Over the past few months, Richard Levin, the Chapter 11 trustee for Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — Nirav Modi’s three US entities that had filed for Chapter 11 bankruptcy protection after the massive PNB fraud — has been undertaking a sale of assets of the entities.
According to US court documents accessed by BusinessLine , after holding public auctions for the three entities’ diamond and jewellery inventories, and their patents and trademarks, the trustee has also undertaken private sales of assets.
While the first three public auctions raised about $5.7 million, the private sales authorised so far have raked in about $4.5 million.
But aside from the fact that the sale value of the assets appears rather small in contrast to the $2-billion fraud at Punjab National Bank, it is unlikely that PNB will receive a meaningful recovery from the US bankruptcy cases, say experts.
On August 24, 2018, a US court approved the trustee’s proposed procedures for selling assets free and clear of all liens and other interest, by public sales.
What was on sale
The first public auction of the US firms’ trademarks and patents and associated jewellery comprised 12 lots of intellectual property (IP).
‘Diamonds Are A Girl’s Best Friend’, one of the well-known domain names and trademarks, fetched $50,000. Patent rights for the exclusive brands ‘112 Facet’ and ‘Patriot Star’ were sold for $25,000 and $280,000 respectively, along with associated inventory. Subsequent public sales of inventories of diamond and jewellery brought in about $4.7 million.
But the value of these inventories in the book (book price as disclosed in the court documents) was nearly twice — $9.1 million — implying that the sales had happened at a substantial discount to the book price.
The examiner in the US Bankruptcy Court, appointed last year to probe Nirav Modi’s ties with the three US entities, had identified tens of millions of dollars of purported diamond sales by the US companies to various shadow entities, where payment could be traced to proceeds from the alleged PNB fraud in India.
The investigation had also corroborated that transactions were used to inflate diamond inventory and accounts receivables artificially, to justify the need for Letter of Undertaking (LoU) financing. After he had completed the public auctions, the trustee was authorised to conduct private sales.
The trustee undertook private sales to companies such as Macy’s Inc, Unique Designs, Simplexdiam Inc, Martin V Marten and Diamond Traders International. Such sales authorised by the court have amounted to about $4.5 million so far.
“Chapter 11 Trustee Levin’s recent successful private sales benefit the Firestar Diamond Inc Chapter 11 estate as they are a more efficient and less expensive method of monetising the assets.
“These cases were filed in late February 2018, nearly 14 months ago, but in many ways they are just warming up with the arrest of Nirav Modi and filing of the recent RICO (Racketeer Influenced and Corrupt Organisations Act) suit,” said Seth R Freeman, Senior Managing Director of GlassRatner Advisory and Capital, LLC, a global specialty financial advisory services firm based in San Francisco.
He added that complex fraud-related bankruptcy cases, such as Firestar Diamond and DC Solar Solutions, are very expensive to administer. He recently served as the chief restructuring officer in the DC Solar bankruptcy involving a $2-billion alleged fraud.
“It is vital for the Chapter 11 debtors to be able to generate cash to finance the case and ideally provide a distribution to the creditors,” Freeman explained.
Traced back to PNB fraud
So, will PNB get any monies out of these sales made by the trustee? Unlikely, said Freeman.
“While the examiner in Firestar Diamond demonstrated the connection with fraud against PNB, given the secured debt and priority of claims in the US bankruptcy, I think it is unlikely that PNB will receive a meaningful recovery from the US bankruptcy cases. However, the facts developed in the US cases may provide support for third-party claims and other recoveries that benefit PNB in India,” he added.
Concerned over the links among the US entities, their suppliers and Nirav Modi, and the manner in which the diamantaire’s companies, as ‘Debtors in Possession’, conducted the Chapter 11 process, the independent trustee was appointed by the US court last year to assume control of the assets to maximise recoveries for the creditors.
The examiner appointed to probe Nirav Modi’s ties with the three US entities had revealed that they were directly involved in transactions related to the LoU fraud at PNB.
The findings of the examiner in the 170-page report, which BusinessLine had covered at length (see bit.ly/2T96OMc) had disclosed that Nirav Modi’s US entities engaged in a large volume of suspect transactions with shadow entities (shell entities created for laundering of funds obtained fraudulently from PNB).
For detailed coverage: PNB Fraud