S.E.C. v. Shiv, 01 Civ. 11282(AKH).
| Decision Date | 29 July 2005 |
| Docket Number | No. 01 Civ. 11282(AKH).,01 Civ. 11282(AKH). |
| Citation | 379 F.Supp.2d 609 |
| Parties | SECURITIES AND EXCHANGE, COMMISSION, Plaintiff, v. Yehuda SHIV, Sagam Capital Management Corp. and Sagam Capital LLC, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Wayne M. Carlin, Securities and Exchange Commission, New York City, for Plaintiff.
The Securities and Exchange Commission ("SEC") brought this lawsuit to stop a massive securities fraud perpetrated by Yehuda Shiv and the companies he controlled, to identify and freeze the funds he despoiled, and to repatriate such funds to their owners. The SEC filed suit on December 10, 2001, and obtained preliminary and, ultimately, final injunctive and equitable relief, including a Receiver to receive and repatriate the funds that Shiv had despoiled. The Receiver, after thorough investigations, now moves to unwind the tangled accounts of Shiv's frauds and to distribute the funds thus freed to those having rightful claim to them.
The central issue now before me is the status of Bank Julius Baer, as lien holder. As the facts uncovered and alleged by the Receiver show, the funds advanced by Bank Julius Baer ("BJB"), as loans to certain of Shiv's customers secured by Shiv's pledges of accounts of other of his customers, enabled Shiv to create a fiction of profits to cover over heavy actual losses in the customers' accounts he managed. The Receiver, in seeking to recapture funds thus fraudulently transferred, contends that BJB is not entitled to the status of lien holder in good faith, and argues that he has standing, and that the district court has jurisdiction, to regulate BJB's liens, incident to his duty to seek, and recapture, the fruits of the securities fraud that Shiv perpetrated.
The objecting party, BJB, focuses on the issue of the Receiver's plan to repatriate funds. BJB argues that the SEC's standing, and this court's jurisdiction, extend to stopping wrongdoers' securities frauds and causing disgorgement of wrongful profits, not to championing some creditors' claims against other creditors. Hence, it argues, the court lacks jurisdiction to fix priorities among creditors, or to adjudicate liens it holds against creditors.
I hold that the court has jurisdiction, and the Receiver has standing, to trace fraudulently taken funds to where they have come to rest or, if liens are asserted, to regulate the lien holder's right to appropriate such fraudulently taken funds.
Yehuda Shiv and his investment companies, Sagam Capital Management and Sagam Capital LLC (the "Sagam Entities"), provided investment advisory services to wealthy individuals, mainly non-citizens of the United States. Typically, Shiv formed a Panamanian or British Virgin Island corporation to become the owner of record of an account, arranged for the client to deposit the funds to be invested in the corporation's accounts at BJB, and organized the corporations so that persons close to Shiv, who would follow his instructions and control their activities, would be in charge of the corporations.
Shiv or the Sagam entities was also given a power of attorney, typically by the corporation nominally owning the funds at BJB. Twelve of the accounts granted Shiv or the Sagam Entities a general power of attorney, nineteen gave a more limited power of attorney. The general powers of attorney generally authorized Shiv to withdraw funds from, or to pledge a client's account, and the limited power of attorney qualified Shiv's power only for the purposes of withdrawing funds, making investments or liquidating losses.
Starting in the mid-1980s, Shiv implemented an investment strategy that utilized foreign currency loans and the purchase and sale of mortgage-backed securities. For their investment advisory services, the Sagam Entities were entitled to two types of commissions: (a) two percent per year payable quarterly on the net asset value of the client's account and (b) twenty percent of profits in excess of ten percent generated each year. BJB was paid a commission for arranging the foreign currency loans and the mortgage-backed securities sales. In many cases, Shiv used his power of attorney to give BJB special mailing instructions whereby monthly account statements would be sent to the Sagam Entities instead of the account owner. Shiv, to cover up losses, would then create false statements and send those to the clients.
In early years, Shiv's strategy produced substantial returns for his clients. In 1994, however, the market changed, with disastrous results for Shiv and his clients. Shiv tried to cover up these losses by sending his clients false monthly account statements that he created showing his clients a steady growth in investments when in fact substantial losses had occurred. Shiv continued to charge the clients his two and twenty percent fees based on these inflated account balances.
Shiv and the Sagam Entities were one of the largest domestic customers of BJB. Shiv shared office space with BJB; they mutually marketed each other's clients; and they acted as co-managers of the Triumph Fund, an open-ended investment company incorporated in the Cayman Islands whose voting shares were owned either directly by Menachem Ivcher, a Shiv client, or by a Sagam Entity, with Ivcher having the power to vote Sagam's shares. The Receiver alleges that BJB knew of Shiv's investment strategy and that it was causing substantial losses for his clients, that it was aware that he was charging his clients management fees based on non-existent assets, and that it permitted Shiv to transfer funds in BJB into and out of his clients' accounts and into the Sagam Entities' accounts. BJB thus continued to earn substantial fees on Shiv's trading activities, and its loans enabled Shiv to transfer funds from one client to another, to BJB's profit and to enable Shiv to cover up the fraud he was perpetrating.
According to the Receiver's report of his investigations, Menachem Ivcher was a major customer of BJB, and he and his companies had a substantial borrowing relationship with the Bank. Menachem Ivcher also was a major factor in Shiv's activities. He extended substantial financing to Shiv and the Sagam Entities, and at various times he, his companies, and/or his daughter Jenny, were shareholders, directors, or had other involvements with one or more of the Sagam Entities.1 Shiv, at various times, acted as investment manager for Menachem Ivcher and for entities controlled by Menachem Ivcher, for example, Sydney Plastics, Inc. ("Sydney") and Eclectic Holdings, Inc. ("Eclectic")2. Shiv's son, Sagiv Shiv, worked for Sydney as its chief financial officer.
During the 1990s, BJB made loans to Menachem Ivcher and his companies which at various times exceeded $25 million. In the latter 1990s, Menachem Ivcher's withdrawals from his BJB accounts to pay for substantial business and trading losses (presumably incurred as a result of trades effected by Shiv as the account's investment manager) exhausted his borrowing capacity. In 1998, BJB refused to extend additional loans. Shiv then pledged the Sagam Entities' accounts and, when those funds were not enough, used his power of attorney to pledge accounts of other of his customers without their authority, to support further lending by BJB to Menachem Ivcher and his companies. Shiv pledged the accounts of Menachem Ivcher's brother, Baruch Ivcher, and of companies controlled by Baruch Ivcher, particularly the accounts of Waxfield Ltd.,3 to support BJB's loans to Menachem Ivcher and Menachem's controlled companies. The BJB statements for Waxfield did not show these pledges, nor that Shiv made them for the benefit of Menachem Ivcher, and Menachem Ivcher's companies, Eclectic and Sydney.
As the Receiver reports, when Menachem Ivcher's losses kept growing, Shiv used his powers of attorney to transfer funds from the accounts of other of his clients in BJB to accounts in BJB controlled by Menachem Ivcher. Shiv pledged the account of Crandon Park S.A. ("Crandon"), a company of an associate of Menachem Ivcher, allegedly without the authority of Crandon's principal and, when that was not enough, Shiv pledged accounts of other of his clients. BJB, on the strength of those pledges, advanced additional funds to Menachem Ivcher and his companies. The Receiver alleges that BJB knew that Shiv lacked authority so to pledge one customer's account for another's borrowing, but accepted the pledges and advanced the funds to enable Shiv to continue his trading and his profits and, in course of that activity, adding to the profits of the Bank.
In 1996, Productos Paraiso Del Peru S.A. ("Productos"), a company affiliated with Baruch Ivcher, borrowed approximately $6 million from BJB. Shiv pledged Waxfield's account to support that loan as well. Waxfield, which is separately represented in this lawsuit, alleges that Shiv had no authority to pledge its accounts to BJB, and that BJB knew that Shiv lacked that authority, to support loans by BJB to Productos — or any person or entity other than Waxfield itself.
Because of Shiv's undisclosed pledges of the Waxfield account to BJB, the account lost borrowing capacity to accommodate its own need for funds to cover its own trading losses. Shiv created capacity by shifting funds from other of his controlled clients' accounts to the Waxfield account, and BJB made those transfers on the strength of the powers of attorney filed with BJB by Shiv. In particular, funds from accounts in the names of Skilled and BBCFD were used to transfer funds to the Waxfield account. Shiv also transferred funds from the Skilled and BBCFD accounts into an account for the benefit of another of Shiv's customers, an account with the name Exceed, also to hide...
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