Oeloitte. - i-masterlink.com · Oeloitte. August 25,2014 Cause No. FSD 97 of 2011 (AJEF) Grand...

Oeloitte.

August 25,2014

Cause No. FSD 97 of 2011 (AJEF)

Grand Court of the Cayman Islands Financial Services Division 3rd Floor, Kirk Building, Albert Panton St. George Town, Cayman Islands

Re: American Pegasus SPC - in Official Liquidation ("the Company") Court update letter

Deloitte & Touche Citrus Grove Building P.O. Box 1787 Grand Cayman KY1-ll09 Cayman Islands

Tel: + 1 (345) 949 7500 Fax : + 1 (345) 949 8258 [email protected] www.deloitte.com

Pursuant to paragraph 5.1 of the Grand Court of the Cayman Islands ("the Court") order dated July 9,2012 (copy attached), the Joint Official Liquidators, Messrs. Stuart Sybersma and Michael Penner ("the Liquidators"), write to provide an update to the Court regarding the liquidation of the Company.

The Liquidators note that an update dated February 24, 2014 was previously filed with the Court and provided to the liquidation committee of the Company. The liquidation continues to be chronically underfunded with limited realisations and it is clear that the pre-liquidation reported values of the Company's assets were significantly overstated.

Auto loan portfolio update

By way of reminder, the Liquidators have been continuing to realise the Company's auto loan portfolio during the course of the liquidation. As at the date of the Liquidators' appointment the Company's portfolio consisted of approximately 6,000 Deficient Loans with a purported face value of approximately $60 million. The Liquidators have determined the deficient loans to be effectively worthless and collection efforts with respect to these loans were discontinued from very early on in the liquidation process. By definition, deficient loans relate to loans where the underlying security, the vehicle, has already been repossessed or destroyed, and the deficient loan represents a residual balance with little or no recourse to pursue.

The Liquidators therefore focused their efforts on the "open loans" during the liquidation. Of the 1,238 "open" loans that were originally deemed collectible by the Company, it transpired that a total of 901 were in fact uncollectible due to various issues such as borrower disputes, non-paying status of borrowers and low vehicle values, making repossession not viable.

The Liquidators' debt collection agent, First Associates, have continued to collect the remaining debts during the liquidation. First Associates have commented on the poor quality of the loan portfolio and have reported that delinquencies are six times higher than what they have experienced on other portfolios.

At the date of the last report to the Court, there remained 191 debts being serviced by First Associates. The Liquidators had instructed First Associates to repossess vehicles in connection with 97 accounts and write off 16 accounts as the cost of repossession would outweigh the vehicle value.

An updated summary of the auto loan portfolio held by the Company from the commencement of the liquidation to date is shown below. As shown, of the 191 loans remaining at the date of the last update to the Court, 17 have been settled in full and 50 are being paid . Repossessions of 50 cars are taking place and are expected to be finalised within the next three months. A total of 16 loans have already been

Member of Deloitte Touche Tohmatsu

Oeloitte. returned to the Company as they are deficient, and it is expected that a further 55 loans will a lso be returned to the Company shortly.

:Status Number

Total loans at appointment

Less deficient loans

Open loans at liquidation date

Less:

Loans paid/settled in full

Loans legally discharged

Loans returned to the Company

Open loans at February 24, 2014

Less:

Loans paid/settled in full

Loans being paid

Repo in progress

Loans returned to the Company

Deficient loans at August 22, 2014

7,835

(6,597)

1,238

(58)

(88)

(901)

191

(17)

(50)

(53)

(16)

55

Net collections in the period from January 1, 2014 to June 30, 2014 after the deduction of First Associate collection costs are $18,080. Collections have now slowed considerably and the Liquidators do not expect future realisations from this source to be material. Total realisations to date from auto loan collections are $859,256. First Associate collection costs total $503,783 resulting in a net return to the Liquidation of $355,473. This represents approximately 1.4% and 0.6% of the original expected return on a gross and net basis respectively.

Legal claims

Pursuant to an order granted by the Court dated September 3, 2013, the Liquidators were given sanction to commence proceedings on behalf of the Company in the United States District Court, Northern District of Georgia to recover certain fraudulent transfers made from the American Pegasus Auto Loan portfolio. The defendants in this action are The Clear Skies Holding Company, LLC, James A. Torchia, Marc A. Celello, Celello Law Group, LLC, and Jaro, LLC.

The Liquidators' US Counsel, Reid, Collins & Tsai ("ReT") and Alston & Bird LLP are continuing to pursue claims against the parties involved in the fraudulent transfer. It has recently been established that it is not in the best interest of the proceedings to continue pursuing the claim against Jaro, LLC. RCT and the Liquidators believe that the claim is not as strong as those claims against the other parties and therefore do not want it to jeopardize the credibility of the other claims.

The deadline for the end of the discovery period was extended to June 30, 2014. On May 20,2014 Stuart Sybersma, one of the liqUidators, was deposed as an expert witness responsible for valuing a number of promissory notes along with an underlying entity's financial condition, solvency and ability to repay the notes, all in connection with the alleged fraudulent transfers. A number of other parties were also deposed prior to the end of the discovery period.

At the end of July 2014, the defendants filed a motion for summary judgment on all claims, along with a statement of facts that they contend are uncontested. RCT are in the process of preparing a response to


Oeloitte. the motion for summary judgment and a response that will contest and supplement the Company's statement of alleged facts . After a decision is made in respect of the motion for summary judgment the parties will have 30 days to submit pre-trial materials .

Counsel for both parties also engaged in court-mandated settlement discussions in late June 2014. As part of these discussions, the defendants' legal counsel indicated that the defendants have limited financial resources from which they would be able to pay a judgment, in the event of the Company's legal proceedings being successful. RCT subsequently requested certified financial statements for the defendants to confirm their assertions and to help inform what might be an appropriate and defensible settlement.

To date, the defendants have not yet provided the certified financial statements and it is unclear whether they will do so.

Creditor/investor correspondence

As noted in the last update to the Court, all of the Official Liquidators' reports are provided to creditors and investors via the Liquidators' secure website, http://www.americanpegasusliquidation.com.

The Liquidators continue to receive queries from investors following the issue of the report, but note that the volume of correspondence has slowed since the early stages of the liquidation. This is to be expected due to the time elapsed since the appointment of the Liquidators, as well as investors becoming increasingly aware that it is unlikely any future payments will be made in respect of their investment.

Should you have any questions please do not hesitate to contact Mike Green of this office on +1 345 814 2223 or [email protected].

Liquidation costs

During the period March 1, 2014 to July 31, 2014 the Liquidators have incurred time costs totalling $67,143 which is mainly in connection with the ongoing litigation.

Including the above, Liquidators' time costs for the period from the commencement of the liquidation to July 31,2014 total $1,449,191 . To date, payments of $125,909 in respect of Liquidators' fees have been drawn, leaving an unpaid balance totalling $1 ,323,282.

In accordance with an Order dated September 3, 2014 the Liquidators are not required to seek Court approval for the payment of the balance of their fees until such time as there are sufficient cash recoveries to reasonably justify the making of a further application to Court for fee approval.

Yours sincerely

S'{~f5-L~ Stuart Sybersma 7 Joint Official Liquidator


IN THE GRAND COURT OF THE CAYMAN ISLANDS FINANCIAL SERVICES DIVISION

In Chambers 9th July 2012 Before the Honourable Mr. Justice Foster

CAUSE NO. FSD 97 OF 2011(AJEF)

IN THE MATTER OF THE COMPANIES LAW (2010 REVISION)

AND

IN THE MATTER OF AMERICAN PEGASUS SPC (IN OFFICIAL LIQUIDATION)

ORDER

UPON THE SUMMONS dated 18 May 2012 (the "Summons")

AND UPON reading the Second Affi,davit of Michael Pearson sworn on the 14th day of June 2012.

AND UPON hearing counsel for the Joint Official Liquidators ("JOLs") of American Pegasus SPC (in official liquidation) (the "Company")

IT IS HEREBY ORDERED AND DIRECTED that:-

1. The Company having now been certified by the JOLs as insolvent, the JOLs are not required to hold a first meeting of contributories of the Company;

2. The JOLs are to send a letter, written in English, to all known creditors and contributories (the "JOLs Letter") which shall contain:

2.1 information on how to access the website set up by the JOLs, being www.americanpegasusliquidation.com. which contains all reports and updates regarding the liquidation of the Company:

lof3

•

2.2 details of the dedicated enquiry email address, [email protected], at which the JOLs can be contacted;

being

2.3 notice to all creditors of the date and time of a creditors meeting of the Company at which the JOLs shall seek to establish a liquidation committee in accordance with paragraph 4 below.

3. The JOLs Letter shall be delivered to the creditors and contributories of the Company .as follows:

3.1 to the creditors by email and post;

3.2 to the contributories by email (if available), failing which by courier to each courier office in each country in which contributories are respectively resident and then by post from within such country.

4. The JOLs shall seek to establish a liquidation committee of creditors of the Company which shall include, if reasonably possible, at least one creditor of either of the following segregated portfolios of the Company;

• American Pegasus Auto Loan Fund Segregated Portfolio • American Pegasus Auto Loan Fund (Dist) Segregated Portfolio

And, if reasonably possible, at least one creditor of any of the following segregated portfolios of the Company:

• American Pegasus Fixed Income Fund - Series II Segregated Portfolio • American Pegasus Fixed Income Fund - Series IV Segregated Portfolio • American Pegasus Fixed Return Fund Segregated Portfolio • American Portfolio Life Fund Segregated Portfolio • American Portfolio Perpetual Income Fund Segregated Portfolio

5. In light of the lack of funds available to the JOLs for the winding up of the Company, paragraph 6 of the winding up order of this Court dated 20 July 2011 shall be discharged and instead:

5.1 the JOLs shall agree the basis and rates of their remuneration in accordance with Part IV of the Insolvency Practitioners Rules 2008 (as amended) within 3 months of the date of the appointment of any liquidation committee and failing the appointment ofa liquidation committee shall revert to the Court.

5.2 the JOLs shall provide a report to the Court and any the progress of the liquidation at least every six months from of the said lack of funds such report may be in the form of a ,nulH ll,UI

the Court unless the Court otherwise orders.

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5.3 the JOLs shall only be required to seek Court approval of their remuneration at such time as there are sufficient available funds to warrant such an application, provided that the JOLs shall seek approval of their remuneration in the event no such approval has been sought within 1 year of the date of this order, unless the Court otherwise directs in the interim.

6. The costs of and incidental to this application shall be paid out of the assets of the Company as an expense of the liquidation.

DATED the 9TH day of JULY 2012

FILED the /3 Y4 day of JULY 2012

THE HON. . JUSTICE FOSTER JUDGE OF THE GRAND COURT

THIS ORDER was issued by SOLOMON HARRIS of 3,d Floor, FirstCaribbean Bank, P.O. Box 1990, Grand Cayman, KYl-lI04, Cayman Islands, Attorneys-at-Law for and on behalf of the Applicants whose address for service is that of their said Attorneys-at-Law

30f3

American Pegasus SPC (In Official Liquidation) Strictly privileged and confidential Official Liquidators’ Second Report

August 26, 2013 1 of 82

AMERICAN PEGASUS SPC (IN OFFICIAL LIQUIDATION) OFFICIAL LIQUIDATORS’ SECOND REPORT August 26, 2013

STRICTLY PRIVILEGED AND CONFIDENTIAL


August 26, 2013 2 of 82

Contents 1 INTRODUCTION .................................................................................................................................. 6

1.1 Basis of Report ............................................................................................................................ 6 1.2 Purpose and Use of Report ......................................................................................................... 6 1.3 Sources of Information and Appendices ...................................................................................... 6 1.4 Prior Reporting ............................................................................................................................. 7 1.5 Limitation ...................................................................................................................................... 7 1.6 Currency ...................................................................................................................................... 7

2 EXECUTIVE SUMMARY ..................................................................................................................... 8

2.1 Background .................................................................................................................................. 8 2.2 Summary of SEC Findings .......................................................................................................... 9 2.3 Events Leading to the Appointment of the Liquidators .............................................................. 11 2.4 Overview of Company’s Operating History ................................................................................ 12 2.5 APLDG and Chapter 15 Recognition ......................................................................................... 12 2.6 Asset Recovery Efforts .............................................................................................................. 13 2.7 Company’s Financial Position and Future Recoveries .............................................................. 15 2.8 Creditors and Investors .............................................................................................................. 16 2.9 Conclusion and Next Steps ....................................................................................................... 17

3 COMPANY STRUCTURE AND OBJECTIVES ................................................................................. 18

3.1 Legal Structure .......................................................................................................................... 18 3.2 Governing Documents ............................................................................................................... 18 3.3 Share Capital Structure ............................................................................................................. 19 3.4 Company Objectives .................................................................................................................. 20 3.5 Auto Loans ................................................................................................................................. 20 3.6 Life Settlement Policies ............................................................................................................. 21

4 KEY SERVICE PROVIDERS (PRE-LIQUIDATION) ......................................................................... 22

4.1 Investment Manager .................................................................................................................. 22 4.2 Directors ..................................................................................................................................... 22 4.3 Administrator and Custodian ..................................................................................................... 23 4.4 Auditors ...................................................................................................................................... 24 4.5 Marketing Agents ....................................................................................................................... 24 4.6 Other Service Providers ............................................................................................................. 24 4.7 Bank Accounts ........................................................................................................................... 25 4.8 Review of Company’s Operating History ................................................................................... 25

5 PERIOD 1 - INCEPTION TO OCTOBER 2007 .................................................................................. 26

5.1 Overview .................................................................................................................................... 26 5.2 Investor Activity .......................................................................................................................... 26 5.3 Auto Loan Activity ...................................................................................................................... 26 5.4 Life Settlement Activity .............................................................................................................. 26 5.5 Acquisition of Synergy Acceptance Corp. ................................................................................. 27

6 PERIOD 2 - OCTOBER 2007 TO OCTOBER 2010 .......................................................................... 30


August 26, 2013 3 of 82

6.1 Overview .................................................................................................................................... 30 6.2 Investment Manager .................................................................................................................. 30 6.3 Investor Activity .......................................................................................................................... 30 6.4 Legal Advisors ........................................................................................................................... 31 6.5 Director Activity .......................................................................................................................... 31 6.6 Marketing Agents ....................................................................................................................... 32 6.7 Service Provider Agreements .................................................................................................... 32

7 PERIOD 3 - SEC INVESTIGATION ................................................................................................... 33

7.1 Overview .................................................................................................................................... 33 7.2 SEC Auto Loan Findings ........................................................................................................... 33 7.3 SEC Life Settlement Findings .................................................................................................... 35 7.4 Subsequent Disclosure of Acceptance Transaction .................................................................. 36 7.5 Investor Misrepresentations ....................................................................................................... 36 7.6 Overall Findings and Penalties .................................................................................................. 37

8 PERIOD 4 - NOVEMBER 2010 TO JUNE 2011 ................................................................................ 38

8.1 Overview .................................................................................................................................... 38 8.2 Appointment of US Trustee over Acceptance ........................................................................... 38 8.3 Appointment of Provisional Liquidators ..................................................................................... 39

9 JOLs’ INVESTIGATIONS .................................................................................................................. 41

9.1 Overview .................................................................................................................................... 41 9.2 Cash Activity .............................................................................................................................. 41 9.3 Henry Carter and APLDG .......................................................................................................... 44 9.4 Dealings with Benjamin Chui ..................................................................................................... 45 9.5 Stipulation Agreement with US Trustee ..................................................................................... 45 9.6 APLDG’s Actions after Termination of the IMA ......................................................................... 46 9.7 United States Chapter 15 Recognition ...................................................................................... 47 9.8 Automotive Loan Data ............................................................................................................... 48 9.9 Open Loan Servicing ................................................................................................................. 49 9.10 Deficient Loan Collection ........................................................................................................... 53 9.11 Life Settlement Policies ............................................................................................................. 54 9.12 Sun Trust Garnishment .............................................................................................................. 55 9.13 Lifestyle Design Group .............................................................................................................. 56 9.14 Qvest LP .................................................................................................................................... 58

10 OTHER LIQUIDATION ACTIVITY ..................................................................................................... 60

10.1 Rule 2004 Discovery .................................................................................................................. 60 10.2 Claim in Acceptance Bankruptcy Proceedings .......................................................................... 60 10.3 Governing Documents ............................................................................................................... 60 10.4 Bank Account Termination ......................................................................................................... 61 10.5 Review of Audited Accounts ...................................................................................................... 62 10.6 Intercompany Loans .................................................................................................................. 63 10.7 Grand Court Applications and Updates ..................................................................................... 65

11 LIQUIDATION COMMITTEE ............................................................................................................. 67

11.1 Grand Court Order ..................................................................................................................... 67 11.2 Statutory Obligations ................................................................................................................. 67 11.3 Non-Disclosure Agreement ........................................................................................................ 68 11.4 Remuneration Agreement .......................................................................................................... 68


August 26, 2013 4 of 82

12 CREDITORS AND INVESTORS ........................................................................................................ 70

12.1 Adjudication Process ................................................................................................................. 70 12.2 Creditor Correspondence .......................................................................................................... 70 12.3 Petitioner Claim ......................................................................................................................... 70 12.4 Advertisement in the Cayman Islands Gazette ......................................................................... 71 12.5 Unsecured Creditors .................................................................................................................. 71 12.6 Redeemed Unpaid Investors ..................................................................................................... 71 12.7 Shareholders ............................................................................................................................. 72 12.8 Liquidation Website ................................................................................................................... 72

13 RECEIPTS AND DISBURSEMENTS ................................................................................................ 73

13.1 Cash at Bank at Date of Appointment ....................................................................................... 73 13.2 Receipts and Disbursements and Current Cash Position ......................................................... 73 13.3 Outstanding Costs of the Liquidation ......................................................................................... 74 13.4 Statutory Priorities of Return to Investors .................................................................................. 75

14 LIQUIDATORS' REMUNERATION ................................................................................................... 76

14.1 Overview .................................................................................................................................... 76 14.2 Remuneration Agreement .......................................................................................................... 76 14.3 Remuneration Rates .................................................................................................................. 77

15 NEXT STEPS ..................................................................................................................................... 78

15.1 Liquidators’ Future Actions ........................................................................................................ 78


August 26, 2013 5 of 82

APPENDICES

1. SEC Cease and Desist Order 2. Orders of the Grand Court of the Cayman Islands re: Official Liquidation 3. APAL Fund IMA Termination Letter 4. Etsior Solicitor Agreement 5. Torchia’s Resignation Letter 6. APAL Fund (Dist.) Offering Memorandum 7. Acceptance US Trustee’s Adversary Complaint 8. Copy of email from Torchia to Chui dated February 27, 2007 9. Copy of email from Chui to Torchia dated May 8, 2007 10. APIM and APLDG Merger Letter 11. Paramount Capital Introduction Amended Agreement 12. APAL Fund Marketing Fee 13. Copy of email from Tagliapietra with Draft Stock Purchase Agreements dated May 30, 2007 14. Copy of email from Tagliapietra with Draft Deal Documents dated June 27, 2007 15. Promissory Note 16. July 2007 APAL Fund Account Statement 17. Copy of letter from American Pegasus SPC dated May 24, 2011 18. Copy of Motion filed by American Pegasus SPC dated June 6, 2011 19. Copy of Order by United States Bankruptcy Court dated June 14, 2011 20. Copy of Winding up Petition dated June 1, 2011 21. Bank Account Review 22. Liquidator Remuneration Agreement 23. SEC Auto Loan Findings – Chart 24. Engagement Letter – Locke Lorde 25. Company’s Legal Counsel (Appointed after Liquidation Date)


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1 INTRODUCTION

1.1 Basis of Report

1.1.1 Messrs. Stuart Sybersma and Michael Pearson of the Cayman Islands firm of Deloitte & Touche

(“Deloitte”) were appointed joint provisional liquidators of American Pegasus SPC (“Company”)

by Order of the Grand Court of the Cayman Islands (“Grand Court”) dated June 20, 2011.

1.1.2 Following their appointment as provisional liquidators, Messrs. Sybersma and Pearson were

appointed as joint official liquidators on July 20, 2011 (“Liquidation Date”).

1.1.3 Mr. Pearson resigned from Deloitte during June 2012 and, following approval from the Grand

Court, was replaced by Michael Penner as an official liquidator on June 28, 2012. As from June

28, 2012 Messrs. Sybersma and Penner are the Joint Liquidators (“Liquidators” or “JOLs”) of

the Company. A copy of the Order of the Grand Court is attached as Appendix 2.

1.2 Purpose and Use of Report

1.2.1 This, the Liquidators’ Second Report and Accounts (“Second Report”) sets out the background

to, and current status of, the Company’s affairs, the steps taken by the Liquidators during the

course of the Company’s liquidation, the outcome of the Liquidators’ review and enquiries to date

and the next steps in the liquidation process.

1.2.2 A copy of this Second Report, which is confidential to the intended recipients and contains

information which is privileged, will be provided to:

(i) The Grand Court;

(ii) Creditors; and

(iii) Shareholders.

1.2.3 Recipients of this Second Report should not disclose this Second Report, or any information

contained herein, to third parties other than their professional advisors (who are also bound to

keep the Second Report confidential) without the prior express written permission of the

Liquidators.

1.3 Sources of Information and Appendices

1.3.1 In preparing this Second Report, the Liquidators have reviewed documents pertaining to the

Company and have held meetings with a number of key individuals with knowledge of the


August 26, 2013 7 of 82

Company’s affairs. Details of the sources of information used and relied upon are referred to

throughout this Second Report.

1.3.2 Where the Liquidators refer in the Second Report to legal advice which they have received or

other communications with their legal advisors, they do not intend to and do not waive privilege in

respect of such advice or communications or generally.

1.4 Prior Reporting

1.4.1 This Second Report should be read in conjunction with the Joint Provisional Liquidators’ report

dated July 19, 2011 (“Provisional Liquidators’ Report”) as well as the Liquidators’ First Report

dated March 30, 2012 (“First Report”).

1.4.2 Additional update letters were provided to the Grand Court on September 28, 2012 and January

29, 2013.

1.5 Limitation

1.5.1 In completing their work, the Liquidators have relied on the accuracy of the information and

documents supplied. Although the Liquidators have sought to cross check information from

different sources to confirm its accuracy, they have not independently verified all of the

information and documentation upon which they have relied when preparing this Second Report.

The Liquidators have not performed an audit or a review made in accordance with International

Standards on Auditing, and consequently, no such assurance is expressed.

1.5.2 The Liquidators’ Second Report contains factual matters and whilst the Liquidators believe all of

the information in this Second Report to be a true and accurate account, they reserve the right to

amend this Second Report should additional information come to light which, had they known it at

the time of writing the Second Report, would have caused them to amend the Second Report.

1.5.3 Although narrative in the Second Report has been updated to include material events occurring

up to the date of issuance of the Second Report, financial information in the Second Report,

including the time costs of the Liquidators is as of May 31, 2013.

1.6 Currency

1.6.1 All references to currency in this Second Report are quoted in United States Dollars (US$) unless

otherwise stated.


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2 EXECUTIVE SUMMARY

2.1 Background

2.1.1 The Company is an open-ended investment vehicle which was incorporated in the Cayman

Islands on June 16, 2004 as an exempted Segregated Portfolio Company (“SPC”) with multiple

underlying sub-funds or Segregated Portfolios (“SP”). The SP’s were intended to invest in distinct

strategies either sub-prime auto loans or insurance life settlement products. The SP’s themselves

are not separate legal entities; instead, they represent separate share classes within the

Company. As an SPC, the assets and liabilities of each SP are supposed to be separated from

each other and do not form the general assets and liabilities of the SPC.

2.1.2 Unlike most open ended companies, the Company paid dividends to some investors in

accordance with the relevant SP’s offering documents. Such dividends were marketed on the

basis of being guaranteed rates of return and paid high rates compared to going market interest

rates. Various external parties were used to market the Company to investors, with such parties

paid a high rate of commission for every investor subscription that they solicited. In certain

aspects the Company operated like a Ponzi scheme, where new investors’ money was used to

pay out dividends and redemptions to older investors.

2.1.3 The Liquidators have determined that the value of the Company’s assets in the various

segregated portfolios were grossly overvalued and realisations will be far less than the purported

net asset value of the various sub-funds that were calculated prior to the Liquidation Date. The

findings of the Liquidators call into question the conduct and competence of the former

investment manager, as well as raise questions with respect to certain transactions entered into

by the Company with certain third parties which are discussed further in this Second Report. The

Liquidators note that the former investment management team and principal of the investment

manager put their personal interests ahead of the interests of the Company’s investors and

misused Company assets in doing so.

2.1.4 Mr. Benjamin Chui (“Chui”) was principal and director of the Company’s investment management

company, American Pegasus LDG, LLC (“APLDG” or the “Investment Manager”), as well as a

director of the Company. The Investment Manager was registered as an investment advisor with

the Securities Exchange Commission (“SEC”) in the United States.

2.1.5 The Investment Manager was subject to inspection by the SEC in 2010. That inspection resulted

in further investigation into the Investment Manager and eventually led to sanctions and a cease

and desist order against Chui, Ms. Triffany Mok (“Mok”), and Mr. Charles Hall Jr. (“Hall”);


August 26, 2013 9 of 82

respectively the Chief Executive Officer, portfolio manager and general counsel of the Investment

Manager.

2.1.6 The SEC findings concluded that Chui, Mok and Hall had (1) failed to disclose their purchase of

Synergy Acceptance Corporation (“Acceptance”), the company which originated and serviced

automotive loans belonging to the Company, and the resulting conflict of interest; (2) had

misused the Company’s assets to purchase Acceptance and to support related parties; (3) had

improperly retired Acceptance’s debts through improper self-dealing; and, (4) had made

misrepresentations to investors.

2.1.7 The SEC cease and desist order, issued in December 2010, resulted in Chui, Mok and Hall being

barred from association with any investment adviser for a period of five years. Since that date,

Chui, Mok and Hall have been excluded from, and not been involved with, the management of the

Company or the Investment Manager. Chui did however manage to continue to control and

manage Acceptance until a trustee in bankruptcy was appointed over Acceptance in June 2011.

2.2 Summary of SEC Findings1

2.2.1 Acceptance was the former servicer of auto loans owned by the Company and the sole supplier

of subprime automotive loans to the largest segregated portfolio, American Pegasus Auto Loan

Fund Segregated Portfolio (the “APAL Fund”). The controlling shareholder of Acceptance, prior

to its acquisition by Chui, was Clear Skies Holding Company LLC (“Clear Skies”). The principals

of Clear Skies are two individuals by the names of Mr. James Torchia (“Torchia”) and Mr. Marc

Cellelo (“Cellelo”). In addition to controlling Clear Skies, Torchia worked for the Investment

Manager as a senior portfolio manager until he resigned on or about June 29, 2007. According

to an offering memorandum for one of American Pegasus’s sub funds, Torchia had “specific

responsibilities in the portfolio management of the life settlement and auto loan divisions”.

2.2.2 In 2007, a holding company owned by Chui, Mok and Hall purchased Acceptance. Rather than

use their own money to finance this transaction, the holding company used approximately $18.5

million of the Company’s cash to pay for the purchase. Acceptance was unprofitable from the

date of purchase and the holding company used additional money from the Company to maintain

its operations.

2.2.3 The money advanced by the Company to allow Chui to acquire Acceptance was funded from the

APAL Fund, the largest segregated portfolio in the Company that invested in subprime auto

1 Virtually all of the information in Section 2.2 below is taken directly from the SEC Cease and Desist Order dated December 21, 2010 (see Appendix 1).


August 26, 2013 10 of 82

loans. Of the money advanced by the APAL Fund to pay Clear Skies and Acceptance’s note

holders, Clear Skies distributed $9 million to Torchia and Cellelo.

2.2.4 The SEC investigation concluded that the monies advanced by the Company for the purchase of

Acceptance were unquestionably fraudulent as to the APAL Fund. The SEC noted that Chui and

Hall failed to disclose the transfers to, or sought approval of the clearly related-party transactions

from the Company’s independent directors. Rather, Chui and Hall went to great lengths to

conceal the transfers from the Company’s independent directors and investors.

2.2.5 After purchasing Acceptance, Chui, Hall and Mok had a fundamental conflict of interest because

they stood to gain by having the Company continue using Acceptance over any other service

provider that might have better served the Company. Further, they failed to disclose this conflict

of interest to the Company’s independent directors and investors for nearly two years. In addition

Chui falsely claimed to prospective investors that the APAL Fund only used finance companies

that were independent of the Investment Manager.

2.2.6 After they acquired Acceptance, Chui, Hall and Mok withheld loan collections that belonged to the

Company and allowed Acceptance to run up large debts to the APAL Fund. Chui also caused the

Company to make approximately $12 million in undisclosed loans to the separate life settlement

segregated portfolios in order to cover those sub funds’ operating costs (in contravention of how

a segregated portfolio company is allowed to operate under Cayman Islands’ law).

2.2.7 According to its offering memorandum, the APAL Fund invested primarily in subprime auto loans.

By December 2008, however, approximately forty percent of the APAL Fund’s assets consisted of

debts and other obligations owed to various related entities controlled by Chui, with APLDG

charging the Company fees to manage these same assets.

2.2.8 In an early 2009 effort led by Chui2, much of this related party debt was purportedly forgiven

through a transaction where Acceptance bought a distressed auto loan portfolio for $12 million3

and immediately sold it to the APAL Fund for over $38.2 million, a mark-up of over 300 percent.

The consideration for the purchase to be paid by the APAL Fund was forgiveness of the debt

owed to it by Acceptance. Chui directed and approved all aspects of this transaction. Hall and

Mok also understood the transaction and participated in it by drafting, reviewing, signing and/or

processing documents used to effect the transaction.

2 The timing of this transaction resulted in a note in the December 31, 2008 APAL Fund audited financial statements (issued August 5, 2009) that “the loan was repaid in full after December 31, 2007”. The Liquidators note that there was no mention of the Acceptance transaction or related loan in the December 31, 2007 APAL Fund audited financial statements even though that audit opinion was dated March 16, 2009. 3 The SEC noted that approximately half of these loans were non-performing loans consisting of “deficiency balances” i.e. loans where the borrower was already in default. The SEC Order also noted that even though Acceptance was purportedly buying the loan portfolio, $10 million of the purchase was guaranteed by the Company.


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2.2.9 In December 2009 the Company rescinded the APAL Fund’s purchase of the auto loan portfolio,

and Acceptance agreed to refund the $21.5 million it charged the APAL Fund for the balances.

Acceptance, which was struggling financially and had minimal assets, had no ability to repay the

refund and the amount remains payable to the Company.

2.3 Events Leading to the Appointment of the Liquidators

2.3.1 Subsequent to Chui, Mok, and Hall’s removal from the management of the Company, the affairs

of the Company were overseen by Mr. Henry Carter (“Carter”). The Liquidators understand that

Carter had originally been retained by Chui as a compliance officer of the Investment Manager,

but over the course of the SEC’s investigation his duties with the Investment Manager expanded

to that of CEO, General Counsel, and Chief Compliance Officer. The Liquidators note that Carter

was not subject to any adverse findings within the SEC investigation.

2.3.2 Carter took steps to terminate the Company’s contract with Acceptance and for the APAL Fund

to take control of the servicing of its auto loan portfolio. In response to this, on or around May 3,

2011, Chui filed to place Acceptance into Chapter 11 (debtor in possession) bankruptcy

proceedings, of which he intended to control. The implication of this filing was that it afforded a

stay to Acceptance that prevented the Company from being able to terminate its auto loan

servicing contract with Acceptance.

2.3.3 During May, 2011, Carter contacted certain investors to request funding to intervene in the

Acceptance bankruptcy proceedings to appoint an independent Chapter 11 trustee in the

Acceptance proceedings and seeking the termination of the loan servicing agreements to allow

the Company to gain control of the servicing of the auto loan portfolio. A motion was

subsequently filed by Carter on June 6, 2011 to appoint an independent trustee over Acceptance

and to reject the contracts between Acceptance and the Company. On June 13, 2011 the

Company4, Acceptance and the United States’ Trustees office filed a stipulation order wherein the

parties agreed to appoint a Chapter 11 bankruptcy trustee (the “US Trustee”) and to provide the

Company with viewing access to Acceptance’s records. On June 29, 2011 Ms. Lynn

Schoenmann was appointed as US Trustee over Acceptance.

2.3.4 On June 1, 2011 two shareholders in the Company filed a petition in the Grand Court of the

Cayman Islands (“the Petition”). The Petition was filed to seek the winding up of the Company

pursuant to Section 92(e) of the Cayman Islands’ Companies Law (2010 Revision) (“Companies

Law”). Pursuant to the Petition, the Grand Court ordered the Company into provisional

liquidation on June 20, 2011. The Petition was not opposed by the Company or any other party

4 Controlled by Carter.


August 26, 2013 12 of 82

and Messrs. Sybersma and Pearson were appointed as joint provisional liquidators as of that

date. Details of the provisional liquidators’ preliminary investigations and findings can be found in

the Provisional Liquidators’ Report.

2.3.5 Following their appointment as provisional liquidators, Messrs. Sybersma and Pearson were

appointed as joint official liquidators on July 20, 2011. Since their appointment the Liquidators

have corresponded with the US Trustee on several occasions to coordinate recovery efforts of

the auto loan portfolio. The Liquidators have also filed an unsecured claim on behalf of the

Company in the Acceptance bankruptcy proceedings and understand that such claim is the

largest in that estate. The US Trustee has advised, however, that to date there are insufficient

realizations in the bankruptcy of Acceptance for any distribution to creditors to be made.

2.4 Overview of Company’s Operating History

2.4.1 The Company’s operating history can be split into four distinct time periods of operation prior to

the Liquidation Date:

(i) Inception to October 2007 when a third party owned Acceptance (“Period 1”);

(ii) October 2007 to October 2010 when Chui had ownership interests in both the

Company and Acceptance (“Period 2”);

(iii) The SEC Investigation culminating in a Cease and Desist Order against Chui and

other management of the Company (“Period 3”); and

(iv) November 2010 to June 2011 when Carter led the Company (“Period 4”).

2.4.2 A detailed summary of the activity in each period is detailed in Sections 5 to 8 below.

2.5 APLDG and Chapter 15 Recognition

2.5.1 Carter5, the acting CEO of APLDG initially assisted the Liquidators in servicing the Company’s

automotive loan portfolio (“Auto Loan”) and responding to their information requests. However,

Carter subsequently did not fully cooperate with the Liquidators’ representatives, resulting in the

Liquidators terminating the Investment Management Agreement (“IMA”) with APLDG on October

31, 2011.

2.5.2 After terminating the IMA, the Liquidators were made aware of APLDG’s unapproved efforts to

continue collecting proceeds from auto loan borrowers on behalf of the Company. The

5 Full background details concerning Carter’s involvement and role at APLDG are provided in the Provisional Liquidators’ Report at Appendix II.


August 26, 2013 13 of 82

Liquidators were forced to take action to protect the Company’s remaining assets, and in that

regard filed for recognition under Chapter 15 of the United States’ Bankruptcy Code in order to,

amongst other things, obtain recognition of their powers to control the Company’s assets.

2.5.3 On December 22, 2011, the United States Bankruptcy Court of the Northern District of California

(“Bankruptcy Court”) granted the Liquidators with recognition as a foreign main proceeding

pursuant to Section 1517(b)(1) of the United States’ Bankruptcy Code, and directed all parties in

possession of the Company’s property to promptly deliver such information to the Liquidators.

2.5.4 The Liquidators subsequently received information held by Carter and APLDG including all the

Company’s physical and electronic records. The Company’s physical records are currently

located in a secure storage facility in San Francisco and the electronic files are also under the

control of the Liquidators.

2.6 Asset Recovery Efforts

2.6.1 The Company’s assets can broadly be split into two main categories: automotive loans and life

settlement polices.

2.6.2 The Company’s auto loan portfolio can be further categorized into two different types of loans;

open loans and deficient balances. Open loans are classified as loans where the borrower is still

in possession of the vehicle, and therefore the loan is secured by an asset (“Open Loans”). On

their appointment the Liquidators were informed that the Company’s portfolio consisted of

approximately 1,200 Open Loans with a purported face value of approximately $15 million. The

Liquidators subsequently determined that the majority of the Open Loans were not performing

prior to the Liquidation Date and monthly payments were either not being made, or were in

arrears. Deficient loan balances are defined as those loans where the vehicle has been

previously repossessed, or by some other mechanism the customer no longer held the vehicle as

security (”Deficient Loans”). The Liquidators were informed that the Company’s portfolio

consisted of approximately 6,000 Deficient Loans with a reported face value of approximately $60

million. In reality, the quality of the deficient loans is so poor that the Liquidators have determined

the value of the portfolio of deficient loans to be worthless.

2.6.3 The Liquidators findings with respect to the quality and purported carrying value of the

Company’s auto loan portfolios raises numerous unanswered questions about the probity and

conduct of the Investment Manager.

2.6.4 The method of collecting Open Loans and Deficient Loans differs; therefore, since termination of

the IMA, two separate national debt collection entities have been engaged by the Liquidators.


August 26, 2013 14 of 82

The Liquidators have contracted with First Associates Loan Servicing, LLC (“First Associates”)

to service the Open Loans and NCO Financial Systems, Inc (“NCO”) to collect the Deficient

Loans.

2.6.5 The collection processes properly started in January 2012 after both loan collection entities

uploaded the Company’s auto loan information into their databases and began performing “skip

tracing” 6 exercises to obtain missing borrower contact details.

2.6.6 The Liquidators’ findings are that the majority of the auto loans are non-performing and that cash

flow and recoveries from such actions is extremely limited. It is also apparent that many of loans

appear to be improperly originated, or improperly accounted for, resulting in incorrect or false

balances owing. Both First Associates and NCO have noted that this is the worst performing auto

loan portfolio either has ever encountered, and that projected recoveries for a sub-prime portfolio

of this size are unusually low. At the time of writing this Second Report, First Associates has

made gross recoveries of approximately $720,659 (net recoveries are currently $241,183) on the

Open Loan portfolio and NCO has made net recoveries of just $5,743 on the Deficient Loan

balances.

2.6.7 Evidence to date has shown that the majority of auto loan borrowers either dispute the account

altogether, dispute the balance or have incorrect contact details on file which has prevented the

loan servicing agencies contacting them.

2.6.8 The Liquidators’ investigations into the Company’s investment in life settlement policies are also

ongoing. Based on information provided by the Investment Manager the JOLs understand that

approximately 85 policies were acquired by the Company, of which 82 were sold, or left to lapse,

prior to the JOLs’ appointment. The Liquidators have investigated, and attempted to sell, the

policies which were identified by APLDG as active, however the JOLs’ determined that only one

policy with a face value of $100,000 remains, and that the other policies were also transferred

from the Company, or left to lapse.

2.6.9 The purchasing party, Credit Nation Lending Services, LLC (“Credit Nation”), of one specific life

insurance policy currently owes the Company $393,000. Credit Nation appears to be one of the

parties that originally sold most, if not all, of the life settlement policies to the Company. Clear

Skies also appears to have sold and then bought the life settlement polices back from the

Company, often at a substantially discounted price from the original purchase price. Both of

these entities were controlled by Torchia7. It is uncertain if there are any other life insurance

6 The process of locating a person's whereabouts by debt collection agencies. 7 Torchia worked for APLDG and/or APIM as a senior portfolio manager until he resigned on or about June 29, 2007. According to an offering memorandum for one of the Company’s sub funds, Torchia had “specific responsibilities in the portfolio management of the life settlement and auto loan divisions”.


August 26, 2013 15 of 82

assets beyond the $393,000 identified, and it seems unlikely that this amount can be recovered

without taking legal action in the United States.

2.6.10 Based on the Liquidators’ investigations to date, with the exception of the minimal auto loan

collection receipts on a monthly basis, there does not appear to be any likelihood of significant

recoveries without initiating litigation against various parties.

2.7 Company’s Financial Position and Future Recoveries

2.7.1 The Company lacks financial resources and there is currently less than $95,000 in the

Company’s bank account to fund the liquidation. Further realizations from the auto loan portfolio

are difficult to estimate at the time of writing this Second Report, however are expected to be in

the region of $5,000 to $20,000 per month (net of fees) and will gradually diminish to zero over

the coming 18 months. The JOLs time costs to May 31, 2013 are $1,020,409, which remain

unpaid.

2.7.2 As a result of the lack of funding the Liquidators initiated discussions with various litigation

funding entities as well as contingent fee lawyers to determine if terms could be agreed whereby

future litigation and investigations are funded, or completed, by third parties on a contingent fee

basis.

2.7.3 On September 28, 2012 the Liquidators informed the Grand Court that they had engaged Reid

Collins & Tsai LLP (“RCT”) as legal counsel to perform a review of potential claims including

conduct of pre-litigation discovery pursuant to the powers provided to the Liquidators by Chapter

15 recognition in the Bankruptcy Court. The powers provided include discovery and interviews

with former parties prior to filing any complaints. If RCT’s initial assessment found that there

were strong claims as well as assets to recover, the Liquidators agreed to seek leave of the

Grand Court prior to commencing any litigation. On January 21, 2013, the Bankruptcy Court,

having reviewed and considered the Liquidators Motion to Amend Order Granting Recognition of

Foreign Main Proceeding, granted the relief request as outlined in that motion. The Liquidators

therefore informed the Grand Court on January 30, 2013 that they may shortly be seeking relief to

conduct examinations, take evidence, seek production of documents, and take delivery of

information concerning the assets and affairs of the Company.

2.7.4 Those initial legal assessments and investigations have now been completed by RCT and the

Liquidators find the strength of the potential claims against various counterparties persuasive.


August 26, 2013 16 of 82

Accordingly, the Liquidators are in the process of seeking the approval of the Grand Court to

commence litigation proceedings against certain parties.

2.8 Creditors and Investors

2.8.1 The Liquidators have not adjudicated any claims in the liquidation to date; however, they have

received proofs of debt totaling approximately $7.9 million. In order to save costs the Liquidators

will only formally adjudicate these claims if, and when, the Company receives sufficient

realizations that will result in funds being available to enable a distribution to creditors.

2.8.2 The Liquidators have identified approximately 1,800 shareholders of the Company, the majority of

which are located in Asia. The Company maintained physical mailing addresses for such

investors but did not have complete e-mail or electronic contact details for all investors.

2.8.3 The number of investors and their geographic location has caused the Liquidators certain

logistical problems in notifying the shareholders of their appointment, since the Company lacks

sufficient financial resources to mail such a large number of notices to foreign jurisdictions.

2.8.4 The Liquidators sought the Grand Court’s direction to send a one page letter to all known

investors directing them to the liquidation website8 for further information and updates; dispense

with the first meeting requirements, and; to form a liquidation committee from certain creditors

who had already contacted the JOLs. A number of these letters have been returned undelivered

and the Liquidators have therefore not yet been able to send notice of their appointment to all

shareholders, nor to hold the first meeting of creditors and contributories.

2.8.5 Despite these circumstances the JOLs have provided informal updates by e-mail to

approximately 315 known investors, and have also held two informal conference calls with those

investors they have been able to contact.

2.8.6 The Liquidators convened the first Liquidation Committee (the “Committee”) on October 29,

2012. Subsequent to convening the Committee, the Liquidators provided a non-disclosure

agreement and proposed remuneration agreement to each of the five appointed Committee

members for execution.

2.8.7 At the date of this Second Report a remuneration agreement has not been agreed with the

Committee. The Liquidators note that realizations in the liquidation to date are insufficient to

cover liquidation costs and the Liquidators have significant time costs (in excess of $1 million)

outstanding which have not been paid. The Liquidators intend to continue to invoice their time at

the proposed rates in the hope that one day realizations will be sufficient to pay liquidation costs

8 www.americanpegasusliquidation.com


August 26, 2013 17 of 82

and make a return to creditors. In the event that future realizations are sufficient to pay the

liquidation costs and the remuneration terms are still not agreed with the Committee, the

Liquidators will revert to the Grand Court to seek an order for remuneration.

2.9 Conclusion and Next Steps

2.9.1 The value of the Company’s assets at the Liquidation Date were grossly overstated and costs of

the liquidation far exceed the limited realizations of the Company’s assets to date.

2.9.2 The Company currently lacks sufficient assets to pay liquidation expenses. In the current

circumstances no distribution is expected to be made to creditors or investors in the Company.

The Liquidators have retained attorneys on a contingent basis to investigate and, if appropriate,

pursue claims against parties who were either negligent in their duties to the Company or who

benefitted inappropriately from their dealings with the Company.

2.9.3 In this regard, the Liquidators will be seeking approval of the Grand Court to proceed with claims

against Clear Skies Holding Company, LLC., James Torchia and Marc Cellelo. Assuming the

Liquidators receive Grand Court approval they will immediately instruct RCT to pursue these

recoveries.

2.9.4 The Liquidators also note that Chui has declared personal bankruptcy in the United States

asserting that he has no assets. The Liquidators have filed a claim in Chui’s personal bankruptcy

in the amount of $93,875,141 and are asserting that such claims should not be discharged on the

basis of the bankruptcy trustee’s findings that there are no assets available for distribution to

Chui’s creditors.


August 26, 2013 18 of 82

3 COMPANY STRUCTURE AND OBJECTIVES

3.1 Legal Structure

3.1.1 The Company is an open-ended investment vehicle and was incorporated in the Cayman Islands

on June 16, 2004 as an exempted Segregated Portfolio Company with multiple underlying sub-

funds or Segregated Portfolios. The SP’s themselves are not separate legal entities; instead,

they represent separate share classes within the Company. As a SPC, the assets and liabilities of

each share class are supposed to be separated from each other and do not form the general

assets and liabilities of the SPC.

3.1.2 The registered office of the Company at the Liquidation Date was located at ATC Trustees

(Cayman) Limited, PO Box 30592, Landmark Square, 3rd Floor, 64 Earth Close, Georgetown,

Grand Cayman, KY1-1203, Cayman Islands. The Liquidators have subsequently changed the

registered office of the Company to c/o Deloitte, PO Box 1787, George Town, Grand Cayman,

KY1-1102, Cayman Islands.

3.1.3 The Company was initially setup with an open ended number of SP’s. Throughout the life of the

Company there were 25 separate SP’s opened. As at the Liquidation Date there were 9 SP’s

active with the remaining closed and all assets distributed.

3.1.4 The Company was not registered with, and hence was not regulated, by the Cayman Islands

Monetary Authority.

3.2 Governing Documents

3.2.1 The Company’s Memorandum and Articles of Association was registered and filed on June 16,

2004.

3.2.2 The Company executed separate offering documents for each SP which is consistent with the

Liquidators’ understanding of a SPC structure. The Liquidators have received the following

offering documents:

(i) American Pegasus Fixed Return Fund Segregated Portfolio (“AP Fixed Return

Fund”) dated July 12, 2004

(ii) APW Fund Segregated Portfolio (“APW Fund”) dated April 2005

(iii) American Pegasus Long Short Fund Segregated Portfolio (“AP Long Short

Fund”) dated August 2005


August 26, 2013 19 of 82

(iv) American Pegasus Fixed Income Fund IV Segregated Portfolio (“AP Fixed

Income Fund IV”) dated August 2005

(v) American Pegasus Auto Loan Fund Segregated Portfolio (“APAL Fund”) dated

October 2006

(vi) American Pegasus Life Fund Segregated Portfolio (“AP Life Fund”) dated

September 2008

(vii) American Pegasus Auto Loan Fund (Dist) Segregated Portfolio (“APAL Fund

(Dist)”) dated March 2009

(viii) American Pegasus Fixed Income Fund II Segregated Portfolio (“AP Fixed

Income Fund II”) dated March 2009

(ix) American Pegasus Perpetual Income Fund Segregated Portfolio (“AP Perpetual

Income Fund”) dated March 2009

3.2.3 The offering document dates vary significantly and the Liquidators have attempted to locate all

original offering documents. The offering documents dated in 2008 and 2009 are amended

versions from 2004-2006 after the transfer of investment management companies. The original

documents have not been located.

3.2.4 The investment objective of the SP’s varied. As an example, the investment objective of APAL

Fund (Dist) was “to provide investors with periodic income in the form of quarterly dividends with

the additional possibility of capital gain opportunities through investing its assets in the APAL

Fund” while the APAL Fund investment objective was “to earn a steady return by purchasing sub-

prime auto loans issued in the United States and by selling such loans in the secondary market”.

3.2.5 The investment objective of AP Fixed Income Fund II was “to generate stable, predictable

periodic distributions to its investors, through investing the Portfolio’s assets in Senior Life

Settlement insurance policies issued by investment grade insurance companies located in the

United States.”

3.3 Share Capital Structure

3.3.1 The Company operated nine different SP cells of participating shares (“Participating Shares”)

and one class of Voting Shares (“Voting Shares”).

3.3.2 The Voting Shares are wholly owned by the Company’s investment manager, American Pegasus

LDG, LLC.


August 26, 2013 20 of 82

3.3.3 The SP cells consist of nine cell/share classes with approximately 1,800 underlying investors,

mainly resident in China, Hong Kong, Taiwan and Europe.

3.3.4 The Company’s articles provide guidance and governance on the redemption process.

3.4 Company Objectives

3.4.1 The Company was setup to invest in subprime auto loans and life settlement policies. The auto

loan investments were made in the APAL Fund while the APAL Fund (Dist) invested in the APAL

Fund; therefore, only one SP had auto loan assets.

3.4.2 The life settlement policies were purchased by five of the SP’s namely AP Fixed Income Fund II,

AP Fixed Income Fund IV, AP Fixed Return Fund, AP Life Fund, and AP Perpetual Income Fund.

3.4.3 The AP Long Short Fund was a portfolio that used an online trading account to invest in various

long and short opportunities. The AP Long Short Fund did not invest or share in any profits of the

APAL Fund or the life settlement portfolios.

3.4.4 The APW Fund invested in all areas of the Company.

3.5 Auto Loans

3.5.1 The Company’s auto loan portfolio can be categorized into two different types of loans; open

loans and deficient balances.

3.5.2 Open loans are classified as loans where the borrower is still in possession of the vehicle, and

therefore the loan is secured by an asset. At the Liquidation Date the Company’s portfolio

consisted of approximately 1,200 loans categorized as Open Loans with a purported face value of

approximately $15 million. The Liquidators note that the majority of the Open Loans were not

performing prior to the Liquidation Date and monthly payments were either not being made, or

were in arrears.

3.5.3 Deficient loan balances are defined as those loans where the vehicle has been previously

repossessed, or by some other mechanism the customer no longer holds the vehicle as security.

At the Liquidation Date the Company’s portfolio consisted of approximately 6,000 Deficient Loans

with a reported face value of approximately $60 million. The Liquidators have determined this

value to be grossly overstated and realizations to date are less than one cent on the dollar.


August 26, 2013 21 of 82

3.6 Life Settlement Policies

3.6.1 Based on information provided by APLDG the Liquidators understand that 85 policies were

acquired during the life of the Company with the vast majority sold, or left to lapse, prior to the

JOLs’ appointment. At the Liquidation Date the Company had just one life settlement policy

registered in its name with a policy payout value of $100,000.


August 26, 2013 22 of 82

4 KEY SERVICE PROVIDERS (PRE-LIQUIDATION)

4.1 Investment Manager

4.1.1 American Pegasus Investment Management, Inc (“APIM”) is a Delaware limited liability company,

and was registered with the SEC in 2005. APIM was the investment manager of the Company

from June 1, 2005 to July 31, 2008. The sole owner and CEO of APIM was Chui.

4.1.2 The IMA between the Company and APIM outlined the services to be provided and fees to be

paid. APIM received approximately $8.7 million for the services they provided as investment

manager to the Company from June 1, 2005 to July 31, 2008.

4.1.3 The contractual relationship with APIM was formally terminated on July 31, 2008 when APLDG

took over as the Investment Manager. See Appendix 3 for a copy of one of the IMA termination

letters.

4.1.4 APLDG was the investment manager of the Company from August 1, 2008 until the Liquidation

Date. The Company signed new agreements with APLDG. The Liquidators have identified the

following agreements with the SP’s.

(i) APW Fund dated April 1, 20059.

(ii) APAL Fund (Dist) dated August 1, 2008.

(iii) APAL Fund dated August 1, 2008.

(iv) AP Life Fund dated September 1, 2008.

(v) AP Long Short Fund dated December 1, 2008.

(vi) AP Fixed Income Fund II dated January 1, 2009.

(vii) AP Fixed Income Fund IV dated January 1, 2009.

(viii) AP Fixed Return Fund dated January 1, 2009.

(ix) AP Perpetual Income Fund dated January 1, 2009.

4.2 Directors

4.2.1 In addition to Chui, Mr. David Bree and Mr. Aldo Ghisletta from DMS Management Ltd (“DMS”)

were appointed as directors of the Company in October 2004. In August 2005, Messrs Bree and

9 The Liquidators are unable to locate an IMA between the APW Fund and APLDG. The only IMA located was with APIM.


August 26, 2013 23 of 82

Ghisletta resigned and were replaced by Mr. Blair Brinkley (“Brinkley”) and Ms. Tammy Seymour

(“Seymour”), also of DMS.

4.2.2 Following concerns raised by the SEC inspection, Chui caused the Investment Manager to use its

voting power to appoint Mok and Ms. Pauline Lee (“Lee”) as additional directors of the Company

on May 21, 2010. Following these Chui controlled director appointments, Brinkley and Seymour

resigned on May 24, 2010 noting that there were strong differences on how the board should

proceed and they did not find their situation tenable.

4.2.3 Mok resigned on October 1, 2010 (following the issuance of the SEC’s Cease and Desist Order)

and Lee resigned on March 9, 2011.

4.2.4 Ms Kathy Levinson and Mr. Isaac Hunt Jr. were appointed as directors on October 12, 2010

following Chui and Mok’s removal from the board of directors in conjunction with the SEC’s

Cease and Desist Order.

4.3 Administrator and Custodian

4.3.1 ATC Fund Services (Curacao) N.V. (“ATC” or the “Administrator”) is a Netherlands Antilles

Limited Liability Company and was appointed as the Company’s administrator and custodian

pursuant to an administrator agreement dated July 2004 (“Administration Agreement”).

4.3.2 The Administrator was tasked to provide certain financial, accounting, corporate, administrative,

investor and other services on behalf of the Company.

4.3.3 The Administration Agreement, signed on behalf of the Company by Chui and Brinkley, notes the

underlying SP’s for which the agreement applies. The Liquidators reviewed the Administration

Agreement and noted that all nine active SP’s were included as part of the Administration

Agreement.

4.3.4 The Liquidators have not formally terminated the Administration Agreement with the Administrator

as the Liquidators require the Administrator’s assistance in collecting and analyzing books and

records of the Company. The Administrator has been cooperative in this regard even though

they have currently over $500,000 in unpaid invoices for which they have filed a claim in the

liquidation as an unsecured creditor.


August 26, 2013 24 of 82

4.4 Auditors

4.4.1 KPMG (Curacao) (“KPMG”) were the auditor of the Company and seven of the nine active SP’s.

The Liquidators understand that each underlying SP signed separate audit engagement letters on

an annual basis.

4.4.2 The last set of financial statements audited by KPMG varied by SP and the audited financial

statements are discussed further in Section 10.5.

4.5 Marketing Agents

4.5.1 APLDG executed a Solicitor Agreement with ETSIOR Sarl on June 12, 2006 to sell interests in

the investment portfolios in Switzerland. Rates include 6% commission on sale plus 5% of the

management and performance fee of the Investment Manager. A copy of the agreement is found

at Appendix 4.

4.5.2 APLDG also executed a Capital Introduction Agreement with Paramount Investment

Management Limited dated December 12, 2008 to solicit the SP’s to institutional and private

investors (See Appendix 11). Marketing fees ranged from 65-75% of total gross fees per

segregated portfolio for all existing and new assets under management.

4.5.3 The Liquidators suspect that there may have been other marketing arrangements in place,

particularly in Asia, however, documentary evidence of these arrangements has not been found.

4.6 Other Service Providers

4.6.1 The Liquidators have also identified several other agreements with regard to APAL Fund only as

follows:

(i) Consulting Agreement dated January 1, 2009 with Corporate Resource Advisors Inc.

(“CRA”).

(ii) Auto Repair Pre-Purchase Agreement dated December 30, 2007 for the pre-purchase of

$4.5 million of auto repairs from Acceptance.

(iii) Loan Servicing and Repossession Administration Agreement dated December 30, 2007

with Acceptance.

(iv) Processing Agreement dated October 1, 2009 with CSC Logic Inc to provide backup data

processing services to assist Acceptance on certain duties.


August 26, 2013 25 of 82

4.6.2 The Liquidators have terminated all agreements that were active at the Liquidation Date that were

no longer necessary to assist in the liquidation of the Company. Certain legal agreements and

banking arrangements were kept active until such time that the services could be transferred, at

which time the agreements were terminated.

4.7 Bank Accounts

4.7.1 The Liquidators identified Northern Trust as the Company’s main bank account provider. Each

SP had a separate account setup to collect subscriptions, make redemption payments and invest

the funds into the appropriate portfolio. The Northern Trust bank accounts were setup in 2006

and the Liquidators have received electronic statements containing all transactions for the history

of each account.

4.7.2 Prior to Northern Trust the Company used accounts at ABN Amro. The Liquidators identified that

most ABN Amro accounts were open from 2004 to 2007; however, electronic records were not

available. The Liquidators have requested bank statements but to date have not received a

complete set of company accounts for the ABN accounts.

4.7.3 In addition to the main accounts held at ABN Amro and Northern Trust the APAL Fund also had

separate accounts setup at Sun Trust and First Caribbean International Bank (“FCIB”) in

Curaçao.

4.8 Review of Company’s Operating History

4.8.1 The Company’s operating history can be split into four distinct time periods of operation prior to

the Liquidation Date:

(i) Inception to October 2007 when a third party owned Acceptance;

(ii) October 2007 to October 2010 when Chui had ownership interests in both the

Company and Acceptance;

(iii) The SEC Investigation culminating in a Cease and Desist Order against Chui and

other management of the Company; and

(iv) November 2010 to June 2011 when Carter led the Company.

4.8.2 A detailed summary of the activity in each period is detailed in Sections 5 to 8 below.


August 26, 2013 26 of 82

5 PERIOD 1 - INCEPTION TO OCTOBER 2007

5.1 Overview

5.1.1 The Company was formed in June 2004 under the laws of the Cayman Islands and operated as

an open-ended investment fund with peak assets purportedly valued at approximately $150

million.

5.1.2 Since inception the Company operated as many as twenty five (25) SP’s which invested in sub-

prime auto loans and life insurance policies. The SP’s had approximately 1,800 shareholders

with the majority invested in the auto loan SP’s.

5.1.3 The Company purportedly operated in compliance with its articles during the period, transacting

at arms-length with a third party servicer of auto loans. The individual transaction values have

not been investigated in-depth, however, the Company’s cash position during this time period

suggests that performance was not reflective of expectations.

5.2 Investor Activity

5.2.1 During the period, subscriptions from investors totaled approximately $120 million while

redemptions totaled approximately $3.8 million and $10 million in dividends were paid.

5.3 Auto Loan Activity

5.3.1 The Company purchased $51 million of auto loan accounts during the period and received in

return $4.8 million in cash receipts from Acceptance that can be traced directly to the Company’s

bank statements.

5.3.2 Pursuant to the SEC Report, "Acceptance was the sole finance company providing auto loans

and loan servicing to the Company and Acceptance derived virtually all of its income from the

Company". All auto loans purchased by the Company in the period for $51 million were

purchased from Acceptance.

5.4 Life Settlement Activity

5.4.1 With the exception of $2.4 million in policy sales and $5.4 million in premium payments, all life

settlement purchases and sales occurred prior to 2007. In total, $26.1 million of life settlement

policies were purchased in the period with $12.6 million received from policies sold.


August 26, 2013 27 of 82

5.4.2 As noted previously, the Liquidators have not been provided all the Company’s bank statements

for the years 2004 to 2006 and believe that additional life settlement purchases up to $22.8

million may have occurred. The missing statements are required in order to confirm this.

5.5 Acquisition of Synergy Acceptance Corp.

5.5.1 As noted above, the Company appeared to operate at arms-length until February 2007 when the

controlling shareholder of Acceptance, Clear Skies Holding Company LLC, offered to sell its

controlling stake in Acceptance to Chui. The principals of Clear Skies are two individual by the

names of Mr. James Torchia and Mr. Marc Cellelo.

5.5.2 Torchia worked for APLDG and/or APIM as a senior portfolio manager until he resigned on or

about June 29, 200710. According to an offering memorandum for one of the Company’s sub

funds, Torchia had “specific responsibilities in the portfolio management of the life settlement and

auto loan divisions”11.

5.5.3 Torchia and Cellelo controlled virtually all of Acceptance’s stock through Clear Skies, a holding

company wholly owned by Torchia and Cellelo. Acceptance’s only other shareholders, Robert

Smith (“Smith”) and David Kagel (“Kagel”), together held less than 0.06 percent of Acceptance’s

outstanding shares12.

5.5.4 In February 2007, Torchia offered to sell Clear Skies’ controlling stake in Acceptance to Chui

and/or the Company13.

5.5.5 Torchia and Chui reached an agreement on the key terms of an acquisition by early May 2007:

Chui and Hall would form a new entity, Synergy Equity LLC (“Equity”), which would acquire Clear

Skies’ controlling stake in Acceptance for approximately $20 million (the “Acquisition”)14. But

instead of paying for the Acquisition with his own funds, Acceptance would effectively finance the

Acquisition with its anticipated future earnings. As outlined in a term sheet (the “Term Sheet”),

Acceptance would first re-purchase all of its shares from Clear Skies in exchange for a $20

million note payable over three years. Acceptance would then issue new shares to Equity for

nominal consideration, giving Chui and Hall full control over Acceptance15.

10 See Torchia’s Resignation Letter (see Appendix 5).

11 See APAL Fund (Dist.) Offering Memorandum at pg. 10 (see Appendix 6).

12 Acceptance US Trustee’s Adversary Complaint pg.’s 4-5 (see Appendix 7).

13 See February 27, 2007 email from Torchia to Chui (see Appendix 8).

14 See May 8, 2007 email from Chui to Torchia (term sheet attached) at Appendix 9.

15 May 8, 2007 email from Chui to Torchia with term sheet attached (see Appendix 9).


August 26, 2013 28 of 82

5.5.6 In the ensuing weeks, Cellelo and lawyers from his firm, The Cellelo Law Group, prepared the

necessary documents16. The stock purchase agreements drafted by Cellelo’s firm largely tracked

the two-step structure outlined in the Term Sheet. In two separate stock purchase agreements,

Acceptance agreed to purchase the 600 shares owned by Smith for $11,610 (the “Smith SPA”)

and the 999,400 shares owned by Clear Skies for $19,338,390 (the “Clear Skies SPA”)17. Then,

in a third stock purchase agreement, Acceptance agreed to sell 600 shares of common stock to

Synergy Equity for $11,610, thereby giving Synergy Equity full ownership and control of

Acceptance (the “Synergy Equity SPA”)18.

5.5.7 The Clear Skies SPA, as contemplated by the Term Sheet, called for Acceptance to make

payments to Clear Skies over a three-year period: $5,096,940 within five business days of

closing (the “Initial Payment”)19 and three additional installments of $4.75 million on the first,

second, and third anniversaries of the Acquisition20. To secure its payment obligation under the

Clear Skies SPA, Acceptance further agreed to issue a non-negotiable promissory note to Clear

Skies for the full purchase price21.

5.5.8 The parties closed the Acquisition at Cellelo’s Atlanta office on June 29, 200722. Torchia signed

each of the stock purchase agreements on Acceptance’s behalf as its president, and Torchia and

Cellelo signed the Clear Skies SPA as Clear Skies’ members23. Torchia also executed the

promissory note on Acceptance’s behalf24.

5.5.9 Although Acceptance had agreed to pay Clear Skies approximately $5 million shortly after the

Acquisition closed, Acceptance lacked the funds needed to make the Initial Payment. In fact, as

reflected in an adversary complaint filed by Acceptance’s bankruptcy trustee, Acceptance was

insolvent as early as May 2006 and consistently losing money. Acceptance’s general ledger

16 May 30, 2007 email from Tagliapietra with first drafts of stock purchase agreements attached (Appendix 13).

17 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). Also refer to Acceptance Trustee’s Adversary Complaint at pg. 5 (see Appendix 7). The Trustee’s complaint notes that it is unclear what happened to the 100 shares owned by Kagel.

18 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14).

19 The parties executed two amendments to the Synergy SPA. The first, dated July 9, 2007, gave Acceptance an additional five business days to make the Initial Payment. The second, dated July 12, 2007, changed the Clear Skies’ account into which the Initial Payment would be wired.

20 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14).

21 Promissory Note (see Appendix 15).

22 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). 23 June 27, 2007 email from Angela Tagliapietra to Chui, Hall, Torchia and Cellelo with draft deal docs attached (see Appendix 14). Also refer to Acceptance Trustee’s Adversary Complaint at pg. 5 (see Appendix 7).

24 Promissory Note (see Appendix 15).


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showed negative equity of $764,385 as of May 31, 2006, and its 2006 income tax return showed

that it lost almost $650,000 in 200625.

5.5.10 To come up with the funds needed to make the Initial Payment and payments under the Lease,

Chui and Torchia, who remained on as Acceptance’s president and CEO, arranged for the APAL

Fund to “prepay” $6 million in purported loan origination fees to Acceptance26. The APAL Fund

wired $6 million to Acceptance’s bank account on July 5, 200727. Acceptance then wired the

Initial Payment to Clear Skies’ bank account at the Bank of North Georgia on or about July 13,

200728.

5.5.11 Although the Acquisition was executed on June 29, 2007, after several further amendments it

wasn’t until October 2007 that the transaction was completed. Further details of the transaction

are explained further in the summary of the SEC investigation at Section 7 of this Second Report.

25 Acceptance US Trustee’s Adversary Complaint pg. 4. (see Appendix 7).

26 Acceptance US Trustee’s Adversary Complaint pg. 6. (see Appendix 7) and the SEC Cease-And-Desist Order at pg. 4 (see Appendix 1).

27 July 2007 APAL Fund Account Statement at pg. 9 (see Appendix 16).

28 Acceptance US Trustee’s Adversary Complaint pg. 8. (see Appendix 7).


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6 PERIOD 2 - OCTOBER 2007 TO OCTOBER 2010

6.1 Overview

6.1.1 The period from October 2007 to October 2010 is the time period when Chui was an owner of

both the Company and Acceptance. The purchase of Acceptance was not disclosed by Chui to

the Company’s independent directors or shareholders. The arrangement created an

independence issue between the two entities and, as per the SEC Report, Chui’s ownership

(through Equity) of Acceptance “created a pervasive conflict of interest”.

6.2 Investment Manager

6.2.1 During the period, the investment manager changed from APIM to APLDG.

6.2.2 The change was the result of a potential merger which was announced on May 6, 2008 between

APIM and APLDG. The Liquidators understand that the principal of Lifestyle Design Group

(“LDG”), Mr. Thomas Quinlin (“Quinlin”), and Chui were going to merge their management

companies. The negotiations appear to have fallen through, and although the name was

registered as APLDG, Quinlin had no formal involvement with APLDG. Attached at Appendix 10

is the notice letter informing investors of the merger.

6.2.3 Chui is the majority owner of APLDG while former employees Mok (1.6%) and Hall (22.5%) were

minority owners.

6.2.4 APLDG received $8.1 million in fees during the period it served as investment manager of the

Company from August 1, 2008 to the Liquidation Date.

6.3 Investor Activity

6.3.1 Pursuant to resolutions passed at a meeting of the board of directors held on October 22, 2008

and written resolutions of the board dated December 30, 2008, the Company suspended

redemptions effective September 30, 2008 after significant redemptions were received for the

months ending August 31 to November 30, 2008.

6.3.2 During the period subscriptions from investors totaled approximately $35 million, redemptions

totaled approximately $31.4 million and $12.8 million in dividends were paid. The final batch of

subscriptions was received by the Company in March 2009 with one final subscription for

$190,000 received in March 2010; some 6 months after redemptions were suspended. The last

batch of redemption payments was made April 2009 with a single final redemption paid in


August 26, 2013 31 of 82

November 2009. The final batch of dividends was paid in August 2009. There were no dividends

paid after redemptions were suspended.

6.4 Legal Advisors

6.4.1 The Liquidators identified two different US firms engaged by the Company during the period.

6.4.2 An engagement letter was identified between the Company and Chamberlain, Hrdlicka, White,

Williams & Martin (“Chamberlain”) dated July 22, 2009 for legal services with respect to recovery

of vehicle repossession expenses. The Liquidators do not understand the requirement to engage

legal counsel at the Company level for tasks that should be completed by the auto loan servicing

agent.

6.4.3 The Liquidators have received no correspondence from Chamberlain with regard to their

engagement and have not received a claim in the liquidation despite notifying Chamberlain of the

Liquidators appointment.

6.4.4 There is no further legal work on going with Chamberlain and the legal services with regard to

recovery of vehicle repossession expenses, if any, has not been pursued by the Liquidators.

6.4.5 The Sparer Law Group (“Sparer”) was engaged on April 10, 2009 by Chui on behalf of the

Company, APAL Fund, and APLDG. The initial engagement was to act on behalf of the

Company with regard to the claim by Tradex Global Advisors LLC. Although the Liquidators have

not been provided with any additional formal engagement letters, the Liquidators understand that

Sparer’s involvement expanded to several other issues including a claim against the Company by

LDG, SEC involvement with the AP Long Short Fund and representing Chui personally.

6.4.6 The Liquidators spoke with Sparer initially to understand their involvement, however, after Sparer

continued to represent Chui the Liquidators terminated any further involvement.

6.4.7 Sparer has a claim in the liquidation for unpaid legal fees from representing the Company as well

as Chui.

6.5 Director Activity

6.5.1 As noted in the Section 4.2, the directors remained unchanged until May 2010. Two new board

members, Lee and Mok, who were both employed with APLDG, were appointed in May 2010.

Following these Chui controlled director appointments, Brinkley and Seymour resigned on May

24, 2010 noting that there were strong differences on how the board should proceed and they did

not find their situation tenable


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6.6 Marketing Agents

6.6.1 APLDG continued to use marketing agents throughout the life of the Company and executed a

Capital Introduction Agreement with Paramount Investment Management Limited (“PIML”) dated

December 12, 2008 to solicit the SP’s to institutional and private investors (See Appendix 11).

Marketing fees ranged from 65-75% of total gross fees per segregated portfolio (listed in

Schedule B of Appendix 11) for all existing and new assets under management. An example of

the marketing fee schedule is found at Appendix 12.

6.7 Service Provider Agreements

6.7.1 Several additional service providers were engaged by the Company after Chui took over control

of Acceptance.

6.7.2 A Consulting Agreement dated January 1, 2009 was executed with Corporate Resource Advisors

Inc. (“CRA”). CRA was engaged to assist in reviewing the operations and identifying areas for

improvement29.

6.7.3 An Auto Repair Pre-Purchase Agreement dated December 30, 2007 for the pre-purchase of $4.5

million of auto repairs from Acceptance was signed. This agreement resulted in the transfer of

$4.5 million in cash from APAL Fund to Acceptance for work to be performed in the future. There

is no evidence to show that this work was ever completed, however, this was identified by the

SEC Report and previously disclosed.

6.7.4 A Processing Agreement dated October 1, 2009 with CSC Logic Inc to provide backup data

processing services to assist Acceptance on certain duties. It is unclear what data processing

services were required.

6.7.5 The Liquidators have terminated all agreements that were still active at the Liquidation Date that

were no longer necessary to assist in the liquidation of the funds.

29 CRA recommended the services of First Associates, the debt collection service provider engaged by the Liquidators, to the Investment Manager, however, the Investment Manager chose not to take CRA’s advice.


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7 PERIOD 3 - SEC INVESTIGATION

7.1 Overview

7.1.1 As noted above, prior to 2007 the Company and Acceptance had separate ultimate ownership. In

2007 Chui purchased Acceptance, however, it wasn’t until 2010 that the purchase of Acceptance

was made known to investors and the independent directors when the Acquisition was disclosed

in the Company’s audited financial statements.

7.1.2 The SEC cease and desist order issued in December 2010 resulted in Chui, Mok and Hall being

barred from association with any investment adviser for a period of five years. Since that date,

Chui, Mok and Hall have been excluded from, and not been involved with, the management of the

Company or the Investment Manager. Chui did however continue to control and manage

Acceptance through a holding company he created and controlled called Equity.

7.1.3 The SEC findings concluded that Chui, Mok and Hall had (1) failed to disclose their purchase of

the Company’s key supplier (Acceptance) and the resulting conflict of interest; (2) had misused

the Company’s assets to support related parties; (3) had improperly retired debt of Acceptance

through improper self-dealing; and, (4) had made misrepresentations to investors.

7.2 SEC Auto Loan Findings30

7.2.1 The primary findings from the SEC were that Chui, Mok and Hall “failed to disclose conflicts of

interest, misused client [Company] assets, and engaged in improper self-dealing”.31

7.2.2 In June 2007 Chui, through Equity, purchased Acceptance using approximately $18.5 million from

the APAL Fund. The transaction was funded with Chui prepaying loan origination fees “knowing

that about $5 million of that money [$6 million] would go immediately to the seller of

Acceptance”.32 Chui, over 3 separate transactions transferred an additional $13.575 million33

from the APAL Fund to Equity to complete the purchase of Acceptance.

7.2.3 The Liquidators have found evidence showing the transfer of the $13.575 million from APAL Fund

into an escrow account. From the escrow account the funds were wired directly to Clear Skies for

completion of the purchase of Acceptance.

7.2.4 Chui, Mok and Hall as new owners of Acceptance created a conflict of interest as they “had an

incentive to use [Acceptance] over any other finance company that might better serve the

30 See chart – SEC Auto Loan Findings at Appendix 23. 31 See paragraph 10 of the SEC Order at Appendix 1. 32 See paragraph 10 of the SEC Order at Appendix 1. 33 The Liquidators have vouched these payments plus an additional $3 million as paid by APAL Fund to Equity.


August 26, 2013 34 of 82

[Company]. This incentive was particularly acute because Chui and Hall planned to use

Acceptance’s earnings to pay back [Equity’s] $13.5 million in loans from the [Company].34”

7.2.5 Chui’s motivation to acquire Acceptance is unclear to the Liquidators and the purchase price

agreed for the transaction lacks commercial rationale. Prior to the transaction Acceptance was

unprofitable, in fact as early as March 2006 Acceptance was in financial difficulty with its general

ledger showed negative equity as of May 31, 2006 and its 2006 income tax return showed a net

loss. As a result, Acceptance was unable to generate earnings to repay the $13.5 million and in

fact required additional money to cover operating costs. “To help cover its operating costs,

Acceptance retained auto loan payments it collected for the [APAL Fund] and other money it

owed the [Company]. Also, Chui directed the [APAL Fund] to prepay $4.5 million in repossession

costs to Acceptance (in addition to the prepaid loan origination fees described above).”35

7.2.6 “Chui, Hall and Mok knew or were reckless in not knowing that Acceptance was unprofitable and

running up millions of dollars in debts to the [Company] during 2007 and 200836.” By December

2008 the APAL Fund was due $15.7 million from Acceptance for prepaid fees and costs. In

addition, Equity still owed $13.575 million for the Acceptance purchase loan. In total, by February

2009 the APAL Fund was due over $33.8 million37 from Equity and Acceptance. Neither of these

entities had the funds available to pay the amounts due.

7.2.7 In order to attempt to settle the debts between the companies Chui structured a deal whereby the

APAL Fund would exchange the debts due for an auto loan portfolio. As noted below, however,

the value of the portfolio was not reflective of the debt due. “In February 2009 Acceptance

bought an auto loan portfolio for $12 million. Acceptance agreed to pay the seller $2 million in

cash at closing and $10 million over time. As authorized by Chui and known to Hall, the APAL

Fund agreed to act as a guarantor that was obligated to pay the $10 million if Acceptance did

not.”38

7.2.8 In addition to having the APAL Fund guarantor for the original purchase of the auto loan portfolio,

Chui had the APAL Fund buy the portfolio from Acceptance for $38.2 million which resulted in a

very large profit for Acceptance. “On the same day that Acceptance completed its purchase of the

portfolio for $12 million, it sold the portfolio to the Auto Loan Fund for approximately $38.2 million,

i.e., for over three times what Acceptance paid for it.”39

34 See paragraph 12 of the SEC Order at Appendix 1. 35 See paragraph 14 of the SEC Order at Appendix 1. 36 See paragraph 15 of the SEC Order at Appendix 1. 37 See paragraph 24 of the SEC Order at Appendix 1. 38 See paragraph 22 of the SEC Order at Appendix 1. 39 See paragraph 23 of the SEC Order at Appendix 1.


August 26, 2013 35 of 82

7.2.9 The Liquidators also note the SEC’s findings that the majority of the auto loans purchased

(roughly half) were already delinquent or deficient (i.e. remaining balances on loans where the

borrowers were already in default), prior to the Acquisition.

7.2.10 To pay for the above transaction the APAL Fund released the debt due from both Equity and

Acceptance and also advanced Equity and Acceptance a further $4.4 million in consideration to

make up the purported difference between the purchase price and the debts forgiven.

7.2.11 In December 2009, subsequent to the sale of the portfolio noted above and the release of debt,

Chui and Hall reversed the transaction in regard to the deficient loan balances which represented

approximately $21.5 million. However, as both Chui and Hall would have known, “Acceptance,

which was struggling financially and had minimal assets, had no ability to pay the refund.”40 The

loans advanced by the APAL Fund to Equity and Acceptance remain outstanding.

7.2.12 Chui had approved all aspects of the transaction. However, during the entire process noted

above, both the purchase of Acceptance and the release of liability, the independent directors

were not consulted or even notified that the transactions had occurred.

7.3 SEC Life Settlement Findings

7.3.1 In addition to the above, “Chui also used the Auto Loan Fund's assets for the benefit of the

Advisers' other hedge fund clients. Chui served as the portfolio manager for the life settlement

funds in the [Company]. From April 2007 through May 2009, Chui had the Auto Loan Fund make

approximately 60 loans totaling $12 million to several of the life settlement funds. These interfund

loans were unsecured and payable on demand with low interest rates. The life settlement funds

used the borrowed money to cover investor redemptions, premiums on the insurance policies in

which the funds invested, and sales commissions. Thus, Chui treated the assets of the Auto Loan

Fund as available to fund the operations of the life settlement funds.”41

7.3.2 The loans were another example of a conflict of interest with Chui acting on behalf of all SP’s as

the lending SP would have benefited from higher rates while the borrower would have benefited

from lower rates. There was insufficient segregation of duties at APLDG to perform the

necessary negotiations at each SP to act in the best of all investors.

7.3.3 The Liquidators note that the transfer of assets between the various SP’s is contrary to the stated

investment objectives of the APAL Fund and the legal manner in which SPC’s are supposed to

operate.

40 See paragraph 26 of the SEC Order at Appendix 1. 41 See paragraph 16 of the SEC Order at Appendix 1.


August 26, 2013 36 of 82

7.4 Subsequent Disclosure of Acceptance Transaction

7.4.1 Chui, Mok and Hall did not disclose the 2007 purchase of Acceptance to the Company’s

independent directors until approximately March 2009 which coincided with the release of the

2008 financial statements in August 2009 which disclosed the transaction to investors and users

of the statements. The Liquidators are unsure why the transaction was not disclosed in the 2007

audited financial statements and note that the December 31, 2007 financial statements were not

released until 2009.

7.4.2 The result of the transactions noted above was that the APAL Fund was no longer compliant with

its offering document and the Company’s corporate documents. “The offering memorandum

used to sell shares in the [APAL] Fund stated that the [Company’s] "investment objective" was ‘to

earn a steady return by purchasing sub-prime auto loans issued in the United States’. The

offering memorandum further stated that the Advisers expected to invest the [Company’s] assets

only in subprime auto loans, U.S. Treasury securities, and interest-rate derivatives for hedging.

As a result of the conduct above, however, by December 2008, roughly 40 percent of the [APAL]

Fund's assets consisted of debts and other obligations owed to the Fund by Equity, Acceptance,

and the life settlement funds.”42

7.4.3 In addition to not being compliant with its investment objective, the Investment Manager was also

receiving management and performance fees on the APAL Fund assets. However, as noted

above, “a substantial portion of the fees the [Investment Manager] charged the APAL Fund were

for ‘managing’ what were simply debts and obligations that were generated by and benefited

related parties…”.43

7.5 Investor Misrepresentations

7.5.1 Subsequent to the purchase of Acceptance and the interfund loans the Company continued to

seek additional investors. Chui informed prospective investors that the APAL Fund “used several

finance companies that were all independent of the advisors. These statements were false

because Acceptance, a company [Chui] owned with [Mok] and [Hall] through [Equity], was the

sole finance company used by the [Company].”44

7.5.2 In addition to failing to disclose the purchase to current and prospective investors, the offering

memorandum was not amended to reflect the change in asset base for the APAL Fund as well as

42 See paragraph 19 of the SEC Order at Appendix 1. 43 See paragraph 20 of the SEC Order at Appendix 1. 44 See paragraph 27 of the SEC Order at Appendix 1.


August 26, 2013 37 of 82

the fees taken at each SP. The original corporate documents note that that the Investment

Manager would earn fees calculated using the Company’s net assets, however, it failed to

disclose the level of fees to be earned for related party debts and interfund debts.

7.5.3 Investors have the opportunity look to SEC filings to determine a fund’s performance and

operations, however in Form ADV filed by APLDG and APIM, depending on the time period, the

form “did not disclose that the Fund obtained all of its auto loans and loan servicing from a related

party (Acceptance). It also disclosed the preceding five years of "business background" for key

personnel of the Advisers including [Chui], [Hall], and [Mok], but omitted any mention of their

affiliation with Acceptance.”45

7.5.4 However despite having the ability to disclosure this information to investors, Chui continued with

his deceptive behavior and failed to properly inform investors of these transactions.

7.6 Overall Findings and Penalties

7.6.1 The SEC found, among other violations, that “APLDG, APIM Chui, and Hall willfully violated

Section 207 of the Advisers Act which makes it "unlawful for any person willfully to make any

untrue statement of a material fact in any registration application or report filed with the

Commission ... or willfully to omit to state in any such application or report any material fact which

is required to be stated therein.”46

7.6.2 The penalties and fines handed down are detailed in paragraph 39 of the SEC Cease and Desist

Order.

7.6.3 A curious and unfortunate outcome of the SEC sanction of Chui was that although he was barred

from continued management of the Company he continued to be able to manage Acceptance

until the successful petition for the appointment of a bankruptcy trustee by Carter in June 2011.

45 See paragraph 30 of the SEC Order at Appendix 1. 46 See paragraph 37 of the SEC Order at Appendix 1.


August 26, 2013 38 of 82

8 PERIOD 4 - NOVEMBER 2010 TO JUNE 2011

8.1 Overview

8.1.1 Subsequent to Chui, Mok, and Hall’s removal from the management of the Company as a result

of the SEC investigation, the affairs of the Company were overseen by Mr. Henry Carter. Carter

had originally been retained by Chui as a compliance officer of the Investment Manager but over

the course of the SEC’s investigation his duties with the Investment Manager expanded to that of

CEO, General Counsel, and Chief Compliance Officer. Carter was not subject to any adverse

findings of the SEC investigation.

8.1.2 Between Chui’s removal in December 2010 and May 2011, Carter was in the process of

reconciling historic data and the auto loan borrower accounts.

8.1.3 Carter's efforts also led to the appointment of two new independent directors, Ms. Kathy Levinson

(“Levinson”) and Mr. Isaac Hunt (“Hunt”) who were invited to join the board in October 2010

pursuant to a request from Carter. Chui and the other directors that were affiliated with APLDG,

Mok and Lee, all resigned after issuance of, and in compliance with the terms of, the SEC Cease

and Desist Order.

8.2 Appointment of US Trustee over Acceptance

8.2.1 According to Carter, on or around May 3, 2011 the Liquidators understand that Chui attempted to

terminate Carter’s contract with immediate effect, requesting his immediate departure from the

premises of the Investment Manager. Carter noted that Chui’s request was a violation of the SEC

cease and desist order and refused to adhere to Chui’s demands. The Liquidators understand

that Carter noted his intention to terminate Acceptance’s servicing contract with the Company and

Chui left the premises, taking with him various computers and records purportedly belonging to

Acceptance which shared the office space with the Investment Manager.

8.2.2 On or around May 3, 2011 Chui filed to place Acceptance into Chapter 11 (debtor in possession)

bankruptcy proceedings, of which he intended to control. The implication of this filing was that it

afforded a stay to Acceptance that prevented the Company from being able to terminate its

servicing contract. The filing was also perceived by Carter as a means of frustrating ongoing

investigations of the Company into the conduct of Chui and Acceptance, and amounts owed by

them to the Company.

8.2.3 On May 24, 2011, Carter contacted certain investors to request funding to intervene in the

Acceptance bankruptcy proceedings to appoint an independent Chapter 11 Trustee in the


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Acceptance proceedings and seeking the termination of the loan servicing agreements to allow

the Company to gain control of the servicing of the auto loan portfolio. See Appendix 17 for a

copy of the letter to investors.

8.2.4 On June 2, 2011 Mr. Jeffrey Golden (“Golden”) of Weiland, Golden, Smiley, Wang Ekvall &

Strok, LLP was retained as US legal counsel to the Investment Manager, the Company and the

APAL Fund.

8.2.5 Pursuant to Golden’s engagement, a motion was filed by the American Pegasus parties on June

6, 2011 to appoint a US Trustee over Acceptance and to reject the contracts between

Acceptance and the Company which would result in the servicing of the loan portfolios being

returned to the Company. See Appendix 18 for a copy of the motion.

8.2.6 On June 13, 2011 the Company, Acceptance and the United States Trustee’s office filed a

stipulation order wherein the parties agreed to appoint a Chapter 11 trustee and to provide the

Company with viewing access to Acceptance’s books and records. On June 15, 2011 the Court

approved the June 13 stipulation (see Appendix 19 for a copy of the order) and on June 29, 2011

Ms. Lynn Schoenmann was appointed as the US Trustee over Acceptance.

8.3 Appointment of Provisional Liquidators

8.3.1 On June 1, 2011 two shareholders in the Company (the “Petitioner”) filed a petition in the Grand

Court of Cayman Islands. See Appendix 20 for a copy of the Petition. The Petition was filed to

seek the winding up of the Company pursuant to Section 92(e) of the Cayman Islands’

Companies Law (2010 Revision).

8.3.2 Pursuant to the Petition, the Grand Court ordered the Company into provisional liquidation on

June 20, 2011 and Messrs Sybersma and Pearson were appointed Joint provisional Liquidators

(“Provisional Liquidators”). The Petition was not opposed by the Company or any other party.

8.3.3 Upon appointment the Provisional Liquidators advised the Company’s directors and the

professional service providers of their appointment and in accordance with their statutory duties

took control of the Company's assets including, where possible, the Company's books and

records. On June 22, by telephone call, the Provisional Liquidators received an update from

Carter regarding the status of various litigations. The Provisional Liquidators also advised Carter

that his powers as a director of the Company were suspended and that he no longer had the

authority to bind the Company without the prior permission of the Provisional Liquidators. Carter

pledged his co-operation and arrangements were made for one of the Provisional Liquidators, Mr.


August 26, 2013 40 of 82

Pearson, to visit Mr. Carter at the Investment Manager’s offices in San Francisco the following

week.

8.3.4 Pursuant to s.102(1) of the Companies Law, the Provisional Liquidators also commenced an

investigation into the background of the Company and its business, dealings and affairs. The

Provisional Liquidators were required to file a report with the Grand Court outlining the progress

of the provisional liquidation and outcome of their investigations no later than September 30,

2011 and this requirement was complied with by issuance of the Provisional Liquidators’ Report

on July 19, 2011.

8.3.5 On July 20, 2011 the Grand Court ordered the Company be placed into official liquidation and

Messrs. Sybersma and Pearson were appointed as Liquidators.


August 26, 2013 41 of 82

9 JOLs’ INVESTIGATIONS

9.1 Overview

9.1.1 The Liquidators notified relevant parties of their appointment as Provisional Liquidators on June

20, 2011. Subsequent to their appointment as Official Liquidators the Liquidators notified all

parties again on August 4, 2011.

9.1.2 The Liquidators held several meetings with key individuals including Carter, as detailed in the

First Report, prior to his passing in early 2012.

9.1.3 On October 12, 2011, the Liquidators instructed the board of directors, and Chui (former director)

to complete a statement of affairs as the Liquidators understood that these individuals would have

the most intimate knowledge of the Company. The Liquidators have also requested a statement

of affairs from the former administrator. To date the Liquidators have yet to receive any of the

statement of affairs from any board member or Chui. The Liquidators have received records from

the Administrator but have been informed that the records provided are incomplete.

9.2 Cash Activity

9.2.1 The Liquidators undertook an exercise to recreate the records of the Company to show the

receipts and disbursements from the Company’s inception to the Liquidation Date.

9.2.2 The Liquidators understood from the Administrator that several cross portfolio transfers were

made and as a result, an investigation of the accounts focused on the transfers to determine if

reversal of the transactions was feasible.

9.2.3 Anecdotally the Liquidators were led to believe that nearly $50 million was used to purchase life

settlements and $100 million was used for auto loans. The Liquidators have found evidence to

support $26 million in life settlement purchases plus $13 million in premium payments and only

$66 million for auto loan payments, not including the approximate $20 million payment for the

purchase of Acceptance. The Liquidators prepared a full accounting from inception to investigate

whether the cash flow of the Company supported the information provided by former

management. The full table can be found at Appendix 21. The summary of significant sources

and uses of cash is found in the tables below.


August 26, 2013 42 of 82

Subscriptions 155,500,000

Redemptions paid (35,000,000)

Dividends paid (22,800,000)

Net Cash Available for Operations 97,700,000

9.2.4 It is noted from the table that approximately $155 million was received from investors and of that

amount approximately $58 million has been returned by way of redemptions or dividend

payments. Dividends were paid to investors up to the second quarter of 2006. It is understood

that investors in certain SP’s were “guaranteed” dividend payments for four years from the date of

their subscription. Therefore, there was $97.7 million of funds available to the Investment

Manager not including earnings. The Liquidators have traced $19.5 million for the purchase of

Acceptance47 therefore, the funds that were available for investment or costs were approximately

$78.2 million.

9.2.5 The Liquidators identified $29.4 million paid for various expenses including management and

performance fees.

Management and Performance Fees (16,800,000)

Commission Fees (6,900,000)

Legal Fees (1,700,000)

Administration Fees (1,300,000)

Consulting Fees (700,000)

Miscellaneous Fees (2,000,000)

Total Fees Paid (29,400,000)

47 The Liquidators note that the amount they have been able to trace for the purchase of Acceptance differs from the $18.5 million noted in the SEC Report.


August 26, 2013 43 of 82

9.2.6 $66 million was used for APAL Fund auto loan purchases, of which $26.5 million of the auto loans

were recovered in collections.

Auto Loan Purchases (66,000,000)

Auto Loan Collections 26,500,000

Net Auto Loan Activity (39,500,000)

9.2.7 Of the purported $50 million in life settlement purchases, the Liquidators have identified $26

million of purchases not including premium payments. This is offset by $29.6 million in sales of

the life insurance policies. A complete record of early bank statements has not been located;

therefore, there may be additional life settlement purchases that have not been reconciled by the

Liquidators.

Life Settlement Purchases (26,100,000)

Life Settlement Premiums (13,300,000)

Life Settlement Sales 29,600,000

Net Life Settlement Activity (9,800,000)

9.2.8 The other transactions identified netted close to zero, therefore, had little effect on the overall

cash balance.

Bank Interest Earned 2,900,000

Operating Loan Proceeds 2,700,000

Unknown transactions (5,700,000)

Net Other Activity (100,000)


August 26, 2013 44 of 82

9.2.9 The net cash positions of all payments and receipts noted above is as follows.

Total Fees Paid 29,400,000

Net Auto Loan Activity 39,500,000

Funds Diverted to Purchase Acceptance 19,500,000

Net Life Settlement Activity 9,800,000

Net Other Activity (500,000)

Total Cash Activity 97,700,000

Based on the above reconciliation of transfers it is clear that the majority of the Liquidators’

collection efforts would be centered on auto loans, however, there is also a significant balance

requiring investigation on the life settlement portfolios when factoring in premium payments.

9.3 Henry Carter and APLDG

9.3.1 As noted in prior reports APLDG initially assisted the Liquidators by responding to their

preliminary information requests and aiding their efforts to service the APAL Fund’s auto loan

portfolio.

9.3.2 Given the limited financial resources available to the Company to oversee the auto loan servicing

and collection process the Liquidators were desirous of implementing the most cost efficient

process as possible. Therefore the Liquidators engaged the services of Carter and certain staff

members retained by him to administer the loan servicing process through a revised investment

management agreement (the “Carter IMA”). Under the terms of the Carter IMA, Carter agreed to

report to the Liquidators on this process and all collections from the loans would be deposited into

accounts controlled by the Liquidators from which Carter would be paid for his services. Carter’s

efforts were closely monitored by the Liquidators and his involvement was conditional on his full

cooperation and transparency.

9.3.3 Carter’s working relationship with the Liquidators deteriorated significantly as time progressed;

primarily due to a lack of communication from Carter, his refusal to substantively engage with the

Liquidators, and differences in opinion as to how the liquidation should be progressed.


August 26, 2013 45 of 82

9.3.4 Despite repeated requests for cooperation, the Liquidators were provided with very little

information with regard to the Company’s affairs during the first six months of their appointment.

Ultimately APLDG refused to provide any further information to the Liquidators until outstanding

debts due from the Company to Carter’s consultancy firm were paid in full. On October 31, 2011,

given the Company’s limited financial resources, the Liquidators terminated the Carter IMA

between APLDG and the Company.

9.4 Dealings with Benjamin Chui

9.4.1 The Liquidators were first introduced to Chui during the US Trustees’ initial creditor meeting, at

which time there was an opportunity to ask questions of Chui. Chui was unable to recall

substantial information on Acceptance or the affairs of the Company.

9.4.2 Chui’s legal counsel submitted invoices to the Liquidators for work they had performed on behalf

of Chui that they believed were covered under the indemnity clause of the IMA. The Liquidators

refused to pay the invoices and as such, Chui’s counsel was forced to resign. Subsequent to

Chui’s counsel’s resignation, Chui filed for personal bankruptcy protection.

9.4.3 A trustee was appointed over Chui’s bankruptcy and after the trustee’s initial review, released

findings that no assets were available to satisfy claims.

9.4.4 The Liquidators have filed a claim in Chui’s personal bankruptcy in the amount of $93,875,141

and are asserting that such claims should not be discharged on the basis of the bankruptcy

trustee’s findings that there are no assets available for distribution to Chui’s creditors.

9.4.5 The Liquidators continue to review potential claims against Chui, however, the leading factor will

be whether there are assets to recover. Based on the trustee’s findings, there may not be any

value in pursuing claims against Chui.

9.5 Stipulation Agreement with US Trustee

9.5.1 The Liquidators gained control of the Company’s underlying auto loans by working with the US

Trustee and negotiated a transfer of the servicing of the auto loans from Acceptance to the

Company.

9.5.2 On July 8, 2011 the Bankruptcy Court agreed a stipulation order (the “Stipulation Agreement”)

that, amongst other things, ordered that the loan servicing contract between Acceptance and the

Company be terminated. The termination of Acceptance’s loan servicing contract was a

necessary step in facilitating the Company taking on direct responsibility for this function.


August 26, 2013 46 of 82

9.5.3 The Liquidators attended meetings with representatives of the US Trustee, Acceptance, Chui and

Carter in San Francisco on July 14, 2011. At these meetings the Liquidators were informed by

Chui that there were in fact four auto loan portfolios that were being serviced by Acceptance. The

first portfolio belongs to the Company, the second portfolio purportedly belongs to Acceptance,

the third purportedly belongs to a company controlled by Chui and the fourth purportedly belongs

to a company which the Liquidators are told is independent of Chui. The Stipulation Agreement

provided for the transfer of the servicing of the Company and Acceptance48 auto loan portfolios.

The position of the US Trustee was that the transfer of the servicing of the loans from the

remaining two portfolios is not provided for in the Stipulation Agreement and Chui was not

agreeable to the transfer of such loans.

9.5.4 Information and banking arrangements with respect to the different portfolios was not segregated

by Acceptance and this caused certain complications in the transfer of the servicing of the loans

of the first two portfolios which the Liquidators have subsequently addressed with the US Trustee.

9.5.5 Subsequent to receiving the auto loan portfolios of Acceptance and the Company, the Liquidators

were informed that the US Trustee also held cash collections that were potentially due to the

Company. The Liquidators were informed that the US Trustee was unable to determine what

portfolio receipts represented the cash held in Acceptance’s bank account. As a result, the

Liquidators and the US Trustee agreed to a 50/50 split of the monies in the Acceptance account

on the understanding that if the source of the funds was determined at a later date, then the

appropriate party would receive the correct balance(s) due. As a result of the agreement the US

Trustee sent the Company $75,000, less certain auto loan collection setup fees for the Company.

To date, the source of the funds has not been identified and it is the Liquidators’ understanding

that they will likely remain unknown.

9.6 APLDG’s Actions after Termination of the IMA

9.6.1 After terminating the Carter IMA, the Liquidators were made aware of APLDG’s unauthorized

efforts to continue collecting proceeds from auto loan borrowers on behalf of the Company. The

Liquidators were provided with a letter dated November 2, 2011, two days after the Investment

Manager’s effective termination, instructing borrowers that APLDG had taken over servicing of

the auto loans and that future payments should be made to APLDG.

48 In the case of the Acceptance auto loan portfolio the Stipulation Agreement provides that monies collected on account of the Acceptance loans will be remitted to the US Trustee, less a servicing fee, and subject to possible claims which may be asserted by the Company and the US Trustee with respect to these loans.


August 26, 2013 47 of 82

9.6.2 The Liquidators received evidence that APLDG had collected approximately $120,000 from the

auto loan portfolio since the United States Court stipulation order dated July 8, 2011. APLDG did

not transfer any of these collections to the Company and the Liquidators intend to net these

recoveries against the creditor claim submitted by APLDG, which currently exceeds the amount

collected.

9.6.3 The Liquidators were forced to take immediate action against APLDG and Carter in order to

protect the Company’s remaining assets. At that time the Liquidators had no standing or

jurisdiction in the United States to have a US Court enforce any action against APLDG. The

Liquidators were therefore left with no alternative but to file for Bankruptcy Court recognition in

order that they could enforce the necessary legal remedies against the Investment Manager and

Carter. A more detailed summary of the Liquidators’ successful application under Chapter 15 of

the United States’ Bankruptcy Code is provided in Section 9.7 below.

9.6.4 Following the Liquidators’ Chapter 15 application and subsequent recognition order by the United

States Bankruptcy Court of the Northern District of California, APLDG and Carter became more

cooperative with the Liquidators and, in accordance with the court order, delivered all the

Company’s books and records to the Liquidators’ representative in San Francisco.

9.6.5 In January 2012 APLDG moved out of the Company’s San Francisco office space and its

involvement in the Company’s liquidation from that date was minimal.

9.7 United States Chapter 15 Recognition

9.7.1 The Liquidators engaged Michelson Law Group (“Michelson”) to represent the interests of the

Company and to prepare their Chapter 15 application. The Liquidators’ Chapter 15 petition was

heard before the United States Bankruptcy Court of the Northern District of California. In addition

to seeking recognition of the Cayman Islands liquidation as foreign main proceedings, the

Liquidators also applied for relief pursuant to Sections 1519, 1521 and 105(a) of the United

States Bankruptcy Code.

9.7.2 Given the time-sensitive circumstances with APLDG holding records and auto loans not being

serviced, the Liquidators elected to file an expedited hearing of the Chapter 15 application in

order to prevent further erosion of value in the auto loan portfolio. APLDG opposed this

expedited hearing, however the Bankruptcy Court rejected this opposition and the Chapter 15

hearing was held on December 22, 2011.

9.7.3 The Bankruptcy Court granted the Liquidators with recognition as a foreign main proceeding

pursuant to Section 1517(b)(1) of the United States’ Bankruptcy Code on December 22, 2011 and


August 26, 2013 48 of 82

afforded the Liquidators all reliefs available as a foreign main proceeding under the United States

Bankruptcy Code. The Liquidators were established as the exclusive representatives of the

Company with authority to administer the assets and affairs of the Company in the United States.

9.7.4 The Bankruptcy Court further directed all parties in possession of the Company’s property to

promptly deliver such property to the Liquidators which included all information in the possession

of Carter. The Liquidators subsequently received information held by Carter and APLDG

including the Company’s physical and electronic records.

9.7.5 The Company’s physical records are currently located in a secure storage facility in San

Francisco and the electronic files are also now in the control of the Liquidators. The records

obtained by the Liquidators were provided by Carter. The Liquidators cannot vouch for the

completeness of such records and note that further records may still be under the control of Chui

or others.

9.8 Automotive Loan Data

9.8.1 The Liquidators’ assessment, based on the recovery work performed to date, is that the value of

the auto loan portfolios were grossly overstated and significant write-downs will be required.

9.8.2 The auto loan servicing has required a lengthy reconciliation process due to the history of the

loan portfolio and the multiple servicing platforms used over time. A servicing platform is a

computer program that servicing companies use in order to store all customer data and payment

information. The APAL Fund data was serviced by Acceptance using several platforms prior to

the Liquidation Date. The first platform used at the incorporation of the Company (2004) was a

company by the name of AMS. During the transition of Acceptance to Chui the platform changed

to an entity by the name of ACS. From ACS, data was then transferred to Deal Pack, the system

in place at the Liquidation Date.

9.8.3 The Liquidators have attempted to contact AMS and ACS, however, neither of these entities has

records indicating that they ever performed work on behalf of the Company, the APAL Fund or

Acceptance. Representatives at Deal Pack have confirmed with the Liquidators that their data

retention policy is that two months after terminating a client relationship their servers are wiped of

that client’s data; therefore, it is reasonable that AMS and ACS do not have any records

available. The Liquidators have not been provided with a set of data that corresponds to AMS or

ACS data and therefore, they are unable to reconcile the old data to the current data with issues.

9.8.4 Despite the lack of records the Liquidators understand that AMS was the initial loan servicing

agent for Acceptance. When Acceptance was purchased by Chui a decision was made by Chui


August 26, 2013 49 of 82

to terminate with AMS and engage ACS as the servicing platform. Carter informed the

Liquidators that the transition from AMS to ACS was completed incorrectly and the borrower data

did not reconcile in ACS. The resulting data after the transfer had errors including incorrect loan

values and incorrect addresses. The reconciliation of data did not occur at ACS and shortly after

the transfer to ACS the auto loan data was transferred to Deal Pack.

9.8.5 Upon receipt of the information and being made aware of the reconciliation issues Deal Pack

management agreed to assist APAL Fund and Acceptance in reconciling the data and they were

part way through the process when Carter became involved with the Company. There was no

report from Deal Pack with regard to how far the reconciliation process was from complete,

however, after Carter’s involvement the Acceptance staff working on the reconciliation were

released from employment.

9.8.6 Despite the issues with the data, the Company has contracted First Associates to service the

Open Loans and NCO to collect the Deficient Loans.

9.8.7 The Liquidators provided both First Associates and NCO with the Deal Pack data and the

background knowledge that considerable reconciliation would be required. Both First Associates

and NCO performed separate reconciliation exercises prior to initiating collection efforts.

9.8.8 Prior to selecting First Associates the Liquidators spoke with two other national debt collection

agencies. The Liquidators entered non-disclosure agreements with the other collection agencies;

however, after the collection agencies reviewed the APAL Fund portfolio they did not submit a

proposal to service the portfolio. The Liquidators therefore only received a proposal from First

Associates. There were no other parties identified that would collect the Deficient Loans other

than NCO.

9.9 Open Loan Servicing

9.9.1 As noted in the First Report the Liquidators engaged auto loan servicers to collect the Open

Loans and the Deficient Loans. The Liquidators engaged First Associates on December 12, 2011

to collect the Open Loans. The Liquidators provided the electronic information that they had in

their possession. Based on this information First Associates sent introductory notices to

borrowers on December 22, 2011, and made preliminary efforts to collect these balances. First

Associates efforts were, however, restricted due to the incomplete information with which they

had been provided and the lack of original loan copy files which they required to make vehicle

repossessions. The physical Open Loan files that were recovered from APLDG were sent to First

Associates during the week of January 16, 2012 which enabled them to pursue their recovery

efforts more vigorously.


August 26, 2013 50 of 82

9.9.2 The Open Loans were extensively reviewed by First Associates and after 12 months of servicing

and investigation First Associates returned all non-performing loans to the Liquidators

9.9.3 First Associates identified many issues with the Open Loan portfolio, which increased the loan

collection times over this period, as well as reduced the face value of the portfolio. These factors

include:

• Incorrect or incomplete contact information, which has required extensive “skip tracing”49

to obtain more accurate account information;

• Evidence that many borrowers had never in fact held a loan with Acceptance or the

Company, and that the account balance shown in the Company’s records may never

have been a valid account;

• Evidence that certain borrowers showing a balance due to the Company never

purchased a vehicle to generate the loan, and claim they only ever took the vehicle in

question for a test drive (First Associates have identified at least 20 borrowers to date

whose loan balances appear to have been subjected to this suspected fraud);

• Loan accounts that have been paid off in full, with adequate supporting evidence

provided by the borrowers, which were still being shown as active Open Loans. To date

First Associates has identified over 35 loans in this category, representing over $200,000

of overstatement in the Open Loan portfolio; and

• Evidence that the recorded opening loan balance was greater than what the borrower

originally signed up to borrow. Furthermore there are many instances of disputes

regarding the payment terms, which are alleged to differ from the original financing

agreements.

• Until reconciled, these borrowers are refusing to make further payments.

9.9.4 The Liquidators were in regular contact with First Associates to review the number of loan

accounts that are serviced under the monthly account fee structure in order to ensure that First

Associates identified those accounts that are generating positive cash flows. After concluding

that loans are non-performing, or cannot be collected for other reasons, these deficient accounts

were returned to the Liquidators.

9.9.5 As of the date of this Second Report, First Associates continue to hold and service 247 loans.

The returned loans were deemed uncollectible and were returned to the Liquidators on the basis

that they were a Deficient Loan and required a separate collection agreement which First

Associates was not interested in pursuing. The loans were deemed uncollectible for lack of ability

49 The process of locating a person's whereabouts by debt collection agencies.


August 26, 2013 51 of 82

to find the borrower, the borrower filed bankruptcy or there is no ability to repossess the vehicle.

Bankrupt borrower collection requires a Court process and First Associates required additional

payment for those services. The Company did not have the funding to support the additional

costs and as such, the loans were returned to the Liquidators. The table below represents the

categories for returned loans.

Open Loans at liquidation date 1,236 Total loans paid/settled in full (118) Total loans legally discharged (18) Total loans actively paying (247) Total loans returned to the Company (see below) 854 Returned loans classified as follows: Uncollectible 624 Deficient prior to appointment 98 New vehicle owner identified (deficient) 30 Repo action taken prior to appointment 102 Total loans returned to the Company 854

9.9.6 First Associates reported in January 2013 that they exhausted all efforts to locate many

borrowers and deemed the loans uncollectible. According to First Associates, they performed an

in-depth evaluation of each loan to determine if it was worth pursuing. In addition, First

Associates identified all cars that were valued below $500 and returned those loans as

repossession of the vehicles would result in no net recovery to the Company. The loans,

although secured by a vehicle, would be considered deficient due to the limited value of the

vehicle.

9.9.7 First Associates found evidence of suspected fraudulent activities on several accounts where

accounts were paid off but not recorded or loan balances were incorrect. The Liquidators have

collected all of this information for further support of the Company’s claim against Acceptance.

9.9.8 An example of one particular loan that was flagged as potentially fraudulent was when an

insurance notification from United Services Automobile Association listed a borrower (“Borrower

A”) of Jasper, GA as the lienholder on a vehicle and referenced a vehicle identification number

(“VIN A”).

9.9.9 Upon review, the vehicle is recorded in the APAL Fund records under Borrower A of, Ellijay, GA

as an Open Loan. However, there is also a loan listed in APAL Fund’s deficient records showing

a vehicle with VIN A with a separate borrower listed of Scranton, PA (“Borrower B”).

9.9.10 While it is a possibility that the above vehicle was legitimately repossessed from Borrower B and

sold to Borrower A using Acceptance financing, this does not appear to be in the normal course


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of business for the Company and it is a possibility that the information has been created

fictitiously to inflate the value of the auto loan portfolio.

9.9.11 The Liquidators continue to hold periodic update calls with First Associates to monitor their Open

Loan recovery efforts. First Associates have indicated on these calls that recoveries from the

Company’s auto loan portfolio are unusually weak for the size of portfolio and that this is the

worst performing auto loan portfolio they have come across in the company’s 25 years of loan

collections.

9.9.12 Despite the difficulty faced, the collection from First Associates has continued throughout the

period of their engagement and has resulted in net collections of $241,183. The collections have

fluctuated significantly during the collection period as noted in the following table. As noted

above, First Associates have now returned all loans that are deemed uncollectible and therefore

the monthly expenses are expected to remain consistently lower than the early part of 2012.

Cash Received Expenses Paid Net Cash Setup Fee 0.00 (10,000.00) (10,000.00)January 2012 21,650.57 (40,903.37) (19,252.80)February 2012 52,443.23 (36,091.96) 16,351.27 March 2012 59,835.21 (34,817.17) 25,018.04 April 2012 60,942.74 (36,643.19) 24,299.55 May 2012 46,338.51 (35,023.70) 11,314.81 June 2012 43,565.73 (40,150.18) 3,415.55 July 2012 32,533.92 (27,919.81) 4,614.11 August 2012 98,419.38 (39,300.81) 59,118.57 September 2012 37,257.94 (24,556.46) 12,701.48 October 2012 66,557.67 (22,393.45) 44,164.22 November 2012 40,698.78 (44,550.77) (3,851.99)December 2012 20,905.51 (20,802.46) 103.05 January 2013 33,915.95 (22,402.25) 11,513.70 February 2013 41,121.96 (18,066.72) 23,055.24 March 2013 33,238.04 (13,267.52) 19,970.52 April 201350 23,906.64 (9,111.22) 14,795.42 720,658.72 (479,475.99) 241,182.73

9.9.13 The fluctuating revenue was primarily related to the number of repossessions and resulting sale

of the vehicles. In addition, early in the servicing process there were several individuals seeking

full settlement of their accounts. The resulting gross cash flows were higher. As an example, in

August and October 2012 First Associates repossessed and sold vehicles at auction, 45 and 12

vehicles, respectively, which increased the monthly collection for those particular months

significantly.

50 Net cash received from May, 2013 collections totaled $26,005.23. This amount was deposited into the Company’s bank account in June, 2013.


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9.9.14 Further lump sum payments from borrowers are not expected in 2013 and there are no

repossessions in process for 2013 as all non-performing loans were returned to the Company,

therefore, no vehicles will be sold at auction.

9.9.15 First Associates estimates that cash flow from the 247 loans will continue for another 12-16

months before it will be cost prohibitive to continue.

9.10 Deficient Loan Collection

9.10.1 As noted in the First Report, the Liquidators contracted NCO on a contingent basis to seek

recovery of deficient loan balances with their fee based of 30% of gross collections. Initial

notification letters of NCO’s appointment were sent to Deficient Loan borrowers on or around

December 15, 2011.

9.10.2 Due to the same data inconsistency issues identified by First Associates for the Open Loans, and

a general lack of contact information contained in the electronic information, NCO were forced to

identify and locate many of the underlying borrowers through “skip tracing” and various other

investigation processes.

9.10.3 NCO identified several crucial issues in the portfolio:

• Over 1,000 of the borrowers have filed for bankruptcy;

• Over 300 borrowers are deceased;

• Approximately 1,200 accounts have incomplete and inaccurate information to the point

that NCO was unable to identify or contact the borrower; and

• It appears that some borrowers, dating back as far as 1989, purchased cars from

dealerships that promised them certain financing terms, often with very little, if any,

money down. The borrower would take the car and wait for the financing terms to come

days or weeks later. According to the borrowers, the financing terms were substantially

different from the terms they had agreed, and they would give the car back on the

understanding that they never actually purchased the vehicle. It appears that the

dealerships considered the vehicle sold and received the financing, though they held the

car to sell again. The loan was instantly a deficiency balance and when Acceptance

purchased or financed these loans they likely had no monetary value and were likely

valueless and uncollectible from the start.

9.10.4 Total cash realizations on the Deficient Loans were extremely poor. NCO recovered, net of fees,

$5,743 and have made payment of this amount to the Company.


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9.10.5 NCO informed the Liquidators that they had never encountered such a poor quality loan portfolio

and that on a $60 million portfolio51 they would typically expect to see cash flow generation within

30 days, even at a discounted level. According to NCO’s collection agents, many borrowers are

vigorously disputing their loan balances and even when offered substantial discounts on the

purported loan balance, there is no willingness to make payment.

9.10.6 NCO was unable to gain any further traction with borrowers and on May 31, 2012 returned the

Deficient Loan portfolio to the Liquidators.

9.10.7 The Liquidators held the Deficient Loans and did not pursue collection until further investigation

could be completed on former affiliated parties of the Company. That investigation is now

complete and the Liquidators accepted an offer from an individual with connections to the

Company52 to review the Deficient Loans. The Liquidators have received no response on their

proposal as at the date of this Second Report with regard to a possible second effort of

collections. The Liquidators note that, to the extent an agreement can be reached to revisit the

Deficient Loans, any collection efforts completed on the Deficient Loans will be on a purely

contingent basis and will be at no cost to the Company.

9.11 Life Settlement Policies

9.11.1 The Liquidators have reviewed a limited amount of information regarding the Company’s life

settlement policies. Based on verbal reports from APLDG, 85 policies were acquired by the

Company with the vast majority sold, or left to lapse, prior to the Liquidators’ appointment. The

records received to date have not allowed the Liquidators to verify this number of policies.

9.11.2 The Liquidators have found evidence of one policy with a face value of $100,000 that remains

active, and a second policy with an amount due from the purchasing party. There is no

opportunity in the market to sell the single policy due to its small size.

9.11.3 The purchasing party on the second policy that currently owes $393,000, Credit Nation, appears

to be one of the parties that originally sold most, if not all, of the life settlement policies to the

Company. Clear Skies also appears to have sold and then bought the life settlement polices

back from the Company, often at a substantially discounted price from the original purchase

price. Both of these entities are commonly controlled by Torchia. It is uncertain if there are

further recoveries beyond the $393,000 identified, and it seems unlikely that this amount can be

recovered without taking legal action in the United States.

51 The deficient loan portfolio provided to NCO had a face value of $60 million. The original purchase price of the deficient loan portfolio is unknown, however, the Liquidators are aware that the portfolio includes the deficient loan payments as discussed in Section 9.2.6. 52 Thomas Quinlin.


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9.11.4 As previously noted in this Second Report, Torchia worked for APLDG and/or APIM as a senior

portfolio manager until he resigned on or about June 29, 200753. According to an offering

memorandum for one of the Company’s sub funds, Torchia had “specific responsibilities in the

portfolio management of the life settlement and auto loan divisions”54.

9.11.5 Based on the review to date there will be no recoveries from life settlements without legal activity.

9.12 Sun Trust Garnishment

9.12.1 Early in the liquidation the Liquidators were notified of a garnishment summons against APAL

Fund55 and an account at Sun Trust bank. The garnishment summons was dated June 30, 2011

and is in the amount of $135,073. It is understood that the proceedings relate to a lease taken

out by Acceptance for a car lot in Georgia. The car lot was required by Acceptance to store

vehicles repossessed for non-payment on auto loans. It is further understood that the lease

required a guarantor which was provided by Mok acting on behalf of APLDG.

9.12.2 The copy of the commercial lease guarantee reviewed by the Liquidators is between Blue Fin

Properties, Georgia (“Blue Fin”) and Acceptance, guaranteed by APLDG (Mok), dated July 17,

2008. The Liquidators have reviewed a corporate resolution signed by Chiu as Director of APAL

Fund on July 24, 2008 in which it was resolved to guarantee the lease between the Blue Fin and

Acceptance. It is further noted that Mok was authorized to execute the lease as guarantor on

behalf of APLDG, and not APAL Fund as the commercial lease guarantee indicates.

9.12.3 The Liquidators have reviewed the affidavit for garnishment between Blue Fin and APAL Fund

and noted that the service address was the former address of Acceptance, not the Company.

9.12.4 Initial investigations into this matter were undertaken by legal counsel engaged by Carter and the

Liquidators were of the view that the garnishment should be challenged on following grounds:

(i) Service – the Company was not properly served as the documents were sent to the mailing

address of Acceptance and not APAL Fund. These documents are noted by the United

States Postal Service as returned to sender as addressee was unknown.

(ii) Invalid guarantee – The Liquidators understand that investigations by the investment

manager revealed that the witnesses were not present when the guarantor (Ms. Mok) signed

the document, an act which questions the validity of the guarantee under Georgia law.

53 See Torchia’s Resignation Letter at Appendix 5.

54 See APAL Fund (Dist.) Offering Memorandum at pg. 10 (Appendix 6).

55 The Summons was against American Pegasus Auto Loan Fund SPC. This is not a legal entity and formed part of the defense against the garnishment.


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9.12.5 Prior to challenging the garnishment Sun Trust Bank in Canton, Georgia was served with the

garnishment and that funds representing loan payments to APAL Fund in the amount of $7,402

were garnished and paid to Blue Fin.

9.12.6 After the initial garnished amounts the Liquidators informed Sun Trust of the challenge to the

garnishment and requested all further funds be paid into a US Court trust account. Sun Trust

confirmed and the Liquidators were provided evidence that all further funds were deposited into a

US Court.

9.12.7 Kitchens New Cleghorn LLC (“Kitchens”) was the legal counsel engaged by APLDG on the

matter to pursue and recover the garnished funds. However, Carter ceased updating Kitchens

with information and provided no instruction with regard to the garnishment. The Liquidators did

not formally engage Kitchens and as a result, on November 6, 2011 Kitchens formally resigned

from representing APLDG in the matter.

9.12.8 The Liquidators, familiar with other counsel in the area that had represented the Company in the

past, engaged Locke Lord LLP (“Locke Lord”) to complete the garnishment appeal. After filing

several motions and appeals, Locke Lord successfully removed the garnishment and recovered

all garnished funds (in the amount of $15,550). The total legal costs incurred to remove the

garnishment were $11,880; therefore, the process only generated a recovery of $3,670 to the

Company’s estate.

9.12.9 Locke Lord had liquidation claims exceeding the $15,550 and in recognition of their efforts, the

Liquidators agreed that all recoveries from the garnishment would be used to pay down a portion

of the outstanding claim due to Locke Lord.

9.13 Lifestyle Design Group

9.13.1 Quinlin, the principal of LDG, has a purported long history with the Company. Early in the

liquidation Quinlin contacted the Liquidators offering his assistance. The Liquidators discussed

his involvement with the Company and his former connection with the Investment Manager. The

Liquidators understand that Quinlin was a former associate of Chui and was intended to be part

of the new management company representing the LDG portion of APLDG.

9.13.2 Based on discussions with Quinlin the following connections have been identified:

(i) Managing member of Qvest III Master Fund, LP (“Qvest LP”), a partnership which owes the

APAL Fund $300,000 plus interest;


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(ii) Investment manager to 31 individuals who have claimed potential secured creditor status with

regard to loans made by Quinlin on their behalf to assist with the operating costs of APAL

Fund in 2008 and 2009;

(iii) A debt collector by profession, Quinlin has offered his assistance on a few occasions to

collect the deficient loan balances56; and

(iv) A member of the Liquidation Committee as voted in by the general creditor group.

9.13.3 There has been significant correspondence received from Quinlin throughout the liquidation. The

initial discussions were a result of Quinlin representing potentially secured creditors, who, in

personal capacities loaned money to the APAL Fund for operating costs. Based on the initial

review of the claims, the security may not be valid and the creditors may rank equal with other

unsecured creditors, however legal advice will be required before a final determination can be

made on these claims.

9.13.4 Another particular point of discussion was the auto loan collections. Due to Quinlin’s debt

collection experience he proposed to take on the collection of the auto loans on behalf of the

Liquidators. In Section 5.5 of the First Report the Liquidators discussed an alternative for the

deficient loan collections if NCO would not continue.

9.13.5 Although Quinlin’s proposal appeared well thought out and detailed, the startup costs and

monthly operating costs of his proposal were prohibitive to the Liquidators moving forward. In

addition, the proposal required the involvement of several individuals who had prior involvement

with the Company, one of which was subject to the SEC cease and desist order. As a result, as

noted in the First Report the Liquidators engaged NCO to recover the Deficient Loans and First

Associates to collect the Open Loans.

9.13.6 Subsequent to NCO resigning, Quinlin requested access to the data to reconcile the information

and begin collections. The Liquidators made it clear that if Quinlin was authorized to pursue the

delinquent loan balances, such collection efforts would be on a contingent fee approach and

there would be no payment for collections unless realizations were received.

9.13.7 Pursuant to correspondence with LDG on March 7, 2013 the Liquidators provided data from Deal

Pack in relation to the Company’s non-performing auto loan accounts. The Liquidators informed

LDG that there were known deficiencies and errors in the data which appeared to stem from,

amongst other things, pre-liquidation transfers of the data between different loan collection

service providers.

56 The Liquidators provided Quinlin with all deficient auto loan borrower information. To date, Quinlin has not provided a response to the Liquidators with regard to his desire and ability to collect the outstanding amounts on the loans.


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9.13.8 The Liquidators provided LDG with access to the 854 Open Loans returned to the Company by

First Associates as well as the 6597 Deficient Loans returned by NCO.

9.13.9 The Liquidators provided the data on a confidential basis and on the condition that upon

completion of LDG’s analysis results will be reported to the Liquidators. Prior to any further action

including loan recoveries, debtor contact, or forwarding information to start the collection process

the Liquidators will discuss the process with LDG and provide authorization. Quinlin has not

provided a plan or proposal for collection of the Company’s debt at the date of this Second

Report.

9.14 Qvest LP

9.14.1 As noted above, Quinlin also controlled an entity by the name of Qvest LP. Qvest LP borrowed

$300,000 from APAL Fund pursuant to two loan agreements dated in March 2009. The loan

agreements were for $200,000 and $100,000 each and interest accrued at 12% and 6%

respectively. Both loans were due in 365 days after which default interest began accruing at 18%

per annum.

9.14.2 The Liquidators identified the loans were outstanding shortly after the Liquidation Date and sent a

notice of default to Qvest LP and Quinlin on August 4, 2011.

9.14.3 The initial response from Qvest LP discussed a loan agreement between Quinlin and Chui

whereby both individuals were in the process of setting up a joint venture through their respective

management firms. Quinlin noted that to capitalize the joint venture both individuals were

expected to contribute $300,000.

9.14.4 The Liquidators have not been able to confirm, however, it is understood that Quinlin deposited

his $300,000 but Chui was not able to contribute his portion. Quinlin agreed to fund the full

$600,000 (both his and Chui’s portion) and Chui would repay the funds to Quinlin.

9.14.5 Based on review it appears that instead of repaying funds from his personal account, Chui paid

the money to Quinlin from the Company, recording such transaction by way of the loan

agreements to Qvest LP. According to Quinlin, the loan agreements were intended to be repaid

by Chui or APLDG, therefore, Qvest LP refutes its obligation to repay the funds. There is no

record of such an agreement and based on the documentation, Qvest LP is the only loan

recipient on the agreements.

9.14.6 After confirming receipt of the Liquidators default notice and providing a response within 10 days,

Quinlin subsequently wound up Qvest LP without providing notice to the Liquidators. The

Cayman Islands gazette notice of Qvest LP’s dissolution, dated January 3, 2012, was identified


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by the Liquidators and a search of the Registrar of Companies noted that Qvest LP was dissolved

effective January 4, 2012, nearly 4 months after the default notice was sent.

9.14.7 Quinlin asserts that Qvest LP should not be responsible for re-paying the loan and in any event it

allegedly lacks the funds to do so. The Liquidators questioned Quinlin on this sequence of events

noting the requirement for the general partner of an entity to settle all debts prior to winding up an

LP. In addition, Quinlin was informed that the Liquidators were forwarding the collection from

Qvest LP to their legal counsel. The Liquidators note that the legal counsel engaged to collect

these funds are engaged on a purely contingent fee basis, therefore, if there are no collections,

the Company does not incur any further cost.

9.14.8 The Liquidators have calculated the interest and principal due as at the date of this Second

Report as $468,575.

9.14.9 At the time of writing this Second Report legal counsel have not submitted their recommendation

for the course of action in pursuit of the receivable.


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10 OTHER LIQUIDATION ACTIVITY

10.1 Rule 2004 Discovery

10.1.1 The Liquidators have engaged contingent fee counsel, RCT, to investigate claims against former

counterparties as well as former individuals and related parties that benefited from the Company

and the SP’s.

10.1.2 RCT has sent notices and requests pursuant to a Rule 2004 Examination. Rule 2004 of the

Federal Rules of Bankruptcy Procedure allows any “interested person” (in this case the

Company) to require someone else to testify and produce documents on matters related to the

Company’s bankruptcy. The 2004 Exam can cover a broad range of issues, including:

(i) The Company’s actions, conduct or property;

(ii) The Company’s debts and financial condition;

(iii) any issue that relates to the Company’s bankruptcy assets; and

(iv) any matter that affects the right to a discharge.

10.1.3 RCT sought Rule 2004 depositions for Torchia, Clear Skies, Torchia’s counsel, Celello and

several other parties with prior knowledge of the Company. In response to the requests, parties

have provided documents which have assisted the Liquidators and RCT in their investigations.

10.2 Claim in Acceptance Bankruptcy Proceedings

10.2.1 The Company is the overwhelming majority creditor in the Acceptance bankruptcy having

submitted a claim for $19,592,991, representing 91.5% of the total unsecured claims

($21,405,650). The Liquidators have the ability to amend the Company’s claim in the future if

additional claims are identified.

10.2.2 The Liquidators have spoken with the US Trustee of Acceptance who has noted that they have

filed claims against counterparties in Acceptance’s bankruptcy proceedings.

10.2.3 There have been no results from Acceptance at this time and the Liquidators will continue to

monitor the progress through periodic updates from the US Trustee.

10.3 Governing Documents

10.3.1 The Liquidators have not been able to recover a full set of the Company’s books and records.

Based on discussions, the Administrator did not believe they had a complete set and that the only


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complete set would be with the former investment manager, APIM. The Liquidators attempted to

recover a complete set from APIM and have taken copies of servers that were available. The

Liquidators identified four servers in total, two of which were damaged and required repair prior to

copying data. The Liquidators repaired the servers and identified a large portion of previously

deleted data that they were able to recover. The Liquidators have received over two million

pages of documents in raw format but due to funding constraints have not been able to process

the data to a reviewable format. The Liquidators have reviewed some specific pieces of data and

the information reviewed to date is summarized below.

10.4 Bank Account Termination

10.4.1 As noted previously, the Company’s primary bank accounts were controlled by the Administrator

at Northern Trust and FCIB. The Liquidators have also obtained electronic records of the

Company’s cash activity since mid-2006 from Northern Trust, which has enabled them to perform

a preliminary analysis of the receipts and disbursements relating to the Company. Prior to

Northern Trust the Company used accounts at ABN Amro. The Liquidators identified that most

ABN Amro accounts were open from 2004 to 2007; however, electronic records were not

available. The Liquidators have requested bank statements but to date have not received a

complete set of company accounts for the ABN accounts.

10.4.2 There were additional accounts and lock boxes in the name of the Company at SunTrust bank in

California; however the Liquidators were unable to take control of these accounts due to Sun

Trust not recognizing the Liquidators appointment. The Sun Trust accounts were setup to collect

auto loan repayments. The accounts included a lock box for cheque payments as well as the

capabilities to receive credit and debit card payments over the phone.

10.4.3 After the Chapter 15 Order was received SunTrust indicated to the Liquidators legal counsel that

they will not provide account statements, or access to the accounts, without being subpoenaed

through the United States’ legal system, which is cost prohibitive given the Company’s current

financial situation. SunTrust has verbally indicated to legal counsel that the SunTrust accounts

are empty and consequently the Liquidators intend to take no further action regarding these

accounts. Sun Trust has instruction that they will not release any funds to any parties without the

express written consent of the Liquidators; however, there is no expectation that any further

amounts will be deposited in the Sun Trust collection account.

10.4.4 The Liquidators, subsequent to their appointment and after understanding the former requirement

for the numerous accounts, have since closed all of the bank accounts noted above and opened

a Liquidator controlled bank account at HSBC Bank (Cayman) Limited (“HSBC”).


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10.5 Review of Audited Accounts

10.5.1 The Liquidators have identified 2006, 2007 and 2008 audited financial statements all of which

were accompanied by unqualified audit opinions. The unqualified audit opinions for the 2007 and

2008 years were post-dated and not released until 2009. An explanation for this delay has not

been provided to the Liquidators. The Liquidators have identified the following final sets of audited

financial statements:

(i) APAL Fund (Dist) – December 31, 2008

(ii) APAL Fund – December 31, 2008

(iii) AP Fixed Income II Fund – March 31, 2007

(iv) AP Fixed Income IV Fund – March 31, 2007

(v) AP Fixed Return Fund – March 31, 2007

(vi) AP Long Short Fund – December 31, 2007

(vii) AP Perpetual Income Fund – March 31, 2007

10.5.2 The purchase of Acceptance was identified in the APAL Fund 2008 financial statements while the

transaction occurred in October 2007. The Liquidators have not investigated why the transaction

was not included in the 2007 audited financial statements.

10.5.3 The audited financial statements for 2007 and 2008 were released from 2008 to as late as August

2009; however, the Liquidators have not been provided a reason for the delay. The Liquidators

have reviewed the engagement letters with KPMG and note that “the [Company] agrees to

release and indemnify KPMG and its personnel from any claims, liabilities, costs and expenses

relating to the services under the engagement letter attributable to any fraudulent acts, omission

or willful default by management and any misrepresentation in the representation letter referred to

above and, in general, for providing incorrect or incomplete information”. The engagement letter

goes on to establish “KMPG’s liability for each event causing damage is limited for audit

engagements to three times the fees agreed or invoiced”.

10.5.4 The Liquidators have not been able to identify all financial statements and the corresponding

engagement letters. The following engagement letters have been identified:

(i) APAL Fund (Dist) –2009 engagement letter signed

(ii) APAL Fund – 2009 engagement letter signed

(iii) AP Fixed Income II Fund – no engagement letter


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(iv) AP Fixed Income IV Fund– 2007 engagement letter

(v) AP Fixed Return Fund – 2006 engagement letter

(vi) AP Long Short Fund – 2006 engagement letter

(vii) AP Perpetual – 2006 engagement letter

10.5.5 The 2009 statements appear to have been started for the auto loan funds however it appears that

the audit of the 2009 statements have not been completed or signed off by the Auditor and the

Liquidators will not be instructing this to be done.

10.6 Intercompany Loans

10.6.1 The records the Liquidators received indicated that there were numerous intercompany loans

between the various SP’s. The transfer of funds between the SP’s is inconsistent with the proper

operating of a SPC whereby each SP is intended to operate independently and the assets of

each cell segregated to cover the liabilities. If a cell is unable to pay its debt that particular

portfolio or share class needs to be repurchased by the Company and the activities of that cell

terminated or the share class needs to be re-capitalized.

10.6.2 Pursuant to the individual offering documents of each SP, it notes that “although the [Company] is

a single legal entity, the assets and liabilities of the [Company] held within or on behalf of each

[SP] it may have are segregated from the assets and liabilities of other [SP’s] and from the

general assets and liabilities of the [Company] and are only available to meet the liabilities of the

[Company] attributable to that [SP]. Therefore as a matter of Cayman Islands Law only, there

should be minimal cross liabilities between [SP’s].”

10.6.3 According to Section 220 of the Companies Law (2010 Revision) (“the Law”) SP assets “shall

only be available and used to meet liabilities to creditors of the [SP] company who are creditors in

respect of that [SP]”. In addition, pursuant to Section 219(6)(c) of the Law it is the duty of the

directors to ensure that assets and liabilities are not transferred between SP’s otherwise than at

full value.

10.6.4 Based on the Liquidators investigation it was determined that more than $135 million was

transferred between cells in aggregate. The largest transfer was for investment from APAL Fund

(Dist) to APAL Fund which represented $66 million and was supported by the offering document

of APAL Fund (Dist) whereby the investment objection of APAL Fund (Dist) was to invest all

assets into APAL Fund.


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10.6.5 The remaining $69 million of inter-portfolio transfers is not supported by any contractual obligation

the Liquidators have been provided and based on the Liquidators investigation; the transfer of

cash for a corresponding inter-portfolio receivable was not completed at full value. The

corresponding receivable from the transfer date was impaired as the transfers appear to have

been made to cover operating expenses of the receiving portfolio. Therefore, the assets of the

portfolio were insufficient to cover liabilities, making the receivable less likely to be paid in full.

10.6.6 Based on the review the Liquidators identified the following portfolio net transfers in/(out) at the

respective portfolio:

(i) AP Fixed Series 5 Fund – ($1.06 million)

(ii) AP Fixed Return Fund - $4.05 million

(iii) AP Fixed Series Fund II - $0.56 million

(iv) AP Fixed Series Fund III - $0.20 million

(v) AP Fixed Series Fund IV – ($4.99 million)

(vi) AP Income Fund – ($1.10 million)

(vii) AP Long Short Fund - $0.71 million

(viii) AP Perpetual Fund – ($3.37 million)

(ix) APW Fund - $2.77 million

(x) APAL Fund – ($44.45 million)

(xi) APAL Fund (Dist) - $51.52 million

10.6.7 The above amounts are based on nearly 2,000 separate transactions resulting in a number of

final balances due to and due from the various portfolios57. The Liquidators note that the records

received from the Administrator do not reconcile with the recreated bank transactions when

referencing inter-portfolio transfers. The Liquidators have not investigated the difference further

at this time.

10.6.8 The Liquidators have also not reviewed the individual transactions in detail to determine whether

transfers were supported by contractual obligations or whether transfers were used to cover

liabilities and operating costs. The Liquidators have identified approximately 60 loans totaling

$12 million between the life settlement portfolios. The loans appear to be unsecured and payable

on demand with low interest. The Liquidators have concern with the validity of the loan

documents due to the conflict of interest with the Investment Manager and its employees acting 57 The Company financial statements appear to net inter-portfolio payables and receivables resulting in the APAL Fund due amounts from the life settlement funds. The Liquidators have not confirmed the ability to offset inter-portfolio transfers at this time.


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for both the lender and the borrower in the documents. The negotiation of the agreements is

flawed as the lending fund would benefit from high interest while the borrowing fund would benefit

from low interest. The Investment Manager would not be able to adequately represent either

portfolio or the investors’ best interest.

10.6.9 Until such time that realizations are sufficient to pay down the costs of the liquidation as well as

the unsecured creditor costs, the Liquidators do not propose to spend time on determining the

correct order of inter-portfolio payables. If realizations are sufficient to pay shareholders, the

Liquidators will take a cost/benefit view whether to perform the investigation into inter-portfolio

transactions or simply treat all portfolios as co-mingled and pay pari passu distributions to

shareholders as an entire group.

10.7 Grand Court Applications and Updates

10.7.1 As discussed in the First Report the Liquidators sought the direction of the Grand Court with

regard to the formation of the Committee as well as holding the first meeting of creditors and

contributories.

10.7.2 The Liquidators held a hearing with the Judge assigned to the liquidation on July 9, 2012 to

discuss the Committee and the first meeting of creditors and contributories. During the hearing

the Liquidators filed a revised classification of solvency to “insolvent”, as it was determined that

realizations will be insufficient to satisfy creditors in full. As a result of the revised status, the

Liquidators have no further obligation to report to the Company’s contributories.

10.7.3 The Grand Court provided directions following the Liquidators recommendations of forming the

Committee out of (1) Two creditors from the claimed (but not adjudicated) secured creditors; (2)

Two creditors from the unsecured creditors; and (3) One redeemed investor, noting that the

Liquidators were approved to send a one page letter to all creditors and contributories notifying

them of the appointment as well as providing them website and email contact information. The

Grand Court also approved the Liquidators to hold the first meeting with creditors only.

10.7.4 With regard to the Committee the Grand Court agreed that one committee was sufficient and the

Liquidators would seek to ensure creditors across all segregated portfolios would be represented

on the committee, if possible.

10.7.5 The Liquidators provided the Grand Court with an update on the liquidation by way of an update

letter on September 28, 2012.


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10.7.6 A further update letter, dated January 29, 2013, was send to the Grand Court outlining difficulties

the Liquidators were facing finalizing a remuneration agreement with the Liquidation Committee,

discussed further in Section 11.4 of this Second Report.


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11 LIQUIDATION COMMITTEE 11.1 Grand Court Order

11.1.1 Pursuant to Grand Court Order dated July 9, 2012 the Grand Court approved the Liquidators to

setup one liquidation committee (“Liquidation Committee”) which “shall include, if reasonably

possible, at least one creditor of either of the following segregated portfolios of the Company;

• American Pegasus Auto Loan Fund Segregated Portfolio

• American Pegasus Auto Loan Fund (Dist) Segregated Portfolio

And, if reasonably possible, at least one creditor of any of the following segregated

portfolios of the Company:

• American Pegasus Fixed Income Fund Series II Segregated Portfolio

• American Pegasus Fixed Income Fund Series IV Segregated Portfolio

• American Pegasus Fixed Return Fund Segregated Portfolio

• American Pegasus Life Fund Segregated Portfolio

• American Pegasus Perpetual Income Fund Segregated Portfolio”

11.1.2 The Liquidators convened the Liquidation Committee on October 29, 2012. The Liquidation

Committee is comprised of five members, two of the members have interest in the overall

Company and therefore, represent all above noted portfolios.

11.1.3 Subsequent to convening the Liquidation Committee, the Liquidators provided a non-disclosure

agreement and proposed remuneration agreement to each of the five Committee Members for

execution. These agreements remain outstanding.

11.2 Statutory Obligations

11.2.1 The Committee is established to assist the Liquidators in decision making and courses of action.

In addition, it the Committee is tasked with approving the Liquidators fees, however, the ultimate

approval of the Liquidators’ fees rests with the Grand Court.

11.2.2 The Liquidators have a duty to report to the Committee unless there are insufficient assets to

comply with the request. The Liquidators have met with the Committee and exchanged

correspondence; however, due to the lack of assets in the Company, they have not proposed any

further meetings at this time.


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11.2.3 If creditors would like to speak with their Committee please contact the Liquidators and we will

forward your request and contact details and we will provide details of the elected

representatives.

11.3 Non-Disclosure Agreement

11.3.1 To date, only two of the five Liquidation Committee members have returned copies of the non-

disclosure agreements. The Liquidators have requested on two separate occasions to those

Liquidation Committee members that have not yet returned the non-disclosure agreement to do

so as soon as possible. The Liquidators have also informed the Liquidation Committee that they

are unable to release information to Liquidation Committee members that do not sign the non-

disclosure agreement.

11.3.2 The Liquidators received a response from one of the Liquidation Committee member’s

representative who has yet to return the non-disclosure agreement. The response from the

representative informed the Liquidators that they are unable to sign the non-disclosure agreement

stating that they have a “legal obligation to provide updates to [all] their clients” and that “it is

possible that those updates to clients would need to include confidential information.” The

representative is a law firm representing 31 potentially secured creditors of the Company but only

representing one of the potentially secured creditors as a Liquidation Committee member. The

Liquidators have asked the Liquidation Committee member to appoint a new representative or

step down if they cannot sign the non-disclosure agreement.

11.4 Remuneration Agreement

11.4.1 At this time, the Liquidators’ remuneration terms are not agreed with the Liquidation Committee.

11.4.2 The Liquidators have received one executed remuneration agreement from Liquidation

Committee members to date. The Liquidators have also been in contact with a Liquidation

Committee member who has yet to return a signed remuneration agreement. This Liquidation

Committee member advised the Liquidators that they would review the remuneration agreement

and would execute a copy of the agreement in due course. The Liquidators therefore expect this

Liquidation Committee member to return a signed remuneration agreement.

11.4.3 Two Liquidation Committee members have requested that the Liquidators amend the

remuneration agreement to a contingent fee approach. The Liquidators are not agreeable to a

contingent remuneration approach in this engagement, however, as the process is currently

academic until such time that realizations are sufficient to pay liquidation costs, the Liquidators do


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not propose to enter into the negotiation of remuneration with these Liquidation Committee

members at this time.

11.4.4 The Liquidators note that realizations in the liquidation are insufficient to cover liquidation costs

and the Liquidators have not been paid for the majority of the work they have done to date. The

Liquidators intend to continue to invoice their time at the proposed rates in the hope that one day

realizations will be sufficient to pay liquidation costs and a return to creditors. In the event that

future realizations are sufficient to pay the liquidation costs and the remuneration terms are still

not agreed with the Liquidation Committee, the Liquidators will revert to the Court to seek an

order for remuneration.


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12 CREDITORS AND INVESTORS 12.1 Adjudication Process

12.1.1 Due to the limited funds in the liquidation the Liquidators have not yet formally completed the

adjudication process of claims, and therefore, the amounts noted in this report may be amended

upon a complete review of the claims.

12.1.2 The adjudication process has not been completed due to the fact that until realizations are

sufficient to discharge all liquidation expenses the cost of adjudicating such claims would far

exceed the benefits of doing so given there is no funding currently available to pay such claims.

12.2 Creditor Correspondence

12.2.1 On July 25, 2012 after receiving Grand Court approval verifying the method of communication,

the Liquidators wrote to the entire creditor and shareholder group advising them of their

appointment as well as directing all shareholders and creditors to the electronic communication

methods available.

12.2.2 To communicate more efficiently with the various creditors and shareholders of the Company, the

Liquidators established a dedicated email inbox to receive and send information in relation to the

liquidation. The Liquidators have continually maintained and monitored this email inbox from the

date of establishment and all creditors and shareholders should now have details of this email.

12.2.3 In addition to the dedicated email address the Liquidators opened a website to post updates. The

website is updated infrequently as the Liquidators have been focusing their attention on recovery

efforts.

12.3 Petitioner Claim

12.3.1 A Winding Up Petition was entered in the Grand Court of the Cayman Islands on June 1, 2011 by

the Petitioner.

12.3.2 As outlined in Section 141 of the Cayman Islands Companies Law (2011 Revision), any fees

incurred by the Petitioner as a result of petitioning to wind-up a company will rank preferentially to

other creditor claims.

12.3.3 As at the Liquidation Date, the Petitioner had outstanding fees relating to the petition to winding-

up the company that totaled approximately $56,860.


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12.3.4 The Liquidators have partially paid this outstanding amount. The source of the funds to partially

settle this outstanding amount was received by the Liquidators from the collections of the

outstanding auto loans that are currently being serviced by First Associates.

12.4 Advertisement in the Cayman Islands Gazette

Notice of the appointment of the Liquidators was advertised in the Cayman Islands Government

Gazette on August 15, 2011. The advertisement invited any creditors and contributories to come

forward and state their claim in the Company.

12.5 Unsecured Creditors

12.5.1 The Liquidators sent a letter notifying the creditors and contributories on August 5, 2011 that the

Company was placed into Official Liquidation. The letter explains that the Liquidation process

involves the realizations of the Company’s assets, quantification of liabilities and distribution of

the proceeds of the assets to creditors and contributories. In the letter, the Liquidators also

request that knowledge of any information regarding specific concerns relating to the Company

and its operations prior to the Liquidation be forwarded to the Liquidators for their review.

12.5.2 The Liquidators have received numerous claims from various unsecured creditors stating their

claim in the Company as part of the Liquidation process which total approximately $7,503,584.

The amount noted is primarily represented by the two largest unsecured creditors for claims of

$4,082,975 and $2,063,553 respectively.

12.5.3 The Liquidators note that the unsecured creditor claiming approximately $4.082 million has

submitted a claim as a secured creditor, on the basis that its loans to the APAL Fund were

secured by the assets of the Company. As noted above, the claims have not been adjudicated

by the Liquidators and therefore, the validity of the secured claim is unknown at this time.

12.5.4 Due to the Company being insolvent and there being insufficient funds, it is unlikely that any of

the unsecured creditors will be paid in full.

12.6 Redeemed Unpaid Investors

12.6.1 Proofs of debt received in the liquidation suggest that the objective to “provide investors with

periodic income in the form of quarterly dividends” as noted in Section 3.2.5 was documented as

guaranteed income in the form of dividend schedules provided to investors at the date of

subscription. The Liquidators have received numerous proofs of debt with similar guaranteed


August 26, 2013 72 of 82

returns between 8% and 12% per annum. The Liquidators note that based on the speculative

nature of investments of each portfolio, there was no ability to guarantee any return.

12.6.2 Redemption requests made on or after September 30, 2008 were suspended by the Company’s

Investment Manager until such time that sufficient liquidity returned to the secondary markets in

auto loans sector. As at September 30, 2008 there were several investors who redeemed out of

the Company prior to the Investment Manager suspending all redemptions and remain unpaid. To

date these investors have not been fully and properly redeemed. The Liquidators have not

investigated this matter further and have not performed any verification into the total number of

outstanding redeemed but unpaid investors. This due to the fact that the Company is insolvent

and there are insufficient funds to cover such redemptions or investigation at this time. It is

unknown whether any of the redeemed unpaid investors will be paid in full.

12.7 Shareholders

12.7.1 The Liquidators wrote to the Shareholders of the Company on August 5, 2011 and July 25, 2012

informing them that the Company was placed into Official Liquidation.

12.7.2 The Liquidators 2011 letter outlined the procedures that will be performed by the Liquidators, as

well as current information known to the Liquidators at the time of appointment related to the SEC

investigation relating to the Investment Manager.

12.7.3 The 2012 letter directed the shareholders to the website and the email address for any further

questions. It also noted that no further correspondence would be sent via regular mail.

12.7.4 Based on the findings detailed throughout this Second Report it is unlikely that the shareholders

will receive a payment in the Liquidation, and unless requested, no further updates will be

provided.

12.8 Liquidation Website

12.8.1 The Liquidators have setup a website, www.americanpegasusliquidation.com and will be directing

all creditors and investors to that website for future updates.


August 26, 2013 73 of 82

13 RECEIPTS AND DISBURSEMENTS

13.1 Cash at Bank at Date of Appointment

13.1.1 As at the Liquidation Date, the Liquidators arranged to transfer the amounts held at Northern

Trust and ABN AMRO (Curacao) to a new bank account in the Cayman Islands at HSBC. As at

the Liquidation Date, the Company held a cash balance of $23,752.

13.2 Receipts and Disbursements and Current Cash Position

13.2.1 A summary of the combined cash receipts and disbursements during the liquidation from the

Liquidation Date to May 31, 2013 is provided in the table below:

USD

CASH AT BANK (Liquidation Date) $23,752.21 RECEIPTS

Open Loan Auto Receipts 720,658.72

Synergy – Realizations 70,906.36Proceeds From Auction of Vehicles 28,351.41Loan Revenue 17,750.85

Recovery from Sun Trust Garnishment 15,550.27

Deficient Loan Balance Collection 5,743.65

Other 1,196.02

883,909.49

PAYMENTS

First Associates Loan Servicing 479,475.99 Legal Fees 147,339.07 Liquidators Remuneration 40,000.00 Liquidators Disbursements 34,275.00Advisory Fees 21,014.38 Petitioner Costs 20,000.00Legal Fees – not approved 13,564.60Record Storage 12,525.47 Bank Charges 10,510.40Investment Manager - Fees 8,528.91 Deal Pack Fees 3,630.00

790,863.82

CASH AT BANK (May 31, 2013) $93,045.67


August 26, 2013 74 of 82

13.2.2 As noted in Section 9.9 the Liquidators engaged First Associates to provide certain services in

relation to the collection and servicing of outstanding auto loans of the Company. First Associates

has been able to collect $720,659 in outstanding auto loans payments and has charged fees in

relation to collecting these outstanding amounts which total $479,476. The funds received by the

Liquidators after all related expenses were paid for servicing the auto loans is $241,183 which

was deposited into the Company bank account held at HSBC.

13.2.3 Legal fees noted in the above table include services rendered by Michelson. The Liquidators of

the Company engaged Michelson to represent them in the US Bankruptcy Grand Court in regards

to filing a Motion for Recognition of Foreign Proceedings under Chapter 15 of the US Bankruptcy

Code.

13.2.4 Travel fees reflected in the table above relate to meetings held in San Francisco, California. The

purpose of these meeting was for the Liquidators to discuss the operations of the Company with

the former investment managers Chui and Carter and to gain a better understanding of the

events which transpired and eventually led to the SEC investigation and liquidation of the

Company.

13.2.5 The Liquidators obtained a large number of the Company’s physical documents as a result of

their travel to San Francisco, California. Due to the limited amount of funds available for the

liquidation the Liquidators determined that the most cost effective way to store the physical

documents was to utilize storage facilities in San Francisco.

13.2.6 As reflected in the table above after beginning with an opening cash balance in the liquidation of

$23,752, the Liquidators have collected receipts of $860,157 while paying out $790,870 in

disbursements which nets a cash balance of $93,046 at May 31, 2013.

13.3 Outstanding Costs of the Liquidation

13.3.1 The table above represents the receipts and payments in the liquidation on cash basis; however,

it does not accurately represent the total costs to May 31, 2013 that have been incurred, which

are detailed below. Outstanding costs of the liquidation include Liquidator remuneration as well as

service provider costs.


August 26, 2013 75 of 82

Total Costs

to Date Payments to

Date Total

Outstanding %

Outstanding

Official Liquidator fees 1,178,211 40,00058 1,138,211 96.61%Official Liquidator disbursements 41,454 34,27559 7,179 17.32%Legal Fees – Not approved 295,366 13,56460 281,802 95.41%Legal fees 321,063 244,29861 76,765 23.91%Advisory fees 29,104 21,01462 8,161 28.04%Operating expense fees 525 - 525 100.00%

Total Costs of the Liquidation 1,865,723 353,151 1,512,643 81.08%

The legal fees noted above as “Not Approved” were submitted by APLDG as costs incurred after

the Liquidation Date by Carter, however, the Liquidators did not engage the respective legal

counsel. The Liquidators do not consider these invoices as costs of the liquidation, however, until

such time that the Liquidators formally deny the claims, they continue to be accounted for as a

potential liability.

13.4 Statutory Priorities of Return to Investors

13.4.1 Any funds in the Liquidation available for distribution, from the excess of cash after all outstanding

costs of the Liquidation have been paid will be distributed to creditors and investors in the

following order of priority pursuant to Cayman Islands law:

• To the potentially secured creditors of the Company if their claim proves valid, the total

balance of which is $4,082,975;

• To the unsecured creditors of the Company, the balance of which totals $3,420,609 based on

Proofs of Debt and outstanding invoices received during the liquidation process; and

• To the redeemed but unpaid investors of the Company, the total balance of which is currently

estimated at $1,196,653, however, the Liquidators continue to receive proofs of debt that

have not been reviewed for value.

13.4.2 As noted earlier in this Second Report it is highly unlikely that there will be sufficient funds to pay

the creditor groups noted above, therefore, the shareholder values have not been reviewed at this

time 58 Liquidators’ Remuneration – see receipts and disbursements at Section 13.2.1. 59 Liquidators’ Disbursements – see receipts and disbursements at Section 13.2.1. 60 Legal Fees (not approved) – see receipts and disbursements at Section 13.2.1. 61 Legal Fees - payments for Liquidators’ approved legal fees totaled $244,298. Of this amount $96,959 was collected from contingent fee lawyers upon settlement of actions and was offset against recoveries (hence not showing as cash receipts in the receipts and disbursements table). The remaining $147,339 (see receipts and disbursements at 13.2.1) was paid by the Liquidators to settle the outstanding legal fees. 62 Advisory Fees – see receipts and disbursements at Section 13.2.1


August 26, 2013 76 of 82

14 LIQUIDATORS' REMUNERATION

14.1 Overview

14.1.1 The charge out rates as set out below are the prescribed rates of remuneration for Official

Liquidators as set out in the Insolvency Practitioners (Amendment) Regulations, 2010 of the

Cayman Islands.

Grade of staff Minimum (US$) Maximum (US$)

Partner /Official Liquidator $500 $900 Director $425 $680 Senior Manager $350 $575 Manager $275 $475 Assistant Manager $200 $350 Senior Accountant $50 $200

14.1.2 As noted in Section 11.4 these charge out rates still need to be formally approved by the

Lliquidation Committee.

14.2 Remuneration Agreement

14.2.1 The Liquidators sent remuneration agreements to the Funds’ respective liquidation committee

members prior to this Second Report dated December 28, 2012 (“Remuneration Agreements”)

which detailed fees for the engagement. An example copy of one of the Remuneration

Agreements is attached at Appendix 22. As noted in the Remuneration Agreements, the

Liquidators fees will be charged on a time and materials basis based on hourly rates as detailed

in Section 14.3 below. These rates are discounted from the standard hourly rates that the

Liquidators would normally charge on engagements of this nature and fall within the mid-range of

the approved range of rates set out in the Cayman Islands Insolvency Practitioner’s Regulations

2010.

14.2.2 As noted in the Remuneration Agreements, the Liquidators are required to obtain approval from

the Committee on the basis of their remuneration. This approval has only been received from

one of the Committee members.

14.2.3 In accordance with the Cayman Islands Companies Winding-Up Rules, the Liquidators’ policy is

to draw down and pay 80% of their invoice amount when the invoice is rendered, and to seek

approval from the Grand Court and the Committee prior to drawing the final 20%. As noted

above, however, there have been insufficient assets to draw down and pay the Liquidators’ fees


August 26, 2013 77 of 82

incurred to date, and less than 4% of such fees have been paid. The Liquidators intend to submit

a copy of this Second Report in support of a separate fee application to the Grand Court. The

Liquidators note that this application is largely academic given the significant shortfall of assets

available in the estate to pay outstanding liquidation costs.

14.2.4 If the Committee does not approve the fees the Liquidators are required to provide full support of

their fees to the Grand Court, the costs of which are to be paid as an expense of the liquidation.

Therefore, the Liquidators recommended that the Committee raise any issues they may have

regarding the fees of the Liquidators prior to the Grand Court application so that additional costs

of the liquidation are avoided. As detailed in Section 13.3 above, the total amount of fees to May

31, 2013 is $1,060,409. The Funds’ realizations to date have not allowed for payment of the initial

80% of the Liquidators’ fees and consequently less than 4% of these fees have been paid at the

Second Report date.

14.2.5 The majority of time incurred by the Liquidators in the liquidation has been incurred to secure

records and address issues raised by former management of the Company. If the Liquidators

had been provided with a full detail of accounts from the Date of Appointment, the time incurred

to date would be significantly reduced. The Liquidators will take this into account when

adjudicating claims of the former investment manager.

14.3 Remuneration Rates

14.3.1 The tables below provide a summary of the agreed hourly rates and percentage of realizations to

be paid to the Liquidators:

Grade of staff Hourly Rate

(USD) Partner or Liquidators $700

Director $565

Senior Manager $500

Manager $400

Assistant Manager $350

Senior Accountant $295

Administrator $140


August 26, 2013 78 of 82

15 NEXT STEPS 15.1 Liquidators’ Future Actions

15.1.1 Based on the investigations to date, with the exception of the minimal auto loan collection

receipts on a monthly basis, there does not appear to be any likelihood of substantial recoveries

without the involvement of legal counsel and possible litigation. The review of records and

investigation by the Liquidators’ is now complete and contingent fee legal counsel has been

engaged to pursue recovery from a legal aspect.

15.1.2 The Liquidators are in the process of seeking sanction from the Cayman Court to commence

proceedings against certain parties.

15.1.3 Further updates will be provided by the Liquidators in due course.


August 26, 2013 79 of 82

APPENDIX 25 - COMPANY’S LEGAL COUNSEL (APPOINTED AFTER LIQUIDATION DATE)

15.2 Solomon Harris (Cayman Counsel)

15.2.1 The Liquidators have not formally retained Cayman Islands’ counsel to advise generally in

relation to the liquidation of the Company in order to reduce costs to the estate.

15.2.2 Solomon Harris was engaged by ABN AMRO Global Custody Services N.V.(the Petitioner) to file

the winding up petition to appoint the Liquidators. Based on their prior knowledge of the

Company and the issues that supported a winding up petition, the Liquidators have engaged

Solomon Harris on a limited and ad hoc basis to assist with certain filings and applications to the

Grand Court, however Solomon Harris has not been consulted in relation to the liquidation of the

Company generally. .

15.2.3 The Liquidators understand that in any matters that relate to the adjudication of claims, or the

distribution of the assets of the Company, Solomon Harris will not be able to advise the

Liquidators because of their ongoing engagement by the Petitioner.

15.3 Kitchens New Cleghorn LLC (US Counsel)

15.3.1 The law firm of Kitchens New Cleghorn LLC was introduced to the Liquidators by Carter.

Kitchens was known to Carter previously and was approached based on their location in Atlanta

and their ability to attend hearings quickly and with less expense than other counsel engaged by

the Company at that time. It was envisioned prior to their appointment that they would act as the

Company’s Georgia based counsel.

15.3.2 The Liquidators provided instruction to Carter to retain Kitchens. An engagement letter was

prepared and agreed to by Kitchens with Carter acting on behalf of APLDG. The Liquidators were

not involved in the preparation or execution of this engagement letter.

15.3.3 Kitchens were initially engaged to investigate and defend the lien collection matter from a former

auto loan repossession storage lot. See Section 9.12 for further information. Unfortunately, due

to non-payment of invoices by APLDG, Kitchens provided notice of their resignation to the

Liquidators on November 6, 2011. Kitchens referenced non-responsiveness from APLDG and

Carter as well as the lack of payment on outstanding invoices.

15.3.4 The Liquidators attempted to renegotiate terms with Kitchens in order to have them continue the

defense of the garnishment, however, without immediate payment of fees, Kitchens would not

continue.

15.3.5 Kitchens currently have a claim in the liquidation for unpaid legal fees.


August 26, 2013 80 of 82

15.4 Locke Lord LLP (US Counsel)

15.4.1 Locke Lord was former US Counsel to the Company who provided advice in relation to the life

settlement policies owned by the Company. Brian Casey (“Casey”) was the lead counsel and

Carter provided the Liquidators with his contact information.

15.4.2 Locke Lord was not acting on behalf of the Company at the Liquidation Date however a proof of

debt was submitted for unpaid legal invoices.

15.4.3 Locke Lord is located in Atlanta, Georgia and as such, the Liquidators contacted Casey to

discuss re-engagement for the specific task of completing the garnishment case that Kitchens

resigned from previously.

15.4.4 Locke Lorde was engaged on November 29, 2011 by the Liquidators. A copy of the engagement

letter is found at Appendix 24.

15.5 A Weiland, Golden, Smiley, Wang Ekvall & Strok, LLP (US Counsel)

15.5.1 The Liquidators were notified by Carter that Weiland, Golden, Smiley, Wang Ekvall & Strok, LLP

were engaged pursuant to an engagement letter dated May 20, 2011.

15.5.2 Carter, on behalf of APLDG, APAL Fund and the Company, engaged Golden to assist with the

recovery of assets and to provide support during the number of US Court applications to prevent

Chui from retaining control of Acceptance as well as the pursuit of certain claims in regard to the

bankruptcy case between the Company and Acceptance.

15.5.3 The Liquidators informed Golden of their appointment on July 9, 2011 after several requests to

Carter to provide a formal introduction went unfulfilled.

15.5.4 Golden continued to work as counsel to the Company until Carter refused to cooperate with the

Liquidators’ representatives, resulting in the JOLs terminating the investment management

agreement with APLDG. The Liquidators felt there was a conflict of interest with Golden acting

on behalf of APLDG and the Company and therefore, engaged Michelson Law Group as the

Company’s legal counsel as noted below.


August 26, 2013 81 of 82

15.6 Michelson Law Group (US Counsel)

15.6.1 Michelson was engaged by the Liquidators on October 25, 2011 as the Liquidators general US

counsel. The lead counsel, Randy Michelson, assisted the Liquidators in securing Chapter 15

recognition as well as securing the records of the Company.

15.6.2 Michelson services include providing assistance to the Liquidators as well as assisting in

protecting the assets of the company that are located in the United States.

15.7 Reid Collins Tsai LLP (US Counsel)

15.7.1 The Liquidators engaged Reid Collins & Tsai LLP on September 27, 2012 to investigate possible

claims available to the Company. RCT was appointed by the Liquidators to investigate and

pursue the Company’s claims against former counterparties and recipients of fraudulent transfers

or preferences from the Company. RCT has undertaken tasks in its judgment necessary to

analyze and pursue possible claims.

15.7.2 The Liquidators engaged RCT on a fully contingent basis with no cost to the estate until such time

there are realisations.

15.7.3 The terms of engagement are a three phase approach. Phase one is the pre-litigation

representation of the Company and RCT will receive 25% of any gross recoveries obtained prior

to phase two. In phase one, Reid Collins is tasked to complete the following:

(i) Review the evidence and law related to the possible claims;

(ii) Investigate claims and perform pre-litigation discovery by way of Rule 2004 document and

deposition requests and examinations;

(iii) Prepare detailed draft complaints deemed viable;

(iv) Pursue pre-suit settlement in connection with any claims deemed viable

15.7.4 In the event that pre-suit settlement discussions are unsuccessful and a suit is filed with respect

to any of the claims identified then RCT will move to phase two which includes filing claims as

well as briefing and arguing motions. The remuneration of phase two increases the amount paid

to RCT to 33% of gross recoveries obtained post-suit but pre-discovery.

15.7.5 Phase three of the engagement begins during post-discovery in relation to any claim and RCT

representation of the Company during that process and all subsequent involvement until

judgment and collection. The remuneration for phase 3 is 40% of gross proceeds.


August 26, 2013 82 of 82

15.7.6 RCT required a local counsel in Georgia to pursue certain parties and recommended that the

Liquidators engage Alston & Bird LLP to represent the Liquidators in the state of Georgia.

15.8 Alston & Bird LLP (Georgia Counsel)

15.8.1 Due to the location of many counterparties being located in the Georgia area it was necessary

that the Liquidators appoint local counsel in that region. RCT recommended the firm of Alston &

Bird LLP (“Alston”) who had successfully worked with RCT in the past. The Liquidators

engaged Alston on February 25, 2013 as Georgia co-counsel with RCT.

15.8.2 The services include the pursuit of certain claims on behalf of the Company against

counterparties identified by RCT through their investigation.

15.8.3 For their services, Alston agreed with the Liquidators that any services performed will be

compensated based on a shared percentage of recoveries along the terms agreed with RCT,

therefore their appointment comes at no additional cost to the Company.

Member of

Deloitte Touche Tohmatsu

Deloitte & Touche Citrus Grove Building P.O. Box 1787 Grand Cayman KY1-1109 Cayman Islands Tel: + 1 (345) 949 7500 Fax: + 1 (345) 949 8258 [email protected] www.deloitte.com

July 25, 2012 Dear Creditors and Shareholders, Re: American Pegasus SPC – in Official Liquidation (“the Company”) Appointment of Liquidators We write to inform you that the Company was placed into Official Liquidation pursuant to an Order from the Grand Court of the Cayman Islands (the “Court”), dated July 20, 2011 (the “Order”). The Order, a copy of which is available on the website, http://www.americanpegasusliquidation.com, also sets out the appointment of Messrs Stuart Sybersma and Michael Pearson of Deloitte & Touche, Cayman Islands as Joint Official Liquidators of the Company (the “Liquidators”). You are receiving this letter as the Company records indicate you are a creditor or shareholder of the Company or one of its underlying segregated portfolios. Communication with Liquidators The Liquidators have a statutory obligation to report to creditors of the Company and pursuant to an order from the Court, the Liquidators are approved to post all past and future liquidation updates to the following website:

www.americanpegasusliquidation.com The Liquidators refer all creditors and shareholders to this website for all future updates. Please note all communication will be in English only. If you have questions that are not addressed on the website please send an email to the Company’s designated email address, where we will periodically respond to enquiries:

[email protected] Projected Outcome of Liquidation and Timeline For reasons outlined in the Liquidators’ Reports, which are available on the website, the Liquidators currently anticipate that the liquidation will take several years to complete. The future conduct of the liquidation is dependent on funding to pursue litigation against certain parties who have improperly benefited from their dealings with the Company. In the absence of both litigation funding and a successful outcome of that litigation, there is no projected return to stakeholders from the liquidation. Information for Creditors Creditors of the Company will be receiving further instructions by email with regard to meetings in the liquidation as well as nomination forms if they wish to become an elected member of the liquidation committee. The liquidation committee will be established at the first meeting of creditors to be held on August 22 at 11:00am EDT. Please inform the Liquidators at the above email address if you are a creditor and have not received notice of the liquidation meetings. Creditors are also directed to the website for a copy of the proof of debt form for you to submit to the above email address. Original copies by mail are not required. Please submit the proof of debt form

http://www.americanpegasusliquidation.com/

http://www.americanpegasusliquidation.com/

mailto:[email protected]

Member of

Deloitte Touche Tohmatsu

along with all supporting documents to support your claim as a creditor, or a redeemed but unpaid shareholder. Information for Shareholders Please note that as per direction of the Court, the Liquidators will not be sending any further correspondence by post and will be reporting to shareholders by email and by website updates only; therefore if not previously completed, please provide the Liquidators with your email address and monitor the website on a quarterly basis for all future liquidation updates. If you are a shareholder that did not redeem from the Company prior to the Liquidation Date you do not need to submit a proof of debt. Should you have any queries, please do not hesitate to contact us at the above email address. Yours faithfully, For and on behalf of the Company

Stuart Sybersma Joint Official Liquidator

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