Case 18-11818-KJC Doc 142 Filed 08/27/18 Page 1 of 16 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: Chapter 11 SAMUELS JEWELERS, INC.1 Case No. 18-11818 (KJC) Debtor. Requested Hearing date: September 13, 2018 at 9:30 a.m. (ET) Requested Objection Deadline: September 7, 2018 at 4:00 p.m. (ET) PUNJAB NATIONAL BANK’S MOTION FOR ENTRY OF AN ORDER DIRECTING THE APPOINTMENT OF AN EXAMINER PURSUANT TO 11 U.S.C. §1104(c) Punjab National Bank (“PNB”), by and through its undersigned counsel, hereby moves this Court (the “Motion”) for the entry of an order directing the appointment of an examiner in the above-captioned Chapter 11 case, substantially in the form attached hereto as Exhibit A, under sections 105(a) and 1104(c) of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) and Rule 2007.1 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”): PRELIMINARY STATEMENT 1. PNB seeks the appointment of an examiner, pursuant to section 1104(d) of the Bankruptcy Code. The Debtor in this case is 100% owned by Gitanjali Gems, Ltd. (“Gitanjali”) whose chairman and director is Mehul Choksi (“Choksi”). Both Gitanjali and Choksi have been implicated in the largest bank fraud (the “Fraud”) in the history of the Republic of India. They have been indicted by Indian authorities, and Choksi is currently an international fugitive from justice.2 PNB is the largest victim of that Fraud. 1 The last four digits of the Debtor’s taxpayer identification number are 6316 and its address is 2914 Montopolis Drive, Suite 200, Austin, Texas 78741. 2 India Waiting on Interpol for Red Notice Against Fraud-Accused Mehul Choksi, The Daily Observer, https://antiguaobserver.com/india-waiting-on-interpol-for-red-notice-against-fraud-accused-mehul-choksi/ 01:23572343.4 Case 18-11818-KJC Doc 142 Filed 08/27/18 Page 2 of 16 2. The Debtor admits through its First Day Declaration that the Fraud was a major precipitating factor in the Debtor’s decision to file for bankruptcy under Chapter 11. The Debtor likewise admits that several of its former officers and directors were implicated in the Fraud, including Choksi (a director until February 2018), Nehal Modi (director and former CEO of the Debtor until 2015, and also the step-brother of Nirav Modi) and Sunil Varma (CFO and President until February 2018). Given these connections, it comes as no surprise that India’s Enforcement Directorate (“ED”) (an agency of the Indian government roughly analogous with the S.E.C.) has filed a criminal complaint alleging significant and troubling involvement of the Debtor and its agents in the Fraud. Nor is it surprising that PNB’s initial investigation has revealed suspicious transactions involving the Debtor. 3. This case has significant similarities and connections to In re Firestar Diamond, Inc., Case No. 18-bk-10509 (SHL) (Bankr. S.D.N.Y.) proceeding before the Honorable Sean Lane in New York. The debtors in those cases, Firestar Diamond, Inc., A. Jaffe, Inc., and Fantasy, Inc. (collectively, the “Firestar Debtors”) are indirectly owned by the other mastermind of the Fraud, Nirav Modi (“Modi”), one of Choksi’s nephews. Facing a similar situation, Judge Lane appointed an examiner early in the Firestar cases. Order Signed on 4/13/2018, Directing the Appointment of the Examiner, In re Firestar Diamond, Inc., Case No. 18-bk-10509 (SHL) (Bankr. S.D.N.Y. Apr. 13, 2018), ECF No. 103. Like the Debtor in this case, the Firestar Debtors cited the Fraud as a major factor in their filing for bankruptcy and attempted to proceed as though they were unconnected to the Fraud. As events unfolded, however, that facade of innocence collapsed as the Firestar Debtors’ President and former sole director invoked his Fifth Amendment rights against self-incrimination, a Chapter 11 trustee was appointed, and the Examiner published its report making it clear the Firestar Debtors participated in the Fraud. The 01:23572343.4 -2- Case 18-11818-KJC Doc 142 Filed 08/27/18 Page 3 of 16 similarities between these cases – and the underlying fraud – underscores the compelling need for the appointment of an examiner in this case. 4. The Court should appoint an examiner in this case to ensure the integrity of these proceedings and allow a neutral third-party to assess the claims that might exist for and against the estate of the Debtor. JURISDICTION AND VENUE 5. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§1334 and 157. This is a core proceeding pursuant to 28 U.S.C. §157(A) as it relates to the administration of the Debtors’ estates. Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. BACKGROUND A. Bankruptcy Proceedings 6. On August 7, 2018 (the “Petition Date”), the above-captioned debtor (the “Debtor”) filed its voluntary petition for protection under Chapter 11 of Title 11 of the United States Code, thus commencing these proceedings (the “Chapter 11 Case”). In its petition, the Debtor estimated each of its assets and liabilities to be in the $100,000,000-$500,000,000 range. ECF No. 1. On August 8, 2018 the Court held a First Day Hearing, ECF No. 18, and on August 16, 2018 a Committee of Unsecured Creditors (“UCC”) was appointed. ECF No. 108. To date, the Debtor has continued in the possession and operation of its properties and businesses. B. The Fraud on PNB 7. PNB is the second largest government-owned bank in India. It learned early this year that it is the victim of the largest bank fraud in India’s history. Choksi and several of the entities he directly or indirectly controls (collectively, “Choksi Entities”), along with his nephew Modi and several of the entities Modi directly or indirectly controls (collectively, the “Modi 01:23572343.4 -3- Case 18-11818-KJC Doc 142 Filed 08/27/18 Page 4 of 16 Entities”), are the perpetrators of this fraud. See ECF No. 11, at ¶ 18. Choksi was chairman and director of Gitanjali, which wholly owns the Debtor. Chosksi, who is now an international fugitive from justice, also served as a director of the Debtor from 2008 until his resignation in February 2018, shortly after the Fraud was discovered. 8. To implement the Fraud, Choksi, the Choksi Entities and their representatives conspired to fraudulently obtain Letters of Undertaking (“LOUs”) and Foreign Letters of Credit (“FLCs”) from PNB. See Declaration of Sean O’Neal dated August 27, 2018 and filed contemporaneously herewith (the “O’Neal Decl.”), Ex. A (the “CBI Chargesheet”).3 An LOU is a guarantee by the issuing Indian bank that guarantees repayment of loans made to such bank customer(s) by a foreign lender, specifically, a foreign branch of an Indian bank. A bank issuing an LOU (here, PNB) agrees to pay to the foreign lender the full amount of the loan plus accrued interest if the importer (here, Choksi and the Choksi Entities) fails to pay back the foreign lender. FLCs function in much the same way. See id. at ¶¶ 1, 4, 8. 9. Beginning in or about March of 2015, the Choksi Entities, including Gitanjali, began obtaining fraudulent LOUs and FLCs from the Brady House, Mumbai branch of PNB. See id. at ¶ 1. Several PNB employees, including Gokulnath Shetty (“Shetty”), the deputy manager at the Brady House branch, and Manoj Hanumant Kharat (“Kharat”), a single window operator, conspired with the Choksi Entities to issue the LOUs and FLCs without the necessary underlying documentation or the pledging of collateral necessary to repay the amount of the LOUs and FLCs, and after the Choksi Entities had already reached credit limits on their accounts. Id. at ¶¶ 1, 8-9, 23, 27. 3 The chargesheet is akin to a criminal indictment. Both the CBI and the ED – agencies roughly analogous to the U.S.’s Federal Bureau of Investigation and Securities and Exchange Commission, respectively – filed charges against Choksi, Gitanjali and other Choksi Entities in relation to this Fraud. 01:23572343.4 -4- Case 18-11818-KJC Doc 142 Filed 08/27/18 Page 5 of 16 10. After being issued by PNB, the funds issued pursuant to the LOUs and FLCs were transmitted by these same bank employees through the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) system to the foreign branches of Indian banks. The SWIFT messages authorized the release of funds in the amount of the LOUs and FLCs for payment to the foreign “exporter/beneficiary” listed in the SWIFT messages for the goods listed therein. See id. at ¶¶ 9, 12, 15-18, 23. According to the LOUs, these funds should have been dispersed to the “exporter/beneficiary” to finance the import of goods into India; however, funds were dispersed to other Choksi Entities instead of to third-party exporters/suppliers and were not used for bona fide import/export purposes. See id. at ¶¶ 1, 12, 16-18, 26, 28. 11. Shetty, Kharat and others concealed the issuances of these LOUs and FLCs by not entering them, or entering much smaller amounts, into PNB’s Core Banking System (“CBS”) thus preventing PNB from uncovering the Fraud. Id. at ¶ 9-10, 15, 23, 25. When the Fraud finally was uncovered in January 2018, PNB referred the investigation to the Central Bureau of Investigation (“CBI”) (analogous to the Federal Bureau of Investigations in the U.S.) which filed formal charges against Choksi, Gitanjali and others in relation to the Fraud. Another agency, the ED, launched its own investigation and filed its own prosecution complaint in June of 2018.