Tuesday, April 1, 2014

March 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     Below is a summary of the activity reported for March 2014. The reported stories reflect: 18 guilty pleas or convictions in pending cases; about 60 years of newly imposed sentences for Ponzi schemers; 9 newly discovered schemes involving over 1,000 victims and over $207 million; and an average age of 53.3 for the alleged Ponzi schemers in the stories reported. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

     Russell Adler, 52, a former law partner in Scott Rothstein’s firm, Rothstein Rosenfeldt Adler, was charged with conspiring to violate federal campaign contribution laws. Adler allegedly helped orchestrate contributions from the firm’s employees and attorneys to John McCain’s 2008 presidential campaign and Charlie Crist’s run for the U.S. Senate, which contributions were then reimbursed by the law firm. Adler is expected to plead guilty next month.

     Robert R. Anderson and his company Rosand Enterprises were relieved of monetary liability when the SEC dismissed its request for monetary relief because Anderson was sentenced to 68 months in prison in a related criminal action and because Rosand Enterprises is a defunct corporate entity.  The SEC had filed an action against the defendants alleging that they had operated a Ponzi scheme, defrauding at least 77 investors out of approximately $12 million. SEC v. Robert R. Anderson & Rosand Enters., 2014 U.S. Dist. LEXIS 38545.

     Hugh Arias, 44, pleaded guilty to charges relating to his role in the $400 million Ponzi scheme run by Nicholas Cosmo through Agape World. Arias received more than $9 million in commissions for pitching investments in the Ponzi scheme. The scheme defrauded more than 4,100 victims who lost a total of about $179 million. Sales agents for Agape World had promised investors returns of 12% to 14% and misrepresented that only 1% of their principal was at risk. Cosmo is currently serving a 25 year sentence in connection with the scheme and 8 others have been charged.

     George Atwater was disbarred for violating numerous rules of professional conduct in connection with his $65 million Ponzi scheme for which he was sentenced to one year in prison. Atwater had been a lawyer in Washington since 1988, and his license was suspended in 2012, after he had pleaded guilty to charges relating to the scheme. Atwater was working for Robert Miracle, who was sentenced to 13 years for running the Ponzi scheme that supposedly involved oil developments in Malaysia and Indonesia.

     Aldo Baccala, 73, pleaded guilty to charges relating to his role in a $20 million Ponzi scheme that defrauded 55 victims. The plea deal was proposed by the state court judge and was opposed by prosecutors. The court offered to limit Baccala’s sentence to no more than 20 years, but prosecutors wanted 64 to 84 years.  Baccala operated Baccala Realty Inc. and sought money from investors for business ventures that included assisted living facilities and a car wash. He promised investors annual returns greater than 12% and as much as 27.5%.

     Bryant E. “Bry” Behrmann, 67, is due for release after serving more than 4 years of his 6 year sentence for running a $45 million Ponzi scheme. Behrmann and his partner, Larry “Buck” Hunter, defrauded 9,400 people who invested $45.7 million in a get-rich-quick scheme that involved selling inventory overstock through their company, Global Online Direct. The scheme promised returns of 65% and up to 35% bonuses to new investors.

     Annette Bongiorno, 66, Joann Crupi, 53, Daniel Bonventre, 66, George Perez, 48, and Jerome O’Hara, 51, were convicted on all counts against them for their respective roles in the Bernard Madoff Ponzi scheme. They were collectively convicted of 31 counts for conspiring to create and use millions of fake account statements and false trade confirmations to deceive investors. Bongiorno had testified in her own defense at her criminal trial, explaining that she didn’t realize she was doing anything wrong when she had backdated trades that didn’t really exist for 40 years. She said, “Everything was backdated. It didn’t raise a red flag.” Backdating trades was like “brushing my teeth.” The five Madoff former employees now face forfeiture of their assets.

     John Bravata and Richard Trabulsy were ordered to pay more than $8 million for their role in the $50 million Ponzi scheme run through Bravata Financial Group and BBC Equities. A district court awarded judgment against the defendants in the lawsuit brought by the SEC. The scheme defrauded about 440 investors through the unauthorized sale of securities.

     Patrick Cole and his company Global Strategic Marketing had a judgment entered against them by the CFTC, issuing a permanent injunction and a disgorgement order of over $1.1 million. The judgment relates to a $23 million Ponzi scheme run through Complete Developments, LLC as a foreign exchange investment program. Global was partners with Complete Developments and failed to verify data provided by Complete Developments in addition to making false statements and claims about low risk of loss.

     Stephen Richard Colson, 48, pleaded guilty to charges relating to a mortgage Ponzi scheme that he ran through his companies, Prestige Title Inc. and Advanced Title and Escrow. Colson’s business depended upon funds generated in new real estate closings to pay off earlier closings.

     Jenny Coplan, 54, was hit with a default judgment against her for more than $936,000 in connection with an SEC action against her for her alleged violations of federal securities laws. The SEC alleged that Coplan defrauded about 90 individuals to invest in her business involving immigration bail bonds – bonds that a person must pay before being released from immigration detention. Coplan operated the business through Immigration General Services LLC and promised high rates of return. Coplan raised about $4 million from investors, returned about $3.1 million in Ponzi-like payments, and misappropriated about $878,000.

     Shawn Kristi Dicken, 40, was found guilty on charges relating to her role in a Ponzi scheme run through Diversified Group Advisory Fund LLC. It is alleged that Dicken funneled $2 million of investors’ money into the Ponzi scheme operated by Joel Wilson. Dicken was a lead sales person at Diversified and had promised investors that their investments were without risk, completely liquid and had a guaranteed rate of return of between 9.5% and 10.44%.

     Robert Eberle, 75, and his wife, Barbara Eberle, 66, were each sentenced to 5 years in prison and ordered to pay $13.2 million in restitution in connection with a Ponzi scheme that they ran through Secure Investment Services. They promised investors returns from the profits of life insurance policies on other people’s lives.

     Archie Evans sought an indefinite delay to his sentencing, arguing that he has been “mentally incapacitated” due to an illness that has prevented him from responding to a pre-sentence report in his criminal case. Evans pleaded guilty in January 2013 to charges relating to a Ponzi scheme run through Gold & Silver LLC that defrauded members of the Baptist church in which he was a preacher. Evans promised investors 10% to 12% interest but either spent their money or lost it on bad investments.

     Fleet Mutual Wealth Limited, MWF Financial Limited and Mutual Wealth were accused by the SEC of operating securities fraud and of using Facebook and Twitter to promote fraudulent investments. The scheme promised investors returns of between 2% and 3% per week and also encouraged investors to become “accredited advisors” who would earn a commission for bringing in new investors. It is alleged that about 150 investors opened accounts with Mutual Wealth and invested about $300,000.

     Michael Brendan Ferguson, 44, was charged not only with securities and grand theft charges relating to an alleged ATM Ponzi scheme, but was also charged with burglary. Ferguson promised up to 15% returns from transaction fees from private ATMs and allegedly defrauded at least 100 investors out of more than $10 million.

     Anthony Robert Fregenti, Jr., 42, was sentenced to 5 years in connection with charges that he operated a Ponzi scheme through Dark Hawk Enterprises LLC involving motorcycles and exotic sports cars. He pleaded guilty last year and had offered to pay $1 million to stay out of prison. His offer was rejected, but he was given credit for 121 days he had already served in jail.

     Michael B. Gale, 66, was sentenced to 2 years in prison and ordered to pay over $425,000 in restitution following his guilty plea to charges that he ran a commodity futures Ponzi scheme through his company, Capital Management Group. Gale defrauded 9 people out of about $893,000.

     John Hagener, 77, and Dawn C. Powers, 43, pleaded guilty to charges relating to a $7 million Ponzi scheme that defrauded more than 100 people. The scheme related to the sale of shares in an investment program called Naras Funds. The scheme was run with Lawrence Lee Loomis aka Lawrence Leland Loomis through Loomis Wealth Solutions in which investors were promised 12% returns.

     Mitchell Brian Huffman was ordered to pay a $2 million civil penalty relating to his operation of a $30 million Ponzi scheme that defrauded about 30 investors. Huffman pleaded guilty in 2011 and was sentenced to 5 years in prison in connection with his scheme that involved exchange-traded commodity futures contracts. Huffman had promised investors annual returns of between 100% and 150%.

     Jeffrey Kelly, 45, was sentenced to 5 years in prison and ordered to pay $1.1 million in restitution in connection with a $1.5 million Ponzi scheme. Kelly told clients that he would invest their money in various financial products such as annuities, stocks and real estate investment trusts, but spent the money on personal expenses instead.

     Robert S. Leben and Amy L. Leben were accused of running a $3 million Ponzi scheme through their company, Structured Financial Group, LLC, in violation of CFTC regulations. In a CFTC enforcement action, they were accused of promising investors quarterly returns of 3.5% and directing investors to paying their money to an attorney serving as agent for the company in a foreign exchange scheme.

     Wing K. Lim aka Kent Lam, 41, pleaded not guilty to charges accusing him of defrauding 5 victims out of $4.3 million in an alleged Ponzi scheme that he ran through his company, Wall Street Investments LP. Lim told his clients that he would invest their money in high-yield hedge funds, such as his DT China Growth Funds, LP and Daytop Funds, LP, but instead he allegedly spent the money on personal items and transferred some of the money into accounts belonging to him and his relatives. Lim is an illegal alien from China.

     Geoffrey Lunn, 58, has admitted he was guilty of running a Ponzi scheme. Lunn claimed he was the vice president of Dresdner Financial, which doesn’t really exist, and said that his operation was named “Operation 44 Magnum.” Lunn told FBI agents that it was called that because, “When people found out that they’d been ripped off they would buy a .44 Magnum and shoot themselves in the head.” Lunn had misrepresented that he worked with stocks and bonds and resold high end items such as Picasso paintings and jewelry.

     Eddie Marin, 52, was sentenced to 10 months in prison after pleading guilty to charges that he helped the wife of Scott Rothstein, Kim Rothstein, conceal jewelry from investigators. Marin also admitted committing perjury in the bankruptcy proceedings relating to Rothstein’s law firm, Rothstein Rosenfeldt Adler. Kim Rothstein is serving 18 months in prison for concealing jewelry.

     Brian William McKye, 50, was sentenced to 17 years in prison and ordered to pay more than $4.5 million in restitution for his role in a $4.5 million Ponzi scheme that defrauded 83 victims. The scheme was run through Global West Funding Ltd., Global West Financial LLC, Global West Financial LLC, Sure Lock Financial LLC, Sure Lock Loans LLC, and The Wave-Goldmade Ltd., and involved fraudulent notes in real estate in which investors supposedly had “100 percent total control” of their money. The scheme promised investors a monthly return from 6.5% to 20% for 6 to 60 months.

     Al Moriarty, 80, was assigned in a new lawyer to handle his criminal trial in connection with his alleged role in a $22 million Ponzi scheme. Moriarty’s prior lawyer, Scott Whitenack, had to bow out of the case because of charges of his own involving moral turpitude. Moriarty and Whitenack had met when both men were in county jail.

     Mt. Gox, the formerly largest Bitcoin exchange in the world, filed for bankruptcy protection in Japan. The company cited liabilities of $64 million and assets of $38 million. Mt. Gox CEO Mark Karpeles suggested that the company had lost about $500 million of Bitcoin through a major breach of system by a hacker. Over 850,000 Bitcoin were lost, which was about 7% of the total outstanding number of Bitcoin worldwide. Mt. Gox soon after filed a petition in Dallas Texas seeking protection under Chapter 15 of the United States Bankruptcy Code. Some have alleged that the Bitcoin business is a Ponzi scheme.

     Jane O’Brien, 61, who is serving a 33-month sentence for securities fraud, has been indicted in connection with an alleged 18 year Ponzi scheme. O’Brien is a former Merrill Lynch broker and is accused of convincing clients to take money from their bank and brokerage accounts and giving the money to her for private placement investments. O’Brien promised at least one client a 25% return but instead used the money for her personal expenses and to make payments to other clients.

     Samuel Ray Palasota, 53, was sentenced to almost 6 years in prison in connection with a $1 million Ponzi scheme. Palasota was convicted in the real estate fraud that Palasota called “The Maker’s Resources.”

     Elaina Patterson, 54, pleaded guilty and was sentenced to 3 to 5 years in prison plus 10 years probation in connection with a $6 million Ponzi scheme that defrauded 31 investors. Patterson formerly worked as a banker at Bank of America and would promise her friends and family investment programs generating 10% to 15% returns that were normally reserved for corporate and high-level clients. Patterson paid back about $4 million but used some of the rest of the money that she stole from victims on travel expenses and expensive cars.

     Ronald Russell, of California, was convicted of running a real estate Ponzi scheme in which he charged investors $2,900 to participate. Russell told investors he would use the money to buy homes, rent them to investors, and then sell them at the same price he had bought them for. Russell defrauded 51 victims who lost about $139,000 in the scheme.

     Feisal Shariff, 43, was sentenced to 8 years and 4 months and ordered to pay more than $3.6 million in restitution in connection with a Ponzi scheme that defrauded more than 70 investors of about $3.6 million. Sharif had pleaded guilty to charges relating to his Ponzi scheme run through First Financial, LLC as a commodities trading program.

     Joel Steinger pleaded guilty to his role in the $1.25 billion Ponzi scheme of Mutual Benefits Corp. which marketed viatical and life insurance settlements. Steinger was the last of 13 defendants to be convicted on charges in connection with the scheme that defrauded about 30,000 victims.

     Garfield M. Taylor, 55, of Maryland, pleaded guilty to charges relating to a $25 million Ponzi scheme in which Taylor misrepresented that he used a sophisticated securities trading strategy that protected against loss. Taylor misrepresented to investors how their money was being used. His companies, Garfield Taylor Incorporated and Gibraltar Asset Management Group, did not have licenses to trade securities.  The SEC also obtained a civil judgment against Taylor.

     Tri-Med Corporation, Tri-Med Associates, Inc., Jeremy Anderson, Anthony N. Nicholas, III, Eric Ager, Irwin Ager, and Teresa Simmons Bordinat were the subject of an asset freeze and had a receiver appointed over them. Tri-Med promised investors above-market interest rates in an alleged medical accounts receivable scam in which Tri-Med assured investors that their funds would be held in trust in a law firm escrow account. About $13 million was raised from at least 232 investors.

     Jason K. Vaughn, an associate of accused Ponzi schemer Rick Koerber, went on trial for his role in the $100 million real estate scheme. Vaughn is accused of defrauding certain investors who put $2.85 million in Vaughn’s company, Freestyle Holdings, which was then lost in the scheme. The trial of Koerber is scheduled to begin in June.

     Deepal Wannakuwatte, 63, of California, was indicted on charges that he allegedly ran a $100 million Ponzi scheme through his companies, International Manufacturing Group, Inc. and Rely Aid Global Healthcare Inc.

     WCM777, WCM777 Inc., WCM777 Ltd., World Capital Markets, and Ming Xu aka Phil Ming Xu were accused by the SEC of running a Ponzi scheme that defrauded victims of $65 million. The defendants are accused of selling “packages” or “membership units” in WCM777, which they claimed to be a profitable multi-level marketing program that sells packages of cloud media or cloud services. The scheme promised 100% returns in 100 days. Investors’ money was used, among other things, to purchase properties that are held in the names of World Capital Market Inc., Manna Holdings Group LLC and Kingdome Capital Market LLC, which are affiliated with Xu. Funds were also sent to PMX Jewels, Limited, a rough diamond jewel merchant in Hong Kong, to Aeon Operating Inc., and to Manna Source International, Inc.

INTERNATIONAL PONZI SCHEME NEWS

Australia

     Centaur Litigation is believed to be a Ponzi scheme and moved from Hong Kong to Sydney. Centaur claimed to have raised more than $160 million from investors and promised large returns. Centaur is purportedly funding a class action over an outbreak of equine flu in 2007. Centaur’s manager, Buttonwood Legal Capital, is seeking assurances from Centaur that it can meet its obligations.

     Ponzi schemer Earl Jones was released from prison after serving one-third of his 11 year prison sentence. Jones had pleaded guilty to running a scheme that targeted more than 150 victims.

     Philip Linacre, 61, pleaded guilty to charges that he ran a $12 million Ponzi scheme that was supposedly a high-return investment program that defrauded his clients. About $1.8 million of the money was paid back as interest to the victims. He was then struck off the Roll of Legal Practitioners.

Canada

     Pamela Vanberg, 33, and two of her companies, Calgary Motorhome Inc. and Canada Motorhome Inc., have been charged in connection with an alleged motorhome time share Ponzi scheme. The scheme defrauded at least 7 people of over $100,000. Vanberg supposedly rented RVs, offered parking stalls to RV owners for a fee of at least $5,000, and gave consumers the option of buying into a resale program for a fixed dollar amount of $10,000.

     Kevin Warren Zietsoff, 41, was sentenced to 4½ years in prison and ordered to pay $11 million in restitution in connection with his $15 million Ponzi scheme that defrauded more than 80 victims.

     In the case of Roszko v. The Queen, the Tax court of Canada allowed a taxpayer’s appeal and held that amounts paid out in a Ponzi scheme were not taxable as interest income. In Roszko, the taxpayer was an investor in the commodities trading company, TransCap Corporation, which promised investors returns of 18% to 22% annually. TransCap was found to be a fraudulent scheme. The taxpayer had invested $800,000 and had been repaid a total of $408,000. The court found that the payments were a return of principal but noted that excess returns might be considered income.

     Roger Schoer was accused at trial of running a Ponzi scheme. Schoer plead not guilty to allegations that he ran a fraudulent scheme. Schoer had advised investors that he was launching a Prince Edward Island tech company.

England

     Matthew Ames, 38, was sentenced to 40 months in prison after having been found guilty on counts relating to a £1.6 million Ponzi scheme operated through his two companies, Forestry for Life and The Investors’ Club. Ames promised investors returns of 15% from investments in teak tree plantations that supposedly generated carbon credits which could then be traded for profit. 

     Bordeaux Fine Wines Ltd. was put into liquidation amid allegations that it was a Ponzi scheme. Investors put as much as £12 million into a wine funds to buy cases of vintage wine, but it appears that the investors’ funds were not spent to purchase the wine but went to pay salespeople instead. The company was formed by Kenneth Gundlach who promised investors large returns based on “carefully selected portfolios of vintage wine.” It is believed that about 444 investors lost money in the scheme.

India

     Giel Mans, 36, was released on bail after having been arrested in December 2011. Mans is accused of running a R10m Ponzi scheme and has previously been denied bail on two occasions as he was deemed a flight risk. Mans faked his own kidnapping to get out of reimbursing investors.

     Nirmal Singh Bhangoo, 60, is being investigated in connection with an alleged Ponzi scheme that defrauded 900,000 investors relating to the sale and development of agricultural land. The scheme involved about $8 billion.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

     Relatives of convicted Ponzi schemer Gershon Barkany were sued by investors in Barkany’s $62 million Ponzi scheme for fraudulent transfer, unjust enrichment and conversion.  The plaintiffs are Barkany Asset Recovery and Cortland Realty Investments, and they sued Barkany’s in-laws, Joseph and Deborah Rosenberg, and his uncle and wife, Jonathan and Gila Zelinger. The lawsuit alleges that the plaintiffs wired in millions of dollars to Barkany’s lawyer’s trust account and that some of the money was thereafter wired to the defendants.

     Four republican politicians from Texas have filed a lawsuit against Archer Bonnema for their losses of $2.5 million in an alleged Ponzi scheme run by Bonnema in which he was to be investing in utilities trading through Pirin Electric, a company traded on the energy market. Bonnema had once claimed to have found Noah’s Ark, and he targeted Christian conservatives in his scheme.

     Skadden Arps agreed to pay $4.25 million to settle claims of defrauded victims in the Ponzi scheme of Alphonse “Buddy” Fletcher. Skadden had represented Fletcher Asset Management, and investors alleged that Skadden had failed to adequately protect their interests.

     Players in the Full Tilt Poker Ponzi scheme are scheduled to get a distribution. An estimated $76 million is to be paid out to an estimated 30,000 American online poker players whose funds have been held in their frozen Full Tilt Poker accounts for about 3 years.

     Victims of the Queen City Investment Fund Ponzi scheme run by Glen Galemmo are suing a Galemmo client, Michael Willner, in a class action alleging that he received millions of dollars from the scheme. The lawsuit is for recovery of fraudulent transfers allegedly made to a net winner in the scheme. Galemmo pleaded guilty to what is alleged to be a $100 million Ponzi scheme.

     The trustee in the Bernard Madoff case argued his appeal before the Second Circuit on the issue of whether section 546(e) of the bankruptcy code should bar some of his claims to avoid and recover fraudulent transfer claims.

     A court approved the settlement between JPMorgan and a class of victims of Bernard Madoff, which provides for payment of $218 million to the victims. The court also approved $18 million of fees to the lawyers who represented the customers.

     The Madoff trustee filed his proposed fourth distribution announcing a distribution of about $349 million to pay customer claims. This distribution will bring the total amount of funds distributed to customers to about $6 billion. Those claimants who also received a SIPC cash advance of up to $500,000 will now be made whole if their claims are $925,000 or less given the 46% distribution the trustee will reach with this latest distribution. 

     JPMorgan has been accused of assisting another Ponzi scheme. A group of investors who claim to have been defrauded by William Wise and his Millennium Bank Ponzi scheme have filed a complaint alleging that JPMorgan knew of suspicious activity at the time that it took over the Millennium account from Washington Mutual. The complaint alleges that for the approximate 5 month period after JPMorgan took over the account, about $16 million passed through the bank and ended up in overseas accounts.

     The law firm Band Gates PL will pay about $167,000 to the receiver of the Arthur Nadel Ponzi scheme to finally settle the receiver’s claims that the firm had fraudulent transferred funds for Donald Rowe, an investment newsletter publisher who had been ordered to pay $4 million to the Nadel receivership. The receiver has returned about $52 million to the approximately 350 investors who lost about $162 million in the Nadel scheme.

     An aircraft hangar business known as Tradewind that was previously owned by Arthur Nadel was sold by the receiver for $1.2 million. Some of the sales proceeds will go to the 400 defrauded victims who had lost about $162 million in the Ponzi scheme and the balance will go to the secured creditor.

     Cordell Consultants Inc. on Friday asked the Eleventh Circuit to revive its fraud suit accusing Kluger Peretz Kaplan & Berlin PL and four of its attorneys of helping Edward Okun perpetuate his $130 million Ponzi scheme. The Eleventh Circuit heard oral arguments in the case relating to Cordell’s lawsuit to recover $7 million.

     The Backstreet Boys are litigating their claim filed in the bankruptcy case of their former manager, Lou Pearlman. The band claims that Pearlman still owes them $3.4 million, but the bankruptcy trustee objected on the grounds that the claim is duplicative of a claim the band filed in the bankruptcy case of one of Pearlman’s companies, Trans Continental Records, Inc., and that there was no evidentiary support for the claim.

     Thomas Petters latest appeal of his criminal conviction and 50 year prison sentence was rejected less than 24 hours after it was filed. Petters contends that the judge who promptly denied the appeal has a conflict of interest because his son is an attorney who worked at the law firm that provided legal services to Petters before his arrest.

     Julio Robaina, who is accused of tax evasion for failing to report $300,000 received from Ponzi schemer Luis Felipe, has now been alleged to have used the money to keep a mistress. Robaina is the former mayor of Hialeah, Florida. Felipe is serving 10 years after pleading guilty to running a $45 million jewelry investment Ponzi scheme.

     TD Bank argued before the Eleventh Circuit, seeking reversal of the jury award against it for $67 million in connection with its activities in the Scott Rothstein Ponzi scheme. Coquina Investments won a jury verdict against the bank, largely based on the role of Frank Spinosa, a TD Bank officer that was allegedly bribed by Scott Rothstein in connection with the Ponzi scheme. Spinosa invoked his Fifth amendment right not to incriminate himself 193 times at the trial, although he has not been charged with any crime in the Rothstein case.

     Cole Taylor Bank was sued by 81 customers in connection with the $50 million Ponzi scheme run by Martin Sigillito. The Bank was accused of aiding and abetting the Ponzi scheme and was also sued for fraud, conspiracy, breach of contract breach of fiduciary duty and negligence. Sigillito was a lawyer who targeted individuals with IRAs. Customers were lured into the scheme by false statements from Millennium Trust, which was the custodian for Sigillito’s company, British Lending Program. The Bank performed the banking services for the IRA accounts, and the customers allege that the bank’s oversights allowed Sigillito to run the Ponzi scheme.

     The receiver in the Small Business Capital Corp. case mailed checks to victims returning about 43% of the investors’ original contribution. SB Capital, run by Mark Feathers, had promised investors 7.5% and involved about $40 million. The receiver hopes to make additional distributions to victims later in the year.

     The Supreme Court found that victim class actions filed in connection with the Stanford Financial Ponzi scheme can proceed against two law firms, an insurance company and a financial advisory firm in Chadbourne & Park v. Troice, 2014 U.S. LEXIS 1644 (Feb. 26, 2014).

     The receiver of Vesta Strategies LLC was barred from suing Continental Casualty Co. to recover losses in the 1031 exchange real estate Ponzi scheme. Dillon v. Continental Casualty Co., 2014 U.S. Dist. LEXIS 41709 (N.D. Cal. Mar. 26, 2014).

     IMG Funding LLC sued Deepal Wannakuwatte and his company the International Manufacturing Group for fraud. The lawsuit claims that the defendants ran a fraudulent investment scheme and claimed that they had secured a $100 million contract to supply latex gloves to the Department of Veterans Affairs. IMG says that, based on the misrepresentations of the defendants, it raised $24 million from 20 investors and paid most of that money to the defendants. Another group of investors, led by Sammy Cemo, the head of Cemo Commercial Inc., also filed a lawsuit for the $7.1 million of funds that they invested.

     The Second Circuit affirmed the dismissal of the lawsuit of Iowa Public Employees Retirement System against Deloitte & Touche LLP relating to Deloitte’s conduct in the WG Trading $38 million Ponzi scheme. The lawsuit had alleged that Deloitte’s auditors had intentionally ignored warning signs that the WG Trading’s principals were stealing investor funds. Iowa Public Employees’ Retirement System v. Deloitte & Touche, 2014 U.S. App. LEXIS 4918 (2d Cir. Mar. 17, 2014).

     The ZeekRewards receiver filed a complaint against six insiders of the company, including Zeek CEO Paul Burks, seeking the return of alleged fraudulent transfers. The six insiders made close to $25 million from the scheme. The receiver also filed a lawsuit against 10 net winners who allegedly made more than $900,000 for a combined total of $18.74 million. That suit also includes net winners who made more than $1,000 in the scheme, which includes about 9,000 affiliates as members of a defendant class. Separately, the court approved judgments that will force Dawn Wright-Olivares and her step-son Daniel Olivares to forfeit a combined $11.4 in earnings. The receiver has reached settlements with about 180 net winners totaling about $2.5 million on winnings of about $4.5 million, or about 56.7% of the profits that were paid out.

Monday, March 3, 2014

Supreme Court Ruling in Stanford Financial Case on SLUSA Leaves Madoff Victims Wondering “Why Not Us?”

Posted by Kathy Bazoian Phelps

   In a legal environment that seems to be growing increasingly difficult for Ponzi scheme victims to recover their losses, the United States Supreme Court gave a group of defrauded investors some welcome news. The Court issued its decision in Chadbourne & Park LLP v. Troice, 2014 U.S. LEXIS 1644 (Feb. 26, 2014) (attached here) in a 7-2 vote, allowing lawsuits by a class of victims of R. Allen Stanford and Stanford Financial against two law firms, an insurance brokerage firm and a financial services firm to proceed. 

   The case involved an appeal over the issue of whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars the investors' lawsuits which allege that some of the defendants misrepresented that certificates of deposits sold by Stanford were safe investments and that the law firms helped Stanford evade regulatory oversight. 

   The SEC and the Obama administration had filed amicus briefs in support of the defendants' positions, supporting the application of SLUSA to bar the victims' claims. The Ponzi Scheme Blog in October 2013 questioned why the SEC would be supportive of a position that would deny recovery to Ponzi scheme victims. The Supreme Court’s recent ruling pretty handily shut down the government’s position in the Stanford case. 

The Holding

   SLUSA is a federal law that bars class-action lawsuits related to securities fraud that are brought under state law.  In Troice, the Court summarized the issues and its conclusion as follows:
The question before us is whether the Litigation Act encompasses a class action in which the plaintiffs allege (1) that they "purchase[d]" uncovered securities (certificates of deposit that are not traded on any national exchange), but (2) that the defendants falsely told the victims that the uncovered securities were backed by covered securities. We note that the plaintiffs do not allege that the defendants' misrepresentations led anyone to buy or to sell (or to maintain positions in) covered securities. Under these circumstances, we conclude the Act does not apply.
The Issues

Boiled down to its simplest form, the main questions considered by the Court were: 

   -Are the Stanford CDs "covered securities"?

   -What do the words "in connection with" mean under SLUSA? 

   If the CDs were not "covered securities" or if they were but the alleged purchase or sale of a covered security was not "in connection with" an untrue statement or omission of material fact, then the cases could proceed under SLUSA. 

Is a CD a security and, if so, is it a "covered security"?

   The Court found that the Stanford CDs did not fall within SLUSA’s definition of a "covered security": 
The law defines "covered security" narrowly. It is a security that "satisfies the standards for a covered security specified in paragraph (1) or (2) of section 18(b) of the Securities Act of 1933." §78bb(f)(5)(E). And the relevant paragraphs of §18(b) of the 1933 Act define a "covered security" as "[a security] listed, or authorized for listing, on a national securities exchange." . . The Litigation Act also specifies that a "covered security" must be listed or authorized for listing on a national exchange "at the time during which it is alleged that the misrepresentation, omission, or manipulative or deceptive conduct occurred." §78bb(f)(5)(E).
   The Court did not challenge or dispute the notion that the CDs are "securities" – noting that the SEC brought an action against Stanford on that basis – but concluded that the CDs were not "covered securities."

   In other words, if there is no "covered security," there is no protection for the defendants under SLUSA. And even if the transaction related to a covered security, the Court noted that the connection only matters if the decision to buy or sell a security is by someone other than the fraudster:
A fraudulent misrepresentation or omission is not made "in connection with" such a "purchase or sale of a covered security" unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a "covered security."
   The Court noted, "If the only party who decides to buy or sell a covered security as a result of a lie is the liar, that is not a 'connection' that matters."

Majority’s Strong Criticism of the Dissent

   The majority opinion disagreed with the two dissenting justices (Justices Kennedy and Alito) on the subject of whether the ruling would have the impact on the securities market threatened by the dissent. Among other things, the dissent argued, "The state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers and advisers, who seek to rely on the stability that results from a national securities market regulated by federal law."
The majority responded to the dissent’s concerns about the protection of the securities market:
  • "We find it surprising that the dissent worries that our decision will 'narro[w] and constric[t] essential protection for our national securities market,' post, at 3, and put 'frauds like the one here . . . not within the reach of federal regulation,' post, at 11. That would be news to Allen Stanford, who was sentenced to 110 years in federal prison after a successful federal prosecution, and to Stanford International Bank, which was ordered to pay billions in federal fines, after the same. Frauds like the one here--including this fraud itself--will continue to be within the reach of federal regulation because the authority of the SEC and Department of Justice extends to all 'securities,' not just to those traded on national exchanges."
  • "[D]espite the Government's and the dissent's hand wringing, neither has been able to point to an example of any prior SEC enforcement action brought during the past 80 years that our holding today would have prevented the SEC from bringing."
  • "[The dissent's warning that our decision will 'inhibit litigants from using federal law to police frauds' and will 'undermine the primacy of federal law in policing abuses in the securities markets' rings hollow."
Lingering Questions About Application of SLUSA in Fraud Cases

   The Troice opinion gives the Stanford victims the opportunity to pursue recourse against alleged wrongdoers – a good thing in the face of minimal recoveries coming out of the Stanford receivership to date. Of course, the defendants in the litigation have stated their intention to file motions to dismiss in the remanded cases on other grounds, so it remains to be seen what actually recovery will ultimately be obtained for the victims through these class actions.

   So while the result appears to be the right one in this case, it does cause one to question the value of SLUSA in other fraud cases. Does this opinion put form over substance, giving relief to the Stanford investors simply because CDs were involved? What about the Madoff victims? They, like the Stanford victims, bought into a fraud and didn’t actually acquire securities – whether "covered" or uncovered – yet Madoff class actions have been barred by SLUSA. See Trezziova v. Kohn (In re Herald, Primeo, and Thema), 730 F.3d 112 (2d Cir. 2013) (“[W]e agree with the district court that the fact that Madoff Securities may not have actually executed their pretended securities trades does not take this case outside the ambit of SLUSA”); see also, Select, L.P. v. Tremont Group Holdings, Inc., 2013 U.S. Dist. LEXIS 125550 (S.D.N.Y. Sept. 3, 2013). 

   Worse yet for Madoff victims, the findings in Troice could have adverse consequences for them in a context other than SLUSA. The Madoff trustee is currently appealing an adverse ruling under Bankruptcy Code section 546(e) which bars certain of his claims to recover fraudulent transfers on transactions relating to securities. If these federal statutes apply whether or not securities were actually purchased, Troice may add insult to injury to the Madoff victims.

   Is it fair to give relief to one set of victims but not the other? Both cases involved massive Ponzi schemes in which victims invested in phony securities and lost their money. What is the difference? Should SLUSA apply where victims thought they were buying covered securities but in fact were buying nothing at all?