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

Wednesday, October 31, 2012

October 2012 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps
The news stories relating to Ponzi schemes were once again plentiful for the month of October. 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.
Robert Arrowood and Trinity Fund, LLC of Oklahoma have been accused of stealing about $43 million from investors in connection with a Ponzi scheme in which Arrowood was supposedly buying and reselling oil and gas leases. The scheme defrauded about 30 victims, who were promised that their investments would mature in less than 60 days with a return rate of 90 percent.
Aldo Baccala, 71, of California, listened to stories from defrauded investors at his criminal trial relating to his alleged $20 million Ponzi scheme in which investor funds were to be used in connection with his Petauma real estate company and assisted living centers. Most of the victims were elderly and had paid their life savings to Baccala, expecting 12 percent returns. He offered investments in a portfolio that included the southeastern nursing homes, a Nevada car wash, and a Colusa mushroom farm.
Daniel Bonventre, 65, Annette Bongiorno, 64, Joann Crupi, 51, Jerome O’Hara, 49, and George Perez, 46, former employees of Bernard Madoff, were the subject of a revised indictment adding more charges against them for their activities in connection with the Madoff Ponzi scheme. It is alleged that some of the defendants helped Madoff carry out the fraud as far back as the early 1970s. Each of the defendants pleaded not guilty to the new indictment, which expands the charges against them. Other former employees have previously pleaded guilty: Former Chief Financial Officer Frank DiPascali; Madoff’s former accountant David Friehling; former employees Craig Kugel, David Kugel, Enrica Cotellessa-Pitz and Eric Lipkin; and Peter Madoff, Bernard Madoff’s brother. It is reported that Irwin Lipkin plans to plead guilty.
William Boockvor, 67, the uncle of Scott Rothstein and known as “Uncle Bill,” was sentenced to 4 years in prison and ordered to pay $166 million in restitution. Boockvor admitted that he played a part in duping investors into believing that Rothstein had millions of dollars that he didn’t have. Boockvor admitted that he helped his nephew put on “investor shows” to lure in large investors. To assure investors that he had cash in his bank accounts, Rothstein would have Boockvor go to the Weston branch of TD Bank with phony paperwork showing large bank balances. The investors would then go to the bank where bank officials would hand over sealed envelopes containing the phony paperwork and a letter on bank stationery vouching for the large bank accounts.
William Jeffrey Chandler, 55, had been facing accusations of running a foreign currency Ponzi scheme, but was found dead inside his Mercedes. Reports are that he suffered from “self-inflicted wounds.” Chandler’s assets had been frozen by the CFTC in connection with charges that he defrauded at least 6 people of $773,100. The investors were to invest in a pooled account in Switzerland and were to be paid 2 percent to 12.5 percent every month in a low-risk investment.
Billy Frank Davis, 67, pleaded guilty to charges in connection with his $7.8 million real estate investment Ponzi scheme. Davis is a former attorney defrauded over 20 investors over a 10 year period by claiming he was a successful real estate investor.
Ramon DeSage saw his home detention rules tightened. DeSage has been on home detention and ordered to stop gambling and to stay out of casinos while he fights charges in connection with a $75 million Ponzi scheme. It is alleged that he used his Las Vegas company, Cadeau Express, to carry out the Ponzi scheme and that he used investor funds to maintain a wealthy lifestyle and cover millions of dollars of gambling losses.
Gordon Driver, 54, of Las Vegas was arrested and charged in connection with an alleged $15 million Ponzi scheme that he ran through Axcess Automation LLC and a hedge fund called Axcess Fund LP. Driver had been the subject of a CFTC enforcement proceeding in 2009, which alleged that he defrauded approximately 100 investors out of $14 million by promising above-average returns, telling them that he had developed proprietary trading software to trade E-Mini S&P 500 futures that had achieved average weekly trading returns of 1% to 5%.
Jeffrey Curtis Folkert, 42, was sentenced to 4 years in federal prison for his role in a $1.5 million Ponzi scheme. Folkert ran a computer consulting business called iStorm Solutions LLC and recruited investors by telling them that they could earn money from Google Inc. when internet users clicked on their advertisements. Folkert spent the investor funds to pay dividends to other investors and for personal expenses and online gambling.
Odalis Freixa, 48, and her sister, Marisela Gamez, 49, of Florida, were arrested in connection with their alleged $1 million Ponzi scheme in connection with a foreclosure and loan modification scam. They used companies FL Home Holdings LLC, FL Home Loans LLC, FL Home Realty Services, LLC, and non-profit corporation, The H.E.R.O. Foundation, Inc., to run their scam.
Donald R. French Jr., 25, pleaded guilty to charges relating to a $10 million investment fraud he ran through his company D3 Capital Management LLC, where he promised clients that he would pay returns as high as 50 percent by investing in things such as emeralds and solar energy. French had been detained in South Africa and then sent back to Las Vegas to face charges that he passed $750,000 in bad checks at casinos.
Celia Gallardo aka Celia Zagha, 42, of California, pleaded guilty to defrauding investors in her real estate Ponzi scheme that resulted in losses of at least $2.2 million to dozens of investors. Gallardo had told investors that she would purchase condominiums and that those properties would yield high rates of return of 100% in 30 days. Most of Gallardo’s investors had withdrawn funds from their 401k accounts and mortgages on their homes. Gallardo spent most of the money on personal expenses, including her home, a Mediterranean cruise with close friends and family, cash withdrawals, and repayments to earlier investors to perpetuate the scheme
Joseph Greenblatt of New York pleaded guilty to charges relating to a $31 million Ponzi scheme that he ran through his company, Maywood Capital. Greenblatt had told investors that he was using their money to purchase and renovate real estate in return for mortgages that promised returns approaching 14 percent.
Oscar Hernandez and his companies, Midway Trading Company and Conquest Investment Group, agreed pay $1.4 million in civil penalties to settle CFTC charges that they operated a commodity pool Ponzi scheme involving about $3.8 million. The defendants promised participants guaranteed annual returns of from 20 to 60 percent.
John Francis Holtsinger, 52, of Iowa, pleaded guilty to charges in connection with a $1.1 million Ponzi scheme. Holtsinger had falsely boasted about having ties to elite financial circles and that he was an experienced investor. He only invested a fraction of the funds given to him and kept the rest of the money to pay his living and other expenses.
Stella Levea and James Masat, principals of First Americans Insurance Service, of Nebraska, were sentenced to 8 years in prison, and Kenneth Mottin, was sentenced to 5 years in prison, in connection with a scheme they operated which promised investors unusually high returns.
Wallace Lindsey Howell, 60, was indicted in connection with the $59 million Ponzi scheme run by Ron Wilson that promised large rates of return on investments in a silver trading scheme. Howell allegedly conspired with Wilson to take $3.5 million from two accounts at Wilson’s Atlantic Bullion & Coin. Wilson pleaded guilty to charges related to the Ponzi scheme in July. Howell refused to cooperate with authorities by declining to give his fingerprints or a DNA sample, or to confirm his name or address, so he remains in jail.
Donald Lopez, 63, of California pleaded guilty to tax evasion relating to his receipt of and failure to pay taxes on $3.94 million received from Ponzi schemers Matthew La Madrid and Moises Pacheco of San Diego, California. La Madrid sent $10 million in stolen investor funds to Lopez’s company, and Lopez took $3.94 million out of that amount and then failed to pay taxes on that amount. La Madrid was sentenced to 10 years in prison last year and ordered to pay $23.5 million in restitution.
Gilbert Lopez, 70, and Mark Kuhrt, 40, who were charged and pleaded not guilty to charges relating to the Ponzi scheme run by Allen Stanford, face their criminal trial. These two accountants are accused of fabricating financial statements that enabled Stanford to lie to investors about the investment scheme. Prosecutors have alleged the following: There are e-mails in which the two defendants discussed Stanford’s unreported loans and how to value certain assets to disguise that debt in the months before U.S. securities regulators seized Stanford’s businesses in February 2009. The emails also show discussions with James M. Davis, Stanford’s chief financial officer, on how to repeatedly flip a Caribbean resort property among Stanford entities so that its value could be inflated from $63.5 million to $3.2 billion in a matter of months - his inflated value was intended to plug the hole in the books caused by Stanford’s personal loans and bad investments.
Geoffrey H. Lunn, 56, Darlene A. Bishop, 40, and Vincent G. Curry, 42, were charged by the SEC in connection with an investment fraud that defrauded investors out of at least $6 million. Lunn created Dresdner Financial, claiming it had connections with top world banking institutions, and Bishop and Curry served as affiliates to market and sell investments for Dresdner. The primary investment marketed by Dresdner was the .44 Magnum Leveraged Financing Program, and investors who initially contributed $44,000 could expect a 100% guaranteed return of $2 million within ten to twelve banking days, or a 4,445% return. It is alleged that at least 70 investors contributed nearly $6 million.
Syed Qaisar Madad, 65, of California, was arrested by the FBI and the IRS criminal investigation unit, on charges relating to an alleged $49 million Ponzi scheme that he ran through his company Technology for Telecommunication and Multimedia, Inc. Madad represented to investors that there money was safe, that his day-trading method would make consistent and substantial profits and that their money would be returned to them if they requested.
Management Solutions, Inc., a real estate investment company that allegedly defrauded investors of at least $200 million, saw its property put up for auction. The furnishings of a 25,000 square foot office building in Utah are being auctioned.
Timothy M. McGinn, 63, and David L. Smith, 66, were indicted on charges in connection with a scheme operated under McGinn, Smith & Co., Inc., a financial broker-dealer firm that had operated for nearly 30 years. It is alleged that they raised $2.4 million from investors for Firstline Security, Inc. without disclosing that Firstline had filed for bankruptcy and had defaulted on its loans. It is also alleged that they diverted $4.1 million of investment dollars into their own bank accounts.
John James Missitti pleaded not guilty to charges relating to an alleged Ponzi scheme that defrauded more than $25 million from about 500 investors. Ronald Lee Brito, Bonnie Brito and Thomas Winston Moore, and Mark J. Carpenter are also charged in connection with the scheme run through the company GetMoni.com.
Robert C. Pibilski, 54, John T. Burns III, 53, and Mahnut Erhan Durmaz, 42, were charged in connection with an alleged $28 million Ponzi scheme that defrauded about 120 investors. While holding estate-planning seminars through a company called USA Retirement Management Services, the men solicited investments, promising to sell promissory notes for investments in Turkish bonds that would yield returns of 4.75 percent to 11 percent annually. The funds were allegedly used to pay other investors and about $2.5 million to pay for their own expenses, including medical insurance, salaries and bonuses to themselves.
William Anthony Rand, who pleaded guilty last year to charges relating to a $68 million Ponzi scheme that he ran through a Dallas oil and gas company called Aspen Exploration, along with his three sons, saw his rare guitars sold by the government in an auction that took place in Beverly Hills. The guitars sold for $298,000. Rand had told investors that they would double their money in 3 years by investing in oil leases. Instead of drilling wells, however, the Rands bought real estate, boats, vehicles an original Picasso, wine, jewelry, jade, and musical instruments.
Jack Michael Shapira, 43, pleaded guilty to fraud charges in connection with a Ponzi scheme involving about $2 million from investors. Shapira promised investors 20% to 30% returns on their investments, which were to be used to fund leases of medical equipment that would then be leased again to medical organizations and government agencies.
Martin Sigillito, 63, a lawyer and American Anglican bishop was scheduled for a three day sentencing hearing. He was convicted by a jury last April for running a $52 million Ponzi scheme that defrauded about 140 victims.
Vincent Thakur Singh, 43, was indicted in connection with a scheme where he allegedly defrauded 190 members of the ethnic Indian Fijian community of about $20 million. Singh had told investors that their money would be used to make safe loans and that they would recover the principal plus as much as a 30 percent return in a few months. Singh had previously filed bankruptcy, and his bankruptcy trustee is pursing about 135 victims to recover returns paid to certain victims in the amount of at least $9.65 million. It is alleged that Singh spent the investors dollars as follows: gambling losses totaling more than $12 million, more than $2 million to accounts Singh controlled, an investment of $880,000 in a film project, a down payment on commercial property of $370,000 and the purchase of three retail franchises for $662,500.
Jasen Snelling, 48, of Cincinnati Ohio, was sentenced to 131 months and ordered to pay $5 million in restitution to victims and $596,929 to the IRS in connection with his Ponzi scheme that defrauded 72 investors. Snelling ran a bogus day trading business through CityFund Advisory and Dunill Investments by creating fictitious trading statements and failing to do anything more than deposit investor funds and then spend them to pay earlier investors, to pay his mortgage, his children’s private school tuition, and his credit card bills. Jerry Smith, 50, of Indiana was a co-conspirator who is scheduled to be sentenced next January. As part of the plea agreement, Snelling also agreed to forfeit all property he illegally obtained with investor funds, including a boat and his interest in a Michigan vacation property.
Wesley A. Snyder, 76, who is serving 12 years in prison for his role in a Ponzi scheme that cost about 800 investors $29 million, is requesting to have his guilty plea and sentence overturned. Snyder claims he pleaded guilty only because he got bad advice from his attorney, the late Emmanuel H. Dimitriou, whom Snyder claims was affected by medication he was taking for cancer. Dimitriou died of cancer in March 2008, four months before Snyder was sentenced. Snyder had pleaded guilty to charges that he ran a mortgage scam through Personal Financial Management but now claims he was coerced into doing so.
Michael Stevens, 45, was arrested and held on $1 million bail in connection with charges relating to a motorcycle Ponzi scheme which was run through Dark Hawk Enterprises LLC with Anthony Fregenti, 41.
Summit Wealth Management Inc. and its president, Angelo A. Alleca and other related entities, were the subject of a civil action brought by the SEC. Robert Terry was appointed as the receiver in this alleged Ponzi scheme. The SEC alleges that approximately 200 investors were defrauded of over $17 million.
Robert Telthorst, 52, of Topeka, was charged with stealing more than $460,000 of client trust funds in connection with an alleged Ponzi scheme in which he took in money from new clients and used it to benefit himself and to cover up his theft of money from other accounts.
John Terzakis was sentenced to 84 months in prison for conspiring to defraud the clients of Vesta Strategies, based in California. Vesta was a qualified intermediary for the purpose of conducting tax-deferred real estate exchanges pursuant to Internal Revenue Code §1031. Terzakis, along with Robert Estupinian and Peter Ye, misappropriated about $25 million owed to § 1031 depositors. Peter Ye pleaded guilty in 2010, and Estupinian pleaded guilty in 2011.
Daniel Tynon, 55, pleaded guilty to charges relating to his operation of a scheme through Dant Corporation, through which he promised more than 40 investors annual returns of 18 percent from investments in tax liens. Tynon had fled to Thailand where he was arrested and returned to the U.S.
US Title LLC, a New Mexico-based title company with ties to Ponzi schemer Doug Vaughan, filed for bankruptcy under Chapter 7. Disgruntled investors had sued US Title for negligence, conspiracy, and unjust enrichment. Vaughan himself had filed bankruptcy but remained on the US Title payroll and served as chairman of the board.
Aaron Donald Vallet, 35, of Tennessee, was sentenced to 120 months in prison and ordered to pay $5.4 million in restitution in connection with his Ponzi scheme that involved more than 30 victims and $5 million. Investors deposited funds with A.D. Vallett & Co., LLC for various financial services, including investment advice, portfolio management, insurance, real-estate consulting, and retirement planning. In addition, Vallett & Co. acted as Third Party Administrator for several 401(k) plans. Instead of investing that money as promised, Vallett kept it in his company's operating account and spent it on various personal and business expenses.
Gregory Viola, 60, of Connecticut, was sentenced to 8 years in prison in connection with his Ponzi scheme that defrauded 50 investors who lost more than $6 million. Viola was an unlicensed investment advisor who solicited investors through his tax business and created phony statements to persuade them that their money was earning profits.
Michael Winans Jr. pleaded guilty to running a Ponzi scheme that defrauded over 1,000 investors of about $8 million. Winans was accused of running a scheme that misrepresented that the Winans Foundation Trust was investing in crude oil bonds in Saudi Arabia. He guaranteed the investors the bonds would yield returns of $1,000 to $8,000 within 60 days. Winans is the son of Michael Winans Sr., a member of the Gospel Hall of Fame quartet the Winans.
Yorkville Advisors, LLC, Mark Angelo, and Edward Schinik were the subjects of a complaint by the SEC alleged that they defrauded investors in hedge funds domiciled in the Cayman Islands and Delaware.

Milowe Brost, Gary Sorenson and Gerald Berke were hit with fines totaling nearly $54 million for their role in a fraudulent scheme run through Arbour Energy which raised $45.5 million from investors. Brost led the Institute For Financial Learning, which he claimed was an “information club,” but it is alleged that it was really used to sell investors stock in Arbour and other entities connected to Brost. Sorenson led a mining company called Merendon that was used as a vehicle to receive and disburse investor money. In a separate case, Brost and Sorenson were arrested in 2009 for what police called “the largest Ponzi scheme” in Canadian history, taking in $400 million from investors.
The hearing by the Alberta Securities Commission against Focused Life Group, run by Victor Delaet, on whether they violated securities laws, concluded and a ruling is expected at a later date. It was alleged that Focused Life ran an insurance investment scam that defrauded hundreds of investors of $54 million. Focused Life promised to use investor funds to buy life insurance policies at a discount from American policy holders who needed cash while they were still alive and, once they died, Focused Life would get the full policy payout.
In an alleged Ponzi scheme in the British Columbia, dozens of defrauded investors protested in front of a Coast Capital Savings branch in Surrey, blaming the credit union for an alleged $83 million Ponzi scheme. Arvindbhai (Arvin) Patel was a former investment advisor at Coast Capital, who admitted to the British Columbia Securities Commission that he encouraged his Coast Capital clients to invest in what he called a secure investment that guaranteed 12 percent returns per year. The money went to Vancouver notary public Rashida Samji, who was to keep it in a trust account that was supposed to act as borrowing security to the Mark Anthony wine group to expand their winery operations internationally. Mark Anthony was not actually involved, and Samji has been accused of operating a large Ponzi scheme.
Cayman Islands
Axiom Legal Financing Fund suspended redemptions and halted new subscriptions as a result of an investigation by OffshoreAlert, which uncovered red flags in connection with Axiom’s investment program. The report by OffshoreAlert noted red flags including conflicting financial statements, £7.9 million loaned to a law firm owned by Axiom’s principal, and insurance provided by a firm that is currently defending a lawsuit brought by one of its clients.
Arrest warrants have been issued for three Chinese men, one of which is known as Yun and another as Pang, who allegedly operated a Ponzi scheme through a website, Hootoot660, that was based in the U.S. The scam featured an online stock known as Guquan and may have defrauded more than 200,000 Chinese citizens out of approximately 2.4 billion yuan ($384 million). Investors were first required to pay 660 yuan to 12,540 yuan in membership fees and were then encouraged to buy the stock, which was said to never drop in price, and to attract more members to earn commissions.
The Autorite des Marches Financiers, France’s financial markets regulator, fined an unidentified investment company and one of its officials a total of 200,000 euros for encouraging clients to invest in funds that were linked to the Bernard Madoff scheme. The regulator declined to name the firm, which was asked to pay 180,000 euros, because it was bought by another company in 2011 that wasn’t at fault.
Zero-Service-GmbH of Schwerte in Nordrhein-Westphalia (Germany) was a Ponzi scheme as determined by Regional Court of Hagen. The court sentenced the two masterminds of this Ponzi scheme to 3 years and 3 months, and 3 years imprisonment. Both masterminds offered leasing agreements for new cars. The customers had to pay only EUR 600 once. They were made believe that the difference between their investment and the price for the cars would be covered by ads. The total damage occurred is near EUR 8 million.
Reported by Bernd H. Klose, www.raklose.de/
Member of FraudNet, www.icc-ccs.org/home/fraudnet
One of the major Ponzi schemes in Germany in the last few years is known as Phoenix Kapitaldienst GmbH, whichwas put into insolvency in 2005. Although the German law provides that investors have to be reimbursed for their damages up to a maximum of EUR 20,000 the competent body tried to delay the payments. Germany’s Federal Court has decided (file no. XI ZR 434/10) that the competent body has to review applications for reimbursement immediately and to pay the reimbursements within 3 months time from acknowledgement.
Reported by Bernd H. Klose, www.raklose.de/
Member of FraudNet, www.icc-ccs.org/home/fraudnet
At Nuernberg District Court, 13 men and one woman were indicted for running a massive Ponzi scheme. According to the indictment, they sold shares in non-existing thermal power units to 1,417 customers causing damage of more than EU 62 million. It is said that the accused used substantial parts of the money for their own lavish lifestyle.
Reported by Bernd H. Klose, www.raklose.de/
Member of FraudNet, www.icc-ccs.org/home/fraudnet
Susi Guru of Susi Emu Farms was arrested and charged in connection with a Ponzi scheme involving thousands of investors, tens of thousands of emus and $50 million. The scheme involved attracting investor dollars to earn a stream of income in exchange for raising an Emu chick. There was a VIP program in which Susi would take on the obligation of raising the emu.
Asif Hussain Siddique, Ayub Siddique, and Iqbal Sheikh (the “Trio”) face criminal charges in connection with their failed attempt to kidnap Ponzi schemer, Imtiyaz Saiyad, who is alleged to have defrauded over 12,000 investors by promising 120% returns. Saiyad’s business was run through Imtsons Ltd. Saiyad had been arrested by was released on the condition that he would make restitution to investors by the end of October 2012. The three investors kidnapped Saiyad at gunpoint and demanded repayment of their $300,000 investments. Although Saiyad was able to return about $10,000, the three are now facing criminal charges in connection with the kidnapping.
A fraudulent scheme operated by TVI Express aka Travel Ventures International has surfaced. The scam involved a network marketing direct selling company that sold discounted travel memberships and scammed over 10,000 investors. As part of the scheme, investors were promised that they would qualify for even bigger rewards by recruiting at least two people.
Scott Cavell, 29, was given a suspended a sentence for manufacturing drugs in his Dublin home. Cavell is wanted in California for his role in a mortgage Ponzi scheme. The court sentenced Cavell to 5 years in prison but suspended the balance on the condition that he cooperate fully with his deportation to the U.S. and that he not be released from jail until his deportation is organized.
Eamonn Kelly, who used celebrity solicitor Gerald Kean’s name to lure people into a Ponzi scheme, has been ordered to pay €450,000 to the Irish Criminal Assets Bureau. The judgment is unusual in that the seized money is to be returned to the victims rather than to the State. Kelly’s scheme involved promises to investors €15,000 profit on a €50,000 investment within six months. Kelly forged Mr. Kean’s name on a letter sent to potential investors to lure them to invest, and he also forged a letter from Ulster Bank stating that Kelly had €4.6 m on deposit at the bank. Kelly pleaded guilty and was sentenced to 6 years in prison.
Reported by Greg Glynn of Arthur Cox, www.arthurcox.com
Member of FraudNet, www.icc-ccs.org/home/fraudnet
Jersey Magistrate Ian Christmas, along with Russell Foot, James Cameron, and John Lewis were sentenced in connection with their convictions for a fraudulent scam run in Jersey. The four were found guilty of defrauding investors of £5.3 million by leading those investors to believe they were buying new properties in the U.S. Although some new properties had been purchased, the business plan failed when the market crashed, and they began using investors’ money to pay off debts to other investors. A disciplinary investigation into Magistrate Christmas’s conduct is ongoing.
Reported by Stephen Baker of Baker & Partners, www.bakerandpartners.com
Member of FraudNet, www.icc-ccs.org/home/fraudnet
New Zealand
Jacqui Bradley was sentenced to seven years five months in jail for a Ponzi scheme that defrauded 28 investors out of $15.5 million through her business, B’On Financial Services. Bradley told her clients that their funds were invested securely with Macquarie Bank in Australia, or had been used to buy New Zealand Government stock. Instead, the funds were used to repay other investors and fund the Bradley’s lifestyle, which included expenditures on school fees to St Cuthbert’s College, clothes shopping, payments on a BMW, and the mortgage on a home that was valued at $4.7 million in 2008.
Aman Futures Group Philippines was the subject of a cease and desist order issued by the SEC in connection with a P244 million Ponzi scheme in the Philippines. It is alleged that Aman Amalilio solicited investments by promising a rate of return from 15 percent to 40 percent for a 20 or 30 day period for investments that were to be made in a Malaysian company engaged in commodity trading futures, such as manganese, palm oil and nickel. Incorporators of Aman Futures include Fernando R. Luna, Lelian Lim Gan, Eduardo Lim, William L. Fuentes, Naezzelle M. Rodriguez, and Lurix Lopez.
The Regional Public Prosecutor’s Office in Gdańsk has been replaced by the  Regional Public Prosecutor’s Office in Łódź, which is now conducting two investigations related to Amber Gold, including the investigation against the president of Amber Gold, Marcin Plichta, and the investigation concerning the airport in Gdańsk and OLT Express. The investigators are examining, among other things, the sources of financing companies belonging to Amber Gold and cash flows associated with individual transactions and investments. Amber Gold was an unregulated Polish lender and investment which has been liquidating itself while promising to repay investors all their funds plus interest. There were 7,000 clients who gave the company about 80m zlotys ($24million) to invest in gold. Whether they will get any money back remains to be seen.
Reported by Jarosław Kruk of Kruk and Partners, www.legalkw.pl
Member of FraudNet, www.icc-ccs.org/home/fraudnet
South Africa
Investigations are underway regarding allegations that Sharemax Investments committed fraud and operated a Ponzi scheme involving about 40,000 people and R4.5 billion. It is alleged that The Villa, a partially completed retail development near Pretoria, was promoted to investors but that The Villa had no income other than investors’ money.
Herman Pretorius, who took his own life earlier this year, had run a large Ponzi scheme through the Relative Value Arbitrage Fund (RVAF). Curators for RVAF estimate the scheme received R2.2bn from about 3,000 investors. The curator has recently revealed that an Anton Piller order was granted by the High Court against Pretorius’ wife and her two sons to “protect and obtain information relating to the whereabouts of missing funds belonging to creditors/investors. The family is opposing the order.
The Enforcement Directorate (ED) was able to get access from Switzerland to the accounts of an Indian company, City Limouzines, and its chairperson, Sayed Mohamed Masood, under the Prevention of Money Laundering Act (PMLA) by demonstrating that the funds were “proceeds of crime.” City Limouzines has been accused of running Ponzi schemes in various cities and offering very high interest rates on investments. It appears that this is the first such attachment of bank accounts in Switzerland under PMLA.

The U.S. Department of Justice held an investment fraud summit at the University of Connecticut involving federal prosecutors, enforcement attorneys, law enforcement officers, scholars, victims of investor fraud and others.
The Internal Revenue Service issued new guidance on the treatment of clawbacks for tax purposes. The IRS has published a new webpage at www.irs.treas.gov/uac/FAQs-Related-to-Ponzi-Scenarios-for-Clawback-Treatment.
France’s prosecutor is requesting permission to question Bernard Madoff and Swiss bank UBS as part of its investigation of investor losses from the Madoff Ponzi scheme. The richest woman in France, L’Oreal heiress Liliane Bettencourt, was one of the investors. France is looking for answers relating to whether UBS had “cheated” French clients by sponsoring a Luxembourt-registered fund, Luxalpha, which had fed assets directly to Madoff but did not say so in the prospectus.
The sentencing of Bernard Madoff’s brother, Peter Madoff, has been delayed at the request of the defense. Peter Madoff had pleaded guilty in June, but has asked for more time to file 11 years of amended tax returns that are required under the terms of his plea agreement.
A $25 million settlement between the law firm Holland & Knight and the receiver of the Arthur Nadel Ponzi scheme was approved by the district court, which found that the agreement was in the best interest of the 350 investors who lost $162 million in the Nadel scheme. The agreement includes a bar order that prevents anyone else from suing the law firm for losses in the Ponzi scheme. The receiver also settled two other claims - The Diocese of Venice will return $521,168 and the Sarasota Opera Association will pay $514,382 to resolve claims that donations that they received that were defrauded investor funds. The receiver has thus far collected about $60 million and investors have recovered about 20% of their losses so far.
The personal collection of Thomas Petters went up for auction and included precious, one-of-a-kind pieces of art, autographed photos of Whitey Ford and a football with Don Meredith’s personalized signature, a LeRoy Neiman painting, a red boxing glove with a personalized signature from Sugar Ray Leonard, and a small concrete dog that is covered in U.S. currency.
Minnesota Democratic Senator Amy Klobuchar denied accusations that she failed to prosecute Thomas Petters while choosing to prosecute only his early co-conspirators. The allegations are that Klobuchar had enough evidence to investigate Petters at the beginning stages of his criminal enterprise in the late 1990s, and additionally that Petters and his employees contributed more than $120,000 to Klobuchar’s campaigns for County Attorney and U.S. Senate.
In the Scott Rothstein Ponzi scheme case, the bankruptcy court approved a settlement between Gibraltar Private Bank & Trust, the trustee of the bankruptcy estate of Rothstein Rosenfeldt Adler (RRA) and others for $15 million. The settlement involves payment of $8,437,500 to the RRA estate, $3,750,000 to the bankruptcy of the Banyon feeder funds and $2,812,500 to family of the late Ed Morse, another Rothstein investor. The court also entered a bar order prohibiting further civil lawsuits from creditors in the bankruptcy case against Gibraltar and its former owner, Boston Private Financial Holdings.
TD Bank’s motion for a new trial in the case of Coquina Investments v. TD Bank arising from the Scott Rothstein Ponzi scheme was denied. Coquina had obtained a $67 million jury verdict against TD Bank earlier this year in connection with allegations that the bank had aided and abetted Scott Rothstein in running his Ponzi scheme. The judge found that the damage award was supported by the evidence and that TD Bank’s net worth of $28 billion enables it to pay a $67 million judgment. TD Bank has an appeal pending before the 11th Circuit.
In response to a motion to for summary judgment, the trustee of Scott Rothstein’s law firm, Rothstein, Rosenfeldt Adler, continues to push forward on his claims for $10 million against Levinson Jewelers and its owners, Mark and Robin Levinson. The Levinsons have asked to have the case dismissed, but the trustee contends that the credibility of the Levinsons is an issue for trial. The trustee has alleged that Rothstein’s law firm used Ponzi scheme funds to pay for jewelry and watches.
A report by the inspector general of the U.S. Postal service found that H. David Kotz, the former SEC’s inspector general, shouldn’t have opened an investigation related to R. Allen Stanford’s Ponzi scheme because he was friends with a female attorney who represented victims of the fraud. The review found that Kotz “appeared to have a conflict of interest” when he opened and supervised an investigation into the court-appointed receiver in the Stanford case because of his relationship with Gaytri Kachroo, a Massachusetts attorney.
Trustmark National Bank has filed an interpleader complaint asking a federal judge to decide to whom it should deliver about $582,000 in an account at the bank in connection with the Allen Stanford Ponzi scheme. Trustmark is seeking an order relieving it from liability, as the funds are subject to competing claims by the U.S.-appointed receiver and the Antiguan-appointed liquidators.
The Fifth Circuit has ruled that the receiver for the Allen Stanford entities may proceed with lawsuits against both Republican and Democratic political committees that were paid more than $1.6 million from the Ponzi scheme funds. The court concluded that the receiver may stand in the shoes of the creditors of the Stanford entities and that he had timely brought claims under the Texas Uniform Fraudulent Transfer Act.
A lawsuit brought by Ahmad Hamad Algosaibi & Brothers Company (AHAB) against Glenn Stewart in Los Angeles District Court withstood a motion to dismiss. It is alleged that Stewart ran a $9 billion Ponzi scheme. AHAB alleges that Stewart helped designed a massive international fraud and money laundering scheme that was masterminded by Maan Al Sanea, a Saudi/Kuwaiti national. It is alleged that Stewart and Al Sanea would incorporate shell banks in Bahrain to leverage unauthorized borrowing, and the monies were then siphoned off to Al Sanea. Stewart and that Al Sanea formed The International Banking Company, which was a sham entity with no real customers or business. Stewart also formed his own companies to siphon off tens of millions of dollars to himself through secret commissions on sham transactions. The court held that AHAB could pursue its claims, which included aiding and abetting fraud, aiding and abetting conversion/misappropriation, and unjust enrichment, under Bahrain law and all but one under Saudi law. AHAB could also proceed with claims against Stewart for bogus commission for work not actually performed.
The receiver in the ZeekRewards Ponzi scheme filed a preliminary liquidation plan which provided, among other things, that the receiver has recovered approximately $293.7 million so far for the approximately 1 million investors. The Receiver also reported that he had presented nearly 61,000 non-negotiable financial instruments (such as cashier’s checks and/or money orders) totaling approximately $100 million for deposit. The receiver reported that he is evaluating claims against individuals and entities involved in the operations, such as banks, law firm and accountants, and that he intends to pursuant fraudulent transfer claims against net winners who profited from the scheme.

Tuesday, October 23, 2012

Radio Show on "Ponzi Scheme Architecture and Pitfalls”

Posted by Kathy Bazoian Phelps

On October 24, 2012 at 1:00 p.m. PST, Kathy will appear on Radio Shalom, The Money and Business Show, on the topic of “Ponzi Scheme Architecture and Pitfalls.”  The show can be heard live at www.radio-shalom.ca/site/emissions-1024.

Monday, October 22, 2012

New IRS Guidance for Ponzi Scheme Clawback Defendants

Posted by Kathy Bazoian Phelps

For investors who need help from the IRS on how to treat clawback payments made to trustees, the IRS has published a new webpage:

So far the IRS has posted answers to two questions:

·         How does a taxpayer treat the repayment of a clawback?

·         What does the taxpayer need to establish as to whether the repayment of a clawback is allowable as a deduction (or a § 1341 credit)?

The IRS’ efforts to assist Ponzi scheme victims is commendable, and the information provided should prove to be helpful. Still, any investor who has experienced the misfortune of having to write a check to the trustee of a Ponzi scheme on a clawback claim is strongly advised to seek professional assistance in properly determining the tax consequences. The last thing a Ponzi scheme victim needs is trouble from the IRS!

Friday, October 19, 2012

In Pari Delicto: Still a Defendant’s Best Friend in a Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

Once again, the defense of in pari delicto has saved a defendant from a claim of professional negligence in a Ponzi scheme case. This time the case is Peterson v. Winston & Strawn, LLP, 2012 U.S. Dist. LEXIS 147653 (N.D. Ill. Oct. 10, 2012). Ronald Peterson is the trustee of two hedge funds, Lancelot Investors Fund, Ltd. and Colossus Capital Fund, Ltd. (the “Funds”), which invested in entities run by Thomas Petters. As we know, the Petters’ entities turned out to be massive Ponzi schemes. Winston & Strawn had been the Funds’ lawyers.

In his complaint, Peterson first alleged that the law firm failed in its duty to disclose to the Funds that their manager, Greg Bell, was not complying with the investment restrictions set forth in a Confidential Information Memorandum (“CIM”) that the Funds had published to investors. According to the complaint, Bell had told the law firm shortly after it was retained in August 2005 that he was not complying with the CIM. Specifically, Bell stated that Petters would not allow him to verify the inventory and that the Funds did not have any lock-box arrangements with any of Petters’ businesses.

Peterson’s complaint further alleged that the law firm drafted an amended CIM in March 2006, which had the same investment restrictions, giving the “false impression” that Bell was complying with those restrictions.

Finally, the complaint stated that Bell became suspicious of Petters in December 2007 and that he expressed those concerns to the law firm in January 2008 when he sought individual representation from the law firm. Peterson alleged that the law firm again failed in its to duty to disclose this to the Funds and to address potential harm to them.

The law firm responded to the suit with a motion to dismiss based on in pari delicto, and the court granted the motion. The court relied heavily on the Seventh Circuit’s decision applying in pari delicto in another malpractice lawsuit that Peterson had filed against the Fund’s auditors. Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir. 2012). In that case the court held that the in pari delicto defense did apply to Peterson’s claims to the extent they arose after Bell joined in Petters' fraud in April 2008. In the court’s view, “The Funds knew what Bell knew . . .”, and because Peterson stood in the Funds’ shoes, in pari delicto barred the claims that arose after April 2008. However, the court made a crucial distinction. It held that Peterson could maintain the claims that arose before April 2008 because the complaint did not allege that Bell knew of Petters’ fraud before then.

In its decision on Peterson’s claim against the law firm, however, the court refused to apply the Seventh Circuit’s distinction on the grounds that everything that the law firm learned about the funds came from Bell:

In the present case, however, Peterson's claims against Winston & Strawn rest entirely on facts that the firm only learned through Bell’s disclosures. Specifically, Peterson contends that Winston & Strawn breached its duties of disclosure and due care in failing to notify and advise the Funds regarding Bell’s stated failure to comply with the investment restrictions in the CIMs. As indicated above, Bell’s actions are imputed to the Funds. Thus the Funds cannot sue Winston & Strawn for failing to advise them of facts that they already knew through Bell.

The court then concluded that because Peterson alleged only that the law firm was negligent and Peterson admitted that Bell was negligent, “Peterson, standing in the shoes of the Funds, is thus equal in culpability to Winston & Strawn and, therefore, the Court finds that in pari delicto bars Peterson’s claims.”

As in every case in which the in pari delicto doctrine is invoked to dismiss a trustee’s claims in a Ponzi scheme case, the result here is that innocent victims are denied a potential source of recovery. Obviously, these victims would argue that this result is both inequitable to them and ineffective in deterring the defendant’s wrongful conduct. On the other hand, proponents of the doctrine argue that this result is required by Butner v. United States, 440 U.S. 48 (1979), and 11 U.S.C. § 541.  And in the case law at this time, that is certainly the prevailing argument.

For more on Peterson v. McGladrey & Pullen, LLP, see my blog of April 9, 2012, The "In Pari Delicto" Battle in Ponzi Cases Rages On.

Tuesday, October 16, 2012

Banks Beware: Aiding and Abetting Claims in Ponzi Cases Are Still Alive and Well

Posted by Kathy Bazoian Phelps

Aiding and abetting claims against banks in Ponzi scheme cases continue to gain traction in the case law. The district court in which a jury awarded a verdict of $67 million against TD Bank for aiding and abetting Scott Rothstein’s Ponzi scheme denied the bank’s post-trial motion for a new trial, to amend the judgment, or for remittitur. Coquina Invs. v. Rothstein, 2012 U.S. Dist. LEXIS 139947 (S.D. Fla. Sept. 28, 2012).

In denying the motion, the court first reviewed the testimony of the witnesses at trial. Based on that evidence, the court found:

Coquina presented sufficient evidence of the existence of an underlying fraud—Rothstein’s Ponzi scheme in which Coquina invested. Coquina presented sufficient evidence for a reasonable jury to find that TD Bank, through Spinosa, Caretsky and other TD Bank employees, knew about the fraud and ignored numerous “red flags” with respect to the RRA accounts. Coquina also presented sufficient evidence for a jury to find that TD Bank provided substantial assistance to advance the commission of the fraud by making misrepresentations to Coquina about purported account restrictions and the amount of money in its accounts, ignoring red flags and placing notes on the RRA accounts to prevent other TD Bank employees from taking phone calls about the accounts.

The court also sustained the jury’s verdict on Coquina’s claim of fraudulent misrepresentation against the bank:

White [a partner in Coquina] testified that Coquina decided that it would not make additional investments without assurances from TD Bank that the trust account would be restricted and the proper amount of money was in the trust account. On August 17, 2009, Coquina representatives Damson and Klein met with Spinosa to obtain assurances about the RRA account and the amount of money deposited in Coquina’s trust account. There is sufficient evidence for a jury to find that, relying on Spinosa’s assurances, Coquina decided to make further investments totaling $24 million with Rothstein. Coquina put forth sufficient evidence for a reasonable jury to find that Spinosa’s statements were in fact false, i.e., it was not possible for TD Bank to restrict the accounts in the manner described in the “lock letters” and the amount of money Spinosa said TD Bank was holding for Coquina in RRA trust accounts (i.e., $22 million) was inaccurate. Coquina also put forth sufficient evidence (through, at a minimum, Spinosa’s, Klein’s, and White’s testimonies) for a jury to find that Spinosa made these statements to induce Coquina’s reliance.

The court also rejected TD Bank’s other claims of error relating to evidentiary issues, the adverse inference issue relating to Spinoza’s Fifth Amendment claim, the jury instructions, and the propriety of punitive damages.

Not surprisingly, TD Bank has filed an appeal. For more information about the jury verdict against TD Bank, see my blog of February 16, 2012, Aiding and Abetting Claims Against Banks in Ponzi Cases Are Alive and Well.

And the aiding and abetting decisions keep coming. Following the denial of TD Bank’s motion for a new trial, the court in Arreola v. Bank of America, N.A., 2012 U.S. Dist. LEXIS 144765 (C.D. Cal. Oct. 5, 2012), denied the bank’s motion to dismiss the plaintiffs’ aiding and abetting claim. The Ponzi scheme perpetrator, Juan Rangel, operating through Financial Plus Investments, Inc., targeted working class Spanish-speaking families and encouraged them to use the equity in their homes to invest in fraudulent notes carrying high rates of return. The scheme involved using straw buyers to purchase the homes of victims who were behind in their payments but still had equity. It also involved the payment of bribes to Dony Gonzalez, a Bank of America branch manager, in exchange for prematurely releasing the hold on funds before the required waiting period, authorizing the deposit of funds into the accounts of entities that were not the payees, and falsifying Verification of Deposit forms.

The complaint alleged claims of aiding and abetting several torts – breach of fiduciary duty, fraud, intentional misrepresentation and negligent misrepresentation. The opinion primarily addressed the claim of aiding and abetting breach of fiduciary duty.

In denying Bank of America’s motion to dismiss, the court held that the complaint adequately pled facts in support of the plaintiffs’ aiding and abetting claims. On the issue of whether Rangel owed a fiduciary duty to the plaintiffs, the court stated:

Here, Rangel specifically targeted vulnerable, distressed homeowners who were facing the loss of their homes. By assuring his victims that they would be able to continue living in their homes, Rangel earned their confidence, which he then exploited to transfer title or divert loan proceeds to Financial Plus. In appealing to Plaintiffs’ fundamental need for shelter and preying on their fear of losing their largest asset, Rangel went far beyond a mere arms-length transaction, and assumed a fiduciary duty to Plaintiffs.

On the issue of whether the bank had knowledge of the scheme, the court held, “The Complaint alleges that Gonzalez was a high level branch manager, and that he committed wrongful acts while in the course of conducting official bank business. . .  Gonzalez knew, at the very least, that the falsified Verification of Deposit forms were being used in connection with fraudulent mortgage applications.”

The court also considered the red flags that the bank ignored:

Plaintiffs allege that the bank knew that Rangel’s business accounts involved the receipt of investor funds, knew of the multiple internal “red flags” that Rangel’s banking activities triggered, and knew that Rangel was transferring money from investor-funded accounts to Rangel’s personal accounts in Mexico. . .  A common-sense reading of these allegations, taken together, sufficiently establish, at this stage, that the bank had actual knowledge of Rangel’s fraud.

Finally, the bank also argued that the plaintiffs’ claim of aiding and abetting negligent misrepresentation should be dismissed because aiding and abetting claims are limited to those based on intentional torts. However, relying on prior case law, the court rejected this argument.

The complaint in Arreola v. Bank of America, N.A. is available here.