18-10509-shl doc 1133 filed 10/10/19 entered 10/10/19 13 ...€¦ · deepak modi was a part owner...

Hearing Date and Time: November 18, 2019 at 11:00 a.m. EST Response Deadline: November 11, 2019

JENNER & BLOCK LLP Marc Hankin Carl Wedoff 919 Third Avenue New York, New York 10022 (212) 891-1600 Angela Allen (admitted pro hac vice) 353 North Clark Street Chicago, Illinois 60654 (312) 222-9350 Counsel for the Chapter 11 Trustee UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re: FIRESTAR DIAMOND, INC., et al.

Debtors.1

Chapter 11 No. 18-10509 (SHL) (Jointly Administered)

TRUSTEE’S OBJECTION TO FILED

CLAIM OF NIPUR BVBA (JAFFE CLAIM NO. 5)

Richard Levin, Chapter 11 Trustee (the “Trustee”) of the Debtors in these chapter 11

cases (the “Debtors”), files this Objection under section 502 of the Bankruptcy Code, 11 U.S.C.

§§ 101−1532, and Rule 3007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy

Rules”), requesting that the claim (Jaffe Claim Dkt. No. 5) (the “Claim”) filed by Nipur BVBA

(“Nipur”) against Old AJ, Inc. f/k/a A. Jaffe, Inc. (“Jaffe”) be disallowed in full. In support of

this Objection, the Trustee states:

1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Firestar Diamond, Inc. (2729), Fantasy, Inc. (1673), and Old AJ, Inc. f/k/a A. Jaffe, Inc. (4756).

18-10509-shl Doc 1133 Filed 10/10/19 Entered 10/10/19 13:11:17 Main Document Pg 1 of 10

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JURISDICTION AND VENUE

1. This Court has jurisdiction over the Objection under 28 U.S.C. § 1334. This is a

core proceeding under 28 U.S.C. § 157(b). The Trustee consents to the entry of a final order by

this Court.

2. Venue is proper in this district under 28 U.S.C. § 1409.

3. This Objection is made under sections 105(a) and 502 of the Bankruptcy Code, 11

U.S.C. §§ 101−1532, and Rules 3007 and 9014 of the Bankruptcy Rules.

BACKGROUND

4. On February 26, 2018, the Debtors filed petitions under chapter 11 in this Court.

On March 9, 2018, this Court entered an Order directing that the Debtors’ cases be jointly

administered. [Dkt. 24.]

5. On June 14, 2018, the United States Trustee for Region 2 appointed Richard Levin

as the trustee in the Debtors’ jointly administered cases, [Dkt. 222], which this Court approved

the same day [Dkt. 227].

A. Nipur’s Proof of Claim.

6. On April 24, 2018, Nipur filed Jaffe proof of claim number 5 (“POC”) asserting its

Claim of $185,744.56 against Jaffe. (A copy of the POC is attached hereto as Exhibit A.) Nipur

attached to its POC documents purporting to depict three consignment transactions—all for

“CUT & POLISHED DIAMONDS”—and five invoices of payments made against those

purported consignments. The POC acknowledges that Jaffe bought $171,003 worth of the

diamonds on consignment from Nipur (as demonstrated by the final invoices submitted along

with the POC).2 According to Jaffe’s book and records and bank statements, these invoices

2 As explained infra ¶ 23, the Trustee has confirmed that Jaffe paid Nipur the amounts listed in the invoices provided in the POC.


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were all dated from between December 12, 2017, and January 29, 2018. The table below reflects

the consignments and final invoices, as described on the final page of the POC.

Date Doc. No. Doc. Type Carats Dollar Amount June 9, 2017 2017/004 P Consignment 29.49 $118,957.60 September 9, 2017 17/058 P Final Invoice 0.73 $(949.00) September 28, 2017 17/060 P Final Invoice 1.71 $(10,413.90) October 24, 2017 17/063 P Final Invoice 7.07 $(33,325.63) November 30, 2017 17/072 P Final Invoice 0.90 $(4,314.60) Total for Consignment #1: 2017/004 P $69,954.47

October 16, 2017 2017/007 P Consignment 462.35 $200,514.15 November 20, 2017 17/066 P Final Invoice 295.61 $(122,000.00) Total for Consignment #2: 2017/007 P $78,514.15

December 19, 2017 2017/009 P Consignment 163.23 $37,275.94 Total for Consignment #3: 2017/009 P $37,275.94

Total of Nipur’s Claim: $185,744.56

B. The Bank Fraud.

7. As detailed by (1) the Indian Central Bureau of Investigation; (2) the Directorate

of Enforcement, Ministry of Finance for the Department of Revenue of India; (3) the Indian

Ministry of Corporate Affairs; (4) two recent rulings by the Indian Debt Recovery Tribunal; and

(5) the report issued by the Court-appointed Examiner in the above captioned cases, and as

supported by the Trustee’s own investigation, beginning no later than 2011 and continuing into

2018, Nirav Modi orchestrated a fraudulent scheme to obtain approximately $4 billion in

financing under false pretenses from financial institutions, including Punjab National Bank

(“PNB”), and to launder the proceeds through a global web of corporate entities, family

members, and co-conspirators (the “Bank Fraud”).

8. The Bank Fraud involved the fraudulent procurement of letters of undertaking

(“LOU”), a financial instrument unique to India designed to facilitate efficient import


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transactions. When used legitimately, LOUs allow an importer to forego the expense an

importer would otherwise incur by borrowing Indian currency and then converting it to a

foreign currency to pay foreign suppliers. Instead, the importer obtains short-term credit from

its bank in India, secured by invoices for the to-be imported goods. The issuing bank, in turn,

enters into the foreign currency transaction: it requests a foreign branch of another Indian bank

to transmit funds into the issuing bank’s own account (referred to as its nostro—“our”—

account) at the foreign branch of a third bank to pay the exporter in its local foreign currency.

The issuing bank then recoups the loan from the importer (or the imported goods serving as its

collateral).

9. Since each LOU requires an import transaction, an importer’s LOU borrowing

capacity is tied directly to its import volume—the more imports, the more LOU funding

available. Realizing this, Modi and his co-conspirators conspired to artificially inflate the

import volume of Modi’s India-based companies—most notably Diamonds R Us, Solar Export,

and Stellar Diamond (collectively, the “LOU Entities”)—with sham transactions so as to obtain

more and more LOU funding.

10. To carry out this scheme, Modi and other co-conspirators utilized a web of

shadow entities to engage in fraudulent and fictitious import transactions (the “Shadow

Entities”). Though designed to look like legitimate independent businesses, the Shadow

Entities were no more than shell companies controlled by Modi and his co-conspirators. They

conducted little to no legitimate business, but instead existed only to further the Bank Fraud by

conducting bogus transactions with entities under the global Firestar umbrella (collectively, the

“Firestar Entities,” and together with the Shadow Entities, LOU Entities, and all other entities

controlled by Nirav Modi and his family members, the “Modi-Controlled Entities”) and

laundering the ill-gotten proceeds.


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11. The Shadow Entity import transactions purported to involve arm’s-length sales

of highly valuable loose diamonds. In truth, these transactions routinely involved goods that (i)

did not exist; (ii) were never transferred; (iii) were transferred at prices having nothing to do

with market value but instead based on whatever amounts were necessary to reconcile the

Shadow Entities’ and Firestar Entities’ books and records so as to conceal other transfers made

for illegitimate purposes; or (iv) were transferred in “circular transactions,” meaning the same

diamonds were exported from and re-imported back into India multiple times at varying and

often inflated prices, in transactions involving various Firestar Entities and Shadow Entities to

give the appearance of multiple distinct transactions for the sole purpose of artificially

increasing the entities’ import volume.

12. Moreover, the India-based Modi-Controlled Entities obtained additional funding

through packing credit loans, which are short-term working capital loans obtained by vendors

to fulfill upcoming orders of goods. In the context of the Bank Fraud, the India-based Modi-

Controlled Entities would obtain packing credit loans based on purported orders from other

Modi-Controlled Entities in Hong Kong, Dubai, and the United States. As set forth in the

Examiner’s Report, however, packing credit loan proceeds were frequently diverted for other

purposes, including the payment of outstanding LOUs.

13. In the context of the Bank Fraud, transactions between and among Firestar

Entities and Shadow Entities furthered the Bank Fraud by: (1) inflating the Indian entities’ LOU

borrowing capacity by artificially inflating their import and export volume (for LOUs and

packing credit loans, respectively); (2) facilitating the repayment of outstanding LOUs and

packing credit loans; (3) laundering the fraudulent proceeds by making them difficult to trace

and siphoning them to Nirav and his co-conspirators; and (4) manipulating auditors, lenders,

and regulatory bodies.


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14. Transfers for these purposes were concealed in various ways, including:

(a) round-trip transactions of gems or funds in which Modi-Controlled Entities transferred

assets amongst themselves without any legitimate economic purpose; (b) buying and selling

gems at inflated or deflated prices (or not sending the gems at all); (c) characterizing transfers as

loans or loan repayments or advances against future purchases or returns of advances, etc.; and

(d) in some instances, fraudulently doctoring books and records outright.

C. Nipur’s Involvement in the Bank Fraud.

15. Nipur is a Modi-Controlled Entity that furthered the Bank Fraud. Nipur was,

and may still be, ultimately owned and controlled by Deepak Modi, who is Nirav Modi’s father.

Deepak Modi was a part owner of Firestone Diamond BVBA, a Firestar Entity, and had

extensive personal and business ties with Brilliant Diamonds Limited (HK)—a known Shadow

Entity. During the relevant period, Deepak Modi directed Nipur to take actions that benefited

Nirav Modi and assisted the Firestar Entities in perpetrating the Bank Fraud.

16. As reflected in the Examiner’s Report (p. 100), Nipur was the direct recipient of

funds under a fraudulently-obtained LOU.

17. Nipur also engaged in circular trading transactions, including two transactions

in early 2017 between Nipur and Firestar Diamond International Inc. (“FDII”) (a Firestar

Entity)—one import followed shortly by one export—of around $1 million of “ROUGH

DIAMONDS” at a price per carat of approximately $63,000, a high rate consistent with price

inflation typical of circular trading.

Branch Date Ship. Type

Shipper Name

Ship. No.

Consignee Name Carats Insured

Value

NYC 2/23/2017 Import Nipur 4537740 FDII 16.29

$1,026,270.00

NYC 3/9/2017 Export FDII 1707995 Nipur Unk.

$855,225.00


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18. Furthermore, the Trustee has traced a number of diamonds consigned by Nipur

to Jaffe as originating from Firestar International Pvt. Ltd., the ultimate parent company of the

Firestar enterprise that played an integral role in directing and furthering the Bank Fraud.

19. In addition, Firestar booked business with Nipur for at least some time as “non-

core” inventory, an accounting practice used to separate circular trades from legitimate business

in order to conceal and further Bank Fraud.

RELIEF REQUESTED

20. The Trustee respectfully requests that the Court enter an order, substantially in

the form attached hereto as Exhibit C, disallowing the Claim in full.

BASIS FOR RELIEF

I. Nipur’s Claim Should Be Disallowed Under Bankruptcy Code Section 502(d).

21. Bankruptcy Code section 502(d) provides that a trustee may not make

distributions to a creditor who has received a preference or fraudulent transfer until the

preference or fraudulent transfer is returned. 11 U.S.C. § 502(d). Nipur has received both

preferences and fraudulent transfers that it has not returned.

22. A transfer made “to hinder, delay, or defraud either present or future creditors”

may be avoided as an actual fraudulent transfer under DCL section 276. See HBE Leasing Corp.

v. Frank, 61 F.3d 1054, 1057 (2d Cir. 1995). Section 276 has a six-year limitations period. N.Y.

CPLR § 213(8). Bankruptcy Code section 544(a) permits the Trustee to use avoidance powers

available to creditors under the DCL.

23. The Trustee has established that Jaffe made payments to Nipur of $11,362.90 on

December 12, 2017, of $37,640.23 on January 24, 2018, and of $122,000.00 on January 29, 2018.

These payments total $171,003.13.


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Date Invoice Issued Doc. Payment

On Date Invoice

Paid Dollar Amount

9/9/2017 17/058 P Final Invoice

2017/004 P 12/12/2017 $949.00

9/28/2017 17/060 P Final Invoice $10,413.90 10/24/2017 17/063 P Final Invoice 1/24/2018 $33,325.63 11/30/2017 17/072 P Final Invoice $4,314.60 11/20/2017 17/066 P Final Invoice 2017/007 P 1/29/2018 $122,000.00

Total Amount Paid by Jaffe to Nipur for Goods on Consignment $171,003.13 Each of these payments was a fraudulent transfer made to further the Bank Fraud described

above and with the actual intent to hinder, delay, or defraud the Debtors’ creditors.

Accordingly, the transfers are avoidable as fraudulent transfers under DCL section 276 and

section 544 of the Bankruptcy Code.

24. A transfer may be avoided as a preference if it (1) was a transfer of an interest of

the debtor in property; (2) was made to or for the benefit of a creditor; (3) was made for or on

account of an antecedent debt owed by the debtor before such transfer was made; (4) was made

while the debtor was insolvent; (5) was made on or within 90 days before the date of filing of

the petition, or one year if the transferee is an insider; and (6) enabled the transferee to receive

more than it would have received had the case been a chapter 7 liquidation and the creditor not

received the transfer. 11 U.S.C. § 547(b). As Nipur was (and may still be) owned and

controlled by Deepak Modi, Nirav Modi’s father, it is an insider of Jaffe. 11 U.S.C.

§ 101(31)(B)(vi).

25. Jaffe transferred $171,003.13 to Nipur within the one-year insider preference

period of February 27, 2017, to February 26, 2018, under the Bankruptcy Code. These transfers

are avoidable as preferential transfers under section 547 of the Bankruptcy Code. 11 U.S.C.

§ 547.


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26. Accordingly, Nipur is liable to the Debtors for at least $171,003.13 because of its

receipt of fraudulent transfers and preferences that it has not repaid. As such, the Claim should

be disallowed in full under Bankruptcy Code section 502(d).

RESERVATION OF RIGHTS

27. Nothing in this Objection should be construed as the Trustee conceding the

validity of Nipur’s Claim or any other claim. The Trustee’s claims analysis continues, and this

Objection is one of many the Trustee anticipates filing. Therefore, the Trustee expressly

reserves the right to object to any or all of the claims filed or deemed filed against the Debtors’

estates, including other claims brought by Nipur, on any proper basis whatsoever.

NOTICE

28. The Trustee has provided notice of this Motion to: (a) the Office of the United

States Trustee; (b) all parties who have formally requested notice in the Debtors’ cases; and

(c) Nipur.

WHEREFORE, the Trustee respectfully requests that this Court enter an Order

substantially in the form of the attached proposed order and grant such other and further relief

as this Court deems just and proper.


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Dated: October 10, 2019, New York, New York Respectfully submitted,

JENNER & BLOCK LLP By: /s/ Marc Hankin Marc Hankin Carl Wedoff 919 Third Avenue New York, NY 10022 (212) 891-1600 [email protected] [email protected] Angela Allen (admitted pro hac vice) 353 N. Clark St. Chicago, Illinois 60654 (312) 222-9350 [email protected] Counsel for the Chapter 11 Trustee


Exhibit A Nipur’s Proof of Claim

18-10509-shl Doc 1133-1 Filed 10/10/19 Entered 10/10/19 13:11:17 Exhibit A Pg 1 of 22

Exhibit B Declaration of Richard Levin

18-10509-shl Doc 1133-2 Filed 10/10/19 Entered 10/10/19 13:11:17 Exhibit B Pg 1 of 4

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK


Debtors.1

Chapter 11 No. 18-10509 (SHL) (Jointly Administered)

DECLARATION OF RICHARD LEVIN IN

SUPPORT OF OBJECTION TO FILED CLAIM OF NIPUR BVBA (JAFFE CLAIM NO. 5)

I, Richard Levin, declare the following is true to the best of my knowledge, information,

and belief:

1. I am the chapter 11 trustee (“Trustee”) of the Debtors in the above-captioned

chapter 11 cases.

2. I submit this Declaration in support of my objection to the claim of Nipur BVBA

(the “Nipur Claim”) (Jaffe Claims Dkt. 5).

3. The statements in this Declaration are based on my personal knowledge,

information supplied or verified by my professionals, my review of relevant documents, or my

opinion based upon my experience and knowledge of the Debtors’ operations and financial

condition. If called as a witness, I could and would testify competently to the facts set forth

herein.

4. In my position as Trustee, I am generally familiar with the Debtors’ books and

records (“Books and Records”) that reflect, among other things, the Debtors’ liabilities and the

amounts owed to creditors as of the Petition Date. My professionals and I have reviewed and



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continue to review the Debtors’ Books and Records to determine the validity of claims asserted

against the Debtors in these chapter 11 cases.

5. In connection with preparation of the Objection, I oversaw the review of the

Books and Records with respect to the Nipur Claim, reviewed the Objection; and reviewed and

approved the information contained on the Objection and the justifications set forth therein.

My professionals and I have performed specific due diligence as to the Nipur Claim and have

information supporting my position. Accordingly, I am familiar with the information contained

in the Objection.

6. I have reviewed and am familiar with Document numbers 2017/004 P, 17/058 P,

17/060 P, 17/063 P, 17/072 P, 2017/007 P, 17/066 P, and 2017/009 P referenced in the Objection

to the Nipur Claims.

7. I have reviewed and am familiar with the evidence detailed by (1) the Indian

Central Bureau of Investigation; (2) the Directorate of Enforcement, Ministry of Finance for the

Department of Revenue of India; (3) the Indian Ministry of Corporate Affairs; (4) two recent

rulings by the Indian Debt Recovery Tribunal; and (5) the report issued by the Court-appointed

Examiner in the above captioned cases that Nirav Modi orchestrated a fraudulent scheme to

obtain approximately $4 billion in financing under false pretenses from financial institutions,

including PNB, and to launder the proceeds through a global web of corporate entities, family

members, and co-conspirators.

8. Accordingly, based on the review described above, I am informed and believe

that the facts contained in the Objection are true and correct.

I declare under penalty of perjury under 28 U.S.C. § 1746 that the foregoing is true and

correct.


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Dated: October 10, 2019, /s/ Richard Levin New York, New York Richard Levin


Exhibit C Proposed Order

18-10509-shl Doc 1133-3 Filed 10/10/19 Entered 10/10/19 13:11:17 Exhibit C Pg 1 of 3

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK


Debtors.1

Chapter 11 No. 18-10509 (SHL)

(Jointly Administered)

[PROPOSED] ORDER GRANTING OBJECTION TO FILED

CLAIM OF NIPUR BVBA (JAFFE CLAIM NO. 5)

Upon consideration of the Objection to Filed Claim of Nipur BVBA (the “Objection”) filed

by Richard Levin in his capacity as Trustee of the three Debtors in these jointly administered

cases (the “Trustee”), seeking entry of an order under section 502(d) of title 11 of the United

States Code (the “Bankruptcy Code”), and Rule 3007 of the Federal Rules of Bankruptcy

Procedure (the “Bankruptcy Rules”), disallowing Nipur’s claim (Jaffe Claim Dkt. 5) (the

“Claim”), as more fully described in the Objection; and appropriate notice under the

circumstances of the Objection having been provided, and it appearing that no other or further

notice need be provided; and the Court having found and determined that the relief sought in

the Objection that is granted hereby is in the best interests of the Debtors’ estates, creditors, and

all parties in interest, and that the legal and factual bases set forth in the Objection establish just

cause for the relief granted herein; and after due deliberation and sufficient cause appearing

therefor, it is

ORDERED that the Objection is sustained; and it is further



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ORDERED that, under section 502(d) of the Bankruptcy Code and Bankruptcy Rule

3007, Claim No. 5 filed by Nipur BVBA against Old AJ, Inc. f/k/a A. Jaffe, Inc. identified in the

Objection is disallowed; and it is further

ORDERED that the Trustee, the Claims and Noticing Agent (Omni Management

Group), and the Clerk of this Court are authorized to take all actions necessary or appropriate

to effectuate this Order; and it is further

ORDERED that this Court shall retain jurisdiction to hear and determine all matters

arising from or related to the implementation and/or interpretation of this Order.

Dated: New York, New York _______ __, 2019

_______________________________________ HONORABLE SEAN H. LANE UNITED STATES BANKRUPTCY JUDGE


18-10509-shl doc 1133 filed 10/10/19 entered 10/10/19 13 ...€¦ · deepak modi was a part owner...

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