Pail Bankruptcy | Securities (Finance) | Chapter 11

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------x In re : : PALI HOLDINGS, INC., : : Debtor.

: ----------------------------------------------------------------x

Chapter 11 Case No. 10-11727

AFFIDAVIT OF GERALD BURKE PURSUANT TO RULE 1007-2 OF THE LOCAL BANKRUPTCY RULES FOR THE SOUTHERN DISTRICT OF NEW YORK STATE OF NEW YORK ) ) COUNTY OF NEW YORK ) ss.:

GERALD BURKE, being duly sworn, deposes and says: 1. I am a Director of Pali Holdings, Inc., the above-captioned debtor and debtor-in-

possession ( “Pali Holdings”). In that capacity I am familiar with Pali Holdings’ business operations and financial affairs. I submit this Affidavit in accordance with Rule 1007-2 of the Local Bankruptcy Rules for the Southern District of New York (the “Local Bankruptcy Rules”) and to assist the Court in understanding the Debtor’s commencement of its case (the “Chapter 11 Case”) pursuant to Chapter 11 of Title 11, United States Code (the “Bankruptcy Code”) on the date of this Affidavit (the “Petition Date”). 2. Except as otherwise stated, I have personal knowledge of the facts set forth in this

Affidavit. If called upon to testify, I would testify competently to the facts set forth in this Affidavit. I am duly authorized to submit this Affidavit on behalf of Pali Holdings.

999940/285-1810447.5

The Nature Of Pali Holdings’ And Its Subsidiaries’ Business 3. Pali Holdings is a privately held corporation organized and existing under the

laws of the State of New York. Pali Holdings is a holding company which conducts all of its business operations through its wholly-owned subsidiaries (collectively, with Pali Holdings, the “Pali Group”) (a) Pali Holdings GmbH (“Pali GmbH”),1 itself a holding company and sole owner of the Pali Group’s operating entities Pali Capital, Inc. (“Pali Capital”) and Pali International Ltd. (“Pali International”), (b) Pali Futures, LLC (“Pali Futures”), and (c) Pali Performance, LLC (“Pali Performance”). The primary operating entity of the Pali Group is Pali Capital, a corporation organized and existing under the laws of the State of Delaware authorized to conduct business in the State of New York. The Pali Group maintains its principal place of business at 650 Fifth Avenue, New York, New York 10019 (the “New York Headquarters”), other than Pali International which is based in London, England. 4. Pali Capital is a full service broker-dealer registered with the United States

Securities Exchange Commission (the “SEC”) under the Securities and Exchange Act of 1934, as amended. Pali Capital is a member of each of the Financial Industry Regulatory Authority, Inc. (“FINRA”), the Securities Investors Protection Corporation (“SIPC”), the International Securities Exchange, the NASDAQ Stock Market, NYSE Arca and the BATS Exchange, and is registered as a broker-dealer in all 50 states of the United States and in Washington, D.C. 5. Pali Capital provided securities brokerage services primarily to hedge funds and

other large institutions, and to a lesser extent to individual investors, in both the equity and fixed income markets. It also derived revenue from investment banking, management buy-outs and

1

Pali Holdings GmbH is a company with limited liability organized under the laws of the Republic of Austria.

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leveraged buy-outs, corporate finance fees, referral fees, currency gain and loss, and interest and dividends. It assisted in market making, recapitalizations, mergers and acquisitions, mezzanine financing and bridge financing. It invested in hedge funds and other entities, and provided online trading services for its clients. Along with its principal place of business at the New York Headquarters, Pali Capital had “offices of supervisory jurisdiction” in Boston, Massachusetts and Minnetonka, Minnesota, and branch offices located in Boca Raton, Florida, Newport Beach, California, Greenbrae, California, Summit, New Jersey and South Norwalk, Connecticut. Pali Capital had clearing relationships with (i) Pershing LLC with respect to its institutional equity and fixed income business, and approximately 100 of its retail clients, and (ii) J.P. Morgan Clearing Corp. with respect to its options business and its other retail clients, who number approximately 350 in total. 6. Pali International provided equity brokerage services in the United Kingdom. It

also offered equity research, distribution, and execution services. It had offices in London, England and Edinburgh, Scotland and conducts business operations in the United Kingdom, Germany, France, Belgium, Holland, and Portugal. Pali Futures is registered with the National Futures Association as an “introducing broker” offering execution services, research, and market knowledge. It focused on institutional clients, providing execution access to all exchange traded futures and options markets, as well as emerging markets. Pali Performance is without business operations and is used by Pali Capital as a vehicle for holding certain illiquid securities received in investment banking transactions. The Circumstances Leading To The Commencement Of The Chapter 11 Case 7. Pali Capital experienced consistent pre-tax losses commencing with the second

quarter of 2008 and continuing through and including the fourth quarter of 2009, caused by,

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among other things, a substantial slowdown in sales and trading by Pali Capital’s primary institutional clients. These losses are projected to continue into at least the first quarter of 2010. As a result, it was difficult for Pali Capital to maintain adequate levels of excess regulatory net capital to support normal business operations, although Pali Capital is in compliance with its minimum regulatory net capital requirements through February 28, 2010. 8. These losses, coupled with certain disputes that arose with former officers and

directors, and the distracting and expensive litigation which resulted, caused Pali Capital’s senior management to conclude that Pali Capital was without long-term viability or the ability to withstand further negative financial events. Accordingly, in March 2009, Pali Capital retained Freeman & Co. LLC (“Freeman”) as investment banker for a transaction under which Pali Capital could either merge with a third party broker-dealer of greater financial strength, or undertake an alternative transaction such as an asset sale, in all cases so that going concern and/or asset values could be maximized and Pali Capital could avoid prejudicing their customers and employees to the greatest extent possible. Pali Capital also retained AMJ Advisors LLC (“AMJ”), Alan M. Jacobs, President, as its financial advisor. 9. The combined efforts of Pali Capital’s senior management, Freeman and AMJ

resulted in a thorough and complete marketing effort during the fourth quarter of 2009, and serious negotiations with three potential transaction candidates in the first quarter of 2010. These negotiations did not prove fruitful, resulting in the cessation of Pali Capital’s business operations and the commencement of an orderly liquidation and wind-down of Pali Capital overseen by Pali Holdings. Pali Holdings filed the instant Chapter 11 Bankruptcy Case to obtain protection from its creditors while it continues to liquidate and wind-down Pali Capital, so that both entities can preserve and maximize the value of their assets including pursuing various
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litigations of Pali Holdings and Pali Capital. Additional Information Required To Be Provided By Local Bankruptcy Rule 1007-2 10. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(2): Pali Holdings’

Chapter 11 Case was not originally commenced under any other chapter of the Bankruptcy Code. 11. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(3): To the best of my

knowledge, information and belief, no creditors’ or other committees were organized with respect to Pali Holdings prior to the commencement of its Chapter 11 Case on the Petition Date. 12. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(4): Information with

respect to the holders of the twenty largest unsecured claims against Pali Holdings is provided on Exhibit “A” attached to this Affidavit. 13. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(5): Information with

respect to the holders of the five largest secured claims against Pali Holdings is provided on Exhibit “B” attached to this Affidavit. 14. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(6) with respect to assets:

Pali Holdings’ principal assets are its equity interests in the other members of the Pali Group. Pali Holdings also has loan receivables arising from a 2007 private placement. Pali Holdings also holds pending and prospective claims and causes of action against third parties, including without limitation (a) claims against certain former officers and directors, (b) malpractice claims against certain former retained professionals, and (c) reimbursement claims against its D&O liability insurance carrier. 15. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(6) with respect to

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liabilities: Pali Holdings’ primary liabilities are as follows: (a) an unsecured loan payable to JPMorgan Chase Bank, N.A. and Custodial Trust Company in outstanding principal amount of $4,500,000.00, (b) loans payable to certain present and former shareholders of Pali Holdings in aggregate outstanding principal amount of $2,850,000.00, some of which are secured by pledges of certain securities, (c) unsecured obligations in the aggregate outstanding principal amount of $20,000,000 arising under certain Subordinated Convertible Debentures due August 18, 2028 currently held by Mandeville Holding Ventures Corporation (c/o Grupo Mundial), (d) a guaranty of Pali International’s leasehold obligations in London, England, (e) contingent, unliquidated and disputed litigation claims asserted by certain former officers and directors, and (f) loans payable to certain former shareholders of Pali Holdings in the aggregate outstanding principal amount of $2,604,000.00. 16. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(7): There are no shares

of stock, debentures or other securities of Pali Holdings that are publicly traded. 17. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(8): To the best of my

knowledge, information and belief, there is no property of Pali Holdings that is in the possession or custody of any custodian, public officer, mortgagee, assignee of rents, secured creditor or agent for any of such entities. 18. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(9): Pali Holdings

maintains its principal place of business at the New York Headquarters pursuant to a nonresidential real property leasehold between Pali Capital as tenant and 650 Fifth Avenue Company as landlord. The current term of such leasehold expires on August 15, 2012 pursuant and subject to the terms of the written agreements of the parties.

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19.

Statement pursuant to Local Bankruptcy Rule 1007-2(a)(10): Pali Holdings’ Pali

substantial assets and books and records are located at the New York Headquarters.

Holdings holds no assets outside of the territorial limits of the United States, except that its indirect wholly-owned subsidiary Pali International owns assets in the United Kingdom. 20. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(11): There are no

actions or proceedings, pending or threatened, against Pali Holdings or its property where a judgment against Pali Holdings or a seizure of its property may be imminent. 21. Statement pursuant to Local Bankruptcy Rule 1007-2(a)(12): The names, tenure,

responsibilities and experience of Pali Holdings’ senior management are as follows: (a) Gerald Burke is a Director of Pali Holdings and the former Co-Chief Executive Officer and Chief Operating Officer of Pali Capital, and has had such positions since January 2009. Prior to his resignation from Pali Capital in March 2010 his primary responsibilities were overseeing business operations and professional services. Mr. Burke was previously at Merrill Lynch for 17 years, where he most recently served as Managing Director, Chief Financial Officer of Merrill’s Operations, Technology and Corporate Services Division. Mr. Burke, a Certified Public Accountant, had responsibility for finance, accounting and product control for all aspects of that business unit, and also served as Chief Financial Officer for the firm’s Global Treasury Division. Prior to that, he was the Chief Financial Officer of Merrill’s Global Equities Division. Kevin Fisher is the President of Pali Holdings and the Chief Executive Officer of Pali Capital, and has been at Pali Capital since 1998. His primary responsibilities are in overseeing business operations, sales and U.S. equity trading. Mr. Fisher was previously an institutional sales trader at Cantor Fitzgerald where he facilitated and executed equity orders for fifty institutional clients. Statement pursuant to Local Bankruptcy Rule 1007-2(b): Pali Holdings does not

(b)

22.

have business operations that could be continued in the instant Chapter 11 Case. As such, (a) there is no weekly payroll to be estimated pursuant to Local Bankruptcy Rule 1007-2(b)(1), (b) there are no amounts paid and proposed to be paid by Pali Holdings for services during the

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thirty days following the Petition Date to officers, stockholders and directors, or to financial or business consultants as none have been retained by Pali Holdings, to be disclosed pursuant to Local Bankruptcy Rule 1007-2(b)(2), and (c) there are no cash receipts and disbursements, net cash gain or loss, or obligations and receivables expected to accrue or remain unpaid, to be disclosed pursuant to Local Bankruptcy Rule 1007-2(b)(3).

__/s/__Gerald_Burke__________________ GERALD BURKE Sworn to before me this 1st day of April, 2010

_/s/ Mark S. Indelicato_________ Notary Public, State of New York Mark S. Indelicato NOTARY PUBLIC, State of New York No. 4867556 Qualified in New York County Commission Expires September 14, 2010

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EXHIBIT A TO RULE 1007-2 AFFIDAVIT List Of Creditors Holding Twenty Largest Unsecured Claims 1. MANDEVILLE HOLDING VENTURES CORP. c/o Grupo Mundial (Attn: F. Martin) Ave. Balboa y Calle 41 E. Bella Vista Panama, Republic of Panama 2. JPMORGAN CHASE Attn: Joe Triarsi 1 Chase Manhattan Plaza New York, NY 10005-1401 3. GE CAPITAL CORPORATION 10 Riverview Drive Danbury, CT 06810 4. QUADRA GLOBAL HOLDINGS, LLC 601 Union Street Suite 4223 Seattle, WA 98101 5. MITCHELL KOPIN 3100 Dundee Road Suite 703 Northbrook, IL 60062 6. LEON BRENNER 75 Monte Carlo 15 Boulevard Louis 11 Monaco, MC 98000 7. INTERNAL REVENUE SERVICE 10th Street & Pennsylvania Ave. Washington, DC 20004 8. JARNO, LTD. c/o Bryan Cave LLP (Attn: R. Wieder) 33 Cannon Street London, UK EC4M5TE 9. MARTIN PETERS 7-10 Chandos Street 3rd Floor London, UK W1G9DQ

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10. ARI NATHAN 25 West Houston St. Apt. 5C New York, NY 10012 11. ARNOLD & PORTER LLP 399 Park Avenue New York, NY 10022 12. BAKER MCKENZIE 1114 Avenue of the Americas New York, NY 10036 13. BERT COHEN 5000-4A Estate Enighed #65 St. John, VI 00830 14. BRIAN LAPIN 300 East 77th St. Apt. 20B New York, NY 10021 15. CAPLIN & DRYSDALE 375 Park Avenue New York, NY 10152 16. DRISCOLL & REDLICH 821 Fifth Avenue Suite 3300 New York, NY 10175 17. EDWARD SUGAR 785 Fifth Ave Apt. 11C New York, NY 10022 18. ERVIN COHEN & JESSUP LLP 9401 Wilshire Blvd. 9th Floor Beverly Hills, CA 90212 19. J.H. COHN 100 Jericho Quadrangle Suite 223 Jericho, NY 11753

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20. JENNER & BLOCK 919 Third Avenue 37th Floor New York, NY 10022

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EXHIBIT B TO RULE 1007-2 AFFIDAVIT List Of Creditors Holding Five Largest Secured Claims Description and Estimated Value of Collateral Capital Stock of Pali Capital, Inc. Estimated Value: Unknown Capital Stock of Pali Capital, Inc. Estimated Value: Unknown Capital Stock of Pali Capital, Inc. Estimated Value: Unknown Capital Stock of Pali Capital, Inc. Estimated Value: Unknown Capital Stock of Pali Capital, Inc. Estimated Value: Unknown

Creditor 1. Bert Cohen 5000-4A Estate Enighed #65 St. John, USVI 00830 Leon Brenner 75 Monte Carlo 15 Boulevard Louis 11 Monaco, MC 98000 Savile Opportunity Fund 150 E. 58th Street 28th Floor New York, NY 10128 Ari Nathan 25 W. Houston Street Apt. 5C New York, NY 10012 Kevin Fisher 25 N. Moore Street Apt. 15B New York, NY 10013

Principal Amount $350,000

Claim or Lien Disputed No

2.

$350,000

No

3.

$350,000

No

4.

$300,000

No

5.

$300,000

No

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