Case Status Report: Lake Shore Asset Management

(English Translation)

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Commodity Futures Trading Commission v. Lake Shore Asset Management Ltd., Case No. 07 C 3598

On August 24, 2011, Philip J. Baker, who has been in federal custody since he was extradited from Hamburg, Germany, in December 2009, pled guilty to one count of wire fraud for fraudulently soliciting and obtaining approximately $294 million from approximately 900 investors worldwide. According to the plea agreement, between 2002 and September 2007, as a result of Baker’s fraudulent solicitations, the Lake Shore companies and commodity pools obtained approximately $294 million, of which Baker admitted that he misappropriated at least $30 million for his own use and the use of another Lake Shore director. Baker also admitted that Lake Shore incurred several million dollars in net trading losses during the same period that he misrepresented that Lake Shore’s trading was profitable. Under the terms of the written plea agreement, the government will recommend the maximum term of 20 years in prison when Baker is sentenced on November 17, 2011. In addition, Baker agreed to an order requiring him to pay restitution totaling more than $154.8 million, representing the outstanding losses to investors.

September 24, 2010: Philip Baker remains in custody in the United States awaiting trial on criminal charges. His criminal trial has been set for June 6, 2011. Appellate arguments relating to two investor claims will be heard on October 1, 2010. Two investors have appealed Judge Manning’s denial of their claims. The Receiver continues to actively seek additional assets for the benefit of the defrauded investors. In Germany, the Receiver’s counsel is trying to obtain computer hard drives that Baker’s German counsel received from Alexandre Schwab, Lake Shore’s attorney. In Canada, the Receiver is working to recover $854,240 USD from the wife of Lake Shore’s purported trader. It appears that the wife received a loan with funds traceable to Lake Shore that she used to purchase a cottage and a Model A car.

June 16, 2009: The Foreign Fugitive director of Lake Shore Asset Management indicted on Federal Fraud and obstruction charges press release, and Indictment.

January 30, 2009: Judge Manning issued an order authorizing a claims verification procedure. (A copy of that order is located in our related documents section below.) The order directs all investors to provide the receiver with specified information within 45 days of the entry of the Court’s Order. The Receiver was also directed to propose a plan of distribution to the Court after giving all of the investors notice of his proposed plan. Investors will have the opportunity to object to the plan.

September 17, 2008: Judge Manning entered a default judgment against Philip Baker on September 17, 2008, for failing to respond to the Commission’s complaint. On June 10, 2008, Lake Shore Asset Management Inc. was also defaulted as a sanction for failing to participate in discovery. The case remains pending against all of the defendants solely for the purpose of obtaining monetary relief in the form of restitution, disgorgement and/or a civil monetary penalty.

The Interpleader action in London has been set for hearing in April 2009. The British Court must decide whether the funds on deposit at the FCMs in London should be paid to the Receiver or Mr. Baker. In the United States, the bankruptcy court has approved a partial payment in the Sentinel bankruptcy. Therefore, we anticipate that the customers who have filed claims with the Receiver will be receiving a partial payment in the near future.

April 24, 2008: Judge Manning entered an order that defaulted the Lake Shore Group of Companies, all of the Lake Shore pools and Hanford Investments. The case against the remaining defendants Philip Baker and Lake Shore Asset Management Ltd. and the relief defendant Anglo International continues. Mr. Baker is continuing to evade service and we are currently serving him through publication in the International Herald Tribune. We are seeking sanctions against Lake Shore Asset Management for failing to comply with the Court’s orders regarding discovery. The Federal Rules of Civil Procedure permit the Judge to sanction Lake Shore by striking its answer and entering a default judgment against it.

That same day, Judge Manning entered an amended order extending the scope of the Receivership of Robb Evans & Associates to include Lake Shore Group of Companies, the Lake Shore pools and Hanford Investments.

On April 28, 2008, the British Court ordered the British FCMs to deposit the money they are holding on behalf of the various Lake Shore entities with the Court. Lake Shore has filed a claim in the High Court on its own behalf for the funds, and the Receiver has filed claims on behalf of the Lake Shore customers seeking to have the funds paid to it for distribution to the Lake Shore investors. The High Court will determine which claimant should receive the funds. Lake Shore investors who want to support the Receiver’s efforts in London should contact Robb Evans & Associates.

April 16, 2008: On February 2, 2008, the Commission filed a motion to file its second amended complaint. This complaint added Hanford Investments Ltd. and all of the pools operated by Lake Shore Group as defendants. In addition, the amended complaint named Anglo International as a relief defendant. On February 19, 2008, Magistrate Mason gave the Commission permission to file its Second Amended Complaint. The second amended complaint includes allegations that the defendants misappropriated funds by improperly charging incentive fees to the pool participants, by transferring over $10 million in profits from Sentinel to Hanford Investments and by transferring over $1 million to Anglo International to pay Lake Shore’s administrative costs. We promptly arranged to have Lake Shore Group, its pools, Hanford and Anglo International served with copies of the complaint. To date all of the defendants except Baker have been served with copies of the complaint. Baker continues to evade service of process. Unsurprisingly, our efforts to serve him under the Hague Convention were unsuccessful. Our German process server indicates that he was not found at the address his lawyer provided. His current whereabouts are unknown. Magistrate Mason has given the Commission permission to serve Baker by publication in the International Herald. On April 14, 2008, the Commission filed its motion seeking to have default judgments entered against Lake Shore Group, the pools and Hanford because they failed to file an Answer to the Commission’s complaint in a timely manner.

On February 4, 2008, the Commission also filed a motion to compel discovery against Lake Shore which still persists in its failure to cooperate in the discovery process. Baker’s deposition was scheduled for April 16, 2008, but Lake Shore Asset Management’s lawyer indicated that he will not appear for his deposition. The Commission will continue to seek an order imposing sanctions against Lake Shore for failing to cooperate in the discovery process. These sanctions could include striking Lake Shore’s answer or the entry of a default judgment against Lake Shore.

On April 1, 2008, Judge Manning issued a 40-page order discharging the rule to show cause against William Nissen. On March 19, 2008, the three British FCMs filed an interpleader action in the British Courts. Essentially, they have informed the court that they have received claims for the funds from two parties: the Receiver (on behalf of the Lake Shore investors) and Lake Shore (on behalf of Philip Baker). The Receiver has engaged British counsel to file its claim on behalf of the customers. Lake Shore’s motion to amend the scope of the Receivership has been briefed by both parties and is currently pending before the Court.

January 11, 2008: The Receiver filed his initial report on December 5, 2007 which reported that Lake Shore raised approximately $312 million from investors and returned approximately $39.3 million leaving approximately $273 million of investor funds with Lake Shore. Lake Shore lost approximately $37.5 million trading and transferred approximately $11 million to entities under the control of Philip Baker and Lake Shore.

On December 10, 2007 Judge Manning entered an order imposing a daily fine of $25,000 (not to be paid with investor funds) against Philip Baker and Lake Shore for their continued violations of the court’s orders. On December 21, 2007, Judge Manning entered an order giving the defendants until December 28, 2007, to file a memorandum as to why she should not refer their contemptuous conduct to the U.S. attorney for investigation.

The Receiver and the CFTC also reported to the court that on June 29, 2007, two days after the ex parte restraining order was entered, Lake Shore entered into a contract with an entity in Bermuda to store its books and records. In early July, all of Lake Shore’s records, some 38 boxes, were transferred to Bermuda from Canada. On September 11, 2007, the day after the parties learned that the Appellate Court had denied Lake Shore’s motion for a stay of the preliminary injunction, Lake Shore’s Swiss attorney, Alexandre Schwab, instructed the Bermuda entity to transfer Lake Shore’s books, records and computer server to his office in Switzerland. The Commission has requested that Mr. Schwab produce Lake Shore’s records. He has not responded.

On December 28, 2007, the Appellate Court issued its ruling on Lake Shore Asset Management Limited’s appeal of the preliminary injunction. Although Lake Shore claims in its press releases that it was successful in its appeal, the preliminary injunction obtained by the Commission was upheld. Lake Shore had argued that since it had only one U.S. customer and all of its various entities were incorporated off-shore and traded through British FCM’s, the CFTC had no jurisdiction. The Appeals Court rejected that argument stating:

“…having assured the NFA as a condition of membership that no foreign secrecy law prevents compliance with this nations disclosure requirements—Lake Shore must abide by federal law, including the record-keeping and disclosure rules.”

However, the Court did find that the unnamed and unserved affiliates of Lake Shore could not be “named in the injunction.” While stating this, the court also noted that “any of Lake Shore’s affiliates is bound, to be sure by an injunction against Lake Shore…Of course, other members of the Lake Shore Group of Companies act at their peril if they disregard the commands of the injunction, for, if the district court ultimately determines that they are in concert with Lake Shore, then they will be in contempt of court.” Consequently, we believe that while the form of the injunction will be changed the substance remains the same.

November 23, 2007: On October 23, 2007, the Appellate Court heard the arguments of counsel in Lake Shore’s appeal of the preliminary injunction. We are awaiting a decision. During October and November, the District Court held two status hearings for the purpose of receiving reports from the Receiver regarding its efforts to obtain the books and records of Lake Shore and to collect the pool assets. The Receiver reported that Lake Shore and its British counsel were not cooperating with its efforts to transfer the funds from the British FCMs to the Receiver. The Receiver sent Lake Shore a release instructing the FCMs to transfer the funds on deposit with them to the Receiver and requested that an authorized official sign the release. Lake Shore refuses to sign this form. Its British counsel wrote that Lake Shore would not sign the release while the appeal of the injunction is still pending before the Seventh Circuit. In light of the fact that the Appellate Court denied the stay of the Preliminary Injunction, this violates the Preliminary Injunction.

Consequently on November 21, 2007, Judge Manning found Lake Shore and Philip Baker in contempt of court. Specifically, she found that Lake Shore and Philip Baker were in civil contempt for violating the Preliminary Injunction by failing to produce Lake Shore’s books and records, and for failing to cooperate with the Receiver. Judge Manning instructed the Commission to recommend possible coercive sanctions against Lake Shore and Baker for their violations of the Preliminary Injunction. The Commission’s recommendations as to Lake Shore are posted on this Web page. The Commission will file its recommendations as to Philip Baker on November 28, 2007.

The briefing in regard to the Rule to Show Cause against William Nissen was completed on November 21. In the meantime, a new attorney has requested leave to file his appearance on behalf of Lake Shore. The Court asked him to address concerns raised by the Commission and the Receiver concerning the source of the funds to be used to pay his fees. He filed a response that stated that Alexandre Schwab, Lake Shore’s Swiss attorney, had told him that the source of the money was a loan from a person “close” to Philip Baker. The Commission and the Receiver argued that this was an insufficient explanation, and on November 21, Judge Manning agreed. However, she entered an order that allowed Sidley Austin to withdraw from the case while stating that Mr. Nissen had to remain in the case until the Court has ruled upon its Rule to Show Cause against him. The new attorney, James McGurk, must inform the court by November 28, 2007, if he still intends to represent Lake Shore.

The next hearing in this matter is scheduled for December 11, 2007.

Status Updates for June 2007 - October 2007

 

Related Documents:

Press Releases:

Staff Contacts:

Rosemary Hollinger
Associate Director and Regional Counsel
CFTC Division of Enforcement
525 West Monroe Street
Suite 1100
Chicago, IL 60661

Mary Elizabeth Spear
Investigator
CFTC Division of Enforcement
525 West Monroe Street
Suite 1100
Chicago, IL 60661

Last Updated: August 25, 2011