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
Friday, January 31, 2014
January 2014 Ponzi Scheme Roundup
2014 began with a continued, but unfortunate, strong showing of activity in Ponzi scheme cases. Below is a summary of the activity reported for January 2014. 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.
Juan Jose Alvarez de Lugo, 53, was sentenced to 4 years in prison in connection with a $5 million Ponzi scheme that defrauded at least 22 victims. Alvarez de Lugo built up a real estate business with a sophisticated website and promotional materials and misrepresented that he was working with governmental agencies to buy, rebuild and then sell “social housing projects” to help the poor. He targeted contacts from his home country Venezuela to invest and promised them annual returns of 20%.
James W. “Bill” Bailey, Jr. lost his appeal seeking to overturn his 32 year sentence. The Fourth Circuit Court of Appeals upheld his sentence arising from charges in connection with a $15 million Ponzi scheme that he operated through Southern Financial Services and that defrauded about 76 victims. The basis of the appeal was Bailey’s claim that the court had wrongly accepted a second plea agreement that contained corrections to a previous agreement. The court noted that Bailey had personally confirmed the corrected plea agreement and the lower court had “validly accepted a reformation of the original plea agreement.”
Anthony Barreiro, 64, and Ernest Ray Parker aka Ray Parker Gaylord, 50, were indicted on charges that they were running a $3.4 million Ponzi scheme through their antique businesses, Charles Gaylord & Co. and ARTLoan Financial Inc. Barreiro and Parker represented to investors that their money would be loaned to investors to buy artwork and the art would be held at ARTLoan as collateral. It is alleged that the two kept $1.5 million and that $1.8 million was used to make Ponzi payments. ARTLoan filed for bankruptcy in 2011.
Arvin Lee Black II aka Lee Black, 34, pleaded guilty to charges relating to a $21 million Ponzi scheme that defrauded more than 50 victims. Black ran a stock day trading company called Sole Group LLC and promised investors returns of 5% with little risk.
Christopher Blackwell, 34, was sentenced to 210 months in prison and ordered to pay $8.6 million in restitution in connection with an $8.6 million Ponzi scheme. Blackwell had pleaded guilty to the scheme in 2011 and then fled to Greece. Blackwell had promised investors big returns on low risk ventures.
Bryan Caisse, 50, a U.S. Naval Academy grad, was indicted on charges relating to his alleged operation of a $1.2 million Ponzi scheme that defrauded more than 20 victims. Caisse was supposedly running a hedge fund called Huxley Capital Management in which he promised investors annual returns of 8% in connection with short-term loans. Caisse instead used the money to fund his lifestyle. Caisse tried to delay angry investors by pretending he had suffered brain damage and a broken hip in a car accident. He had fled the country with a one-way ticket to Colombia and is reportedly now trying to raise bail from the same people who were his victims.
Anthony D’Agostino, 77, was found guilty on all counts relating to a $20 million alleged Ponzi run through Commercial Mortgage & Finance. D’Agostino, the former president of the company, insists he was not running a Ponzi scheme. About 1,400 people lost money in the scheme. Commercial Mortgage is still in business but is being operated by a board of creditors who lost their money.
David George Dreslin, 54, was arrested in connection with an alleged $6 million real estate development Ponzi scheme. Dreslin solicited investors through his company, Dreslin Financial Services, promising them high returns in a short period of time and that their investment would be safe. Dreslin did not actually own the real estate he represented. His business partner, Gary Gauthier, 64, was also arrested and is accused of soliciting investors into the scheme. Gauthier is the former host of a Christian radio show called “It’s God’s Money.”
Glen Galemmo, 48, pleaded guilty to charges relating a Ponzi scheme that defrauded about 200 victims. The plea agreement said that Galemmo collected $116 million, but more than 160 investors are suing Galemmo and claim that they lost up to $300 million. Galemmo had promised clients more than 30% returns through investments in his company, Queen City Investments.
Kamalu Gonzales, 47, was sentenced to 78 months in prison and ordered to pay $830,000 in restitution in connection with a $1 million Ponzi scheme that defrauded at least 16 victims. Gonzales diverted about $410,000 for his own purposes despite his representations that he was a successful investor and trader on the foreign currency exchange market.
Randal Kent Hansen, 65, was convicted on charges in connection with a $10 million Ponzi scheme that he ran through two hedge funds known as RAHFCO Funds LP and RAHFCO Growth Fund. The scheme, which he ran with Anthony John Johnson, defrauded about 90 investors from whom he took more than $20 million.
Jason Nicholas James, 38, was arrested on charges related to a Ponzi scheme involving at least $350,000, run under the guise of a used-car dealership. James was using the identity of his brother, Jeremy Michael James, and other alias that included Jay James and J. James.
Herbert Kay was indicted on charges that he ran an investment Ponzi-like scheme that defrauded at least 5 people out of about $200,000. Kay entered not guilty pleas to all of the charges, stating that his business simply failed and “There’s just nothing nefarious here.”
Douglas Edward Kacos, 58, and Thomas Doctor, 60, will not be receiving any jail time in connection with their no contest pleas to charges of money laundering. As part of the $9 million Ponzi scheme run by Jeffrey Ripley, 60, and Danny VanLiere, 61, through their company, API Worldwide Holdings, that defrauded 140 investors, Kacos and Doctor ran funds through Kacos’ restaurant, New Beginnings Restaurant.
Pastor Charles Lawrence Kennedy, 71, was sentenced to one year and a day in prison and ordered to pay about $315,000 in restitution in connection with a Ponzi scheme that defrauded about 100 investors. Kennedy solicited funds for a scheme run by Stanley Wayne Anderson and Edwin Alexander Smith through CFO-5 LLC and Trinity International Enterprises Inc. Investors were told that significant profits were generated through the trading of European medium term notes, when in fact no such program existed. Kennedy solicited funds from fellow pastors and members of their congregations through his company, Keys to Life Corporation, and promised them that for every $1,000 invested, the minimum return would be $1,000,000 which would be paid in 90 days. Kennedy collected $460,000 from 9 investors and forwarded $315,000 of that sum to Trinity.
Jason Keryc, 34, Anthony Ciccone, 39, and Diane Kaylor, 36, each pleaded not guilty at their arraignment in connection with their involvement of the $400 million Ponzi scheme masterminded by Nicholas Cosmo. Two other associates, Bryan Arias, 40, and Shamika Luciano, 31, have also been charged in connection with the scheme. Cosmo had taken in more than $400 million from 5,000 investors through his companies, Agape World and Agape Merchant Advance. It is alleged that each of the defendants made money the scheme in the following amounts: Keryc $16 million; Ciccone $10.7 million; Kaylor $4.7 million; Arias $1.7 million; and Luciano $275,000.
Ryan W. Koester was sentenced to 2 years in prison and 14 years probation and ordered to pay more than $517,000 for his role in a $1.5 million Ponzi scheme that defrauded 24 investors. Koester operated his scheme through his company, Rykoworks Capital Group LLC, claiming to be an expert in foreign commodities trading. Instead of investing the money in foreign markets, he used them for living expenses and risky internet trading.
Terry Kretz, 61, Daryl Bornstein, 54, and Robert Haley, 54, pleaded guilty to charges relating to a Ponzi scheme run through investment company, Hanover Corporation. They offered investors promissory notes bearing high interest rates, representing that the money would be used for specific purposes such as stock options and startup companies.
Anthony Lupas Jr., 79, surrendered to a federal prison for inmates “who have special health needs.” Lupas was deemed not competent to stand trial after it was determined that he had “lost his perception of reality.” Lupas was a lawyer who had defrauded his clients out of $6 million in a Ponzi scheme.
Bernard Madoff returned to prison after recovering from a heart attack that occurred last December.
Peter Barnett Madoff, 68, the younger brother of Bernard Madoff, was disbarred as an attorney by the New York appeals court for his role in the Bernie Madoff Ponzi scheme. Peter Madoff was sentenced 10 years in prison after pleading guilty to federal conspiracy and securities fraud charges relating to the scheme. Peter Madoff admitted that he failed to report benefits as income on his tax returns and that he falsely placed his wife on the payroll of the Madoff firm.
Barry Minkow pleaded guilty to charges of stealing $3 million from parishioners of San Diego Community Bible Church of which he was the pastor. Minkow gained notoriety for his $100 million Ponzi scheme operated through his carpet cleaning company ZZZZ Best. Minkow, at 21, was the youngest person at the time to take a company public, but was sentenced to 25 years in prison in 1988 for the scheme. He was released in 1995, became the pastor of the church two years later, and founded the Fraud Discovery Institute which helped the FBI and other law enforcement agencies to detect white collar crimes. In the meantime, he continued to engage in fraudulent activities, and was sentenced to 5 years in prison in 2011 for securities fraud. He faces an additional 5 years for this latest conviction.
Hendrix Montecastro was sentenced to 81 years and 8 months in prison in connection with his $142 million Ponzi scheme. His mother, Helen Pedrino, 62, was sentenced to 7 years in prison. They were also ordered to pay more than $6 million in restitution.
Steven Palladino, 56, his wife Lori Palladino, 51, and his son Gregory Palladino, 28, pleaded guilty to charges relating to an alleged $10 million Ponzi scheme that they ran through Viking Financial Group that allegedly defrauded about 40 victims. Steven Palladino was sentenced to 10-12 years in prison and 5 years of probation, while Lori and Gregory were each sentenced to 2 years in a house of correction.
James Pantazelos lost his appeal of his sentence in which he argued that his criminal-history score overstated the significance of his criminal history because his prior criminal history involved nonviolent offenses. The Seventh Circuit affirmed his 114 month sentence. U.S. v. Pantazelos, 2014 U.S. App. LEXIS 1142 (7th Cir. Jan. 22, 2014). Pantazelos had operated a $4.3 million Ponzi scheme through Destiny’s Partners, Inc.
Larry Michael Parrish, 49, was sentenced to 9 years in prison and order to pay $4 million in restitution in connection with $9.2 million Ponzi scheme that defrauded 70 investors. The scheme was run though IV Capital Ltd. as an investment firm that supposedly traded in international exchanges. Parrish guaranteed monthly returns of at least 2.5%.
Tom Petters, 54, filed new motions to have the judge removed from his case and to alter the recent order that denied Petters his previous effort to have his 50 year prison term reduced. Petters also asked to be released on bail pending a ruling on his motions. Petters filed the motions with the assistance of his “jailhouse lawyer,” John Gregory Lambros, who is an inmate with Petters serving time for his role in an international cocaine distribution ring in the 1980s. Lambros is not actually an attorney and is scheduled to be released in 2014. Petters was convicted in connection with his $3.65 billion Ponzi scheme.
Aubrey Lee Price, 47, was arrested in Georgia on charges relating to an alleged Ponzi scheme he had run though PFG, LLC and Montgomery Asset Management, LLC fka PFG Asset Management, LLC. Price had disappeared in 2012 and had left a suicide note, but authorities remained skeptical and had conducted a massive manhunt. In 2013, a court declared Price dead, but on New Year’s Eve, Price was pulled over in a routine traffic stop for a tinted window violation. Officers became suspicious when he gave them evasive answers, and they learned that Price was wanted by the FBI. Price defrauded investors by promising high returns in supposed low risk securities investments. Instead, Price use the investors’ funds to purchase a failing bank, Montgomery Bank & Trust, and then used the bank to embezzle at least $21 million.
R. Christopher Reade, 43, a Las Vegas attorney, pleaded guilty to charges that he helped his client, Rick Young, launder $2.3 million from a $16 million Ponzi scheme. Young claimed he had developed an automated trading program that traded according to his strategies simply by “flipping a switch.” Young is serving 25 years in prison and was ordered to pay $13.3 million in restitution.
Hans Seibt, 72, was sentenced to 10 years in prison and ordered to pay $1.3 million in restitution. Seibt used his companies, HSLV Development Corp., Clark and Nye County Development Corp., and SWN Land Corp., to solicit investments of $10,000 or more in the land scheme and promised investors returns of 10% to 12%.
Luis Alonso Sena, 61, was arrested in connection with charges relating to a $7 million alleged Ponzi scheme that lured in more than 70 individuals. Sena is the pastor of Zion Living Word Christian Center in California. He purported to run a foreign currency investment company through Architects of the Future Investments, promising investors up to 20% returns per month.
Richard Trabulsy had his new plea agreement approved by the court after his first plea agreement was thrown out after a dispute over the length of his sentence. Trabulsy worked with John Bravata at BBC Equities, which ran a $50 million real estate Ponzi scheme that defrauded more than 400 investors. Bravata is serving a 20 year sentence. His son, Antonio Bravata, was also convicted in connection with the scheme and is serving a 5 year sentence.
WCM777 changed its name to Kingdom777. The name change came with the announcement that Kingdom777 acquired the assets of WCM777 on December 30, 2013. The founders, Dr. Phil Ming Xu and Tiger Liu will not be officers in the new company and are referred to as “founders. Police in Peru raided the local WCM777 operation, which prompted the head of the organization to declare his love for the Peruvian people. Xu also promised “a promotion plan with a payout ratio of 130%.” The state of California issued a Desist and Refrain Order that bans the company in California, which also named executives Ming Xu and Zhi Liu, and Harold Zapata and World Capital Market Inc.
Joel Wilson, 31, was arrested in Germany and accused of running a $500,000 Ponzi scheme. Wilson represented that he would use investors’ funds to purchase, fix up and resell homes in Michigan but instead used the money for himself and to make Ponzi-like payments. He ran the alleged scheme through his company, Diversified Group Advisory Fund LLC. Wilson left for German in 2012 during the investigation of the alleged Ponzi scheme. Shawn Dicken, 40, was also charged in connection with the scheme.
INTERNATIONAL PONZI SCHEME NEWS
The Ontario Securities Commission approved a settlement that will permanently bar Kevin Warren Zietsoff, 41, from participating in the capital markets. Zietsoff operated a $15 million Ponzi scheme and defrauded more than 80 victims in Canada and the U.S. He sold promissory note securities without a license, misrepresenting that he was a successful trader and that the notes were either low risk or risk free.
The Nova Scotia Securities Commission levied $500,000 of fines against Quintin Sponagle and Trevor Hill in connection with a alleged $3.2 million Ponzi scheme that they ran through Jabez Financial Services Inc. The scheme allegedly defrauded 137 investors, who were promised returns up to 214%.
Earl Jones, currently serving an 11 year sentence after pleading guilty to a $50 million Ponzi scheme, could be released from prison in light of a recent Quebec court ruling. The Quebec Superior Court ruled that a federal government decision that abolishes early parole for white collar crime is unconstitutional. Jones waived his right to a parole hearing in June.
Hong Kong-based company Mega Holding has been accused of running a Ponzi scheme that allegedly defrauded 35,000 people.
It was reported that over 20, and maybe hundreds of, retired senior officials from the Ministry of Foreign Affairs were swindled in a $24.8 million (150 million yuan) scheme run through the Xin Lu Yuan Company operated by Zhang Zhouming, 46. The company had claimed that it owned 6 mines in China and overseas and more than 1,000 acres of forest and that each adviser could earn a bonus of 500 yuan for introducing a new investor to the company. Zhang was arrested in 2012. The scheme involved more than 1,700 investors who lost a total of about $430 million (2.6 billion yuan).
Matthew Ames, 38, pleaded not guilty to charges that he ran a £1.6 million Ponzi scheme under the guise of saving the rainforest. Ames was charged with fraud in connection with his two green investment firms, Forestry for Life and the Investor Club. Investors were promised 15% returns from teak tree plantations and rainforest protection projects. Instead of investing the money, however, Ames used the money to fund a lavish lifestyle and to purchase a Lamborghini and a Caribbean rental.
Nigel Goldman, 56, disappeared from his mansion in Spain after he was accused of stealing more than £3 million from investors in an alleged Ponzi scheme run through his Tangiers-based company, International Financial Investment. Goldman offered investments in commodities such as bullion, and stocks and shares. Goldman is a British poker champion who has twice been jailed for fraud. In 2012, he wrote “High Stakes: How I Blew £14 Million” - his memoirs describing his history of dishonesty.
Dresden based financial service provider Infinus Group was dismantled as a Ponzi scheme. Public prosecution of Dresden arrested six senior representatives of Infinus for giving untrue statements about the financial situation of Infinus. Public prosecution suspects that payments to the investors were made with investments of new clients. According to the public prosecution, 25,000 investors lost approximately EUR 400,000,000. Following the search and arrest detention, 17 of the 22 companies belonging to the Infinus Group filed for insolvency. It is reported that the creditors’ claims total nearly EUR 1 billion. Reported by Bernd Klose, www.raklose.de/.
A new law was signed to prohibit Ponzi schemes in Kazakhstan. The law, which amended the criminal code, provides for 7 to 12 year long prison terms for those orchestrating a Ponzi scheme and bans advertising of Ponzi schemes. According to the General Prosecutor’s Office, from 2010 to 2013, there were a total of 61 criminal cases relating to Ponzi schemes and about 4,000 victims with about $5 million of losses.
Rene Alan Chalmers, 43, was sentenced to 4 years and 3 months in prison in connection with a $1.5 million Ponzi scheme through his company, Chalmers Cameron Investments. Chalmers had previously plead guilty to charges of theft and making false statements to investors, which arise from his supposed trading foreign currency business and misleading banks when buying properties.
The government shut down an office of WCM777, which recently changed its name to Kingdom 777, due to regulatory scrutiny it has been receiving in a number of countries.
Police arrested suspect Elvy Mansilangan-Lu, known as the “Queen of the Ponzi Scheme,” in connection with an alleged Ponzi scheme run through Minerva Co. The scheme was supposedly a double your money investment scheme in which victims, mostly Muslim investors, lost about P200 million.
NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES
The receiver of the Acorn Capital Management Ponzi scheme run by Donald Anthony Walker Young defeated a motion to dismiss his claims to recover allegedly fraudulent transfers made to two of Acorn’s limited partners, Diana and William Wister, in the amount of about $11.8 million.
Francisco Javier Herrera Navarro, the ex-director of commodities trading company, Agra Canada and its subsidiary Agra USA, must pay $42 million to Rabobank in connection with a personal guarantee that he made promising to repay Agra’s obligations and the amounts due on receivables that Agra Canada sold to Rabobank. A New York state appeals court reversed a lower court's denial of the bank’s motion for summary judgment and said that Navarro unconditionally waived all defenses when he signed the guarantor agreement. The losses were in connection with a Ponzi scheme run though the companies that were operated by Eduardo Guzman Solis.
JPMorgan Chase & Co. reached agreements with various governmental agencies to pay $2.6 billion in fines to resolve criminal and civil allegations that it failed to stop Bernard Madoff’s Ponzi scheme. JPMorgan agreed that it ignored red flags in the Madoff banking arrangement for and failed to report suspicious activity. In connection with a deferred prosecution agreement, JPMorgan will pay $1.7 billion to settle the government’s charges, $350 million to the Office of the Comptroller of the Currency, $325 million to the Madoff trustee, and $218 million to settle class action claims. The $1.7 billion from JPMorgan will go in the Madoff Victim Fund to be distributed to the Madoff victims. 193 investors – the “net winners” who withdrew more money than they invested and who are not otherwise entitled to share in the recovery - have asked to be excluded from the JPMorgan settlement.
The U.S. Supreme Court asked the Obama administration for its input on the issues raised in the Madoff trustee’s appeal seeking permission to sue HSBC and other financial institutions. The trustee’s claims were dismissed by the lower court on the grounds that the trustee lacked standing to bring the claims, among other things. The Trustee’s claims against JPMorgan will be dropped in light of the settlement reached with that bank.
The Madoff trustee’s settlement with Jeffry Picower was upheld on appeal. Two investors, Adele Fox and Susan Marshall, sought to pursue their own claims against Picower but were stayed by the court overseeing the Madoff case because those claims were “derivative” of the trustee’s claims. The trustee’s settlement brought in a total of $7.2 billion to be paid to the estate and the government, which makes up a large part of the $9.5 billion that the trustee has recovered in the case.
A New York appellate court overturned an order dismissing claims against accounting firm Konigsberg, Wolf & Co. and its president, Paul Konigsberg, brought by Madoff investor Mark Weinberg. Weinberg alleges that the firm and its partner, Steven Mendelow, steered him to invest in a Madoff feeder fund FGLA Equity. The appellate court found that Weinberg had adequately pled claims of fraud, aiding and abetting fraud and negligent hiring and supervision.
U.S. Bankruptcy Court Judge Burton R. Lifland, the judge overseeing the Bernard Madoff Ponzi scheme case, died at age 84 after suffering from bacterial pneumonia. Judge Stuart M. Bernstein will take over the Madoff case.
The receiver of the Arthur Nadel Ponzi scheme has reached a settlement with Choice Direct Mail Inc. and Ty Hardin to settle claims that they hid money from the receiver. The receiver had obtained a judgment against Donald Rowe, the publisher of a Sarasota investment newsletter that had strongly touted Nadel’s investment program. Rowe was ordered to pay $4 million but was subsequently accused of hiding assets to avoid paying the receiver. Last year, the law firm of Band Weintraub PL agreed to pay almost $1 million to settle claims that it was “front and center” in a conspiracy to hide Rowe’s money from the receivership. In this new settlement, the receiver will recover nearly $750,000 and Choice Direct mail, and Ty Hardin have not admitted any liability. The Nadel Ponzi scheme involved losses of $162 million by 350 investors.
The bankruptcy trustee in the Tom Petters case filed a motion to take a district court appeal directly to the 8th Circuit Court of Appeals. The appeal relates to the bankruptcy court’s ruling to consolidate separate entities.
The former partner of Scott Rothstein, Stuart Rosenfeldt, filed a motion to avoid testifying in the upcoming criminal trial of a junior lawyer in their firm, Christina Kitterman, who has been accused of playing a role in the Rothstein Ponzi scheme. Rosenfeldt plans to plead the Fifth and refuse to answer questions that might incriminate him since Rosenfeldt still faces possible indictment from his association with Rothstein. Rosenfeldt denies any wrongdoing.
The Fifth Circuit upheld a lower court’s ruling that Trustmark National Bank could not withhold $1.98 million from the receiver in the Ponzi scheme case of R. Allen Stanford. Trustmark had secured a letter of credit by issuing a certificate of deposit to Stanford who placed the cash collateral in a Trustmark deposit account. A creditor of Stanford was allowed to present its letter of creditor to Trustmark for payment, but Trustmark was not allowed to offset that with Stanford’s cash collateral and Trustmark was ordered to turnover the cash collateral to the receiver. See Trustmark National Bank v. Janvey, 2014 U.S. App. LEXIS 357 (5th Cir. Jan. 8, 2014)
The receiver of the WexTrust Capital Ponzi scheme case is seeking compensation for him and his professionals in the amount of about $1 million. This request is in addition to about $20 million that has previously been paid in fees. The Ponzi scheme involved losses of $238 million, and the 1,300 victims have shared about $5 million in recovered funds so far. Secured creditors have been paid about $55.1 million. The case remains open due to ongoing unresolved issues with the IRS and family members relating to certain real property. The scheme was run by Joseph Shereshevsky and Steven Byers, who are serving 22 year and 13 year prison terms, respectively.
In the ZeekRewards $600 million Ponzi scheme case, a lawyer representing a group of victims has objected to the receiver’s proposed process to distribute assets to victims, arguing that if the distributions go directly to the victims, they will not be able to first deduct their 25% fee from each claim. One lawyer has asked that future distributions to 740 victims be paid solely to his law firm because he entered into a contingency fee agreement with them to file a class action, which was later found to be in violation of the stay order in the case. The receiver takes issue with the contingency fee being charged for filling out the online claims form, noting that “whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.” More than 170,000 individuals have submitted claims.
Four Oaks Fincorp Inc. and Four Oaks Bank & Trust Company in North Carolina reached a deal with the government to pay a penalty of $1.2 million without admitting wrongdoing or liability in connection with the ZeekRewards scheme. Authorities say that the bank permitted Rex Ventures Group, the parent company of ZeekRewards, to move $60 million because the bank permitted money to move in a manner which took the bank out of its usual intermediary position between the third party processor and the Federal Reserve. The bank allowed the third party processor to directly submit Automated Clearinghouse requests for payments directly to the Federal Reserve, which removed the controls of the bank required by the Bank Secrecy Act to ensure that the bank satisfied its “know your customer” obligations.
The Office of Comptroller of the Currency announced a policy shift which would make it easier to target lenders in certain types of enforcement actions. The new “streamlined” procedures apply to banks with more than $50 billion in assets. The agency is insisting that banks have strong risk-management grades and that boards stand up to management, questioning and challenging management’s actions that threaten to take undue risk. The new procedures will allow the agency to skip a judicial hearing in obtaining a safety-and-soundness order, which can be enforced through assessment of civil money penalties.
The State of California is considering legislation to align California law with federal income tax law. Senate Bill 797 is intended to provide relief to victims of Ponzi schemes by offering them tax relief and to “ensure the state doesn’t re-victimize these innocent Californians.” SB 797 allows innocent victims to carryover or carryback net operating losses for each taxable year beginning on or after January 1, 2008.
Congress took away half of the $50 million that the SEC had set aside for technology initiatives. SEC Chairman Mary Jo White said that the cutback “will affect the pace and extent of our continued progress.” The SEC was to use the funds for technology upgrades that would have helped it, among other things, better detect trading and accounting frauds that are often the subject of Ponzi schemes.