Posted by Kathy Bazoian Phelps
The volume of news stories reported in November 2013 in Ponzi scheme cases remained high. Below is a summary of the activity reported. 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, received permission to continue to practice law under supervision while criminal charges remain pending against him for his alleged role in the Scott Rothstein Ponzi scheme case. Bates is accused of assisting Rothstein with about $60 million of his Ponzi scheme by lying to investors and providing fraudulent legal opinions and other documents that Bates allegedly knew were untrue on his firm’s letterhead. Bates pleaded not guilty and the lower court barred Bates from practicing law as a condition of his release pending trial, saying there was evidence that he had “committed horrific breaches of his duties and responsibilities.” The district court approved an agreement between the prosecution and defense that allows Bates to practice law under the strict supervision of an
Craig Berkman, currently serving time in prison for two different Ponzi schemes, is watching his investors fighting over the few dollars that are available for distribution. Berkman was found guilty five years ago, and investors in the first Ponzi scheme were awarded $28 million. Creditors forced Berkman into bankruptcy and ultimately reached a settlement where Berkman paid $4.75 million to the trustee in his bankruptcy case, which was distributed to creditors. Investors in a new scheme in which Berkman was purportedly selling an investment in Facebook and in which they invested $13 million, claim that the $4.75 million paid to earlier investors was their money. The trustee says that the new investors’ claims are bogus because Berkman paid the earlier investors before he was raising money from the Facebook investors.
Annette Bongiorno, 64, Joann Crupi, 52, Daniel Bonventre, 66, George Perez, 47, and Jerome O’Hara, 50, continued with their trial for their respective roles in the Bernard Madoff Ponzi scheme. A former trader at Madoff’s brokerage, David Kugel, told the jury that he created fake trading data for customer accounts but made sure the fake trades looked realistic. Kugel pleaded guilty to fraud 2 years ago and is still awaiting sentencing. Other employees and witnesses have testified in the case which is expected to last several months.
Ronald Lee Brito, 62, of Michigan, was sentenced to 12 years and ordered to pay more than $12 million in restitution in connection with his Ponzi scheme that he ran through GetMoni.com. At least 250 investors lost more than $16 million. Others who pleaded guilty to the scheme are Bonnie Brito, John Missitti, and Thomas Moore, who were sentenced to 18 months, 6 years and 6 years, respectively.
Jack Brown’s son, Jason Brown, apologized to creditors for his father’s $12 million Ponzi scheme. Jason Brown has denied having any role in the Ponzi scheme but has admitted to working as a partner with his father in a number of businesses and signing checks for Brown’s Tax Service.
Jim Donnan and Gregory L. Crabtree had their criminal trial delayed until May 2014 due to what they cite as a large amount of evidence and need for more time to prepare and negotiate an alternative disposition. The two defendants are charged with running a Ponzi scheme through GLG Limited that promised investors returns of 50% to 200% on short-term investments. The indictment alleges Donnan took $8.5 million and Crabtree took $1.7 million, while investors lost $23 million. Both pleaded not guilty.
John S. Dudley, 59, was sentenced to 5 years in prison and ordered to pay back $6.8 million in connection with a $12 million Ponzi scheme that defrauded approximately 100 investors. Dudley promised investors returns of 5% to 10% from forex trading, mining speculation and a human jetpack rocket suit. Dudley held investment club meetings known as “bounce nights” or “Tashi group meetings” and told investors that their investments were protected from loss by a “senior life settlement policy.” Dudley initially pleaded not guilty but later agreed to a guilty plea on one count of wire fraud. It is expected that Dudley will be deported back to Great Britain after serving his sentence.
Ronald Jerry Fast, 70, pleaded guilty to charges in connection with a $16 million Ponzi scheme that he ran though Marathon Leasing Corp. The scheme promised investors 12% returns, but the financial prospectus bore no relationship to the actual performance of the company. Promised returns were paid from money invested by new investors or existing investors who bought even more shares in the company. Fast’s daughter, Danielle Fast-Carlson, has also been charged in connection with the scheme, and her trial has been continued until December.
Richard Freer, 67, waived his preliminary injunction hearing and will face trial in connection with his alleged $10 million Ponzi scheme. The scheme allegedly defrauded 90 victims, most of them elderly, and involved reverse mortgages and retirement and college education funds.
Charles Lawrence Kennedy, Jr., 71, pleaded guilty to a $5 million Ponzi scheme that defrauded about 100 investors. Kenney, along with co-defendants Stanley Wayne Anderson and Edwin Alexander Smith ran the scheme through Kennedy’s company, Keys to Life Corporation, which promised investors that for every $1,000 invested, the minimum return would be $1 million to be paid within 90 days. The scheme promised returns through trading of European medium-terms notes issued by European financial institutions. Keys to Life partnered with two other companies as well, Trinity International Enterprises, Inc. and CFO-5, LLC. Kennedy solicited money from fellow pastors and members of their congregations, but used most of the money for personal expenses.
Jeffrey J. Kinseth, 58, was sentenced to more than 4 years in prison and ordered to pay $1.1 million in restitution after he pleaded guilty to charges in connection with a $1 million Ponzi scheme. Kinseth solicited funds from 11 investors, promising substantial returns, but issued phony account statements showing fictitious returns instead.
Christina Kitterman may get a personal appearance by Scott Rothstein at her criminal trial. Kitterman is charged with aiding Rothstein’s Ponzi scheme. The court ordered Rothstein to appear at her upcoming criminal trial. Kitterman is an attorney who formerly worked at Rothstein’s firm, and she has been charged with posing as a Florida Bar investigator to help Rothstein fool investors.
Anthony J. Lupas, 78, a former attorney, was declared not competent to stand trial on charges in connection with an alleged $6 million Ponzi scheme that promised investors annual tax-free returns of at least 5%. The government decided not to appeal the decision. Last year, a state fund supported by attorney registration fees in Pennsylvania announced that the fund would pay $3.25 million to Lupas’ victims.
Brian Williams McKye, 49, of Oklahoma, was found guilty after less than 90 minutes of deliberation by the jury. McKye ran a $4.5 million Ponzi scheme through Global West Funding, Global West Financial, Sure Lock Financial, Sure Lock Loans, and The Wave-Goldmade Ltd., by selling investment notes and promising investors monthly returns of 6.5% and up to 20% for 6 to 60 months. McKye defrauded 83 investors by promising them that they had “100 percent total control” over their money and that their investments were secured by risk-free real estate notes.
Phil Ming, owner of WCM777, acknowledged that WCM777 was selling unregistered securities in the U.S. The Massachusetts securities division has banned WCM777 from business operations in the state of Massachusetts, and the company has been ordered to refund over $300,000 to participating investors. WCM777 announced that it is closing its US operations and relocating back to Hong Kong. However, it was reported that WCM777 is still accepting US funds for investment via Global Payout, a California-based payment processor. Columbian President Juan Manuel Santos ordered a police investigation of WCM777 last month to investigate allegations that it is a Ponzi scheme. The program guarantees returns of over 100% after 100 days.
Al Moriarty, 80, deposited almost $10 million of investor funds into his personal account, the testimony revealed at his trial. Moriarty, a Cal Poly football Hall of Famer, is facing charges in connection with a $12 million Ponzi scheme. Investors were told that their funds would be lent to educators for home purchases and that they would be repaid in monthly payments at 10% interest over 5 years. Moriarty also promised that their investments were backed by his personal gold and real investments and his personal life insurance policy should anything happen to him.
Christopher A.T. Pedras and his companies, Maxum Gold Bnk Holdings Limited and Maxum Gold Bnk Holdings, LLC, were the subject of an emergency asset freeze sought by the SEC in connection with an alleged $5.6 million Ponzi scheme that defrauded at least 50 investors. Pedras promised investors 4% to 8% monthly returns for investing in a trading platform in which Maxum Gold supposedly served as an intermediary between global banks. Sylvester M. Gray II and Alicia Bryan allegedly assisted in soliciting investors for the program. More recently, the three began soliciting investments in a New Zealand company called FMP Medical Services Limited that was to be publicly traded and operate kidney dialysis clinics in New Zealand. More than $2.4 million was used to pay fictitious returns to investors, $1.2 million was paid in sales commissions, and more than $2 million was used by Pedras for personal expenses.
Bruce Prevost, David Harrold and Michelle Palm were sentenced to 7½ years, 5 years, and 3 years of probation, respectively, for their role in misleading investors in the Tom Petters' $3.65 billion Ponzi scheme through feeder funds Palm Beach Capital Management and Arrowhead Capital Management. Palm testified against James Fry, Arrowhead’s founder, who was sentenced to17½ years, and Palm’s did not profit personally from the scheme. None of the three defendants were accused of knowing about the Petters’ Ponzi scheme, but they misled investors about how their firms received payments. Prevost and Harold lost about $720 million for clients investing in the Petters’ scheme, and they collected more than $58 million in fees and commissions.
Carmelo Provenzano, 31, was sentenced to 33 months in prison and ordered to pay $4.5 million in restitution to 13 victims in connection with a $4 million Ponzi scheme run with co-conspirators George Sepero, 40, and Daniel Dragan, 43. The scheme claimed that hedge funds were run using a secret computer program could deliver high returns as much of 170% on investments in foreign currency markets.
Bebe and Marco Ramirez, the principals of USA Now Regional Center, were the subject of a civil forfeiture action in which the couple’s Mercedes and Dodge Ram were forfeited. USA Now ran a scheme that was supposed to take foreign investors’ money and invest in projects that create jobs in exchange for U.S. green cards. None of USA Now’s investors received even conditional approval for a U.S. immigration visa in exchange for their $500,000 investment. No criminal charges have yet been filed against Bebe or Marco Ramirez.
Richard Reynolds aka Richard Adkins, 52, had his request to dismiss the case against him denied. Reynolds is accused of stealing more than $5.8 million for investors. He requested that his case be dismissed because his right to a speedy trial had been violated. His trial is scheduled to begin in December.
Sorin Rivera fka Valerie D’Andrea, 39, was charged with running a $347,000 Ponzi scheme that defrauded 7 victims. Rivera changed her name after she filed bankruptcy in 2008. Between 2004 and 2008, Rivera ran an investment scheme that promised investors up to 55% returns. Rivera never worked for a securities or commodity firm. She lists “Equity Options Trader” as her occupation on her Facebook page.
Kim Rothstein, 39, wife of Ponzi schemer Scott Rothstein, filed for divorce and was sentenced to 18 months in prison for hiding jewelry worth about $1 million from authorities following Scott Rothstein’s arrest. Kim claimed that Scott Rothstein had urged Kim to stash the jewelry as insurance and was doing this even while he was supposedly cooperating with authorities in the hope of getting a downward departure from the federal sentencing guidelines. Kim’s sentencing judge cut 6 months of the 2 year sentence recommended by the U.S. Attorney’s office. Kim also agreed to pay $515,000 and turnover other jewelry and valuable items.
Ryan Edward Rude, 40, was sentenced to 26 years in prison and ordered to pay $2.9 million in restitution in connection with his $4.8 million Ponzi scheme that defrauded investors in California, Colorado and Arizona. Rude defrauded investors in his real estate scheme by promising them secured interests in property development projects, but instead used their money to pay other investors or for his personal use.
Matthew J. Ryan saw his office building in which he ran his $4.8 million Ponzi scheme sold by the local government. Ryan is serving a 10 year 1 month prison sentence for his scheme that defrauded 53 investors through his real estate business, Prime Rate & Return.
Feisal Sharif was ordered to pay more than $2.2 million to defrauded victims and was also fined $900,000 in connection with a $5.4 million Ponzi scheme run through First Financial LLC. Sharif defrauded at least 50 victims in a commodity futures trading pool.
Ronald W. Shephard, 74, pleaded guilty and was sentenced to 2 years in prison and ordered to pay about $1,825,000 in restitution in connection a $3 million Ponzi scheme run through Safety Solutions USA LLC and The Real Estate in Lee’s Summit. The scheme defrauded about 39 investors and promised them 15% to 100% annual returns from securities trading even though Shephard was not registered to sell securities in Missouri and had been issued a cease and desist order barring him from doing so. Safety Solutions had developed a trailer hitch called Tow-Safe, but Shephard did not tell anyone that his patent request had been rejected or that the state had ordered him to stop selling unregistered securities.
Wesley A. Snyder, 77, lost his third appeal seeking a new trial in connection with his conviction in connection with his $29 million Ponzi scheme run through his firm, Personal Financial Management, that defrauded about 800 investors. Snyder had pleaded guilty and was sentenced to 12 years in prison, but has repeatedly asked that his guilty plea and sentence be overturned and that he be allowed to go to trial. He claims that his guilty plea requires him to have defrauded customers, but that he never intended to defraud anyone.
Louis J. Spina, 56, was charged in connection with an alleged $18 million scheme that defrauded 28 investors through his company LJS Trading LLC. Spina promised investors monthly returns of 9% to 14% by using an algorithmic trading software to invest their funds. Spina used misleading screen shots of his trading account that showed inflated balances and gains. Spina lost about $8 million in trading and spent the balance making payments to investors and for personal expenses, including car payments, an apartment rental and a donation to a university.
Yin Nan (Michael) Wang and Wendy Ko and their company Velocity Investment Group were the subject of an asset freeze and fraud charges brought by the SEC. They are accused of raising more than $150 million from over 2,000 investors. Velocity managed unregistered investment funds known as Bio Profit Series which supposedly were making real estate loans in California. The investors received promissory notes and were promised returns from 8% to 300%. Wang is also accused of running another company, Rockwell Realty Management, in connection with the scheme.
INTERNATIONAL PONZI SCHEME NEWS
Canada
Arlan Galbraith, 66, pleaded not guilty to charges in connection with the $20 million Ponzi scheme run through Pigeon King International. Galbraith initially said he was breeding pigeons for sport but later claimed he was planning processing plants to produce pigeon meat for the consumer market. Investors were to buy pairs of breeding birds for up to $500, and Galbraith was to buy the offspring back at fixed prices over the life of 5 or 10 year contracts. At his trial, Galbraith testified that he resorted to eating his own pigeons after the company collapsed in 2008. The Ontario government has spent about $100,000 to dispose of about 175,000 pigeons that remained in the barns at the time of the bankruptcy of the company.
Rashida Samji aka Rashida Makalai, 60, of Vancouver, was charged in connection with an alleged $17 million Ponzi scheme that defrauded 14 investors. Samji had represented to investors that their funds would be placed in a “secure” investment in a winery that would yield 6% to 30% annually. It is alleged that this scheme was part of a larger scheme that defrauded about 218 investors of $83 million. Samji allegedly took the investors’ funds and put them into accounts in the names of her companies, Notary Corp. and Samji & Assoc. Holdings Inc.
China
A Chinese trading website for the virtual currency, Bitcoin, was shut down based on allegations that it was operating a Ponzi scheme. The Hong Kong-registered site, Global Bond Limited, had around 500 users, and the combined losses may total $3.28 million.
Wang Xiaoqing, 30, was sentenced to life in prison for orchestrating a $4.9 million (30 million yuan) Ponzi scheme. Xiaoqing offered investors double-digit returns and told investors their funds would be used to build a hotel. Instead Xiaoqing used the money to fund an extravagant lifestyle.
Dubai
Malik Noureed Awan, 28, the CEO of MMA Forex, was sentenced to 2 years on prison in connection with charges related to an online foreign exchange Ponzi scheme.
Germany
The Frankfurt Regional Court bundled cases together that are linked to the $466 million Ponzi scheme run by Helmut Kiener and his K1 Group hedge fund. Investors filed lawsuits against Barclays Plc alleging that Barclays failed to properly investigate the X1 Global Index certificates it had issued. Kiener was convicted in 2011 and sentenced to 10 years and 8 months in prison after confessing to the scheme.
India
Gold bars and silver coins were seized from the locker of Prashant Dash held at HDFC Bank. Prashant Dash has been accused of running a Ponzi scheme through Seashore Group, which ran 9 companies. Authorities sought permission to attach properties of Seashore Group.
G Ratna Kumari and R Pandu were arrested and accused of defrauding about 100 investors, promising them higher returns and commissions for enrolling other investors in the scheme.
Shivraj Sharma was arrested in connection with a scheme run through Eve-Miracles, a multi-level marketing company that allegedly defrauded than 1.2 lakh unsuspecting investors of over Rs 141 crore.
MP Kunal Ghosh was arrested in connection with the Saradha Ponzi scheme. The Saradha group allegedly defrauded investors of over Rs. 2,300. Ghosh claims he is being made a scapegoat and that he was not involved in the scheme.
New Zealand
Convicted Ponzi schemer David Ross, 63, was sentenced to 10 years and 10 months in prison in connection with the $385 million Ponzi scheme that he ran through Ross Asset Management. Ross defrauded over 700 investors promising them guaranteed returns of up to nearly 40%. Ross had pleaded guilty to certain charges in connection with the scheme in August 2013.
Scotland
Stewart Kennedy was disqualified from acting as a company director for 12 years due to his conduct in connection with an alleged Ponzi scheme in which he invited people to invest £15,000 each in an “Easyearn Franchise,” which purportedly would pay returns from fees paid by businesses and individuals in return for advice on how to reduce their monthly bills. It is alleged that Kennedy’s company, CRS2010, collected £357,500, of which £71,000 was used for Kennedy’s personal benefit.
South Africa
Funds in the amount of R54-million were seized from the Ponzi scheme of Barry Tannenbaum, which boosted the funds held in the asset forfeiture unit of the National Prosecuting Authority to R82-million. Tannenbaum had defrauded 800 investors out of about R13-billion.
United Kingdom
Richard Pollett, 71, was ordered to pay back more than £ 90,000 as compensation to the victims of a £10 million Ponzi scheme run by Pollet and John Hirst. Pollett is a former accountant who helped Hirst defraud investors.
Ruth Kevan, 58, was sentenced to 2½ years in prison in connection with a £160,000 Christmas savings Ponzi scheme. Kevan exploited a Christmas savings club that had been running for decades with her colleagues while she was working at HM Revenue and Customs. Kevan took over the club in the 1970s and promised investors returns of 14.5%. About 40 investors lost funds.
Caryn Bates, 41, and Matthew Sullivan, 53, were sentenced to 5½ years and 7 years, respectively, in connection with a £2 million Ponzi scheme that they ran through World Trading in which they were purportedly trading stocks and bonds. About 40 victims were defrauded when they were promised guaranteed returns of between 2% and 5% per month.
Faye Gale, 31, the former wife of David Gale, 45, appealed a ruling that she pay £700,000 of liability stemming from David Gale’s operation of a Ponzi scheme. The lower court cleared her of any dishonesty or guilt, but ruled that she would still have to pay the bills.
NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES
In connection with the Creative Capital Consortium LLC Ponzi scheme, a court declined to grant summary judgment to Wells Fargo Bank in connection with claims brought by Franz Lesti, Petra Richter and others alleging that the bank knowingly or negligently assisted one of its customers in connection with the Ponzi scheme. Wells Fargo allegedly allowed a bank account to stay open long after it became aware of fraudulent conduct.
Victims of the Ponzi scheme run by Dante DeMiro, 46, will receive about $2 million in restitution payments from an asset forfeiture fund with the U.S. Attorney’s office. The bankruptcy trustee has separately recovered $2.6 million in nonforfeited assets. DeMiro was sentenced to 10 years in prison in 2011 and ordered to pay $12.9 million in restitution to his victims in connection with his scheme run through MuniVest Services.
Victims of the J.V. Huffman $25 million Ponzi scheme may receive between 10% and 15% on their claims. About $2.3 million is to be divided among 340 victims whose losses total $22 million. Huffman spent the victims’ funds on luxury items such as a 1939 Cadillac, memorabilia from the “I Love Lucy” show and artwork.
The district court issued a decision in the Bernard Madoff case that preserves claims of the Madoff trustee against subsequent transferees. The court held that the law does not require the trustee to obtain final judgments against initial transferees before suing subsequent transferees and also held that the trustee’s claims were timely filed against the subsequent transferees as they were filed within one year of a settlement with the initial transferee.
The Securities Investor Protection Corporation joined in the request of the Bernard Madoff trustee that the Supreme Court hear an appeal of the ruling barring the trustee from suing JPMorgan Chase and other banks for their failure to take action to report and stop suspicious activity by Madoff. SIPC is urging the Supreme Court to consider the case, arguing that allowing the lawsuits to proceed would give Madoff’s customers "the greatest and most equitable pro rata distribution of their lost investments as Congress intended."
The Special Master appointed to administer $2.35 billion in forfeited funds in the Madoff Ponzi scheme has announced his distribution plans to pay victims. Investors who were not directly invested in the Madoff scheme are not “customers” under the SIPA statute and have not received payments from the Madoff trustee or SIPA, but may receive funds as “victims” under the forfeiture statutes. The claims bar date for victims is February 28, 2014. The Special Master’s website is at www.madoffvictimfund.com. As a result of the announcement, a planned $800 million settlement between Kingate Management and the Madoff trustee broke down. Kingate, one of the largest investors in the Madoff scheme, would not be entitled to payment from the $2.35 billion victim fund according to the new announcement by the Special Master, which changed the settlement terms for Kingate.
A state appellate court reversed the lower court’s ruling in Frederick Darren Berg’s Meridian Mortgage Ponzi scheme case that the trustee should pay $74,000 to the Moss Adams accounting firm. The appellate court found that the sanctions order was not proper because the trustee had asked for dismissal of his state-court lawsuit against Moss Adams before the order. The court had instructed the trustee to identify which investor relied on which audit before proceeding with the litigation. However, while considering the trustee’s to request to withdraw the lawsuit so the trustee could refile it in federal court, the lower court imposed the $74,000 sanction. The Meridian Mortgage scheme involved about $100 million and 600 investors.
The court presiding over the criminal trial of Stephen Merry, Timothy Durkin, David Petersen and Yaman Sencan declined to allow a government witness to testify by video. The defendants are accused of running a $5 million Ponzi-like scheme between 2009 and 2012. The witness is in poor health and cannot travel, but the government argued that the witness’s testimony is “critical to the case.” The court held that the prosecution waited too long to file the motion for live-videotaping of the witness and that there was not enough evidence to justify keeping the defendants from facing the witness in person.
The law firm of Band Weintraub PL will pay nearly $1 million to settle claims that it was part of a conspiracy to hide money from the receiver in the Arthur Nadel Ponzi scheme. The receiver had alleged than David S. Band, who left Band Weintraub earlier in the year, helped his client Donald Rowe conceal assets from the receiver. The receiver had obtained a $4 million judgment against Rowe but was told that Rowe did not have money to satisfy the judgment. In fact, more than $2.5 million was in a trust account at Band Weintraub which was transferred back to Rowe. Band Weintraub does not admit any liability and purportedly settled at the insistence of its insurance company.
Defrauded victims in the New Age Title Co. alleged Ponzi scheme won a $21.5 million jury verdict against various parties for their involvement in the scheme. The jury awarded punitive damages of $10 million against Wells Fargo, $5 million against New Age Title Co, $6 million against New Age’s real estate attorney, David Mour, and $500,000 against Forcht Bank, in addition to about $500,000 in compensatory damages. New Age Title, owned by Ivan DeLeon and Jeana Kaufman, did a refinance of the victims’ home but failed to pay off the original mortgage. The check sent to Wells Fargo to payoff the original loan was stopped, Wells Fargo contacted New Age about the bad check, and Mour helped arrange a deal for Kaufman and DeLeon to pay the victims’ monthly mortgage payments. A check to Wells Fargo bounced and instead of reporting fraud, Wells Fargo reported the victims as delinquent to credit agencies.
A district court declined to dismiss a lawsuit filed against U.S. Bank related to the Peregrine Financial scheme brought by the CFTC. The CFTC alleges that U.S. Bank allowed Peregrine founder Russell Wasendorf to raid what should have been a segregated customer account and that Wasendorf stole more than $215 million from that account. U.S. Bank disputes many of the allegations in the complaint.
The bankruptcy court presiding over the Tom Petters case agreed to consolidate nine bankruptcy cases, finding in part that consolidation would save benefit money and benefit creditors. The trustee administering the Petters corporate bankruptcy case stated that the consolidation “solidifies my ability to pursue the large hedge funds. The hedge funds argued that they were “special purpose entities” that were established to secure their investments with Petters.
Victims of Ponzi schemer Thomas Redmond Jr. are receiving $46,000 in restitution payments from the Indiana Securities Restitution Fund to help recover some of their losses. Redmond defrauded 10 victims out of more than $580,000. The fund can pay up to $15,000 or 25% of unrecovered losses, whichever is less.
The ZeekRewards receiver filed a quarterly reporting indicating that he intends to pursue claims against about 700 financial institutions who he alleges improperly stopped payment on more than 7,500 cashier’s checks and money orders in violation of an asset freeze. The receiver also identified that he is evaluating pursuit of about 77,000 net winner investors for recovery of fraudulent transfers in the amount of about $283 million, including many of them who reside outside of the United States. The receiver also disclosed that he had settled with nearly 155 net winners for $2.235 million on false profits of $3.94 million. An auction of buildings and personal property of ZeekRewards is scheduled for mid-December.
Sen. David Vitter, Sen Charles Schumer, Rep. Scott Garrett and Rep. Carolyn Maloney introduced legislation called the Restoring Main Street Investor Protection and Confidence Act to assist defrauded investors in filing claims against brokers, giving the SEC greater power to oversee the process of determining whether customers of failed brokerages qualify for compensation. The legislation appears to arise from the ongoing battle in the Stanford Financial case between SIPC and the SEC over whether defrauded Stanford victims are entitled to payment from SIPC. SIPC has refused to pay Stanford victims, contending that Stanford investors do not meet the legal definition of “customers” that would entitled them to payment. The bill would, among other things, amend the definition of “customer” so that investors who deposit cash to buy securities can still be covered by SIPC protection even if the money is initially given to a firm that is not a SIPC member.
Saturday, November 30, 2013
Sunday, November 24, 2013
Who Are the Victims in the Bernard Madoff Ponzi Scheme?
Posted by Kathy Bazoian Phelps
People lose money in Ponzi schemes. They may have invested directly, or perhaps through a feeder fund. Or maybe they invested in a limited partnership that itself invested in the Ponzi scheme. When the Ponzi scheme implodes, people want their money back.
Recent activity in the Bernard Madoff scheme raises the question of the best methodology to get money back to the people who have been defrauded. The various agencies of the U.S. government operate under different statutory authorities with varying objectives and sometimes competing methodologies for reimbursing the defrauded.
SIPA Payments to “Customers”
In a proceeding under the Securities Investor Protection Act (SIPA) – which the Madoff scheme is – “customers” of the Ponzi scheming entity are entitled to protection and payment from the Securities Investor Protection Corporation (SIPC), administered by the appointed trustee. In the case of Madoff, the SIPA Trustee is Irving Picard, who has been reimbursing customers as statutorily required and pursuant to the court approved parameters of who is a “customer.” SIPA, 15 U.S.C. § 78lll(2)(A), defines a "customer" of a debtor as follows:
Forfeited Funds to “Victims”
In the meantime, the U.S. government has forfeited about $2.35 billion of additional funds, which can now be distributed to those who were defrauded. Under a variety of criminal and civil forfeiture statutes, payment of forfeited property is to be made to “victims” under the supervision of the Department of Justice (DOJ). Richard Breeden has been appointed as Special Master for the purposes of distributing this forfeited property. His website is at www.madoffvictimfund.com.
The Special Master will be paying the money to “victims,” which are a different set of claimants from the “customers” who are receiving payments from the Trustee, although there may be some overlap. The Special Master explains on his website that:
The good news is that both the Trustee and the Special Master appear to be calculating claims using the same or similar net investment method. Under that method, they will calculate the net equity amount of the claim by deducting withdrawals and redemptions received by investors from the amount of their investments made. They just may not be dealing with the same creditor body in doing the math, however.
The bad news is that the different definitions of “customer” and ‘victim” will lead to very different and potentially inconsistent results. Someone who is a “customer” for the Trustee’s purposes might not be a “victim” entitled to the forfeited funds, e.g., a feeder fund or a family partnership, but the individual investor in such an entity would be a “victim.”
There is an obvious mountain of work ahead of the Special Master in trying to identify the massive number of individual “victims.” This seems a virtually impossible task at this point. Some feeder funds have gone out of business, and it is unclear whether the Special Master has access to the databases of investor names who had their money invested in the Madoff scheme, whether directly or indirectly. It is also not entirely clear that the victims themselves necessarily know that their money was invested in the Madoff scheme if their funds were placed in the scheme through a feeder fund.
In one other complication, the Special Master has announced that he will not make a distribution to claims purchasers. Once a victim, always a victim, says the Special Master, meaning that purchasers of claims will not be entitled to payment of the forfeited funds from the Special Master. Presumably the “victims” who are contractually obligated to transfer their rights in their claims, including rights to forfeited property, to the purchaser will still be obligated to pass on any distribution received to the claims purchaser.
One has to wonder whether this will spawn the next layer of litigation in the unraveling of the Madoff Ponzi scheme. Reports are that the inconsistent distribution plans and the Special Master’s recent disclosure of his plan have caused a decline in the price of Madoff claims on Wall Street – about a 5% decline in the price for victims’ claims and as much as a 15% drop in the claims of feeder funds.
Is one distribution plan right, and one wrong? Both the Trustee and the Special Master appear to be doing their jobs. By statute, they just have different jobs to do. Let’s just hope that the people who were defrauded can ultimately get their money back through what has become a very complicated and cumbersome process. At least there is a decent amount of money to distribute – almost $12 billion – on about $19.5 billion in losses. What’s a $6.5 billion deficiency among friends? Hopefully more is to come.
To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.
People lose money in Ponzi schemes. They may have invested directly, or perhaps through a feeder fund. Or maybe they invested in a limited partnership that itself invested in the Ponzi scheme. When the Ponzi scheme implodes, people want their money back.
Recent activity in the Bernard Madoff scheme raises the question of the best methodology to get money back to the people who have been defrauded. The various agencies of the U.S. government operate under different statutory authorities with varying objectives and sometimes competing methodologies for reimbursing the defrauded.
SIPA Payments to “Customers”
In a proceeding under the Securities Investor Protection Act (SIPA) – which the Madoff scheme is – “customers” of the Ponzi scheming entity are entitled to protection and payment from the Securities Investor Protection Corporation (SIPC), administered by the appointed trustee. In the case of Madoff, the SIPA Trustee is Irving Picard, who has been reimbursing customers as statutorily required and pursuant to the court approved parameters of who is a “customer.” SIPA, 15 U.S.C. § 78lll(2)(A), defines a "customer" of a debtor as follows:
[A]ny person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.The Second Circuit, has narrowly interpreted “customer,” finding that "the critical aspect of the 'customer' definition" to be "the entrustment of cash or securities to the broker-dealer for the purposes of trading securities." In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011); see also Kruse v. SIPC (In re Bernard L. Madoff Inv. Sec. LLC), 708 F.3d 422 (2d Cir. 2011). This means that the feeder funds that directly invested in the Madoff scheme are customers, but not the individuals who invested in the feeder funds. The Trustee has collected about $9.5 billion, of which more than $5.4 billion has already been distributed to customers. Information about claims and his distribution plan can be found at his website at www.madofftrustee.com/claims-03.html.
Forfeited Funds to “Victims”
In the meantime, the U.S. government has forfeited about $2.35 billion of additional funds, which can now be distributed to those who were defrauded. Under a variety of criminal and civil forfeiture statutes, payment of forfeited property is to be made to “victims” under the supervision of the Department of Justice (DOJ). Richard Breeden has been appointed as Special Master for the purposes of distributing this forfeited property. His website is at www.madoffvictimfund.com.
The Special Master will be paying the money to “victims,” which are a different set of claimants from the “customers” who are receiving payments from the Trustee, although there may be some overlap. The Special Master explains on his website that:
Federal law defines a "victim" as "any person" who suffered a "pecuniary loss" as a "direct result" of crime. “Those who invested directly with Madoff or in one of the feeder funds – those who “lost your own money” - will be entitled to a distribution. There may be 10,000 or more “victims” who otherwise are not receiving a payment directly from the Madoff Trustee.The Special Master’s website also attempts to explain the differing approaches as between the distribution of the forfeited funds and the distributions being made in the SIPA proceeding:
[T]hese two programs exist to pursue different objectives. The forfeiture program is designed to help all persons who suffered a pecuniary loss as a direct result of criminal activity. It is a very broad program designed to help the victims of crime recover a portion of their pecuniary losses resulting from the criminal activity giving rise to the forfeiture of assets. The MVF and similar forfeiture programs are an integral part of the Department's efforts to deter criminal activity by taking away its profits. Beyond deterring crime, the program also provides a measure of "justice," or fairness, to the victims of crime when it does take place. The ultimate policy objectives of the forfeiture laws are promoting law enforcement and providing recoveries for crime victims.
By contrast, the Bankruptcy Code and the Securities Investor Protection Act (or "SIPA") (which overlays the Bankruptcy Code in the case of Madoff Securities) are narrower sets of laws designed to establish the relative priorities of "customers" and "creditors." Bankruptcy proceedings are enormously important to the U.S. economy, but the goals of bankruptcy are commercial. The two programs have different objectives, and so they may have different results.The inconsistent distributions plans are causing some confusion and consternation.
- Are the right people being paid?
- Can all of the “victims” even be located?
- Are the Trustee and the Special Master calculating claim amounts in a similar and consistent fashion, or might different mathematical calculations lead to inconsistent results?
- As between the payments made by the Trustee and the payments to be made by the Special Master, will anyone examine whether there is any duplication or overpayments to any particular individual?
- What happens to victims’ claims that have been purchased in the claims trading process?
The good news is that both the Trustee and the Special Master appear to be calculating claims using the same or similar net investment method. Under that method, they will calculate the net equity amount of the claim by deducting withdrawals and redemptions received by investors from the amount of their investments made. They just may not be dealing with the same creditor body in doing the math, however.
The bad news is that the different definitions of “customer” and ‘victim” will lead to very different and potentially inconsistent results. Someone who is a “customer” for the Trustee’s purposes might not be a “victim” entitled to the forfeited funds, e.g., a feeder fund or a family partnership, but the individual investor in such an entity would be a “victim.”
There is an obvious mountain of work ahead of the Special Master in trying to identify the massive number of individual “victims.” This seems a virtually impossible task at this point. Some feeder funds have gone out of business, and it is unclear whether the Special Master has access to the databases of investor names who had their money invested in the Madoff scheme, whether directly or indirectly. It is also not entirely clear that the victims themselves necessarily know that their money was invested in the Madoff scheme if their funds were placed in the scheme through a feeder fund.
In one other complication, the Special Master has announced that he will not make a distribution to claims purchasers. Once a victim, always a victim, says the Special Master, meaning that purchasers of claims will not be entitled to payment of the forfeited funds from the Special Master. Presumably the “victims” who are contractually obligated to transfer their rights in their claims, including rights to forfeited property, to the purchaser will still be obligated to pass on any distribution received to the claims purchaser.
One has to wonder whether this will spawn the next layer of litigation in the unraveling of the Madoff Ponzi scheme. Reports are that the inconsistent distribution plans and the Special Master’s recent disclosure of his plan have caused a decline in the price of Madoff claims on Wall Street – about a 5% decline in the price for victims’ claims and as much as a 15% drop in the claims of feeder funds.
Is one distribution plan right, and one wrong? Both the Trustee and the Special Master appear to be doing their jobs. By statute, they just have different jobs to do. Let’s just hope that the people who were defrauded can ultimately get their money back through what has become a very complicated and cumbersome process. At least there is a decent amount of money to distribute – almost $12 billion – on about $19.5 billion in losses. What’s a $6.5 billion deficiency among friends? Hopefully more is to come.
To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.
Sunday, November 17, 2013
Receiver First, Bankruptcy Second: No In Pari Delicto Bar in a Ponzi Scheme Case
Posted by Kathy Bazoian Phelps
In Pari Delicto – “in equal fault.” This is a powerful defense that can completely bar a plaintiff’s claims against a third party where both the plaintiff and defendant were engaged in wrongful conduct.
A recent bankruptcy decision ratified an infrequently used tactic to avoid the bar of in pari delicto to a trustee’s claims – the appointment of a receiver before the bankruptcy is filed. See In re NJ Affordable Homes Corp., 2013 Bankr. LEXIS 4798 (Bankr. D.N.J. Nov. 8, 2013).
Generally speaking, bankruptcy trustees, standing in the shoes of the collapsed Ponzi schemer, are subject to the defenses that existed as of the date of the bankruptcy filing under § 541(a) of the Bankruptcy Code, including the in pari delicto defense. See The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes at § 14.04.
In NJ Affordable Homes, the court acknowledged that the Third Circuit, in Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354 (3d Cir. 2001), had adopted that widely-held view.
However, the court found that Lafferty only partly controlled because “Lafferty did not involve a pre-petition receiver.” The court cited language from Lafferty itself that distinguished trustees from receivers: “These cases are easily distinguishable, however; unlike bankruptcy trustees, receivers are not subject to the limits of Section 541.” NJ Affordable Homes at *101 (citing Lafferty, 267 F.3d at 358).
The NJ Affordable Homes court found, “[I]t remains an open question in the Third Circuit whether a trustee is barred from suit, under 11 U.S.C. § 541 as well as his avoidance powers, pursuant to the in pari delicto defense and the parallel doctrine of unclean hands when he succeeds a pre-petition receiver.”
In resolving that question, the court relied heavily on two other circuit decisions, FDIC v. O’Melveny & Myers, 61 F.3d 17, 18 (9th Cir. 1995), and Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995).
Scholes is often cited for the proposition that a receiver is an innocent successor and that “the defense of in pari delicto loses its sting when the person who is in pari delicto is eliminated.” O’Melveny is cited to emphasize that a receiver is appointed “as part of an intricate regulatory scheme designed to protect the interests of third parties who also were not privy to the [entity’s] inequitable conduct.”
The court also considered it important that the earlier appointment of a receiver further removed the trustee from the debtor’s wrongful conduct. It cited In re Edgewater Med. Ctr., 332 B.R. 166, 170-72 (Bankr. N.D. Ill. 2005), in which a receiver had been appointed pre-petition, followed by a custodian, and then ultimately by the trustee in that case, leaving the trustee in that case “two levels removed from any wrongful acts.”
Stressing the significance of the pre-petition appointment of a receiver, the NJ Affordable Homes court held that the trustee’s action was not barred by in pari delicto:
In seeking a way “to promote the equitable distribution in bankruptcy,” the NJ Affordable Homes court used the pre-petition appointment of a receiver as the hook to get to the result it thought was equitable – to allow the trustee to bring claims by declining to apply the in pari delicto doctrine as a bar.
So why does the case law generally refuse to apply an equitable rationale to bankruptcy trustees? Trustees are innocent successors. They are removed from the debtor’s wrongful acts, and they seek to bring claims against third parties for the purpose of benefitting the creditors, not the debtor. Applying in pari delicto to a trustee only serves to harm the creditors of the estate.
Historically, a trustee’s main hope in dodging in pari delicto was to find an equitable loophole under state law since in pari delicto is a state law defense which courts find applicable to a trustee under § 541. However, the approach taken in NJ Affordable Homes and Le-Nature’s Inc. – crediting the pre-petition appointment of a receiver with washing claims of the in pari delicto defense – gives creditors an alternative path to create distance from the wrongful conduct of the debtor and the in pari delicto bar. Creditors should seriously consider a receiver pit stop on the road to the debtor’s bankruptcy.
In Pari Delicto – “in equal fault.” This is a powerful defense that can completely bar a plaintiff’s claims against a third party where both the plaintiff and defendant were engaged in wrongful conduct.
A recent bankruptcy decision ratified an infrequently used tactic to avoid the bar of in pari delicto to a trustee’s claims – the appointment of a receiver before the bankruptcy is filed. See In re NJ Affordable Homes Corp., 2013 Bankr. LEXIS 4798 (Bankr. D.N.J. Nov. 8, 2013).
Generally speaking, bankruptcy trustees, standing in the shoes of the collapsed Ponzi schemer, are subject to the defenses that existed as of the date of the bankruptcy filing under § 541(a) of the Bankruptcy Code, including the in pari delicto defense. See The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes at § 14.04.
In NJ Affordable Homes, the court acknowledged that the Third Circuit, in Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354 (3d Cir. 2001), had adopted that widely-held view.
However, the court found that Lafferty only partly controlled because “Lafferty did not involve a pre-petition receiver.” The court cited language from Lafferty itself that distinguished trustees from receivers: “These cases are easily distinguishable, however; unlike bankruptcy trustees, receivers are not subject to the limits of Section 541.” NJ Affordable Homes at *101 (citing Lafferty, 267 F.3d at 358).
The NJ Affordable Homes court found, “[I]t remains an open question in the Third Circuit whether a trustee is barred from suit, under 11 U.S.C. § 541 as well as his avoidance powers, pursuant to the in pari delicto defense and the parallel doctrine of unclean hands when he succeeds a pre-petition receiver.”
In resolving that question, the court relied heavily on two other circuit decisions, FDIC v. O’Melveny & Myers, 61 F.3d 17, 18 (9th Cir. 1995), and Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995).
Scholes is often cited for the proposition that a receiver is an innocent successor and that “the defense of in pari delicto loses its sting when the person who is in pari delicto is eliminated.” O’Melveny is cited to emphasize that a receiver is appointed “as part of an intricate regulatory scheme designed to protect the interests of third parties who also were not privy to the [entity’s] inequitable conduct.”
The court also considered it important that the earlier appointment of a receiver further removed the trustee from the debtor’s wrongful conduct. It cited In re Edgewater Med. Ctr., 332 B.R. 166, 170-72 (Bankr. N.D. Ill. 2005), in which a receiver had been appointed pre-petition, followed by a custodian, and then ultimately by the trustee in that case, leaving the trustee in that case “two levels removed from any wrongful acts.”
Stressing the significance of the pre-petition appointment of a receiver, the NJ Affordable Homes court held that the trustee’s action was not barred by in pari delicto:
[T]he in pari delicto defense and the doctrine of unclean hands [are] inapplicable to causes of action that could have been brought by the Receiver under the circumstances sub judice.
From this holding, it is only a short step to the conclusion that the Trustee as a successor-in-interest stands in a similar position. For the purposes of 11 U.S.C. § 541, the Receiver was in place at the commencement of this bankruptcy case. The Trustee took cleansed causes of action, limited to those provided to the Trustee under the Bankruptcy Code, as an innocent successor.Although the court did not cite it, Kirschner v. Wachovia Capital Markets, LLC (In re Le-Nature’s Inc.), 2009 U.S. Dist. LEXIS 98700 (W.D. Pa. Oct. 23, 2009), came to the same result and determined that there was nothing to impute from the debtor to the trustee.
In seeking a way “to promote the equitable distribution in bankruptcy,” the NJ Affordable Homes court used the pre-petition appointment of a receiver as the hook to get to the result it thought was equitable – to allow the trustee to bring claims by declining to apply the in pari delicto doctrine as a bar.
So why does the case law generally refuse to apply an equitable rationale to bankruptcy trustees? Trustees are innocent successors. They are removed from the debtor’s wrongful acts, and they seek to bring claims against third parties for the purpose of benefitting the creditors, not the debtor. Applying in pari delicto to a trustee only serves to harm the creditors of the estate.
Historically, a trustee’s main hope in dodging in pari delicto was to find an equitable loophole under state law since in pari delicto is a state law defense which courts find applicable to a trustee under § 541. However, the approach taken in NJ Affordable Homes and Le-Nature’s Inc. – crediting the pre-petition appointment of a receiver with washing claims of the in pari delicto defense – gives creditors an alternative path to create distance from the wrongful conduct of the debtor and the in pari delicto bar. Creditors should seriously consider a receiver pit stop on the road to the debtor’s bankruptcy.
Thursday, November 14, 2013
A Catch 22 for Banks? SARs and Ponzi Scheme Cases
Posted by Kathy Bazoian Phelps
What is a bank’s worst nightmare? High on the list has to be the balancing act between (a) compliance with suspicious activity reporting, on the one hand, and (b) protection of information that could lead to civil liability for having become aware of suspicious activity, on the other hand.
Banks are required to report fraud and are subject to criminal and civil penalties if they do not. 31 U.S.C. § 5318. The government - and society - encourages banks to report fraud. As reported in an earlier blog post, “Banks, Please File Your Suspicious Activity Reports to Help Stop Ponzi Schemes,” governmental agencies are imposing hefty fines for the failure of banks to file SARs, and proposals are being floated in the government to ask for more accountability and prison terms for the bankers themselves.
One would think that banks would be tripping over themselves to get SARs on file – immediately and frequently. Yet, the act of putting together a report that admits knowledge of suspicious activity could lead to civil liability on the part of the bank for having that knowledge. What is a bank to do?
In Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 159756 (M.D. Fla. 2013), the receiver of the Arthur Nadel $168 million Ponzi scheme sued Wells Fargo Bank, alleging that the bank failed to comply with federal banking regulations and the bank’s own internal procedures, which allowed the Ponzi scheme to flourish. The receiver sought turnover from Wells Fargo Bank of certain documents that the bank had withheld from discovery on the basis of the SAR privilege. Wells Fargo sought to keep privileged a broad category of documents that extended well beyond the SAR itself.
The SAR privilege provides that SARs filed by banks are confidential and subject to an “unqualified discovery and evidentiary privilege that courts have held cannot be waived.” Id. at *3 (citations omitted). Wells Fargo argued that “the SAR privilege covers not only a SAR and any information that could reveal the existence of a SAR, but also material prepared by the bank to detect suspicious activity, regardless of whether a SAR was ultimately filed or not.” Id. at *2. The documents that Wells Fargo sought to withhold from discovery were categorized as: (1) listings of transactions or copies of certain transactional documents relating to bank accounts, some with highlighted notations; (2) internal bank emails and reports; and (3) a series of email communications between another financial institution and the bank.
The federal regulations are express and serious in protecting SARs from disclosure and providing assurances to banks in protecting that information. 31 U.S.C. § 5318 states:
After in camera review of Wells Fargo’s privilege log and documents, the court permitted a few documents that were “evaluative” in nature and that were “intended to comply with federal reporting requirements,” including communications with another financial institution, to remain subject to the SAR privilege, but required turnover of the balance of the documents.
It was not clear from the decision whether Wells Fargo was seeking protection of these documents solely for purposes of complying with the Bank Secrecy Act’s secrecy requirements, or whether it was seeking to protect information that might lead to later civil liability for the bank. Regardless, the fight over how far the SAR privilege extends is an important high stakes battle, reminding banks to tread very carefully in these waters.
Read about my new book, Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams, at www.ponzi-proof.com.
What is a bank’s worst nightmare? High on the list has to be the balancing act between (a) compliance with suspicious activity reporting, on the one hand, and (b) protection of information that could lead to civil liability for having become aware of suspicious activity, on the other hand.
Banks are required to report fraud and are subject to criminal and civil penalties if they do not. 31 U.S.C. § 5318. The government - and society - encourages banks to report fraud. As reported in an earlier blog post, “Banks, Please File Your Suspicious Activity Reports to Help Stop Ponzi Schemes,” governmental agencies are imposing hefty fines for the failure of banks to file SARs, and proposals are being floated in the government to ask for more accountability and prison terms for the bankers themselves.
One would think that banks would be tripping over themselves to get SARs on file – immediately and frequently. Yet, the act of putting together a report that admits knowledge of suspicious activity could lead to civil liability on the part of the bank for having that knowledge. What is a bank to do?
In Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 159756 (M.D. Fla. 2013), the receiver of the Arthur Nadel $168 million Ponzi scheme sued Wells Fargo Bank, alleging that the bank failed to comply with federal banking regulations and the bank’s own internal procedures, which allowed the Ponzi scheme to flourish. The receiver sought turnover from Wells Fargo Bank of certain documents that the bank had withheld from discovery on the basis of the SAR privilege. Wells Fargo sought to keep privileged a broad category of documents that extended well beyond the SAR itself.
The SAR privilege provides that SARs filed by banks are confidential and subject to an “unqualified discovery and evidentiary privilege that courts have held cannot be waived.” Id. at *3 (citations omitted). Wells Fargo argued that “the SAR privilege covers not only a SAR and any information that could reveal the existence of a SAR, but also material prepared by the bank to detect suspicious activity, regardless of whether a SAR was ultimately filed or not.” Id. at *2. The documents that Wells Fargo sought to withhold from discovery were categorized as: (1) listings of transactions or copies of certain transactional documents relating to bank accounts, some with highlighted notations; (2) internal bank emails and reports; and (3) a series of email communications between another financial institution and the bank.
The federal regulations are express and serious in protecting SARs from disclosure and providing assurances to banks in protecting that information. 31 U.S.C. § 5318 states:
Suspicious activity reports are confidential. Any bank subpoenaed or otherwise requested to disclose a suspicious activity report or the information contained in a suspicious activity report shall decline to produce the suspicious activity report or to provide any information that would disclose that a suspicious activity report has been prepared or filed citing this part, applicable law (e.g., 31 U.S.C. 5318(g)), or both, and notify the appropriate FDIC regional Office (Division of Supervision and Consumer Protection (DSC)).However, how far does that protection extend? Wells Fargo sought a broad interpretation of the statutory language, citing to comments in the Federal Register that the SAR privilege applies to "material prepared by the financial institution as part of its process to detect and report suspicious activity, regardless of whether a SAR ultimately was filed or not."
After in camera review of Wells Fargo’s privilege log and documents, the court permitted a few documents that were “evaluative” in nature and that were “intended to comply with federal reporting requirements,” including communications with another financial institution, to remain subject to the SAR privilege, but required turnover of the balance of the documents.
It was not clear from the decision whether Wells Fargo was seeking protection of these documents solely for purposes of complying with the Bank Secrecy Act’s secrecy requirements, or whether it was seeking to protect information that might lead to later civil liability for the bank. Regardless, the fight over how far the SAR privilege extends is an important high stakes battle, reminding banks to tread very carefully in these waters.
Read about my new book, Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams, at www.ponzi-proof.com.
Tuesday, November 12, 2013
Radio Show on Banks, Bankers, Investors: The Consequences of Knowing a Ponzi Schemer
Posted by Kathy Bazoian Phelps
Listen to Kathy Phelps on Radio Shalom on November 13, 2013 at 4 p.m. Eastern discussing consequences for banks, bankers and investors involved in Ponzi schemes.
Have we seen any slowdown in Ponzi scheme activity since Madoff and the other larger Ponzi schemes unwound in 2008 and 2009?
Why are people still investing in Ponzi schemes?
Why are bankers not going to jail for their role in these schemes?
Are we any further ahead 5 years after Madoff in detecting and combating these types of fraudulent schemes?
To listen to the show, go to www.radio-shalom.ca/site/emissions-1042 and click on Listen Live.
Read about Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.
Listen to Kathy Phelps on Radio Shalom on November 13, 2013 at 4 p.m. Eastern discussing consequences for banks, bankers and investors involved in Ponzi schemes.
Have we seen any slowdown in Ponzi scheme activity since Madoff and the other larger Ponzi schemes unwound in 2008 and 2009?
Why are people still investing in Ponzi schemes?
Why are bankers not going to jail for their role in these schemes?
Are we any further ahead 5 years after Madoff in detecting and combating these types of fraudulent schemes?
To listen to the show, go to www.radio-shalom.ca/site/emissions-1042 and click on Listen Live.
Read about Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com.
Sunday, November 10, 2013
Ponzi Schemes Are an International Problem
Posted by Kathy Bazoian Phelps
Courts across the globe are dealing with the peculiar issues arising in the administration of Ponzi scheme cases, struggling to do equity and to get the defrauded victims at least some of their money back.
The purported business operations of these Ponzi schemes are as varied and diverse as the countries in which they proliferate. The schemes range from securities trading to goat rearing scams and tend to take on the character and customs of the local culture. What remains a constant in all varieties of Ponzi schemes, however, is that the investors lose money. Defrauded victims then seek compensation from the resulting insolvency proceedings of the perpetrator.
The Eastern Caribbean Supreme Court of Antigua and Barbuda recently issued a decision in the Stanford International Bank liquidation regarding the issue of how to fix the investors’ claim amounts. The decision is here. The Court ultimately approved the modified net investment methodology for allowance of claims for Ponzi scheme investors. The net investment method was the methodology used in the Bernard Madoff case, as affirmed by the Second Circuit in In re Bernard L. Madoff Investment Securities, LLC, 654 F.3d 229 (2d Cir. 2011). However, the Court also took the time to analyze competing claims allowance methodologies such as the Last Statement Method and the Rising Tide Method.
The Court relied heavily on U.S. law in reaching its conclusion, noting that:
The law coming out of Ponzi scheme cases continues to evolve on a nearly daily basis. The Eastern Caribbean Supreme Court of Antigua and Barbuda aptly noted, “It is . . . clear that [the U.S.] great legal system continues to develop rational solutions to do equity for the innocent victims of Ponzi schemes, but with painful difficulty, precisely because ‘Ponzi schemes’ have no inherent integrity.”
Courts across the globe are dealing with the peculiar issues arising in the administration of Ponzi scheme cases, struggling to do equity and to get the defrauded victims at least some of their money back.
The purported business operations of these Ponzi schemes are as varied and diverse as the countries in which they proliferate. The schemes range from securities trading to goat rearing scams and tend to take on the character and customs of the local culture. What remains a constant in all varieties of Ponzi schemes, however, is that the investors lose money. Defrauded victims then seek compensation from the resulting insolvency proceedings of the perpetrator.
The Eastern Caribbean Supreme Court of Antigua and Barbuda recently issued a decision in the Stanford International Bank liquidation regarding the issue of how to fix the investors’ claim amounts. The decision is here. The Court ultimately approved the modified net investment methodology for allowance of claims for Ponzi scheme investors. The net investment method was the methodology used in the Bernard Madoff case, as affirmed by the Second Circuit in In re Bernard L. Madoff Investment Securities, LLC, 654 F.3d 229 (2d Cir. 2011). However, the Court also took the time to analyze competing claims allowance methodologies such as the Last Statement Method and the Rising Tide Method.
The Court relied heavily on U.S. law in reaching its conclusion, noting that:
It is clear that the United States’ legal system, covering a vast economy, has developed very sophisticated remedial measures to deal with this unfortunately persistent form of fraud. Such measures include numerous instruments of primary legislation as well as case law jurisprudence. There are even practitioners’ text books, such as “The Ponzi Book, A Legal Resource for Unraveling Ponzi Schemes”, by Phelps and Rhodes, published by LexisNexis.In carefully considering the consequences of the different claims allowance methodologies, the Court relied heavily on The Ponzi Book, describing it as “that most helpful work” and quoting from Chapter 20.04 extensively in its evaluation of the competing methodologies. The Court dismissed the Last Statement Method, finding that it was “equally absurd for SIB as it was for Madoff.” The Court observed, “In both cases the investors were duped by a falsely represented investment strategy[,]” and “In both cases the profits or interest respectively which was credited or paid to investors derived directly from deposits from subsequent investors, and not from legitimate investment returns.”
The law coming out of Ponzi scheme cases continues to evolve on a nearly daily basis. The Eastern Caribbean Supreme Court of Antigua and Barbuda aptly noted, “It is . . . clear that [the U.S.] great legal system continues to develop rational solutions to do equity for the innocent victims of Ponzi schemes, but with painful difficulty, precisely because ‘Ponzi schemes’ have no inherent integrity.”
Thursday, November 7, 2013
“Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes” Just Released
Posted by Kathy Bazoian Phelps
The ongoing losses from Ponzi schemes are extraordinary (over $22 billion reported in related cases just this year). “Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams” provides a comprehensive, but easily understandable, description of the all-too-common pitfalls of Ponzi schemes, the psychology of the schemer, and the warning signs of a fraud, along with lists of specific due diligence questions to ask.
See www.ponzi-proof.com for more information and read the press release at www.prnewswire.com/news-releases/new-book-provides-guidance-to-help-investors-spot-and-avoid-ponzi-schemes-and-other-fraudulent-scams-230647751.html.
The ongoing losses from Ponzi schemes are extraordinary (over $22 billion reported in related cases just this year). “Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams” provides a comprehensive, but easily understandable, description of the all-too-common pitfalls of Ponzi schemes, the psychology of the schemer, and the warning signs of a fraud, along with lists of specific due diligence questions to ask.
See www.ponzi-proof.com for more information and read the press release at www.prnewswire.com/news-releases/new-book-provides-guidance-to-help-investors-spot-and-avoid-ponzi-schemes-and-other-fraudulent-scams-230647751.html.
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