Posted by Kathy Bazoian Phelps
July saw news in over 2 dozen Ponzi cases and court decisions in many others. Here are the highlights from the past month – who was arrested, convicted, sentenced, etc., followed by a summary of the more significant legal decisions and pleadings filed in pending cases. This isn’t everything that happened in the world of Ponzi schemes, but it is enough to give you a flavor of the level of activity in just this one month period of time.
PONZI SCHEME CASES
James W. “Bill” Bailey’s Ponzi scheme case saw 42 property owners, who had their property seized by the government in a related forfeiture action, challenge the forfeiture. The property owners contend that a new plea agreement rendered the preliminary forfeiture order invalid and that there is no nexus between their properties and the criminal conduct of Bailey, who is accused of running a $13 million Ponzi scheme in North Carolina.
Steven Bingaman, 55, pleaded guilty to 23 counts relating to his Ponzi scheme. He falsely told his victims that their money would be put in escrow or safely invested, but spent the money instead on his homes, a Las Vegas bookie, and other expenses.
Full Tilt Poker CEO Raymond Bitar, 40, was arrested over an alleged Ponzi scheme where Bitar falsely claimed to Internet poker customers that their money would be safe and would not be mixed with company funds. Bitar pleaded not guilty, was held and then later released on $2.5 million bail. The scheme allegedly involved $430 million received from players.
Robin Brass, 55, was sentenced to 8 years in prison for her scheme which stole $1.9 million from investors.
John Clement, 66, from Southern California, surrendered to serve his 2 year prison term for running a $5 million Ponzi scheme called Edgefund Capital, LLC that he ran out of his house. Edgefund was supposedly a hedge fund that took money from 22 investors.
Brendan Coughlin, 46, and Henry Harrison, 47, were charged in the $485 million Ponzi scheme of Dallas-based Provident Royalties LLC founded by Joseph Blimline that defrauded more than 7,700 oil and gas investors.
John W. Cranney of Belmont, California, was accused of running a Ponzi scheme that defrauded at least 36 elderly victims of $10.4 million, promising them high returns of 6% or more on supposedly safe investments for retirement, which were invested in unregistered securities and that he called promissory notes. He used investors’ money to, among other things, fund his company, Shaklee Corp., that recruits sales people to sell health and personal care products.
Ramon Desage, 61, was arrested on charges of wire fraud and for allegedly soliciting about $75 million from at least 4 investors to fund his lavish lifestyle and payoff gambling debts. Desage, a Las Vegas businessman with a dual Lebanon citizenship, used his company, Cadeau Express, to solicit funds from investors with promises of high returns.
Gordon A. Driver, who lives in Las Vegas and has ties in Southern California, operated a Ponzi scheme using his companies, Axcess Automation, LLC and Axcess Fund Management LLC, that stole $14.3 million from more than 100 people in the U.S. and Canada. Driver was ordered to pay $9.6 million in restitution plus a $31.8 million civil penalty.
Jedidah Duarosan of Hawaii plead guilty to operating a Ponzi scheme that took $882,000 from 6 families, promising them risk-free returns of 5% per month supposedly funded by investments in oil, gold, and real estate.
Archie Larue Evans, 41, of South Carolina, was charged of various crimes for his Ponzi scheme operations of Gold & Silver, LLC, which invested in futures markets through a company named Open E Cry. The alleged scheme, which promised investors a high rate of return, resulted in losses in excess of $2.5 million.
Mark Feathers, 48, and his Los Altos company, Small Business Capital Corp. (known as SB Capital), had their assets frozen by the SEC for operating a Ponzi-like scheme that raised $42 million from more than 400 investors by claiming to invest in mortgages that could provide a 7.5% annual return. SB Capital underwrote loans to commercial properties.
Alan G. Flesher, 64, Wayne D. Flesher, 62, and Nancy Carol Khalial, 64, of Oxnard, California, pleaded guilty to 17 counts in connection with a Ponzi scheme they were running through companies called Unlimited Cash Inc. (UCI) and Douglas Network Enterprises Inc. (DNE). The defendants told victims that UCI would sell ATMs and “Ad Toppers”—computer monitors capable of displaying video advertisements—and DNE would place the devices in commercial locations that would generate income. The defendants took in approximately $41 million over a four-year period from approximately 700 investors, but did not place most of the ATMs and Ad Toppers sold to investors. The loss amount to victims is approximately $27 million.
Celia Gallardo, 42, of San Fernando, California, was arrested and accused of operating a real estate Ponzi scheme that bilked dozens of investors out of over $1 million using her companies Gold Feather Realty and Gold Credit Investments. Gallardo told investors that she would purchase condominiums located in other states that would yield extraordinary short-term returns of as much as 100% in thirty days. Gallardo told investors that their money was safe and she issued them promissory notes evidencing their investment and promised returns.
Allen R. Jacobson who was named as part of an alleged $200 million Ponzi scheme was held in contempt for trying tried to hide assets from a court-appointed receiver. Jacobson failed to turn over $220,000 in tax refunds to the receiver appointed to take over Management Solutions Inc. Jacobson has since returned over $170,000 but had not yet paid over the remaining $50,000. Jacobson, his father and his company took in more than $200 million from about 225 investors for real estate investments, mostly in apartment buildings in various states. Jacobson and his had used their connection as members of LDS Church to solicit 225 investors through a complex web of entities under the umbrella of Management Solutions, Inc. The Jacobsons have entered into a settlement with the SEC although the terms of the settlement are not yet known.
David Lincoln Johnson, 73, of Southern California, was sentenced to 14 years in prison for being one of 3 perpetrators of a $16 million Ponzi scheme. Co-defendants Christiano Kawika Hashimoto, and Catherine Lipscomb, previously pleaded guilty to mail fraud and receiving sentences of 10 years and two years, respectively. Through their companies, Financial Solutions, and Gentech Fabrication, Inc., they defrauded investors, offering a fixed rate of interest ranging from 5% to 20%, payable on a monthly basis. Promissory notes supplied to investors also indicated that their investment was backed by a $100 million government bond.
Chetan Kapur, the sole managing principal of ThinkStrategy Capital Management LLC, a hedge-fund manager who allegedly invested with convicted Ponzi scheme operators Samuel Israel III and Arthur Nadel, was himself charged with fraud.
Thomas E. Kelly was sentenced to 4 years and 3 months plus 5 years supervised release. For 15 years, Kelly lured at least 19 investors to invest at least $1 million in his fictitious entity, Seneca Group.
Stephen J. Klos, 86, a former usher of a Mercer Island Church, pleaded guilty to 10 counts of securities fraud for running a Ponzi scheme that defrauded elderly victims. Klos and Robert Justice, paid later investors in the scheme with money from new clients, and kept money for themselves along the way. Between 10 and 23 victims were affected, and more than $3 million was stolen from church members and others. Klos had been barred from securities and financial dealings in 1992 for running another Ponzi scheme that raised more than $3.4 million. Justice pleaded guilty earlier this year to four counts of securities fraud and received a one-year sentence. Klos faces a sentencing range of 51 to 68 months when he is sentenced in December.
Jeffrey Lowrance, who once lived in Houston Texas, pleaded guilty to charges related to a $25 million Ponzi scheme that he operated by taking advantage of liberal laws in New Zealand. Lowrance set up a shell company, First Capital Savings & Loan, in New Zealand for $130, which he ran from Panama, and he defrauded over 400 victims by promising them up to 7% interest each month by investing in his foreign currency trading scheme. Lowrance kept the money for himself, and it is alleged that he used some of it to fund an unsuccessful religious newspaper called “USA Tomorrow.”
Peter Madoff, brother of Bernard Madoff, remains free on bail until his October 4th sentencing, after pleading guilty and agreeing to serve 10 years in prison. He also agreed to surrender all of his assets, and his Park Avenue co-op is on the market for $4 million. Proceeds from the sale will be turned over to the U.S. Marshals Service as part of his forfeiture agreement.
Brian Keith Miller, 46, admitted to soliciting about $1 million from clients of an investment firm from which he had been fired. Miller had worked as a financial adviser for Anderson and Strudwick, an investment firm, when he was fired over accusations that he misused clients' money. He continued to solicit money from other clients, who said he never told them he'd lost his job.
Ward Onsa, 60, of New Century Investment Management, LLC, was sentenced to 6 ½ years in prison for running a Ponzi scheme in which investors, primarily retirees, lost more than $3 million. Onsa told the New Century investors that their money would be used to purchase securities, futures contracts, and options designed to profit when the Dow Jones Industrial Average reached 10,748. Onsa’s trading theory was that the market would not go above this level. When the market surpassed the 10,748 level, the investments lost their value.
Terrance Osberger, 48, was indicted in connection with an alleged Ponzi scheme that he allegedly ran through Eagle Trades, Ltd., a “high-yield” investment program designed to entice investors with the promise of high returns. At least one investor was promised returns of 1,100 percent over the course of 190 days.
Wayne L. Palmer, 57, owner of National Note of Utah, LC, was the subject of a complaint filed by the SEC in connection with an investment program that took in more than $100 million from more than 600 investors over the past eight years. Palmer and the company are based in West Jordan, Utah. Palmer has solicited investors to purchase two to five-year promissory notes issued by National Note, which were to pay interest at a fixed annual rate of 12% with a minimum investment of $25,000.
Gurudeo ‘Buddy’ Persaud was charged by the SEC with defrauding at least 14 investors of more than $1.1 million with promises of 6 to 8 percent returns. Persuad was investing money through his company, White Elephant, on the basis of lunar movements, mainly relying on an internet service that provided directional market forecasts based on lunar cycles and gravitational pull. His investment strategy was based on the idea that gravitational forces affect mass human behavior and the stock market, and that, when the moon exerts greater gravitational pull on the earth, people feel dejected and are more inclined to sell securities.
Aubrey Lee Price, a Georgia banker who disappeared after writing a suicide letter, was indicted for bank fraud. Price is accused of embezzling over $21 million from a bank in Georgia and for stealing more than $40 million from investors in a Ponzi scheme.
Richard F. Reynolds aka Richard F. Adkins, of Bozeman, Montana, was arrested after being charged with over 20 felonies, including allegations that he operated a pyramid or Ponzi scheme by soliciting investors for a purported foreign currency trading platform through Buffalo Extension and Buffalo Exchange, among other things, which were not registered with any state securities department or the SEC. Investors, many of whom were clerics and pastors, were promised quarterly returns of 100 percent. Reynolds took in $5.4 million from over 140 investors in 21 states and six countries. He has pleaded not guilty and is being held on $10 million bail.
Eric Schmickle, 37, of Cedarburg has admitted to stealing nearly $3 million from investors in a Ponzi scheme, whose victims included his father, brothers and attorneys who worked with his brother. Schmickle, through his businesses Q Wealth Management and Aquinas, traded commodity futures contracts through the Chicago Mercantile Exchange. It is alleged that Schmickle took in $4.2 million from 10 investors. Schmickle agreed to pay $2.9 million in restitution.
Allen Stanford, 62, who was convicted earlier this year of running a multi-billion dollar Ponzi scheme, has been moved to a high security federal prison in Central Florida to begin serving his 110-year sentence. He has been in custody since his arrest in June 2009, and was found guilty of defrauding more than 20,000 investors of $7 billion through the sale of bogus certificates of deposit at his Antigua-based Stanford International Bank. It is reported that according to the orientation handbook for the prison facility, the Coleman II facility, located 50 miles northwest of Orlando, it serves brunch on the weekend, has Bocce ball courts, a music centre and a game room.
Arthur Strasnick, 64, a Florida investment adviser, was sentenced to five years in prison followed by three years of supervised release and ordered to pay $1.9 million in restitution. As president of Backstreet Associates Inc. from 2003 to 2006, he ran a Ponzi scheme that promised investors a "guaranteed" rate of return of 12 percent to 20 percent annually.
Ron Wilson, 64, of South Carolina, and former Anderson County Council member, pleaded guilty in connection with his Ponzi scheme operations of Atlantic Bullion & Coin. He never actually purchased the metal as he promised his investors. More than 900 people invested more than $90 million.
PONZI SCHEME NEWS IN PENDING LEGAL CASES
The SEC lost its battle with SIPA in the Stanford Financial Ponzi case to have Stanford investors covered as “customers.” About 7,000 clients who purchased Stanford International Bank CDs will not be treated as customers and therefore will not receive the benefit of SIPC insurance. SEC v. SIPC, 2012 U.S. Dist. LEXIS 91496 (D.C. July 3, 2012).
California Attorney General Kamala Harris and Irving Picard, the liquidator of Bernard l. Madoff Investment Securities, LLC, have agreed to mediate a dispute regarding Harris’ lawsuit against the estate of Stanley Chais, a target of litigation commenced by Picard for $1 billion allegedly withdrawn from the Ponzi scheme. Harris is seeking $270 million from the Chais estate. Picard contends that only he can collect money for Madoff's Ponzi victims and that Harris’ lawsuit interferes with his exclusive right to recover money for Madoff victims, while Harris contends her suit can proceed because she's using her state policing power to protect consumers from fraud.
Irving Picard, the Madoff trustee, filed a motion asking for approval to make another distribution of recovered funds, ranging from $1.5 billion to $2.4 billion. The appeals period ran on July 16, 2012, on a ruling to deliver $5 billion of settlement funds from Picower to the Madoff estate, which has freed up those funds for distribution to investors. However, many investors have filed objections regarding their claim amounts, seeking claims for time-based damages of interest at 9% since the time when their funds were first invested. If no interest is allowed, Picard would be able to distribute $3.019 billion, or 41.826% of each customer’s allowed claim. However, if Picard is required to reserve 3% for Time-Based Damages, he can only distribute $2.427 billion, or 33.541% of each customer’s allowed claim. If he is required to reserve 9% for Time-Based Damages, he can only distribute $1.493 billion, or 20.563% of each customer’s allowed claim.
The Second Circuit upheld an arbitration award against Goldman Sachs in the amount of $20,580,514.52 for handling of funds in the Bayou Group, LLC Ponzi case. Goldman Sachs Execution & Clearing, L.P., fka Spear, Leeds & Kellogg, L.P. v. Official Unsec. Cred. Comm. of Bayou Group, LLC, 2012 U.S. App. LEXIS 13531 (2d Cir. July 3, 2012)
An $11 million class settlement was approved on a preliminary basis regarding claims arising from the Ponzi case of LandAmerica Financial Group, Inc. The claims against Commonwealth Land Title Co. and others were that they defrauded nearly 400 investors by helping LandAmerica Financial Group Inc. orchestrate a Ponzi scheme that cost the investors $191 million.
Bank of America agreed to pay $5.9 million to settle allegations that it ignored warning signs in the Nevin Shapiro investment fraud, a Florida Ponzi scheme. The bank is seeking a court order banning any future lawsuits against it related to Shapiro.
Two investors, Joshua M. Berman and Richard Born failed in their attempts to recover $1.25 million and $10.5 million respectively, from fund manager J. Ezra Merkin for money lost in Bernard Madoff's Ponzi scheme. An arbitration panel denied Berman’s claim and allowed only $1 million plus interest to Born. In the meantime, Merkin agreed to pay $410 million to settle a lawsuit brought by New York state that accused Merkin of secretly steering client money to Madoff. Berman and Born could still recover losses from the Attorney General’s settlement or from Irving Picard, the Madoff trustee, despite the arbitration. Merkin also agreed to pay an additional $110 million to investors.
A Minnesota Court of Appeals ruled that 19 banks that were victims of Corey Noel Johnston’s $135 million Ponzi scheme will divide the remaining funds based on their net investment and leave out the interest owed. Johnston and his company, First United Funding, had sold “loan participations” to banks, having the banks participate in loans for commercial real estate deals that already had been sold to other banks. After the scheme unraveled, the victim banks disagreed on how distributions of any recovered assets should be calculated. A district court ruling said that recovered assets would be distributed based on each bank's net investment. Some of the banks that had invested with First United for a longer period of time argued they would have received more money from the receiver if the payouts were based on principal and interest. The appellate court noted that calculations by the court-appointed receiver in the case show that 10 banks would get more money back using the interest-included method, and nine would get more back with the net-investment method.
A U.S. District Court in Dallas ruled that Allen Stanford’s U.S. court-appointed receiver may keep control of the process to collect and distribute Stanford’s assets to victims, overruling efforts by the Antiguan liquidators to administer those assets. The court said that it was "manifestly clear" that the United States was the "nerve center" of Stanford's estimated $7 billion fraud, which centered on bogus certificates of deposit.
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