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, May 31, 2013

May 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   It’s springtime, and Ponzi schemes are in full bloom. Here is a summary of 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.

   Leonard Ansill was arrested in connection with an alleged $1.1 million Ponzi scheme in which he offered investments to six investors that were supposedly funded with mortgages that he never actually held.

   Daniel Bonventre, Jerome O’Hara, and George Perez, former employees of Bernard L. Madoff Investment Securities LLC, had their request for separate trials rejected by the court. The three were indicted together, along with Annette Bongiorno and Joann “Jodi” Crupi, for their conduct in the Madoff Ponzi scheme. The three sought to have their cases heard separately from the others to avoid being tainted with the conduct of the other defendants. The court stated, “Bonventre, O'Hara and Perez have not shown that a joint trial with the other Defendants will prejudice them to a degree amounting to a miscarriage of justice." The court also ordered the early turnover by the government of the government’s exhibit copies and list.

   James Brandolino, 44, pleaded guilty and was sentenced to almost 9 years in prison and ordered to pay more than $3.8 million in restitution for a $5 million Ponzi scheme that defrauded 60 investors. Brandolino had futures trading losses of $850,000, and he misappropriated more than $2 million, using the money to purchase a BMW, Rolex watch and a piano. 

   Jason Franklin Brown, son of Ponzi schemer Jack E. Brown, was the subject of an involuntary bankruptcy petition. Jason Brown owes about $1.5 million for his part in what has been called a family Ponzi scheme. It is alleged that Jason Brown received about $542,000 in “bonuses” over the course of the last three years, none of which he reported to the Internal Revenue Service. He also allegedly received a $52,000 yearly salary and a $26,400 yearly housing allowance for “preparing $40 tax returns and doing some light bookkeeping.” 

   Robert A. Christy, of Georgia, and his company, Crabapple Capital Group LLC, had their CFTC registration revoked. The order of the CFTC found that Christy and Crabapple violated CFTC regulations in connection with their operation of a Ponzi scheme. Christy was ordered to pay $2.6 million in sanctions for his Forex fraud. 

   James F. Ellis, 70, was sentenced to about 3 years for his role in the Wilton Manors Ponzi scheme run by George Elia. Ellis helped bring more than $6 million to Elia’s Ponzi scheme, and he pocketed about $3 million from the scheme, paying for 3 homes, two BMWs and expensive cruises. Ellis pleaded guilty midway through his trial.

   Mark A. Ellison, David D. Swenson and Jeremy Snow Swenson pleaded not guilty to fraud charges connection with an alleged real estate investment scheme run through DBSI, Inc., which was supposedly a profitable real estate investment company. Ellison was general counsel for DBSI, which ran an $80 million Ponzi scheme.

   Edward Fitzgerald, 60, was arrested in Florida and is expected to be brought back to Southern California to face charges relating to an alleged $16 million Ponzi scheme. Fitzgerald is a former yacht broker and is accused of buying and selling boats with other people’s money. 

   Alan G. Flesher, 65, Wayne D. Flesher, 62, and Nancy Carol-Khalial, 65, were sentenced to 17½ years, 6 years and 4 years, respectively, and ordered to pay $27.4 million in restitution for their role in a $41 million Ponzi scheme which defrauded 790 investors. They pleaded guilty to running a scheme through their companies, Unlimited Cash Inc. and Douglas Network Enterprises Inc. They sold ATMs and Ad Toppers, which were advertisement-displaying video screens mounted on top of ATMS and vending machines. Victims were told they would earn income from ATM transaction fees and advertisement revenue generated by Ad Toppers, which would show ads for companies such as Coca-Cola, Gold’s Gym, and Paramount Pictures. Victims lost about $27 million in the scheme.

   James Fry, 59, an investment manager who raised millions of dollars for the Thomas Petters $3.65 billion Ponzi scheme, went on trial. Fry is the only person charged in connection with the Petters case who did not plead guilty and says that he was duped along with the investors. Fry is charged with lying to investors about the Petters’ investment program and lies of omission by keeping information from investors about the criminal background of Frank Vennes, who has pleaded guilty to participating in the Petters scheme. Fry operated Arrowhead Capital Management, the investment firm that he used to lure in investors, and also set up a hedge fund in Bermuda. Fry received more than $30 million throughout the course of the scheme, and Vennes had received about $48 million in total commissions.

   Kevin Harris, Keelan Harris, Karen Starr, Complete Developments LLC and Investment International Inc. were prosecuted by the CFTC and ordered to pay restitution and penalties of over $23 million in connection with their $23 million foreign currency Ponzi scheme.

   Jerry Lynn Helms, 48, pleaded guilty to running a Ponzi scheme in which he advised investors he would buy heavy equipment at auctions and then resell it to companies that would pay higher values. Helms defrauded local North Carolina investors out of several hundred thousand dollars.

   James Jackson Jr., 47, was arrested and accused of taking $1.7 million from 17 victims in a Ponzi scheme targeting elderly investors. Jackson allegedly ran the scheme through his companies, American Senior Advisory Group and Covenant Planning Group. Jackson told investors that their money was going to a company called AFG, but in fact their money was never invested. Jackson forged the signatures of local lawyers on what he called "deposit agreements" provided to the victims. 

   Mahmoud “Mike” Karkehabadi, 55, was sentenced to 27 years for his B-move producer Ponzi scheme which he ran through his company, Alliance Group Entertainment. Prosecutors alleged that it was a $9 million Ponzi scheme, but the jurors found the loss was between $500,000 and $3 million for 21 investors. Karkehadbadi promised investors returns of 18% to 35% no matter how well a movie did.

   Jeffrey Kelly, 45, pleaded guilty to charges relating to $1.5 million Ponzi scheme. Kelly had misrepresented that he was investing money in an assortment of financial products including annuities, stocks and real estate investment trusts, but he was spending the money on personal and business expenses instead.

   James Stanley Koenig, 61, was found guilty of running a Ponzi scheme after a trial that lasted 3 months. Koenig defrauded about 2,000 investors out of $250 million in a real estate and securities investment Ponzi scheme which he ran through Asset & Real Estate Investment Co. Koenig’s co-conspirators, Gary Armitage, 62, and Jeffrey A. Guidi, each previously entered into plea agreements. Koenig represented that his companies specialized in assisted-living centers and that they were profitable for tax-sheltered property exchanges. Koenig and his co-conspirators used investor funds to pay returns to existing investors and to pay personal expenses, including the purchase of an 80-acre castle, a Lear jet and expensive cars. Koenig had failed to disclose a prior conviction and prison terms to investors relating to a gold-selling scam.

   George Lindell, 65, and Holly Hoaeae, 39, of Hawaii were indicted on charges relating to the operation of an $8.6 million Ponzi scheme. Lindell and Hoaeae had induced investors to invest in “The Parking Lot,” which was to generate between 6% and 8% returns. Instead of investing funds into safe holdings such as bonds, they used the funds for personal expenditures, such as the construction of a residence in Lahaina, Maui, the purchase of a Lexis automobile, payment of a $27,967 debt on a truck loan, and payment of $28,500 for a New Zealand safari. 

   Klaus Link, 66, was sentenced to 5½ years and ordered to pay $500,000 in restitution in connection with a $1.7 million Ponzi scheme that he ran though his company, Tri-Link Consultants Ltd., which defrauded about 20 investors. Link used investor funds to fund his own lavish lifestyle, including renovations to his home, luxury vehicles and tailored suits.

   Peter B. Madoff’s house was put up for sale by the U.S. Marshalls at an asking price of $4.495 million. Peter Madoff is currently serving a 10 year sentence for his role in the Bernard Madoff Ponzi scheme, and he was ordered to forfeit all of his and his family’s assets. 

   Stephen E. Maiden, 40, pleaded guilty to charges in connection with an $8.9 million Ponzi scheme that he ran through his hedge fund, Maiden Capital Opportunity Fund, based in Charlotte, North Carolina. Maiden touted his past educational and professional experience as an investment banker to attract investors. Maiden delivered false account statements rather than profits to his victims.

   James Mason, 66, of North Carolina, was charged with operating a foreign currency Ponzi scheme that defrauded at least 500 investors out of about $5 million. Mason operated JHM Forex Only Pool and Forex Trading at Home Association. It is alleged that Mason did not engage in much Forex trading, but that he directed investors to an online account portal where they could track their account balances, which were false.

   Edward May, 76, asked to be released from prison because he has virtually lost all of his eyesight and the prison is not equipped to handle his disability. May, of Detroit, was convicted of running a $200 million Ponzi scheme and is only 17 months into a 16 year sentence. May had pleaded guilty to fraud but wants to be released from prison while he pursues appeals. May’s fraud involved representations to investors that he had telecommunications deals with Las Vegas hotels which would generate double-digit returns. 

   Robert Medhus, 65, agreed to plead guilty to charges that he defrauded investors out of more than $900,000 in a securities Ponzi scheme. Medhus allegedly used investors’ funds for his own personal use rather than investing it in securities. 

   Philip Milton and Trade LLC of Florida were the subject of consent orders obtained by the CFTC requiring them to pay restitution and penalties in connection with their $28.4 million commodity pool Ponzi scheme. The order also required relief defendants BD, LLC, CMJ Capital, LLC, Center Richmond, LLC, and TWTT, LLC, to disgorge $545,200, $2,826,981.37, $1,253,862.62, and $100,000, respectively. The CFTC also named William Center and Gregory Center in its complaint, which alleges that the parties defrauded at least 2,000 customers and misappropriated at least $9.6 million of the pool funds for personal use. Litigation continues against William Center and Gregory Center.

   Michael Morawski, 56, and Frank Constant, 59, were sentenced to 10 years and 7½ years in prison, respectively, for their role in a $21 million Ponzi scheme that defrauded 267 investors. The defendants used a real estate investing company, Michael Franks LLC, to run the scheme that promised victims between 7% and 9% interest annually over 3 to 5 years for investments in apartment buildings in Illinois, Texas and Alabama. 

   Al Moriarty, 79, was arrested in connection with an alleged $20 million Ponzi scheme in which he promised investors 10% returns. Moriarty targeted the elderly with little investment experience.

   Timothy Melvin Murphy, 70, former commander of the Joint Forces Training Base, was sentenced to 8 years in prison and ordered to pay $2.95 million in restitution for running a Ponzi scheme that defrauded 26 investors out of about $3 million. Murphy ran his scheme through his California business, Capital Investors Inc., promising investors returns of 12% from investments in truck-leasing companies. Rather than investing the victims’ money, he used it for personal expenses, including refurbishing and maintaining a classic car collection and for treatments at a weight-loss clinic. 

   Steven Palladino, 55, was the subject of an emergency enforcement action brought by the SEC in Massachusetts, in which a temporary restraining order and asset freeze were imposed against Palladino and his company, Viking Financial Group, Inc. The SEC alleges that about 30 investors were defrauded in a $5.5 million Ponzi scheme run by Palladino and his wife, Lori Palladino, 52. Palladino and his wife are currently free on $250,000 bail following their indictment. The SEC contends that Palladino spent about $30,000 at the high end department store Hermes and that he pocketed tens of thousands of dollars in insurance proceeds and a 401k check.

   Daniel Parrilli, 62, John Lauer, 48, and Christopher Anderson, 57, were sentenced in connection with a $3.5 million Ponzi scheme involving a scheme to distribute comic books, movies and collectibles through Sundown Entertainment Incorporated. The trio, who had met in prison, raised $7 million from 150 investors, promising up to 150% to investors in a short period of time. The revenues from the distribution business were insufficient to pay the promised returns so they kept raising more money to pay off earlier investors. The three pleaded guilty. Parrilli was sentenced to 70 months and ordered to pay about $3.65 million in restitution, Lauer was sentenced to 31 years and ordered to pay about $457,000, and Anderson was sentenced to 95 months and ordered to pay more than $3.7 million in restitution.

   Larry Michael Parrish, 49, pleaded guilty to a Ponzi scheme that defrauded about 70 investors of $9.2 million. Parrish ran his scheme through IV Capital, which he represented was an investment and trading company that traded in international exchanges. He told investors that he could generate a minimum gross monthly profit margin of 5% and 2% on smaller investments. Parrish invested a small portion of the funds, but lost that money in trading activity and bad investments, he spent about $5.2 million to make payments to investors, and he used the rest for personal expenses, including rent, electronics, a golf outing for friends, and a Harley-Davidson motorcycle.

   Jason Pascua pleaded guilty to charges relating to a Ponzi scheme that he ran though J2 Marketing in which he defrauded 31 families in Hawaii of $1.5 million. Pascua ran a company that purported to be in the concert and nightclub promotions industry, and promised investors short-term investment opportunities that promised returns of 25% to 50%.

   Tom Petters, 56, is trying to get his 50 year prison sentence thrown out. Petters was convicted of running a $3.7 billion Ponzi scheme, but is now claiming that his defense attorney never told him that prosecutors had offered a 30 year prison sentence in exchange for a guilty plea. Petters is scheduled to be released in 2052, just before his 95th birthday.

   Richard Reynolds aka Richard F. Adkins, 52, is the subject of a motion to revoke his temporary release from custody. Reynolds is accused of running a $5.38 million Ponzi scheme and has been allowed to go home four days a week to work on his own defense, despite a $10 million bail.  The prosecutor contends that Reynolds violated the conditions of release when he went to a building next door to his wife’s apartment. Reynolds is alleged to have stolen from at least 140 investors, using his relationships with various ministers, pastors and evangelists to solicit investors.

   Arnand Sekaran, 44, was sentenced to 2.5 years in prison for his role in a $2.3 million Ponzi scheme run by Wasson Capital Ltd. Sekaran formed Wasson as an asset management firm in New York that was to invest funds in the U.S. options market. About 10 investors lost about $2 million. Sekaran sent fabricated statements to investors showing inflated values of their investments.

   Elizabeth Sichler, 60, who had pleaded guilty to a $2.3 million Ponzi scheme, did not get her 55 month prison sentence vacated. Sichler had been seeking a new sentence on the grounds that her attorney did not properly inform her of her appeal rights prior to the deadline. The court denied the request, finding that Sichler “did not specifically instruct counsel to file an appeal, nor did she tell him that she wanted to file an appeal.” Sichler had run a Ponzi scheme in which she misappropriated funds from a trust account maintained to temporarily hold taxes, fees and other costs in real estate deals and used money from new clients to cover the earlier thefts.

   Nickolas Skaltsis of New Hampshire was cited by the N.H. Bureau of Securities Regulation for securities fraud, the sale of unregistered securities and failure to be licensed. Skaltsis failed to respond to a cease-and-desist order and was ordered to pay restitution to 15 victims of $304,000 and penalties of $82,500. Skaltsis had issued at least 21 unsecured promissory notes in the name of Liberty Realty Trust to 15 investors who were told that their money would be used to acquire and renovate distressed real estate. Instead, Skaltsis used the money for personal expenses.

   Jeffrey J. Sykes, 54, was sentenced to 10 years in prison and ordered to pay almost $17 million in restitution for operating a $40 million Ponzi scheme through his company, Gemstar Capital Group, based in California. The investors thought they were trading in U.S. Treasury Bills when, instead, Sykes used their money for personal expenses and other ventures not approved by the investors.

   Quantum Title was indicted by a grand jury on charges relating to running $3 million Ponzi scheme. The money was missing from the company’s escrow account for 14 transactions where the payoff was not sent to the original mortgagor. It is alleged that principals of Quantum Title, Michael Martinez, 52, and Kathy Norman, 52, took the money and used it for other purposes and to pay off older transactions. 

   Lee Peck Eu Unitt, 48, was found guilty of charges relating to a Ponzi scheme that she operated with her husband, Peter Unitt III. Unitt used her clients’ money to pay other clients and to support an extravagant lifestyle that included family vacations to Malaysia, Cancun and Aruba, expensive cars and other personal expenses. Peter Unitt has also been charged in connection with activities run through his law firm, the Crest Group LLC, in which Lee was a secretary, business manager and paralegal. 

   Christopher Varlesi, 54, was sentenced to 5 years after pleading guilty to charges in connection with a $1.5 million Ponzi scheme which defrauded 18 investors, including his family and friends. The scheme was run through Gold Coast Futures and Forex, which was an investment trading pool. Varlesi falsely reported to investors that he was trading gold, commodity futures and foreign currency when, in fact, he was using most of the investor funds for his own benefit, including $120,000 to pay for a year’s rent for an apartment in the Trump International Hotel and Towers in Chicago. Varlesi created false account statements and he provided promissory notes to some investors, promising the return of the principal amount plus guaranteed interest ranging from 5% to 7½% per month.

   Anthony Vassallo sought to withdraw his guilty plea relating to his $45 million Ponzi scheme which he had run through his money management firm, Equity Investment Management and Trading, Inc. On the day that Vassallo was scheduled to be sentenced, his lawyer asked to withdraw Vassallo’s guilty plea, stating that Vassallo pleaded guilty only because he couldn’t prepare a defense while stuck in jail. Prosecutors say that the motion is “without any legal or factual basis.”

   Arnett Waters, 63, was sentenced to 17 years in connection with a gold and rare coins Ponzi scheme that he operated through A.L. Waters Capital LLC and Moneta Management, LLC, which he operated with his wife Janet Waters. Waters pitched two investment funds, Port Huron Partners, LP and Port Huron Partners II, LP, in which he raised about $1 million from investors. Waters also operated two rare coin dealerships which sold coins to investors at inflated prices. Waters used the investors’ funds for luxury travel and personal expenses. Waters was also charged with obstruction of justice for making misrepresentations to the SEC during an investigation and for concealing a bank account. Waters ultimately pleaded guilty.

   Michael Winans Jr., who was convicted of running a Ponzi scheme and sentenced to 14 years in prison after pleading guilty, is now asking the public for donations to pay for his legal representation. Winans request to delay his imprisonment was denied. Winans had admitted in court to stealing millions of dollars, but now has released a video stating that “there are numerous stories out there that claim I stole millions of dollars from innocent people. That is not true.”


   Marlon Gary Hibbert, 49, and Verna Hibbert, 48, were accused of running an $8.6 million Ponzi scheme that defrauded parishioners in Pastor Hibbert’s church, called The Life Centre Word of Faith Ministries, and non-profit organizations, called Dominion World Outreach Ministries and Fight for Justice. In connection with his investment fund, Hibbert required that investors invest a minimum of $10,000 and promised them monthly returns of up to 8.5% through foreign exchange trading. It is alleged that a lot of the investors’ money went to Panama. Police also charged Lorraine Bahlmann, 47, with fraud, alleging she was an administrative clerk responsible for mailing or e-mailing inaccurate account statements to victims showing they were earning healthy returns on their investments while they were in reality facing large losses.

   The Alberta Securities Commission ruled that Dale St. Jean and Gregory Tindall of Calgary were running a Ponzi scheme that had raised $52 million from investors. Investors were promised returns ranging from 15% to 22%. The Commission reported that a panel had also found that TransCap Corp. and Strata-Trade Corp. were involved in the Ponzi scheme. St. Jean and Tindal have also been accused by the U.S. SEC in connection with a hedge fund investment fraud that allegedly defrauded U.S. investors of $34 million.

   Lin Haiyan, 39, was sentenced to death by a Chinese court for running a $70 million Ponzi scheme since 2007. Haiyan, a Chinese woman, promised friends, family, former classmates and others high returns with little risk. Although she appears to have started her business as a legitimate investment program, her investments in futures and speculative stocks suffered losses but she kept on soliciting new investments anyway. China permits the imposition of the death penalty for about 55 types of crimes, including economic crimes. However, the death penalty sentence of Wu Ying, another Chinese woman found guilty of running a Ponzi scheme, was commuted to a life sentence in 2012. Wu Ying had turned a nail salon into a $60 million Ponzi scheme. China does not publicly report execution figures; however, it has been estimated that 4,000 prisoners were executed in China in 2011.

   Finanzgericht Köln, the Financial Court Cologne, handed down a decision relating to the tax treatment of profits derived from a Ponzi scheme. Victims of Ponzi schemes may suffer dramatic damages not only in losing their money to the fraudsters or by avoidance actions of trustees and liquidators once they received payments from the scheme. The German tax authority argued that payments received from Ponzi schemes are subject to taxation at least until such time that the Ponzi scheme has been discovered. In a decision that benefits victims and tax payers, the Fiscal Court of Cologne held that profits derived from Ponzi schemes are not subject to taxation. However, it is expected that the German equivalent to the Internal Revenue Service will appeal this judgment to the Federal Financial Court. The decision can be accessed (in German) at www.justiz.nrw.de/nrwe/fgs/koeln/j2013/10_V_216_13_Beschluss_20130410.html.

Reported by Bernd H. Klose, www.raklose.de 
Member of FraudNet, www.icc-ccs.org/home/fraudnet

   The repercussions from the recently disclosed alleged Ponzi scheme of Sudipta Sen, run under the name Saradha Group, continue to be disclosed. There have been a number of suicides by defrauded investors from the Ponzi scheme which had offered investors the opportunity to invest in a range of ventures, including real estate and motor vehicles. Saradha had utilized about 300,000 agents on a commission basis to recruit new investors. It is estimated that hundreds of thousands of Indian investors may have invested billions of dollars into the Saradha Group ventures.

   Bail was denied for Sudipta Sen and Debjani Mukherjee despite Sen’s plea that he be released on bail so he could return depositors’ money by selling his property. 

   The government in West Bengal set up a Rs crore relief fund to compensate victims of the Saradha Group. A portion of the relief fund will be funded by a 10% tax on cigarettes. The question is being asked why people who smoke should fund the victims’ losses.

   Investigators learned that more than 100 former police officers were on the Saradha Group payroll.
Police raided the offices of The Rose Valley Company in a Ponzi scheme that is similar to the recently busted Saradha Group. 

   The Securities and Exchange Board of India passed an order against Basil International, another alleged Ponzi scheme, directing the company and its directors not to collect any more funds from investors or to dispose of any assets. Basil had taken as much as Rs 92 crore from investors, promising returns of 11% to 14%.

   Quintin Earl Sponagle, 48, was arrested in Panama and extradition proceedings are underway so that Sponagle may face charges in connection with a $4 million Ponzi scheme in Canada. Sponagle allegedly defrauded 179 investors in his company, Jabez Financial Services Inc., a company registered in Panama but not authorized to trade securities in Nova Scotia, by promising them up to 214% returns per year. Sponagle had fled to Nova Scotia in 2006. 


   A class action was filed against The Entrust Group in connection with a $27.5 million self-directed IRA Ponzi scheme. The lawsuit was filed against Entrust Arizona LLC nka Vantage Retirement Plans, the Entrust Group Inc., Entrust Administration Inc. and Hugh Bromma. Investors were allegedly lured into the scheme by self-described “real estate investing guru” Mike Watson, who was not named in the complaint. Watson charged attendees thousands of dollars to attend his real estate investment seminars and would then entice investors to invest.

   A 12 foot, 8,000 pound section of the Berlin Wall was auctioned off for $24,000 to pay back the victims of the Ponzi scheme of Ben DeHaan. DeHaan had been convicted of running a $7.3 million Ponzi scheme.

   The receiver for the $80 million Ponzi scheme of First United Funding LLC and Corey N. Johnston sued Security Financial Bank for the return of fraudulent transfers. Johnson allegedly ran his scheme “by overselling participations, selling loan participations in loans that did not exist, and by engaging in other fraudulent conduct." The receiver alleges that Security Financial Bank profited as a result of the wrongful conduct.

   Bernard Madoff spoke with CNNMoney to reflect on the consequences of his actions. Madoff had to make a collect call because he only now makes $40 a month doing menial prison labor. Madoff acknowledged, “I was responsible for my son Mark’s death and that’s very, very difficult.” He also said, “I live with the remorse, the pain I caused everybody. Madoff also spoke to FOX Business Network, stating that his bank, JPMorgan Chase willfully ignored his illegal activity and that “there is no question that JPMorgan is guilty. They would have to be idiots to not realize what was going on. They should have reported me to the SEC or Treasury.”

   A bankruptcy judge ordered the Moss Adams accounting firm to pay $180,000 in legal fees as sanctions for a contempt finding for not complying with a bankruptcy trustee’s subpoena for documents related to Frederick Darren Berg’s Meridian Mortgage $100 million real estate investment Ponzi scheme. Although the court found that there was not intentional withholding of documents, the court found that Moss Adams did not fully comply with a 2010 subpoena. Moss Adams had audited some of the Meridian Mortgage funds, and the trustee had sued Moss Adams for negligence in the preparation of the audits of six Meridian funds between 2001 and 2007. 

   Sedgwick LLP moved to dismiss claims against it by the receiver of the Medical Capital Holdings Inc. $1 billion Ponzi scheme. The claims are for malpractice and the receiver is seeking $200 million in damages. Sedgwick, bringing its third motion to dismiss, argues that it cannot be responsible for work performed by other law firms. The receiver alleges that Sedgwick assisted Medical Capital in making unauthorized loans.

   Repet Group and America TBS, companies based in California, were sued along with their principals, Sheng Xu, Hairong Cao, and Shubin Zhao, by lender Wuxi City Runyuan Keji Xiaoe DakKuan Co. for damages in connection with Ponzi scheme activity where the defendants would allegedly payoff old loans with newer loans. Wuxi City is claiming millions of dollars in damages for RICO violations, breach of contract, fraud, conversion, unjust enrichment and vicarious liability. The complaint states, “Reminiscent of the recent spate of mortgage fraud scandals to have plagued this country, defendants knowingly utilized materially false and forged audit reports and other documents to inflate the collateral of business entities they controlled in China in order to obtain loans ostensibly for the capital requirements of those same enterprises. Rather than use these loans for their intended purposes, however, defendants conspired with others known and unknown to transfer said funds out of the People's Republic of China and into the United States for their personal use.”

   The court in the bankruptcy case of Scott Rothstein’s law firm, Rothstein, Rosenfeldt & Adler, approved the disclosure statement and set a confirmation hearing for July. Many of the law firm’s investors are opposed to the proposed repayment plan and a proposed settlement with TD Bank that the investors argue would cause investors to lose direct claims against TD Bank.

   Convicted Ponzi schemer Nevin Shapiro filed a complaint with the Florida Bar relating to his lawyer’s conduct at the trial of Juan Rene Caro. Shapiro told the district court that he committed perjury on witness stand when testifying at the trial of Caro, who is currently serving an 18-year sentence for his $132 million check-cashing scheme. Shapiro stated that his lawyers, Guy Lewis and Michael Tein knowingly allowed him to lie. Shapiro also admitted, among other things, that he lied when he was asked about his investment company. He had testified that he operated a grocery brokerage business, but in reality the operation was a front for his Ponzi scheme. 

   Victims of Ponzi schemer David Smith are eligible to file a petition for remission with the U.S. Department of Justice for compensation. Those who invested during the period February 3, 2005 through to July 15, 2008 will be eligible.

   The court in the Ponzi scheme case of R. Allen Stanford approved an interim distribution to victims of $55 million to about 17,000 claimants. The distribution constitutes about a 1 cent distribution on the $5.1 billion of claims in the case.

   A bankruptcy court denied a motion to convert the Chapter 11 bankruptcy case of Vaughan Company Realtors to Chapter 7. The motion would have likely removed the trustee, who has filed about 100 fraudulent transfer actions seeking repayment from investors who had profited from the scheme.

   The court approved the claims process in the ZeekRewards receivership case, which established a claims bar date of September 5, 2013, and approved a centralized claims website. The receiver estimates that there are nearly 1 million claimants, so additional procedures were established for noticing purposes, including email and publication. One mailing to all claimants would cost about $500,000. The court also approved the Receiver’s request that “Retail Profit Points” that had accumulated would not serve as a basis for a claim against the estate. These were points that had accumulated from alleged daily profits.

Monday, May 20, 2013

Ponzi Scheme Sentences: Maybe 150 Years Isn’t So Bad

Posted by Kathy Bazoian Phelps

   On June 29, 2009, Bernard Madoff received a prison sentence of 150 years for his Ponzi scheme that resulted in about $17.3 billion in losses. That type of prison sentence is effectively a life sentence and appears to accomplish two of the most important objectives of the U.S. criminal justice system - punishment and deterrence. We have seen some stiff prison sentences come out of Ponzi scheme operations over the past several years, and the general trend seems to be some correlation between the length of the sentence and the amount of losses suffered by the defrauded victims.

Long Prison Sentences
   In addition to Madoff, recently we have seen some other long Ponzi scheme prison sentences: Allen Stanford received 110 years for $8 billion in losses. Thomas Petters received 50 years for $3.65 billion of losses. Scott Rothstein received 50 years for $1.2 billion in losses. Marc Dreier received 20 years for $380 million in losses. And the list goes on and on.

   There are, of course, a few aberrations of large sentences for disproportionately small losses, like Karen P. Bowie of Texas, who received 80 years for $4.7 million in losses. The unevenness in the length of prison sentences may cause some to complain about the unfairness of the sentencing process. And others may feel dissatisfied when they hear that inmates such as Madoff seem happier in prison than he was running his scheme or that others are playing croquet in prison.

The Death Penalty?
   Let’s compare this level of discontent with the United States criminal justice system with what goes on in other parts of the world. This week, a Chinese court just sentenced a Chinese woman, Lin Haiyan, 39, to the death penalty for running a $70 million Ponzi scheme. Given China’s history, death will most likely be by firing squad. Yikes!

   So what did Lin Haiyan do to merit the death penalty? She promised friends, family, former classmates and others high returns with little risk. She appears to have started her business as a legitimate investment program, but she kept on soliciting new investments even after her investments in futures and speculative stocks suffered losses and then made payments to earlier investors in a Ponzi scheme-like fashion.

   China permits the imposition of the death penalty for about 55 types of crimes, including some economic crimes. China does not publicly report execution figures. However, it has been estimated that 4,000 prisoners were executed in China in 2011 and that there are a few thousand executions each year.

   However, whether Haiyan will actually be executed remains to be seen. The death penalty sentence of Wu Ying, another Chinese woman found guilty of running a Ponzi scheme, was commuted to a life sentence in 2012. Wu Ying had turned a nail salon into a $60 million Ponzi scheme, but an outcry of opposition may have led to the change in her sentence.

   The frauds that the Madoffs and Haiyans of the world commit make paupers of their victims, who can number in the tens or hundreds or thousands. The victims are then left to burden their friends and family, or society, who thus also become victims. And there is also the emotional trauma and wreckage left behind.

   All of this raises many questions. So far, our response in the U.S. has been to impose long prison sentences (which often amount to life sentences), along with virtually complete asset forfeiture. The death penalty is (thankfully) off the table because that can only be imposed for first degree murder and, possibly, certain crimes against the state. Kennedy v. Louisiana, 554 U.S. 407 (2008).

   Have long sentences and forfeiture worked as a deterrent? If not, what else can we do to deter would-be Madoffs and Haiyans from committing fraud and victimizing so many of us? I am certainly not advocating the death penalty, but do question the effectiveness of what we have now since Ponzi schemes just seem to keep proliferating. How should we punish perpetrators when deterrence fails and their victims demand justice? What do you think?

Tuesday, May 7, 2013

Insurance Coverage for Ponzi Scheme Losses?

Posted by Kathy Bazoian Phelps

   It sounds like a good idea: Insure against losses from investing in a Ponzi scheme. Insurance policies, including homeowner’s policies, can provide coverage from losses from fraud, embezzlement or forgery. But does it work to provide compensation for losses in a Ponzi scheme?

   Last year, the Second Circuit affirmed a district court’s dismissal of a Madoff customer’s complaint against a homeowners policy, but not for the reasons you might expect. Horowitz v. American International Group, Inc., 498 Fed. App’x 51 (2d Cir. 2012).

   Horowitz purchased a homeowner’s insurance policy from AIG with a Fraud Safeguard endorsement providing for up to $30,000 in coverage for losses resulting from fraud, embezzlement or forgery. Horowitz had invested a total of $4,327,230.55 with Madoff and had withdrawn $4,553,000, leaving a balance that Horowitz believed to be more than $8.5 million of expected profits.

   AIG denied coverage, finding that Horowitz had not suffered a loss under the policy terms. After Horowitz sued AIG, the district court dismissed the complaint, finding that the Madoff Ponzi scheme was not a peril covered by the policy and that a Ponzi scheme is not a predictable peril. The Second Circuit disagreed, finding that "a Ponzi scheme is likely just the sort of fraud anticipated by the policy drafters." Id. at 53.

   That should mean a win and $30,000 of insurance benefits for Horowitz, right? Not in that case. Even though Ponzi scheme losses were covered, the Second Circuit found that, "in our view the dispute in this case turns not on whether the peril, i.e., the Madoff fraud, is a covered event, but on the Horowitzes' remaining arguments concerning which losses flowing from that fraud are directly attributable to the covered conduct and thus recoverable under the policy." Id.

   The Second Circuit rejected Horowitz’ interpretation of "loss" and found that "the covered loss is limited only to the ‘something’ of value’ that the Horowitzes were induced to part with as a result of the fraud." In other words, their expected profits of over $8.5 million were not "something of value" and therefore not a covered loss.

   The decision is in line with decisions on other issues in Ponzi scheme cases ranging from fraudulent transfer claims to claims distribution that draw a distinction between an investor’s capital investment and expected profits. The Second Circuit expressly rejected Horowitz’s alternative methodologies of loss calculations:
   (1) the full account balance as reflected in their final BLMIS statement;
   (2) earnings reasonably expected on their capital investment based on a growth assumption or implied interest rate;
   (3) net loss in constant dollars;
   (4) non-recoverable tax payments; or
   (5) legitimate growth on investments during the pre-Ponzi period.

   The lesson here is that while an investor can obtain insurance in the hope of recouping some of the losses in a Ponzi scheme, to recover, the investor must prove an actual loss of value and not merely a loss of expected profits.

   For other decisions relating to Madoff investors’ claims against their insurance policies, see Lissauer v. Fireman’s Fund Insurance Companies, 459 Fed. App’x 67 (2d Cir. 2012); Chaitman v. Chubb Insurance Co. of New Jersey, 2012 N.J. Super. Unpub. LEXIS 2738 (Sup. Ct., App. Div. Dec. 14, 2012).

Friday, May 3, 2013

"Ponzi Schemes Explained" on The Not So Legal Show

Posted by Kathy Bazoian Phelps

The Not So Legal Show is fun, funny, and informative. Producer Stephanie Cohen recently interviewed me about Ponzi schemes. To view the show, click here, and let me know what you think.

Thursday, May 2, 2013

Two Ponzi Presentations This Month

Posted by Kathy Bazoian Phelps

   I'm looking forward to my two presentations this month. At the California Bankurptcy Forum in San Diego, May 17-19, I'm on a panel that's presenting Beverly Hills Cop - Issues in Parallel Criminal, Bankruptcy, Forfeiture Proceedings. For more information, click here. Then, on May 29, I'm giving a presentation for the Los Angeles Chapter of the Association of Certified Fraud Examiners on Ponzi Schemes: A Fraud Examiner's Role. For more information on this one, click here. I hope to see you at one or both of these.