January 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   The year 2013 is off to a good (or bad, depending on how you look at it) start for Ponzi scheme news. Here is the summary of the stories that were reported this month. 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.

   Gary T. Armitage, 60, reached a plea agreement on the eve of his trial relating to a $200 million Ponzi scheme run through AGA Financial in which he and James Koenig, 57, defrauded about 2,000 investors.

   Jason "Bo" Beckman, Gerald Durand and Christopher Pettengill of Minnesota were sentenced in connection with a $194 million Ponzi scheme that defrauded more than 700 investors, mostly retirees. The scheme was run by Trevor Cook, a money manager who is now serving a 25 year prison term. Beckman was sentenced to 30 years in prison and ordered to pay nearly $155.4 million in restitution. Beckman had recently unsuccessfully offered $19 million to victims in exchange for a lighter sentence. Durand was sentenced to 20 years and Pettengill was sentenced to 7.5 years. Co-conspirator Patrick Kiley has not yet been sentenced. The scheme was allegedly that Cook and his co-conspirators solicited investors to put money in a foreign currency trading program that they promised would earn a double-digit rate of return, typically between 10.5% and 12% annually, with little or no risk.

   Lt. David Benjamin and Detective Jeff Poole, both employees of the Broward County Sheriff's Office, were suspended with pay after the disclosure that the men were "under criminal investigation by an outside agency." The investigation relates to their involvement with Scott Rothstein, although the exact conduct for which they are being investigated in unclear. Lt. Benjamin had been contacted in 2009 for a police escort to a waiting plane bound for Morocco. It is reported that when Rothstein boarded the plane, he had a duffel bag containing at least $2 million and a collection of expensive watches, and had already wired at least $15 million to a Moroccan bank account. In exchange for his services, Rothstein allegedly gave Benjamin one of the high-priced watches, which Benjamin later agreed to return to the court-appointed bankruptcy trustee.

   Jack E. Brown was the subject of the largest-ever creditor’s meeting in the U.S. Bankruptcy Court for the Eastern District of Tennessee. About 50 victims showed up and called for Brown, along with his wife, Janet Brown, and son, Jason Brown, who are said to be involved, to be jailed and their assets seized. Brown is accused of running a Ponzi scheme that promised 24 percent annual returns in a $10 million scheme. Brown’s lawyer reported that the money is gone. Brown actually did not participate in the hearing, having reportedly suffered severe heart palpitations at the exact moment that the meeting was scheduled to start. Brown has advised that he intends to invoke his Fifth Amendment right not to incriminate himself in any event. The trustee in the bankruptcy case has objected to Jack Brown’s claims of exemption in assets to the extent that any of the assets claimed as exempt can be traced to the proceeds of the Ponzi scheme. The Trustee has already reached an agreement with Brown’s wife, Janet Brown, who has agreed not to oppose the sale of certain family assets, include Brown’s Tax Service. The trustee sold the client list of Brown's Tax Service to tax preparer Eric Pelton.

   Randy M. Cho, 39, was sentenced to 12 years in prison in connection with a nearly $8 million Ponzi scheme in which he misrepresented that he was able to purchase specially discounted shares of big companies such as AOL/Time Warner, Inc. and Google. Cho had pleaded guilty to the scheme in which he used investor funds for himself rather than investing any of the funds.

   Fred David Clark, Jr., David Schwartz, Cristal Coleman, Barry Graham, and Ricky Lynn, all former real estate executives with Cay Clubs Resorts and Marinas, were sued by the SEC for allegedly running a $300 million Ponzi scheme in which almost 1,400 investors were defrauded. The suit alleges that the defendants paid themselves "exorbitant salaries and commissions totaling more than $30 million." Cay Clubs allegedly promised guaranteed income, instant equity in undervalued properties and triple digit returns.

   Billy Frank Davis, 68, was sentenced to 10 years in prison and ordered to pay $7.8 million in restitution for his $7.8 million Ponzi scheme in which he defrauded more than 20 investors. Davis is a former attorney who held himself out as being involved in the real estate investment business.

   James Davis, the chief financial officer for Allen Stanford’s business, was sentenced to 5 years in prison and ordered to pay $1 billion in restitution. Davis had pleaded guilty and was used by the government as a witness against Allen Stanford. During Stanford’s trial, Stanford’s defense attorneys had tried to shift the blame for the fraud to Davis, alleging that Stanford had naively placed his trust in Davis. Stanford is presently serving a 110 year sentence. Davis admitted that he helped Stanford falsify his bank’s profits and fabricate documents to hide the fraud.

   Ramon DeSage, 63, was indicted in connection with charges that he ran a Ponzi scheme through companies including Cadeau Express, Beryt and Merits Incentives.

   Brian Ray Dinning pleaded not guilty to charges in connection with an alleged Ponzi scheme in which he took $2 million from 23 investors who believed they would be making money generated from South African real estate and gold and diamond mines while contributing to the protection of wildlife and building churches in poorer areas of that country. Dinning also plans to appeal a no-bond ruling issued after he was arrested in Canada.

   Russell Allen Erxleben, 56, the former University of Texas kicker and New Orleans Saints punter, was arrested on charged with running a $2 million Ponzi scheme in which he was supposedly dealing with post-World War I German government bonds and a work of art purportedly by French painter Paul Gauguin. Erxleben had previously been sentenced in 1999 to 7 years in prior for a $36 million investment scheme. Erxleben ran his latest scam through companies called WALTEC Consultants, LRE Holdings and The MDM Group. The indictment said that WALTEC stood for "We All Like To Earn Cash" and that MDM stood for "Million Dollar Man" or "My Damn Money." Erxleben has been ordered to be held in custody until his next court appearance.

   Archie Larue Evans, 42, pleaded guilty to charges related to a Ponzi scheme. Evans, the former Pastor of Tilly Swamp Baptist Church, allegedly defrauded church members and others out of $2.5 million in a scheme he ran through Gold 7 Silver, LLC, promising investors quarterly interest payments of 10 to 12 percent.

   Dan Gaub's probabte estate in the State of Washington received more than 200 claims from investors who were defrauded by what they say was a Ponzi scheme in which they were promised 4% every month. Gaub was a self-described "living legend" in high-risk foreign currency trading. Gaub died last year in a motorcycle accident owing as much as $40 million or more.

   John Geringer, 48, Christopher Luck, 56, and Keith Rode, 45, pleaded not guilty to charges in connection with a Ponzi scheme they ran through a company called Geringer, Luck & Rode, LLC, which managed an investment fund called GLR Growth Fund. The indictment alleged that they took about $60 million from about 90 investors, promising returns of 17% to 25% per year for investments in publicly traded securities.

   Eldon A. Gresham, 67, of Georgia, pleaded guilty to charges in connection with a $15.8 million Ponzi scheme in which he defrauded about 90 people, most of them elderly, in a foreign exchange scam. Gresham, the former regional director for the Fellowship of Christian Athletes, promised investors monthly returns of 5% to 10%, allegedly basing his success on the "Lord’s blessings" and offering the program to "a limited number of Christians for a limited time."

   Dean Gross, 50, of California was sentenced to 7 years in prison and ordered to pay $15.4 million in restitution in connection with a Ponzi scheme in which he collected more than $35.8 million from approximately 39 investors. Gross operated the scheme through his home business, Bridon Entertainment, where he falsely represented himself as a veteran of the advertising industry who had connections that allowed him to purchase advertising time and space at discounted rates. Gross would provide supposed copies of contracts with potential ad-buyers, and would promise short term rates of return of 8% to 30% and one year investments with returns of 10% to 20%.

   Keith V. Harned lost his appeal of the denial of his motion to vacate his sentence of 210 months for his involvement in a Ponzi scheme. The Eleventh Circuit affirmed the denial of his motion to vacate. Harned v. United States, 2012 U.S. App. LEXIS 26645 (11th Cir. Dec. 31, 2012).

   David N. Hawkins, 45, of Colorado, was charged in connection with a $1.2 million Ponzi scheme he ran through PD Hawk Investments Fund, which promised guaranteed returns of 10 percent a month through trading and exchanging foreign currencies. He allegedly told investors he had spent three years "realizing sustained and consistent profits" up to 62% in one day from trading in foreign currencies. Hawkins is a former Colorado sheriff’s deputy and is accused of defrauding co-workers and other law enforcement officials.

   Peter “Hans” Heckman, 63, is wanted in connection with a $1.2 million Kauai Ponzi scheme. Heckman was indicted in July 2007, but had fled Hawaii prior to his indictment. The indictment alleges that Heckman operated a failing recording studio on Kauai and offered potential investors guaranteed returns of 10% to 15% for terms as short as two weeks. A $10,000 reward has been offered by the FBI for information leading to the capture of Heckman.

   Herbalife is defending allegations that it is a pyramid scheme. The SEC has opened an investigation. In the meantime, Herbalife’s executives are publicly defending the business model, stating that Herbalife invested $44 million last year into research and development, technical infrastructure and other areas to support its product. Herbalife also hired a customer research company who found from a sampling that more than 5 million households purchased Herbalife products in the past three months. Herbalife is incorporated in the Cayman Islands and based in Los Angeles and maintains that it complies with the appropriate Federal Trade Commission standards and the guidelines of the SEC.

   John Francis Holtsinger, 52, was sentenced to 87 months in prison in connection with a Ponzi scheme in which victims lost about $1.1 million. Holtsinger admitted to receiving more than $1.1 million from investors, but used the money for personal expenses and to pay back earlier investors rather than for investment purposes. Holtsinger also admitted to attempting to coerce people into lying to law enforcement during the investigation by threatening that those who cooperated with investigators would not be repaid.

   Wallace Lindsay Howell, 61, of South Carolina pleaded guilty to charges in connection with his role in a $90 million Ponzi scheme that was run with Ronald Gene Wilson. Wilson has been sentenced to 19 years in prison and ordered to pay more than $57 million in restitution. Howell and Wilson promised to buy and sell silver for customers, but actually invested very little of the money received.

   Mitchell Brian Huffman, 52, of South Carolina was sentenced to 5 years in prison in connection with a $2.5 million Ponzi scheme after pleading guilty in September 2012. Huffman solicited investments by promising annual returns exceeding 100% by using a proprietary trading program used to trade in the commodity futures market. Investors were directed to deposit funds into Huffman’s personal bank account. Huffman had raised more than $3.2 million from 30 investors.

   William Johnson, 61, of West Palm Beach was sentenced to 41 months in prison and ordered to pay $528,013 in restitution in connection with a $500,000 Ponzi scheme that he ran through his investment house, Professional Planning Group.

   Mahmoud Karkehabadi, aka Mike Karkeh, 56, was found guilty of operating a multi-million Ponzi scheme to finance B-movies through his company Alliance Group Entertainment in Burbank, California. Karkehabadi solicited hundreds of people to invest in the movies he was producing and made promises of quick and high returns on millions of dollars worth of loans. Timothy Cho, president of Newport Coast Entertainment, which raised money to finance Karkehabadi’s movies, was acquitted.

   Patrick Kiley, 74, postponed his sentencing on two different occasions. First, he complained that his lawyer had mishandled his defense. He later received court approval for a mental health evaluation to review what his new attorney called “severe emotional and psychological issues.” Kiley, a Christian radio host, was involved in the Ponzi scheme run by Trevor Cook in which they defrauded more than 700 investors, mostly retirees, from about $194 million in savings. Kiley’s "Follow the Money" program aired on more than 200 Christian and conservative radio station and drew in two-thirds of the investors.

   Gary Milosevich, 67, pleaded guilty to charges in connection with a Ponzi scheme that he ran with Daniel Tepoel, in which investors put their money into "prime bank guarantees." They used the names Rainbow Management Trust and Interstar Management Limited to run the fraud. Tepoel was convicted in 2008 and is currently serving his prison sentence. Milosevich had been at large until January 2012 when he was found in Honduras and returned to the United States.

   Edward Moskop had his appeal of his 20 year prison sentence affirmed by the Seventh Circuit. Moskop, 65, was sentenced after pleading guilty to charges that he had run a Ponzi scheme for 20 years, stealing more than $1.4 million from 26 victims. Moskop had appealed the sentence, arguing that the court had failed to address his arguments in mitigation and had therefore imposed an unreasonable prison sentence. United States v. Moskop, 2013 U.S. App. LEXIS 462 (7th Cir. Jan. 8, 2013).

   Robert Moss, 49, of South Carolina was sentenced to 57 months in prison and ordered to pay $1.46 million in connection with a $1.5 million Ponzi scheme in which he promised investors above-average returns by options trading in the commodities futures market. Moss told investors that he had not had a losing year trading since 1993, and generated market-beating annual returns ranging from 22% to 41%. Moss lured in $3 million from 22 investors.

   Wayne Ogden, 48, stood trial in connection with a real estate Ponzi scheme he allegedly ran after he was released from prison in 2000 from a 1997 conviction for a different fraud. Ogden faces a second trial in April for allegedly running another Ponzi scheme with his brother Terry Ogden, using a company called Paradigm Acceptance LLC.

   Marjorie Parise, 51, admitted that she hid profits she had made from an investment in the Global Trading Investments LLC Ponzi scheme in 2003, along with many other assets, which she failed to disclose in her own bankruptcy case.

   Jere Parkhurst pleaded guilty to charges related to a Ponzi scheme involving investments for purposes of home renovation. Parkhurst promised up to 25% returns on their investments in renovation projects designed to quickly flip historic homes near Phoenix.

   Shanna Raymond, 37, and Brian Gill, 55, have been sentenced to 2 years and 18 months, respectively, for their roles in a Ponzi scheme run with Dan Two Feathers, who previously sentenced to 6 years, and Terrance Paulin, who was sentenced to two years and nine months. The scheme defrauded investors of more than $2.4 million.

   Alan Ritter, 70, of New York was sentenced to 3 years in prison in connection with a $6 million Ponzi scheme that he ran as a real estate investment program. Ritter pleaded guilty in September 2012.

   Scott Saidel, 45, admitted that he conspired to help Kimberly Rothstein sell jewelry, including a 12-carat diamond that she was supposed to turn over to federal authorities. He pleaded guilty to conspiracy to commit money laundering, obstruct justice and tamper with a witness.  He faces up to 5 years in prison and his sentencing is scheduled for June.

   Feisal Sharif and his company, First Financial, will likely be the subject of a fine for Sharif’s failure to be properly registered, among other things, the Connecticut Banking Department announced. Feisal was arrested in September 2012 on charges that he defrauded at least 50 (the number is now up to 80) investors in an alleged Ponzi scheme involving equities futures where he promised returns of 1% to 15% per month.

   Martin Sigillito, 63, was sentenced to 40 years in prison in connection with a $52.5 million Ponzi scheme which he ran through the "British Lending Program." The scheme had the victims making "loans" for the purpose of buying and flipping real estate in Great Britain.

   Nicholas Skaltis, 62, of New Hampshire was charged in connection with a fraudulent scheme he ran through Liberty Realty Trust, Phoenix Asset Group, and Tobias Investment, promising returns of 12% to 14% for investments in distressed properties. The scheme involved about $350,000 and 13 investors. In some instances, investor checks were deposited into Skaltis’ personal bank accounts even though the investors were issued promissory notes by Liberty Realty Trust.

   Duane Slade’s criminal trial resulting from his $160 million Ponzi scheme that targeted wealthy Mormons resulted in a hung jury. Slade was the founder of Mathon Investments through which investors would make loans to third-party borrowers at high interest rates and were promised rates as high as 120%. The trial also involved co-defendants Guy Andrew Williams and Brent Williams. All three remain out of jail at this time. A fourth individual Russell Sewell entered a plea and has not yet been sentenced.
   Jeffrey Sykes of California pleaded guilty to charges in connection with a $40 million Ponzi scheme run through his company, Gemstar Capital Group Inc., in which he solicited investors to participate in a T-Bill trading program. Sykes’ sentencing is set for April 26, 2013. Sykes, with the assistance of former Cowboy center Michael John Kiselak, 45, solicited investors for the trading program. Kiselak was accused by the SEC of lying to investors and was ordered to surrender $19 million, but was not charged in the case.

   Eliyahu Weinstein pleaded guilty to charges that he masterminded a $200 million Ponzi scheme. Weinstein, a former rabbinical student and used-car salesman, could be sentenced up to 25 years in prison. His co-conspirator, Vladimir Siforov, was also charged in connection with the scheme to defraud investors and fabricate documents.

   Ronald Gene Wilson, 65, began serving his 19 year prison sentence in a Florida facility. Wilson pleaded guilty to charges in connection with his Ponzi scheme run through Atlantic Bullion & Coin in which 798 investors lost $57.4 million. Before being sentenced, Wilson told the judge, "I am extremely sorry for what I’ve done . . . my conscience is clearer now than it has been in years; I am here now to accept the punishment the court is giving me."

INTERNATIONAL PONZI SCHEME NEWS

Canada
   The British Columbia Securities Commission has accused Canadian woman Doris Nelson of running a $135.4 million Ponzi scheme through her business, the Little Loan Shoppe, a loan business. It is alleged that Nelson promised returns of 40% to 60% a year to at least 800 investors, promising that the investment was risk-free. The U.S. SEC had also accused Nelson of "conducting a massive Ponzi scheme and stealing investor money to fund her home improvement projects, gambling jaunts to Las Vegas and purchases of a Corvette and a Mercedes." It is believed that Nelson paid out $118 million to investors, including $2.2 million in commissions to recruiters. The remaining $17 million was used to finance operating losses and personal expenses, and other "unaccounted-for" losses.

   The sentencing hearing for Weizhen Tang, 54, has been delayed because the self-proclaimed ‘Chinese Warren Buffet” is seeking a psychiatric assessment for himself. Tang was found guilty of running a $52 million Ponzi scheme that defrauded 200 investors.

Germany
   The trial of 51 year old Ulrich "Richie" Engler, former member of German Armed Forces who later worked as sales representative for vacuum cleaners, opened at Mannheim Regional Court. Engler was indicted for allegedly having swindled about 1,300 victims of US$ 37 million in a Ponzi scheme. Engler lived in the U.S. and was arrested last summer in Las Vegas. German Public Prosecution had issued an international search warrant for him. Las Vegas Police stopped Engler in his car for driving drunken. Engler has confessed to the indictment. The trial is scheduled for ten days. Engler faces up to 15 years imprisonment. The remaining assets of Engler and his companies are in the custody of Florida-based trustees.

   Report by Bernd H. Klose, www.raklose.de
   Member of FraudNet, www.icc-ccs.org/home/fraudnet

   Barclays Plc was sued in Germany by investors who lost money in the 345 million euro ($460 million) Ponzi scheme operated by Helmut Kiener’s K1 hedge fund. Over 150 lawsuits were filed, alleging that Barclays failed to properly review the K1 products. Kiener was convicted in 2011 and sentenced to 10 years and 8 months in prison in connection with the scheme.

Malaysia
   Zeplin Uteh Jacob was freed from detention upon a finding that he was denied his right to counsel on a remand hearing following his arrest. Jacob was arrested after 100 people had lodged complaints with the police and Bank Negara claiming that they had been conned into investing in the "Beras 1Malaysia" investment scheme and had lost RM 10 million.

Pakistan
   The Securities and Exchange Commission of Pakistan, State Bank of Pakistan, National Accountability Bureau, Federal Investigation Agency, Financial Monitoring Unit (FMU) and the federal and provincial police agreed to devise a comprehensive strategy to combat illegal business activities, including Ponzi and pyramid schemes, carried out by companies and unregistered entities. The meeting identified different areas of common interest, including intelligence sharing, training of investigators, and the possibility of introducing new law to check fraudulent businesses. They also agreed to launch awareness campaign so as to advise the public to be prudent while making any investment and to verify that the entity they are dealing with is duly authorized/licensed by the relevant authority to carry out its business.

Philippines
   The Department of Justice filed syndicated estafa charges against officials and owners of Nad21 Auto Options, led by Jahcob "Coco" Rasuman and his father, former Department of Public Works and Highways (DPWH) undersecretary Bashir Rasuman Sr., in connection with the P300-million Ponzi investment scheme that duped investors in Cagayan de Oro.

Russia
   The Investigative Committee's Novosibirsk branch closed its criminal case against organizers of the MMM-2011 financial pyramid, Alexei Astafyev. Investigators said Astafyev had placed ads for the MMM-2011 Ponzi scheme on the Internet promising investors annual profits of 100 percent. More than 100 people invested 9 million rubles in the scheme over three months.

United Kingdom
   Banners Brokers, an online marketing business, has been accused by some of operating a pyramid or Ponzi scheme. Participants have learned that the only way to grow the business is to bring in new referrals. Banners Brokers is a US operation, but has a UK arm that is run by Ian Driscoll, 58.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

   The receiver of the Trevor Cook Ponzi scheme filed a lawsuit against Associated Bank, claiming that the bank "engaged in and observed enough atypical banking activities and other circumstantial evidence to have actual knowledge of the fraud" and that the bank's substantially assisted in the fraud.

   U.S. District Court Judge Mark S. Davis recused himself from the criminal case of Brian Ray Dinning, who is charged with running a $2 million Ponzi scheme. Judge Davis felt uncomfortable continuing with the case after he learned that some of the prosecution witnesses work at Regent University, where Davis sits on its law school Board of Visitors and is friends or acquaintances with the faculty.

   JP Morgan was ordered by the Office of the Comptroller of the Currency (OCC) to cooperate and turnover documents in connection with its investigation of the Bernard Madoff Ponzi scheme. JP Morgan takes the position that an order requiring turning over documents would constitute a violation of its attorney-client privilege. The OCC says that it cannot “do its work and carry out its authority under its examination statute … if that statute was interpreted or operated to bar access to bank records for which a claim of privilege was made.”

   In the Bernard L. Madoff SIPA proceeding, the district court issued its ruling on whether the U.S. Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), prohibits the Bankruptcy Court for issuing a final ruling in fraudulent transfer claims filed by the trustee. SIPC v. Madoff, 2013 U.S. Dist. LEXIS 2517 (S.D. N.Y. Jan. 4, 2013). The court held that “although Stern precludes the Bankruptcy Court from finally deciding avoidance actions (unless, possibly, the Trustee has sought to disallow a claim to the estate under § 502(d)), the Bankruptcy Court nonetheless has the power to hear the matter in the first instance and recommend proposed findings of fact and conclusions of law." The Court further declined to withdraw the reference of these cases to the Bankruptcy Court "for cause shown" before the Bankruptcy Court has issued appropriate findings of fact and conclusions of law.”

   In considering a settlement between defendants and the SEC in which the defendants consented to judgment “without admitting or denying the allegations,” the district court denied final judgment against Michael Turnock and William P. Sullivan II, who allegedly ran a Ponzi scheme through Bridge Premium Finance LLC. The court stated, "I refuse to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him," Kane wrote in his Jan. 17 order denying the entry of final judgments. "A defendant’s options in this regard are binary: He may admit the allegation or he may go to trial." Turnock and Sullivan are accused of fraud and operating a $15.7 million Ponzi scheme in which they promised annual returns of up to 12%.

   Law firm Astor Weiss Kaplan & Mandel LLP was slapped with a putative class action in Pennsylvania state court. The lawsuit alleged negligence that the firm should have known that Mantria Corp. was violating states securities law and was running a $54 million Ponzi scheme.
   A liquidation trust created in the bankruptcy cases of Palm Beach Finance Partners LP and Palm Beach Finance II LP, creditors in the Thomas Petters Ponzi scheme, filed a lawsuit against General Electric Co., a finance subsidiary that the creditors allege kept quiet after discovery the fraud so that Petters had time to repay a $45 million loan. The complaint asserts claims against GECC for aiding and abetting and conspiracy to commit civil fraud and states that the funds lost $1 billion through the Petters fraud.

   It was announced that Kim Rothstein, wife of Ponzi schemer Scott Rothstein, is scheduled to plead guilty on February 1, 2013 to conspiring to hide more than $1 million in jewelry from federal authorities. Kim Rothstein, along with her former attorney Scott Saidel, and her friend Stacie Weisman, acknowledged to the court that they are ready to take plea deals for their roles in the alleged plot to conceal jewelry, including a 12-carat diamond ring, and then to attempt to persuade Scott Rothstein to lie under oath about the ring.

   The Eleventh Circuit heard arguments on the battle between the bankruptcy trustee and the United States government over forfeited assets in the Scott Rothstein Ponzi scheme case. Circuit Judge Gerald Bard Tjoflat peppered both sides with many questions, debating the conflict between criminal forfeiture and bankruptcy proceedings. The judge stated to the Assistant U.S. Attorney at one point, "Your problem is how in the world does criminal forfeiture proceedings adjudicate rights of claimants in the bankruptcy estate?" The lower court, however, had ruled in favor of the government, giving the government the right to administer Rothstein’s yachts, cars and other items, as well as about $2 million left in the accounts of the law firm, Rothstein Rosenfeldt Adler.

   In another case coming out of the Scott Rothstein Ponzi scheme, Beverly v. TD Bank, a court heard a request for punitive damages against TD Bank for its alleged wrongful conduct in covering up Rothstein’s fraud. The court said that it would take judicial notice of previous rulings in other cases, including the sanctions order in the Coquina v TD Bank case where the court found that TD Bank had knowledge of Rothstein’s $1.4 billion fraud and willfully violated evidence production rules.

   The trustee of Sentinel Management Group won an award of $15.6 million against FCStone for the return of money that had been paid to FCStone. FCStone had been paid about 70% of the money it had invested with Sentinel while other customers had only received back about 35%. The trustee had asked the court to allow creditors to receive more balanced payouts, and the court noted “If there is one prevailing principle that underpins American bankruptcy laws, it is that ‘equality is equity,’” FCStone says it will appeal the ruling and the district court ordered FCStone to post an $8 million cash deposit pending judgment in the appeal.

   The receiver for Allen Stanford, Ralph Janvey, submitted his Motion for Approval of Interim Distribution, proposing to make an initial payment of $55 million to approximately 18,000 defrauded investors. The total claims received thus far total about $5.13 billion, so the payment would amount to approximately 1% of each investor’s loss. The plan has been criticized by victim advocate groups who believe the amount of fees collected is grossly disproportionate to the amount of the payout. 

   Janvey also obtained an order approving a plan to allow him to claw back millions of dollars that were paid as fictitious profits to about 800 net winner investors in the Ponzi scheme.

   The Supreme Court granted certiorari regarding the appeal from the Fifth Circuit over the issue of whether class-action lawsuits from investors who lost funds in the Allen Stanford Ponzi scheme should be permitted to proceed against individuals, law firms and investment companies that the investors claim aided Stanford’s fraud. The question is whether the Securities Litigation Uniform Standards Act (SLUSA) blocks this type of class action lawsuit related to securities fraud. The underlying lawsuits claim that the law firms of Chadbourne & Park and Proskauer, Rose, in addition to insurance broker Willis of Colorado, who each worked for Stanford, misled investors and regulators about the value and risks of investing with Stanford. Those defendants argue that SLUSA precludes state-law class actions over alleged misrepresentations made “in connection with” the purchase or sale of covered securities.

   A lawsuit against Deloitte & Touche in connection with its audit of WG Trading Co. was dismissed. The court dismissed claims by the Iowa Public Employees’ Retirement System, which had invested $500 million in entities controlled by the former managers of WG Trading, Paul Greenwood and Steven Walsh. The court found that the plaintiff had not adequately alleged that the defendant exhibited "conscious indifference" and disregarded "red flags" that would have alerted it to the scheme. The court also ruled that Deloitte & Touche could not be held accountable for representations in statements of unaudited, non-client entities and dismissed claims that the auditor had aided and abetted the fraud.

Madoff Trustee Meets Stern v. Marshall

Posted by Kathy Bazoian Phelps

   In connection with the SIPA proceeding of Bernard L. Madoff Investment Securities, LLC, the district court issued its ruling on whether the U.S. Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), prohibits the bankruptcy court from issuing a final ruling on a fraudulent transfer claim. The Madoff trustee has filed hundreds of fraudulent transfer claims against net winners and others in the Madoff proceeding, and those defendants were given the opportunity and a deadline by District Judge Rakoff to file motions seeking to withdraw the reference under Stern v. Marshall. The court heard arguments in June 2012 and has now issued a ruling on the matter. SIPC v. Madoff, 2013 U.S. Dist. LEXIS 2517 (S.D.N.Y. Jan. 4, 2013).

   The court held that "although Stern precludes the Bankruptcy Court from finally deciding avoidance actions (unless, possibly, the Trustee has sought to disallow a claim to the estate under § 502(d)), the Bankruptcy Court nonetheless has the power to hear the matter in the first instance and recommend proposed findings of fact and conclusions of law. The Court further declines to withdraw the reference of these cases to the Bankruptcy Court ‘for cause shown’ before the Bankruptcy Court has issued appropriate findings of fact and conclusions of law." Id. at *54.

   In other words, the bankruptcy court will do the heavy lifting and try the cases, issuing proposed findings of fact and conclusions of law, but not a judgment. Judge Rakoff will then get to decide whether he agrees with the bankruptcy court’s conclusions and enter judgment accordingly.

Alleged Ponzi Scheme Perpetrators Speak Out Against Use of Words “Ponzi Scheme”

Posted by Kathy Bazoian Phelps

   What is it with alleged Ponzi scheme perpetrators these days? They seem to have a heightened sensitivity to the use of the words "Ponzi scheme." In 2012, two cases were decided against two governmental agencies – the SEC and the IRS–in connection with their use of the words "Ponzi scheme."
In a case brought by the SEC against Small Business Capital Corp. and its principal, Mark Feathers, Feathers filed a Motion for Restraining Order ("TRO"), Preliminary Injunction, Sanctions, and Special Damages against the SEC, arguing that the SEC used "fighting words" in certain publications related to the case. SEC v. Small Business Capital Corp., 2012 U.S. Dist. LEXIS 178392 (N.D. Cal 2012). Feathers based his motion on the argument that the SEC’s use of the works "Ponzi-like" and "swindler" are "fighting words" which violated that his First Amendment rights. The court, in denying Feathers’ motion, noted:
The problem with Plaintiff's request in the context of this action, however, is that claims under the First Amendment are not at issue in this case. Indeed, the classic issue presented by "fighting words" is whether such speech is constitutionally protected; in other words, whether the challenged speech is "likely to produce a clear and present danger of a serious substantive evil that rises far above public inconvenience, annoyance, or unrest." City of Houston v. Hill, 482 U.S. 451, 462 (1987). Any party's right to free speech is not implicated by the claims brought by Plaintiff, which involves only violations of securities law. Absent such a free speech issue, the court is unable to analyze whether Defendant could prevail on the merits of a First Amendment claim.   The court found that "fighting words" lose First Amendment protection only if they constitute "words that by their very utterance inflict injury or tend to incite an immediate breach of the peace." Id. at *5 (citing Hill, 482 U.S. at 461-62). After denying Feathers’ request for a TRO and preliminary injunction, the court cautioned:
With that said, however, the court expects all parties to this case to act in a dignified and appropriate manner. The language utilized in press releases, pleadings or other documents should be carefully chosen so as not to denigrate others or unnecessarily jeopardize the viability of the investment assets, especially when this case remains at the initial stages of litigation.Id. at *6.
   In a separate case brought against the IRS, Plaintiffs Emerging Money Corporation, Emerging Administrative Services, LLC and Emerging Actuarial Designs, LLC alleged that the IRS had wrongfully disclosed information when it asserted to certain taxpayers that the transactions that the "Plaintiffs had promoted to them were ‘sham transactions’ and part of a ‘Ponzi scheme.’" Emerging Money Corp. v. United States, 873 F. Supp. 2d 451 (D. Conn. June 4, 2012).

   The Plaintiffs’ "claim was based on 26 U.S.C. § 7431, which permits plaintiffs to recover damages when an officer of the United States knowingly or negligently discloses returns or return information in violation of Section 6103. Plaintiffs seek, inter alia, $1,000 for each unauthorized disclosure of their return information." Id. at *6. The IRS filed a motion for summary judgment, arguing that it was permitted to make those statements under the Internal Revenue Code.

   The facts in the case were that the IRS had investigated the Plaintiffs’ "Stock to Cash" program in which a client would transfer shares of stock to a lender and the lender would make an upfront cash payment called a "loan." The IRS concluded that the program was a Ponzi scheme and delivered letters to the clients who had participated in the program which included the following information: "(1) identification of Plaintiffs as possible ‘lenders’ or administrators of the Stock to Cash program (the ‘identification of Plaintiffs’); (2) the statement that the IRS was conducting an investigation of the Stock to Cash program (the ‘investigation assertion’); (3) the IRS's position that the Stock to Cash transactions were ‘sham transactions’ (the ‘sham-transaction assertion’) and (4) the assertion that those transactions were ‘built into a Ponzi scheme’ (the ‘Ponzi-scheme assertion’)." Id. at *4-5.

   The IRS contended that it was entitled to disclose the information under the "Own Information" exception under 26 U.S.C. § 6103(e)(7). The court reviewed relevant case law and concluded that most of the information disclosed was the recipients’ own information because it "consisted of facts that directly impacted the Recipients' tax liabilities." However, the court noted, "But the Ponzi-scheme assertion did not directly impact the Recipients' tax liabilities. Their ‘loans’ would have been considered sales of stock whether or not the program was a Ponzi scheme. The fact that the transactions were ‘shams’ was enough to establish to the Recipients that they were invalid, without a contextual reference to a larger Ponzi scheme." Id. at *13.

   The court reviewed several other exceptions, such as the "Administrative Proceeding" Exception, the "Investigative Purposes" exception, and the "Erroneous Information" issue, and ultimately concluded that the IRS did not violate Section 6103 when it sent out the letters regarding most of the information contained in the letters. However, the court found that the "exceptions did not cover the IRS’s assertion that the Stock to Cash program was a Ponzi scheme." Id. at *23. The court instructed the Plaintiffs to file a statement and explanation of the damages they were seeking if they wanted to proceed to trial. The Plaintiffs filed a supplemental statement asking for $69,000 in statutory damages, or in the alternative, actual and punitive damages, plus attorneys’ fees and costs. The Plaintiffs’ statement is attached here.

   Two alleged Ponzi scheme perpetrators, two governmental agencies, two courts, and two decisions – all involving the use of the words "Ponzi scheme." If nothing else, these cases are a reminder that we are in this country innocent until proven guilty, so we should tread carefully when using those two little words.

What is More Sacred in Unraveling a Ponzi Scheme: The Attorney-Client Privilege or the Government’s Right to Know?

Posted by Kathy Bazoian Phelps

   The consequences of Bernie Madoff’s massive Ponzi scheme will linger for years and will test the boundaries of what we thought were established limits. The latest struggle is between the bank that handled most of Madoff’s banking, JP Morgan, and the Office of the Comptroller of the Currency (OCC) over whether the bank should be required to turnover certain records to the government. Although no one seems to know specifically what the OCC is looking for, all indications are that the OCC wants to see communications between JP Morgan and its lawyers in connection with its investigation of the Madoff fraud.

   JP Morgan contends that the requested information is protected by the attorney-client privilege. The dispute raises an important question over the sacredness of the attorney client privilege. As noted by Jennifer Zuccarelli, a JP Morgan spokesperson, "This dispute does not go to the merits of the matter but it does raise an important issue of principle: Whether we and other banks, large and small alike, have the fundamental right long recognized in this country to communicate freely with and seek confidential guidance from their lawyers."

   On the other hand, the OCC has asserted that the OCC "could not do its work" if banks can withhold information on that basis. The OCC ha further stated that the bank’s failure to produce records "will have to be seen as a continuing purposeful impediment to the authority of the OCC . . ." The OCC has given JP Morgan until January 11, 2013, to produce the documents or risk sanctions for impeding the OCC’s investigation.

   If the documents sought truly contain attorney-client privileged communications, should the government’s investigation – which appears at the moment to be ill-defined in terms of purpose and scope – trump that privilege?

   In an unrelated dispute with federal regulators over documents, JP Morgan was allowed to invoke the attorney-client privilege to decline to produce certain emails that had been requested by the Federal Energy Regulatory Commission. A copy of the federal magistrate’s decision can be read here. FERC had accused a JPMorgan unit of making "factual misrepresentations" and omitting material information in communications with the California Independent System Operator, which operates the state’s power grid, and in filings to the commission. The FERC suspended the unit’s electricity-trading authority for six months starting April 1. The court in that matter noted:

It is settled that the attorney-client privilege "‘protects the confidential communications made between clients and their attorneys when the communications are for the purpose of securing legal advice.’" Id. (quoting In re Lindsey, 158 F.3d 1263, 1267 (D.C. Cir. 1998). "To be privileged, a communication must be ‘for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding.’" Id. at *5 (citation omitted).

   From available news reports, it appears that the OCC believes that investigation of a massive Ponzi scheme should limit the scope of the attorney-client privilege. JP Morgan and the OCC are trying to reach a resolution of this matter. If they are unable to do so, then we will see if a Ponzi scheme alters what we thought was otherwise fairly well-settled law regarding the nature of the attorney-client privilege.

Taking Advantage of Stern v. Marshall in a Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

   Clawback actions in Ponzi scheme cases may be a dime a dozen these days, but the issues now raised by the Supreme Court decision in Stern v. Marshall, __ U.S. __, 131 S. Ct. 2594 (2011), can become quite costly for those involved. In Stern v. Marshall, the Supreme Court held that bankruptcy judges do not have the constitutional authority "to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim," even though Congress designated it as a core claim in 11 U.S.C. § 157(b)(2)(C). Id. at 2620.

   Whether you are representing the trustee plaintiff or a clawback defendant, the issue commands immediate attention and can impact the tenor of the entire case. Following Stern v. Marshall, two circuit courts have stated that Stern v. Marshall prohibits bankruptcy judges from entering final judgments in fraudulent transfer actions, at least when the defendant has not filed a proof of claim that is related to the trustee’s fraudulent transfer claim. Executive Benefits Insurance Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 2012 WL 6013836 (9th Cir. Dec. 4, 2012); Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012).

   On the other hand, in Onkyo Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705, 722-23 (6th Cir. 2012), the Sixth Circuit held that a bankruptcy court can enter a final judgment on a fraudulent transfer action that is related to the defendant’s proof of claim.

   In light of Stern v. Marshall and its progeny, a Ponzi scheme clawback defendant therefore must move quickly and carefully in evaluating whether to seek to transfer the case to the district court, and the trustee must thoughtfully respond. What are the available options and what strategic considerations parties should think about in evaluating those options? And, if the best choice for your client is to seek to transfer the case to the district court, what are the steps to get that accomplished?

Selecting the Court to Hear Fraudulent Transfer Claims

   The choice of courts comes down to two - the bankruptcy court or the district court. Determination of which court is the right court or better court is a multi-step process, with several variables to consider.

Step One: Who Filed a Proof of Claim?

   The first question is whether the defendant has filed a proof of claim in the bankruptcy case. Or, if you are representing the defendant, whether the defendant should file a proof of claim (probably for purposes of participating in any distributions from the assets that the trustee collects, including the clawback actions). As noted, at least the Sixth Circuit has held the filing of a proof of claim gives the bankruptcy court jurisdiction over a fraudulent transfer claim when it is related to the defendant’s proof of claim. Onkyo Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d at 722 -23. In the clawback situation, this relationship likely cannot be contested because both the proof of claim and the trustee’s clawback claim most probably arose out of the same series of transactions.

   If there is a group of clawback defendants, how many of them filed proofs of claims? If none of the clawback defendants have filed proofs of claim, then an analysis must be undertaken to determine which court is the better court (see Step Two below). If all or nearly all of the defendants have filed claims, then the chances are that the cases will remain in the bankruptcy court for final resolution. But what if some of the defendants did file proofs of claim and others did not, for whatever reason? Then the district court may still be an option, and the party seeking to move the case to district court might argue that there are common issues in the actions – insolvency, the Ponzi presumption, and possibly good faith. The argument, therefore, would be that all of the cases involving all defendants, whether or not the defendants have filed claims, should be tried in the district court that has jurisdiction over all of the actions. The resulting efficiencies would be the "cause" for withdrawal of the reference under 28 U.S.C. § 157(d).

   Another possible path to getting all of the cases to the district court would be, of course, to withdraw the proofs of claim, if such an action is otherwise advisable. This would remove the basis for keeping the clawback actions in the bankruptcy court. However, defendants must fully understand the consequences of withdrawing their claims before they do so. A trustee, on the other hand, should pay close attention to the withdrawal of a defendant’s proof of claim. If a defendant withdraws a proof of claim in order to pursue a Stern v. Marshall issue in the district court, the trustee should make sure the withdrawal papers explicitly bar re-filing the claim and bar any distribution from the estate. The trustee could consider seeking that such a bar apply even to any claim that might otherwise arise from any recovery that the trustee might obtain against the defendant on the clawback claim. The trustee would also be prudent to insist on the defendant's signature on the withdrawal, not just the lawyer's.

Step Two: The Strategic Considerations

   If representing the clawback defendant, there are many factors to consider when deciding whether to push for removal to the district court or to stay in the bankruptcy court.

   First is the "know your judge" factor. It is fair to say that very few clawback actions ever go to trial. Most are either dismissed by the court or settled. Whether you are likely to do better for your clients on your dismissal motion or in your settlement with the trustee in the district court or the bankruptcy court depends at least in part on the judges involved. So if you are unfamiliar with them, you would serve your clients well to inquire about them in an effort to get some local knowledge. The unknown variable here, however, is that, although you know which bankruptcy judge is assigned, you will not know which district judge is assigned until you actually file a motion to withdraw the reference, unless your district has only one district judge.

   Second, from a litigation tactic standpoint, give some consideration to which court your opponent would likely prefer and then consider pushing for the opposite if it otherwise makes sense. The trustee and the trustee’s attorney are likely more comfortable in the bankruptcy court if only because that is where they more regularly practice. Withdrawal of the reference or even the threat of going to the district court could potentially impact the posture of the case and settlement value.

   Third, the speed at which the different courts can get a case to trial may also be a consideration that can sway the decision. In many districts, experience suggests that the district court takes longer to set a matter for trial than in the bankruptcy court. Either the trustee or the defendant may feel more or less pressure to resolve the case expeditiously and such variables should be considered.

   Fourth, if the case proceeds in bankruptcy court and the defendant either has not filed a claim or has withdrawn it, and that court eventually enters a money judgment against the defendant, the defendant might then be able to argue that the judgment is void under Stern v. Marshall. This is questionable because the cases are split on whether the Stern v. Marshall issue can be waived. In In re Bellingham Ins. Agency, the Ninth Circuit held that the issue could be waived, and even implicitly so by conduct. But in Waldman v. Stone, the Sixth Circuit held that, because of the institutional concerns on which Stern v. Marshall relied, the issue cannot be waived.

   Finally, one more factor could influence which court will hear the clawback. A defendant could file a jury demand and then refuse to consent to a trial in the bankruptcy court under 28 U.S.C. § 157(e). In Granfinanciera S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782 (1989), the Supreme Court held that there is a right to a jury trial in a fraudulent transfer action, at least when the defendant has not filed a proof of claim. This would also take the case into district court, at least for trial.

The Process

   If you decide that it is in your client’s better interests for the clawback case to go to the district court, the process is relatively straightforward. You file a motion to withdraw the reference for cause under 28 U.S.C. § 157(d). Under Rule 5005(a), Fed.R.Bankr.P., the motion is filed with the bankruptcy clerk, but under Rule 5011(a), it is heard by a district judge. That judge is selected when the bankruptcy clerk transmits the motion to the district court. Under Rule 5011(c), the motion does not stay the proceedings in the bankruptcy court unless the bankruptcy court so orders.

   The district judge may then grant the motion, deny the motion, or defer it until the matter is ready for a dispositive motion or trial.

   A trustee may resist a motion to withdraw the reference on the grounds that there is not cause for the withdrawal until the case is ready for trial and there is no reason why the bankruptcy judge can't supervise all of the pretrial proceedings. The trustee may hold out hope that, by the time the matter is ready for trial (if it hasn't settled), the defendant might be prepared to consent to the bankruptcy court.

   Although potentially costly, both Stern v. Marshall and Granfinanciera provide your clawback defendants with potentially valuable strategic options. If considered carefully, they could offer advantages that could change the tenor and momentum of a case.