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

Friday, November 30, 2012

November 2012 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

The Ponzi scheme news for the month of November was as strong and steady as ever. Here is the summary of the stories that were reported this month. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.
Mark Akins was ordered to pay $340,000 restitution in connection with a Ponzi scheme that defrauded 82 investors of more than $1 million. Akins was accused of being the chief marketer of the fraud run by Frederick H. K. Baker, in which investors were told their money was being invested in foreign currency trading using a foolproof algorithm that paid 15% profits every month. Akins was sentenced to 27 months in prison earlier this year. Baker is serving a 41-month prison sentence and must pay $776,336 in restitution.
Philip Barry, previously convicted of operating a Ponzi scheme that defrauded investors of $27 million, saw his conviction affirmed on appeal. The Second Circuit concluded that any evidentiary error was harmless in the face of the evidence of the fraud, including a seized note on which Barry had written to himself, “I’m just a crook running a Ponzi scheme.” United States v. Barry, 2012 U.S. App. LEXIS 23275 (2d Cir. Nov. 13, 2012).
Jack Brown, the owner of Brown’s Tax Service, has been accused of running a Ponzi scheme. Brown’s Tax Service was closed, and a sign was posted that read: “Due to health issues, Brown’s Tax Service is closed as of November 6, 2012.” However, Brown’s Tax Service has been accused of running a scheme in which nearly a thousand investors lost more than $4 million.
James R. Cruise Jr. was charged in connection with a real estate Ponzi scheme that defrauded 25 investors of more than $1.2 million. An administrative complaint was filed seeking a cease and desist order against Cruise and his company, The Austin Group.
Brad Demuzio of Idaho was sentenced to prison after being charged by the CFTC with operating a $1.8 million commodity pool and foreign currency exchange Ponzi scheme through his company, Demuzio Capital Management. Demuzio defrauded at least 16 investors and falsely represented that their principal was safe and that they were earning profits.
Ramon Desage was ordered to stop gambling while awaiting trial in connection with charges that he ran a $75 million Ponzi scheme. DeSage is accused of running a Ponzi scheme using his company Cadeau Express, which described itself as a “unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers.”
Alex Dowlatshahi and Christopher Mills must disgorge more than $766,000 in ill-gotten gains from the Ponzi scheme run by David Allen, the co-founder of China Voice Holding. The specific findings were: “Court finds Dowlatshahi jointly and severally liable for disgorgement of ill-gotten gains with his entities: (1) Lucrative [Enterprises Corp.] to disgorge ill-gotten gains of $300,454, (2) [Strategic Capital] Synergetic [Solutions LLC] to disgorge ill-gotten gains of $24,091, and (3) relief defendants Darius Assets to disgorge ill-gotten gains of $305,989.” The court also found that Mills should disgorge ill-gotten gains of $2,165 and found Mills jointly and severally liable for disgorgement of ill-gotten gains with his entities: (1) Sleeping Bear [LLC] to disgorge ill-gotten gains of $116,219 and (2) Silver Summit [Holdings LLC] to disgorge ill-gotten gains of $18,025.”
Tim Durham, 50, who was convicted of charges relating to his Ponzi scheme run through Fair Finance Co., was sentenced to 50 years in prison.  Durham had objected to a pre-sentencing report that recommended 225 years in prison and restitution of $209 million. Durham has asked for a five year prison term. Durham’s co-defendants, Jim Cochran and Rick Snow, are also scheduled to be sentenced and face 145 years and 85 years, respectively. The defendants misappropriated funds from Fair Finance, leaving the company without the ability to repay about 5,000 investors who had purchased more than $200 million unsecured investment certificates. Durham and Cochran used investor funds to sustain their lavish lifestyles, which at one point included more than 40 classic and exotic cars worth over $7 million, a $3 million private jet, and a $6 million yacht in Miami.
Jedidhah “Jed” Duarosan, of Maui, Hawaii, was scheduled be sentenced in connection with charges relating to the operation of a Ponzi scheme in which she collected approximately $882,000 from six Maui families. Duarosan fired her attorney at her sentencing hearing and asked to be represented by David Miller, who Duarosan claimed to be a federal judge. The court ordered Duarosan, who was free after posting a bond, to be held in jail overnight pending a hearing to determine who represents Duarosan.
James F. Ellis, 69, of Florida was indicted in connection with an alleged $11 million Ponzi scheme that targeted members of the Wilton Manors gay community. Ellis is accused of being the front man for adviser George Elia, who is accused of defrauding investors through his company, International Consultants & Investment Group Limited Corp. Ellis allegedly pretended that Elia was a financial whiz capable of generating large returns for investors. Elia had promised investors quarterly returns of 40%. Ellis received monthly payments from Elia that often totaled $20,000 - $25,000 which were “kickbacks” given in exchange for Ellis’s recruitment of new investors to Elia’s scheme.
Robert E. Estupinian was sentenced to 66 months in prison in connection with the Ponzi scheme run through Vesta Strategies. Vesta represented that it was a safe and financially secure Section 1031 exchange company, that client deposits would be held by Vesta, and that client deposits would be returned at the time of redemption. Vesta collapsed in 2008 with $25 million owed to depositors. Estupinian, along with John D. Terzakis and Peter Ye, pleaded guilty to charges in connection with the scheme. Terzakis was previously sentenced to 84 months.
Donald R. French, Jr. of Florida is thought to be the youngest Ponzi schemer ever. He launched his $10 million scheme at the age of 21. French saw his arraignment postponed in connection with charges that he ran a Ponzi scheme through his company, D3 Capital Management, which promised investors returns of up to 50% per year with investments in foreign currencies, emeralds and a solar energy project in Italy. He used investor funds to buy a home in Rome and to travel to 30 countries. He was also a high roller in Las Vegas. French was detained in South Africa and brought back to Las Vegas for passing bad checks.
Joseph Greenblatt, 50, of New York was sentenced to 6 to 18 years and ordered to pay more than $23 million in restitution for stealing more than $31 million through his Ponzi scheme run through Maywood Capital, a real estate investment company.
Robert Hague-Rogers, 76, was sentenced to 10 years in federal prison and ordered to pay $9.34 in restitution in connection with a Ponzi scheme that he ran through HR Financial Services and HR Sales and Marketing. Rogers made unauthorized loans against employer-sponsored health plans to repay investors holding promissory notes with interest rates of up to 15%. He used the funds for personal expenses including leases of luxury vehicles, house payments and taxes, and private life insurance policies.
Lawrence H. Heim, 72, of Oregon, was sentenced to 51 months in prison and ordered to pay $4,057,003.87, in connection with the $4 million Ponzi scheme he ran through U.S. Gold & Silver Investments, Inc. Heim operated a website and hosted a radio program in which he advertised the sale of gold and silver coins and calculated the future value of gold. Many of Heim’s approximately 48 victims were elderly individuals who had purchased coins with funds from their retirement savings.
Michael Jenkins and Harbor Light Asset Management were charged by the CFTC in connection with a Ponzi scheme in which they allegedly solicited at least $1.79 million from about 377 people. Jenkins allegedly used $748,827 of investors’ funds to trade gold and oil futures, stock index futures, and E-mini futures in his personal accounts and to pay for charges at department and discount stores and gasoline stations, and for cellular phone bills and airline tickets. The CFTC complaint, filed on November 20, 2012, alleges that HLAM’s investment agreement falsely represented to investors that their investment was solely for investing in E-mini futures and that investors’ funds would be immediately wired to a specific trading account. However, according to the complaint, most of investors’ funds were misappropriated by HLAM and Jenkins.
James F. Lagona was arrested in connection with obstruction of justice charges, among others, that he tried to use political influence to alter an upcoming sentence relating to a $5.8 million Ponzi scheme. Lagona was found guilty in connection with a scheme that defrauded 90 victims and that was run by Guy Gane and his company, Watermark Financial Services.
Robert Roland Langguth of Texas pleaded guilty to charges in connection with an alleged Ponzi-style scheme that he ran through Capital Finance, Paris Properties, and Paris RE Inc. in which he allegedly sold ownership shares in real estate bridge loans, even though he was not licensed to sell real estate or securities. The arrest warrant stated that Langguth stole between $7 million and $20 million from up to 250 victims.
Irwin Lipkin, 74, pleaded guilty to charges related to Bernard Madoff’s Ponzi scheme. Lipkin was Madoff’s first employee in 1964 and retired in 1998, and has said that he was not aware of the Ponzi scheme before he retired. Lipkin did plead guilty, however, to falsifying the books on Madoff’s order in making accounting entries in financial records that he knew were inaccurate. Lipkin and his wife illegally remained on the Madoff payroll after his retirement in 1998 and received benefits although they did not work. Lipkin’s son, Eric Lipkin, pleaded guilty in 2011 to charges that he reported people were Madoff employees so they could receive retirement benefits.
Gilbert Lopez, 70, and Mark Kuhrt, 40, two former accounting executives at Stanford Financial Group Co., were convicted on criminal charges related to their alleged assistance to R. Allen Stanford in concealing the Stanford Ponzi scheme from investors. Prosecutors told jurors that Lopez and Kuhrt meticulously tracked about $2 billion that Stanford “sucked out” of the bank to fund risky private ventures including Caribbean airlines, resort developments and international cricket tournaments. They further charged that the accountants didn’t disclose these loans or additional funds that Stanford took to underwrite a lavish personal lifestyle of private jets, yachts and waterfront mansions. They face possible sentences of more than 20 years in prison.
Jeffery Lowrance, 51, a United States citizen based in Panama, who operated a New Zealand registered company, was sentenced to more than 14 years in prison and ordered to repay more than $17 million. Lowrance had defrauded 452 investors of $31 million in connection with his Ponzi scheme which he ran through Mentor Investing Group, Inc. and First Capital Savings & Loan, Ltd. Both businesses claimed to buy and sell foreign currencies and to engage in FOREX trading. Lowrance misrepresented to potential investors that they would be paid as much as 4 to 7% monthly interest.
Andrew Mackey, 62, of New York, was sentenced to 27 years in prison and ordered to pay $6,650,067 in restitution in connection with a Ponzi scheme that defrauded more than 160 investors who invested almost $12.3 million in his company, ASM Financial Funding Corp. Mackey falsely promised investors monthly returns of 10-20% from allegedly lucrative offshore deals. One of his investment programs was known as the Wealth Enhancement Club. Mackey also used more than 30 salespeople as intermediaries, paying them $1.1 million in commissions for recruiting new investors. Mackey’s common-law wife, Inger Jensen, 54, was also convicted and received a 14 year sentence.
Syed Qaisar Madad, 65, was charged in connection with a $50 million Ponzi scheme. Madad was the CEO and co-owner of Technology for Telecommunication and Multimedia, Inc. (“TTM”). TTM, which first claimed to be in the business of securing large orders for the supply of equipment to a video-conferencing company, later transitioned to investments and trading. Madad stated that his investment strategy centered around both beginning and ending the trading day with 100% cash. He claimed to achieve extraordinary returns that regularly exceeded 30% and some years approached 65% despite never investing more than 10% to 15% of his cash in the market at any given point. Madad used millions of investor funds to pay his own personal expenses and the expenses of his wife’s business.
Billy W. McClintock, 70, and Dianne Alexander aka Linda Dianne Alexander, 70, were charged with running a $15 million Ponzi scheme that defrauded at least 220 investors. The fraud was allegedly a “prime bank” scheme that promised annual returns of 38% that was to be generated by a secret, highly exclusive organization in Europe known as “The Trust.” McClintock and Alexander told investors that the Trust was created after World War II by a group of extremely wealthy families, that the Trust owned European banks, and that it had the power to create money through fractional banking and the sale of bank debentures. They also represented that access to the Trust was open only to close friends and family members of current investors, and was subject to strict secrecy rules. The Trust does not exist.
Paul R. Melbye, 47, of Texas, pleaded guilty to charges related to the Ponzi scheme of Provident Royalties LLC that Melbye ran with Joseph Blimline. It is alleged that Melbye took money from more than 7,700 investors promising 18% annual returns. Melbye, acting on behalf of Provident Royalties made omissions to investors such as that Blimline had received millions of dollars in unsecured loans; that Blimline had been previously charged with securities fraud violations by the state of Michigan; and that funds from investors in later oil and gas projects were used to pay individuals who invested in earlier oil and gas projects.
Brian Keith Miller, 47, was sentenced to 6 years and 8 months in prison for running a Ponzi scheme which defrauded 32 victims of nearly $1 million. Miller led some investors to believe he worked at the investment firm Anderson and Strudwick after he had been fired. Miller used some of the proceeds to pay about $2,000 per month on a $380,000 mortgage and other proceeds were used to repay personal loans, buy vehicles and furniture, pay for travel and leisure activities, and make home improvements.
Aaron Olson was sued by his uncle, Eric Olson, in connection with a Ponzi scheme run by Aaron Olson through his investment company, KMO Associates. Aaron and Eric had previously been sued by Park Construction, which alleged that Eric was engaged in a partnership with Aaron. Eric denied the charges and had filed a complaint against Aaron alleging that Eric was a defrauded investor and was not part of the fraudulent scheme. Eric has sought to consolidate his case with the Park Construction lawsuit.
Anand Sekaran, president and director of Wasson Capital Ltd., pleaded guilty to running a $2.3 million Ponzi scheme that defrauded more than 10 investors. As part of his plea agreement, Sekaran agreed to pay $2.3 million in restitution and forfeit for the proceeds obtained as a result of the offense.
Feisal Sharif of Connecticut was charged by the CFTC of operating a $5.4 million Ponzi scheme that defrauded at least 50 people.  The investors invested in a commodity pool named First Financial, LLC, and they were promised guaranteed monthly and yearly returns of 1 to 15%. To falsely assure pool participants that their funds were safe in the pool’s trading accounts, Sharif allegedly fabricated trading account statements from First Financial and from futures commission merchants.
Jason Snelling, 48, was sentenced to a total of 40 years in prison by a court in Franklin County, Indiana for running a $9 million Ponzi scheme. 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 and to pay personal expenses. Snelling had previously been sentenced by other courts in Ohio on other charges related to the scheme and is currently serving time in Ohio as a result of a plea deal he signed with the United States Attorney for the Southern District of Ohio. Snelling’s partner, Jerry Smith, is currently awaiting two state court trials on related charges.
Robert Telthorst, 52, of Topeka, pleaded guilty to charges in connection with a Ponzi scheme in which he stole more than $460,000 from client trust funds. Telthorst admitted to taking money from the account for himself and then covering up the theft by taking money from other clients’ trust accounts.
Kaveh Vehedi, 51, of California, has agreed to plead guilty to charges in connection with a Ponzi scheme he ran through KGV Investments in which he sold himself as a successful international broker, claiming connections to projects in Dubai, China, and San Diego. The scheme promised 50% returns within nine months to some investors, and he defrauded 31 people to invest over $12 million. Vehedi allegedly used the proceeds to pay for luxury vehicles, private school tuition and his own properties.
Joseph Weigel, 77, a lawyer from Milwaukee, was the subject of a proceeding in the Wisconsin Supreme Court over his license. It was alleged that Weigel ran hundreds of millions of dollars through his firm’s trust accounts like a Ponzi scheme, using money from new cases to pay off older clients.
Ron Wilson, 65, of South Carolina was sentenced to nearly 20 years and ordered to pay $57,401,009 in restitution in connection with his $59 million Ponzi scheme that he ran through his company, Atlantic Bullion & Coin Inc. Wilson collected about $90 million from 798 investors in 25 different states by promising them profits from the purchase and appreciation of silver which Wilson was to purchase and hold at a Delaware depository. The losses were about $57.4 million. Wallace Lindsey Howell has also been charged in connection with the scheme. In addition, Joey Preston and Tracy Neily have also been accused of fraud in connection with the scheme and the South Carolina Securities Division is seeking a permanent bar on selling of securities of these two individuals. Preston and Neily acted as securities agents, although they were not registered and did not tell clients that neither they nor the investment was registered. 


A new report by Kroll Investigative Firm reveals that Kabul Bank, the largest financial institution in Afghanistan, has turned out to be a Ponzi scheme. According the audit, Kabul Bank was an institution linked to President Hamid Karzai’s government and was siphoning money from the funds deposited at the bank. The audit found that $861 million, which is around five percent of the total economic output of the nation, had been spread around to 19 different people and companies. In total, hundreds of millions of dollars is said to have been sneaked out of Afghanistan, with some of it even in airplane food trays.
The Australian Securities and Investments Commission (ASIC) began seeking large fines and disqualification orders against the operators of a massive Ponzi scheme that was run through the Integrity Plus Unit Trust and the Super Save Superannuation Trust. The scheme involved about 700 Australians who lost more than NZ$60 million. The scheme was run through other countries as well, such as the US, Hong Kong, Vanuatu, the Bahamas, Anguilla, Turks and the Caicos Islands, though it was principally operated by David Hobbs of New Zealand. Investors were lured into subscribing to so-called investment education packages and setting up personal offshore companies. Hobbs made false representations such as that the offshore investments were legal, that there was no risk of losing money because it was “capital guaranteed” or “principal protected,” and that the returns would be “around 4% per month.”
Milowe Brost was freed from custody after a judge lowered his bail from $1 million to $2,000. Brost faces charges in connection with an alleged Ponzi scheme that defrauded investors of at least $100 million.
Ross Bayne and Lloyd Culham were found guilty of illegally trading securities in a civil suit and were ordered to pay more than $500,000. Bayne ran Arcadia Investments and, with Culham, persuaded investors to invest in a scheme that involved a fake bank and a Danish lawyer, Eli Heckscher. Bayne was involved with a fraudulent investment company, Morgan European Holdings, which was not registered to trade in securities. Bayne and Culham told investors that MEH had a special link to a global bank called the World Trade Bank, though no such bank exists.
Eleven conmen were indicted at Regional Court in Duesseldorf for running a Ponzi scheme using Business Capital Investors, a company located in New York and Panama. The fraudsters sold shares in BCI to more than 1,700 customers promising an annual return of 15.5%. The annual payments were made with the money of the investors joining later. The Ponzi scheme was discovered one year ago when 120 policemen made a raid on the conmen and seized, among other things, a yard on the Dutch Antilles which was acquired with the money of the victims. The total damage is believed to BCI as high as EUR 60 million.
Report by Bernd H. Klose, www.raklose.de
Member of FraudNet, www.icc-ccs.org/home/fraudnet.
Stuttgart Regional Court has sentenced a 79 year old investment adviser to two years imprisonment. The investment adviser persuaded long time customers of his investment advisory firm to invest with a US company promising a yield of 15%. What makes the case so remarkable is the fact that the investment adviser had consulted two well-known law firms to receive advice if the investments introduced to him by the US company was safe. Both law firms denied and advised not to invest any money into the US company. However, the investment adviser persuaded eight long standing customers to investments in the amount of EUR 1.5 million. He himself invested EUR 145,000. None of the investors - including the investment advisor – received any return.
Report by Bernd H. Klose, www.raklose.de
Member of FraudNet, www.icc-ccs.org/home/fraudnet.
The Public Prosecution Mannheim has indicted Ulrich “Richie” Engler, who was extradited from the U.S. to Germany earlier this year for running a massive Ponzi scheme. According to the indictment, Engler is accused of having swindled 1,295 investors from Germany, Austria and Switzerland of EUR 29,000,000.00. Engler offered an investment into US based companies and promised interest up to 6% per year. According to the indictment, Engler never intended to make any payments to the investors, but intended to spend their money for his own lavish lifestyle and to sustain the fraud scheme. It is unclear yet as to when Mannheim District Court will schedule the trial.
Report by Bernd H. Klose, www.raklose.de
Member of FraudNet, www.icc-ccs.org/home/fraudnet.
Abhay Gandhi was arrested in connection with a Ponzi scheme that he ran through AISE Capital Management. Gandhi was wanted in four cases of cheating and breach of trust, and he is accused of investing investor dollars overseas to avoid paying back investors. Gandhi had promised investors 10% returns every month. Gandhi has been charged under section 409 of the IPC, which carries with it the possibility for life imprisonment. Gandhi has identified Janaksinh Parmar as having a role in sheltering Gandhi and accepting a large fee for providing Gandhi safe passage out of the country.
The Securities and Exchange Board of India (Sebi) served show-cause notices to Beetal Livestock & Farm (P) Ltd, a company that had claimed to have large goat-rearing farms in northern parts of the country and had solicited investments from the public with a promise of 2% monthly returns, and doubling of money in three to four years. The business model involved having investors pay a few thousand rupees to become owner of a goat, to be reared by Beetal. Investors were told that as each goat gives birth to four kids a year, the new goats would be sold to other investors — giving up to four-fold appreciation in the first year itself. Beetal told investors that the investments could give manifold returns in subsequent years, with each of the four new goats giving birth to 3-4 kids the following years.
Mohmamd Shoeb Diwan was arrested in connection with a Ponzi scheme run through Aliya Enterprises, of which he was the director. Qutubuddin Saiyed, the owner of Ailya, was previously arrested in connection with the case. The scheme promised investors double returns on their investments.
A 43 year old man from Bnei Brak was convicted in a Tel Aviv court in connection with a Ponzi scheme that stole more than 5 million shekels from investors. The man used the money to purchase an apartment building for himself and to buy other personal things.
New Zealand
The receivers of Ross Asset Management, a Wellington fund manager, released a report stating that they have identified $10.2 million of the $449.6 million that was believed to managed by Ross for 900 investors. The Financial Markets Authority had obtained a freezing order on the assets of the company’s director, David Ross, 62, and associated entities. The receivers, PricewaterhouseCoopers, have noted characteristics of a Ponzi scheme in that investors’ money was coming into accounts and those funds were being used to pay other investors.
President Benigno S. C. Aquino has ordered a fast-tracked investigation of a scheme run by Manuel Amalilio through the Malaysian-owned Amman Future Trading. It is believed that 15,000 investors were involved in the scheme that involved 12 billion peso ($290 million). Aman Futures supposedly promised profits of 20 to 30% in eight days and 50-86% in 18 to 20 days for investments made allegedly on the company’s non-existent palm oil, mining and futures businesses. It is reported that charges are being prepared against company chief executive officer Manuel Amalilio, Mohammad Suffian Saaid, and an associate, who are now in hiding. Anwar Alvin Zainal, an insurance agent believed to be an incorporator of the Aman Futures Group Phils. that operated the scheme, was kidnapped and murdered this week in Zamboanga del Sur. Pagadian City Mayor Samuel Co and his wife were also officially designated as accused in the scam.
South Africa
Giel Mans, accused of masterminding a $5 million Ponzi scheme and of faking his own kidnapping and trying to bribe a prosecutor, now claims he has a secret stash of diamonds located in a safe deposit box in London that are worth $10 million and will compensate his victims. Mans argued that he would only reveal the secret if he is released from jail on bail. The court declined to release him on bail after prosecutors expressed concern that Mans would likely flee if released. Mans, known as a diamond dealer, solicited investors for his diamond business, promising lucrative returns from his purchase of the best diamonds and the resale of those diamonds at a huge profit abroad. Rather than purchase expensive diamonds, Mans merely falsified receipts from various diamond suppliers.
United Kingdom
Nicholas ‘Beano’ Levene, 48, was sentenced to 13 years in connection with a Ponzi scheme that involved between £32 million and £200 million. Levene had offered shares in blue-chip companies, including HSBC, the Royal Bank of Scotland, Imperial Energy and Rio Tinto. He claimed he had access to shares unavailable to ordinary investors, which he would trade at a supposedly huge profit. In fact, he just invested and lost the investors’ money in the stock market. Levene also spent more than £18 million funding his lavish lifestyle, including £588,000 for his son’s bar mitzvah.
David Bowerman, 35, was sentenced to 8 years in prison in connection with his Ponzi scheme that defrauded more than 250 investors, including terminally ill cancer patients, out of up to £7.5 million. Bowerman sold fake bonds and offered loans under the pretense that his experience as an FSA-approved financial advisor would help boost their credit rating. He spent investors’ funds on three Caribbean cruises and flashy cars including a £38k Audi sports car, a BMW and an Aston Martin, and he is reported being seen lighting cigarettes with a £50 note. Bowerman then set up an online bookmaker called Shearer Hare and encouraged friends and family to invest heavily in it - using the funds to give the impression of a profit-making business. The business generated £4.85m but £3.8m soon disappeared through online betting by Bowerman with an unknown amount blown on his increasingly lavish lifestyle. 

In connection with the Ponzi scheme of John Farahi, which targeted the Persian community in Beverly Hills California, David Tamman, 45, a former Nixon Peabody securities partner, was found guilty on charges of conspiracy, obstruction of justice, alteration of records, and accessory to mail fraud and securities violations. Farahi, through his company New Point Financial Services Inc., recruited investors through a daily Farsi-language radio show, promising that their money would be used to buy low-risk corporate bonds backed by the federal bank bailout initiative known as the Troubled Asset Relief Program. Investors lost at least $7 million.
Fairfield Greenwich Group, one of Madoff’s feeder funds, along with other related entities, settled their part of a class action suit for as much as $80.3 million. The settlement will be funded by founder Walter Noel and other individuals associated with the firm. The settlement, which needs a judge’s approval before taking effect, provides $50.3 million to the class, which will get an additional $30 million if that money isn’t used to resolve other legal claims. A provision in the agreement allows Fairfield Greenwich to cancel the settlement if too many investors opt out of the deal to pursue individual claims. The investors are continuing to pursue claims in the case against Citco Group Ltd. and PricewaterhouseCoopers LLP.
Fortress Credit purchased more than $2 billion of claims from Rye Select Broad Market Fund in the Madoff case. Rye settled a lawsuit brought by the Madoff trustee and assigned unspecified additional amounts of each of the two claims to Fortress that it was granted under the settlement.
A Bank of New York Mellon Corp. unit, Ivy Asset Management, agreed to pay $210 million to the state of New York to resolve a number of lawsuits claiming that the bank concealed doubts about Madoff’s business. An additional $9 million will be contributed by other individual defendants in the cases. Ivy had been paid more than $40 million to give advice and conduct due diligence for clients invested in Madoff investments, and those clients lost more than $236 million in the Madoff scheme. The New York Attorney General announced that the settlement funds will be returned to investors. The Madoff trustee, Irving Picard, also reached a settlement with Ivy for $24 million.
Appellate arguments were heard in the cases filed by Irving Picard, the Madoff trustee, against various financial institutions, including HSBC Holdings PLC, JP Morgan Chase & Co, UBS AG, and Uni-Credit SpA. Picard’s lawsuits against the banks were dismissed by the district court on standing and in pari delicto grounds. Picard argues that he is not an ordinary bankruptcy trustee and has additional rights and powers under the Securities Investor Protection Act. The banks answered pointing to language in SIPA which they argue gives Picard the same rights and powers as an ordinary bankruptcy trustee and thus is barred from suing.
In litigation pending in connection with the Meridian Mortgage Ponzi scheme, new evidence was presented to the court in the case of the liquidating trustee against Moss Adams, the accounting firm for Meridian Mortgage. The trustee told the court that Moss Adams had withheld “smoking-gun emails” which demonstrated that Moss Adams knew that one of its employees had a romantic relationship with Meridian founder Frederick Darren Berg. The lawyer for the trustee stated that “The auditor cannot be, if you will, in bed figuratively or literally with the client,” as such a relationship “would absolutely violate the most basic premise of auditing.” The employee, Dan Matthias, said his relationship with Berg lasted about 6 months and says that it is far-fetched to suggest that he could have influenced the audit work of more senior people in a different part of the firm.
The receiver of the Arthur Nadel Ponzi scheme obtained approval to distribute another $22 million to about 340 defrauded investors. This distribution, combined with an earlier distribution of $26 million, will bring the total distributed to investors to almost 37%. Most of the latest money comes from a settlement paid to the receiver by the law firm Holland & Knight, which agreed to pay $25 million to settle a lawsuit accusing it of failing to report illegal activities at the Scoop Management hedge funds operated by Nadel.
The trustee of the bankruptcy case of Thomas Petters lost his claims to recover allegedly fraudulent transfers in the amount of $2 million paid to College of St. Benedict. A federal judge has dismissed the Trustee’s fraudulent transfer claims against the College of St. Benedict, allowing the organization to keep $2 million that was donated by Petters from Ponzi scheme proceeds. Petters, through the Thomas J. Petters Family Foundation, had paid $2 million to get his parents‘ names on the school’s auditorium.
The Petters trustee filed a lawsuit against BMO Harris Bank for aiding and abetting the Petters fraud by ignoring Petters’ huge deposits. It is alleged that M&I Bank, now owned by BMO Harris, was complicit in the Ponzi scheme and ignored multiple red flags to protect its lucrative banking relationship, where more than $35 billion flowed through the account. The trustee alleged that none of the $35 billion in deposits were from retail stores, which were supposedly a source of income for the Petters’ operation, and nearly $70 million was transferred to personal accounts controlled by Petters.
The fraudulent claims of trustee of the bankruptcy of Scott Rothstein’s law firm, Rothstein, Rosenfeldt Adler against the Dan Marino Foundation for $259,000 were dismissed. The court found that Marino had provided value in exchange for the funds.
Jonathan Hullick, former chief operating officer and executive vice-president of Gibraltar Private Bank and Trust Co., has sued Gibraltar and Boston Private Financial Holdings for wrongful termination in 2008 in relation to the Ponzi scheme of Scott Rothstein. Hullick claims that while working for Gibraltar he spotted suspicious activity in the bank accounts of Rothstein and Rothstein’s law firm, and reported it to Steven D. Hayworth and other Gibraltar executives, who assured him the accounts were “taken care of.” Hullick further alleges that he was asked to “relax regulatory requirements” and when he refused, the bank fired him. The complaint further alleges that Rothstein admitted this year that he had asked Hayworth to fire Hullick, and that Hayworth promised he “would take care of it.”
A new group of 35 investors sued TD Bank and Scott Rothstein seeking $72 million in damages, alleging that the bank was “Rothstein’s key conspirator in the Ponzi scheme.” It is alleged that the bank legitimized the illegal enterprise, disregarded red flags that should have exposed the fraud, lied to investors and covered up incriminating documents.
The trustee in the Rothstein bankruptcy case has hired GrayRobinson to help track down missing jewelry. GrayRobinson had represented JR Dunn Jewelers, who had been sued by the trustee. That lawsuit settled, and GrayRobinson will now help the trustee tracking the most valuable diamond connected to the Rothstein fraud, which is an 8.91-carat unmounted gem worth almost $700,000.
The receiver of Stanford Financial, along with several investors, filed a lawsuit for $1.8 billion against the law firms, Greenberg Traurig and Hunton & Williams, for their role in designing the “architecture” of the Ponzi scheme and “essentially hijacking the sovereign island nation of Antigua through the use of political corruption, loans made with funds stolen from Stanford’s investors, and even writing the laws that governed Stanford International Bank’s operations.” Attorney Carlos Loumiet worked at both law firms, but was not named as a defendant in the lawsuit. Yolanda Suarez, a protégé of Loumiet, was named in the suit. The claims alleged in the complaint are negligence, aiding and abetting breaches of fiduciary duty, breach of fiduciary duty, fraudulent transfer, unjust enrichment, negligent retention and negligent supervision.
In connection with the Ron Wilson Ponzi scheme, the South Carolina Attorney General’s office filed a complaint requesting that Joey Preston be ordered to return approximately $1 million that Preston allegedly made as commissions in connection with Wilson’s silver-buying Ponzi scheme. It is alleged that Preston violated the South Carolina Uniform Securities Act by bringing in investors without being properly registered and without doing proper due diligence on the investment he was recommending. The state’s complaint claims Preston held “silver parties” at his home for Wilson, where guests received a seminar on silver investment.
The receiver in the ZeekRewards case posted a letter on his website updating investors and expressing his intention to pursue fraudulent transfer claims against those who had profited from the Ponzi scheme. The receiver estimates that there are about 800,000 victims and total losses of $500 million to $600 million. The receiver has recovered about $300 million so far.
Paul Burk, 65, the owner of ZeekRewards.com’s parent company, Rex Venture Group, LLC, has denied that he operated a Ponzi scheme in response to a class-action lawsuit filed against him and his companies. Burks has said that said that plaintiffs “knowingly and voluntarily purchased bids” to participate in ZeekRewards.com.
Kelsey Grammer was dismissed from a lawsuit in which he had been named and accused of receiving dirty money from a Ponzi scheme affiliated with the website Staropoly.com. TV actress Lydia Cornell had sued Grammer, claiming that the website, which was billed as a new social network, was nothing more than a Ponzi scheme that caused her to lose money.
The quest for turnover of records from the FBI continues in the Ponzi scheme case of Blue Mountain Consumer Discount Co. Investors chose not to serve a subpoena for about 20 boxes of documents seized by the FBI, even though those records are thought to be needed in connection with lawsuits filed against Francis Cinelli and the CEO of the company, Walter “Buddy” Lambert. The court overseeing the matter had suggested that the victims serve a subpoena to force the FBI to release the documents. The attorneys for the victims stated at a hearing that they have not, and do not intend to, file a subpoena out of concern that it will interfere with the FBI’s criminal investigation.
The government announced that it will return $9,000,000 in forfeited funds to the victims of the Ponzi scheme that was run by the late Ashvin Zaveri of New York. More than 120 victims may be eligible to receive a share of the forfeited funds. Zaveri was indicted in 2009 on charges related to his scheme that defrauded investors of approximately $35,000,000 in connection with “oil and natural gas exploration partnerships” available through his company Zaveri Oil & Gas Ltd.

Monday, November 19, 2012

The Reach of Receivers in Ponzi Scheme Cases: Where There Is a Will, There Is a Way

Posted by Kathy Bazoian Phelps

One of a receiver’s duties in administering a Ponzi scheme case is to commence appropriate litigation to avoid and recover property that the Ponzi schemer fraudulently transferred to third parties. By law, a receiver generally has the benefit of nationwide service to reach a defendant’s assets that are located in other jurisdictions. See 28 U.S.C. §§ 754 & 1692.

However, to get the benefit of nationwide service under section 754, a receiver faces a difficult hurdle. The receiver must file copies of the receivership complaint and the order of appointment in the district court for each district in which receivership property is located, and this must be done within ten days of the receiver’s appointment.

The statute also states the consequences of missing this short deadline. Section 754 provides, “The failure to file such copies in any district shall divest the receiver of jurisdiction and control over all such property in that district.”

But what happens if the receiver does not know where property is located in the first ten days of the case? Without knowing where the property is located, it is impossible to know where to file the appropriate papers within that very short time period.

One option is to file the necessary papers in all 91 judicial districts within the ten day time limit. While this might be justified in a case of nationwide scope, in most cases it is not.

As a more practical solution to this problem, receivers have sought to amend the order appointing them for the purpose of restarting the clock to give them a new opportunity to file the papers in the relevant jurisdiction. A recent decision confirms that this practice remains acceptable to assist receivers in reaching assets in other jurisdictions. In Miller v. Wulf, 2012 U.S. Dist. LEXIS 164237 (N.D. Utah Nov. 15, 2012) (citing SEC v. Vision Commc’ns, Inc., 74 F.3d 287, 291 (D.C. Cir. 1996)), the court stated, “this technical deficiency may be remedied by reappointing the receiver, which restarts the ten-day period for the receiver’s compliance with § 754.”

While this end run around section 754 is fantastic for receivers in reaching assets in other jurisdictions, it does leave one wondering why section 754 exists at all. The ability of a receiver restart the clock by the entry of either a new appointment order or an amendment to the existing appointment order would seem to make section 754 meaningless.

Sunday, November 18, 2012

Just Doing Their Jobs? Professionals Facing Criminal Charges In Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps
Two recent criminal trials highlight the risks in working for what turns out to be a Ponzi scheme perpetrator. Not only might you lose money, or be hit with a large civil judgment, but landing in prison is becoming a reality for some as well.
Accountants in the Stanford Financial Ponzi Scheme
In the Ponzi scheme of Stanford Financial Group Co., two accountants at the firm, ex-Chief Accounting Officer Gilbert Lopez, 70, and Global Controller Mark Kuhrt, 40, are standing trial in connection with charges that they helped R. Allen Stanford conceal his Ponzi scheme by creating false financial statements.
At trial, prosecutors told the jurors that Lopez and Kuhrt had carefully tracked approximately $2 billion that Stanford had taken out of the bank for risky private ventures and for personal use. Lopez and Kurht described their role as involving complicated accounting issues and that they trusted Stanford’s top deputy, finance chief James M. Davis, who himself pleaded guilty for his role in the Ponzi scheme and is awaiting sentencing. The defense for Lopez and Kurht stressed that the accountants relied on information provided by Stanford and Davis and that they did not intend to create false financial records or break any laws.
If convicted, Lopez and Kuhrt face more than 20 years in jail.
Lawyer for New Point Financial Services, Inc.
A former securities partner in the firm of Nixon Peabody, David Tamman, 45, was found guilty of 10 criminal counts in connection with his participation in a Ponzi scheme in Los Angeles, California. The Ponzi scheme, run by John Farahi and his company, New Point Financial Services, Inc., involved the loss of up to $20 million taken from defrauded investors largely in the Persian Jewish community in Los Angeles. Tamman had served as New Point’s corporate securities counsel while at Nixon Peabody and while at his previous firm, Liner Grode Stein Yankelevitz Sunshine Regensreif & Taylor.
A Justice Department press release announcing the conviction stated, “As New Point's lawyer, Tamman helped John Farahi violate the most basic investor protection law—that you tell investors the truth.” The charges against Tamman were, among other things, that he interfered with the SEC probe by altering and backdating documents, removing documents, and lying to the agency personnel in sworn testimony. Farahi pleaded guilty to 41 criminal counts last year. The press release further stated, “This verdict demonstrates that there are severe consequences when an attorney crosses the line between vigorous representation of a client and obstruction of an SEC investigation.”
If convicted, Tamman faces a maximum prison sentence of 190 years, although the actual sentence is expected to be lighter than that.

Tuesday, November 13, 2012

Investors Settle with Fairfield Greenwich for Up To $80.25 Million

Posted by Kathy Bazoian Phelps
A class of Madoff investors has settled with Fairfield Greenwich and its related entities for up to $80.25 million.
These entities were Madoff feeder funds that had invested over $4.5 billion with Madoff. In their second amended complaint, the investors asserted claims of common law fraud federal securities fraud and control person liability negligent misrepresentation gross negligence breach of fiduciary duty, third-party beneficiary breach of contract constructive trust, mutual mistake and unjust enrichment See Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 354 (S.D.N.Y. 2010), and Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010).
The defrauded investors specifically alleged that the Fairfield defendants:
Made false representations and omissions regarding Madoff’s split-strike conversion strategy.
Made false representations and omissions regarding the funds' track record of profitability.
Made false representations and omissions in fund reports to investors and concerning due diligence and oversight of Madoff.
Ignored red flags of Madoff’s fraud.
Falsely reassured investors who made inquiries.
Assisted Madoff in thwarting an SEC investigation.
Attempted to raise money to keep Madoff afloat in late 2008.
Earned massive fees from funneling plaintiffs’ assets into the Madoff fraud.
Fairfield’s response to the allegations is explained in the motion to approve the settlement as follows:
[T]he FG Defendants vigorously maintain that they did not know about wrongdoing at BLMIS until it was revealed to the public in December 2008, lost more than $72 million of their own and family members' money in the fraud, maintained a full-time professional staff to perform due diligence and risk monitoring, and were among many financial firms and regulators that were fooled by Madoff including the Securities and Exchange Commission. They also point to the efforts to conceal the fraud by Madoff and seven others who pleaded guilty to crimes, including creating false trade blotters, trade confirmations and DTC reports which they were shown, and aspects of Madoff's activities that were not typical of a Ponzi scheme, including refusing new investments and redeeming billions of dollars upon request over many years.
The settlement calls for a guaranteed recovery of $50.25 million upon the court’s approval of the settlement agreement, plus an additional amount up to $30 million “to the extent it is not used to pay certain other claims or judgments against the FG Defendants.”
The settlement agreement was apparently hard fought, following substantial discovery. The defendants produced more than six million pages of documents, while plaintiff’s produced more than 75,000 pages of documents. The parties took about 50 depositions.
The settlement will be funded by the founding shareholders of Fairfield - Walter Noel, Jeffrey Tucker and Andres Piedrahita. The settlement motion explains that “the settlement consideration represents a substantial portion of the assets that might be recovered” if the plaintiffs were to prevail.
The plaintiffs’ claims against co-defendants PricewaterhouseCoopers, Citco and GlobeOp are not settled and will continue to be litigated. The memorandum states that the Citco Defendants acted as administrators of the Funds and custodians of the Funds' assets and were responsible for monitoring BLMIS as subcustodian of those assets. PwC Netherlands and PwC Canada were the auditors of the Funds' financial statements. Interestingly, the settlement proposes to bar these defendants from asserting claims for contribution against the settling defendants.
The settlement agreement, filed on November 6, 2012, is here. The memorandum in support of the motion to approve the agreement is here. The plaintiff’s second amended complaint is here.