The massive fraud at India’s second-largest public sector bank is drawing as much attention in the US as it is here. The string of top-notch lawyers assigned to the bankruptcy case of Nirav Modi’s companies in the US is indicative of the weight the US Trustee’s office is attaching to the case.

In just three months, the overall fees of these lawyers, appointed by various parties, including the United States Department of Justice (DoJ), has touched a whopping $2.74 million. These fees will ultimately be paid out of the ‘estate’.

Significant case for DoJ

Concerned over the manner in which the Chapter 11 bankruptcy cases, involving three Nirav Modi companies — Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — were evolving, the DoJ had, sometime back sought a motion seeking the appointment of a Chapter 11 trustee to preserve what remained of the debtors’ operations and value.

The appointment of Richard Levin, an author of the 1978 US Bankruptcy Code, and recognised internationally as one of the foremost bankruptcy lawyers, as the Chapter 11 Trustee in the Firestar case, is indicative of the significance the DoJ is placing on the proceedings of Modi’s companies, according to bankruptcy experts in the US.

The appointment of a Chapter 11 Trustee follows the US Bankruptcy Court ordering a probe into Nirav Modi’s ties to Firestar Diamond and its affiliates, in April. It had then directed the appointment of an examiner to take a closer look at Nirav Modi’s ties to the US companies that had filed for bankruptcy.

John J Carney, who has been appointed as the examiner for the case, is a former Securities Fraud chief, assistant United States attorney, and US Securities and Exchange Commission senior counsel.

Baker & Hostetler LLP has been appointed as the examiner’s legal counsel. Among the law firm’s partners is Irving Picard, Trustee for the Securities Investor Protection Act (SIPA), who marshalled the Bernie Madoff assets and claims.

“Appointing both an Examiner and a Chapter 11 Trustee is extraordinary, particularly given the size of the Modi-owned US companies and relatively limited unsecured creditors. The US Trustee’s selection of two of the most highly recognised international fraud investigations and recovery and bankruptcy attorneys, to serve as Examiner and Chapter 11 Trustee, underscores the seriousness of the legal issues in the US cases and the connections to the $2-billion fraud allegations in India,” says Seth R. Freeman, Senior Managing Director of GlassRatner Advisory and Capital LLC and a cross-border bankruptcy and fraud expert with 15 years’ India experience.

The fees of the examiner, the financial advisors to the examiner, and examiner’s legal counsel, alone, are a little over half a million dollars, going by court documents (see table).

Highly paid professionals

“Chapter 11 bankruptcy in the US is not an inexpensive process and requires highly paid, skilled legal and financial advisory professionals to be engaged. The reality is that under normal circumstances, businesses the size of Firestar Diamonds and A Jaffe would be considered relatively small Chapter 11 bankruptcy cases that, even with some serious concerns that need to be negotiated and resolved, would not incur such fees in the first three months — and this is just the beginning,” adds Seth Freeman.

But, these are not normal circumstances and the Modi-owned jewellery companies in the US have direct ties to the biggest bank fraud in India’s history; add the appearance of the Ministry of Corporate Affairs and PNB in the cases, criminal charges, arrests and ongoing investigations in India and this situation is unlike any routine New York City jewellery business bankruptcy, explains Seth.

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Published on June 29, 2018