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The fallout from the PinnFund USA Inc. scandal continues to grow and now may affect litigation involving Enron Corp. PinnFund, a San Diego-based mortgage buyer and lender, filed for Chapter 7 with the U.S. Bankruptcy Court for the Southern District of California in its home city on March 22, 2001, or 12 days after the Securities and Exchange Commission began investigating the company for running a $270 million Ponzi scheme. That investigation led to the company ending in receivership and the indictment and conviction of several fund principals. Now a Feb. 17 ruling by the U.S. Bankruptcy Appellate Panel for the 9th Circuit in San Francisco regarding payments made by PinnFund before its filing not only keeps alive another strand of PinnFund’s sprawling litigation, but could also lead to even wider repercussions. The unanimous decision of the bankruptcy panel reversed a decision of the bankruptcy court, which ruled that a $4 million transfer that PinnFund returned to an investor called Circle Trust Co. 89 days before it filed for Chapter 7 was, in fact, “a settlement payment” within the meaning of �741(8) of the federal bankruptcy code. The section covers settlement payments “commonly used in the securities trade.” Because the lower court deemed the transfer a “settlement payment,” the bankruptcy trustee in the case couldn’t “avoid” the payment under �546(e) of the bankruptcy code. In other words, the trustee was prohibited from nullifying the fund transfer and bringing it into the pool of money it controlled. But the 9th Circuit panel reversed that ruling. The panel held that the transfer was not, in fact, a “settlement payment” under �741(8). Writing for the panel, Judge John J. Hargrove, the chief bankruptcy judge for the 9th Circuit, said “it is apparent that Section 741(8) was designed to enhance enforcement of the securities laws and rules assuring the integrity of securities markets.” But because the fund transfer back to Circle Trust was not made in compliance with federal securities laws and procedures, the panel held that the payment was not “commonly used in the securities trade.” “The limitation on avoiding powers … does not extend to actually fraudulent transfers that were not received in good faith,” Hargrove wrote. The panel remanded the case back to the district court. “It was a very good opinion and a very good day for the bankruptcy trustee in this case,” said the counsel to the trustee, Ali M.M. Mojdehi of Baker & McKenzie in San Diego. “We get to go back and collect the $4 million.” The decision could affect the Enron litigation in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan involving the former energy giant’s Wall Street dealings. In those proceedings, certain improper derivative securities payments were made by Enron to various investment banks, such as Credit Suisse First Boston, just prior to Enron’s collapse and subsequent bankruptcy filing. The parties in the Enron case are wrestling over the same legal matter as in PinnFund. “I don’t know what the law is in the 2nd Circuit,” said Janet Gertz, a colleague of Mojdehi’s at Baker & McKenzie, about where an appeal in the Enron case would end up. “But the Circle Trust opinion seems pretty directly on point.” The PinnFund matter may not be entirely over, however. Circle Trust’s lawyer, Margaret Mann of Heller Ehrman White & McAuliffe in San Diego, on Wednesday filed a notice of appeal in the 9th Circuit. “We strongly believe the ruling was inconsistent with other decisions made by this circuit,” she said. “We’re hopeful that the panel’s decision will get overturned.” According to Gertz, the opinion helps reconcile two competing interests in federal law: the precept that the buying and selling of securities should happen fluidly and without too many administrative holdups and the notion that a trustee should control all funds paid out by the debtor just weeks before it files for bankruptcy. “When the transfer of securities is illegal, a debtor isn’t going to be able to keep the money from flowing back to the trustee, where it rightfully belongs,” she said. Copyright �2005 TDD, LLC. All rights reserved.

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