stein & Lubin. Morgan Miller Blair, a very respected firm in Walnut Creek (now disbanded for other reasons) whose name is not on the list of 14, was hired to investigate this question. Morgan Miller Blair agreed that the fund had been violating the SEC rules and regulations. You received a letter dated April 1, 2007, about this but the letter was crafted to conceal the real truth of the problem.

      I have looked at a potential case against Stein & Lubin and absent some dramatic new fact or facts, Stein & Lubin has no defense.

      The documents and depositions from George P. Smith Partners will throw light on one of the most intriguing issues in the origination of the R.E. Loans portfolio. From the documents that I have, there was a predictable sequence in the origination of some of the loans in the portfolio. David Rifkin, a principal with George P. Smith Partners, a big real estate investment bank in Century City, would have a needy borrower with a “difficult” problem but no source of funding. David Rifkind would call Bar-K, who had plenty of money, which was poring into R.E. Loans from you, millions each month, but Bar-K was too small to broker these loans. George P. Smith Partners and Bar-K acted as a team, with David Rifkind as the broker.

      The team co-owned a plane, a Beech B200 with tail number 500NG, which was parked in Southern California. David Rifkin and one or two commercial pilots would take the plane to the Bay Area, pick up the rest of the team, and they would all go to meet the borrower and to see the project. This is how some of your California money ended up in questionable out-of-state loans.

      I don’t know why Cushman Wakefield is on the list of 14. This name does not appear on any of my documents.

      The Diamond McCarthy investigation will take time. I would not expect any report to you until next year.

      [OK, OK – Walter, Kelly and Bruce. Walter Ng will not produce documents and not testify, he will assert his Fifth Amendment privilege. Kelly Ng will not produce documents and not testify, he will assert his Fifth Amendment privilege. Bruce Horwitz will not produce documents and not testify, he will assert his Fifth Amendment privilege.]

      I don’t know if Diamond McCarthy will also handle the clawback litigation. The Committee offered many of the potential clawback defendants, that is investors who withdrew money after November 1, 2007, the effective date of the exchange agreement, a settlement of 5%. The selected clawback defendants were threatened with a lawsuit in bankruptcy court in Dallas if they did not accept the deal and pay 5% back to the Committee. The clawback defendants, who called me, referred to this settlement proposal as “extortion.” The letter from the Committee was pretty heavy handed to some investors who withdrew their money for a good reason and in good faith. Maybe the Committee will see the light and take a more humanitarian approach to these few investors. Personally, I am wondering if Federal Judge Edward Chen took advantage of the 5% payback on the hundreds of thousands of dollars he withdrew and what effect, if any, that will have on the cases in Oakland. It would be interesting to see if Diamond McCarthy had the courage to sue a sitting Federal Judge.

      My next post, tomorrow morning, will discuss the status of the cases pending in the bankruptcy court in Oakland. Judge Efremsky has ordered that the audio recordings of the hearings in these cases be immediately posted on the court’s website. Judge Efremsky apparently understands that the investor/victims want, and are entitled to, current and accurate information about these cases. The audio recordings can be downloaded for about $2.00 if you have a Pacer account.

  2. My reports started today with the R.E. Loans bankruptcy in Dallas and will move on
    tomorrow to the bankruptcy cases in Oakland.

    Monday, I will give a report on the FBI and SEC investigations.

    • No questions. All I have is a sincere “thank you” from myself and other investors in RE Loans, RE Reno, Mortgage Fund 08 and etc., that appreciate your information and updates regarding the class action and bankruptcy cases. While I am saddened that so many investors and their families have been severely hurt by the actions of a few weak, dishonest and tiny men, I am truly inspired by strong individuals, like yourself and others that fight for justice and what is right.

      • By request, I will move up the report on the SEC and FBI investigations and report on them now.

        First, you need to know the difference between the end result of the SEC investigation and the FBI investigation.

        The SEC investigation results in a civil, not a criminal, complaint. The SEC investigation is led by Attorney Erin Schneider. Erin Schneider was a Hastings Law School graduate and, I believe, she has worked for the SEC for 10 years. Attorney Schneider is smart with experience and she has an impressive track record for the SEC. She provides focus for her team that includes investigators who work side-by-side with her.

        The Schneider team replaces an attorney and an investigator, two losers who completely botched and then terminated the original investigation in December 2009.

        A civil action for violation of the securities law involves alleged violation(s) of federal laws, usually false statements or misrepresentations made in interstate commerce or sent in the U.S. mail. I don’t think that face-to-face false statements or misrepresentations at a Silver Dragon Restaurant annual meeting can be violations, but I could be wrong, as I am not very knowledgeable in this area of the law. Remedies for a violation of the federal securities include permanent injunctions or orders banning the defendant or defendants from dealing in securities, disgorgement of profits, and civil penalties.

        An SEC civil action could be filed in the San Francisco or Oakland branch of the United States District Court, Northern District. An apparent problem, which I have mentioned before, is the fact that a sitting Federal Judge was an investor who made a preferential withdrawal after the exchange. This might be a factor in picking a Court for the case.

        The FBI investigation is completely different because it does not immediately result in anything. The FBI functions as investigators and/or detectives. All of the FBI personnel are Special Agents of the FBI, not attorneys who file lawsuits. They have impressive gold badges and concealed weapons permits for guns, not credit card type plastic licenses from the California State Bar. The FBI investigation team is led by Christine Hemje, an FBI Special Agent assigned to the Concord Office of the FBI. She is not an attorney. Special Agent Hemje does not have the power or authority to file a legal action. She just carries a gun.

        As an aside, whenever I cross-examine a Special Agent from the FBI, I always ask if there are “General Agents” with the FBI. The response is: “No.” Incredulously I look at the jury and ask: “So all of the agents are ‘Special?’” Answer: “Yes.” The jury chuckles every time.

        The FBI investigation is turned over to the Office of the United States Attorney and attorneys in that office decide if a criminal complaint will be filed, when to file, who to name, and what counts or charges will be brought. The types of charges include violation of federal laws, commonly fraud by use of the mail and/or wire fraud to transfer investment money. Remedies for violations can include time in a federal prison.

        One important factor to keep in mind is the following: The burden of proof in a civil action brought by the SEC is lower than the burden of proof in a criminal action brought by the United States Attorney. The burden of proof in a criminal action is proof beyond a reasonable doubt and because of the jury pools in the Northern District Federal Courts can be anti-law enforcement, this higher burden of proof becomes a substantial barrier to a criminal conviction in some clear cut cases.

        What do the SEC and FBI investigations have in common? Two things – confidentiality and a one-way street mentality. The one-way street mentality means that the SEC and the FBI take, but never give. When I was growing up, we would trade baseball cards. One for one, one for two, etc. The SEC and the FBI never trade anything. Confidentiality means that the SEC and the FBI will never tell you anything about their investigations.

        So don’t worry if you have not heard from them. They are following the rules and maintaining confidentiality. There is no point in calling or e-mailing the SEC or the FBI. You are just wasting their time and taking them away from their job — investigation. If the SEC or the FBI want to interview or talk to you, then they will let you know.

        How do we learn about these investigations? When someone is interviewed, that person is not necessarily bound by the rule of confidentiality. That person can tell who was present, every question asked, and how he/she responded. From these post-interview reports, we can glean some facts about the investigations.

        I can tell you this. The SEC and FBI investigations are active. The SEC team took a very important deposition a week ago. From one person who had a joint SEC and FBI interview, we learned that investigators from the Internal Revenue Service were also present. From that person, we also learned that he/she was shown document after document after document after document, with concise and pinpoint questions asked about particular sentences in each document. This means that many, many documents have been obtained and reviewed.

        Why is this important to you? The filing of a criminal complaint (or the death of a lead person, like Walter Ng) involving certain fraudulent investment arrangements may trigger significant income tax refunds under IRS Code section 165, the Bernard Madoff rule for Ponzi scheme losses. This section comes into play when the criminal complaint is filed; a conviction is irrelevant.

        The Bernard Madoff tax refund rule does not apply to everyone. Every investor must check with his or her tax preparer to see if he or she qualifies. Some investors have done this in advance and learned that they may recoup 100% of their losses through tax refunds. Others have learned the Bernard Madoff rule does not apply to them and they would not get any tax refund, zero.

        The triggering of IRS Code section 165 has other consequences. I hope that your class action attorneys have thought about total refunds under IRS Code section 165 and whether or not the filing of a criminal complaint and total refunds would significantly deplete their class action. There is a way to minimize this impact on the size of the class and perhaps that explanation is best left to them.

        Many investors want convictions and jail time. Their sense of justice and accountability is not measured in dollars and cents. One investor, a military veteran, told me that he served his Country with conviction and now it is time for his Country to return the favor and convict the Ng family and Bruce Horwitz.

        Finally, instead of a post about the Department of Labor investigation, tomorrow I will post a report about the Carrie Johns lawsuit, a lawsuit that raises the same issues.

        • This is a status report on Carrie Johns’ civil case against Walter Ng, Barney Ng, Kelly Ng, Bruce Horwitz, Bar-K, Inc., Lend, Inc., and the Bar-K 401K Plan. The case was filed on May 15, 2012, in the Northern District Federal Court in San Francisco. It is assigned to United States District Judge William Alsup with the case number C 12-02456 WHA.

          The case is for wrongful termination and for breach of fiduciary duty against her employers and the trustee of the Bar-K 401(k) pension plan.

          Kelly Ng, Bar-K, Inc., Lend, Inc., and the Bar-K 401K Plan appeared and filed a motion to dismiss the case. Carrie Johns’ filed opposition papers and the Kelly Ng defendants filed a reply brief. Judge Alsup will hear the motion dismiss next week on October 4, 2012, bright and early at 8:00 a.m. in his courtroom on the 19th Floor of the Federal Courthouse in San Francisco.

          The case presents issues that are currently under investigation by the United State Department of Labor.

          The case has no immediate value to you the investors, but it may have significant value for all the attorneys around the edges, including your class action counsel.

          Briefly, the case may provided valuable insights about the “upstairs” and downstairs” operations and division of responsibility at the 201 Lafayette Circle: the “downstairs” offices of R.E. Loans, Mortgage Fund ’08, and B-4 Partners; and the “upstairs” offices of Bar-K.

          For those of you who attended the McGuire trial, you might recall my hand-drawn “upstairs” and “downstairs” illustrating the cash flow. Investors’ money goes in “downstairs,” and then it goes “upstairs” to be lent to borrowers; borrowers’ interest and principal payments on their loans goes in “upstairs” and then “downstairs” to be paid as interest and principal disbursements to the investors.

          The Carrie Johns case presents another facet of the “upstairs” “downstairs” operation.

          The “downstairs” operations of R.E. Loans, LLC, was managed by B-4 Partners, LLC. The actual management, by B-4 Partners, to the extent there was any management, was the responsibility of Walter Ng and Bruce Horwitz up until April 1, 2007. Kelly Ng assumed some management function at that point. The three managers of B-4 Partners and R.E. Loans were paid a guaranteed salary of $12,000 each month. Barney Ng, who had no say in the management of R.E. Loans, LLC, and worked upstairs at Bar-K, did not receive any salary. From time to time the four partners took draws, which they called “bonuses.”

          When Mortgage Fund ’08 became operational, it was managed, that is, looted, by Mortgage Fund, LLC. Walter Ng and Kelly Ng managed mortgage Fund, LLC.

          The clients of the downstairs managers, all of them, were you, the investors. You paid their salaries and bonuses.

          The “upstairs” operations of Bar-K consisted of loan origination and loan servicing for R.E. Loans and Mortgage Fund ’08. The Bar-K operation was owned and managed by Barney Ng and Kelly Ng.

          [If you are still with me, you probably realize that Kelly Ng had an irreconcilable conflict of interest in his three-headed role as a manager of R.E. Loans, as a manger of Mortgage Fund ’08, and as an owner/manager of Bar-K.]

          For some loans, the borrowers paid a loan origination fee to Bar-K when the loan was initially funded. For some loans, the borrowers paid a commission on each draw. On most draws, Bar-K was paid a loan-servicing fee deducted from the draw.

          Carrie Johns was in the middle of all of this. She was an upstairs employee of Bar-K, working downstairs for B-4 Partners. Carrie Johns was paid a salary by Bar-K, and starting in 2007, a $5,000 monthly “downstairs” bonus by B-4 Partners.

          Like the other Bar-K employees, Carrie Johns had a 401(k) account invested in R.E. Loans, and when that fund closed for new investments, she had another 401(k) account with Mortgage Fund ’08. [This issue, that is, whether directing the employees’ pension plan contributions into these funds amounted to prohibited transactions under the law, is under investigation by the Department of Labor.]

          Carrie Johns was terminated in June 2010. When the R.E. Loans bankruptcy was filed, her 401(k) account balance with R.E. Loans was $386,618.75. Her 401(k) balance with Mortgage Fund ’08 was $18,677.18.

          In her lawsuit, she claims loss of these two accounts, and back wages and benefits amounting to another $100,000.

          There is one small problem with the lawsuit. In order to make a valid claim, Carrie Johns has to sue the trustee of the Bar-K pension plan who directed the investments into R.E. Loans and Mortgage Fund ‘08. It appears, however, from the papers filed as part of the motion to dismiss, Carrie Johns was the trustee of the Bar-K pension plan who directed the investments into R.E. Loans and Mortgage Fund ’08.

          If the pension plan part of the case is thrown out of federal court, Carrie Johns can file the wrongful termination part of the case in state court.

          Either way, as a long time player in the R.E. Loans operation with a pending case, Carrie Johns’ testimony about Walter Ng, Barney Ng, Kelly Ng, and Bruce Horwitz may be valuable, if it is not too self-serving.

          This case can be followed if you have a PACER account.

          • There are five pending cases in the Oakland Bankruptcy Court.

            First, in the Walter and Maribel Ng case, Tracy Green and her trustee are liquidating Walter and Maribel Ng’s property.

            Second, Barney Ng is steamrollering the Petitioners in his involuntary bankruptcy case to a money judgment because the Petitioners defaulted by failing to answer his counterclaim.

            Third, in the Mortgage Fund ’08 case, Susan Uecker, the Liquidating Trustee and her counsel have Alligator Bay on the auction block, doing their best to maximize the return on the sale.

            Fourth, in her case against Kelly Ng, Susan Uecker, the Liquidating Trustee and her counsel have the upper hand after Kelly Ng asserted his Fifth Amendment right to remain silent at his deposition, refusing to admit anything, including, for example, that his father is Walter Ng.

            Fifth, in the big money case, Susan Uecker’s case against Wells Fargo has an opening round hearing on October 4. At that hearing, Wells Fargo is trying to score a knockout by asking Judge Efremsky to dismiss the case.

            I’d like to start with the Wells Fargo case.

            Here’s the procedural background, as I see it. The R.E. Loans Committee hired Eric Madden and Diamond McCarthy to prepare a draft Complaint against Wells Fargo. After doing that job, the R.E. Loans Committee did not pursue the case and Wells Fargo got off the hook in the R.E. Loans case.

            Someone leaked the draft Complaint against Wells Fargo, Equitatus got a copy, and Equitatus posted the draft Complaint on the Equitatus blog. Susan Uecker’s attorneys, seeing a good thing on the Equitatus blog, used much of the R.E. Loans draft Complaint to craft a new Complaint for Mortgage Fund ’08 against Wells Fargo.

            Susan Uecker’s attorneys filed the new Complaint. Wells Fargo was served and Wells Fargo has made a motion to dismiss. Susan Uecker’s attorneys have filed opposition.

            Here’s the factual background, as I see it. Readers of this blog know that Walter Ng and Kelly Ng, as the managers of Mortgage Fund ’08, and Bruce Horwitz, as their “consultant,” pitched Mortgage Fund ’08. They actively promoted Mortgage Fund ’08 because R.E. Loans was shut down for “new” investment money and they needed “new” money to pay interest and principal distributions to “old” R.E. Loans investors. Walter Ng and Kelly Ng took the first $39,000,000 in Mortgage Fund ’08 investments, “new” money, transferred it to B-4 Partners, which was controlled by Walter Ng, Kelly Ng, and Bruce Horwitz, and B-4 Partners transferred it dollar-for-dollar to R.E. Loans for distribution to “old” investors.

            Yes, the Mortgage Fund ’08 investors trusted Walter Ng, Kelly Ng, and Bruce Horwitz, and they were not worthy of that trust.

            This was all done in secret. When Wells Fargo found out about these transfers, which I am tempted to call a Ponzi scheme, Wells Fargo did the unthinkable. Wells Fargo actively participated in a cover-up. Wells Fargo agreed to take three loans that it held as collateral for the R.E. Loans’ line of credit, reassign those loans from itself to R.E. Loans, so R.E. Loans could “sell” those three loans to Mortgage Fund ’08. The Wells Fargo reassignments of these three loans were backdated to make the “theft” of $39,000,000 from Mortgage Fund ’08 into “sales” of loans. As icing on the cake, Wells Fargo directed that Mortgage Fund ’08 pay an additional $796,564.23 to Wells Fargo to complete the deal.

            I am not kidding!

            The arguments on October 4 will involve two legal issues. Was Wells Fargo a “transferee” of the money? Did Wells Fargo aid and abet Walter Ng and Kelly Ng’s breach of fiduciary duty to Mortgage Fund ’08?

            If you were a Mortgage Fund ’08 investor, you should go this hearing and support your Liquidating Trustee and her counsel. Judge Efremsky usually rules form the Bench giving comprehensive decisions. It will be interesting and there is, at least, $40,000,000 of your money at stake.

          • ” Wells Fargo agreed to take three loans that it held as collateral for the R.E. Loans’ line of credit, reassign those loans from itself to R.E. Loans, so R.E. Loans could “sell” those three loans to Mortgage Fund ’08.”

            What was the status of the three loans at the time of the transfer?

            Were they still viable, current, paying loans or were they already DOA?

          • The borrower’s last payment on the Alligator Bay loan was made on July 9, 2007. Notice of Default was served by mail on December 27, 2007. The loan was accelerated making it “due and payable at once” in the amount of $9,468,234.54.

            The reassignment from Wells Fargo to R.E. Loans was dated October 31, 2008, backdated to March 11, 2008. The sale to Mortgage Fund ’08 was dated December 29, 2008, backdated to March 12, 2008.

            The borrowers on the T& J Development and Peachtree Properties loans had defaulted before the “sale” to Mortgage Fund ’08, but the holder of the second deed of trust was making the payments. According to my records, the last payment on the T & J Development loan was made on June 5, 2008. The last payment on the Peachtree Properties loan was made on May 9, 2008. The reassignments from Wells Fargo and the transfers to Mortgage Fund ’08 were backdated, so the “sales” of these two loans fell within the window of the payments made by the holder of the second deed of trust.

            I am not sure that payment “status” at the time of the transfer is the test. I believe that the test is: Assuming an “arms length transaction,” what would a buyer with all the facts pay for these loans? Using an “arms length transaction” standard, all three of these loans would have been worth just the “as is” value of the collateral, no more. If that is the correct standard, then having Mortgage Fund ’08 “buy” the three loans at face value, or par, was unconscionable.

          • The next active case on my list is the involuntary bankruptcy filed against Barney Ng.

            Filed on December 15, 2011, the petitioners in this case are the BATROA Profit Sharing Plan (Dr. Michael Levine), the Boody and Kurtin Family Trust, and Andrea Keaton, PhD. The attorneys for the Petitioners are Robert Cross from Sideman & Bancroft, Barbara Suzanne Farley, and Deborah Kurtin. Barbara Suzanne Farley is Dr. Levine’s wife. I will call the Petitioners, “Levine, Kurtin and Keaton.”

            Barney Ng was served. He appeared through his counsel and he filed a counterclaim. Judge Efremsky issued a standard 21-day order setting a date for Levine, Kurtin and Keaton to reply to Barney Ng’s counterclaim. Levine, Kurtin and Keaton did not file a reply. Their default was entered.

            On June 21, 2012, Levine, Kurtin and Keaton dismissed the involuntary petition, but the counterclaim remained. Levine, Kurtin and Keaton filed a motion to have the default set aside. That motion was heard by Judge Efremsky on September 4, and denied.

            Because the default was not set aside, the next step in the case is a judgment for damages. A judgment for damages is a matter of right. Many times the judgment follows a hearing where the judge takes evidence about the damages. The parties in default get to watch. Judge Efremsky, however, asked Barney Ng’s attorneys to put everything in writing first, allowing Levine, Kurtin and Keaton to respond. Barney Ng’s attorneys filed their papers yesterday.

            The first measure of damages will be Barney Ng’s attorney fees. The fees are based upon his attorneys’ hourly rate. The attorneys have requested a default judgment against Levine, Kurtin and Keaton for their fees in the amount of $129,879.06 as of yesterday.

            The calculation of the second measure of damages, Barney Ng’s actual damages, is less precise. The measure of actual damages can include the time that Barney Ng worked on his defense and specific items of damage that relate to being in bankruptcy for 6 months. This might include lost business opportunities as a result of the bankruptcy. There is no particular list of items to determine actual damages. It is calculated on a case-by-case basis.

            Barney Ng has requested a default judgment against Levine, Kurtin and Keaton for actual damages of $600,000. This figure includes his time in defending the case over 6 months, 520 hours at $400 per hour. The bulk of this time was spent compiling documents for his deposition that Levine, Kurtin and Keaton scheduled, but did not take.

            Finally, the law allows punitive damages, but only in some cases. The standard is high. Barney Ng’s attorneys argue that this is such a case. The amount of punitive damages must have some relationship to Levine, Kurtin and Keaton’s net worth and be high enough to set an example to other litigants. Barney Ng’s attorneys have requested a default judgment for punitive damages against Levine, Kurtin and Keaton in the additional amount of $500,000.

            A response from Levine, Kurtin and Keaton is due on October 16. Barney Ng’s attorneys have the right to reply to that response, which is due October 26. The hearing on all of these papers is set for November 13.

            Barney Ng’s damages are set but his attorneys’ fee claim goes up and up as they continue to work on the case.

            What is this case really about? From time to time, a case will become more important than the individual parties. It seems to me that this case is now all about the integrity of the bankruptcy system. The evidence so far supports the conclusion that Levine, Kurtin and Keaton filed the involuntary petition against Barney Ng for an improper purpose and that the petition had no basis in fact or in the law.

            For example, Levine, Kurtin and Keaton alleged a breach of fiduciary duty against Barney Ng. If you read my Carrie Johns post, you will learn that Barney Ng worked upstairs for Bar-K. He was not a manager of R.E. Loans downstairs. Since he was not a manager of R.E. Loans, he would not have a fiduciary duty to the investors, including the petitioners. The claim that he had a fiduciary duty to Levine, Kurtin and Keaton was too far over the line.

            When a case is not about the parties but about the integrity of the system, the case takes on a life of its own. Judge Efremsky, who has the final word on this, is legally bound to protect the system. He usually rules from the bench so you can go and hear the ruling for yourself.

        • As I understand it, there are two possible sources of tax-related recovery of a portion of the funds invested by individuals (not IRAs) in NG funds: (1) take a capital loss on the lost investment and offset future capital gains (no carrybacks); or (2) claim a theft loss under section 165 and write that loss off against past and future ordinary income (subject to the carry back and forward rules). In no case would there be a 100 percent recovery of the investment losses contrary to what seems to be stated in the fourth paragraph from the bottom above. One could only be able to offset the capital or theft loss against the other appropriate income whose value would be determined by the applicable tax bracket on that income.

          One can claim a theft loss even if there is no indictment or death triggering the Madoff safe harbor rules, but the Madoff rules do create very useful safe harbors supporting the factual basis for the theft loss.

          The people who invested funds through their IRAs presumably never paid taxes on those contributed funds due to the deduction for contributions to the IRA. They won’t pay the normal taxes on distributions from the IRA so indirectly they already have gotten a tax benefit–never having paid taxes–related to the lost investment. Not much of a consolation however.

  3. WOW!! Thank you Robert Brower, (and Equitatus and others working on our behalf) again!! Sorry to say most of our money that was invested was in pension funds and IRA funds, that will not benefit from 165 triggering (as I understand). So glad to hear that there are actions going forward!!

  4. Mr. Brower, thank you for bringing us up to date on all these matters; the silence over the last few months has been very depressing. You’ve given me a bit of hope that some restitution may yet be obtained.

    • Concerned,

      Thank you for the comment.

      As this tragedy plays out, it will be very difficult to keep track of all the moving parts. Some events are predictable; others are not. It is also somewhat difficult to determine if certain reports are reliable.

      For example, and I believe that this is accurate, Eric Madden and Diamond McCarthy were not authorized by the Committee to sue Wells Fargo. The draft Complaint was leaked and it appeared on the Equitatus blog. It looked very good to me. I think that the Debtor, i.e., R.E. Loans, and its counsel, needed Wells Fargo to put up the post-plan confirmation funding. Wells Fargo said that if you sue us, you will get no post-confirmation funding. It was similar to “you got the main course, but I don’t see a tip, so no dessert for you.” Wells Fargo threatened to call the loan and hold a fire sale of the portfolio, the collateral for the loan, shutting out everyone else. So the lawsuit against Wells Fargo was dropped to open up post-confirmation funding.

      Someone with limited inside knowledge told me that the post-confirmation funding has certain periodic payments that must be made to Wells Fargo. The Debtor, R.E. loans, and its counsel, got Court approval for a foreclosure of the Rancho Las Flores deed of trust with a known buyer. The known buyer was willing to bid enough money at the foreclosure sale, an auction, to give the developer of Rancho Las Flores a $10,000,000 settlement with the remainder to go to R.E. Loans, which in turn, would use that money to make the periodic payment to Wells Fargo.

      The person with the limited inside knowledge told me that the known buyer has backed out of the Rancho Las Flores deal. This means that the periodic payment will be due and the Liquidating Trustee R.E. Loans and his counsel will not have the money to make the payment to Wells Fargo.

      If all of this is true, and I suspect it probably is, the lawsuit against Wells Fargo is forever gone and Wells Fargo might hold that fire sale anyway.

      As readers of this blog know, I predicted, and I am still predicting, a 0% recovery from the R.E. Loans portfolio.

      With a recovery from the portfolio non-existent, I think that the investors need to forget about the Liquidating Trustee and his goofy FAQ letters, focusing your attention on your class action case where you are represented by four superb and experienced law firms. In the McGuire trial, I argued to the jury that Bruce Horwitz threw the Investors, like you, under the bus. The jury returned a fraud verdict against Bruce Horwitz, 12-0, unanimous. In the class action case, your lawyers will have the ammunition to argue that you were thrown under a fast-moving stagecoach. With your posse of lawyers in close pursuit of Wells Fargo, I am expecting the same result for you.

      • I too am an investor that lost all of my life savings to RE Loans. If there is zero hope of recovering anything what do we do to keep on living? Will we get revenge to make the Ng’s suffer as we are? While Kelly’s son gets to go on an exotic vacation for his graduation recently, we can barely afford to fill our car with gas. Is there hope for justice? is anyone investigating Kelly??? He continues to live in his big house with his wife Jenny.

        • To Sad and depressed:

          It was not my intent to make you feel that your situation is hopeless, that is, “zero hope of recovering anything,” because I think that one or more of the paths to a recovery will be successful.

          The paths of recovery include:

          1. The main bankruptcy case in Dallas. Recovery in this case will come from the liquidation of the loan portfolio. The attorneys in Dallas claim that the recovery will be between 3% and 5% of your investment. I disagree. I think that the recovery from the portfolio will be 0.

          2. Civil litigation against third parties brought by Eric Madden and the Diamond McCarthy law firm in Dallas. As I have explained on this blog, this case will not include Wells Fargo, but there are several other possible defendants. It is too soon to evaluate the extent of your recovery from this case, but Eric Madden and the Diamond McCarthy firm are competent and experienced. I am very optimistic about this path of recovery.

          3. The class action lawsuit in Alameda County. We have discussed this case on this blog and the four law firms representing you are doing an excellent job. Since this case is just getting underway, it is also too soon to evaluate the extent of your recovery from this case. I understand the underlying facts of the case, especially the facts against Wells Fargo, and those facts are good for you and bad for Wells Fargo. I am very optimistic about this path of recovery.

          4. A recovery under IRS code section 165, if you qualify. I have explained on this blog that there is a full governmental investigation underway, which includes the FBI, the IRS, the SEC, and the Department of Labor. There is hope for justice, and it is no consolation to you to say, “wait and see.” That, however, is the reality of the situation.

          5. If you are a Mortgage Fund ’08 investor, the lawsuit brought by the Liquidating Trustee against Wells Fargo. Wells Fargo tried to get that case dismissed last Thursday, October 4. Wells Fargo’s attorneys had the better argument at that hearing, but Judge Efremsky gave your attorneys an opportunity to amend and refile the complaint by November 30. If your attorneys do a good job marshaling the facts against Wells Fargo, then that case will be alive. As I have explained on this blog, your attorneys are arguing facts that are false and can never be proven. I do not understand why they are arguing false facts when the true facts against Wells fargo are so good. We just have to hope that they change their focus and look at the true facts.

          • Dear Mr. Brower,

            Thank you very much for responding to my post, I really appreciate it.

          • Regarding paragraph 5, above, the First Amended Complaint was filed today. It is full of interesting facts and there are some Mortgage Fund ’08 checks attached as an Exhibit.

            If you have a PACER account, I suggest downloading a copy and reading it, especially paragraphs 39 through 48. The allegations against Wells Fargo, if true, are very damning.

            Wells Fargo can file another motion to dismiss asking Judge Efremsky to throw out the case or file an answer and proceed with discovery.

    • Judge Brick has a set procedure for his case management conferences. The parties file a Joint Case Management Conference Statement. Judge Brick reads that document and issues a Tentative Case Management Order. If no one objects to that tentative order, there is no hearing and the tentative order becomes the final order.

      Several times, I have given detailed instructions on this blog about viewing these documents on Domain Web. The only thing you need is the case number, which is RG11593201.

      • The last updates there are from August, although when I try to read those documents, there appears to be an error, because multiple programs report that there is no image on those pages. However, I already know about that meeting. Perhaps in another week or two they will post something for the October status; hopefully something that can be read.

        Thanks!

    • For those of you with a PACER account, Barney Ng’s lawsuit against Wells Fargo Capital has been removed from Superior Court to Federal Court. The new case number is 2:12-cv-08942 MMM-AJEW.

      Barney Ng’s case involves Rancho Las Flores.

      The new Adams Canyon case against Wells Fargo Capital was filed in Alameda County Superior and assigned to Judge Brick. You can follow this case on Domain Web for free. The case number is RG12648160.

  5. Does anyone know when we can write this fiasco off on our taxes as a loss? Not that it helps much but anything is better than nothing

    • IRS Code section 165, the Madoff exception for Ponzi scheme losses, is triggered when the United States Attorney files the criminal complaint against any of the Ngs and/or Bruce Horwitz.

  6. I noticed that on 10/10/12 REL was dismissed as a party in the Collins litigation in CC county. Mr. Brower, are you at liberty to say why?

    • The Collins case was filed before R.E. Loans filed for bankruptcy. The R.E. Loans bankruptcy filing triggered an automatic stay of all litigation regarding R.E. Loans. Judge Houser, the bankruptcy judge in Dallas, issued an order that stated certain requirements for proceeding notwithstanding the automatic stay in the Collins case and in the McGuire/Bergeron case. Dismissal of R.E. Loans was one of those requirements. Collins and McGuire/Bergeron have complied with all of Judge Houser’s orders and the cases are moving forward.

  7. We are investors in RE Loans. We are in the process of refinancing our residence and the bank has apparently come across information regarding RE Loans. They are asking for a letter to explain our position with RE Loans or some kind of tax documentation. Has anyone had this experience, and if so, what did you provide?

    • Carolyn, I too am an investor in RE Loans and just trying to refinance. How did this ever resolve? Did you submit any paperwork with your loan documents when you applied? Thank you for any update.

  8. equitatus,

    What happened to the followup report promised on March 29th re. the Class Actions 5th Case Management Conference in your Greenberg Traurig’s Desperate Attempt To Deflect Blame blog?

    How about the last minute desperate Cross Complaint against Walter, Kelly, Bruce and Arminino McKenna and the Ng’s 2006 lawyers? Any news on that?

    ANV

    • AnotherNgVictim,

      I was not present at the Case Management Conference but several attorneys and spectators report that there was chaos and confusion. When it ended, there was spirited name calling in the corridor outside the courtroom.

      First, you may recall that Wells Fargo filed an adversary case in the Bankruptcy Court in Dallas against the class action plaintiffs. In that case, Wells Fargo contended that some or all of the causes of action in the Amended Complaint brought by the class action plaintiffs crossed over the line by asserting claims that belonged to R.E. Loans. They wanted Judge Houser, the bankruptcy judge in Dallas, to shut down the class action.

      The issue was fully briefed and argued before Judge Houser. Last year, in May, in a comprehensive decision, Judge Houser ruled that the class action plaintiffs were bringing causes of action that belonged to the investors and that the Alameda County Class Action could proceed. Equitatus reported this victory on his blog.

      Without any fanfare, Wells Fargo appealed. The appeal was assigned to Chief Judge Fitzwater in Dallas. Judge Fitzwater issued his decision on March 28, 2013. He dissected Judge Houser’s ruling and affirmed part of it and reversed part of it.

      Judge Fitzwater ruled that the class action plaintiffs were asserting a cause of action against Wells Fargo that belonged to R.E. Loans. He remanded the case back to Judge Houser for her to order that particular cause of action be stopped.

      Without summarizing the events that followed in Oakland and Dallas, the bottom line is this. The class action attorneys need to file an amended complaint, removing the causes of action and following the directions provided by Judge Fitzwater. The attorneys have reserved a slot on Judge Brick’s calendar on June 10 at 3:00 p.m. for a motion to file the amended complaint.

      Second, Greenberg Traurig has filed and served its cross complaint against Armanino McKenna, Stein & Lubin, Walter Ng, Kelly Ng and Bruce Horwitz. This defense tactic is not unusual. In California, a defendant can file a cross complaint against other parties that the defendant thinks are at fault. This way everyone shares the risk and pays his or her part of the damages. Greenberg Traurig’s timing should not disrupt the case because the class action plaintiffs’ case is stalled over the amended complaint.

      The role of Walter Ng, Kelly Ng and Bruce Horwitz is unclear. They will assert their Fifth Amendment rights until it is clear that the United States Attorney will, or will not, file a criminal case. (Aside: All parties have appeared by counsel in the SEC case and there is a stipulation extending the time to answer until June 3, 2013. The Stipulation acknowledges that a criminal action may be filed.)

      Finally, there has been nothing filed about the attorney client privilege and attorney work product privilege issue between the class action plaintiffs and Greenberg Traurig. The class action plaintiffs want the documents; Greenberg Traurig refuses to turn them over.

      The next case management conference is also set for June 10 but at 9:00 a.m.

      • Thank you, Mr. Brower.

        From your report it’s hard to determine whether or not our case has made any progress or if we’re still in legal limbo. I suspect the latter.

        It looks as if we’ll have more news next month.

        Can you shed any light upon the continuing absence of ‘equitatus’? I certainly hope that the hunt for him/her by the opposition was unsuccessful and that his/her blog has not been shut down.

        • The class action case has made good progress. But like every class action, the moment of truth is the class certification motion. That is several months away.

          Equitatus’ real name was provided, but Equitatus did not know the source of the draft complaint that was published on his/her blog.

          I do not know the reason for the recent silence.

      • The parties have stipulated to the filing of a Third Amended Complaint and Judge Brick has ordered that it be filed by May 30. The parties in their stipultion have agreed that Judge Fitzwater (the Dallas judge Mr. Brower refers to) will deterrmine whether the Third Amended Complaint complies with his Order (i.e. that no claim(s) which belong to RE Loans are asserted in the Third Amended Complaint and as to MF 08 whether claims belonging to MF08 are asserted in the Third Amended Complaint is an issue to be decided by Judge Efremsky or the appellate court if Greenberg/Wells Fargo disagree w/Judge Efremsky’s decision. So the class action appears to me to be ‘dead in the water’ until these respective bankruptcy judges have had a swing at the Third Amended Complaint. Mr. Brower can enlighten all of us on this.

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