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

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

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

Wednesday, July 31, 2013

July 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     There has been no slowdown in Ponzi scheme news over the summer. Here is a summary of stories that were reported for the month of July. 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.
     Arnulfo M. Acosta had his appeal to vacate, set aside or correct his sentence denied. Acosta v. U.S., 2014 U.S. Dist. LEXIS 103879 (S.D. Cal. July 24, 2013). Acosta appealed his 87 month sentence, which arose from a $40 million Ponzi scheme that defrauded 1,700 investors, based upon allegations of ineffective counsel and that his sentence reflects constitutionally-impermissible racially disparate treatment. The appellate court rejected both arguments and upheld his sentence.

     Steven Bingaman, 57, of New York, had previously pleaded guilty to charges relating to his Ponzi scheme in which he defrauded investors by promising to use their funds for financing but instead using them to pay personal expenses such as country club dues and home mortgages. Bingaman’s sentence was doubled to 4 to 12 years due to Bingaman’s failure to pay back the $1.1 million he had agreed to pay back in exchange for a reduced prison sentence. Bingaman only brought a $100,000 money order as of the deadline.

     John Bravata’s Ferrari and Maserati were sold at auction by the government following his conviction for running a $50 million Ponzi scheme that defrauded hundreds of investors. Bravata ran his scheme through BBC Equities, LLC and Bravata Financial Group LLC, representing that he was running a successful real estate investment fund that would generate guaranteed returns of 12% annually. Over 400 investors invested $50 million in the scheme.

     James Douglas Cassity, 67, pleaded guilty to charges relating to a $600 million Ponzi scheme that he and his son, Brent Douglas Cassidy, 46, ran though National Prearranged Services, Inc. Brent Cassidy pleaded guilty earlier this month. The company sold prearranged funeral contracts for up to $10,000 each to as many as 150,000 customers, but the money was used for the principals’ personal expenses and to pay for previous customers’ funerals.

     Some victims of Cornerstone Financial, Inc., a Montana company, will receive restitution payments of over $242,000 from Montana’s new Securities Restitution Assistance Fund. Cornerstone ran one of the largest Ponzi schemes in Montana history. Robert Congdon and Keith Kovick, the two principals of Cornerstone, are currently serving time in federal prison. The Securities Restitution Assistance Fund was created in 2011 so that state victims of securities fraud can receive 25% of their losses, or $25,000, whichever amount is less. Twenty of the 100 victims of Cornerstone filed claims and will be receiving payments.

     Brendan W. Coughlin, 46, Henry D. Harrison, 47, Paul R. Melbye, 47, and W. Mark Miller, 59, all of Texas, were sentenced to prison and ordered to pay $2.3 million in restitution for their role in the nearly $500 million Ponzi scheme of Provident Royalties Inc. Coughlin and Harrison were sentenced to 21 months, Melbye to 18 months, and Miller to 6 months plus 6 months home confinement. The scheme’s mastermind, Joseph Blimline, is currently serving a 12 year sentence.

     Ramon DeSage is facing a new federal indictment for tax evasion. DeSage is already accused of running a $191 million Ponzi scheme through Cadeau Express, Beryt and Merits Incentive, and now is accused of failing to pay federal income tax on more than $87 million in unreported income.

     Jose L. Nino de Guzman Jr., 30, of Washington, pleaded guilty to charges in connection with a $30 million Ponzi scheme involving bogus real estate investments in Peru. De Guzman ran his scheme through NDG Investment Group LLC and defrauded more than 200 investors by sending them false updates even though he had only purchased a few, if any, properties and never generated a profit. De Guzman used the money to fund his lavish lifestyle, including the purchase of $600,000 yacht, a $365,000 diamond ring, and a $200,000 Bentley.

     Garrett "Denny" Denniston, 62, of Connecticut, was sentenced to 8 years and ordered to pay $3 million in restitution in connection with charges relating to a $3 million Ponzi scheme that he ran through his company called ConsensusOne. The scheme defrauded 54 investors.

     Armand R. Franquelin and Martin A. Pool, 43, were sued by the SEC in connection with an alleged $12 million Ponzi scheme that defrauded victims out of their IRAs. They allegedly ran the scheme by convincing investors to convert funds in their IRA accounts to self-directed IRAs through Destiny Funding LLC, a company owned by Franquelin and Pool which would be invested in another of their companies, Elva Group. The scheme, which supposedly involved buying, developing and selling residential real estate, defrauded about 130 investors.

     John Henley Fowler, 64, and his son, Jeffrey Robert Fowler, 35, of Florida, agreed to consent judgments in favor of the SEC. Both of them waived their rights to jury trials and any appeals of the SEC’s proposed final judgments. The Fowlers had raised about $4.3 million from 70 investors in a Ponzi scheme that purported to be a gold futures investment program. Julianne Chalmers allegedly solicited investors to invest in the program by purchasing promissory notes.

     Glen Galemmo and his wife Kristine Galemmo of Ohio have been accused of operating a Ponzi scheme they allegedly ran through Queen City Investments in which they promised investors 432% returns. They were sued by a group of investors after Galemmo sent an email stating that his funds were shutting down. Galemmo claimed that his strategy was to identify "severely-undervalued" stocks, and he represented that he had total assets of $200 million under management.

     Celia Gallardo, 42, was sentenced to 5 years in prison and ordered to pay $2.389 million in restitution connection with charges that she ran a Ponzi scheme through her companies, Gold Feather Realty and Gold Credit Investment. Gallardo had pleaded guilty to charges relating to her real estate scheme in which she took investors’ money to pay for trips abroad, house payments, and payments to earlier investors.

     John Geringer, Christopher Luck and Keith Rode are scheduled to go to trial this month after pleading not guilty to charges relating to an alleged $60 million Ponzi scheme through their company, Geringer, Luck and Rode LLC, which managed an investment fund called GLR Growth Fund. A civil suit filed by the SEC is pending.

     Anderson Scott Hall of Florida saw his trial continued to August in connection with criminal charges related to his alleged Ponzi scheme that he ran through Abaco Securities International. It is alleged that Hall held out Abaco to be a legitimate investment company and that he would induce investors to transfer their retirement savings from legitimate life insurance companies to his control.

     David Lee Hardin Jr., 59, of California, was sentenced to 3 years in prison and ordered to pay $1.5 million in restitution in connection with his Ponzi scheme that he ran through a group of companies called Covenant Mortgage, Covenant Marketing, Covenant Debt Solutions, Covenant Insurance and HRE Mortgage. Hardin had promised investors returns to be generated through home sales and fees from debt settlement services. Hardin had pleaded guilty to the scheme in March 2013.

     Dan Harkey, the CEO of Point Center Financial, was found guilty of breaching his fiduciary duties to his investment clients with "malice, fraud and oppression." Harkey was ordered to pay more than $4.5 million, but the jury then doubled the award to $11.6 million. Harkey was found liable for 11 counts of elder abuse in a Ponzi-like scheme in which he preyed on older people to invest their life savings in projects involving commercial real estate.

     Glenn Kane Jackson, 47, was sentenced to 7 years in prison and ordered to pay $8.6 million in restitution and fines in connection with his Ponzi scheme that defrauded 13 investors. Jackson’s wife, Gina McGee, had previously pleaded guilty to charges that she and Jackson had run a scheme through Highlands Capital Partners LP.

     Albert Kaleta agreed to settle the SEC’s claims against him and his company, Kaleta Capital Management, for $3.2 million relating to a $15 million Ponzi scheme involving promissory notes in which BusinessRadio Network LP dba BizRadio and Daniel Frishberg Financial Services Inc. dba DFFS Capital Management Inc. had also been named as relief defendants by the SEC. Kaleta had previously agreed to pay the receiver $1 million. The receiver had also sued Barrington Financial Advisors and its CEO, William Heath, who had acquired DFFS Captial Management’s assets through allegedly fraudulent transfers. The settlement with Barrington and Heath requires payment of $50,000 from each of them.

     Patrick Kiley, 75, was sentenced to 20 years in prison and ordered to pay over $155 million in restitution to victims for his role in the $194 million Ponzi scheme that defrauded more than 700 investors. Kiley had lured in 70% of the investors into the Trevor Cook Ponzi scheme through his Christian radio show, "Follow the Money." Trevor Cook operated Crown Forex SA and JDFX Technologies along with Christpher Pettingill, Jason 'Bo' Beckmann, and Gerald Durand, in which they pitched risk-free returns to potential investors. Kiley has continually claimed his innocence, saying that he was duped just like the investors, but he was convicted following a jury trial last year. Beckman, 43, was sentenced to 360 months, and Durand, 62, was sentenced to 240 months. Pettengill, 56, was previously sentenced to 90 months. Cook had previously pleaded guilty and is serving a 25 year prison sentence.

     Jeffrey J. Kinseth, 58, of Iowa, pleaded guilty to charges relating to his $1 million Ponzi scheme that he operated through Virtual Vision, promising investors substantial returns from the trading of futures or foreign currency. Kinseth defrauded 11 investors and issued false account statements and phony emails to assure investors that their money was growing.

     James Stanley Koenig was sentenced to 42 years and 8 months in prison in connection with his $250 million Ponzi scheme that defrauded more than 1,000 victims. Koenig was found guilty in his criminal trial of running a scheme through Asset & Real Estate Company and fifty affiliate companies, telling investors that the companies specialized in senior housing centers and selling them ownership shares in the property. Attorney General Kamala Harris said, "This individual ran a ruthless Ponzi scheme that robbed investors, including vulnerable elderly people, of their life savings."

     Jason Konior, 39, pleaded guilty to charges in connection with a $2.9 million Ponzi scheme in which he promised investors he would provide matching funds up to 9 times the amount of their investments in his fund, Absolute. Absolute had a "first loss" investment program in which Konior claimed that he would place the combined funds—the investors’ funds and the additional funds to be provided by Absolute—in a brokerage account designated by Absolute in which investors could trade securities. Konior represented that the hedge funds would be responsible for trading losses, and they would share any profits with Absolute.

     David Kugel, 67, Eric Lipkin, 38, and Enrica Cotellessa-Pitz, 54, former employees of Bernard Madoff’s company, have all been permanently barred by the SEC from the securities industry. The three had previously pleaded guilty to their role in the Madoff scheme. Kugel assisted by helping create fictional trades and account statements. Lipkin assisted Madoff for more than 10 years by helping employees to carry out a fictitious investing strategy. Cotellessa-Pitz, who worked for Madoff for 30 years, helped falsify accounting records and financial statements to mislead SEC examiners.

     Duncan MacDonald III, 50, and Gloria Ann Solomon, 71, pleaded guilty to charges relating to a $10 million Ponzi scheme run through Global Corporate Alliance. The scheme involved the sale of health care benefit programs with promises of high returns based on management fees and securing more investors. Global was supposedly a health insurance company that had more than 100,000 premium-paying policy holders when in fact it never had more than 40 policyholders. MacDonald and Solomon allegedly manufactured enrollment numbers to induce investments from at least 80 investors who believed that the premium payments would be funding their returns.

     Shawon McClung, 27, pleaded guilty to charges in connection with a $1.7 million Ponzi scheme that promised returns of 15% to 100% every 14 to 30 days. McClung stated that he had software to make automated trades on the foreign currency market, but he did not actually trade their money.

     Shawn Merriman’s victims will begin receiving disbursements totaling about 16.5 cents on the dollar for their losses in Merriman’s $20 million Ponzi scheme, in which Merriman promised his victims annual returns of 7% to 20%. The money will come from Merriman’s Idaho assets. There are 94 victims, but only those due $4,100 or more will receive checks. Merriman was previously sentenced to 12½ years in prison and ordered to pay $20.1 million in restitution.

     Everett Charles Miller, 43, pleaded guilty to charges in connection with his $41.2 million Ponzi scheme that he ran through his company, Carr Miller Capital LLC. Miller promised mostly elderly investors returns of 7% to 20% in 9 months. Miller invested the money in money-losing ventures and spent a lot of money on luxury boxes for sporting events, lavish parties and many luxury vehicles.

     Steven Palladino and his company, Viking Financial Group, were found liable for securities fraud in a civil case filed by the SEC. Palladino had promised about 33 investors interest of 7% to 15% per month on investments in connection with short-term loans to those unable to obtain traditional financing. Palladino spent hundreds of thousands of dollars on gambling, vacations, luxury vehicles and tuition, and he was ordered to disgorge $3.1 million.

     Elaina Patterson, 53, pleaded not guilty to charges that she ran a $2.1 million Ponzi scheme using her position at Bank of America to defraud 31 investors. Patterson resigned from Bank of American in 2011 after her scheme began to unravel. Patterson had promised interest of 10% to 15% and issued allegedly fake certificate of deposit receipts and tax forms. She had also set up accounts in investors’ names without their knowledge and put her own address on the accounts, using the money for personal expenses such as multiple vacations, and college and private school tuition for her children.

     Thomas Petters, 56, made a last ditch attempt to reduce the 50 year prison sentence that he received in connection with his $3.65 billion Ponzi scheme. Petters argued that he was unaware of a purported 30 year sentence offer until after his conviction. Petters’ lawyer filed a brief on the sentencing issue, which is now in the court’s hands. Both Petters’ defense attorneys and investigators say that they had personal conversations with Petters about the 30 year cap in a plea agreement.

     Bebe and Marco Ramirez had their home and their offices at USA Now Regional Center, raided by the FBI in connection with an investigation of al alleged Ponzi scheme that defrauded wealthy Mexican investors. Mexican nationals were promised permanent residence in the U.S. after 4 months they invested $500,000 in a business venture that would create at least 10 jobs in two years.

     Thomas Redmond Jr., of Indiana, was sentenced to 4 years in prison in connection with a Ponzi scheme that defrauded 10 victims of about $580,000. Redmond was found guilty on charges related to a scheme that targeted the elderly at his church by promising returns for supposed investments in two different companies.

     Bryant Ismail Rodriguez had his motion to vacate his sentence denied. Rodriguez v. U.S., 2013 U.S. Dist. LEXIS 94819 (S.D.N.Y. July 2, 2013). Rodriguez was convicted on charges relating to a Ponzi scheme that he ran though a consumer electronics distribution company called Communications and Electronics Inc. and was sentenced to 108 months in prison. Rodriguez was supposedly supplying major electronics retains chains such as Circuit City with merchandize at a substantial profit, but he had no business with any electronics retail chains. Rodriguez’s claims of ineffective counsel were denied by the court.

     Kimberly Rothstein, the wife of convicted Ponzi schemer Scott Rothstein, had her sentencing delayed to allow her more time to cooperate with prosecutors. Kim Rothstein faces 5 years in prison for concealing and trying to sell more than $1 million in jewelry that investigators wanted to seize.

     Jeffrey Shalhoub, 38, of New York, was indicted in connection with a Ponzi scheme in which he defrauded at least 12 investors of about $300,000, holding himself out as a commodities pool operator for The 9 Group Ltd. The case had already been prosecuted civilly by the CFTC. Shalhoub had promised his clients returns of 5.2% per week, showing them false statements reflecting those returns even though the investors were actually losing money. Shalhoub had neither admitted nor denied the charges in the CFTC action but agreed to pay penalties and reimbursements.

     Trendon T. Shavers, 30, of Texas, and his company, Bitcoin Savings & Trust, were sued by the SEC alleging that they were operating a Ponzi scheme involving Bitcoin, a virtual currency. The complaint alleges that Shavers promised returns of 1% per day and no risk in connection with purported trading of Bitcoins. The company raised at least 700,000 Bitcoin, which were valued at $4.5 million a few years ago and now may be worth as much as $60 million. Bitcoin is a peer-to-peer payment system that promises to be secure and anonymous. The system was created in 2009 by an anonymous person and has been used to buy a range of products from consumer goods to illegal drugs. The SEC alleges that Shavers returned about 500,000 Bitcoin to investors but that he transferred about 150,000 Bitcoin to his personal account. It is believed that there are at least 66 investors but that the number may rise.

     Jill Marie Silvey, 51, was sentenced to 15 years in prison and ordered to pay restitution for her $2 million Ponzi scheme. Silvey was convicted earlier this year on about 52 fraud-related charges. Silvey had told investors that she was lending their money to homeowners who could not afford traditional home loans in exchange for monthly interest payments. About 20 investors were defrauded when she used their money to make payments to earlier investors and to buy expensive cars, clothing and furniture.

     Nickolas Skaltsis pleaded guilty, was sentenced to a terms of between 18 months and 5 years, and was ordered to pay restitution of his victims of almost $278,000. Skaltsis defrauded at least 21 investors in a $300 million Ponzi scheme by promising them returns of up to 24% for investments in real estate.

     Leon Randy Sinclair III, 61, was sentenced to 20 years in prison for his role in a Ponzi scheme that defrauded dozens of elderly investors out of $16 million. Sinclair promised lifelong annuity payments to his investors and their descendants after they die.

     Reed Slatkin, 64, was released from prison after serving his 10 year prison sentence. Slatkin had pleaded guilty to charges related to his $600 million Ponzi scheme that defrauded 800 investors, many of which were his friends and fellow Scientology members.

     Maxwell B. Smith III, 73, of New Jersey was sentenced to a total of 22 years and ordered to pay almost $8 million in restitution in connection with a $9.8 million Ponzi scheme that he ran through a phony investment fund called Health Care Financial Partnership Municipal Loans. Smith had falsely reported that Health Care Financial was a lucrative investment fund with paperwork showing more than $300 million in assets. Smith told investors that he managed the fund by financing and refinancing loans to healthcare facilities such as nursing homes, and he promised annual tax-free interest of between 7.5% and 9%. Smith used investor funds for personal expenses that included fine dining, entertainment, about $400,000 in mortgage payments on his home and a relative’s home, $120,000 in home renovations, $78,000 for luxury furnishings, and rental payments for a villa in Gordes, France, for several weeks each summer for almost 15 years.

     Jason M. Snelling lost his appeal to have his sentence overturned, Snelling v. State, 2013 Ind. App. Unpub. LEXIS 833 (Ind. July 3, 2013). Snelling had pleaded guilty to charged in connection with a Ponzi scheme that he ran with Jerry Smith through CityFund Advisory and Dunhill Investment Advisors, Ltd. Snelling appealed his sentence of 8 years, but Snelling’s arguments that the court did not properly consider mitigating factors were rejected on appeal.

     David Tamman, the lawyer for John Farahi, who ran a Ponzi scheme through his company, Newport Financial Services, Inc., saw his sentencing delayed when he sought to replace his attorneys. Tamman was convicted for his role in the scheme.

     Michael James Turnock, 69, of Colorado, was sentenced to 6½ years in prison and ordered to pay $4.1 million in restitution in connection with a Ponzi scheme that was run through his company, Bridge Premium Finance LLC. Bridge Premium claimed to be in the business of insurance premium financing and promised investors annual returns of up to 12%. Investors were told that they were "100 percent protected" through various forms of collateral.

     Eliyahu Weinstein is engaged in plea negotiations with the government over charges relating to a $6 million Facebook stock scam. Weinstein has previously pleaded guilty to other unrelated charges in connection with a $200 million Ponzi scheme and is now negotiating an agreement relating to charges that he, along with Alex Schleider, 47, and Aaron Muschel, 63, defrauded a New Zealand man out of more than $6 million.

     Guy Andrew Williams, 42, and Brent F. Williams, 66, both of Arizona, were convicted by a jury of charges relating to a $100 million Ponzi scheme they ran through investment funds known as the "Mathon" entities. The majority of the Mathon investors were members of the Church of Jesus Christ Latter-Day Saints and were told that their money would be used to make short terms loans to third party borrowers at a high interest rate. Instead, the investors’ money was used to pay extravagant salaries and bonuses exceeding $10 million and to make millions of dollars of "loans" to companies they secretly controlled.

     M. Viktoria Wilson, the wife of Joel I. Wilson, who has been accused of running a Ponzi scheme, won her motion to dismiss to charges of lying to investigators about her husband’s whereabouts after an arrest warrant had been issued. Joel Wilson has been accused of defrauding investors through his investment company, The Diversified Group, in a $10 million Ponzi scheme.

International News


     Dale Joseph Edgar St. Jean and Gregory Dennis Tindall were ordered to disgorge $9.6 million of ill-gotten gains and to pay penalties of about $2 million as a result of their $52 million Ponzi scheme. They were also banned from trading securities, as were their companies, TransCap Corp. and Strat-Trade Corp. The scheme had promised investors safe investments of returns of 15% to 22%, but their money was used to pay returns to earlier investors.


      It was reported that Zeng Chengjie was executed by lethal injection for operating a Ponzi scheme that defrauded about 60,000 victims out of $460 million. Zeng had been sentenced to death for "illegal fund-raising" after it was alleged that he used investor funds to support his company that placed bids for city development projects. A change in leadership resulted in Chinese politicians withdrawing their investments, which then triggered panic among civilian investors. Zeng’s family was not notified before his execution and did not see his body before it was cremated.


      Sumangal Industries was restrained from the securities market in connection with a potato purchase scheme that promised up to 100% returns in 15 months. The scheme guaranteed returns and informed investors that, due to the company’s expertise in the trading of potatoes, the company could buy potatoes when the price was low, store them until the price rose, and then sell them at a profit. The company was ordered to refund investor money within 3 months. The investment program was known as the "Flexi Potato Purchase Scheme."

      Michael Gulakhev, 25, and his Indian wife, Jennifer Menezes, were arrested for their role in the Ponzi scheme run through Mavrodi Mondial Moneybox India (MMM India). The couple was handling the firm’s publicity and coordination via the internet. Twenty bank accounts belonging to the couple have been frozen.

      The Securities and Exchange Board of India (Sebi) approved a proposal to amend the securities laws to give Sebi more power to regulate Ponzi schemes. Sebi can now carry out search and seizure operations, attach assets, and seek information or telephone call data records from any person or entity relating to a securities investigation by it.


      Eran Mizrahi, 41, known as the "Israeli Madoff," was sentenced to 12 years in prison in connection with his $16 million Ponzi scheme. Mizrahi was fined $83,000 and ordered to pay each of his victims $71,600 in compensation.

New Zealand

      David Ross, 63, accused of running a Ponzi scheme through Ross Asset Management, had his hearing on certain financial charges delayed to August. Ross is accused by the Financial Markets Authority of running $400 million Ponzi scheme that affected about 1,200 investors. Ross has now been charged with providing a financial service when he was not registered to do so, making false or misleading statements to get authorization as a financial advisor, and supplying information to the authority that he knew to be false or misleading.

      A letter of complaint was sent to the Financial Markets Authority by an investor in the David Ross Ponzi scheme claiming that the FMA filed to perform its statutory obligations in conducting due diligence on Ross. The letter requests that the Ombudsman ascertain whether the FMA carried out proper due diligence before Ross was approved as a financial advisor.

In the News

      The receiver in the Ponzi scheme case of Benny Judah, 54, has asked for authority to close out the bank accounts and the operations of the receivership estate. The receivership returned almost $10.4 million to victims whose losses were initially estimated to be about $35 million. Judah had pleaded guilty to charges relating to his scheme, was sentenced to 20 years in prison, and was ordered to pay $59.8 million in restitution. Judah had operated a $40 million Ponzi scheme guaranteeing 10% annual returns from the sale of 5 year debentures supposedly backed by income from heavy equipment leases.

      A jury returned a verdict in favor of Westport National Bank and its parent company, Connecticut Community Bank, after about 200 Madoff investors had sued the bank, claiming combined losses of $60 million. The lawsuit alleged that the bank breached its duties as the custodial bank in charge of their money. The investors alleged that when their accounts were transferred to Westport, no assets actually existed in the custodial accounts and the bank’s one-man custodial department did little to determine whether the trading information provided by Madoff’s firm was accurate. The bank separately agreed to pay $7.5 million to a group of 240 investors in a related case.

      Victims of the Lou Pearlman Ponzi scheme may get a small $.04 distribution on their claims out of the Pearlman bankruptcy proceedings. Victims must still approve the plan proposed by the bankruptcy trustee, which is scheduled to take place in September.

      The bankruptcy plan in the case of Rothstein Rosenfeldt Adler, the law firm of Scott Rothstein, was approved. It is expected to pay victims 100% of their lost funds. Most of the money to fund the plan is coming from a settlement with TD bank, which is paying about $363 million to Rothstein investors through various judgments and settlements. The $141 million of allowed claims are expected to be paid in full from the $79.2 million in cash on hand held by the trustee plus the additional $72.45 million to be paid by TD Bank. TD Bank has also retained a lower priority claim to recover the $132.45 million that it has paid in settlements and judgments so far. The trustee is also continuing to pursue fraudulent transfer claims.

      First Reliance Bank is now named in a class action lawsuit against the estate of John Schurlknight and his law firm, Schurlknight and Rivers Law Firm. It is alleged that the bank had actual knowledge of the scheme run by Schurlknight and that the law firm was defrauding its clients out of millions of dollars.

      About 135 net winner investors in ZeekRewards have agreed to settlements with the receiver that will result in recovery of about $1.82 million, reflecting 56% returns on their investments. The receiver believes that about $291.6 million was transferred to about 77,000 net winners.

Saturday, July 20, 2013

Custodial Bank Wins Jury Verdict in Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

A group of investors in the Madoff case suffered a loss when the jury verdict was announced in favor of Westport National bank and its parent, Connecticut Community Bank. Read the following article for more information about the jury verdict and the related settlement with some of the investors: http://dealbook.nytimes.com/2013/07/18/jury-largely-sides-with-bank-in-madoff-related-case/?ref=business\

This result is in contrast to the large jury verdict of $67 million last year against TD Bank in the Coquina v. TD Bank case. The contrasting results in the jury verdicts in these two bank liability cases may have much to do with the way the juries responded to the facts and legal theories involved. The Connecticut Community Bank case involved complex issues of contract interpretation and fiduciary duties relating to custodial agreements, while the TD Bank involved aiding and abetting fraud allegations with a bank officer who asserted his Fifth Amendment privilege and refused to testify in response to questions about his allegedly fraudulent conduct. If a bank liability case gets to a jury, practitioners on both sides of fight should keep in mind that fraud may be easier for a jury to understand than contract interpretation or fiduciary duties.

Friday, July 12, 2013

As Many Ponzi Schemers Go Into Prison, One Comes Out

Posted by Kathy Bazoian Phelps

   Reed Slatkin is 64. And he is now free, after having served his 10 year prison sentence. Slatkin had pleaded guilty to charges relating to his $600 million Ponzi scheme that defrauded 800 investors. In one of the early and more notorious Ponzi schemes of this generation, Slatkin defrauded Hollywood celebrities and fellow Scientology members. He returned money to only select investors, many of which were his friends in Scientology. 

   Out of the financial and emotional wreckage caused by the Slatkin Ponzi scheme came some significant law, including a Ninth Circuit decision holding that a criminal guilty plea can be used as conclusive evidence of fraudulent intent for purposes of proving an actual fraudulent transfer claim. Johnson v. Neilson (In re Slatkin), 525 F.3d 808 (9th Cir. 2008). 

   Since many Ponzi schemers are sentenced these days to what is effectively a life sentence (e.g. Bernard Madoff for 150 years; Allan Stanford for 110 years), it will be interesting to see what this Ponzi schemer does with his life on the other side.

Tuesday, July 2, 2013

The Victim Balancing Act in the Petters Ponzi Scheme Case Continues

Posted by Kathy Bazoian Phelps

   The unique circumstances of Ponzi schemes require careful consideration to mete out justice in unwinding them and in redressing the injuries to defrauded victims. Investors who got out early were often paid back in full, plus some. Other investors who invested later may have received little to nothing. Fraudulent transfer law is used to seek recovery of money paid out to investors, whether earlier or later. Many questions unique to Ponzi scheme cases must be evaluated in the process of trying to do equity. For example:
  • How should courts balance the interests of earlier versus later investors?
  • Should net winners and net losers be treated differently?
  • How far back can the trustee look in seeking to recover money paid to investors?
  • How should courts apply good faith criteria to Ponzi scheme victims asserting a good faith value defense to fraudulent transfer claims, where they relied and trusted family and friends in a typical affinity scheme?
   Unfortunately, many judges are either reluctant or unwilling to pause and ponder the special circumstances and dynamics of Ponzi schemes in evaluating these questions. Recently, however, the bankruptcy court in the Thomas Petters Ponzi scheme case took the time to recognize "the patchy and incomplete match between the phenomenon [of failed investment schemes] and the existing state of the law." In re Petters Co., 2013 Bankr. LEXIS 2523, at *9 (Bankr. D. Minn. June 19, 1013). (The court then cited The Ponzi Book to "highlight the deep underlying tensions in any legal response to failed, large-scale, and long-term fraudulent schemes" due to "shortfalls of existing statutory remedies.")
"In the law . . . there is no specific, dedicated set of legal remedies to address the failure of a Ponzi scheme, as such." Id.   The Petters court wrote a thoughtful Preface to its opinion that resolved the statute of limitations issues which arose in response to the trustee’s fraudulent transfer claims. In evaluating what statute of limitations should apply, the court was mindful of the impact in terms of dollars that its decision would have on all parties, noting:
In the most practical sense, the outcomes on these issues could control whether some defendants could be liable to the estates at all; and it could set the outside exposure of other defendants that had longer and more sustained transactional relationships with the Debtors. Conversely, it would either limit or expand the estates’ maximum possible recoveries from the clawback. Ultimately, the ruling would affect the size of the pot of recovered funds from which creditors' readjusted rights would be serviced, after the full task of recapture via avoidance was completed.   Acknowledging the Ponzi scheme "phenomenon," the Petters court analyzed established boundaries, and the lack of boundaries, in statutory law and the relevant case law in resolving the several statute of limitations questions raised in the case.

   The court noted that the Minnesota Uniform Fraudulent Transfer Act does not contain its own statute of limitations, and that perhaps Minnesota was the only state that removed the statute of limitations provision from its version of the Uniform Fraudulent Transfer Act. The court considered two competing interpretations of the statute of limitations: (1) six year limitation period "upon a liability created by statute"; or (2) six years with a possible extension because "the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud." The difference is that the latter interpretation would permit the trustee to reach back for an extended period of time because of the "discovery allowance" period.

   The court also considered how to coordinate the statute of limitations restrictions of Bankruptcy Code § 546(a) with the state law statute of limitations. The defendants argued that the two limitations periods of § 546(a) ran at the same time so that the six year state limitations period ran backwards from the date that avoidance action was commenced. The trustee argued that the state statute of limitations was tolled from the entry of the order for relief until the avoidance action was commenced, so the limitations period would run backwards from the date of the order for relief.

   Finally, the court also considered the trustee’s request to reach back further based on non-statutory tolling doctrines.

   Here are the court’s conclusions on the statute of limitations questions:

   Ruling #1: "The Trustee’s avoidance claims under MUFTA are subject to a six-year limitations period. However, the discovery allowance of Subd. 1(6) may operate to extend the scope of transfers subject to avoidance to those made before that six-year period, if the Trustee proves the factual basis for it."

   Ruling #2: "As long as the Trustee commenced any individual action in this avoidance docket by the deadline under § 546(a)(1), his avoidance power can reach, at minimum, transfers that took place within the full length of the six-year base limitations period under Subd. 1(6), dating back from the date of the subject Debtor’s bankruptcy filing."

   Ruling #3A: "The extension of avoidance at the Trustee’s instance under color of the discovery allowance of Subd. 1(6) to any transfer that took place earlier than the six-year base period of that subdivision will turn on whether the predicate creditor for a particular adversary proceeding had discovered the facts constituting the fraud of the Petters Ponzi scheme, as they applied to such a transfer."

   Ruling #3B: "The discovery allowance of Subd. 1(6) is the only basis on which the Trustee may obtain an easing or extension of that six-year period. The doctrines of fraudulent concealment, equitable tolling, and adverse domination are not available to him as bases for tolling as a matter of law, or they do not lie on their merits on the configuration of parties in the Trustee’s litigation."

   These rulings set the boundaries in the Petters case for how far back the trustee can reach to "recapture ill-gotten gains." The court sought not to subjectively determine "fairness," but to respect existing law:
Our legal system is structured to protect seated property rights and to promote the reliance that underpins free commerce and the ready flow of capital. A deal is a deal, presumptively final as made; and transfers of property regular on their face are to be treated as final unless there is a specific basis, justified in established law, to disturb and reverse them. Particularly when a recapture in "clawback" would ensnare unwitting recipients of past payment--those who transacted with the fraud's purveyor without knowledge of the wrongdoing--the need for definitive, principled, and limiting substantive rules is obvious.   Id. at *11 (footnote omitted). Yet, despite providing the parties with well-reasoned rulings on the statute of limitations issues, the court felt the need to reflect on the difficulty of fairly balancing the parties’ interests:
And yet there is that nagging point under it all: the money given to earlier recipients was likely mulcted from later-coming investors and lenders; so how "just" is it to allow earlier participants to keep the benefit of funds that had been "stolen" from others before they received them?   It is indeed nagging that statutes of limitations may unfairly protect earlier-investing net winners at the expense of later-investing net losers. It is also further nagging that the payments that these statutes allow net winners to keep are from funds stolen from net losers. It is, however, pretty rare to find a decision in a Ponzi scheme case that doesn’t leave you with a nagging feeling . . .