PNB fraud case: Now, Nirav Modi firm Firestar under US scanner

US bankruptcy court is the latest addition to the list of entities that have launched an investigation into the over $2-billion fraud involving now fugitive Nirav Modi and some employees of Punjab National Bank (PNB). United States Bankruptcy Court for the Southern District of New York has okayed a special probe of the circumstances surrounding the case and has directed the United States Trustee to appoint an examiner.

The examiner will have to determine to what extent the Modi entities have the ability to influence the actions taken by diamantaire’s US jewellery business Firestar Diamond Inc, which had filed for bankruptcy protection in America soon after the banking fraud came to light. The examiner will also try to find out if any current officer or director of the US company ‘actively and knowingly participated’ in the fraud or dishonesty in the company affairs’ management.

A copy of the court order, accessed by DNA Money, states, “Ordered that, the examiner is directed to investigate the circumstances surrounding the alleged fraud involving the individual known as Nirav Modi, certain persons or entities affiliated with Nirav Modi and certain employees of Punjab National Bank for the purpose and to the extent necessary to determine: (1) whether and to what extent, if any, the Modi entities have the ability to direct and/or influence the conduct, decisions or actions taken by the debtors in these cases; (2) whether any current officer or director of the debtors actively and knowingly participated in fraud or dishonesty in the management of the affairs of the debtors; (3) whether any claims or causes of action in favor of the debtors may arise from the alleged fraud circumstances.”

It is not known exactly when billionaire Modi, who allegedly orchestrated the banking fraud, fled India. The fraud surfaced in mid-February this year when it was reported that entities controlled and influenced by Nirav Modi obtained fake bank guarantees to get loans from overseas branches of Indian banks. In the last week of that month, Firestar Diamond Inc, part of Nirav Modi’s previously glittering international business empire, reasoned that liquidity and supply chain challenges were forcing it to seek bankruptcy protection. It’s filings listed both the company’s assets and liabilities in the $50 million to $100 million range.

The requirement of the special examiner, okayed by the United States Bankruptcy Court Southern District of New York through an April 13 order, comes after US Trustee William K Harrington’s office urged the court to do so. A bankruptcy court has the authority to appoint an examiner on request of a party in interest in order to investigate any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement or irregularity in the management of the affairs of the debtor of or by current or former management of the debtor.

Just days ago, India’s Ministry of Corporate Affairs joined bankruptcy proceedings against Firestar Diamond and two of its affiliates—Fantasy Inc and A Jaffe Inc.

The US court has ordered the examiner to cooperate fully with any governmental agencies in the United States and the Union of India.

It has been alleged that entities ultimately controlled or influenced by Nirav Modi defrauded PNB by raising credit from overseas branches of other Indian banks, using illegal guarantees issued by staff at PNB’s Brady House Mumbai branch over several years.

The examiner will also study whether any claims or causes of action in favour of Firestar Diamond Inc may arise from the alleged fraud circumstances.

“...that the examiner shall prepare and file his or her final report within 120 days of being appointed by the United States Trustee pursuant to this order, setting forth his or her conclusions regarding the Determinations, unless such time shall be extended by order of the court upon the request of any party-in-interest for cause,” said the court order.

Firestar Diamond Inc had been directed to provide to the examiner all non-privileged documents and information in its possession.

By Kumar Shankar Roy, DNA Money