SEC target Lancer receiver files initial report
STATUS REPORT: A MESS
by Lee M. Webb
September 11, 2003
Marty Steinberg, court-appointed receiver for the U.S. Securities and Exchange Commission (SEC) target Lancer Group, filed his initial report on the purported $1-billion (U.S.) Lancer funds on Sept. 8. The report offers little detail regarding the portfolio stocks of the allegedly fraudulent operation, but it does provide some idea of the extent of the Lancer muddle.
The SEC shut down the Lancer Group on July 10, levelling allegations of massive fraud against Lancer and its leader, Michael Lauer. Among other things, the SEC claims that Lancer and Mr. Lauer used bogus valuation opinions to fraudulently boost the reported value of some portfolio companies and engaged in month-end price rigging of thinly traded and virtually worthless OTC Bulletin Board and pink sheet stocks held by the funds.
In connection with the SEC's civil complaint against Lancer and Mr. Lauer in the U.S. District Court for the Southern District of Florida, the U.S. regulator obtained a court order freezing the assets of Mr. Lauer and Lancer. The court also appointed Mr. Steinberg as receiver for the allegedly fraudulent Lancer funds.
Under the court order, Mr. Steinberg was instructed to file "a report reflecting the existence and value of the assets" of the Lancer entities with the SEC and the Florida court within 60 days. Mr. Steinberg's initial report was night box filed with the court at the wire on Sept. 8.
To the extent that Mr. Steinberg's report reflects the existence and value of the Lancer assets, that reflection suggests an utter mess; and that may indeed be an accurate reflection. The report contains a number of references to the disarray of the Lancer records, with the most scathing assessment appearing in Mr. Steinberg's accompanying affidavit.
"The state of the Lancer entity records, including but not limited to the lack thereof, has made it extremely difficult to even determine the validity of Lancer's ownership of the stock holdings that have been listed in various Lancer documents," Mr. Steinberg states. "Unfortunately, the records are incomplete and in disarray and not in the condition that would generally be associated with the orderly retention of business records."
It is not clear from the receiver's report whether the disarray and incomplete state of the Lancer records is attributable to generally sloppy record keeping by the purported $1-billion (U.S.) fund operation or at least partly the result of some other event. Stockwatch has heard unconfirmed reports that Lancer's New York office may have been the scene of an unauthorized entry before the receiver secured the premises. In any event, that disarray has presented the Mr. Steinberg with some problems.
"After reviewing all sources that we have been directed to, we have been unable to confirm the existence of security positions in excess of 40 per cent of the security positions identified in recent Lancer Portfolio Statements," Mr. Steinberg reports. "The holdings are primarily in small, thinly traded, illiquid securities of entities, many of which appear to have substantial financial problems.
"The Receiver has retained forensic accountants who are reviewing over 100 boxes of records and numerous computer hard drives, many of which are incomplete.
"The Receiver is interviewing and intends to retain a Fund Manager to review the Lancer holdings. As of this date, the Receiver cannot provide the Court with any value of Lancers' holdings, other than to say that the values listed on various reports appear to be much higher than any actual value that will be determined by the Fund Manager, for many of the reasons stated in the SEC's pleadings."
The receiver's initial report does offer at least a tentative schedule of Lancer investor contributions and withdrawals between Jan. 1, 1995, and Dec.31, 2002. According to that heavily disclaimered accounting, which is subject to a number of caveats, Lancer investors ploughed approximately $1.15-billion (U.S.) into Mr. Lauer's funds during that period. (Subsequent amounts are in U.S. dollars.) Over the same period, investors withdrew approximately $537-million, leaving net contributions of more than $613-million in the dubious Lancer funds.
As of July 31, according to Mr. Steinberg's affidavit, approximately $3.5-million in cash was held in six Lancer accounts with Bank of America. "These amounts do not reflect the payment of (or future) professional fees in the bankruptcy case or the Receivership," Mr. Steinberg states in a footnote to that information.
Given the apparently atrocious state of Lancer's records, a hodgepodge of virtually worthless portfolio companies that require investigation, a spate of lawsuits against Lancer that will require the receiver's attention, and the necessary liaison with a number of interested parties including the Federal Bureau of Investigation, the U.S. Department of Justice, the Internal Revenue Service, the SEC and regulators in other jurisdictions, the payment of necessary professional fees may soon take a big bite out of the $3.5-million in cash that the receiver has identified to this point.
The receiver has already hired attorneys, investigators, forensic accountants and other support staff and is in the process of hiring a fund manager to manage the dubious Lancer portfolios.
The receiver's attorneys have been providing legal counsel; analyzing the Lancer assets and potential causes of action; co-ordinating communications with Lancer investors; interviewing and retaining other professionals to assist the receiver; and researching, drafting and filing motions, memoranda and reports for the receiver in connection with the Lancer receivership and a number of other legal cases involving Lancer.
Among other things, the Lancer entities "were embroiled in a dozen or more legal battles pending before various courts around the country" prior to the appointment of the receiver. Those legal disputes require the receiver's attention and, of course, the advice of counsel. "The Receiver will analyze each action and determine on a case by case basis whether to prosecute or defend, compromise, settle or dismiss the actions," the Sept. 8 report notes.
Among the apparently pressing legal disputes is a $100-million lawsuit filed against Lancer in New York by AXA Alternative Advisors Inc. and the University of Montreal Pension Fund on June 12. The University of Montreal Pension Fund may have been Lancer's largest investor, ploughing $67-million (U.S.) into the allegedly fraudulent operation.
The receiver's investigators have also been busy. "The Receiver has identified former and present employees and principals of the Receivership Entities, the portfolio companies, and the Receivership Entities' service providers (including lawyers, accountants, brokerage houses, transfer agents and consultants) to be interviewed," Mr. Steinberg reports.
In addition to assisting with the seizure of the Lancer offices and conducting witness interviews, the investigators have developed an investigative plan. Among other things, the investigators "have performed or are currently performing" background investigations of Lancer principals and key employees; background checks on portfolio companies and their principals; checks for the existence of director and officer insurance and fidelity bonds; prior litigation searches; asset searches of Lancer-related personnel; public records searches for pertinent entities and individuals; identification of personal associates; and criminal and regulatory checks. The receiver reports that the investigators have already investigated over 30 individuals and companies related to the Lancer entities.
Given the reportedly abominable state of Lancer's records, the receiver's team of forensic accountants is faced with a formidable task. The accountants will review more than 105 boxes of records retrieved from the Lancer offices; review all financial and accounting files; meet with Lancer's auditors; recover all the books and records from one of Lancer's former accounting firms; and conduct other interviews. It seems likely that the forensic accountants will also be tasked to ferret through 138 boxes of records recovered from just one of the Lancer portfolio companies, Total Film Group.
The receiver's fund manager, while not yet selected at the time the initial report was filed, may have one of the least onerous tasks. Nonetheless, it will likely require some well compensated skill to wring some value out of the shaky Lancer portfolios.
In the search for a fund manager, the receiver issued a formal request for proposal to more than 30 qualified fund managers. "The Receiver received 11 detailed responses, which included, among other things, fee quotes, references, past performance information, and detailed descriptions of their experience dealing with assets comparable to those held by the Receivership Entities," Mr. Steinberg reports.
It is not clear whether an acknowledgment of having experience with the type of virtually worthless securities that comprised much of the Lancer portfolios would factor in favour or against the respondents. In any event, the receiver first narrowed the list to four candidates and has since entered into detailed contract negotiations with two of them.
"The proposed contract provides that the fund manager will assist the Receiver in managing and operating the Funds, valuing the assets on a case by case basis, developing and recommending a strategy for disposition of Fund assets if warranted, and assisting the Receiver in identifying additional means of recovering cash and other assets," the receiver states.
"The proposed contract has three primary compensation elements -- a fee for providing valuation services, an annual management fee, and an asset disposition fee," Mr. Steinberg continues. "The Receiver is negotiating a contract that incentivizes the manager to maximize the value of the Funds' portfolios for the benefit of investors."
It may be quite some time before there is any indication of just how much success the soon-to-be-appointed fund manager has in maximizing the value of the Lancer portfolios. Indeed, it may be at least three months before the receiver even files another status report.
On the same day he filed his initial report, Mr. Steinberg filed a motion for the entry of a case management order. Among other things, that order sets out a schedule for future reports, with the next four status reports to be filed quarterly and thereafter semi-annually.
Quite apart from setting out a reporting schedule, the receiver believes that a case management order and procedures are necessary because of the complexity of the Lancer case. Even through the legalese in Mr. Steinberg's motion, the extent of the Lancer mess is evident.
"The Receiver submits that a case of this nature and complexity, which involves approximately 300 domestic and foreign investors, foreign assets, parallel bankruptcy and foreign administration proceedings, pending lawsuits in multiple jurisdictions, anticipated lawsuits between redeeming and non-redeeming investors, and anticipated lawsuits by investors against third parties in multiple jurisdictions, cannot be efficiently managed without the establishment of procedures similar to those in a Title 11 bankruptcy case," Mr. Steinberg argues.
"Such procedures will ensure that all actions and claims involving investors, creditors, the Receiver, and third parties arising out of the same nucleus of facts, transactions and occurrences will be litigated before this Court in a timely, cost effective and organized fashion," the receiver continues. "Absent such procedures, investors, creditors, the Receiver, and third parties will be compelled to pursue and defend duplicative litigation in numerous fora, both foreign and domestic, under multiple sets of procedural rules and perhaps contradictory substantive law, and without the co-ordination of effort that is vital to a successful administration of the Receivership Entities' assets."
While it may be three months before the receiver files another status report that will possibly provide some indication of how much progress has been made in sorting out the Lancer mess, there will undoubtedly be other Lancer-related developments. Stockwatch will monitor and report on developments involving the Lancer debacle.
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