I authorize AurumXchange to transfer funds only because they might be uncomfortable to return the funds to me due to their suspicion. I never admit the funds are stolen. I'm just trying to reach an agreement with them that even IF the funds are stolen, they are still doing the right thing. And there's nothing wrong for them to send the funds to Bitcoinica either, if I'm proven to be innocent, because of my explicit authorization. This case, they don't have to hold the funds forever and the liquidity of both parties can be restored.
You don't see anything wrong with your friend's legitimate LR funds being released to bitcoinica? Your friend would lose his $40k, not restore his liquidity.
No. I would simply retain $40K from those recovered from Chen Jianhai, and convert that to Singapore Dollar and send back to my friend.