To: The Honorable Judge Chin, The Honorable Judge Chin and Jonathan Ware and Tim Coleman, Receiver for Wextrust
Wextrust Victims Letter to Judge Chin November 2014
The Honorable Denny Chin
Daniel Patrick Moynihan Federal Courthouse
Room 1020
500 Pearl Street
New York, NY 10007
Re: SEC v. Steven Byers, et al. 08-Civ. 7104 (DC)
SUBJ: Investor objections to pending fee requests
October 26, 2014
Your Honor,
I am writing on behalf of the WexTrust victims to object to pending fee
requests and communicate our concerns as the case draws to a close.
We recognize that the process of devolving and liquidating the various assets has been a task of considerable complexity. Over the course of the past six years, a virtual army of lawyers, accountants and other professionals have billed thousands of hours to the estate. As the Court is aware, many questions have been raised as to the individual billing rates, the Receiver’s performance and most importantly as to the cumulative charges. You have received many letters from victims addressing a range of complaints since the case began. Rather than recite a litany of old gripes with respect to the conduct of the Receivership, I would like to comment on the big picture.
The first indication that we were going to have an issue with fees came
early, when Dewey&LeBoeuf submitted a bill for $2.1M for twenty days’
work. You will recall that the charge included exorbitant rates for partners, associates, summer students, paralegals and clerks. Unbeknownst to all at the time was the fact that D&L was experiencing severe financial pressures which ultimately led to bankruptcy. Unfortunately, the first fee application was only a prelude of things to come. As the charges continued to grow unabated, many victims wrote letters to the Court voicing their alarm. Even the media began to question the rapid escalation of fees. To your credit, you have expressed reservations over the charges to the SEC and Receiver on several occasions. Indeed, during a hearing on Sept 13, 2010 you said, “...if Judge Sullivan or I had been asked at the outset will you authorize $20M in fees ...? We would have said no way.” Later, at that same hearing, Mr. Jacobson of the SEC reassured you that “all professionals in this case understand that at the end of the case, if there is not a lot of money in the estate, that all of their fees are subject to some type of disgorgement ...” He went on to explain that the case law is fairly clear on this issue and that “when the Court decides final fee applications it can take into account the recoveries to the estate.”
Of course, when the case began, no one knew with certainty what the victim recoveries might be. In retrospect however, the Receiver was often overly optimistic in his projections. For example, at a May 21, 2009 hearing, he said that he expected the victims to recover “anywhere from five to fifty cents on the dollar” even though that statement was flatly contradicted by his own analysis in the just-released Third Interim Report. More recently, on Aug 8, 2013, the Court was told that the Receiver “conservatively estimated” $25-$30M to be available for distribution and administrative costs. Now we know that figure to be closer to $21M. These inaccurate estimates are important because they were invariably made in support of pending fee applications and may have persuaded the Court that more money was going to be available for the victims than is the case.
Well, we now know with some certainty what the recovery to the estate will be, and the numbers are deeply disturbing. When this whole affair began, cash on hand was $22.1M. Presently, we have $21.3M in cash. The Receiver informed the Court on Sept 9, 2014 that administrative costs still pending include $5.1M in holdbacks and nearly $1M in unbilled professional fees. If these remaining charges are approved, then the amount available for distribution to the victims will total about $15.2M (assuming the estate isn’t hit with a big tax bill from the IRS). Taking into account the initial distribution of $5M, the total amount returned to the victims will be $20.2M. Professional compensation, on the other hand, will have totaled $24.1M ($18M already paid, $5.1M in holdbacks and the $1M in unbilled charges).
So Your Honor, the bottom line is this: after six years and legions of high priced professionals later, the Receiver has managed to spend $24.1M to
produce a NEGATIVE return of $1.9M! Stated another way, on day one there was $22.1M in cash available for the victims. Now, our cumulative cash distribution will likely total $20.2M, for a loss of $1.9M. And it is critically important to understand that this $20.2M distribution, as disappointing as it is, in no way represents a “recovery” by any stretch of the imagination. In the end, it is simply our own money that was sitting in a bank account to begin with. In fact, an argument could be made that we will have paid $24.1M for the privilege of making a simple bank withdrawal. Only in this case, the Receiver failed to protect the status quo as directed by the Court, resulting in a $1.9M loss of principal. Thus, the true c...
Daniel Patrick Moynihan Federal Courthouse
Room 1020
500 Pearl Street
New York, NY 10007
Re: SEC v. Steven Byers, et al. 08-Civ. 7104 (DC)
SUBJ: Investor objections to pending fee requests
October 26, 2014
Your Honor,
I am writing on behalf of the WexTrust victims to object to pending fee
requests and communicate our concerns as the case draws to a close.
We recognize that the process of devolving and liquidating the various assets has been a task of considerable complexity. Over the course of the past six years, a virtual army of lawyers, accountants and other professionals have billed thousands of hours to the estate. As the Court is aware, many questions have been raised as to the individual billing rates, the Receiver’s performance and most importantly as to the cumulative charges. You have received many letters from victims addressing a range of complaints since the case began. Rather than recite a litany of old gripes with respect to the conduct of the Receivership, I would like to comment on the big picture.
The first indication that we were going to have an issue with fees came
early, when Dewey&LeBoeuf submitted a bill for $2.1M for twenty days’
work. You will recall that the charge included exorbitant rates for partners, associates, summer students, paralegals and clerks. Unbeknownst to all at the time was the fact that D&L was experiencing severe financial pressures which ultimately led to bankruptcy. Unfortunately, the first fee application was only a prelude of things to come. As the charges continued to grow unabated, many victims wrote letters to the Court voicing their alarm. Even the media began to question the rapid escalation of fees. To your credit, you have expressed reservations over the charges to the SEC and Receiver on several occasions. Indeed, during a hearing on Sept 13, 2010 you said, “...if Judge Sullivan or I had been asked at the outset will you authorize $20M in fees ...? We would have said no way.” Later, at that same hearing, Mr. Jacobson of the SEC reassured you that “all professionals in this case understand that at the end of the case, if there is not a lot of money in the estate, that all of their fees are subject to some type of disgorgement ...” He went on to explain that the case law is fairly clear on this issue and that “when the Court decides final fee applications it can take into account the recoveries to the estate.”
Of course, when the case began, no one knew with certainty what the victim recoveries might be. In retrospect however, the Receiver was often overly optimistic in his projections. For example, at a May 21, 2009 hearing, he said that he expected the victims to recover “anywhere from five to fifty cents on the dollar” even though that statement was flatly contradicted by his own analysis in the just-released Third Interim Report. More recently, on Aug 8, 2013, the Court was told that the Receiver “conservatively estimated” $25-$30M to be available for distribution and administrative costs. Now we know that figure to be closer to $21M. These inaccurate estimates are important because they were invariably made in support of pending fee applications and may have persuaded the Court that more money was going to be available for the victims than is the case.
Well, we now know with some certainty what the recovery to the estate will be, and the numbers are deeply disturbing. When this whole affair began, cash on hand was $22.1M. Presently, we have $21.3M in cash. The Receiver informed the Court on Sept 9, 2014 that administrative costs still pending include $5.1M in holdbacks and nearly $1M in unbilled professional fees. If these remaining charges are approved, then the amount available for distribution to the victims will total about $15.2M (assuming the estate isn’t hit with a big tax bill from the IRS). Taking into account the initial distribution of $5M, the total amount returned to the victims will be $20.2M. Professional compensation, on the other hand, will have totaled $24.1M ($18M already paid, $5.1M in holdbacks and the $1M in unbilled charges).
So Your Honor, the bottom line is this: after six years and legions of high priced professionals later, the Receiver has managed to spend $24.1M to
produce a NEGATIVE return of $1.9M! Stated another way, on day one there was $22.1M in cash available for the victims. Now, our cumulative cash distribution will likely total $20.2M, for a loss of $1.9M. And it is critically important to understand that this $20.2M distribution, as disappointing as it is, in no way represents a “recovery” by any stretch of the imagination. In the end, it is simply our own money that was sitting in a bank account to begin with. In fact, an argument could be made that we will have paid $24.1M for the privilege of making a simple bank withdrawal. Only in this case, the Receiver failed to protect the status quo as directed by the Court, resulting in a $1.9M loss of principal. Thus, the true c...
Why is this important?
This petition has been created at the request of the Wextrust victims to allow each one of them a way to let Judge Chin know that they fully support the letter written by Jay C. Starling, M.D.