Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Sunday, September 30, 2012

September 2012 Ponzi Scheme Roundup

 Posted by Kathy Bazoian Phelps
September was another busy month for Ponzi scheme news. Here is the summary of the stories that were reported this month. Please feel free to post comments about 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.
Angelo A. Alleca, 42, and Summit Wealth Management Inc., based in Atlanta, were the subject of a complaint filed by the SEC seeking an asset freeze in connection with their sale of interests in Summit Fund. It is alleged that Alleca and Summit Wealth Management sold interests in Summit Fund, which they told their clients was operating as a “fund-of-funds” meaning they were investing their money in other funds and investment products rather than directly in stocks and other securities. Alleca instead allegedly engaged in active securities trading with his clients’ money, and he incurred substantial losses. He concealed the Summit Fund trading losses from investors and provided them false account statements.
Willard Aller and Bonnie Aller have pleaded no contest to charges in connection with a Ponzi scheme they had allegedly operated through their company, Malibu East Motor Cars. Under the terms of the plea agreement, Will and Bonnie Aller will serve 10 years of supervised probation and pay at least $234,000 to victims who said they never got the money they invested in what they thought were high-interest car loans for people with poor credit.
Nikolai Battoo and his companies BC Captial Group SA (based in Panama) and BC Capital Group Ltd. (based in Hong Kong) were the subject of an emergency action by the SEC to obtain a freeze of the U.S.-based assets belong to Battoo and his companies. Battoo and his companies operated feeder funds for Bernard Madoff’s Ponzi scheme, and it is alleged that Battoo raised at least $100 million from U.S. investors by overstating the value of his investments, among other things. Battoo blamed the collapse of MF Global for his inability to pay redemptions requested by investors. In a separate complaint, the CFTC is also seeking an asset freeze and appointment of a receiver. Tracy Lee Sunderlage, who allegedly helped Battoo raise money, was also charged.
Stephen B. Blankenship, 63, pleaded guilty to a $600,000 Ponzi scheme that he operated through his company, Deer Hill Investment Group. He defrauded about a dozen investors, many of whom were elderly members of his church, by taking their money to supposedly invest at higher rates of return than they had been receiving. He prepared false statements showing that his clients’ accounts were increasing in value.
Daniel Bogar, Bernerd Young, and Jason Green, were charged in administrative proceedings brought by the SEC in connection with their role in the Ponzi scheme of Allen Stanford. The SEC alleged that they knew or should have known that offering documents in connection with the certificates of deposits sold by Stanford International Bank were false or misleading. Jay Comeaux settled with the SEC’s administrative proceedings against him without admitting or denying the SEC’s allegation. Comeaux had been responsible for supervising financial consultants and had received commissions of at least $1.3 million.
Ronald Lee Brito, 61, Bonnie Brito, 66, and Thomas Winston Moore, 68, of California were arrested on charges relating to an alleged $25 million investment scheme. The case will be prosecuted in Michigan since most of the approximately 500 victims were from Michigan, recruited by John James Missitti of Michigan. Missitti and Mark Carpenter were also named in the indictment. The five defendants promised investors large returns on their investments in, among other things, valuable minerals extracted from a gold mine in Arizona. They used various corporate names to run the scheme, including Infinity Trading, LLC, GetMoni.com, and PJM Kingman Mine.
Mark Casolo, 55, a former stockbroker for McGinn, Smith & Co, was arraigned on allegations that he stole about $2.2 million from 16 victims in a 3 year Ponzi scheme. Casolo pleaded not guilty to charges that he duped clients into investing their life savings with him. Casolo used the companies Escalation Capital Group, LTD, Wilderness Partners, LLC, Wilderness Capital Group, and NCH Partners, LLC to run his scam.
Nicholas Cosmo saw his 25 year prison sentence upheld on appeal. Cosmo ran a $413 million Ponzi scheme through Agape World Inc. and Agape Merchant Advance LLC in which he told investors he would use their money to make short term loans. He claimed that the loans would be secured by borrowers’ assets and promised returns as high as 80 percent.
Lydia Cladek, 68, of Florida was sentenced to 30 years in prison for her role in a $50 to $100 million Ponzi scheme that she operated through her company, Lydia Cladek Inc. Cladek bought sub-prime automobile finance contracts from dealers at discounted prices and then promised investors a large slice of the income from the notes’ interest rates, which often exceeded 20 percent. Cladek used the investors’ funds on a variety of luxuries, including 12 houses, most of which were used for investment purposes. Cladek had three vacation homes, lived in a gated community in St. Augustine Beach and had $2,000-sheets on her bed. Cladek also made substantial donations to various animal shelters or rescue operations. The court noted that Cladek showed no remorse, and the 30 year sentence may be the largest ever given to a female accused of operating a Ponzi scheme.
Michael Todd Crosswhite, 42, received a 2 year, 9 month sentence and agreed to pay more than $940,000 in restitution to his victims. Crosswhite victimized 9 people and one business working under the name of Allianz Life Insurance Company of North America. Crosswhite was an independent agent of Allianz, held himself out as a financial consultant, and was selling insurance products for other companies.
Ramon DeSage, a businessman in Las Vegas, is accused of using his companies, including Cadeau Express to defraud investors of millions of dollars. Tara Mazzeo, 36, of Las Vegas, is accused of lying to IRS agents about her financial ties to DeSage, including of lying about receiving almost $500,000 from DeSage in 2009 to help buy a home and a luxury vehicle, and about the transfer of $350,000 from DeSage’s bank accounts to Mazzeo’s business, Tarabella LLC.
Marino De Silva, 51, a Los Angeles-based and U.K. born guitarist, is facing up to 8 years in jail after pleading guilty to charges relating to his taking millions of dollars from investors, using his company Angels on Earth Foundation as a front for raising money for causes such as wounded American troops and kids with autism. De Silva allegedly operated the company in a Ponzi scheme fashion but never gave the money to the charities he was supposedly helping. DeSilva claimed to own rights to rare recordings and interviews by iconic bands such as the Rolling Stones, the Beatles, and Carlos Santana. Investors were solicited to assist in the digital re-mastering of the recordings which, once released, would supposedly be in high demand and produce lucrative returns. However, when the purported “re-mastered” albums were released, they turned out to be nothing more than poor quality cover versions of already-released songs, most performed by DeSilva himself.
George Elia was charged with 8 additional counts relating to his alleged Ponzi scheme that he ran through International Consultants & Investment Group Limited Corp. that defrauded investors out of more than $11 million. Elia was going to enter into a plea deal as to the one count of wire fraud, but changed his mind and was then indicted on 8 additional charges. Elia targeted the Wilton Manors gay community through word of mouth marketing.
Timothy Geidel and his companies Georgetown Capital Group and Royal Alliance Associates have been sued by plaintiffs claiming that they lost more than $132,000 in “bogus securities” that Geidel sold them. Geidel pleaded guilty in 2011 to charges relating to his Ponzi scheme where he defrauded more than 40 investors of $1.3 million. Most of his investors were active or retired members of a school district and he told investors that they could make investments in certificates of deposit with 6% returns. The CDS were “fictitious and nonexistent.” He was sentenced to 3½ years in prison and ordered to make restitution.
Jon Harder, 47, of Oregon pleaded not guilty to charges that he defrauded more than 1,000 investors of $130 million, and then surrendered himself to Oregon law enforcement officials. It is alleged that Harder operated a Ponzi scheme through Sunwest Management, raising money from investors to operate more than 300 assisted-living centers. The indictment alleges that Sunwest had started to lose money in 2006, but Harder brought in more money to buy more than 100 assisted-living centers at the rate of one a week to hide the losses. The indictment seeks a money judgment of $130 million. Harder filed for personal bankruptcy protection, and in 2010, he agreed to pay $4.2 million in fines to the Oregon Division of Finance and Corporate Securities. Harder and his wife spent the misappropriated funds on a lavish lifestyle which included the acquisition of 18 pieces of property and the purchase of numerous luxury cars, including a Mercedes, a Land Rover, two BMWs, a Cadillac Escalade and a Lexus.
Yusaf Jawed and Lyman Bruhn were charged by the SEC with running a Ponzi scheme investing in blue-chip stocks, or public stocks of well-established companies. Charges were also brought against Jawed’s attorney, Robert Custis. They raised more than $37 million from more than 100 investors in the Pacific Northwest. They used false marketing materials and promised double-digit returns. Jawed controlled Griphon Asset Management, LLC, and Griphon Holdings, LLC, which served as advisers to numerous hedge funds created and managed by Jawed, including Gripfhon Alpha Fund, L.P. and Grifphon Iota Fund, L.P. Bruhn operated Pearl Investment Management LLC and Sasquatch Capital Management LLC in Portland and raised more than $600,000 from ten investors on the West Coast for a hedge fund, the Blue Chip Focus Fund. Investors were told through private placement memoranda that the funds experienced annual returns ranging from 12.8% to 132.5%. Jawed misappropriated millions of dollars in investor funds for his personal use, which included luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.  
Rick Koerber of Utah saw 18 of 20 charges against him allowed to go forward in connection with allegations that he ran a $100 million Ponzi scheme. Koerber had been contesting the charges and denied that he operated his company, FranklinSquires Cos., as a Ponzi scheme. Koerber allegedly promoted “Equity Milling“ as a form of real estate investment, and advertised on billboards and magazines, and through seminars that people paid several thousands of dollars to attend.
Keith Kovac, 61, and Robert Congdon, 61, both of Montana, were sentenced to 2½ and 2 years, respectively, and must pay almost $1.2 million in restitution for their role in a Ponzi scheme operated under the name Cornerstone Financial. Kovick and Congdon illegally arranged for loans, but were not properly registered with the state.
Gary Harrison Lane, 59, a former Reno financial advisor, was indicted on charges relating to an alleged Ponzi scheme where is accused of taking at least $2.1 million from elderly and inexperienced investors. It is alleged that Lane deposited investor funds into E-trade accounts that were not affiliated with his employer, Bank of America Investment Services, while investors understood that he was purchasing U.S. Treasury Bonds on their behalf at a rate of 6%.
Philip Lester, 65, real estate broker in Nevada, was charged with securities fraud, elder abuse and conspiracy and arrested in connection with a Ponzi scheme he ran through Gold Country Lenders with his sister, Susan Laferte, 58, along with Lester’s wife, Ellen Lester, 65, who is an attorney and business partner, and their business associate Jonathan Blinder, 58. Lester would take investor funds to purportedly invest in real estate projects, but he would use the money to pay investors on other projects. He promised investors security in the form of deeds of trust owned by the entity in which the investor thought the investment was being made but, in fact no security was provided. Investors are owed more than $2.3 million.
Irwin Lipkin, 74, the former controller of Bernard L. Madoff Investment Securities, was to plead guilty to charges related to falsifying documents that were provided to Madoff’s investors. The expected guilty plea was delayed after Lipkin suffered “an emergency medical condition.” Lipkin’s son, Eric S. Lipkin, pleaded guilty in 2011 to charges that he reported that people were Madoff employees so they could receive retirement benefits. It has been alleged that Lipkin continued to draw a salary from BLMIS even after retiring in 1999. Lipkin is the ninth former Madoff employee to plead guilty to criminal charges.
Steven Lippman, a lawyer who formerly worked at Ponzi schemer Scott Rothstein’s law firm, pleaded guilty to conspiring to violate federal election laws and to commit bank fraud. It is alleged that Lippman made sizable contributions to John McCain’s 2008 presidential campaign and then was illegally reimbursed by Rothstein. Additionally, it is alleged that Lippman used a bank account that he controlled to artificially inflate the value of the Rothstein firm’s accounts and fraudulently obtain additional financing. Lippman saw his pay go from $400,000 to over $1.3 million when he worked for Rothstein.
Michelle Longchamps, was given a conditional sentence for two years less a day for her role in a $1.6 million Ponzi scheme so she will not need to go to prison. Longchamps is undergoing ongoing cancer treatment which was factored into her sentencing. Longchamps used fraudulent entities such as “Integrity Financial Management.” Perhaps the license plates of her and her husband should have tipped off investors: “no job for me” and “live for free.” Her husband, Jeffrey Longchamps, received an 18 month conditional sentence in August.
Lawrence Leland Loomis, 55, of California, was indicted along with 6 others, for their role in a multistate Ponzi scheme and related mortgage fraud scams that defrauded investors of $17 million. Loomis and his father-in-law, John Hagener, 76, were charged with operating a California-based investment fund called Loomis Wealth Solutions that defrauded more than 100 investors of more than $7 million. Loomis and Hagener pleaded not guilty. Loomis was ordered held, and Hagener was freed on $1 million bond. The others charged in connection with the schemes are Darren Fehst, 44, Michael Llamas, 27, Peter Woodard, 54, Joseph A. Gekko, 43, and Dawn C. Powers, 42.
Loronda Murphy, 48, of Connecticut, pleaded guilty to charges related to a mortgage fraud Ponzi scheme in which she refinanced homes for 5 people but failed to repay the original mortgages. Murphy operated the scheme with Scott Forcino, 46, who is a real estate lawyer that oversaw some of the transactions. Murphy defrauded two banks through her company, Settle One Corporation.
James Pantazelos, 63, pleaded guilty to charges related to his operation of a Ponzi-type scheme through his company, Destiny Partners, Inc., where he took in $4,294,930 from investors and promised them 200% returns. Pantazelos told investors that their funds would be placed in “Private Investment Trading Platforms” that traded bank notes in foreign markets and that funds would be donated to charitable contributions.
Laura Pendergest-Holt, 39, the former chief investment officer of Allen Stanford’s companies, was sentenced to 3 years after she pleaded guilty to obstructing an investigation by the SEC. Pendergest-Holt gave testimony to the SEC which omitted crucial details about the finances of Stanford International Bank, Ltd., and was intended to impede the SEC’s investigation and to help the bank to continue operating.
Richard Plato 64, of Texas, was convicted by a jury in connection with a scheme run through his company, Momentum Production Corp., in which he sold promissory notes that he claimed were secured by South Texas oil and gas interests. Plato had previously been convicted of fraud in Texas, Florida and Louisiana. He sold about $6.2 million worth of notes and never disclosed his previous convictions. About $2 million of the funds were diverted to Plato’s benefit.
Grahame Rhodes of Missouri was the subject of a civil enforcement action brought by the CFTC for fraud in connection with his operations of a multi-million commodity pool Ponzi scheme. It is alleged that Rhodes took at least $2.1 million from at least 12 individuals to trade commodity futures in a pooled investment account. Rhodes was never registered with the CFTC and allegedly solicited prospective pool participants by pretending to be a successful, but cautious, trader who earned annual rates ranging between 20 and 50 percent trading E-mini S&P futures contracts.
Alan Ritter, 69, of New York, pleaded guilty to charges in connection with his 11 year operation of a $6 million Ponzi scheme. Ritter initiated the scheme in 2001 after the failure of a debt collection business he started with a partner. To cover the losses, he solicited hundreds of thousands of dollars from investors, promising to invest the funds in real estate ventures. Instead, Ritter used the funds to pay interest payments on the previous loans and to pay personal expenses.
Juan Carlos Rodriquez, 41, pleaded guilty to charges relating to his stealing $1.9 million from 63 investors and he was sentenced to 7 years in prison and ordered to pay about $2 million in restitution. Rodriquez was an accountant with an investment business, MDN Financial Group into which he lured clients, family and friends to invest, guaranteeing returns of 20 to 50 percent in each month. He was purportedly investing in stocks, bonds, and gold, but instead stole the money to pay for homes, cars and a nice lifestyle. It is alleged that Rodriguez took a total of about $5 million for 116 investors who signed investment management agreements with MDN.
Kim Rothstein, 38, Scott Rothstein’s wife, was charged in connection with allegations that she concealed more than $1 million in jewelry from federal investigators and then later attempted to sell some of it through Eddy Marin, 50, and Patrick Daoud, 54. At the time that investigators seized property from the Rothsteins’ residence, Kim Rothstein assured them that they had everything, but it is alleged that she and two others “knowingly took action to conceal certain items of jewelry.” It is also alleged that Kim Rothstein and her co-conspirators, Stacie Weisman, 49, and Scott F. Saidel, 45, tried to persuade Scott Rothstein to testify falsely about the location of jewelry. Kim has plead not guilty to the charges, but it is expected that she will enter into a plea agreement with prosecutors. Marin has been charged with obstruction of justice and perjury.
Francis X. Sanchez, 52, was sentenced to more than 11 years in prison and ordered to pay more than $7.8 million in restitution for his role in a $7.2 million Ponzi scheme operated through InvestForForeclosures with his partner, James D. Bourassa, 55. Sanchez represented that he bought distressed houses, rehabilitated them, and sold them for profit. He pleaded guilty to fraud in May and admitted in his plea agreement that that he solicited people to invest in InvestForClosures by making various misrepresentations, including: (1) that their investments would be safe because they would be backed by real estate; (2) that InvestForClosures used the majority of its investors’ funds to purchase real estate; and (3) that because of the business’s efficient cash flow from buying and selling houses, InvestForClosures had never failed to make an interest payment on time or to return an investor’s principal when requested. Sanchez also represented that he was developing an exclusive residential community in Mexico known as The Sands of Gold. Bourassa was sentenced to 51 months in prison.
Eric Schmickle, 37, and his company Q Wealth Management Inc. were charged by the CFTC in connection with allegations that they were operating a commodity futures Ponzi scheme that took in at least $5.3 million from at least 10 customers. It is alleged that Schmickle made misrepresentations to induce investments and then created and sent false account statements. Scmickle has already pleaded guilty in a related criminal action.
Feisal Sharif, 42, of Connecticut has been charged, arrested, and released on $150,000 bail, in connection with operating a Ponzi scheme through his company, First Financial LLC, that defrauded investors of hundreds of thousands of dollars. It is alleged that Sharif created and emailed bogus account statements to convince the victim that his $400,000 investment had appreciated to more than $2.2 million and that the funds were secure.
Joseph Angelo Sivigliano, 80, was sentenced to 8 years in prison and ordered to pay more than $2.21 million in restitution for his role in $3.8 million Ponzi scheme in which he sold “investment opportunities” in Helping Hearts and Hands Inc. (HHH) based in Oklahoma. Sivigliano took in $3.8 million from 67 investors and paid some of that money out to earlier investors and some to his businesses Celebrity Limo Valet Corp., MC Productions Inc., and Lansbrook Worship & Event Center. He held out as a charitable organization that benefits philanthropic ventures such as a Christian childcare facility called “Teaching Little Hearts and Hands.” Co-conspirator Dwight Pimson, 57, of Louisiana, and Marie Pimson, 43, or Oklahoma, pleaded guilty and were sentenced to 5 years and 30 months, respectively, and were ordered to pay restitution of more than $2.7 million each.
Michael Turnock, 68, and William P. Sullivan II, of Colorado, were unsuccessful in their attempt to be relieved from a freeze order of their assets obtained by the SEC in connection with allegations that they operated a $15.7 million Ponzi scheme through Bridge Premium Finance LLC. They had sought a release of their assets on the basis that they are suffering economic hardship and health issues.
Hugo Edgardo Urrea, 55, a youth baseball coach, pleaded guilty to charges in connection with a Ponzi scheme that defrauded about two dozen victims of $419,000. Urea promised that he would invest the money or provide investment advice, but instead kept the money to use it to pay his mortgage and his son’s university tuition. Urrea was sentenced to 20 years, with 15 of those years suspended, and ordered to pay $247,000 in restitution.
Doug Vaughan, 64, who pleaded guilty to charges relating to his Ponzi scheme in December 2011, was sentenced to 12 years in prison in connection with his Ponzi scheme that stole $75 million from more than 600 investors. Vaughan then filed a Chapter 7 bankruptcy petition. Vaughan ran his scheme through his New Mexico residential brokerage firm called Vaughan Company Realtors. Vaughan had spent investor funds on his “Ponzi Palace,” which was a four bedroom, seven bath mansion with a poolside cabana and wine cellar on a golf course, along with almost $800,000 for luxuries including $252,653.38 for domestic and international travel, $146,263.64 on clothes and jewelry, $153,710.58 on home furnishings. Vaughan’s bookkeeper, Martha Runkle, was sentenced as well, but the terms of her sentencing agreement have been sealed.
Spero Vourliotis, 52, of Alabama, pleaded guilty to and agreed to repay $5.3 million as restitution in connection with his Ponzi scheme-like operation which he ran through Capston Group, Cornerstone Investment Group and Tristone Investment Group. Vourliotis took in about $7.5 million from about 36 investors in these investment clubs. Carey Michael Billingsley also pleaded guilty today to one count of selling an unregistered security in the scheme. Billingsley was an associate with Vourliotis who recruited some investors.
Michael Winans Jr. has waived his right to be indicted by a grand jury and was charged in connection with charges that he operated a Ponzi scheme in which he represented that the Winans Foundation Trust was investing in crude oil bonds in Saudi Arabia. Winans is the son of Michael Winans Sr., a member of the Gospel Hall of Fame quartet the Winans. He is alleged to have taken at least $8 million from 1,000 victims, guaranteeing the victims that the bonds would yield returns of $1,000 to $8,000 within 60 days.
William J. Wise, 62, pleaded guilty to counts in connection with his $130 million Ponzi scheme run through Millennium Bank, its Geneva-based parent United Trust of Switzerland S.A. and Sterling Bank and Trust, all of which were all controlled by Wise. The scheme defrauded about 1,200 investors by selling them bogus certificates of deposit.
Troy B. Wragg, Amanda E. Knorr, Speed of Wealth, LLC, Wayde M. McKelvy, Donna McKelvy, and Mantria Corporation, had a final judgment entered against them, ordering them to disgorge millions of dollars in connection with a scheme that raised funds for Mantria “green” initiatives such as “carbon negative” housing community and “biochar” charcoal substitute made from organic waste. Investors were promised returns from 17 percent to “hundreds of percent” annually.

David Hobbs was hit with a reserved judgment in connection with an alleged $50 million Ponzi scheme involving 14 unlicensed investment funds. Hobbs is one of 19 defendants originally named in a lawsuit brought by the Australian Securities and Investment Commission. Hobbs, though Vanuatu company, Future Trading Corporation Ltd., took in more than $42 million (NZ$50 million) from more than 700 Australians where investors were promised access to offshore investment opportunities and the wholesale financial market generating returns of about 3 to 4 percent or more per month with no risk of losing the invested money.
Milowe Brost and Gary Sorenson were ordered to pay millions in penalties by the Alberta Securities Commission in connection with a Ponzi scheme in which it is alleged that 4,000 investors were bilked out of at least $100 million. The Alberta Securities Commission has imposed sanctions about $54 million against Brost and Sorenson, along with Dennis Morice, the Institute for Financial Learning, Group of Companies Inc. and Merendon Mining Corporation Ltd.
Gerald Berke lost his bid to have his extradition case in Canada thrown out. Berke is wanted by the FBI in connection with a Ponzi scheme that he operated in California that defrauded about 70 investors out of $81 million.
David Bowerman, 35, pleaded guilty to 33 fraud charges relating to a Ponzi scheme in which he took up to £5 million from about 200 investors. Bowerman was a mortgage advisor and defrauded 200 investors, including his own mother.
Nicholas Levene, 48, has admitted to running a £32m Ponzi scheme. Known as “Beano,” Levene promised investors he was buying shares, but in fact stole some of the money. Levene would falsify documents to make it look like he had bought them shares or made them profits when in fact they were being stolen from. His victims allegedly include property developers the Tchenguiz brothers, music mogul Simon Cowell and Sir Philip Green.
A group of investors in Shams Investment has sued Abdul Mubin Shaikh, Imran Qazi Painter, Feroz Ali Najmushani, and Shakun Patel in connection with an investment scheme run through Shams Investment and its two subsidiaries, Akshar Colour Limited and Green Nest Infratech Ltd. Investors were promised 10% returns every month on their principal and were promised that they could win a flat in the real estate project of the company if they took part in a monthly lucky draw. About 50 investors who had lost their money in the scheme sat on a one-day fast to draw the attention of the police. The alleged perpetrators have not yet been charged and many cannot presently be located.
An international bench warrant was issued for Francois de Dietrich in connection with an alleged scam he ran from Etic Solutions. De Dietrich has previously been convicted of fraud and served a two-year jail term in France. Now it is alleged that 187 investors have been defrauded in connection with a scheme where he told investors they could make large returns when he used their money to buy second-hand planes, Rolls Royces and other big ticket items at auctions and then sell them to Middle East investors. De Dietrich has been on the run, and he was sentenced to 18 months in prison in his absence after refusing to reveal information about his worldwide assets.
The investment firm of Custom House Capital collapsed after being run like a Ponzi scheme which promised prominent investors attractive returns. More than 1,500 investors invested as much as €500m.
John Hirst, 61, Richard Pollett, 70, and Linda Hirst, 62, were sentenced in connection with their £10 million Ponzi scheme. Hirst was sentenced to nine years in prison for his role in the Ponzi scheme that targeted ex-pats in Mallorca. Financial advisor Pollett was sentenced for six and a half years. Linda Hirst was sentenced to two and a half years. John Hirst and Pollett promised investors returns of 20 % per annum. Of the £10 million of investor deposits, less than £5 million was paid out to investors to give the impression the scheme was working. The rest of the money was used to fund Hirst’s extravagant lifestyle which included spending £90,000 on his Las Vegas wedding and at least £270,000 spent renovating Hirst’s villa in Mallorca.  Additionally, approximately £160,000 was spent on hotels, holidays, and flights with more than £25,000 spent on jewelry.
New Zealand
Jacqui Bradley, who ran a Ponzi scheme with her late husband, Mike, though B’On Financial Services, was found guilty. Bradley owed more than $15 million to 28 investors.
Sergei Mavrodi, the creator of the 1990s MMM Ponzi scheme, has created a political party with the same name. The goal of this new party is supposedly to bring about “world financial apocalypse.” Mavrodi served 4½ years for his scheme that defrauded 10 to 15 million Russians of $110 million.

Singer John Mayer has been sued for $465,000 by the trustee administering the Darren Berg $100 million Ponzi scheme. Berg had paid a booking agency Grabow & Associates the funds and Mayer was paid by Grabow for his appearance at a corporate event in 2008. Berg was sentenced to 18 months for his role in the Ponzi scheme.
Investors who lost more than $2.5 million in the Ponzi scheme of Blue Mountain Consumer Discount Co. have served a subpoena on the FBI for documents that the FBI seized from the home and offices of Francis Cinelli in connection with a lawsuit against Cinelli and the CEO of the company, Walter “Buddy” Lambert. The FBI seized about 20 boxes of documents in 2011, and the investors need the documents to move their civil case forward. The FBI said it had copied about half of the items. The court overseeing the manner suggested that the victims serve a subpoena to force the FBI to release the documents.
The trustee of the Ponzi scheme of Dante DeMiro in Michigan has obtained the voluntary turnover of funds from various entities. He received the return of $22,500 from the city of Muskegon Heights, $500,000 from Comstock Township, a Kalamazoo area township, and nearly $1.5 million from other entities.
Irving Picard, the trustee of the Bernard L. Madoff Ponzi scheme case, made a distribution of about $2.5 billion to victims, which is the second pro rata distribution he has made. The victims have previously received disbursements from Picard and they have received advances from the Securities Investor Protection Corporation, which brings the amounts paid to victims for their losses to over 50%.
Nigel Fielding, the CEO of HSBC (Luxembourg), is being sued in the Cayman Islands for breach of duty, willful neglect and willful default in his capacity as a director of Primeo Fund, whose entire assets of more than $786 million were invested in Bernard Madoff’s fraudulent enterprise.
Investors and the receiver in the Ponzi scheme case of Management Solutions, Inc. are battling over disclosure of records and the receiver’s proposed auction of the remaining assets. The investors want the receiver to turnover over marketing reports and property appraisals relating to property that the receiver might include in the auction, and the receiver has expressed concern over how much input the investors should have in the running of the receivership. The receiver hopes that one big auction will reduce the ongoing costs of the receivership. Management Solutions took in over $200 million from investors in operating one of the largest ever Utah Ponzi schemes.
The former finance’ of Thomas Petters, Tracy Mixon, 39, saw her support payments end this month. Mixon had been receiving support payments for her and her two children with Petters for many years. The receiver of the Petters case filed a motion to stop the support payments, noting that Mixon has had “ample time” to find a job or make other arrangements to support her family.
The Trustee in the Scott Rothstein bankruptcy case has settled with the Razorback investors in which it is proposed that the Razorback group would be allowed a special payment of $8 million as a “substantial contribution” claim because of the resources expended by the Razorback group in pursuing TD Bank and others in court. The Razorback investors alleged that they lost about $200 million in the Rothstein Ponzi scheme. They have already reached a settlement with TD bank for $170 million and a smaller settlement with Gibraltar Private Bank and Trust.
TD Bank settled a lawsuit brought by Emess Capital, which had sued for $33.8 million in connection with the Scott Rothstein Ponzi scheme case. Emess had amended its complaint to allege that the bank had violated the federal Racketeer Influenced and Corrupt Organizations Act (RICO), which permits victims of racketeering to recover treble damages. The terms of the settlement are confidential. The lawsuits against TD have alleged that it aided Rothstein’s $1.2 billion Ponzi scheme by ignoring fraud alerts and by issuing phony “lock letters” to Rothstein’s victims that promised their money was only to be released to them. A former TD executive allegedly signed the letters.
SPD Group, operating as J.R. Dunn Jewelers, agreed to a $325,000 settlement with the trustee administering the Ponzi scheme case of Scott Rothstein’s law firm, Rothstein Rosenfeldt Alder. Rothstein reportedly bought more than $2 million in jewelry from J.R. Dunn between November 2005 and October 2009, including many items for Rothstein’s wife, Kim.
TD Bank’s motion for a new trial in the case in connection with the Scott Rothstein case, where it was hit with a $67 million jury verdict in favor of Coquina Investments, was denied. The court found, “The jury was entitled to find… that it was particularly reprehensible...that a bank, which people entrust with their money, would aid and abet a Ponzi scheme such as the one Rothstein was operating.”
A claim for negligence against the SEC by investors in the Stanford Financial Ponzi scheme withstood a motion to dismiss. The claim is that, despite knowledge of the Ponzi scheme as early as 1997, the SEC failed to notify the Securities Investor Protection Corp. The lawsuit alleges that the SEC has a nondiscretionary obligation to report a broker/dealer to SIPC when the SEC believes that the broker or dealer is in or approaching financial difficulty.
The liquidators in the Allen Stanford case have filed a lawsuit against Canadian TD Bank, alleging collusion in the Stanford Ponzi scheme. The complaint alleges, “But for TD Bank’s conduct… the [fraud] would have been discovered and prevented, the fraudulent transactions… would not have been completed and damages would not have been suffered by SIB and its customers.” Although the complaint alleges $20 million in damages, the plaintiffs have said that their claims may exceed $3 billion. TD Bank has filed a motion to dismiss the complaint.
Greenwich Insurance Co. has filed a lawsuit claiming that it has no duty to defend or indemnify Dallas law firm Carter Holmes PLLC or Steve Holmes in connection with lawsuits that have sprung from the $57 million Striker Petroleum Ponzi scheme. Greenwich contends that the defendant have no coverage because the claims were not made and reported during any single policy period. The allegations of the Ponzi scheme which was revealed in 2009 were that Striker, Mark Roberts, 58, and Christopher Pippin, 35, had defrauded investors of $57 million, promising debentures collateralized by oil and gas properties.
Dustin Diamond, who played the character Screech on “Saved by the Bell,” has been sued by the receiver of the estate of Robert Stinson. Stinson is serving 33 years in prison for his Ponzi scheme operated through his company, Life’s Good, Inc., that defrauded 263 investors of more than $17 million. Diamond was named in the complaint along with Rogue International Talent Group dba Rogue Entertainment dba Rogue Talent Agency; Roger Paul Inc.; Roger Paul; High Idea Corp. dba High Ideas Inc. who had received money out of the Ponzi scheme, some of which had been lent to Diamond and has not yet been repaid.
The receiver of the estate of Ronnie Wilson and his company, Atlantic Bullion and Coin, Inc., was authorized to sell silver bars that were seized by authorities and to use the proceeds for an eventual distribution to defrauded investors. The silver bars were sold for $675,000. Wilson pleaded guilty to charges in connection with his $90 million Ponzi scheme.
The state of California has sued movie producers Windsor Pictures, Skyline Pictures, Michelle Kenen Seward, Dror Soref, and others, alleging that they were operating a Ponzi scheme and committing fraud in raising more than $23 million to supposedly make and distribute movies. The victims were mostly seniors who were invited to seminars and were offered a “no risk” investment in movies that would have “high rates of return.” The complaint alleges that Seward told prospective investors that she was tired of seeing seniors being taken advantage of by the financial industry” and that this was not a Ponzi scheme. The complaint also names Protege Financial & Insurance Service dba Senior Retirement Specialists and Teacher Retirement Specialists, Saxe-Coburg Insurance Solutions LLC, Not Forgotten LLC, and Scott Walter Foulk.
More than 33,000 customers of Zeek Rewards have signed a petition to keep the company in operation, standing behind the company and contesting the receiver’s appointment and administration of the company. The petition states that the shutdown of Zeek has “devastated them and that they are “behind Zeek Rewards, Zeekler, Rex Venture, and Paul Burks one hundred percent.” Once of the individuals leading this group, Robert Craddock, who has been openly critical of the SEC for shutting down the business, has been subpoenaed by the SEC. A lawyer for Fun Club USA, Inc., a company owned by Craddock, has filed a motion for permission to appear in the Zeek case. The receiver has so far recovered almost $300 million in assets but is still looking for more. It is estimated that this was a $600 million Ponzi scheme that involved approximately 1 million investors. Burks has agreed to pay $4 million in a penalty and give up his interest in the firm without admitting or denying guilt.

Saturday, September 15, 2012

Federal Equity Receivers Gathered at NAFER Annual Conference

Posted by Kathy Bazoian Phelps
The inaugural conference of the National Association of Federal Equity Receivers just concluded in Fort Worth, Texas and was a fantastic gathering of close to 60 federal equity receivers and other professionals. The caliber of educational programs and professionals in attendance was exceptional. I particularly enjoyed meeting many of the receivers whose cases are cited in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes. The panels included discussions on the pros and cons of bankruptcy versus receivership, parallel civil insolvency proceedings and forfeiture proceedings, tax issues arising in receiverships, recovery of assets overseas, and first day issues in a receivership. 
I spoke on two panels which drew a lot of audience participation and discussion of different experiences and methodologies used by different receivers:

     Bankruptcy vs. Receivership: Different Strokes for Different Folks
     Forfeited Assets: Yours, Mine or Ours:  Competition in Parallel Civil and Criminal Proceedings

NAFER has attracted the attention of the players in this field and will be a great organization going forward for educational content for federal equity receivers and a forum for networking and sharing ideas of what does and doesn’t work in these types of receivership cases.  The NAFER website is www.naferforum.org if you want to learn more about the organization.

Tuesday, September 11, 2012

Finger-Pointing at the SEC: Whose Fault Is It That Ponzi Schemes Thrive?

Posted by Kathy Bazoian Phelps

When a Ponzi scheme crash lands, all kinds of things go flying. The dollars go into the wind, the tangible assets go underground, the perpetrator is thrown into jail, and the allegations of wrongdoing are strewn about with a vengeance.

The defrauded investors, and society at large, should of course be the most upset with the perpetrator himself or herself. But that person is usually already sitting in jail, sometimes even for what is the balance of their lives as is the case with Bernie Madoff and Allen Stanford. Retribution is one of the more minor of the objectives of the criminal justice system; however, it is a significant element of a defrauded investor’s mental state in trying to reconstruct what went wrong and who to blame. A defrauded investor left in financial ruin must live day-to-day with the loss caused by the jailed perpetrator. Story after story of the country club nature of some of the prisons in which these perpetrators now reside merely serves to inflame an already financially devastated life.

Defrauded investors, therefore, quite understandably want more accountability from someone. They can’t get any more out of the perpetrator sitting in jail. So they look to our protectors and ask why the government gatekeepers did not stop the fraud. The government allocates sizeable portions of the federal budget to run governmental agencies designed to protect us from fraud. The SEC is, of course, the most visible of such organizations and the one that we most count on to protect our interests and to stop fraud in its tracks. Unfortunately, there has not been much fraud-stopping in the higher profile cases of late.

Investors have tried and failed to hold the SEC liable for failing to detect the Madoff fraud. See, e.g., Donahue v. United States, 2012 U.S. Dist. LEXIS 84353 (D.C. June 19, 2012). Now, in the Ponzi scheme case of R. Allen Stanford, some investors are seeking to hold the SEC liable for negligence in not stopping the Stanford Ponzi scheme. The plaintiffs in Zelaya v. United States, 2012 U.S. Dist. LEXIS 127233(S.D. Fla. Sept. 7, 2012), have sued the SEC for negligence for failing to follow two statutory obligations which they allege were nondiscretionary. If the duties were nondiscretionary, then the SEC would be unable to assert sovereign immunity to shield itself from liability. 

First, the plaintiffs alleged that the SEC knew as early as 1997 that Stanford was operating a Ponzi scheme, yet failed to comply with the nondiscretionary obligation to report that fact to SPIC. Second, the plaintiffs allege that the SEC did not review the investment advisor’s registration amendments and did not deny the annual registration after the SEC had allegedly concluded that Stanford was operating as a Ponzi scheme. 

The court denied in part and granted in part the SEC’s motion to dismiss the negligence claims against it. The court concluded:
While the determination of whether a broker/dealer is in or approaching financial difficulty is inherently discretionary, once the Securities and Exchange Commission concludes that a broker/dealer is in or approaching financial difficulty a nondiscretionary duty to report this information to the Securities Investor Protection Corporation arises. However, the Securities and Exchange Commission's treatment of an investment advisor's amendment to its Section 80b-3 registration application involves an element of judgment grounded in policy considerations, and thus falls under the discretionary function exception of the FTCA.

So it remains to be seen whether these investors will succeed in holding the SEC liable for their losses. On the one remaining claim, they will need to show that the SEC knew that Stanford was operating a Ponzi scheme, which may still present a big hurdle for the investors.

Wednesday, September 5, 2012

Equitable Subordination of Claims in Ponzi Scheme Cases – Gray Standards With Black and White Consequences

Posted by Kathy Bazoian Phelps
The tool of equitable subordination in a Ponzi scheme case can have a significant impact on the ultimate distributions in the case. Whether used by a trustee seeking to subordinate a claim, or challenged by a creditor seeking to hold on to the priority of its claim, § 510(c) of the Bankruptcy Code can cause significant swings in the manner in which claims are ultimately allowed and paid in a Ponzi scheme case.
The standards for equitable subordinate were best defined in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir. 1977), which stated in part that a court can equitably subordinate a claim when the claimant has “engaged in some type of inequitable conduct” and the “misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant.”
In the past year, we have seen some high profile decisions and discussion on the topic, which leave room for questioning exactly what standard is applied. In the Bernie Madoff Ponzi scheme case, the trustee sought to have the claims of Saul B. Katz and related defendants subordinated based on allegations that the defendants did not receive fraudulent transfers in good faith and that they had engaged in inequitable conduct. Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011). The court declined to dismiss the complaint, finding that, “this alleged misconduct would have injured any investors who invested in Madoff Securities based on the impressive returns others appeared to receive.” In other words, a trustee in a Ponzi scheme could subordinate claims of investors by proving that they acted “with knowledge, or in reckless disregard” of the fraud. This could be a powerful tool for trustees to reprioritize claims and bump certain investor claims ahead of others.
On the other hand, just last month, the Seventh Circuit held that equitable subordination of a bank’s claim was inappropriate because “gross and egregious misconduct” had not been demonstrated. In re Sentinel Management Group, Inc., 2012 U.S. App. LEXIS 16546 (7th Cir. Aug. 9, 2012). In that case, the debtor was supposed to maintain customer assets in segregated accounts, but instead had pledged hundreds of millions of dollars in customer assets to secure a loan from the Bank of New York. The trustee sued the bank, alleging that the bank knew that that debtor had fraudulently used customer assets to finance the loan and that the bank acted inequitably and unlawfully.
The Sentinel court held that equitable subordination of the bank’s claim was inappropriate because the bank was negligent, not fraudulent. The court noted, “Perhaps the bank should have known that [the debtor had] violated segregation requirements, but as the district court found, ‘such a lack of care does not rise to the level of the egregious misconduct necessary for equitable subordination.’”
The Sentinel court was quite critical of the bank officials, calling them “such artless liars that they couldn’t have been concealing deliberate wrongdoing. Instead, the bank officials were simply trying to cover up their own incompetence . . . . And incompetence alone, however problematic, won't require the equitable subordination of the bank’s lien.”
The juxtaposition of these two cases leaves the standard for equitable subordination confused. In one case, Picard v. Katz, equitable subordination is a possibility where there is an investor accused of not accepting transfers in good faith and allegations that other investors might have invested based on the impressive returns paid to the defendant investor.
     Picard v. Katz Score Card
          Inequitable conduct – Yes
          Harm to other creditors – Maybe
          Equitable Subordination – Yes
In the other case, In re Sentinel Management, the bank is alleged to have known about the fraud, but the court merely found it incompetent. Rather than speculating that others might be damaged, many investors were actually damaged when the bank accepted the investors’ supposedly segregated funds as collateral for a loan. Equitable subordination was not allowed in Sentinel despite the actual harm to the investors.
     Sentinel Score Card
          Inequitable conduct (defined as “egregious conduct”) – No
          Harm to other creditors – Yes
          Equitable Subordination – No
These cases demonstrate that some form of inequitable conduct makes all the difference. But what is “inequitable conduct”? Sentinel says that “gross incompetence” - sufficient to cause a district court judge to call you an “artless liar” - is not inequitable conduct. However, the Sentinel court appears to have morphed the "inequitable conduct" test of Mobile Steel into an “egregious misconduct” test. The Katz court, on the other hand, was more focused on some form of wrongful conduct which harmed other creditors or conferred an unfair advantage on the claimant.
The question that is left open after these two cases is whether the “inequitable conduct” test of Mobile Steele was intended to cover any wrongful conduct, even negligence, for the purpose of protecting creditors whose conduct was wholly innocent. In any event, an equitable subordination claim is by definition an equitable claim that should not be subject to rigorous "elements," but rather a weighing of all of the circumstances. However, while the standard is a bit gray, the consequences can be black and white on the issue of whether a particular creditor will receive any payment in a Ponzi case.