SAN DIEGO — Any money that may eventually be returned to investors in bankrupt J. David & Co. will be allocated on a hard-money-in, hard-money-out formula, ignoring the paper profits that investors thought they were receiving, a judge ruled Wednesday.
U.S. District Judge J. Lawrence Irving held that such a formula was the most equitable way to divide investor funds, given the fact that the once-mighty, fraud-ridden J. David investment firm was nothing more than an "arbitrage mirage."
Attorneys representing some former J. David investors had objected to bankruptcy trustee Louis Metzger's distribution formula because, they said, it violated their clients' due-process rights to argue their claims individually.
Attorney Margaret Mann, representing about 50 former J. David investors, said that such a process would involve hiring an accountant to verify the accounting already conducted by Metzger's staff of outside auditors.
In addition, Mann suggested that there may be "grounds" that J. David (Jerry) Dominelli actually generated profits in his alleged foreign currency trading operation, although she acknowledged that she was "not prepared to present evidence on that point."
Judge Rejects Argument
Irving rejected her argument, noting Dominelli's admission last year that he operated a "massive Ponzi scheme," using funds from new investors to pay off existing clients.
Dominelli is serving a 20-year prison sentence after pleading guilty to three counts of fraud and one count of income tax evasion. His J. David & Co. attracted about $200 million from 1,500 investors with promises of annual returns of up to 40%. Actual losses totaled about $82 million.
Claims against the bankrupt company have amounted to $1.8 billion from nearly 5,300 former investors and creditors.
Last month, Irving, upset over the "cavalier attitude" that investors have displayed in filing claims, said he would review the claims and ask that criminal penalties be brought against any who fraudulently filed false claims.
That announcement brought a flood of responses both to Irving and to trustee Metzger, Irving said in court Wednesday.
"I've received some correspondence from rather hysterical creditors," he said.
Irving said he has discussed the situation with U.S. Atty. Peter K. Nunez and he is "receptive to my position."
Many investors filed multiple claims against several of the firms that were part of the J. David empire, on advice of their attorneys.
Form for Investors
Irving asked Metzger to prepare a form so that investors could simply withdraw their multiple claims.
After the hearing, Metzger said that he has yet to receive any official response to his request that dozens of charitable and civic organizations either return more than $1 million in contributions from J. David or agree to waive the upcoming statute of limitations that would prevent Metzger from taking legal action.
The groups have until March 15 to respond or face litigation to retrieve the funds.
Meanwhile, in other J. David developments, San Diego Superior Court Judge Ben W. Hamrick confirmed a May 13 trial date for six lawsuits brought by former J. David investors. Defendants include the accountancy firm of Laventhol & Horwath and the law firm of Wiles Circuit & Tremblay.
Last month, the national law firm of Rogers & Wells agreed to an out-of-court settlement of more than 300 investor lawsuits, seeking about $120 million. The settlement, which may be approved by Hamrick on March 25, will total about $40 million--the largest settlement ever made by a U.S. law firm.