October 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   October remained a busy month for Ponzi scheme news. 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.

   Douglas L. Bates, 54, pleaded not guilty to charges relating to the Ponzi scheme of Scott Rothstein. Bates, a lawyer, has been accused of being involved in $60 million of the Rothstein fraud. As a condition of Bates’ pre-trial release earlier this year, the court stated that Bates cannot work as an attorney until the criminal case is over. Another lawyer charged in the case, Christina Kitterman, is practicing law while her case is pending.

   Alice Belmonte, 47, was charged with a $4 million Ponzi scheme that defrauded 10 investors. Belmonte was a lawyer who took clients’ money to supposedly invest in real estate transactions and delivered forged documents to them to lure then in. Belmonte was disbarred by the New York state bar.

   James Berghius, 41, was convicted on charges relating to his $2.5 million Ponzi scheme. Berghius defrauded family members, friends and acquaintances by convincing them to take out home-equity loans to invest in hard-money loans, real estate transactions or the purchase of real estate franchises. Instead, Berghius used the investors’ money to pay other investors and to buy himself luxury items such as several Mercedes Benz cars, one of which was purchased by signing over a check he had received from an investor that same day.

   John Bertuca, 56, began serving his one year sentence for filing a false tax return. Bertuca had pleaded guilty and was to testify against David McQueen, Trent Franke and others involved in a $46 million Ponzi scheme. Bertuca had offered advice to McQueen and Franke on how to hide their assets.

   Randi Bochinski, 46, and Alan Gilner, 78, were sentenced to 6 and 7 years, respectively, and were each ordered to pay $5 million in restitution, in connection with a Ponzi scheme in which they promised investors 1,000% returns.

   Annette Bongiorno, 64, Joann Crupi, 52, Daniel Bonventre, 66, George Perez, 47, and Jerome O’Hara, 50, went on trial for their respective roles in the Bernard Madoff Ponzi scheme. The trial is expected to last 5 months. The opening statements reflected the theme of the prosecutors’ case – “For year after year, they lied for the most simple reason – greed.” The defendants have each pleaded not guilty, but prosecutors described them each as “necessary players” in the Madoff Ponzi scheme, alleging that Bongiorno and Crupi fabricated account statements and other fake records, described as “millions of pages of lies” to fool the SEC. The prosecution also alleged that O’Hara and Perez developed a software program that automated the fraud and generated “information out of thin air.” Bonventre was allegedly in charge of keeping three separate books of records, “each one designed to fool whoever was looking at it.” The defense lawyers, on the other hand, argued that Madoff was manipulative and too shrewd to have involved lowly office workers to get in on his crimes. The defendants take the position that they believed in Madoff just like everyone else did. “The world was taken in. The government will not be able to prove that JoAnn Crupi knew any better.”

   Adam Boskovich, 43, was charged with defrauding a group of about 80 investors of about $21 million in connection with a larger $150 million Ponzi scheme, thought to be the largest Ponzi scheme in Orange County California history. The Ponzi scheme was allegedly run by Gerard Frank Cellette, 48, who falsely claimed to have large printing contracts with major corporations and promised investors 15% returns on their investments in the scheme. The scheme was run through Minnesota Print Services, Inc. and investors were presented with fictitious contracts containing the names of fictitious customers for fake printing projects. Boskovich collected about $1 million in commissions from the scheme.

   Werner Brudi had his 24 month prison sentence upheld by the Second Circuit. U.S. v. Brudi, 2013 U.S. App. LEXIS 21218 (2d Cir. Oct. 11, 2013). Brudi sought to overturn his sentence, arguing that his sentence was both substantively and procedurally unreasonable because the court did not consider the immigration consequences of his conviction and because his clean record, advanced age and his dependent wife’s ill health militated against a long sentence. The Sentencing Guidelines recommended a sentence of 33 to 41 months. The Second Circuit affirmed the 24 month sentence. 

   Jenny E. Coplin, 54, of Florida, was charged with operating a $4 million Ponzi scheme through her company, Immigration General Services, LLC, which defrauded about 90 people. Coplin allegedly promised investors up to 108% returns by investing in immigration bail bonds and promised them that their money was safe because it was insured by the Federal Deposit Insurance Corporation (FDIC).

   Patrick Daoud and Eddy Marin pleaded guilty to charges stemming from Scott Rothstein’s $1.2 billion Ponzi scheme. The two helped Kim Rothstein sell jewelry that federal authorities were seeking to forfeit.

   Brian Ray Dinning, 48, was sentenced to 12½ years in prison in connection with a $2 million Ponzi scheme that involved gold, diamonds and real estate ventures in South Africa. Dinning is a former tax attorney who had promised at least 20 investors that they would be making money while also contributing to the protection of wildlife and building churches in poorer areas of South Africa. Dining’s sentence was nearly double the recommended sentence, at least in part because Dining fled to Canada after his indictment. 

   Michael R. Enea, 58, was charged by the SEC with running a $2.1 million Ponzi scheme in which he sold investments in “credit card portfolios” to 18 investors. Enea agreed to pay $843,000 as part of a settlement with the SEC from the proceeds of sale of his home. The SEC alleged that Enea sold sham investments in credit card portfolios through Credit Card Equipment Plus, Inc., but Enea neither admitted nor denied the allegations in the settlement. Enea used about some of the investors’ money to make Ponzi payments to investors and used the rest of the money on personal expenses, including hunting expenses, mortgage payments, cars, and dance lessons.

   Ann Forehand, 63, had federal charges against her dropped in connection with a Ponzi scheme that her husband, Edward Forehand, was convicted of in August. The scheme involved the purchase of cookware and defrauded 87 investors of almost $3 million. Ann Forehand had refused a plea bargain and the charges against her were later dropped.

   James Fry, 59, was sentenced to 17½ years in prison for his role in the Tom Petters Ponzi scheme. Fry was the manager of the hedge fund, Arrowhead Capital Management, which had received over $30 million in commissions. While Fry was not accused of having actual knowledge of the Ponzi scheme, evidence showed that he knew that money he invested with Petters was not flowing back from big-box retailers the way it was supposed to. Fry’s investors lost $120 million in Petters’ $3.65 billion Ponzi scheme. Fry has been criticized for keeping may of his assets acquired from Petters after the fraud was uncovered. Fry was also the subject of a $41.1 million judgment entered against him.

   Edwin Yoshihiro Fujinaga and his company, MRI International Inc., were the subject of an asset freeze sought by the SEC. MRI was doing business in Las Vegas and had raised more than $800 million from investors who mostly lived in Japan. The investors were told that their money would be used to buy medical accounts receivable from medical providers that would be paid by insurance companies. Instead, they used the money to buy luxury cars, pay credit card bills and fund other businesses owned by Fujinaga. 

   Tate George, 45, was convicted on charges relating to a $2 million Ponzi scheme that targeted ex-professional athletes. George, a former professional basketball player, raised money through his company, the George Group, by telling investors that his real estate portfolio was worth $500 million and that their money would fund real estate development projects in New Jersey and Connecticut. George represented that investor funds would be safeguarded in an attorney escrow account. Instead, he spent the funds on a lavish lifestyle.

   Duane Hamblin, 42, Guy Andrew Williams, 42, and Brent F. Williams, 66, were sentenced to 15 years, 12.5 years and 7.5 years, respectively, in connection with a $166 million Ponzi scheme they ran through the “Mathon” entities. The scheme targeted members of the Church of Jesus Christ Latter-Day Saints from Arizona, Utah and Nevada. 

   Randal Kent Hansen, 64, was the subject of a new lawsuit in connection with his $10 million Ponzi scheme. The SEC had filed a complaint in March which has been on hold while criminal charges are pending. A new case, filed by Reginald Martin, was just filed for breach of contract over $24,880 that was invested with Hansen but not repaid.

   Gene Hinsley was found guilty on one charge relating to a $2 million Ponzi scheme in which he sold securities issued in the form of investment contracts for speculating in the silver market. However, the jury was unable to come to a unanimous decision on the other nine counts. The U.S. Attorney has not yet decided whether to retry the case. 

   Yusaf Jawed was sentenced to 6.5 years in prison and ordered to pay $6.4 million in restitution in connection with a Ponzi scheme that took in at least $37 million from more than 100 investors. Jawed ran his scheme through Griphon Asset Management LLC and Griphon Holdings LLC, and had a $34 million judgment entered against him in an action brought by the SEC. Jawed had promised investors returns of 12.8% to 132.5% in connection with securities trading in publicly-traded securities, biotech companies, foreign currencies and commodities.

   Doug Kacos, 58, and Thomas Doctor, 53, were charged with money laundering in connection with the $9 million API Worldwide Holdings LLC Ponzi scheme. It is alleged that Kacos deposited checks from the scheme into the accounts of his restaurant, New Beginnings, or he cashed the checks against his business account and then gave the money back to Jeff Ripley, 60, the scheme’s mastermind, or Danny VanLiere, 61. Both Ripley and VanLiere have pleaded guilty to the scheme. Kacos and Doctor are also accused of setting up crews of employees to wire victims’ money overseas from different locations to avoid fraud detection.

   Peter Kirschner, Stuart Rubens, and their companies Premiere Consulting LLC and Advanced Equity Partners LLC were charged in connection with an alleged $2.5 million Ponzi scheme that defrauded about 200 investors. The scheme was to raise money to market a product, among other things, that was a state-of-the-art laser-line system that could mark first downs in professional and college football games. The marketing was to take place through Though Development, Inc., which engaged Premiere and Advanced to market TDI stock to investors. Investors were told that (1) TDI was planning an impending initial public offering, and that this would cause their shares to greatly appreciate; (2) their investments would be used to develop TDI’s technology and assist in IPO efforts; and (3) the NFL had agreed to license TDI’s technology in preseason and playoff games, and in one case, the 2013 Super Bowl. Investors were not told that Premier and Advanced were to pay commissions to sales agents of at least 75% of the proceeds from the share sales. TDI has not been charged with any wrongdoing.

   Marcin Malarz, 39, and Arthur Lin, 48, were indicted in connection with an alleged $9 million Ponzi scheme that raised money from 25 real estate investors. Lin was an officer of Malarz Equity Investments LLC, which supposedly bought apartment buildings and converted the units into condominiums. The SEC had separately filed an enforcement action against Malarz and Lin in 2011, alleging that they had raised about $14.4 million from at least 43 investors.

   Everett C. Miller, 43, Carr Miller Capital LLC, John Fish, 39, and Ryan Carr, 37, were the subject of a judgment ordering them to pay $29.8 million to victims and imposing $6.5 million in civil penalties against them for their conduct in a $40 million Ponzi scheme which the court found involved more than 8,800 violations of New Jersey securities laws. Investors were promised returns of 20%, but about $13.5 million of their money went to personal expenses of the perpetrators and about $22 million went to hedge funds and other high-risk ventures “which incurred significant losses and were not authorized or disclosed to most investors.” Miller pleaded guilty in July.

   John James Missitti was sentenced to more than 6 years in prison and was ordered to pay about $300,000 in restitution in connection with the GetMoni.com Ponzi scheme that he ran in Michigan. Missitti was originally an investor in the scheme run by Ronald and Bonnie Brito, but when he learned it was a Ponzi scheme, he solicited new investors into the scheme instead of reporting it to authorities. The scheme promised high returns, up to 100%, to be generated from different ventures such was loans to building contractors and for air conditioning contracts, and from extracting gold and silver from mines. Missitti brought more than 100 investors into the scheme who lost about $4.5 million.

   James Mulholland Jr. and Thomas Mulholland were the subject of a judgment in favor of the SEC for $1 million. The SEC had alleged that they had sold about $2 million of demand notes to 75 investors in Michigan and Florida to fund a failing real estate business. 

   Kathleen Otto, 72, the wife of deceased Ponzi schemer John Otto, was held liable for her husband's $114.5 million judgment in favor of defrauded victims. The scheme had been run through HL Leasing, an dover 1,000 investors invested $100 million and were promised returns of 9% from the supposed purchase of American Express lease agreements at a discount. Although Kathleen was not initially found liable, a court then found that because John Otto was an alter ego of the companies, his surviving spouse could be held liable for the debts under California law. Kathleen Otto filed bankruptcy and does not have assets to satisfy the judgment.

   Steven Palladino, 56, Lori Palladino, 62, Gregory Palladino, 28, and their company, Viking Financial Group, were arraigned on charges in connection with their alleged Ponzi scheme in which they borrowed money from investors thought their money was being used to provide high-interest loans, with returns over 20%. The scheme defrauded about 42 victims of over $10 million. The new indictment supersedes earlier charges against Steven and Lori Palladino. It is alleged that the Palladinos used the investors’ money to fund a lavish lifestyle, including luxury vehicles, a trip to the Bahamas and gambling.

   Tom Petters, 56, sought to shorten his 50 year prison sentence to 30 years, arguing that he was not sufficiently informed of a possible plea bargain that carried a 30 year prison sentence. Petters broke down in tears on the stand, apologizing for lying on the stand at his criminal trial and stating that he would have accepted a 30 year plea deal but was only told of it after he was sentenced. Petters defense team said that Petters knew of the plea deal but rejected it. 

   Marco and Bebe Ramirez were charged by the SEC in connection with an alleged $5 million Ponzi scheme they ran through their three companies, USA Now LLC, USA Now Energy Capital Group LP, and Now Co. Loan Services, in which they promised investors a conditional visa and eventually a green card if they invested in the EB-5 Immigrant Investor Pilot Program that would create or preserve a minimum number of jobs for U.S. workers. The Ramirezes initially targeted investors in Mexico, but then also solicited investors in Egypt and Nigeria. 

   Ryan Edward Rude, 40, was found guilty on charges relating to a $4.8 million Ponzi scheme that he ran through his real estate company, Alliance Group. Rude promised investors secured interests in property development projects in California. Some of the investors had borrowed money to invest, using their homes as collateral. All of the properties acquired by Rude ended up in foreclosure. 

   Scott Saidel was sentenced to 3 years in prison for his role in helping Kimberly Rothstein, the wife of Ponzi schemer Scott Rothstein, in hiding jewelry from federal authorities. Some jewelry items were withheld from authorities, and Kim Rothstein and two others attempted to sell some of the jewelry to local jewelers. Saidel agreed to hold some sales proceeds in his attorney trust account to conceal them from investigators. Saidel was also previously disbarred from the practice of law. Kim Rothstein pleaded guilty in the case. 

   Francis X. Sanchez had his appeal of his 136 prison sentence and restitution order of $7.9 million dismissed. U.S. v. Sanchez, 2013 U.S. App. LEXIS 20117 (7th Cir. Oct. 2, 2013). Sanchez had been sentenced in connection with a $10 million Ponzi scheme that defrauded about 100 investors. Sanchez had promised investors returns to be generated from rehabbing projects and a luxury rental community he was building near Acapulco with backing from Mexican authorities. Sanchez’s newly appointed lawyer filed a motion to dismiss the appeal of the sentence that had been filed by Sanchez on the grounds that the appeal was frivolous. Sanchez was seeking to have his guilty plea set aside but the court agreed that Sanchez and understood his procedural rights and the consequences to pleading guilty.

   Rayla Melchor Santos, Hung Wai Shern, Rui Ling Leung, and entities operating under the names of CKB and CKB168, were the subject of an asset freeze and fraud charges by the SEC. The SEC complaint also named CKB promoters, Daliang Guo, Yao Lin, Chih Hsuan Lin, Wen Chen Hwang, Toni Tong Chen, Cheongwha Chang, Joan Congyi Ma, and Heidi Mao Liu. The alleged Ponzi scheme was based on the distribution of web-based children’s education courses. Investors were told that by investing in CKB, they would earn risk-free returns in the form of Profit Reward Points that would be convertible into shares of CKB stock when the company went public on the Hong Kong Stock Exchange. The scheme defrauded about 400 U.S. investors of more than $20 million, and millions more was raised from investors from other countries.

   George Sepero, 40, was sentenced to more than 8 years in prison and ordered to pay nearly $5 million in restitution in connection with his $3.5 million Ponzi scheme and for defrauding an elderly paraplegic woman. Sepero had pleaded guilty to the scheme, along with co-conspirators Carmelo Provenzano, 31, and Daniel Dragan, 43. The defendants lured in investors by describing a “secret computer algorithm” to trade foreign currency that would generate a 170% return on their investments. 

   Nicholas D. Skaltsounis, 68, sat through a trial on claims brought by the SEC against him and his company AIC for allegedly running a $7.7 million Ponzi scheme that defrauded at least 74 investors.

   Hans Seibt, 71, entered into a plea agreement in connection with charges that he ran a Ponzi scheme through his companies, HSLV Development Corp. and Clark and Nye County Development Corp. Seibt would solicit investments of $10,000 or more in a land scheme in which he offered trust deeds, joint venture agreements and subscription agreements, supposedly secured by parcels of land. Seibt promised returns of 10% to 12%, but instead of buying the land he promised, he used the money for personal expenses. 

   Richard Schwartz’s estate was the subject of an emergency petition to freeze Schwartz’s assets. Schwartz committed suicide in August 2013, and it is believed that Schwartz was running a $5 to $10 million Ponzi scheme through his company, RAS & Associates. RAS offered wealth management services and sold life insurance through New York Life. Schwartz himself held a $13 million life insurance policy. 

   Ephren Taylor is the subject of a new criminal investigation in connection with any alleged $14.5 million Ponzi scheme. Taylor had urged parishioners of various churches to invest in gas stations and other small business, and to invest in “sweepstakes” machines that promised high returns. In connection with an action by the SEC, a judge had previously ruled that Taylor must pay investors more than $14.5 million.

   George Theodule, 52, pleaded guilty to charges in connection with a $30 million Ponzi scheme that defrauded 2,500 people. The scheme targeted mostly Haitian-Americans. Theodule had run the scheme through his companies, Creative Capital Consortium LLC and A Creative Capital Concepts LLC, and had told investors he would be able to double their money in 90 days.

   Damian Valdez and his company, Evolution Capital Advisors, were the subject of a disgorgement order in connection with an action by the SEC against them in connection with their $10.1 million Ponzi scheme that defrauded 80 victims. The court found that they are liable to disgorge $183,000 and that Valdez must pay a civil penalty in the amount of about $3.8 million. The receiver in the case has already distributed $3.6 million to investors whose principal was not repaid.

   Daniel Wise was convicted on charges relating to his operation of a $66 million Ponzi scheme. Wise is a former certified public accountant that was found guilty of defrauding investors in real estate ventures by promising them short-term and high returns. The indictment alleged that Wise took $7 million of the investors’ funds for his personal use. 

INTERNATIONAL PONZI SCHEME NEWS 

Australia
   Police in Victoria have begun investigating an alleged $70 million Ponzi scheme involving Bill Jordanou, 55, a well-known international poker player, and a Melbourne accountant, Robert Zaia, 45. It is alleged that Jordanou and Zaia used fraudulent documents to access loans from the Commonwealth Bank and to siphon money for their personal use. 

Canada
   France-Josée Dancause, 49, Alain Péloquin, 48, Benoît Sénécal, 57, Sophie Jolicoeur, 44, Isabelle Cantin, 36, and Chantal Goulet, 44, were arrested in connection with a $19 million Ponzi scheme that defrauded more than 200 investors. The scheme, run through Peloquin’s company Evaluation Apex, Inc., promised high returns supposedly generated from a lucrative contract with the federal government that provided for the purchase of seized assets before the assets were put up for auction to the general public. 

   In the largest recovery ever under Ontario’s civil forfeiture law, Ontario’s Attorney General obtained a court order to recover $17 million for victims in the Allen Stanford Ponzi scheme. The money, held in accounts at a major Canadian bank, will be forfeited to Ontario and then transferred to the United States Justice Department for distribution to the victims of the scheme.

China
   A Taiwanese investor, Lee Cheng Chung, has filed suit in Hong Kong seeking documents from BSI SA Hong Kong branch and BSI Luxembourg that would allegedly show that Hong Kong regulators permitted the sale of the Fairfield Sentry Fund, a Bernard Madoff feeder fund, and that Banca del Gottardo and Fairfield had an agreement regarding the sale. 

India
   Badarul Islam, the managing director of Finix, who has accused of running a Ponzi scheme, was caught by victims and turned into police. Islam had been on the run for a year.

   A new report on the Saradha Ponzi scheme estimates that the scheme took in at least $335 million from investors. The scheme, run by Sudipta Sen, was revealed earlier this year and, since that time, at least 10 people have committed suicide over the scheme. The Saradha Group had operated a group of companies that supposedly did business in real estate, motor vehicles and bio gas.

Malta
   A court dismissed libel charges against The Malta Independent on Sunday editor David Lindsay in connection with an article written about an alleged $20 million Ponzi scheme run by Soleil Group Holdings, Exodus Limited and Exodus Capital Limited. The court determined that the article in question was based upon rulings made in American courts and was not libelous. The court held, “It is clear that the defendant had the right and duty to report the case to the public since it was in the national interest, and that the reportage had been based on documentation presented to the courts and as such it was privileged in the eyes of the law.” The court also overruled the plaintiffs’ objections to the use of the words “Ponzi scheme,” “swindled” and “defrauded,” since those terms had been used in the American courts to describe the situation.

Russia
   An employee of the Russian postal service, Pochta Rossii, was charged with embezzlement after it was discovered that she transferred 3 million rubles of federal budget funds to buy virtual stock in the Ponzi scheme MMM run by Sergey Mavrodi. Mavrodi had been arrested in 2003 and sentenced to four years in prison for his MMM Ponzi scheme, but then commenced similar schemes in Russia, Ukraine, the Baltic States and other locations with the ambition of “destroying the global financial system.” The postal employee faces up to 10 years in prison for the transfer of federal funds into the scheme.


NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

   Over 45 defrauded victims of Anthony Lupas, 78, will receive $3.25 million from the Pennsylvania Lawyers Fund for Client Security, a fund established by the Pennsylvania Supreme Court from collecting annual attorney registration fees. Lupas is a former lawyer who faces charges in connection with his alleged Ponzi scheme in which he promised annual tax-free returns of 5% to 7%.  

  In connection with the Thomas Petters Ponzi scheme, the former president of Acorn Capital Group LLC, Paul Seidenwar, has agreed to a settlement worth more than $3 million to resolve a class action claim that he was partially responsible for Acorn’s funding of the Petters’ scheme. Seidenwar consented to the assignment of an insurance policy from himself to the class and to give the class the right to seek coverage under the insurance policy.

   The trustee of Bernard L. Madoff Investment Securities LLC filed an appeal with the United States Supreme Court challenging the dismissal of his lawsuits against financial institutions including JP Morgan Chase and HSBC Holdings Plc for billions of dollars. The cases had been dismissed on standing and in pari delicto grounds, and the appeal argues that those rulings had limited the powers of trustees and protections for customers under SIPA.

   It is reported that JPMorgan Chase is in discussions with the government to enter into a deferred prosecution agreement with federal authorities in connection with a criminal investigation that JPMorgan Chase had turned a blind eye to Bernard Madoff’s Ponzi scheme and failed to alert federal authorities. The arrangement would suspend criminal charges in exchange for a fine and other concessions. Both the FBI and the U.S. Attorney’s Office have opened an investigation into whether JPMorgan failed to timely report fraudulent activity running through its bank accounts. Billions of investor dollars flowed through Madoff’s account at JPMorgan starting back in 1986. Despite internal emails reflecting concerns, suspicions and possible knowledge of the fraud, JPMorgan failed to alert authorities until October 2008, just two months before the scheme was disclosed. 

   A court dismissed the claims of the liquidators of Madoff Securities International Ltd. against Sonja Kohn and Bernard Madoff’s sons, Mark and Andrew Madoff, among others. 

   Four charities who were forced to return money to the receiver in the Art Nadel case are getting some help from The Patterson Foundation. The Patterson Foundation as pledged to match donations made to the organizations that must return the money - Jewish Family & Children's Service of Sarasota-Manatee, Girls Inc., the Sarasota Opera and the Diocese of Venice – up to $640,000, or half of the money needed to reimburse the nonprofits for the money being clawed back. The Patterson Foundation decided to provide some relief because it decided that being forced to give back the Nadel donations was akin to an unanticipated financial disaster for the nonprofits. 

   A bankruptcy court permitted a $718 million case to proceed against Fulbright & Jaworski for malpractice in connection with the Tom Petters Ponzi scheme. Plaintiff Palm Beach Finance has sued the firm claiming that it failed to advise them to file for bankruptcy following the exposure of the Petters fraud. Palm Beach delayed filing for bankruptcy for more than a year, during which time it accrued $1 billion of debt. 

   TD Bank was fined $37.5 million by the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, and agreed to pay another $15 million to the SEC in connection with accusations that TD Bank had played an improper role in the Scott Rothstein Ponzi scheme. It was alleged that a bank officer had falsely assured investors about the availability of their money.

   The penalty to the University of Miami for its use of money from Ponzi schemer Nevin Shapiro to attract and pay football and basketball players was announced by the NCAA’s Committee on Infractions. The UM football team will lose 9 scholarships over 3 years, but will not be precluded from playing in post-season bowl games. Shapiro was sentenced to 20 years in prison for his involvement in the $930 million Ponzi scheme. The NCAA says that Shapiro provided at least 72 Miami football players, 12 of their associates and 3 recruits impermissible benefits between 2002 and 2010. The basketball program was also accused of impropriety.

   Charges were dropped against CommunityOne N.A. in connection with allegations that the bank had failed to implement a proper anti-money laundering compliance program. The Justice Department dropped charges that the bank did not maintain an effective anti-money laundering program and that they had failed to file suspicious activity reports in connection with a Ponzi scheme run by Keith Simmons. CommunityOne agreed to pay $400,000 to the victims of the Ponzi scheme.

   The Supreme Court heard arguments in the R. Allen Stanford case about whether class action claims against the law firms of Proskauer Rose and Chadbourne & Parke, as well as insurance brokerage Willis Group Holdings PLC and financial services firm SEI Investments and insurance company Bowen, Miclette & Brittin, should be permitted to proceed under the Securities Litigation Uniform Standards Act (SLUSA). The actions were flied on behalf of about 25,000 investors who had purchased certificates of deposits from Stanford’s bank based in Antigua. SLUSA prevents state law claims against third parties when the allegations are “in connection with the purchase or sale of a covered security.” The district court barred the suits from going forward, but the Fifth Circuit allowed the claims to proceed, finding that the allegations were only “tangentially related” to covered securities. The Supreme Court justices had questions of both sides, making it difficult to predict the outcome. 

   The Center for Public Integrity reported that President Barack Obama has declined to return $4,600 in campaign contributions that he received from R. Allen Stanford less than one year before Stanford was arrested for running his $7.2 billion Ponzi scheme. The Obama campaign has not returned the money despite repeated requests from the receiver of the Stanford estate. The Center for Public Integrity reports that the Obama campaign still has $5.4 million, even though the president will not be running in another election. Other candidates and committees have also declined to return funds received from Stanford to the Stanford receiver, but many others voluntarily returned contributions made to them.

   The appellate court argument took place in the Stanford Financial case in which the SEC is seeking to overturn the lower court’s ruling that victims of the $7 billion Ponzi scheme are not customers and therefore not entitled to SIPC protection. The lower court ruled that the SEC had not shown that the 7,000 investors in the scheme met the definition of “customer” under the Securities Investor Protection Act. This case is the first time that the SEC has gone to court to force SIPC to extend coverage.

   Ahmad Hamad Algosaibi & Bros. Co. agreed to settle its $9 billion lawsuit against Glen Stewart, the former CEO of The International Banking Corp., for operating a Ponzi scheme and fraudulently obtaining loans. Stewart will not have to pay any money under the terms of the settlement but will meet with the lawyers for the plaintiffs to provide information about the scheme.

   The receiver of the $30 million Ponzi scheme case George Theodule’s companies, Creative Capital Consortium LLC, A Creative Capital Concept$ LLC and six other entities, sought reversal of a lower court ruling dismissing his claims against Bank of America. The receiver argued to the Eleventh Circuit that the lower court had erred in dismissing his complaint for aiding and abetting breach of fiduciary duty and fraudulent transfers, among other things, without granting an opportunity to amend the complaint.

   Rep. Michele Bachmann (R.-Minn) returned to the bankruptcy trustee for Frank Vennes $14,000 in campaign contributions that had been paid to her by Vennes. He had previously been convicted of money laundering and sentenced to 5 years in prison. After his release, he began soliciting funding for Petters Company Inc., a Ponzi scheme run by Thomas Petters. Vennes donated to Bachman’s campaign, seeking a pardon for his prior conviction. After her election to Congress, Bachman began lobbying for Venne’s pardon. The Petters scheme was revealed in September 2008, and in October 2008, Bachman sent a letter withdrawing her support for Vennes’ pardon. The $14,000 covers about 80% of the contributions that Vennes and his wife made to Bachman’s campaign.

   The receiver for ZeekRewards requested an extension of time to file claims for a group of claimants, which was granted by the court. The receiver agreed to allow more time for affiliates and banks that are still resolving issues with cashier’s checks and other instruments paid into the scheme before it was shut down. Following his appointment, the receiver had presented more than 140,000 cashier’s checks and other instruments for deposit, but many were not paid, partially because some banks had issued stop payments and had refunded their customers the full check amount. The receiver alleges that this was done improperly and made demand on more than 700 banks to honor the instruments and to cancel “returned item fees” that were charged to the receivership after trying to deposit the instruments.

   The ZeekRewards receiver is seeking authority to auction real and personal property, including the former warehouse and office of Rex Venture Group, the parent company of Zeek Rewards, and office furniture and other memorabilia. The receiver has recovered about $325 million for defrauded victims so far. 

   House Representative Maxine Waters (D. Cal.) introduced a bill to toughen penalties for violation of anti-money laundering laws. For example, the legislation would raise the maximum prison sentence for willfully evading an institution’s Bank Secrecy Act program or controls to 20 years from the five year cap. It would also include a requirement that the Justice Department explain to Congress “why it did or did not pursue prison sentences” when it settles an anti-money laundering probe for a financial penalty. Additional provisions would give the Financial Crimes Enforcement Network (FinCEN) the authority to litigate on its own and to establish a FinCEN whistleblower program similar to the SEC’s program.

Banks, Please File Your Suspicious Activity Reports and Help Stop Ponzi Schemes!

Posted by Kathy Bazoian Phelps

   People are not supposed to launder money. Banks are not supposed to let people launder money. Yet, both things keep happening.

   With a number of recent high-profile mistakes made by financial institutions, the government is cracking down. It’s getting ugly out there. Fines, penalties, and possible prison sentences are all in play. Yet, is this enough to prompt banks into diligent action?

   In just the past month, several banks have been slapped with some sizable penalties, and criminal charges are being contemplated:

• JPMorgan Chase is the target of an investigation right now where both civil monetary and criminal charges are being discussed as a result of the bank’s failure to detect and report the Bernard Madoff Ponzi scheme. JPMorgan Chase handled the banking for Madoff beginning in 1986 and, despite internal emails expressly stating concerns that Madoff was running a Ponzi scheme, JPMorgan did not file a report of suspicious activity until October 2008, only two months before Madoff confessed to the nearly $20 billion Ponzi scheme. It has been reported that JPMorgan is in discussions with the government to enter into a deferred prosecution agreement that would suspend criminal charges against JPMorgan in exchange for a large fine.
• TD Bank was assessed a civil penalty in the amount of $37.5 million by the Financial Crimes Enforcement Network (FinCEN) and Office of Comptroller of the Currency (OCC) for its failure to file suspicious activity reports in connection with the handling of the bank accounts of Scott Rothstein and the Ponzi scheme run through Rothstein’s law firm. TD Bank also agreed to settle SEC charges in an administrative proceeding by paying another $15 million. FinCEN said TD Bank “did not do enough to prevent the pain and financial suffering of innocent investors.” OCC said, “The failures to file SARs were significant and egregious for a number of reasons.” Those reasons included the number of alerts generated on the accounts and the velocity of funds that flowed through them.
• Saddle River Valley Bank was assessed a $4.1 million penalty by FinCEN and another $4.1 million penalty by the OCC, to be satisfied by a single payment of $4.1 million, and was also the subject of a civil asset forfeiture of $4.1 million by the U.S. Attorney’s Office for the District of New Jersey. The bank was charged with Bank Secrecy Act violations and had failed to timely file 190 SARs, most of which reported back to a single individual.

   The Bank Secrecy Act clearly requires banks to file suspicious activity reports (SARs) for, among other things, any transaction involving at least $5,000 and that the bank “knows, suspects, or has reason to suspect”:

• “involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities . . .”
• “is designed to evade any regulations promulgated under the Bank Secrecy Act”; or
• “has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.”

   Ponzi schemes, by definition, involve at least some, if not all, of this kind of activity. Once a suspicion arises, a SAR must be filed.

   The FinCEN website reports that 507,217 SARs were filed in 2003, and that number grew to 1,582,879 in 2012. Is that growth because more criminal activity is taking place, or because more financial institutions are complying with the Bank Secrecy Act requirements? Or has the number of filed SARs increased because of the threat of civil and criminal penalties for failure to file SARs? 

   FinCEN reports enforcement actions on its website at www.fincen.gov/news_room/ea/, making a public display of its enforcement actions. However, not all regulatory agencies make such information publicly available. 

   Given the ongoing failure of financial institutions to file SARs in what seem like obviously suspicious circumstances, one must question whether the existing threat of monetary penalties and criminal liability is enough to encourage banks into action to actively and aggressively comply with the Bank Secrecy Act and report suspicious activity.

   Some politicians don’t think so. Just this past week, House Financial Services Committee Ranking Democrat Maxine Waters (D-Calif.) introduced a bill in the House, entitled the Holding Individuals Accountable and Deterring Money Laundering Act (H.R. 3317), to toughen penalties for violation of anti-money laundering laws. For example, the legislation would raise the maximum prison sentence for willfully evading an institution’s Bank Secrecy Act program or controls to 20 years from the five year cap. It also includes a requirement that the Justice Department explain to Congress “why it did or did not pursue prison sentences” when it settles an anti-money laundering probe for a financial penalty. Additional provisions would give FinCEN the authority to litigate on its own and to establish a FinCEN whistleblower program similar to the SEC’s program.

   What is clear is that when a bank violates its duties to report fraud and file suspicious activity reports, there are negative consequences – both for the bank and for defrauded victims. The banks are paying fines and may find their officers serving prison time. But it is the investors who really suffer for a bank’s lack of diligence which, in some cases, can allow a Ponzi scheme run for decades right under its nose.

Is the SEC Here to Help Defrauded Victims in a Ponzi Scheme, Or Not?

Posted by Kathy Bazoian Phelps

   The Securities Exchange Commission (SEC) plays an active role in protecting the rights of investors. Its own mission statement is:

The mission of the Securities and Exchange Commission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

   Yet, in the high-profile Ponzi scheme case of R. Allen Stanford and Stanford Financial Bank, the SEC is finding itself aligned both for and against efforts to recover funds for the benefit of the defrauded victims. Positions taken by the SEC in two different pending litigation matters in the Stanford case may have polar opposite effects on the financial outcome for defrauded investors.  

   One case, SEC v. SIPC, now pending in the Circuit Court for the District of Columbia, involves a battle between the SEC and the Securities Investor Protection Corporation (SIPC) over whether the defrauded victims are “customers” under the Securities Investor Protection Act (SIPA) and therefore entitled to payment from SIPC. This is the first time that the SEC has ever commenced an action seeking SIPC coverage for investors. The lower court found that the Stanford investors are not entitled to SIPC coverage, but the SEC continues to champion the cause of the investors in the Circuit Court seeking SIPC coverage for them.

   The other case, Chadbourne & Park LLP v. Troice et al., involves an appeal to the U.S. Supreme Court over the issue of whether Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars lawsuits by a class of victims against third parties to recover their losses from alleged wrongdoers. The Fifth Circuit held that the claims against two law firms, an insurance brokerage firm and a financial services firm could proceed despite SLUSA. The U.S. Government, on behalf of the SEC and other agencies, filed an amicus brief with the Supreme Court arguing that the investor claims should be barred under SLUSA. If the Government’s position prevails, defrauded victims will be denied recovery on their claims.

   In what would be a worst case scenario for the investors, the SEC will lose in SEC v. SIPC so that investors will be denied “customer” status and protection, and the Government’s position in the Chadbourne & Park case will prevail, denying investors the ability to use self-help to sue alleged wrongdoers.

   At a quick glance, it seems that the SEC is on the wrong side of the SLUSA fight in Chadbourne & Park, given the potentially adverse consequences for investors if the SEC’s position is adopted. But perhaps the issue has more do with the way that the applicable statutes are written and interpreted than with any intent on the part of the SEC. 

   In Chadbourne & Park, the principal question to be considered by the Supreme Court is: 

Does the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. 77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is “more than tangentially related” to the “heart, crux or gravamen” of the alleged fraud?

   SLUSA prohibits a state law class action alleging a purchase or sale of a covered security “in connection with” an untrue statement or omission of material fact. A “covered class action” is a lawsuit in which damages are sought on behalf of more than 50 people, and a “covered security” is a nationally traded security that is listed on a regulated national exchange. So the question remaining is: What does “in connection with” mean?

   The target defendants in the litigation at issue argue that “in connection with” covers the following two factual scenarios that touch “covered securities” in the Stanford case: (1) that Stanford lied to purchasers of CDs and told them that the CDs were backed by investments in stocks; and (2) that some of the CD purchasers must have liquidated stocks in order to purchase the CDs.

   The Fifth Circuit did not agree that either of these two scenarios were sufficient to bar claims under SLUSA, holding that the purchase or sale of a covered security must be more than tangentially related “to the ‘heart,’ ‘crux,’ or ‘gravamen’ of the defendants’ fraud.”  The Fifth Circuit held that the claims against the defendants could proceed.

   The Government, on the other hand, has taken the position in its amicus brief to the Supreme Court that the relevant language of SLUSA was taken from the Securities Exchange Act of 1934 and should be read consistently with similar language in Section 10(b) of the Act.  In urging a broad reading of the words “in connection with,” the Government contends that: 

[A] broad reading is essential to the achievement of Congress’s purpose in enacting both Section 10(b) and SLUSA.  Under Section 10(b), it enhances the SEC’s ability to protect the securities markets against a variety of different forms of fraud. Under SLUSA, it furthers Congress’s objective of preventing the use of state-law class actions to circumvent the restrictions by the PSLRA [Private Securities Litigation Reform Act] and by this Court’s decisions constraining private securities-fraud suits.

   In an amicus brief taking the contrary position, 16 law professors directly challenge the concept of broadening the application of SLUSA to include the certificates of deposit purchased by the Stanford investors. They note that the certificates of deposit are not themselves covered securities and argue that therefore SLUSA should be “interpreted in a way that does not preclude investors from using state courts to pursue claims seeking traditional state law remedies for acts that do not involve covered securities within the meaning of the federal securities laws.” 

   To stress their position that SLUSA should not apply to non-covered bank-issued securities that may be potentially backed by covered securities, the 16 law professors float the following hypothetical class action claims, among others, that they contend would improperly be prohibited under SLUSA if interpreted that broadly:

• "A car dealer who lies to customers about the terms of a car loan, where the car loans are securitized in a pool and interests in the pool are sold off as covered securities."
• "A credit card company that securitizes credit card balances fails to pay appropriate wages to telephone operators and answering card holder questions, and the operators file a state class action alleging violations of state wage and hour laws."
• "A nationally-traded securities clearing firm engages in sex discrimination in compensating clerical workers for work done in the securities office, and the workers file a sex discrimination class action law suit."

   In summary, where the Supreme Court draws the lines on the application of SLUSA could have a significant impact on a variety of state law claims that may or may not have much to do with securities. The SEC stands behind a broad reading of SLUSA under the pretense of protecting the securities market, but its position appears to have the consequence of harming, not helping, defrauded victims by blocking state law damage claims.

   The issues are undoubtedly complicated, and there are a variety of competing considerations. From the investors’ perspective, however, they can just add this to the list of roadblocks to getting their money back. 

Ponzi Scheme Cases Can Actually Return 100% to Investors, Plus Some

Posted by Kathy Bazoian Phelps

   When a Ponzi scheme ends up in a bankruptcy or receivership proceeding, we often assume that the defrauded victims won’t fully recoup their losses. And the measurement of losses often only contemplates the net difference between the amount invested less the amount returned to the investor. Expected profits, interest and other damages usually don’t even come into consideration, and any recapture of lost principal is considered a good thing.

   But, once in a while, defrauded victims actually recoup the full amount of their losses. And in very rare circumstances, defrauded victims might even receive a distribution on account of other types of damages associated with the failed investment. This is the situation in the LandAmerica Financial Group, Inc. cases.

   The Liquidation Trustee of LandAmerica 1031 Exchange Services, Inc., Gerard A. McHale, Jr., recently sent a letter to victims, advising them that they would be receiving a 60% distribution on their Class 7 Damages Claims. Those victims have already received 100% of their lost principal claims in the total amount of $250,000,000. An additional $12 million is to be distributed on the Damages Claims. 

   The court had previous considered and established protocols for fixing damages claims filed by victims. The categories of damages sought by victims were for: 1) Professional Fees; (2) Lost or Forfeited Deposits; (3) Deprivation of Tax Benefits; (4) Punitive Damages; (5) Interest; (6) Lost Opportunities and Other Speculative Damages; (7) Exchange Fees Paid to LES; and (8) Other Miscellaneous Damages.

   The court allowed amounts for lost deposits, lost exchange fees and certain miscellaneous damages, but limited professional fees and qualified claims for deprivation of tax benefits. Claims for punitive damages, lost opportunities and speculative damages were disallowed. Pre-petition interest was already paid as a component of earlier distributions to claimants, and post-petition interest was disallowed. 

   The Liquidation Trustee notified approximately 165 damage claimants that they would be receiving a 60% distribution on their damage claims, with the hope of a further distribution upon resolution of the remaining administrative matters in the case.

   This is rare but welcome news in a Ponzi scheme case. 

In Pari Delicto Doesn’t Always Bar a Trustee’s Claims in a Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

   Bankruptcy trustees have been getting discouraged lately, blocked from pursing recoveries for the creditors of their estates by the doctrine of in pari delicto. Courts have frequently been finding, as a threshold matter, that the affirmative defense of in pari delicto bars a trustee, who stands in the shoes of the debtor, from recovering damages from a wrongdoing defendant if the debtor also participated in that same wrongdoing. See, e.g., Grayson Consulting Inc. v. Wachovia Securities, LLC (In re Derivium Capital LLC ), 716 F.3d 355 (4th Cir. 2013).

   However, trustees’ tort claims against defendants do not have to be barred by the in pari delicto doctrine as a threshold matter. Courts can, and should, take the time to analyze the facts and the law on a case-by-case basis and carefully consider whether such extraordinary relief should be applied against a trustee because it would permit a defendant to skate free of liability in a fraud case.

   One opinion in a Ponzi scheme case recently analyzed the application of in pari delicto to a bankruptcy trustee. The court in that case thoughtfully wound its way through the doctrine and the layers of exceptions to the doctrine, finding that in pari delicto would not bar the trustee’s claims – at least not at the motion to dismiss phase of the case. Anderson v. Cordell (In re Infinity Business Group, Inc.), 2013 Bankr. LEXIS 4053 (D.S.C. June 19, 2013).

   In Infinity Business, the court found that the trustee’s complaint sufficiently alleged that the law would not impute to the debtor the acts and knowledge of the debtor’s agents because those agents were acting fraudulently against the debtor and the agents participated in the fraud.

   The court also found that the adverse interest exception to the doctrine would apply to bar imputation, and that the sole actor exception to the adverse interest exception would not apply. “Without a demonstration that liability for the Management Defendants’ acts and knowledge would be imputed to the Debtor, the MK Defendants are unable to show that the Debtor (and thus the Trustee standing in the shoes of the Debtor) bears equal or greater fault for the alleged tortious conduct as they do, and thus the defense of in pari delicto would not apply.” Id. at *56.

   The court in that case speculated as to the standard that South Carolina would apply for the adverse interest exception and assumed a stringent standard of “total abandonment.” The court then found that “even under the total abandonment standard, which is the most stringent standard suggested by the MK Defendants, the Complaint sufficiently alleges facts to plausibly suggest that that there was a total abandonment of the Debtor’s interest in this case such that the adverse interest exception would be applicable to bar imputation of liability to Debtor.” Id. at *43-4.

   In next considering “sole actor” exception to the adverse interest exception, the court noted the law that “even if an agent’s actions are totally adverse to the corporation, if the agent is the sole agent or sole shareholder of a corporation, the agent’s knowledge and conduct will be nevertheless imputed to the corporation and therefore in pari delicto would apply to bar the Trustee's claims.” However, the court made no such finding w in the case, because of the further exception to the exception to exception, known as the “innocent decision-maker rule.” 

[W]here only some members of management are guilty of the misconduct, and the innocent members could and would have prevented the misconduct had they known of it, the culpability of the malefactors should not be imputed to the company because that imputation would punish innocent insiders (e.g. non-culpable shareholders) unfairly.

Id. at *52, n.14 (citation omitted).

   The court again turned to the specific allegations in the trustee’s complaint, finding that the allegations in the complaint “plainly state that the Management Defendants did not have complete control over the Debtor, that the Innocent Directors were unaware of the Management Defendants’ Scheme, and that the Innocent Directors had the authority and control necessary to stop the fraud.” Id. at *54.

   While the facts of the case are important here, more significantly is the court’s willingness to recognize the gravity of the application of the in pari delicto doctrine to bar a trustee’s claims and to use the facts alleged in the complaint as the hook to avoid apply in pari delicto doctrine to bar the trustee’s claims.

   The trustee’s lawyers in Infinity Business made it easy for the court. They included language in the complaint on which the court could hang its hat in not applying in pari delicto.  The lesson to be learned from this case for bankruptcy trustees and their attorneys is to be very thorough at the pleading stage and to think through each of the layers of the in pari delicto doctrine before filing the complaint. Remember, there is the rule, the exception, the exception to the exception, and then the exception to the exception to the exception. If trustees stand any chance of avoiding the application of the in pari delicto doctrine, they must allege facts in their complaints that take the analysis all the way down the winding path to the finish line.