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PNB, US Trustee seek probe into Mehul Choksi's US firm Samuels Jewelers

What next? - A decision on the appointment of the examiner may be announced by the end of the second week of next month

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Fresh from a moral victory, Punjab National Bank (PNB) and US Trustee have now trained their guns at Mehul Choksi's Samuels Jewelers, seeking a probe into the US firm that has filed for bankruptcy.

The investigation may reveal the nature and extent of any involvement of the American company's executives in the biggest banking fraud in India, perpetrated by Choksi and his nephew Nirav Modi.

Just days ago, PNB was proven right as a US examiner, after an intensive investigation, found substantial evidence showing that senior executives and directors at Modi's three US firms that filed for bankruptcy soon after the $2 billion fraud came to light were aware of and involved in the scam.

On August 7, 2018, Samuels Jewelers filed a voluntary petition for relief under Chapter 11. On August 27, PNB, as the largest victim of that fraud, sought the appointment of an examiner, pursuant to section 1104(d) of the Bankruptcy Code, for Samuels Jewelers, which is a 100% subsidiary of Mehul Choksi's Gitanjali Gems. Both Gitanjali and Choksi have been implicated in the bank fraud and Choksi, like Modi, is currently an international fugitive.

This case involving Choksi's Samuels Jewelers has significant similarities and connections to Firestar Diamond proceedings before the US Bankruptcy Court Southern District of New York. Firestar Diamond, A Jaffe and Fantasy, Inc are indirectly owned by the other mastermind of the fraud, Nirav Modi. "The similarities between these cases – and the underlying fraud – underscores the compelling need for the appointment of an examiner in this case," PNB attorneys told the US Bankruptcy Court for the District of Delaware. A decision on the appointment of the examiner may be announced by the end of the second week of next month.

Samuels Jewelers (debtor) has already admitted through its First Day Declaration that the fraud was a major precipitating factor in its decision to file for bankruptcy under Chapter 11. It likewise admitted 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).

Samuels Jewelers currently has three directors - CEO and company secretary Farhad K Wadia, chief merchandising officer Bhavesh Shah and Rajesh Motwani (interim chief financial officer since February 2018). All three were named as directors effective February 28 this year.

The US Trustee Andrew R Vara has also separately moved the court for an order directing the appointment of an examiner in the Samuels Jewelers case.

"The court should order the appointment of an examiner to investigate and report on the nature and extent of any involvement of the debtor (Samuels Jewelers) and any current or former officers and directors of the debtor in the alleged fraud involving Mr Choksi, Mr Modi, entities controlled by them, and Punjab National Bank. In addition, the examiner would investigate whether any current or former officer of the debtor participated in fraud or dishonesty in the management of the debtor. The examiner's report would shed light on, inter alia, the question as to whether the debtor's current management should be permitted to continue to operate the debtor," the US Trustee told the court.

Separately, BDO India LLP, which was hired by the bank to conduct a forensic investigation into the fraud, has told the US Bankruptcy Court that there is evidence of a series of transactions resulting in payments from Samuels Jewelers to repay fraudulent letters of undertaking or foreign letters of credit and demonstrates that the US company had some involvement in the fraud, which necessarily involved the movement of funds among numerous Choksi entities.

Facing a similar situation, Judge Sean Lane in New York had appointed an examiner early in the Modi firms' cases. Just like Samuels Jewelers, Modi's bankrupt firms had 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.

The examiner in the probe for Modi's firms also published a report, including finding that Modi's firms purchased and sold loose diamonds supposedly valued at more than $280 million to 'shadow entities' from 2011 to 2017 and helped continue the fraud.

UNDER SCANNER

  • BDO India LLP has found evidence of a series of transactions resulting in payments from Samuels Jewelers to repay fraudulent letters of undertaking or foreign letters of credit
     
  • On August 7, 2018, Samuels Jewelers filed a voluntary petition for relief under Chapter 11
     
  • This case involving Samuels Jewelers has significant similarities and connections to Firestar Diamond proceedings before the US Bankruptcy Court Southern District of New York
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