Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters
Kathy is a senior business trial attorney with more than 25 years experience prosecuting and defending claims for clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases on under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring an expert on fraud or Ponzi schemes.
Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors
Tuesday, December 31, 2013
The year ended with lots of news in Ponzi scheme cases. Below is a summary of the activity reported for December 2013. 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.
Suzette Anguay, 50, of Hawaii, was sentenced to 46 months in prison and ordered to pay $510,000 in restitution for a Ponzi scheme that defrauded 15 investors of $800,000. Anguay had promised returns of up to 30% through her company, Money $en$e. But instead of investing the money in real estate as promised, she spent it on credit card debt, Las Vegas vacations and payments to some victims to keep the Ponzi scheme going.
Bryan Arias, 40, and Shamika Luciano, 31, former associates of Nicholas Cosmo, were arrested on charges relating to the Cosmo $400 million Ponzi scheme run through Agape World and Agape Merchant Advance that defrauded more than 4,000 people. Arias and Luciano were added to an indictment pending against three other Cosmo associates, Jason Keryc, Anthony Ciccone and Diane Kaylor. It is alleged that both Arias and Luciano "identified potential investors, solicited investments in specific Agape bridge loans and merchant loans, maintained contact with investors, retained client bridge loan contracts, received money from investors and managed account records for each" of their investors.
Annette Bongiorno, 64, Joann Crupi, 52, Daniel Bonventre, 66, George Perez, 47, and Jerome O’Hara, 50, continued with their trial for their respective roles in the Bernard Madoff Ponzi scheme. Frank DiPascali, 57, Madoff’s former right-hand man who has pleaded guilty, testified against the five defendants at their criminal trial. Among many other things, DiPascali testified that he knew as early as the 1970s that fake trades were being used in the Madoff business and that “It was virtually impossible not to know what was happening.” He said that historical prices for trades were taken out of newspapers and given to Bongiorno on index cards about once a month. The defense called DiPascali a pathological liar.
Kevin Brown, 40, was sentenced to 3 years in prison and ordered to pay $1.6 million in restitution in connection with a $1.6 million Ponzi scheme in Missouri run through Invision Investments. Brown had promised investors that their money would be used to buy and rehab real estate, but instead he used the money for personal expenses and to make payments to earlier investors.
William Dean Chapman, 44, was sentenced to 12 years in prison after having pleaded guilty to charges in connection with a Ponzi scheme run through Alexander Capital Markets. Customers would give their stock holdings to Chapman as collateral for loans, but Chapman would then sell the stocks. Congressman Alan Grayson (D-Fla.) lost $18 million in the scheme. Grayson had previously fallen victim to another Ponzi scheme, Derivium Capital, and won a $34 million judgment against the company in 2009.
Thomas Doctor, 53, pleaded no contest to charges relating to a $9 million Ponzi scheme run through API Worldwide Inc. that defrauded about 150 investors. Doctor and Doug Kacos, 58, the owner of the New Beginnings restaurant chain, were charged with money laundering in the scheme. Doctor and Kacos allegedly set up crews of employees and others to wire victims’ money overseas from various party stores. Brian Palmer, 64, former Michigan state representative, also pleaded no contest to a charge of neglect of duty by a public official for his role in the Ponzi scheme. Palmer was sentenced to one year of probation and order to complete community service and pay fines. Palmer lost $400,000 in investments with API Worldwide, but worked with API in an effort to recoup his losses. He met with potential investors, took calls from them, and allowed API owners to use his name and elected position to make the investment seem more legitimate. Jeffrey Ripley, 61, and Danny Lee VanLiere, 62, had previously pleaded guilty and were sentenced to prison.
James Duncan was sentenced to 19 years and 8 months in prison and ordered to pay $3.4 million in restitution. Duncan masterminded a $142 million real estate and investment fraud that defrauded hundred of victims. Duncan cooperated as a key witness in the trial against his former business partner, Hendrix Montecastro and his mother, Helen Pedrino. Montecastro and Pedrino filed a motion for a new trial following their conviction. The motion was filed just in advance of the sentencing hearing, which was then continued to January at which time the court will rule on the motion for new trial and proceed to sentencing if the motion is denied. Montecastro was convicted of more than 300 felonies in connection with his role in the investment scam. Pedrino recruited 5 of the victims and was convicted of 54 criminal charges.Other defendants, who have pleaded guilty and been sentenced in the case, are: Maurice McLeod, Charlie Sung Choi, Cindi Grace Kelly and Thuan Nhan Du.
Russell Erxleben, 56, pleaded guilty to charges in connection with a $2 million Ponzi scheme. Erxleben had previously served 8 of a 10 year sentence related to an earlier $30 million foreign currency trading scheme. After his release, Erxleben again engaged in the investment business and misrepresented to investors that their money would be put into post-WWI German government gold bearer bonds through his company, Erxleben Entities. He also misrepresented that investor funds would go toward a work of art purportedly by Paul Gaugin through his company, Gauguin Partners LLC. Instead he used the money for personal expenses and to pay earlier investors. Exrleben was a first-round draft pick by the New Orleans Saints in 1979.
Alphonse Fletcher was accused by the trustee administering one of his hedge funds, Fletcher Asset Management, of operating like a Ponzi scheme. The trustee alleges that Fletcher took in more than $30 million in fraudulent transactions. Fletcher claimed his fund was worth $352 million but it had assets worth less than $8 million. The trustee alleged wrongful conduct such as "the extensive use of wildly inflated valuations, the existence of fictitious assets under management numbers, the improper payment of excessive fees" and "misuse of investor money."
Trent Francke pleaded guilty to charges in connection with a $46.5 million Ponzi scheme, and he agreed to testify against the alleged leader of the scheme, David Wilson McQueen. The plea agreement says that McQueen, with assistance from Francke and others, operated several investment funds: Accelerated Investment Group, or AIG, International Opportunity Consultants, IOC, Diversified Liquid Asset Holdings, DLAH, and Diversified Global Finance. The scheme promised investors that their money would be invested in forex trading, real property, and ethanol-related projects. Francke and McQueen told investors they were “Christians” who preferred to deal with “God-fearing, churchgoing people.”
Richard Freer was arraigned on new charges relating to about $1 million taken from an investor under false pretenses. Freer is already accused of running an alleged $10 million Ponzi scheme and was indicted in September after a 6 month long grand jury trial.
Glen Galemmo asked for a 90 day delay in civil proceedings pending against him because it was anticipated that he would plead guilty to charges in connection with an alleged $300 million Ponzi scheme that he ran through Queen City Investment Fund. It is reported that Galemmo reached a plea deal but the agreement was sealed. Galemmo had claimed that he could pay 432% returns based on his strategy of identifying “severely undervalued” stocks. The scheme allegedly defrauded 165 investors.
Fotios Geivelis Jr. aka Frank Geivelis aka Frank Anastasio, 34, was charged in connection with an alleged $3.9 million Ponzi scheme run through his Florida company, Worldwide Funding III, Ltd. Geivelis alleged defrauded more than 36 investors to whom he had promised to obtain a $10 million non-recourse overseas loan for “humanitarian” or “job-creating” projects.
Sharon Lee Graham, 59, was sentenced to 4 years in prison for her involvement in the Ponzi scheme run by Ward Real Estate Brokerage & Foreclosure Services. Graham was the bookkeeper in the business that solicited more than $5 million from investors, supposedly for the purpose of purchasing, refurbishing and reselling distressed homes at a profit. The former officers of the company, Leesa Marie Ward and Alison Ann Jenson, pleaded guilty and each received 3 years sentences.
Benton T. Hall, 22, of Arizona, pleaded guilty to charges in connection with the Ponzi scheme run by Ron Wilson. Wilson was previously sentenced to more than 19 years in prison in connection with a $57.4 million Ponzi scheme run through Atlantic Bullion & Coin Inc. that defrauded 798 investors. Hall was a co-conspirator with Wallace Lindsey Howell, who pleaded guilty to hiding assets that had been acquired with the Ponzi scheme money.
Scott Anderson Hall, 49, pleaded guilty to charges relating to a $5 million Ponzi scheme that defrauded more than 50 investors. Hall set up a shell corporation, Abaco Securities International, and convinced a group of investors to invest their retirement savings, promising returns exceeding 12%.
Robert A. Helms and Janniece S. Kaelin of Texas were accused by the SEC of masterminding an $18 million oil and gas Ponzi scheme. The SEC has alleged that Helms and Kaelin “misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests.” The assets of their Texas based company, Vendetta Royalty Partners, were frozen. Deven Sellers and Roland Barrera were also named in the SEC complaint. Helms and Kaelin also used Vesta Royalty Partners LP and Iron Rock Royalty Partners LP as part of their scheme in which they promised investors returns ranging from 300% to 500% to be paid in 5 to 7 years. At least 80 investors were defrauded, and only about 10% of their funds were actually invested, generating very small returns.
Christopher Jackson, Michael Bolden, Victor Alvarado, Erica Arceo and Nicholo Arceo had their trial confirmation hearing scheduled for their upcoming trial in connection with charges that they ran a $26 million real estate Ponzi scheme through Diversified Management Consultants Inc. that defrauded 180 investors. Many of the investors pulled equity out of their homes to participate.
Phil Kenner, 43, and Tommy Constantine, 47, were arrested on charges relating to an alleged $15 million Ponzi scheme that defrauded at least 13 NHL players. The scheme promised investors that their funds would be invested in a prepaid credit card company, a real estate development in Hawaii, and an escrow account for legal expenses related to Mexican land deals. Instead, the money was spent on personal expenses and secret investments.
Anthony M. Livoti Jr., 64, was convicted following his trial on charges relating to his role in the Mutual Benefits Corp. Ponzi scheme that involved viatical life settlements. Livoti was outside counsel for Mutual Benefits. Mutual Benefits had sold $1.25 billion worth of life insurance policies held by people dying of AIDS, cancer and other terminal illnesses to about 30,000 investors. The investors bought the policies at a discount and were promised the full value of the policies upon the death of the insured. Livoti used new investor funds to pay premiums on older life insurance policies. The former top executive of Mutual Benefits, Joel Steinger, has still not stood trial due to severe back pain but is scheduled to go to trial next April.
Shawon McClung, 27, was sentenced to 51 months in prison and ordered to pay $1.7 million in connection with a Ponzi scheme that promised investors guaranteed returns of 15% to 100% every 14 to 30 days. The scheme was run through Flint-McClung Capital LLC, claiming to use a software program to automate trades of foreign currency, even though he never paid the programmer and the software was never developed.
Frank Mete, 55, pleaded guilty to charges in connection with a $1 million Ponzi scheme that he ran through his brokerage company in which he promised investors returns ranging from 15% to 18%. Mete told investors he would use their funds for hard money loans, but instead set up fake bank accounts and used the money for personal expenses.
Marian Morgan was resentenced to 33 years and 9 months in prison and ordered to pay almost $20 million in restitution in connection with charges relating to a $28 million Ponzi scheme that she ran with her husband, John Morgan, through their company, Morgan European Holdings. John had pleaded guilty and was sentenced to 10 years and 1 month in prison. They promised 200% to 300% returns in three months from a “high yield/prime bank note” investment program where investors’ money would supposedly be held safe in an escrow account in Denmark. Marian was originally sentenced to 35 years in prison, but Marian appealed to the 11th Circuit which concluded that her sentence should not have included an enhancement for abusing a position of trust.
Bich Quyen Nguyen, 59, was convicted on a fraud charge in connection with a $9.5 million Ponzi scheme that defrauded 250 victims. Nguyen had represented that she was the chief executive officer of a Swedish credit union that offered guaranteed returns as high as 46.2% on one year certificates of deposit involving at least $1 million. Nguyen also misrepresented that investors’ money would be safe because it would be held in “blocked’ accounts. Co-conspirator Johnny Edward Johnson, 70, was arrested earlier in the year and pleaded guilty to a charge in connection with the scheme.
Jose L. Nino de Guzman Jr., 30, was sentenced to 10 years in prison and ordered to pay more than $18 million in restitution in connection with a $31 million Ponzi scheme in which about 200 investors ultimately lost more than $18 million. Nino de Guzman told investors that their funds would be invested in Peruvian real estate projects through his company, NDG Investments Group LLC. He promised investors returns as high as 40% but instead spent their money on a Bentley, a yacht, and jewelry, among other personal expenses. The court stated that Nino de Guzman made “obscene expenditures of funds on hedonistic things for pride, hubris, and ego.”
Dawn Wright-Olivares, 45, and her step-son, Daniel Olivares, 31, were charged on both criminal and civil fraud charges for their roles in the ZeekRewards Ponzi scheme. Wright-Olivares worked as the chief operating officer and Olivares worked as the master computer programmer. The two are charged with knowing that the daily reward of 1.5% promised to investors was arbitrary and not related to the company’s net profits, yet they did not disclose this to investors. After learning about criminal investigations of ZeekRewards, they withdrew large amounts of money and caused the forgiveness of loans made to them by the company. Criminal charges have not been filed against the scheme’s mastermind, Paul Burks. Both entered into plea agreements and it is reported that a settlement has been reached for them to pay over $11 million. Dawn Wright-Olivares will pay $8.2 million and Daniel Olivares will pay $3.3 million.
Darin Palmer, 42, saw his mansion, built with $6.9 million of defrauded investors’ money, sold for $762,000. Palmer was convicted in 2011 in connection with a Ponzi scheme run in Idaho between 2002 and 2008 that defrauded 68 investors of more than $20 million. Palmer was sentenced to 8 years in prison.
Thomas Petters, 56, was denied his request to have his 50 year prison sentence reduced. Petters was convicted in 2009 in connection with his $3.7 billion Ponzi scheme. He filed a motion claiming that he had not been advised by his lawyers of a government plea bargain that would have resulted in a 30 year prison term, which he argued constituted ineffective assistance of counsel. The court concluded, “Petters is simply lying in a desperate attempt to save his own skin. The Court is not so easily fooled.” In weighing the testimony of Petters against that of his lawyers, the court found the lawyers’ testimony to be credible and that, “He seemed to be a man putting on a show, willing to say or do anything - including shedding crocodile tears - to obtain a reduction of the lengthy sentence imposed by this Court.” The court concluded: “Like so many before it, this great American tragedy, in which money was lost, lives were ruined, and more than a dozen people have been sent to prison, has come to an end. Petters' last-ditch attempt to escape just punishment for his crimes does not hold water; he received constitutionally effective counsel and his sentence was not unlawful. He is entitled to neither relief nor sympathy from this Court.”
Marjorie Parise, 51, was sentenced to 2 years in prison for concealing assets from the bankruptcy trustee of Global Trading Investments LLC, which had operated a Ponzi scheme. Parise had a judgment entered against her for the return of profits she had received from the Ponzi scheme in the amount of about $430,000, but Parise took numerous steps to fraudulently conceal funds and made false statements in the bankruptcy proceeding. Parise filed her own bankruptcy petition and fraudulent failed to report millions of dollars in real estate holdings and other personal assets.
Shannon Polen was sentenced to 6 years in federal prison and ordered to pay more than $10.7 million in restitution in connection with a Ponzi scheme that defrauded about 78 victims out of approximately $15 million. Polen is already serving a 12 year state sentence for securities fraud and theft and will serve the new federal sentence after he has completed the state sentence. Polen ran three investment schemes to defraud victims. In one, he told investors he was buying and reselling repossessed tractors. In another, he claimed to be buying and selling construction materials from and to government contractors working on the Tennessee Greenway Project. In the third, he sought funds to supposedly be used to buy materials to aid in the cleanup of the 2008 coal ash spill at the Tennessee Valley Authority’s Kingston Fossil Plant.
Richard Reynolds, 52, was convicted following his criminal trial in which it was alleged that he defrauded 141 investors of $5 million in a Ponzi scheme that involved trading foreign currency and gold. Reynolds used his connections with ministers, pastors and other religious leaders to recruit investors.
Robert Rocco, 48, was charged and pleaded not guilty to charges in connection with an alleged $5 million Ponzi scheme in which he promised investors returns from the financing of wholesale cigarette purchases for a Shinnecock Indian tobacco shop. Rocco promised returns of up to 18% through his company, Limestone Capital Services. Rocco also formed Advent Equity Partners which also claimed to provide credit card services for retail end users to purchase cigarettes.
Jeffrey Shalhoub, 38, pleaded guilty to charges related to a $300,000 Ponzi scheme that he ran as a commodities pool operator for The 9 Group Ltd. Shalhoub promised weekly returns of up to 10% and delivered fictitious statements to his clients falsely indicating that their accounts were increasing by as much as 5.2% per week when they were actually losing money.
Charles G. Shomo, 64, is being evaluated for competency to stand trial in connection with charges related to a $590,000 Ponzi scheme. Shomo allegedly defrauded investors and used their money for personal expenses and an unrelated scooter business.
Keith Simmons won his appeal to overturn his conviction and sentence of 50 years in connection with his operation of a $35 million Ponzi scheme that he ran through Black Diamond Capital Solutions. Simmons sought to have his money laundering conviction thrown out. The court, with a dissenting opinion, vacated the conviction on the money laundering charges but affirmed the fraud charges. The Fourth Circuit found that the money laundering convictions were based on the Ponzi scheme payments and that, to convict him of both fraud and money laundering would be to punish him twice for the same offense. Simmons defrauded more than 400 investors by promising high returns in a foreign currency exchange and that they could withdraw their money in 90 days. None of the money was actually invested. Instead, Simmons spent the money on himself, purchasing $4.6 million in real estate, investing $1.2 million in an extreme fighting venture, spending $2.2 million on other business ventures, and purchasing gifts and vacations for his employees and girlfriends. U.S. v. Simmons, 2013 U.S. App. LEXIS 24617 (4th Cir. Dec. 11, 2013).
Robert Stinson Jr. won a reduced sentence resulting from his guilty plea in 2011 in connection with at $17.6 million Ponzi scheme that defrauded 262 investors. Stinson was originally sentenced to 33 years and four months, which was 10% more than the maximum guideline sentence. The new sentence is 27 years. Stinson ran the scheme through Good S.T.A.B.L. Mortgage Fund LLC, which promised investors 16% returns by making short-terms mortgages for real estate investors who brought, renovated and sold houses.
Thomas Franklin Tarbutton, 54, was arrested in Panama and returned to California in connection with charges that he ran a $3 million Ponzi scheme through Villa Capital Inc. Tarbutton had fled to Brazil in 2011 after charges had been filed. He allegedly ran a real estate scheme in which investors were told their money was used to provide loans to people buying properties. He provided investors with fraudulent and forged real estate documents showing that they were lienholders on property deeds.
Kaveh Vahedi, 52, was sentenced to 18 years in prison and ordered to pay $9.7 million in restitution in connection with a more than $11 million Ponzi scheme. The sentence was more than double what prosecutors had recommended, and the court noted that Vahedi’s Ponzi scheme was “one of the most heartbreaking, vicious fraud schemes” that he has ever seen.
Daniel H. Williford, 55, was indicted on charges relating to a $44 million Ponzi scheme that defrauded 200 investors. Williford promised investors in North Carolina that he would invest their money in wireless internet equipment, internet towers and other companies. Instead, he only invested about $7.7 million and used the rest of the money for personal expenses and to make payments to earlier investors. Williford said he was investing in companies he controlled called Velocenet, Broadband Leasing, Connect Inc. and others.
INTERNATIONAL PONZI SCHEME NEWS
Milow Brost, 60, was arrested after breaking his release conditions. Brost was originally arrested in 2009 and was charged with running the largest Ponzi-type investment scam ever in Canada. Brost was prohibited from soliciting any investments without court approval. Brost is accused of defrauding 4,000 investors out of about $400 million. Gary Sorenson was also charged in connection with the scheme.
Checks were mailed to 125 victims of the $50 million Earl Jones Ponzi scheme. The distribution was made from the proceeds of a class action settlement with Royal Bank of Canada. After payment of lawyers’ fees, the payout to victims was $12.2 million. Jones was sentenced in 2010 to 11 years in prison in connection with the Ponzi scheme that defrauded over 150 investors which he ran through Earl Jones Consultant and Administration Corp. Jones had solicited investors through financial courses at local community centers, often promising that he would serve as the executor of their estate upon their death.
Arlan Galbraith, 66, was found guilty in connection with a $1 million Ponzi scheme he ran through Pigeon King International. A bail hearing took place, and his sentencing date has not yet been scheduled. Under his scheme, investors were to buy pairs of breeding birds for up to $500, and Galbraith was to buy the offspring back at fixed prices over the life of 5 or 10 year contracts.
Canada’s financial crime agency, the Financial Transactions and Reports Analysis Centre of Canada, reported an increase in the number of transactions related to money laundering or criminal activity over the past year. There were 919 cases referred to law enforcement authorities in 2012, compared to 796 of the previous year and 556 in 2008-09.
Wang Xiaoqing, 30, was sentenced to a term of life imprisonment for running a $5 million Ponzi scheme that promised investors more than 10% returns on investments to be used to build a luxury hotel.
The assets of Sayed Mohammed Masood were attached as part of the investigation of an alleged Ponzi scheme. The authorities attached his flat as “proceed of crime” and on the basis that it is involved in money laundering. The scheme is believed to involve over Rs 500 crore.
Proceedings were commenced to confiscate properties of Flourish India, which has been accused of defrauding investors of Rs 100 crore. Flourish India promised investors attractive returns and collected money through more than 130 branch offices.
Vijay Dixit, 60, was arrested in connection with an alleged Ponzi scheme involving more than Rs 200 crore. Dixit has been accused of promising investors exceptionally high and guaranteed returns in real estate projects.
Authorities ordered a probe into an alleged Ponzi scheme run through HBN Company. The scheme allegedly defrauded 1,000 people of about Rs 5 crore.
Authorities arrested SpeakAsia promoter Ram Sumiran Pal, 37, in connection with an alleged Ponzi scheme run that defrauded over 24 lakh investors of over Rs 2,276 crore. Satish Pal, 36, was also arrested in connection with the scheme.
The House of Representatives and Senate approved legislation to amend the Securities Act to prohibit pyramid and Ponzi schemes. The bill defines a Ponzi scheme as “an investment scheme that provides investors with returns derived substantially from investments made by other investors in the scheme, rather than from genuine profits." The act promises fines or imprisonment of up to 10 years for persons convicted of operating illegal investment schemes.
David Ross appealed his prison sentence of 10 years and 10 months on the grounds that it was manifestly excessive or inappropriate. Additionally, the liquidators of Ross Asset Management are in talks with 3 former investors to recover about $3.8 million of payments that they received. The liquidators are considering claw back actions of about $100 to $115 million.
Eric Bartoli, 59, was arrested in connection with a $65 million Ponzi scheme that was conducted in the United States and Latin America more than 10 years ago which defrauded 800 investors. Bartoli allegedly offered large returns in oil, telecommunications and craft companies. Bartoli operated his scheme through his mutual fund, Cyprus Funds Inc. Bartoli has been on the run for 10 years, and the U.S. authorities had requested Bartoli’s extradition two years ago. He was arrested while jogging in a park, wearing a track suit and a bulletproof vest.
Mayor Samuel Co and his wife Priscilla Ann were arrested on charges relating to the Aman Futures Ponzi scheme. The scheme is believed to have defrauded 15,000 investors. Co and his wife have been on the run for 6 months.
NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES
The trustee of the Marc Dreier Ponzi scheme estate sought court approval to make a distribution to creditors. The proposed plan will pay priority and secured creditors in full, and holders of about $375.4 million in unsecured claims will recover between 4.9% and 12.6%.
HSBC Institutional Trust Services (Ireland) Ltd. was sued for $540 million in connection with the Bernard Madoff Ponzi scheme. An investment fund, Defender Ltd., has sued the bank alleging that it failed to conduct due diligence, monitoring or supervision of the actions of the Madoff firm. The fund alleges that HSBC failed to advise that it was not in a position to confirm the existence of its assets and that it failed to communicate its concerns about the Madoff business.
JP Morgan reached a deferred prosecution agreement with the government in connection with allegations that it engaged in criminal conduct in the Bernard Madoff scheme. It was reported that the problems arose because JP Morgan did not file suspicious activity reports at a time when it clearly suspected fraud. JP Morgan tentatively agreed to pay $2 billion to settle criminal charges relating to its handling of the Madoff account.
The Madoff trustee was barred from pursuing claims against the spouses of Madoff’s sons. The court concluded that the trustee’s claims were barred by the doctrine of in pari delicto because the women did not qualify as insiders. The trustee had claimed that they were unjustly enriched by $54.5 million. SIPC v. Bernard L. Madoff Investment Securities, LLC, 2013 U.S. Dist. LEXIS 172952 (S.D.N.Y. Dec.5, 2013).
The Madoff trustee and his firm requested $31.5 million in fees and $810,000 in expenses for about 82,000 hours of time that they have spent administering the Madoff case between May 1 and July 31, 2014.
A group of investors who received fictitious profits from the Arthur Nadel Ponzi scheme will pay more than $1.3 million to settle clawback claims. The investors sued by the receiver for $2.5 million have settled the claims with the receiver. Investors lost about $162 million in the scheme, and the receiver has collected and returned approximately $52 million to about 350 investors,
The receiver in the David Salinas $50 million Ponzi scheme obtained approval to distribute about $10 million to victims of the scheme. It is anticipated that the victims will receive a 35% to 40% distribution. Salinas was accused of masterminding the scheme in which he was to sell corporate bonds but then used the money to make improper loans to affiliated parties. Brian Bjork, an associate, pleaded guilty to charges in connection with the scheme. Salinas and Bjork formed Select Asset Management and J. David Financial to run the scheme that defrauded over 150 investors.
Victims in a class action against the SEC asked the Fifth Circuit to overturn a lower court’s decision that barred their lawsuit accusing the SEC of facilitating the Allen Stanford scheme. The lower court ruled that the discretionary function of the Federal Tort Claims Act shielded the SEC from the lawsuit.
The court in the ZeekRewards case approved about $1.6 million in fees and expenses for the receiver and his professionals. This brings the total to about $5.2 million for fees and expenses in the case, which is less than 2% of the $330 million recovered to date. The receiver also filed a motion for approval of procedures to sue Zeek insiders and net winners who profited by $1,000 or more from the scheme. The receiver intends to sue all of the net winners in one action rather than filing separate actions. The inventory and personal property of ZeekRewards went up for auction to generate additional recoveries for victims. It is estimated that about 77,000 profited from the scheme but that about 840,000 lost at least part of their investment. Finally, the receiver sent out about 80,000 notices of claim determinations to claimants, giving them an opportunity to agree or object to the determinations. The receiver’s website is at www.zeekrewardsreceivership.com.
To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com/.
Sunday, December 22, 2013
Roadblocks for Investors
- Investors don’t have standing to bring claims.
- While investors may be entitled to their net losses, they are not entitled to expected profits.
- Investors cannot bring class actions pursuant to Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb ("SLUSA").
- Heightened pleading standards for class actions pursuant to Private Securities Litigation Reform Act, 15 U.S.C. § 77a, et seq. ("the PSLRA").
- Investors get sued to give back monies they were paid during the scheme on fraudulent transfer theories.
- They don’t have standing to bring claims.
- Since they stand in the shoes of the wrongdoers, they are barred by the in pari delicto doctrine from bringing third party claims.
- They are barred from pursuing certain fraudulent transfer claims under the settlement payment defense in 11 U.S.C. § 546(e).
- Standing by Assignment
- Assignments Created a SLUSA Barrier
Monday, December 16, 2013
Are the prison sentences being imposed in these cases too long, too short, or just right?
Cast your vote before December 31, 2013.
Sunday, December 15, 2013
In U.S. v. Simmons, 2013 U.S. App. LEXIS 24617 (4th Cir. Dec. 11, 2013), the Fourth Circuit overturned convictions on money laundering charges in connection with money that the defendant moved as part of his Ponzi scheme.
Keith Simmons operated a $35 million Ponzi scheme from 2007 to 2009 that defrauded 400 investors. Simmons was convicted on one count of securities fraud, one count of wire fraud, and two counts of money laundering. The court sentenced him to a prison sentence of 50 years. The fraud counts arose from Simmons’ role in the Ponzi scheme and not any particular instances of fraud. The money laundering counts arose from two discrete payments to investors made in 2008. Those two payments involved the diversion of “investor money back to other investors in Ponzi-fashion . . . to induce further investments by investors and their friends and family members.”
The court considered whether there was a merger of the money laundering and fraud charges under the Supreme Court case United States v. Santos, 553 U.S. 507 (2008). The key question considered by the Simmons court was whether the two payments giving rise to the money laundering convictions involved “proceeds” of unlawful activity or were “essential expenses” of maintaining the Ponzi scheme. The court further considered whether payments of purported returns to early investors are understood to constitute "essential expenses" of Ponzi schemes rather than transactions dispensing a Ponzi scheme's profits.
Simmons argued that it was improper to convict him separately of money laundering for payments that were essential to accomplishing his fraud, while the government argued that Simmons’ fraud did not depend on payments to investors and that the payments were not essential to the fraud.
The Fourth Circuit split on the issue. The majority concluded that the money laundering convictions cannot stand and that “a defendant cannot be convicted of money laundering merely "’for paying the essential expenses of operating the underlying crime.’" The court found, “The evidence admitted at Simmons's trial irrefutably established that the ongoing success of his Ponzi scheme depended on payments to earlier investors, including those payments charged in the money-laundering counts.” The court also noted:
In addition to the evidence proving that this particular Ponzi scheme relied on payments to early investors, such payments are understood to constitute essential features of Ponzi schemes. In fact, we have defined a Ponzi scheme as one ‘in which early investors are paid off with money received from later investors in order to prevent discovery and to encourage additional and larger investments.’ United States v. Loayza, 107 F.3d 257, 259 n.1 (4th Cir. 1997).The court cited other decisions that had reached the same conclusion, including United States v. Van Alystyne, 584 F.3d 803, 815 (9th Cir. 2009), in which the Ninth Circuit reversed the defendant's money-laundering convictions on the ground that the payments of purported returns to early investors were "inherent" to the defendant's underlying scheme to defraud.
The dissenting opinion in the Simmons case, however, noted that there is a distinction between an expense of the fraud, on the one hand, and payments to conceal the fraud and promote future frauds, on the other hand. The dissent argued that, in using a portion of the money Simmons obtained through wire and securities fraud, Simmons was then able to use the proceeds of the fraud to return money to investors. He was then able to engage in additional fraud from which he obtained additional proceeds “because the payments to Bazluki and Lux deflected potential suspicion that otherwise might arise with respect to his initial fraudulent transactions.”
In disagreeing with the majority, the dissent stated:
The majority could only make its analysis work if Simmons were convicted of some single crime prohibiting a Ponzi scheme because under a Ponzi scheme, the proceeds from earlier fraudulent transactions are used to engage in future transactions. But Simmons was not charged with a crime prohibiting a Ponzi scheme; he was charged with committing distinct crimes of wire fraud, securities fraud, and money laundering, and his payment of monies to investors who had already been defrauded was not an expense of the fraud; it was a transaction of money laundering.This decision in a criminal case highlights the differing approaches to Ponzi schemes in civil proceedings as well. Some believe that Ponzi schemes are a single tangled unit; others believe that activities that take place during a Ponzi scheme should be considered on a transaction-by-transaction basis. The debate arises in many contexts in Ponzi scheme cases, including:
- The Ponzi scheme presumption: Are all transfers made during the course of a Ponzi scheme necessarily made with actual fraudulent intent, or must a particular transfer have been made in furtherance of the Ponzi scheme?
- Amendment of complaints and the relation back doctrine: Are all claims to recover transfers made during the course of a Ponzi scheme related, or can they be viewed as distinct claims that may be time-barred if not timely brought?
- The ordinary course defense to preferences: Are all payments made during the course of a Ponzi scheme necessarily part of the fraud and therefore not ordinary, or can some payments be considered ordinary course?
- Constructive trust defenses to fraudulent transfer claims: Can a fraudulent transferee defendant assert that the money paid to it was earmarked or set aside in a trust for its benefit such that no property of the estate was actually transferred?
- Trust assertions over property of the estate: Can investors in a Ponzi scheme successfully argue that their funds are not property of the Debtor and obtain a priority in the return of the funds to them ahead of general unsecured creditors or other investors?
Sunday, December 8, 2013
Two recent decisions in Ponzi schemes cases highlight the importance of the discovery process and the discovery tactics that can be employed to either elicit or withhold information.
Testimony of SEC Employees Not Required in Bernard Madoff Scheme
In a case arising out of the Bernard Madoff scheme, a group of defendants in the Citco and Fairfield Greenwich Ltd. cases sought to take the depositions of two SEC employees. Anwar v. Fairfield Greenwich Ltd., 2013 U.S. Dist. LEXIS 168989 (S.D.N.Y. Nov. 26, 2013). In that case, the Defendants contended that the testimony of those witnesses would show that "the Defendants could not reasonably have been expected to discover the Madoff fraud at an earlier time since the SEC itself was unable to do so despite its employees' frequent visits and interactions with BLMIS and its officers and employees, including Bernard L. Madoff." The plaintiffs in the case, along with the SEC, argued that the testimony sought lacked "meaningful relevance."
Under Rule 45 of the Federal Rules of Civil Procedure, the court evaluated whether there would be an undue burden in compelling the testimony of the two witnesses and balanced the parties' interests by considering whether the information was necessary or available from another source. The defendants argued that the testimony was "critical" because it would "help establish that the Defendants could not 'have reasonably foreseen that the Fairfield defendants would fail to perform the expected due diligence and monitoring of the Fund's investments held by BLMIS . . .'" In comparison to the SEC’s investigation of Madoff, the defendants noted, "Madoff's ability to conceal the fraud from even the most determined investigators and examiners is highly relevant to whether the defendants could or should have uncovered Madoff's scheme."
The court disagreed with the defendants, finding that the testimony would be "of marginal relevance," and stated:
The mere fact that a government agency charged with assessing BLMIS's regulatory compliance failed to discover Madoff's wrongdoing in a timely manner hardly suggests that the Defendants could not have done so had they taken additional steps in the course of auditing FGG. Indeed, in order to capitalize on the SEC's conceded failure to uncover the fraud at an earlier time, the Defendants would have to establish that they and the SEC were similarly situated, and that the SEC competently discharged its regulatory and investigative functions.Testimony of Receiver in Arthur Nadel Scheme Was Required
In litigation pending in the Arthur Nadel Ponzi scheme case, the court-appointed receiver refused to answer questions at his deposition in connection with a fraudulent transfer lawsuit that he had commenced against Wells Fargo Bank. The receiver asserted the attorney-client privilege, contending that all of his knowledge about the case came from his communications with his lawyer, and that "Wells Fargo asked questions that seek legal theories, strategies, and conclusions conveyed to Receiver by his attorneys." Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 166375 (M.D. Fla. Nov. 22, 2013). The receiver claimed that the disputed questions, while appearing to request factual information, require interpretation of legal terms of art. Because his answers would necessarily reveal the legal conclusions of his attorneys, Receiver maintains that he properly refused to answer them.
Wells Fargo argued that the "Receiver is using the attorney-client privilege to 'shield facts from discovery simply because those facts were conveyed to him by his attorneys.'" Wells Fargo also argued that the "Receiver's refusal to answer questions conflicts with the 'sword and shield' doctrine. That doctrine states that 'a party who raises a claim that will necessarily require proof by way of a privileged communication cannot insist that the communication is privileged.'"
The court identified the following standard for what questions must be answered at a deposition:
During a deposition, a person may instruct a deponent not to answer a question only: (1) when necessary to preserve a privilege, (2) to enforce a limitation ordered by the court, or (3) to protect a witness from an examination being conducted in bad faith or in such a manner as to unreasonably annoy, embarrass, or oppress the deponent. Fed. R. Civ. P. 30(c)(2).While the court concluded that some of the deposition questions encroach on privileged communications, it concluded that some were factual in nature and should be answered. The court directed the receiver to respond to the following 7 questions and limited the deposition to one hour:
(1) Does the receiver know whether its position is that under [the] origination [column], these are assets of the identified company or assets of the debtor?
(2) If Art Nadel has transferred money from Victory Fund to Scoop Capital, as the transferee, do you believe that Art Nadel controls Scoop Capital?
(3) Is it your understanding that the destination account is the account into which the wired amounts were sent?
(4) Do you believe that those accounts listed under destination account [on Exhibit B] were the recipient of the wired funds?
(5) How did Wachovia execute a transfer if it wasn't a transferor bank?
(6) Factually what's the period of time in which the receiver believes it can recover for the fraudulent transfer claims? What period of time?
(7) Does the receiver believe that all transfers dating back to 2002 are subject to recovery in this action?Are Discovery Games Worth it?
These two cases leave the question pending about whether it is worth it to object to propounded discovery in the absence of compelling circumstances.
In the Madoff case, one has to wonder why the relevance objections over the SEC employee testimony made it all the way to court and then became the subject of a written opinion. Perhaps it is because trial lawyers love relevance objections as it provides another opportunity to state and remind the court of the party's theory of the case. Did the defendants accomplish that objective in this case, or did the defendants unnecessarily associate themselves with the admitted negligence of the SEC in failing to detect Madoff’s fraud?
In the Nadel case, it's questionable whether the receiver came out ahead in his efforts to block discovery. Plaintiffs must be careful in trying to hide behind their attorneys, particularly where the plaintiff is a fiduciary like the receiver in that case. It is a risky strategy. The court might conclude that the receiver is trying to hide something or, worse yet, it could create an appealable issue if the receiver succeeds in the efforts to block discovery. Even though the receiver probably has no first-hand knowledge of anything, is it really worth the fight?
To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.
Saturday, November 30, 2013
The volume of news stories reported in November 2013 in Ponzi scheme cases remained high. Below is a summary of the activity 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.
Douglas L. Bates, 54, received permission to continue to practice law under supervision while criminal charges remain pending against him for his alleged role in the Scott Rothstein Ponzi scheme case. Bates is accused of assisting Rothstein with about $60 million of his Ponzi scheme by lying to investors and providing fraudulent legal opinions and other documents that Bates allegedly knew were untrue on his firm’s letterhead. Bates pleaded not guilty and the lower court barred Bates from practicing law as a condition of his release pending trial, saying there was evidence that he had “committed horrific breaches of his duties and responsibilities.” The district court approved an agreement between the prosecution and defense that allows Bates to practice law under the strict supervision of an
Craig Berkman, currently serving time in prison for two different Ponzi schemes, is watching his investors fighting over the few dollars that are available for distribution. Berkman was found guilty five years ago, and investors in the first Ponzi scheme were awarded $28 million. Creditors forced Berkman into bankruptcy and ultimately reached a settlement where Berkman paid $4.75 million to the trustee in his bankruptcy case, which was distributed to creditors. Investors in a new scheme in which Berkman was purportedly selling an investment in Facebook and in which they invested $13 million, claim that the $4.75 million paid to earlier investors was their money. The trustee says that the new investors’ claims are bogus because Berkman paid the earlier investors before he was raising money from the Facebook investors.
Annette Bongiorno, 64, Joann Crupi, 52, Daniel Bonventre, 66, George Perez, 47, and Jerome O’Hara, 50, continued with their trial for their respective roles in the Bernard Madoff Ponzi scheme. A former trader at Madoff’s brokerage, David Kugel, told the jury that he created fake trading data for customer accounts but made sure the fake trades looked realistic. Kugel pleaded guilty to fraud 2 years ago and is still awaiting sentencing. Other employees and witnesses have testified in the case which is expected to last several months.
Ronald Lee Brito, 62, of Michigan, was sentenced to 12 years and ordered to pay more than $12 million in restitution in connection with his Ponzi scheme that he ran through GetMoni.com. At least 250 investors lost more than $16 million. Others who pleaded guilty to the scheme are Bonnie Brito, John Missitti, and Thomas Moore, who were sentenced to 18 months, 6 years and 6 years, respectively.
Jack Brown’s son, Jason Brown, apologized to creditors for his father’s $12 million Ponzi scheme. Jason Brown has denied having any role in the Ponzi scheme but has admitted to working as a partner with his father in a number of businesses and signing checks for Brown’s Tax Service.
Jim Donnan and Gregory L. Crabtree had their criminal trial delayed until May 2014 due to what they cite as a large amount of evidence and need for more time to prepare and negotiate an alternative disposition. The two defendants are charged with running a Ponzi scheme through GLG Limited that promised investors returns of 50% to 200% on short-term investments. The indictment alleges Donnan took $8.5 million and Crabtree took $1.7 million, while investors lost $23 million. Both pleaded not guilty.
John S. Dudley, 59, was sentenced to 5 years in prison and ordered to pay back $6.8 million in connection with a $12 million Ponzi scheme that defrauded approximately 100 investors. Dudley promised investors returns of 5% to 10% from forex trading, mining speculation and a human jetpack rocket suit. Dudley held investment club meetings known as “bounce nights” or “Tashi group meetings” and told investors that their investments were protected from loss by a “senior life settlement policy.” Dudley initially pleaded not guilty but later agreed to a guilty plea on one count of wire fraud. It is expected that Dudley will be deported back to Great Britain after serving his sentence.
Ronald Jerry Fast, 70, pleaded guilty to charges in connection with a $16 million Ponzi scheme that he ran though Marathon Leasing Corp. The scheme promised investors 12% returns, but the financial prospectus bore no relationship to the actual performance of the company. Promised returns were paid from money invested by new investors or existing investors who bought even more shares in the company. Fast’s daughter, Danielle Fast-Carlson, has also been charged in connection with the scheme, and her trial has been continued until December.
Richard Freer, 67, waived his preliminary injunction hearing and will face trial in connection with his alleged $10 million Ponzi scheme. The scheme allegedly defrauded 90 victims, most of them elderly, and involved reverse mortgages and retirement and college education funds.
Charles Lawrence Kennedy, Jr., 71, pleaded guilty to a $5 million Ponzi scheme that defrauded about 100 investors. Kenney, along with co-defendants Stanley Wayne Anderson and Edwin Alexander Smith ran the scheme through Kennedy’s company, Keys to Life Corporation, which promised investors that for every $1,000 invested, the minimum return would be $1 million to be paid within 90 days. The scheme promised returns through trading of European medium-terms notes issued by European financial institutions. Keys to Life partnered with two other companies as well, Trinity International Enterprises, Inc. and CFO-5, LLC. Kennedy solicited money from fellow pastors and members of their congregations, but used most of the money for personal expenses.
Jeffrey J. Kinseth, 58, was sentenced to more than 4 years in prison and ordered to pay $1.1 million in restitution after he pleaded guilty to charges in connection with a $1 million Ponzi scheme. Kinseth solicited funds from 11 investors, promising substantial returns, but issued phony account statements showing fictitious returns instead.
Christina Kitterman may get a personal appearance by Scott Rothstein at her criminal trial. Kitterman is charged with aiding Rothstein’s Ponzi scheme. The court ordered Rothstein to appear at her upcoming criminal trial. Kitterman is an attorney who formerly worked at Rothstein’s firm, and she has been charged with posing as a Florida Bar investigator to help Rothstein fool investors.
Anthony J. Lupas, 78, a former attorney, was declared not competent to stand trial on charges in connection with an alleged $6 million Ponzi scheme that promised investors annual tax-free returns of at least 5%. The government decided not to appeal the decision. Last year, a state fund supported by attorney registration fees in Pennsylvania announced that the fund would pay $3.25 million to Lupas’ victims.
Brian Williams McKye, 49, of Oklahoma, was found guilty after less than 90 minutes of deliberation by the jury. McKye ran a $4.5 million Ponzi scheme through Global West Funding, Global West Financial, Sure Lock Financial, Sure Lock Loans, and The Wave-Goldmade Ltd., by selling investment notes and promising investors monthly returns of 6.5% and up to 20% for 6 to 60 months. McKye defrauded 83 investors by promising them that they had “100 percent total control” over their money and that their investments were secured by risk-free real estate notes.
Phil Ming, owner of WCM777, acknowledged that WCM777 was selling unregistered securities in the U.S. The Massachusetts securities division has banned WCM777 from business operations in the state of Massachusetts, and the company has been ordered to refund over $300,000 to participating investors. WCM777 announced that it is closing its US operations and relocating back to Hong Kong. However, it was reported that WCM777 is still accepting US funds for investment via Global Payout, a California-based payment processor. Columbian President Juan Manuel Santos ordered a police investigation of WCM777 last month to investigate allegations that it is a Ponzi scheme. The program guarantees returns of over 100% after 100 days.
Al Moriarty, 80, deposited almost $10 million of investor funds into his personal account, the testimony revealed at his trial. Moriarty, a Cal Poly football Hall of Famer, is facing charges in connection with a $12 million Ponzi scheme. Investors were told that their funds would be lent to educators for home purchases and that they would be repaid in monthly payments at 10% interest over 5 years. Moriarty also promised that their investments were backed by his personal gold and real investments and his personal life insurance policy should anything happen to him.
Christopher A.T. Pedras and his companies, Maxum Gold Bnk Holdings Limited and Maxum Gold Bnk Holdings, LLC, were the subject of an emergency asset freeze sought by the SEC in connection with an alleged $5.6 million Ponzi scheme that defrauded at least 50 investors. Pedras promised investors 4% to 8% monthly returns for investing in a trading platform in which Maxum Gold supposedly served as an intermediary between global banks. Sylvester M. Gray II and Alicia Bryan allegedly assisted in soliciting investors for the program. More recently, the three began soliciting investments in a New Zealand company called FMP Medical Services Limited that was to be publicly traded and operate kidney dialysis clinics in New Zealand. More than $2.4 million was used to pay fictitious returns to investors, $1.2 million was paid in sales commissions, and more than $2 million was used by Pedras for personal expenses.
Bruce Prevost, David Harrold and Michelle Palm were sentenced to 7½ years, 5 years, and 3 years of probation, respectively, for their role in misleading investors in the Tom Petters' $3.65 billion Ponzi scheme through feeder funds Palm Beach Capital Management and Arrowhead Capital Management. Palm testified against James Fry, Arrowhead’s founder, who was sentenced to17½ years, and Palm’s did not profit personally from the scheme. None of the three defendants were accused of knowing about the Petters’ Ponzi scheme, but they misled investors about how their firms received payments. Prevost and Harold lost about $720 million for clients investing in the Petters’ scheme, and they collected more than $58 million in fees and commissions.
Carmelo Provenzano, 31, was sentenced to 33 months in prison and ordered to pay $4.5 million in restitution to 13 victims in connection with a $4 million Ponzi scheme run with co-conspirators George Sepero, 40, and Daniel Dragan, 43. The scheme claimed that hedge funds were run using a secret computer program could deliver high returns as much of 170% on investments in foreign currency markets.
Bebe and Marco Ramirez, the principals of USA Now Regional Center, were the subject of a civil forfeiture action in which the couple’s Mercedes and Dodge Ram were forfeited. USA Now ran a scheme that was supposed to take foreign investors’ money and invest in projects that create jobs in exchange for U.S. green cards. None of USA Now’s investors received even conditional approval for a U.S. immigration visa in exchange for their $500,000 investment. No criminal charges have yet been filed against Bebe or Marco Ramirez.
Richard Reynolds aka Richard Adkins, 52, had his request to dismiss the case against him denied. Reynolds is accused of stealing more than $5.8 million for investors. He requested that his case be dismissed because his right to a speedy trial had been violated. His trial is scheduled to begin in December.
Sorin Rivera fka Valerie D’Andrea, 39, was charged with running a $347,000 Ponzi scheme that defrauded 7 victims. Rivera changed her name after she filed bankruptcy in 2008. Between 2004 and 2008, Rivera ran an investment scheme that promised investors up to 55% returns. Rivera never worked for a securities or commodity firm. She lists “Equity Options Trader” as her occupation on her Facebook page.
Kim Rothstein, 39, wife of Ponzi schemer Scott Rothstein, filed for divorce and was sentenced to 18 months in prison for hiding jewelry worth about $1 million from authorities following Scott Rothstein’s arrest. Kim claimed that Scott Rothstein had urged Kim to stash the jewelry as insurance and was doing this even while he was supposedly cooperating with authorities in the hope of getting a downward departure from the federal sentencing guidelines. Kim’s sentencing judge cut 6 months of the 2 year sentence recommended by the U.S. Attorney’s office. Kim also agreed to pay $515,000 and turnover other jewelry and valuable items.
Ryan Edward Rude, 40, was sentenced to 26 years in prison and ordered to pay $2.9 million in restitution in connection with his $4.8 million Ponzi scheme that defrauded investors in California, Colorado and Arizona. Rude defrauded investors in his real estate scheme by promising them secured interests in property development projects, but instead used their money to pay other investors or for his personal use.
Matthew J. Ryan saw his office building in which he ran his $4.8 million Ponzi scheme sold by the local government. Ryan is serving a 10 year 1 month prison sentence for his scheme that defrauded 53 investors through his real estate business, Prime Rate & Return.
Feisal Sharif was ordered to pay more than $2.2 million to defrauded victims and was also fined $900,000 in connection with a $5.4 million Ponzi scheme run through First Financial LLC. Sharif defrauded at least 50 victims in a commodity futures trading pool.
Ronald W. Shephard, 74, pleaded guilty and was sentenced to 2 years in prison and ordered to pay about $1,825,000 in restitution in connection a $3 million Ponzi scheme run through Safety Solutions USA LLC and The Real Estate in Lee’s Summit. The scheme defrauded about 39 investors and promised them 15% to 100% annual returns from securities trading even though Shephard was not registered to sell securities in Missouri and had been issued a cease and desist order barring him from doing so. Safety Solutions had developed a trailer hitch called Tow-Safe, but Shephard did not tell anyone that his patent request had been rejected or that the state had ordered him to stop selling unregistered securities.
Wesley A. Snyder, 77, lost his third appeal seeking a new trial in connection with his conviction in connection with his $29 million Ponzi scheme run through his firm, Personal Financial Management, that defrauded about 800 investors. Snyder had pleaded guilty and was sentenced to 12 years in prison, but has repeatedly asked that his guilty plea and sentence be overturned and that he be allowed to go to trial. He claims that his guilty plea requires him to have defrauded customers, but that he never intended to defraud anyone.
Louis J. Spina, 56, was charged in connection with an alleged $18 million scheme that defrauded 28 investors through his company LJS Trading LLC. Spina promised investors monthly returns of 9% to 14% by using an algorithmic trading software to invest their funds. Spina used misleading screen shots of his trading account that showed inflated balances and gains. Spina lost about $8 million in trading and spent the balance making payments to investors and for personal expenses, including car payments, an apartment rental and a donation to a university.
Yin Nan (Michael) Wang and Wendy Ko and their company Velocity Investment Group were the subject of an asset freeze and fraud charges brought by the SEC. They are accused of raising more than $150 million from over 2,000 investors. Velocity managed unregistered investment funds known as Bio Profit Series which supposedly were making real estate loans in California. The investors received promissory notes and were promised returns from 8% to 300%. Wang is also accused of running another company, Rockwell Realty Management, in connection with the scheme.
INTERNATIONAL PONZI SCHEME NEWS
Arlan Galbraith, 66, pleaded not guilty to charges in connection with the $20 million Ponzi scheme run through Pigeon King International. Galbraith initially said he was breeding pigeons for sport but later claimed he was planning processing plants to produce pigeon meat for the consumer market. Investors were to buy pairs of breeding birds for up to $500, and Galbraith was to buy the offspring back at fixed prices over the life of 5 or 10 year contracts. At his trial, Galbraith testified that he resorted to eating his own pigeons after the company collapsed in 2008. The Ontario government has spent about $100,000 to dispose of about 175,000 pigeons that remained in the barns at the time of the bankruptcy of the company.
Rashida Samji aka Rashida Makalai, 60, of Vancouver, was charged in connection with an alleged $17 million Ponzi scheme that defrauded 14 investors. Samji had represented to investors that their funds would be placed in a “secure” investment in a winery that would yield 6% to 30% annually. It is alleged that this scheme was part of a larger scheme that defrauded about 218 investors of $83 million. Samji allegedly took the investors’ funds and put them into accounts in the names of her companies, Notary Corp. and Samji & Assoc. Holdings Inc.
A Chinese trading website for the virtual currency, Bitcoin, was shut down based on allegations that it was operating a Ponzi scheme. The Hong Kong-registered site, Global Bond Limited, had around 500 users, and the combined losses may total $3.28 million.
Wang Xiaoqing, 30, was sentenced to life in prison for orchestrating a $4.9 million (30 million yuan) Ponzi scheme. Xiaoqing offered investors double-digit returns and told investors their funds would be used to build a hotel. Instead Xiaoqing used the money to fund an extravagant lifestyle.
Malik Noureed Awan, 28, the CEO of MMA Forex, was sentenced to 2 years on prison in connection with charges related to an online foreign exchange Ponzi scheme.
The Frankfurt Regional Court bundled cases together that are linked to the $466 million Ponzi scheme run by Helmut Kiener and his K1 Group hedge fund. Investors filed lawsuits against Barclays Plc alleging that Barclays failed to properly investigate the X1 Global Index certificates it had issued. Kiener was convicted in 2011 and sentenced to 10 years and 8 months in prison after confessing to the scheme.
Gold bars and silver coins were seized from the locker of Prashant Dash held at HDFC Bank. Prashant Dash has been accused of running a Ponzi scheme through Seashore Group, which ran 9 companies. Authorities sought permission to attach properties of Seashore Group.
G Ratna Kumari and R Pandu were arrested and accused of defrauding about 100 investors, promising them higher returns and commissions for enrolling other investors in the scheme.
Shivraj Sharma was arrested in connection with a scheme run through Eve-Miracles, a multi-level marketing company that allegedly defrauded than 1.2 lakh unsuspecting investors of over Rs 141 crore.
MP Kunal Ghosh was arrested in connection with the Saradha Ponzi scheme. The Saradha group allegedly defrauded investors of over Rs. 2,300. Ghosh claims he is being made a scapegoat and that he was not involved in the scheme.
Convicted Ponzi schemer David Ross, 63, was sentenced to 10 years and 10 months in prison in connection with the $385 million Ponzi scheme that he ran through Ross Asset Management. Ross defrauded over 700 investors promising them guaranteed returns of up to nearly 40%. Ross had pleaded guilty to certain charges in connection with the scheme in August 2013.
Stewart Kennedy was disqualified from acting as a company director for 12 years due to his conduct in connection with an alleged Ponzi scheme in which he invited people to invest £15,000 each in an “Easyearn Franchise,” which purportedly would pay returns from fees paid by businesses and individuals in return for advice on how to reduce their monthly bills. It is alleged that Kennedy’s company, CRS2010, collected £357,500, of which £71,000 was used for Kennedy’s personal benefit.
Funds in the amount of R54-million were seized from the Ponzi scheme of Barry Tannenbaum, which boosted the funds held in the asset forfeiture unit of the National Prosecuting Authority to R82-million. Tannenbaum had defrauded 800 investors out of about R13-billion.
Richard Pollett, 71, was ordered to pay back more than £ 90,000 as compensation to the victims of a £10 million Ponzi scheme run by Pollet and John Hirst. Pollett is a former accountant who helped Hirst defraud investors.
Ruth Kevan, 58, was sentenced to 2½ years in prison in connection with a £160,000 Christmas savings Ponzi scheme. Kevan exploited a Christmas savings club that had been running for decades with her colleagues while she was working at HM Revenue and Customs. Kevan took over the club in the 1970s and promised investors returns of 14.5%. About 40 investors lost funds.
Caryn Bates, 41, and Matthew Sullivan, 53, were sentenced to 5½ years and 7 years, respectively, in connection with a £2 million Ponzi scheme that they ran through World Trading in which they were purportedly trading stocks and bonds. About 40 victims were defrauded when they were promised guaranteed returns of between 2% and 5% per month.
Faye Gale, 31, the former wife of David Gale, 45, appealed a ruling that she pay £700,000 of liability stemming from David Gale’s operation of a Ponzi scheme. The lower court cleared her of any dishonesty or guilt, but ruled that she would still have to pay the bills.
NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES
In connection with the Creative Capital Consortium LLC Ponzi scheme, a court declined to grant summary judgment to Wells Fargo Bank in connection with claims brought by Franz Lesti, Petra Richter and others alleging that the bank knowingly or negligently assisted one of its customers in connection with the Ponzi scheme. Wells Fargo allegedly allowed a bank account to stay open long after it became aware of fraudulent conduct.
Victims of the Ponzi scheme run by Dante DeMiro, 46, will receive about $2 million in restitution payments from an asset forfeiture fund with the U.S. Attorney’s office. The bankruptcy trustee has separately recovered $2.6 million in nonforfeited assets. DeMiro was sentenced to 10 years in prison in 2011 and ordered to pay $12.9 million in restitution to his victims in connection with his scheme run through MuniVest Services.
Victims of the J.V. Huffman $25 million Ponzi scheme may receive between 10% and 15% on their claims. About $2.3 million is to be divided among 340 victims whose losses total $22 million. Huffman spent the victims’ funds on luxury items such as a 1939 Cadillac, memorabilia from the “I Love Lucy” show and artwork.
The district court issued a decision in the Bernard Madoff case that preserves claims of the Madoff trustee against subsequent transferees. The court held that the law does not require the trustee to obtain final judgments against initial transferees before suing subsequent transferees and also held that the trustee’s claims were timely filed against the subsequent transferees as they were filed within one year of a settlement with the initial transferee.
The Securities Investor Protection Corporation joined in the request of the Bernard Madoff trustee that the Supreme Court hear an appeal of the ruling barring the trustee from suing JPMorgan Chase and other banks for their failure to take action to report and stop suspicious activity by Madoff. SIPC is urging the Supreme Court to consider the case, arguing that allowing the lawsuits to proceed would give Madoff’s customers "the greatest and most equitable pro rata distribution of their lost investments as Congress intended."
The Special Master appointed to administer $2.35 billion in forfeited funds in the Madoff Ponzi scheme has announced his distribution plans to pay victims. Investors who were not directly invested in the Madoff scheme are not “customers” under the SIPA statute and have not received payments from the Madoff trustee or SIPA, but may receive funds as “victims” under the forfeiture statutes. The claims bar date for victims is February 28, 2014. The Special Master’s website is at www.madoffvictimfund.com. As a result of the announcement, a planned $800 million settlement between Kingate Management and the Madoff trustee broke down. Kingate, one of the largest investors in the Madoff scheme, would not be entitled to payment from the $2.35 billion victim fund according to the new announcement by the Special Master, which changed the settlement terms for Kingate.
A state appellate court reversed the lower court’s ruling in Frederick Darren Berg’s Meridian Mortgage Ponzi scheme case that the trustee should pay $74,000 to the Moss Adams accounting firm. The appellate court found that the sanctions order was not proper because the trustee had asked for dismissal of his state-court lawsuit against Moss Adams before the order. The court had instructed the trustee to identify which investor relied on which audit before proceeding with the litigation. However, while considering the trustee’s to request to withdraw the lawsuit so the trustee could refile it in federal court, the lower court imposed the $74,000 sanction. The Meridian Mortgage scheme involved about $100 million and 600 investors.
The court presiding over the criminal trial of Stephen Merry, Timothy Durkin, David Petersen and Yaman Sencan declined to allow a government witness to testify by video. The defendants are accused of running a $5 million Ponzi-like scheme between 2009 and 2012. The witness is in poor health and cannot travel, but the government argued that the witness’s testimony is “critical to the case.” The court held that the prosecution waited too long to file the motion for live-videotaping of the witness and that there was not enough evidence to justify keeping the defendants from facing the witness in person.
The law firm of Band Weintraub PL will pay nearly $1 million to settle claims that it was part of a conspiracy to hide money from the receiver in the Arthur Nadel Ponzi scheme. The receiver had alleged than David S. Band, who left Band Weintraub earlier in the year, helped his client Donald Rowe conceal assets from the receiver. The receiver had obtained a $4 million judgment against Rowe but was told that Rowe did not have money to satisfy the judgment. In fact, more than $2.5 million was in a trust account at Band Weintraub which was transferred back to Rowe. Band Weintraub does not admit any liability and purportedly settled at the insistence of its insurance company.
Defrauded victims in the New Age Title Co. alleged Ponzi scheme won a $21.5 million jury verdict against various parties for their involvement in the scheme. The jury awarded punitive damages of $10 million against Wells Fargo, $5 million against New Age Title Co, $6 million against New Age’s real estate attorney, David Mour, and $500,000 against Forcht Bank, in addition to about $500,000 in compensatory damages. New Age Title, owned by Ivan DeLeon and Jeana Kaufman, did a refinance of the victims’ home but failed to pay off the original mortgage. The check sent to Wells Fargo to payoff the original loan was stopped, Wells Fargo contacted New Age about the bad check, and Mour helped arrange a deal for Kaufman and DeLeon to pay the victims’ monthly mortgage payments. A check to Wells Fargo bounced and instead of reporting fraud, Wells Fargo reported the victims as delinquent to credit agencies.
A district court declined to dismiss a lawsuit filed against U.S. Bank related to the Peregrine Financial scheme brought by the CFTC. The CFTC alleges that U.S. Bank allowed Peregrine founder Russell Wasendorf to raid what should have been a segregated customer account and that Wasendorf stole more than $215 million from that account. U.S. Bank disputes many of the allegations in the complaint.
The bankruptcy court presiding over the Tom Petters case agreed to consolidate nine bankruptcy cases, finding in part that consolidation would save benefit money and benefit creditors. The trustee administering the Petters corporate bankruptcy case stated that the consolidation “solidifies my ability to pursue the large hedge funds. The hedge funds argued that they were “special purpose entities” that were established to secure their investments with Petters.
Victims of Ponzi schemer Thomas Redmond Jr. are receiving $46,000 in restitution payments from the Indiana Securities Restitution Fund to help recover some of their losses. Redmond defrauded 10 victims out of more than $580,000. The fund can pay up to $15,000 or 25% of unrecovered losses, whichever is less.
The ZeekRewards receiver filed a quarterly reporting indicating that he intends to pursue claims against about 700 financial institutions who he alleges improperly stopped payment on more than 7,500 cashier’s checks and money orders in violation of an asset freeze. The receiver also identified that he is evaluating pursuit of about 77,000 net winner investors for recovery of fraudulent transfers in the amount of about $283 million, including many of them who reside outside of the United States. The receiver also disclosed that he had settled with nearly 155 net winners for $2.235 million on false profits of $3.94 million. An auction of buildings and personal property of ZeekRewards is scheduled for mid-December.
Sen. David Vitter, Sen Charles Schumer, Rep. Scott Garrett and Rep. Carolyn Maloney introduced legislation called the Restoring Main Street Investor Protection and Confidence Act to assist defrauded investors in filing claims against brokers, giving the SEC greater power to oversee the process of determining whether customers of failed brokerages qualify for compensation. The legislation appears to arise from the ongoing battle in the Stanford Financial case between SIPC and the SEC over whether defrauded Stanford victims are entitled to payment from SIPC. SIPC has refused to pay Stanford victims, contending that Stanford investors do not meet the legal definition of “customers” that would entitled them to payment. The bill would, among other things, amend the definition of “customer” so that investors who deposit cash to buy securities can still be covered by SIPC protection even if the money is initially given to a firm that is not a SIPC member.
Sunday, November 24, 2013
People lose money in Ponzi schemes. They may have invested directly, or perhaps through a feeder fund. Or maybe they invested in a limited partnership that itself invested in the Ponzi scheme. When the Ponzi scheme implodes, people want their money back.
Recent activity in the Bernard Madoff scheme raises the question of the best methodology to get money back to the people who have been defrauded. The various agencies of the U.S. government operate under different statutory authorities with varying objectives and sometimes competing methodologies for reimbursing the defrauded.
SIPA Payments to “Customers”
In a proceeding under the Securities Investor Protection Act (SIPA) – which the Madoff scheme is – “customers” of the Ponzi scheming entity are entitled to protection and payment from the Securities Investor Protection Corporation (SIPC), administered by the appointed trustee. In the case of Madoff, the SIPA Trustee is Irving Picard, who has been reimbursing customers as statutorily required and pursuant to the court approved parameters of who is a “customer.” SIPA, 15 U.S.C. § 78lll(2)(A), defines a "customer" of a debtor as follows:
[A]ny person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.The Second Circuit, has narrowly interpreted “customer,” finding that "the critical aspect of the 'customer' definition" to be "the entrustment of cash or securities to the broker-dealer for the purposes of trading securities." In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011); see also Kruse v. SIPC (In re Bernard L. Madoff Inv. Sec. LLC), 708 F.3d 422 (2d Cir. 2011). This means that the feeder funds that directly invested in the Madoff scheme are customers, but not the individuals who invested in the feeder funds. The Trustee has collected about $9.5 billion, of which more than $5.4 billion has already been distributed to customers. Information about claims and his distribution plan can be found at his website at www.madofftrustee.com/claims-03.html.
Forfeited Funds to “Victims”
In the meantime, the U.S. government has forfeited about $2.35 billion of additional funds, which can now be distributed to those who were defrauded. Under a variety of criminal and civil forfeiture statutes, payment of forfeited property is to be made to “victims” under the supervision of the Department of Justice (DOJ). Richard Breeden has been appointed as Special Master for the purposes of distributing this forfeited property. His website is at www.madoffvictimfund.com.
The Special Master will be paying the money to “victims,” which are a different set of claimants from the “customers” who are receiving payments from the Trustee, although there may be some overlap. The Special Master explains on his website that:
Federal law defines a "victim" as "any person" who suffered a "pecuniary loss" as a "direct result" of crime. “Those who invested directly with Madoff or in one of the feeder funds – those who “lost your own money” - will be entitled to a distribution. There may be 10,000 or more “victims” who otherwise are not receiving a payment directly from the Madoff Trustee.The Special Master’s website also attempts to explain the differing approaches as between the distribution of the forfeited funds and the distributions being made in the SIPA proceeding:
[T]hese two programs exist to pursue different objectives. The forfeiture program is designed to help all persons who suffered a pecuniary loss as a direct result of criminal activity. It is a very broad program designed to help the victims of crime recover a portion of their pecuniary losses resulting from the criminal activity giving rise to the forfeiture of assets. The MVF and similar forfeiture programs are an integral part of the Department's efforts to deter criminal activity by taking away its profits. Beyond deterring crime, the program also provides a measure of "justice," or fairness, to the victims of crime when it does take place. The ultimate policy objectives of the forfeiture laws are promoting law enforcement and providing recoveries for crime victims.
By contrast, the Bankruptcy Code and the Securities Investor Protection Act (or "SIPA") (which overlays the Bankruptcy Code in the case of Madoff Securities) are narrower sets of laws designed to establish the relative priorities of "customers" and "creditors." Bankruptcy proceedings are enormously important to the U.S. economy, but the goals of bankruptcy are commercial. The two programs have different objectives, and so they may have different results.The inconsistent distributions plans are causing some confusion and consternation.
- Are the right people being paid?
- Can all of the “victims” even be located?
- Are the Trustee and the Special Master calculating claim amounts in a similar and consistent fashion, or might different mathematical calculations lead to inconsistent results?
- As between the payments made by the Trustee and the payments to be made by the Special Master, will anyone examine whether there is any duplication or overpayments to any particular individual?
- What happens to victims’ claims that have been purchased in the claims trading process?
The good news is that both the Trustee and the Special Master appear to be calculating claims using the same or similar net investment method. Under that method, they will calculate the net equity amount of the claim by deducting withdrawals and redemptions received by investors from the amount of their investments made. They just may not be dealing with the same creditor body in doing the math, however.
The bad news is that the different definitions of “customer” and ‘victim” will lead to very different and potentially inconsistent results. Someone who is a “customer” for the Trustee’s purposes might not be a “victim” entitled to the forfeited funds, e.g., a feeder fund or a family partnership, but the individual investor in such an entity would be a “victim.”
There is an obvious mountain of work ahead of the Special Master in trying to identify the massive number of individual “victims.” This seems a virtually impossible task at this point. Some feeder funds have gone out of business, and it is unclear whether the Special Master has access to the databases of investor names who had their money invested in the Madoff scheme, whether directly or indirectly. It is also not entirely clear that the victims themselves necessarily know that their money was invested in the Madoff scheme if their funds were placed in the scheme through a feeder fund.
In one other complication, the Special Master has announced that he will not make a distribution to claims purchasers. Once a victim, always a victim, says the Special Master, meaning that purchasers of claims will not be entitled to payment of the forfeited funds from the Special Master. Presumably the “victims” who are contractually obligated to transfer their rights in their claims, including rights to forfeited property, to the purchaser will still be obligated to pass on any distribution received to the claims purchaser.
One has to wonder whether this will spawn the next layer of litigation in the unraveling of the Madoff Ponzi scheme. Reports are that the inconsistent distribution plans and the Special Master’s recent disclosure of his plan have caused a decline in the price of Madoff claims on Wall Street – about a 5% decline in the price for victims’ claims and as much as a 15% drop in the claims of feeder funds.
Is one distribution plan right, and one wrong? Both the Trustee and the Special Master appear to be doing their jobs. By statute, they just have different jobs to do. Let’s just hope that the people who were defrauded can ultimately get their money back through what has become a very complicated and cumbersome process. At least there is a decent amount of money to distribute – almost $12 billion – on about $19.5 billion in losses. What’s a $6.5 billion deficiency among friends? Hopefully more is to come.
To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.