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
Sunday, March 31, 2013
March continued the trend of way too many breaking news stories in Ponzi scheme cases. 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.
Brett Amendola, 38, of Virginia, was sentenced to 84 months in prison in connection with his $5 million Ponzi scheme involving the purported purchase of a golf course that defrauded more than a dozen victims. Amendola had persuaded investors to provide short-term funding that would be held in escrow to fulfill a requirement by his lender. The money was to be returned to investors with interest in a matter of days. Amendola impersonated an attorney that supposedly controlled the escrow account and lead investors to believe that they were wiring money into an escrow account, but they were in fact wiring money into accounts controlled by Amendola. Jerry J. Mckerac, 61, was also charged in connection with the scheme for similarly impersonating the escrow attorney.
James W. "Bill" Bailey, 65, filed a notice of appeal of his 32 year prison sentence which he received after pleading guilty in connection with a Ponzi scheme that he ran through Southern Financial Services. When sentencing Bailey to 32 years, the court took into account the harm to Bailey’s victims along with the lavish lifestyle financed by the crimes, calling the theft of the investors’ live savings "coldblooded."
Gerson Barkany, 29, was charged in connection with his role in a $50 million Ponzi scheme. Barkany allegedly concocted real estate deals as part of the scheme and then spent investor funds for his personal benefit. He promised "risk-free" investments in large real estate projects where he would supposedly purchase properties in Manhattan, Queens, the Bronx and Atlantic City, and then re-sell them at a large profit. An FBI press release stated that Barkany promised that the sellers of these properties "would only close on the real estate sales contracts after Barkany had located a purchaser who would be willing to buy the property from Barkany at a higher price. In that way, Barkany assured the victim that the real estate deals would be ‘risk free.’"
Byran Behrens, convicted and imprisoned for operating an $8 million Ponzi scheme, filed a Chapter 11 petition for bankruptcy protection while in federal prison. Behrens had been sentenced to 5 years in prison and was ordered to pay $6.8 million in restitution to 20 victims. Behrens listed $475,000 of property on his bankruptcy schedules, including two homes, and also listed a $600,000 "employment contract" with 21st Century Financial, the company he used to run his fraud.
Craig Berkman, 71, a former Oregon gubernatorial candidate, was accused by the SEC of defrauding investors of about $10 million by claiming to have special access to pre-initial public offering shares of Facebook Inc. and other social media companies. Berkman promised a 5% annual return until they had received a 100% return of principal and interest. Berkman forged an attorney’s letter to demonstrate an interest in Facebook. Berkman also solicited another $2.6 million in investments for another company called Face Off Acquisitions, misrepresenting that he was going to purchase another fund that owed a large number of Facebook shares.
Bitcoin continues to be the subject of much curiosity, concern and allegations that it is a Ponzi scheme. Bitcoin calls itself "the world’s first decentralized digital currency." However, no one is certain who started Bitcoin, and the 3 individuals who have been linked to it deny any connection. Meanwhile the value of Bitcoin currency is soaring, with a Bitcoin worth $40, and about 10 million Bitcoins in circulation. News reports state that the currency is expanding at a set rate of 25 new Bitcoins generated every 10 minutes. The currency is exchanged on-line on a peer-to-peer basis.
John Bravata, 45, former chairman of BBC Equities LLC, was convicted in connection with a Ponzi scheme that he ran with his son, Antonio Bravata, 25, who was also convicted. Bravata collected $53 million from more than 500 investors in a scheme involving real estate purchases at the real estate investment fund he co-owned with partner and company Richard Trabulsy. Trabulsy, 32, pleaded guilty last fall. Bravata, through BBC Equities and Bravata Financial Group LLC, offered real estate investments but the funds were largely used to support the lavish lifestyle of the defendants.
Jack Brown, 58, retained criminal counsel in response to an investigation of allegations that he was running a $12 million Ponzi scheme. Brown is in poor health and not available to attend the meeting of creditors in his bankruptcy case. By telephone from his hospital bed, Brown, a former tax preparer, confessed to running a Ponzi scheme while a crowd of creditors listened in the Bankruptcy Court. Reports are that Brown sounded frail and confused and that he contradicted himself when asked about the location of thousands of dollars that he took from widows and the elderly. Brown admitted that he took some money in the form of personal loans, sometimes in cash, and sometimes as investments. He said that some money went into an E-Trade account, while other money went to pay back creditors and investors.
Victor E. Cilli saw his stock trading license revoked by the CFTC for his role in a Ponzi scheme that defrauded investors out of $506,000. Cilli was convicted in 2011 and was sentenced to 3 years in prison. In addition to the Ponzi scheme, Cilli conspired to defraud KeyBank of Cleveland of more than $1.5 million in student loans and also failed to make more than $150,000 in tax payments.
George Elia, 69, on the third day of his trial, entered a surprise guilty plea in connection with charges that he had stolen $9.5 million from more than 40 clients in a scheme that targeted the Wilton Manors’ gay community. Elia’s scheme promised investors high returns through his company, International Consultants & Investment Group Ltd. Corp. Elia changed his plea after having listened to the testimony of four of his victims. James F. "Jim" Ellis, also involved in the fraud, pleaded guilty and faces up to 5 years in prison.
Charles David Eizelman, 69, was ordered to pay $387,000 in connection with his Ponzi scheme that targeted seniors. Eizelman pleaded guilty in 2012, and will be incarcerated if he fails to make his quarterly payment in connection with the restitution order.
John Farahi, 55, was sentenced to 10 years in prison and ordered to pay about $24 million in restitution to 59 victims for running his $20 million Ponzi scheme in Beverly Hills through his company Newpoint Financial Services. Farahi had pleaded guilty last year.
Donald R. French, Jr., 26, pleaded guilty to one charge in connection with his $10 million Ponzi scheme. French ran his scheme through Boca-Raton-based D3 Capital Management, promising returns of up to 50% per year with investments in foreign currencies, emeralds and a solar-energy project in Italy. French has admitted to using his "gift of gab" in convincing investors to invest. French used the money to relocate to Rome, buy luxury cars, travel around the world, and on gambling.
Eduardo Galan, 62, was arrested and charged in connection with an alleged Ponzi scheme that defrauded at least 10 investors through his company, S&G Unlimited Services. Galan would take investments in the form of loans and mortgages and would issue promissory notes that promised returns of 13% or greater.
Ronald Wesley Groves, 71, and Donald Charles Mann, 56, were sentenced to 10 years and 17 years 6 months, respectively, for their role in a Ponzi scheme run through Money Growth Solutions. The two men had raised $4.8 million for 642 investors by promising high rates of return (up to 4,000%) on secretive investments into international bank trades. They invested in a Florida battery company that was later found to be a scam and they backed a Liberian presidential candidate using the investors’ funds. The men then each received an additional year, to be served consecutively to the previous sentences, for putting four fraudulent liens on properties belonging to the FBI agents who investigated the case and two liens against the federal prosecutor’s property.
Gordon Hall and Benton Hall were arrested for their role in the silver Ponzi scheme operated by Ron Wilson and Wallace Lindsey Howell. An unsealed indictment revealed that Howell allegedly hid and transferred assets from the Ponzi scheme by transferring them to the Halls. It is alleged that at least $1.5 million, along with title to two properties, a truck, gold coins, and a bag of silver were transferred to the Halls. It is further alleged that the Halls agreed to pay Howell’s legal bills and provide him a guaranteed monthly payment for life in exchange for the assets transferred to them.
David Hawkins, 43, a former El Paso County sheriff’s deputy, pleaded guilty to charges in connection with a Ponzi scheme that victimized fellow members of the sheriff’s department and other law enforcement officers. Hawkins defrauded about 73 investors of more than $1.2 million, promising them a return of 10% per month. Hawkins did not invest the funds in foreign currencies as promised, but instead spent investor funds to buy two cars, to purchase franchises, and to set up operations for two semi-professional indoor-arena football teams.
Peter Heckmann, 54, turned himself in to Hawaiian authorities in connection with charges that he allegedly operated a $1.2 million Ponzi scheme. Heckmann is a German national, who then pleaded not guilty and agreed to remain in custody without the opportunity for bail.
Kyle Higgins, 28, pleaded guilty to charges in connection a Ponzi scheme and was sentenced to 5 years of probation and ordered to pay $130,000 in restitution. He also agreed to testify truthfully against Clifford Puterbaugh, 50, who allegedly lured investors into a securities investment program. Puterbaugh has been charged with various crimes against more than 20 victims.
Michael Anthony Gonzalez pleaded guilty to mail fraud in a Ponzi scheme case that defrauded more than 40 investors of over $1 million. Gonzalez told investors that he would use their money to buy specific California municipal bonds which would pay specific rates of return. Instead of buying the bonds, however, Gonzalez used the money to pay for his own living expenses and to make payments to other investors. He failed to disclose his disciplinary history including bars issued by the New York Stock Exchange and the National Association of Securities Dealers. He also lied to investors, claiming that he was associated with a New York-based registered broker who provided investor protection through the Securities Investor Protection Corporation.
James Lagona was sentenced to 11 years for his role in a $6 million Ponzi scheme run through Watermark M-One Financial Services, a company owned by Guy Gane. Watermark promised investors returns of 10% per year to be generated from waterfront real estate investments. Lagona was an employee of Watermark, maintained his innocence, but chose to stand trial with Gane and co-conspirator, Ian Gent. Gane testified against the other two, and all three were convicted. Gane was sentenced to 13 years, and Gent was sentenced to 8 years.
Robert Langguth was sentenced to 48 months in prison and ordered to pay $10,253,203 in restitution for his Ponzi scheme that defrauded about 250 victims of between $7 and $20 million. Langguth had pleaded guilty to charges in connection with the Ponzi scheme run through Langguth’s Capital Finance Company.
Tina Louis Mangiardi, 50, a former model, pleaded guilty to charges in connection with a $2.5 to $7 million Ponzi scheme she ran in Florida in which she promised investors that she would double their money from financing construction projects. Mangiardi, through her Orlando-based businesses, T.L.M. Builders & Design LLC and Tim Design and Construction, Inc., convinced investors to invest in "bid bonds" for projects including restaurant chains, local hospitals and Disney. Mangiardi defrauded over 40 investors of millions of dollars. One of Mangiardi’s investors, Adam Pollack, was jailed this month after he supposedly attacked Mangiardi when she came to Pollack’s "No Holds Barred Fighting" gym to pay a debt to Pollack. It is alleged that Pollock put on boxing gloves, brandished a knife and threatened to cut off her fingers and toes as collateral for his investment. His sentence could exceed Mangiardi’s.
Gary Martin, 61, of Florida was sentenced to 10 years and ordered to pay $31.7 million in restitution and more than $28 million to the government in connection with a $32.5 million Ponzi scheme. Martin pleaded guilty last year in connection with his role in luring victims into the scheme by, among other things, telling investors that Queen Shoals Consultants LLC had over 20 years of experience in financial services. Sidney Stanton Hanson, who started QSC, was previously sentenced to 22 years in prison. Investors in the scheme were promised returns of 8% to 24% plus an additional 1% to investors who rolled over their IRA balances, but the funds were not used for the promised "risk-free" investments. Rather, Hanson spent the money for personal expenditures such as an 88-acre farm, private plane rentals and luxury vacations.
Gary Lynn McDuff, 58, of Texas, was convicted, after a six minute jury deliberation, of charges relating to a Ponzi scheme he ran with co-conspirator Gary Lancaster, 61, of Oregon, and co-conspirator Robert Reese of California, who is now deceased. The men solicited investments through Lancorp Investment Fund for investment in A+ or A1 rated bonds. Investors were told that their investments would be insured and their money would not be at risk.
Istvan "Steve" Merchenthaler, 42, already charged in connection with a $2 million Ponzi scheme that defrauded about 200 investors in a scam run though PhoneCard USA, has now been linked to 60 pipe bombs discovered in a storage locker room in Merchenthaler’s name in Philadelphia. Although Merchenthaler has not been charged in connection with bombs, the timing of the discovery coincided with new charges related to his alleged Ponzi scheme. The scheme involved misrepresentations that he had "lucrative contracts" with Walmart, 7-Eleven, and BJs Wholesale Club. While free on bail, Merchenthaler allegedly stole a 2012 Jeep Grand Cherokee and a 2013 Dodge Charger. He is now in federal custody. Back in 2004, Merchenthaler had been arrested in Brazil on charges of trafficking 20kg of cocaine. Merchenthaler has used as many as 8 aliases.
Hendrix Montecastro, 40, and his mother, Helen Pedrino, 61, were convicted in connection with the $142 million Stonewood mortgage and securities investment scam. Other co-conspirators who have previously been sentenced in connection with the scheme are James Duncan, Maurice McLeod, Thuan Nhan Du, Cindi Gayle Kelly, and Charlie Sung Choi.
Jimmy E. Morrisett, 53, pleaded guilty to charges in connection with his oil and gas Ponzi scheme. Morrisett agreed that he owes more than $6.8 million in restitution to investors, who number between 50 and 250.
Steven Palladino, 55, and his wife, Lori Palladino, 52, were charged in connection with the operation of a multi-million Ponzi scheme through their company, Viking Financial Group, Inc., in Boston. They borrowed money from investors and told them the funds would be used to provide loans at a higher interest rate. Fake loans were entered in the company’s books, and the funds were instead used to fund a lavish lifestyle for the Palladinos, including a vacation in the Bahamas, rent on an apartment for Steven Palladino’s mistress, a $13,000 Rolex watch, and gambling. Some of the money was also used to pay $350,000 to satisfy a condition on his probation from a 2007 Superior Court conviction for defrauding an elderly relative. Steven Palladino has more than two dozen theft-related convictions on his record. The couple’s son, Gregory Palladino, was later arrested for operating a motor vehicle with a suspended license, but has not been charged in connection with the Ponzi scheme.
Jason Pascua, 38, was charged in connection with a $1.4 million Ponzi scheme that he allegedly operated in Hawaii. Pascua ran the scheme through J2 Marketing Solutions and allegedly defrauded 29 people by posing as a concert and nightclub promoter in Honolulu and Las Vegas and promising investment returns of 25% to 50%. Pascua, now living in Arizona, has not yet been arrested but is returning to Honolulu to surrender to authorities.
Robert Ponte, 59, Robert Rivernider, 47, and Loretta Seneca, 50, each pleaded guilty in the midst of their trial relating to a $20 million Ponzi scheme. It was alleged that Ponte and Rivernider used the internet to sell investors on a "No More Bills" debt repayment program, where the investors would typically borrow funds from the home equity lines or their 401(k) retirement plans with the promise of 7% to 10% returns. In a second scheme, all three defendants recruited borrowers to take out financing in a real estate scheme to purchase investment properties in Tennessee and Florida. They would mark up the price and falsely represent that the properties would produce income sufficient to cover the expenses and reduce the borrower’s debt burden.
Reef Ltd., an international company that operates Profitable Sunrise, was the subject of a cease and desist order. The Maryland Attorney General sought to shut down Profitable Sunrise, which is said to offer implausible "risk-free" investments to people. The company pitch, which uses quotes from the Bible, offers investors short-term, high-interest investments and offers a bonus if an investor lures in other investors.
Grahame E. Rhodes, 61, was sentenced to 63 months in prison and ordered to pay about $1.9 million in restitution in connection with a $2.5 million Ponzi scheme where he promised investors high rates of return but in reality invested and earned very little. He spent the investors’ funds on himself and to pay false returns to investors.
Jeffrey Ripley, 60, and Danny Lee VanLiere, 61, pleaded no contest to charges in connection with the Ponzi scheme they operated through API Worldwide Holdings LLC. The scheme, which involved the sale of unregistered securities, defrauded more than 100 victims of thousands of dollars.
George Sepero, 40, pleaded guilty to charges in connection with a $3.5 million Ponzi scheme that Sepero ran with Carmelo Provenzano and Daniel Dragan. The three claimed to run numerous hedge funds under the names of Caxton Capital Management and CCP Pro Consulting Inc. Sepero defrauded an elderly paraplegic woman out of her entire life savings, misrepresenting to her family that he was authorized to manage her annuity account and that checks should be made payable to his company, Casa Nostra Enterprises. Sepero and his co-conspirators used investors’ money to pay credit card bills of more than $25,000 per month, bar tabs exceeding $18,000, luxury vehicles, and travel to Europe.
Jerry Smith, 50, of Indiana, was sentenced to 65 months in prison and ordered to pay about $5.4 million in restitution to victims and about $72,000 in restitution to the IRS for his role in a Ponzi scheme run with Jason Snelling, 48. Smith and Snelling operated bogus day-trading entities known as CityFund Advisory LLC and Dunhill Investment Advisors, which were nothing more than bank accounts into which investors deposited their funds. Snelling was previously sentenced to 131 months.
Garfield M. Taylor, 54, was indicted and pleaded not guilty in connection with an alleged $25 million Ponzi scheme that defrauded 130 investors. Taylor was one of six people charged in connection with a scheme that promised investors substantial returns by using a sophisticated securities trading strategy that protected against loss. Taylor allegedly used $5 million in investor funds to pay family and friends and for his personal use, including $73,000 to his children’s private school.
Frederick Tropeano, 47, of New Jersey, was sentenced to 12 years in prison in connection with his mortgage refinance Ponzi scheme that he ran through his company, Hawthorne Capital Corporation. Tropeano defrauded more than 40 homeowners out of more than $7.5 million. Tropeano and his father, Silvano Tropeano established fraudulent bank accounts in the names of two attorneys and listed them as settlement agents on mortgage refinances without their knowledge or consent.
Michael James Turnock, 68, has settled a civil lawsuit by the SEC in connection with a Ponzi scheme to which Turnock had previously pleaded guilty. Under the settlement, the SEC will seize profits and fines totaling $12.6 million. Turnock’s company, Bridge Premium Finance LLC, had promised returns as much as 12% in connection with the $15.7 million Ponzi scheme. Turnock and BPF had admitted to violating securities laws when soliciting investments with guaranteed returns when BFP represented that it loaned investor money as insurance premiums to small businesses at high interest rates.
Michael Welke was ordered to pay $400,000 to settle claims brought by the CFTC and was barred for life from the commodities industry. Welke allegedly operated companies called Elite Management Holdings Corp. and MJM Enterprises, which collected up to $4.7 million from about 130 investors. Investors were promised large returns and low risk for investments in commodities, metals and foreign currency. Welke’s partners, Omaha lawyer Michael Kratville, and Jonathan Arrington were also named in the complaint.
M. Viktoria Wilson, 24, was arrested in Michigan for allegedly providing misleading information to investigators trying to locate her husband, Joel Wilson, 30, who has been charged with running a $7 million real estate Ponzi scheme that defrauded about 120 investors. Joel Wilson operated Diversified Group Partnership Management LLC and American Realty Funds Corporation, through which Joel Wilson promised investors annual returns of 10% supposedly derived from the purchase, renovation and resale of real estate in Michigan. The Wilsons spent the money on a lavish lifestyle, include the purchase of a rival securities broker, Viktoria’s business, sporting event tickets and travel. Joel Wilson is presently residing in Germany with no apparent plans to return to face the criminal charges. Vikktoria posted $10,000 bond but was required to surrender her passport. Joel Wilson subsequently set up a defense fund entitled The Wilson Family Victory Trust.
Ronnie Gene Wilson, who ran a $90 million Ponzi scheme and is currently serving a 19 year sentence, saw his personal items and home put up for auction. Proceeds from the auction will go toward paying back Wilson’s victims who were defrauded in the Atlantic Bullion and Coin Ponzi scheme.
INTERNATIONAL PONZI SCHEME NEWS
David Chodorowski, 41, was sentenced to 6 years in prison and ordered to pay $1.65 million in restitution to his victims in connection with a Ponzi scheme in which he took more than $2.5 million from investors. Chodorowski had previously pleaded guilty to charges in connection with a scheme that he ran through Assante Wealth Management.
Peter Sbaraglia, a Toronto dentist who participated in a $40 million Ponzi scheme run by Robert Mander, has been banned for life from trading by the Ontario Securities Commission. Sbaraglia operated C.O. Capital Growth and raised more than $21 million from 25 to 30 investors. Most of that money was funneled to a company called E.M.B Asset Group Inc., owned by Mander.
Wolfgang Joseph Friedrich, 62, and Monique Adriana Friedrich, 52, have been charged in connection with an alleged Ponzi scheme that they were running through Allrich Investments.
Carmelita Del Rosario, 42, was charged in connection with a $1.8 million Ponzi scheme that defrauded 49 investors. Rosario allegedly used her position at the Workers’ Compensation Board and her connections to the Filipino community to convince investors to putting money into a WCB investment fund that did not actually exist.
Eli Heckscher, a Danish attorney, was criminally indicted for his role in a scheme that took more than $26 million and was funneled to Europe by convicted con artists John and Marian Morgan of Sarasota. Heckscher also continues to face indictment in Tampa federal court as part of the Morgans’ case and their Morgan European Holdings Ponzi scheme. The Morgans solicited funds from at least 100 investors, offering high yields, and then wired the funds to Hacksher, who allegedly moved the money around the globe while sending a lot of the money back to the Morgans for their private use. John Morgan, 54, was sentenced to 10 years in prison in connection with a plea deal, and Marian Morgan, 58, was sentenced to 35 years in prison following her conviction at trial.
Jolan Saunders, 36, Michael Strubel, 51, and Spencer Steinberg, 43, were arrested in connection with allegations that they engaged in a conspiracy to defraud investors in a £40 million "Ponzi-style" investment fraud related to electrical contracts in the hotel sector. It is alleged that their company, Saunders Electrical Wholesalers Ltd., misrepresented that they had high value contracts with blue chip hotel chains and the London Olympics Athletes Village that required investment funding.
Nicholas "Beano" Levene, 48, was ordered to pay £1 in compensation in connection with his £32 million Ponzi scheme. Levene is serving a 13 year prison sentence and his assets were seized by the trustee in his bankruptcy case. The court found, "As there is nothing available, I direct that he should pay the nominal sum of £1 within seven days." Levene had taken about £15 million from investors, promising to invest the money in lucrative rights-issues releases from companies such as HSBC, Lloyds TSB and mining firms Xstrata and Rio Tinto.
Mannheim Regional Court sentenced Ulrich "Richie" Engler, who lived in Florida and Nevada and was extradited by the US authorities to Germany, to 8½ years imprisonment. The court found Engler guilty for having swindled 1,100 investors out of $32 million. According to the trustee of the US bankruptcy proceedings, investors invested approximately $171 million into Engler’s fraud scheme. Only $78 million was returned by Engler to the investors. The court used provisions in the German Criminal Procedures Act to limit the indictment to the cases of approximately 1,100 investors in order not to overload the proceedings.
Report by Bernd H. Klose, www.raklose.de
Member of FraudNet, www.icc-ccs.org/home/fraudnet
The house registered in the name of Laura Haude, the daughter of David Leigh, was attached as having been purchased with money from a Ponzi scheme. Leigh is said to have defrauded more than 200 wealthy businessmen to invest in a scheme known as the Frankel Scheme, believed to be the largest commercial crime matter in South Africa. The scheme is said to have lured in about $800 million (R7.444 billion). Leigh was an agent of Barry Tannenbaum, who is the son of one of the founders of Adcock Ingram pharmaceutical group, which had initiated the Frankel Scheme in 2004. Tannenbaum was offering returns of up to 216% per year.
NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES
A judge ruled that St. Anselm Exploration, an oil and gas company, and its principals – Anna Wells, Mark Palmer and Michael Zakroff – were not operating a Ponzi scheme. The SEC had alleged that they were operating a Ponzi scheme, using new investments to pay off old ones. The judge disagreed, stating, "What this court perceives from the evidence presented in this case is not fraud, whether intentional or reckless, or even negligence," he wrote, "but a company that got too far out over its skis."
In the $1 billion Ponzi scheme case of Medical Capital Holdings Inc., Wells Fargo Bank has asked the district court to dismiss a consolidated class action which alleged that the bank had breached its contract with noteholders by disbursing their funds to MedCap. Wells Fargo argued that it was not contractually required to notify investors of irregularities until the accounts had defaulted. In the meantime, Bank of New York Mellon has agreed to pay the MedCap receiver a settlement of $114 million.
The Attorney General of New Jersey reached a settlement with RBC Capital Markets LLC, a Canadian investment bank, in connection with conduct in the Ponzi scheme of James Hankins, Jr. It was alleged that RBC did not follow its own procedures and did not perform monthly reviews of accounts opened by Hankins. Hankins operated a $19 million Ponzi scheme and is currently serving a 20 year prison sentence. RBC has agreed to pay $450,000 in connection with the settlements.
A judgment of $2.88 million was entered against investment adviser Maxam Capital Management, which had invested money from the retirement fund of the Town of Fairfield, Connecticut, in the Bernard Madoff Ponzi scheme. Fairfield had contended that Maxam, along with other investment advisers, either knew that Madoff’s investment strategy was fraudulent or failed to adequately investigate the soundness of the program.
Claims were dismissed against M&I Bank in a $1 billion lawsuit that accused the bank of conspiracy for its role in allegedly assisting Thomas Petters. However, even though claims for conspiracy, aiding and abetting fraud, negligent misrepresentation and gross negligence were dismissed, $250 million of claims still remain in the lawsuit on fraudulent transfer theories.
Victims of the Scott Rothstein case objected to the Chapter 11 plan filed by the trustee of the Rothstein Rosenfeldt Adler PA, which included a settlement with TD Bank that the investors claimed as "unfair and inequitable" because it includes a bar order against other litigation against TD Bank. A group of creditors is moving to try to convert the case to Chapter 7.
The receiver over the Ponzi scheme case run by David Salinas, 60, has said that he can verify 175 claims and $30.6 million of lost funds in the scheme that involved several high-profile college basketball coaches. Salinas, a one-time Texas financial adviser, committed suicide in 2011 while under investigation.
The trustee of the Ponzi scheme case of Wesley A. Snyder won her appeal over the dismissal of her lawsuit against 26 banks in the bankruptcy court. The trustee had sued the banks for fraudulent transfers, but the lower court dismissed the cases, finding that the banks had established a good faith defense. Snyder, 76, had run a wrap around mortgage Ponzi scheme through his firm, Personal Financial Management, by telling customers to borrow more than they needed from the banks and to give Snyder the extra, which he would supposedly repay to the banks. Snyder pleaded guilty in 2008, was sentenced to 12 years, and has appealed the sentence 3 times.
Litigation pending in the Allen Stanford Ponzi scheme case, Janvey v. Proskauer Rose LLP, was stayed upon the parties’ agreement in light of other pending matters. The lawsuit accuses of Proskauer Rose LLP and Chadbourne & Parke LLP of helping Stanford in the $7 billion Ponzi scheme. There are motions to dismiss pending in a different but similar lawsuit, and the parties agreed that if those motions are granted, then they will move ahead with this lawsuit. The receiver, Ralph Janvey, has also filed a motion to transfer the case to Washington, D.C. and, if that motion is granted, the parties have agreed to continue the stay.
An agreement was reached in the Allen Stanford case that will allow victims to see some returns in the near future. An agreement was reached regarding control of about $300 million in frozen foreign bank accounts and other assets once owned by Stanford in Canada, Switzerland and the United Kingdom. The receiver is awaiting court approval to make an initial distribution of $55 million. The receiver has collected about $230 million to date. At this point, it is looking like victims may only recover about 1% of the money they invested with Stanford.
The Ninth Circuit heard argument in the case of USACM Liquidating Trust v. Deloitte & Touche, LLP. In this case, the liquidating trustee of USA Commercial Mortgage Co. seeks to reverse the decision of the lower court which found in favor of Deloitte & Touche based on application of the in pari delicto defense to the trustee’s claims. The trustee argued that that Deloitte & Touche should be liable for damages arising from its audits of the company’s financial statements and that the wrongful conduct of the CEO and president of the USACM should not be imputed to the company. The lower court found that the in pari delicto defense barred the trustee’s claims. The trustee’s lawyer argued that Nevada state law required an equitable look at the facts and that "Nevada law says that when applying in pari delicto, you should not be so enamored with a Latin phrase that you apply it to all situations of illegality." (In the interest of full disclosure, the trustee’s position in this case was argued in front of the Ninth Circuit by my partner, Max Liphart of Diamond McCarthy LLP.)
The trustee of the bankruptcy estate of Gary Wilder and Toni Jo Wilder reported that most of the creditors will get less than 2 cents on the dollar. A distribution of $5.2 million will be made on the $217 million of allowed claims. Gary Wilder is currently serving 15 years and Toni Jo Wilder is serving 7 years for their role in a $220 million Ponzi scheme that ultimately forced the closure of Wildwood Industries, a leaf and vacuum-bag manufacturing business that once employed 700 people.
The receiver of ZeekRewards, Rex Venture Group, filed his report stating that he has recovered $312 million and that he has incurred $1.6 million in fees in connection with his administration of the case. The receiver reported that his forensic accountants have spent more than 1,800 hours in unraveling the company’s finances. The receiver also filed a motion seeking approval of a claims process which would seek to compensate about 840,000 net losers. The receiver is proposing that claims be submitted electronically using a claims portal on his receivership website, www.zeekrewardsreceivership.com, and that a bar date be set. The receiver believes that there are about 80,000 others who profited from the scheme and who may be subject to fraudulent transfer claims as net winners.
Montana governor Steve Bullock signed a bill designed to help victims of Ponzi schemes and other financial scams to get some of their money back. House Bill 81 is designed to create a steady stream of revenue into an account that will fund restitution to Montanans who are affected by securities fraud. If the balance in the restitution fund is sufficient, eligible victims can receive 25% of their losses or $25,000, whichever is less. New Hampshire also has a similar bill pending to provide funding for defrauded investors.
Sunday, March 10, 2013
When the Ponzi schemer defrauds employees of government agencies such as the FBI, you would expect a powerful government response of outrage, retribution, punishment and compensation. The Ponzi scheme of Kenneth Wayne McLeod, however, has seen a very different outcome. The government is now the subject of a $120 million lawsuit brought against it by McLeod’s victims.
McLeod’s victims were largely the employees of law enforcement agencies, including the FBI, DEA ICE, NSA, NCIS, and ATF.
In their lawsuit, the government employees claim that their own agencies were negligent in failing to protect them from McLeod and his scheme. The claim arises because the government agencies actually hired McLeod to give their employees investment and retirement savings advice. McLeod took full advantage of these opportunities to promote his fraud. His particular vehicle was the FEBG Bond fund, which allegedly offered 8%-10% tax-free returns. There are over one hundred plaintiffs in the suit, several of whom claim that they invested over $1 million dollars with McLeod.
McLeod took in $34 million, none of which was actually invested in anything. The scheme unraveled in June of 2010, when he committed suicide and the SEC filed a civil enforcement action.
In their suit, the plaintiffs claim that their agencies and their senior officials violated procurement regulations by failing to investigate McLeod before hiring him to do training seminars; violated ethics rules by accepting favors from McLeod; and violated applicable Office of Management and Budget regulations by allowing McLeod to give employees specific retirement advice.
The specific legal claims are negligence, breach of fiduciary duties, aiding and abetting McLeod’s breach of fiduciary duties, negligent retention and supervision, and negligent infliction of emotional distress. The plaintiffs seek damages of $120 million, consisting of principal investment losses of over $19 million; lost earnings of over $10 million; and non-economic damages of over $90 million.
The suit was filed on February 19, 2013, in the Middle District of Florida. It is available here.
The website of the receiver appointed in the SEC enforcement action is febginfo.com.
As previously reported in my blog, the several attempts of Ponzi scheme victims’ to hold the SEC responsible for negligence have generally proven unsuccessful. See my blogs of September 11, 2012 and February 22, 2013. We’ll see if this case turns out any differently.
Detailed information about the wide range of claims that the victims of a Ponzi scheme can pursue and the potential defenses to those claims is available in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis® 2012). www.ThePonziBook.com.
Monday, March 4, 2013
The American Bankruptcy Institute Journal, March 2013 issue, has a full-page review of the book that I co-authored with Hon. Steven Rhodes, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012).
Tom Salerno, a partner with Squire Sanders in Phoenix, wrote the review. He calls the book:
"…the essential legal resource in this area…"
"…coherent, detailed and user-friendly…"
"…destined to become the Bible in this area of the law…"
"…an invaluable tool…"
"…a veritable ‘how-to’ manual…"
The review is here. Thanks, Tom!
For more information about The Ponzi Book, go to: www.theponzibook.com.