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

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

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

Tuesday, December 31, 2013

December 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

The year ended with lots of news in Ponzi scheme cases. Below is a summary of the activity reported for December 2013. 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.

Suzette Anguay, 50, of Hawaii, was sentenced to 46 months in prison and ordered to pay $510,000 in restitution for a Ponzi scheme that defrauded 15 investors of $800,000. Anguay had promised returns of up to 30% through her company, Money $en$e. But instead of investing the money in real estate as promised, she spent it on credit card debt, Las Vegas vacations and payments to some victims to keep the Ponzi scheme going.

Bryan Arias, 40, and Shamika Luciano, 31, former associates of Nicholas Cosmo, were arrested on charges relating to the Cosmo $400 million Ponzi scheme run through Agape World and Agape Merchant Advance that defrauded more than 4,000 people. Arias and Luciano were added to an indictment pending against three other Cosmo associates, Jason Keryc, Anthony Ciccone and Diane Kaylor. It is alleged that both Arias and Luciano "identified potential investors, solicited investments in specific Agape bridge loans and merchant loans, maintained contact with investors, retained client bridge loan contracts, received money from investors and managed account records for each" of their 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. Frank DiPascali, 57, Madoff’s former right-hand man who has pleaded guilty, testified against the five defendants at their criminal trial. Among many other things, DiPascali testified that he knew as early as the 1970s that fake trades were being used in the Madoff business and that “It was virtually impossible not to know what was happening.” He said that historical prices for trades were taken out of newspapers and given to Bongiorno on index cards about once a month. The defense called DiPascali a pathological liar.

Kevin Brown, 40, was sentenced to 3 years in prison and ordered to pay $1.6 million in restitution in connection with a $1.6 million Ponzi scheme in Missouri run through Invision Investments. Brown had promised investors that their money would be used to buy and rehab real estate, but instead he used the money for personal expenses and to make payments to earlier investors.

William Dean Chapman, 44, was sentenced to 12 years in prison after having pleaded guilty to charges in connection with a Ponzi scheme run through Alexander Capital Markets. Customers would give their stock holdings to Chapman as collateral for loans, but Chapman would then sell the stocks. Congressman Alan Grayson (D-Fla.) lost $18 million in the scheme. Grayson had previously fallen victim to another Ponzi scheme, Derivium Capital, and won a $34 million judgment against the company in 2009.

Thomas Doctor, 53, pleaded no contest to charges relating to a $9 million Ponzi scheme run through API Worldwide Inc. that defrauded about 150 investors. Doctor and Doug Kacos, 58, the owner of the New Beginnings restaurant chain, were charged with money laundering in the scheme. Doctor and Kacos allegedly set up crews of employees and others to wire victims’ money overseas from various party stores. Brian Palmer, 64, former Michigan state representative, also pleaded no contest to a charge of neglect of duty by a public official for his role in the Ponzi scheme. Palmer was sentenced to one year of probation and order to complete community service and pay fines. Palmer lost $400,000 in investments with API Worldwide, but worked with API in an effort to recoup his losses. He met with potential investors, took calls from them, and allowed API owners to use his name and elected position to make the investment seem more legitimate. Jeffrey Ripley, 61, and Danny Lee VanLiere, 62, had previously pleaded guilty and were sentenced to prison.

James Duncan was sentenced to 19 years and 8 months in prison and ordered to pay $3.4 million in restitution. Duncan masterminded a $142 million real estate and investment fraud that defrauded hundred of victims. Duncan cooperated as a key witness in the trial against his former business partner, Hendrix Montecastro and his mother, Helen Pedrino. Montecastro and Pedrino filed a motion for a new trial following their conviction. The motion was filed just in advance of the sentencing hearing, which was then continued to January at which time the court will rule on the motion for new trial and proceed to sentencing if the motion is denied. Montecastro was convicted of more than 300 felonies in connection with his role in the investment scam. Pedrino recruited 5 of the victims and was convicted of 54 criminal charges.Other defendants, who have pleaded guilty and been sentenced in the case, are: Maurice McLeod, Charlie Sung Choi, Cindi Grace Kelly and Thuan Nhan Du.

Russell Erxleben, 56, pleaded guilty to charges in connection with a $2 million Ponzi scheme. Erxleben had previously served 8 of a 10 year sentence related to an earlier $30 million foreign currency trading scheme. After his release, Erxleben again engaged in the investment business and misrepresented to investors that their money would be put into post-WWI German government gold bearer bonds through his company, Erxleben Entities. He also misrepresented that investor funds would go toward a work of art purportedly by Paul Gaugin through his company, Gauguin Partners LLC. Instead he used the money for personal expenses and to pay earlier investors. Exrleben was a first-round draft pick by the New Orleans Saints in 1979.

Alphonse Fletcher was accused by the trustee administering one of his hedge funds, Fletcher Asset Management, of operating like a Ponzi scheme. The trustee alleges that Fletcher took in more than $30 million in fraudulent transactions. Fletcher claimed his fund was worth $352 million but it had assets worth less than $8 million. The trustee alleged wrongful conduct such as "the extensive use of wildly inflated valuations, the existence of fictitious assets under management numbers, the improper payment of excessive fees" and "misuse of investor money."

Trent Francke pleaded guilty to charges in connection with a $46.5 million Ponzi scheme, and he agreed to testify against the alleged leader of the scheme, David Wilson McQueen. The plea agreement says that McQueen, with assistance from Francke and others, operated several investment funds: Accelerated Investment Group, or AIG, International Opportunity Consultants, IOC, Diversified Liquid Asset Holdings, DLAH, and Diversified Global Finance. The scheme promised investors that their money would be invested in forex trading, real property, and ethanol-related projects. Francke and McQueen told investors they were “Christians” who preferred to deal with “God-fearing, churchgoing people.”

Richard Freer was arraigned on new charges relating to about $1 million taken from an investor under false pretenses. Freer is already accused of running an alleged $10 million Ponzi scheme and was indicted in September after a 6 month long grand jury trial.

Glen Galemmo asked for a 90 day delay in civil proceedings pending against him because it was anticipated that he would plead guilty to charges in connection with an alleged $300 million Ponzi scheme that he ran through Queen City Investment Fund. It is reported that Galemmo reached a plea deal but the agreement was sealed. Galemmo had claimed that he could pay 432% returns based on his strategy of identifying “severely undervalued” stocks. The scheme allegedly defrauded 165 investors.

Fotios Geivelis Jr. aka Frank Geivelis aka Frank Anastasio, 34, was charged in connection with an alleged $3.9 million Ponzi scheme run through his Florida company, Worldwide Funding III, Ltd. Geivelis alleged defrauded more than 36 investors to whom he had promised to obtain a $10 million non-recourse overseas loan for “humanitarian” or “job-creating” projects.

Sharon Lee Graham, 59, was sentenced to 4 years in prison for her involvement in the Ponzi scheme run by Ward Real Estate Brokerage & Foreclosure Services. Graham was the bookkeeper in the business that solicited more than $5 million from investors, supposedly for the purpose of purchasing, refurbishing and reselling distressed homes at a profit. The former officers of the company, Leesa Marie Ward and Alison Ann Jenson, pleaded guilty and each received 3 years sentences.

Benton T. Hall, 22, of Arizona, pleaded guilty to charges in connection with the Ponzi scheme run by Ron Wilson. Wilson was previously sentenced to more than 19 years in prison in connection with a $57.4 million Ponzi scheme run through Atlantic Bullion & Coin Inc. that defrauded 798 investors. Hall was a co-conspirator with Wallace Lindsey Howell, who pleaded guilty to hiding assets that had been acquired with the Ponzi scheme money.

Scott Anderson Hall, 49, pleaded guilty to charges relating to a $5 million Ponzi scheme that defrauded more than 50 investors. Hall set up a shell corporation, Abaco Securities International, and convinced a group of investors to invest their retirement savings, promising returns exceeding 12%.

Robert A. Helms and Janniece S. Kaelin of Texas were accused by the SEC of masterminding an $18 million oil and gas Ponzi scheme. The SEC has alleged that Helms and Kaelin “misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests.” The assets of their Texas based company, Vendetta Royalty Partners, were frozen. Deven Sellers and Roland Barrera were also named in the SEC complaint. Helms and Kaelin also used Vesta Royalty Partners LP and Iron Rock Royalty Partners LP as part of their scheme in which they promised investors returns ranging from 300% to 500% to be paid in 5 to 7 years. At least 80 investors were defrauded, and only about 10% of their funds were actually invested, generating very small returns.

Christopher Jackson, Michael Bolden, Victor Alvarado, Erica Arceo and Nicholo Arceo had their trial confirmation hearing scheduled for their upcoming trial in connection with charges that they ran a $26 million real estate Ponzi scheme through Diversified Management Consultants Inc. that defrauded 180 investors. Many of the investors pulled equity out of their homes to participate.

Phil Kenner, 43, and Tommy Constantine, 47, were arrested on charges relating to an alleged $15 million Ponzi scheme that defrauded at least 13 NHL players. The scheme promised investors that their funds would be invested in a prepaid credit card company, a real estate development in Hawaii, and an escrow account for legal expenses related to Mexican land deals. Instead, the money was spent on personal expenses and secret investments.

Anthony M. Livoti Jr., 64, was convicted following his trial on charges relating to his role in the Mutual Benefits Corp. Ponzi scheme that involved viatical life settlements. Livoti was outside counsel for Mutual Benefits. Mutual Benefits had sold $1.25 billion worth of life insurance policies held by people dying of AIDS, cancer and other terminal illnesses to about 30,000 investors. The investors bought the policies at a discount and were promised the full value of the policies upon the death of the insured. Livoti used new investor funds to pay premiums on older life insurance policies. The former top executive of Mutual Benefits, Joel Steinger, has still not stood trial due to severe back pain but is scheduled to go to trial next April.

Shawon McClung, 27, was sentenced to 51 months in prison and ordered to pay $1.7 million in connection with a Ponzi scheme that promised investors guaranteed returns of 15% to 100% every 14 to 30 days. The scheme was run through Flint-McClung Capital LLC, claiming to use a software program to automate trades of foreign currency, even though he never paid the programmer and the software was never developed.

Frank Mete, 55, pleaded guilty to charges in connection with a $1 million Ponzi scheme that he ran through his brokerage company in which he promised investors returns ranging from 15% to 18%. Mete told investors he would use their funds for hard money loans, but instead set up fake bank accounts and used the money for personal expenses.

Marian Morgan was resentenced to 33 years and 9 months in prison and ordered to pay almost $20 million in restitution in connection with charges relating to a $28 million Ponzi scheme that she ran with her husband, John Morgan, through their company, Morgan European Holdings. John had pleaded guilty and was sentenced to 10 years and 1 month in prison. They promised 200% to 300% returns in three months from a “high yield/prime bank note” investment program where investors’ money would supposedly be held safe in an escrow account in Denmark. Marian was originally sentenced to 35 years in prison, but Marian appealed to the 11th Circuit which concluded that her sentence should not have included an enhancement for abusing a position of trust.

Bich Quyen Nguyen, 59, was convicted on a fraud charge in connection with a $9.5 million Ponzi scheme that defrauded 250 victims. Nguyen had represented that she was the chief executive officer of a Swedish credit union that offered guaranteed returns as high as 46.2% on one year certificates of deposit involving at least $1 million. Nguyen also misrepresented that investors’ money would be safe because it would be held in “blocked’ accounts. Co-conspirator Johnny Edward Johnson, 70, was arrested earlier in the year and pleaded guilty to a charge in connection with the scheme.

Jose L. Nino de Guzman Jr., 30, was sentenced to 10 years in prison and ordered to pay more than $18 million in restitution in connection with a $31 million Ponzi scheme in which about 200 investors ultimately lost more than $18 million. Nino de Guzman told investors that their funds would be invested in Peruvian real estate projects through his company, NDG Investments Group LLC. He promised investors returns as high as 40% but instead spent their money on a Bentley, a yacht, and jewelry, among other personal expenses. The court stated that Nino de Guzman made “obscene expenditures of funds on hedonistic things for pride, hubris, and ego.”

Dawn Wright-Olivares, 45, and her step-son, Daniel Olivares, 31, were charged on both criminal and civil fraud charges for their roles in the ZeekRewards Ponzi scheme. Wright-Olivares worked as the chief operating officer and Olivares worked as the master computer programmer. The two are charged with knowing that the daily reward of 1.5% promised to investors was arbitrary and not related to the company’s net profits, yet they did not disclose this to investors. After learning about criminal investigations of ZeekRewards, they withdrew large amounts of money and caused the forgiveness of loans made to them by the company. Criminal charges have not been filed against the scheme’s mastermind, Paul Burks. Both entered into plea agreements and it is reported that a settlement has been reached for them to pay over $11 million. Dawn Wright-Olivares will pay $8.2 million and Daniel Olivares will pay $3.3 million.

Darin Palmer, 42, saw his mansion, built with $6.9 million of defrauded investors’ money, sold for $762,000. Palmer was convicted in 2011 in connection with a Ponzi scheme run in Idaho between 2002 and 2008 that defrauded 68 investors of more than $20 million. Palmer was sentenced to 8 years in prison.

Thomas Petters, 56, was denied his request to have his 50 year prison sentence reduced. Petters was convicted in 2009 in connection with his $3.7 billion Ponzi scheme. He filed a motion claiming that he had not been advised by his lawyers of a government plea bargain that would have resulted in a 30 year prison term, which he argued constituted ineffective assistance of counsel. The court concluded, “Petters is simply lying in a desperate attempt to save his own skin. The Court is not so easily fooled.” In weighing the testimony of Petters against that of his lawyers, the court found the lawyers’ testimony to be credible and that, “He seemed to be a man putting on a show, willing to say or do anything - including shedding crocodile tears - to obtain a reduction of the lengthy sentence imposed by this Court.” The court concluded: “Like so many before it, this great American tragedy, in which money was lost, lives were ruined, and more than a dozen people have been sent to prison, has come to an end. Petters' last-ditch attempt to escape just punishment for his crimes does not hold water; he received constitutionally effective counsel and his sentence was not unlawful. He is entitled to neither relief nor sympathy from this Court.”

Marjorie Parise, 51, was sentenced to 2 years in prison for concealing assets from the bankruptcy trustee of Global Trading Investments LLC, which had operated a Ponzi scheme. Parise had a judgment entered against her for the return of profits she had received from the Ponzi scheme in the amount of about $430,000, but Parise took numerous steps to fraudulently conceal funds and made false statements in the bankruptcy proceeding. Parise filed her own bankruptcy petition and fraudulent failed to report millions of dollars in real estate holdings and other personal assets.

Shannon Polen was sentenced to 6 years in federal prison and ordered to pay more than $10.7 million in restitution in connection with a Ponzi scheme that defrauded about 78 victims out of approximately $15 million. Polen is already serving a 12 year state sentence for securities fraud and theft and will serve the new federal sentence after he has completed the state sentence. Polen ran three investment schemes to defraud victims.  In one, he told investors he was buying and reselling repossessed tractors. In another, he claimed to be buying and selling construction materials from and to government contractors working on the Tennessee Greenway Project.  In the third, he sought funds to supposedly be used to buy materials to aid in the cleanup of the 2008 coal ash spill at the Tennessee Valley Authority’s Kingston Fossil Plant.

Richard Reynolds, 52, was convicted following his criminal trial in which it was alleged that he defrauded 141 investors of $5 million in a Ponzi scheme that involved trading foreign currency and gold. Reynolds used his connections with ministers, pastors and other religious leaders to recruit investors.

Robert Rocco, 48, was charged and pleaded not guilty to charges in connection with an alleged $5 million Ponzi scheme in which he promised investors returns from the financing of wholesale cigarette purchases for a Shinnecock Indian tobacco shop. Rocco promised returns of up to 18% through his company, Limestone Capital Services. Rocco also formed Advent Equity Partners which also claimed to provide credit card services for retail end users to purchase cigarettes.

Jeffrey Shalhoub, 38, pleaded guilty to charges related to a $300,000 Ponzi scheme that he ran as a commodities pool operator for The 9 Group Ltd. Shalhoub promised weekly returns of up to 10% and delivered fictitious statements to his clients falsely indicating that their accounts were increasing by as much as 5.2% per week when they were actually losing money.

Charles G. Shomo, 64, is being evaluated for competency to stand trial in connection with charges related to a $590,000 Ponzi scheme. Shomo allegedly defrauded investors and used their money for personal expenses and an unrelated scooter business.

Keith Simmons won his appeal to overturn his conviction and sentence of 50 years in connection with his operation of a $35 million Ponzi scheme that he ran through Black Diamond Capital Solutions. Simmons sought to have his money laundering conviction thrown out. The court, with a dissenting opinion, vacated the conviction on the money laundering charges but affirmed the fraud charges. The Fourth Circuit found that the money laundering convictions were based on the Ponzi scheme payments and that, to convict him of both fraud and money laundering would be to punish him twice for the same offense. Simmons defrauded more than 400 investors by promising high returns in a foreign currency exchange and that they could withdraw their money in 90 days. None of the money was actually invested. Instead, Simmons spent the money on himself, purchasing $4.6 million in real estate, investing $1.2 million in an extreme fighting venture, spending $2.2 million on other business ventures, and purchasing gifts and vacations for his employees and girlfriends. U.S. v. Simmons, 2013 U.S. App. LEXIS 24617 (4th Cir. Dec. 11, 2013).

Robert Stinson Jr. won a reduced sentence resulting from his guilty plea in 2011 in connection with at $17.6 million Ponzi scheme that defrauded 262 investors. Stinson was originally sentenced to 33 years and four months, which was 10% more than the maximum guideline sentence. The new sentence is 27 years. Stinson ran the scheme through Good S.T.A.B.L. Mortgage Fund LLC, which promised investors 16% returns by making short-terms mortgages for real estate investors who brought, renovated and sold houses.

Thomas Franklin Tarbutton, 54, was arrested in Panama and returned to California in connection with charges that he ran a $3 million Ponzi scheme through Villa Capital Inc. Tarbutton had fled to Brazil in 2011 after charges had been filed. He allegedly ran a real estate scheme in which investors were told their money was used to provide loans to people buying properties. He provided investors with fraudulent and forged real estate documents showing that they were lienholders on property deeds.

Kaveh Vahedi, 52, was sentenced to 18 years in prison and ordered to pay $9.7 million in restitution in connection with a more than $11 million Ponzi scheme. The sentence was more than double what prosecutors had recommended, and the court noted that Vahedi’s Ponzi scheme was “one of the most heartbreaking, vicious fraud schemes” that he has ever seen.

Daniel H. Williford, 55, was indicted on charges relating to a $44 million Ponzi scheme that defrauded 200 investors.  Williford promised investors in North Carolina that he would invest their money in wireless internet equipment, internet towers and other companies. Instead, he only invested about $7.7 million and used the rest of the money for personal expenses and to make payments to earlier investors. Williford said he was investing in companies he controlled called Velocenet, Broadband Leasing, Connect Inc. and others.



     Milow Brost, 60, was arrested after breaking his release conditions. Brost was originally arrested in 2009 and was charged with running the largest Ponzi-type investment scam ever in Canada. Brost was prohibited from soliciting any investments without court approval. Brost is accused of defrauding 4,000 investors out of about $400 million. Gary Sorenson was also charged in connection with the scheme.

     Checks were mailed to 125 victims of the $50 million Earl Jones Ponzi scheme. The distribution was made from the proceeds of a class action settlement with Royal Bank of Canada. After payment of lawyers’ fees, the payout to victims was $12.2 million. Jones was sentenced in 2010 to 11 years in prison in connection with the Ponzi scheme that defrauded over 150 investors which he ran through Earl Jones Consultant and Administration Corp. Jones had solicited investors through financial courses at local community centers, often promising that he would serve as the executor of their estate upon their death.

     Arlan Galbraith, 66, was found guilty in connection with a $1 million Ponzi scheme he ran through Pigeon King International. A bail hearing took place, and his sentencing date has not yet been scheduled. Under his scheme, 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.

     Canada’s financial crime agency, the Financial Transactions and Reports Analysis Centre of Canada, reported an increase in the number of transactions related to money laundering or criminal activity over the past year. There were 919 cases referred to law enforcement authorities in 2012, compared to 796 of the previous year and 556 in 2008-09.


     Wang Xiaoqing, 30, was sentenced to a term of life imprisonment for running a $5 million Ponzi scheme that promised investors more than 10% returns on investments to be used to build a luxury hotel.


     The assets of Sayed Mohammed Masood were attached as part of the investigation of an alleged Ponzi scheme. The authorities attached his flat as “proceed of crime” and on the basis that it is involved in money laundering. The scheme is believed to involve over Rs 500 crore.

     Proceedings were commenced to confiscate properties of Flourish India, which has been accused of defrauding investors of Rs 100 crore. Flourish India promised investors attractive returns and collected money through more than 130 branch offices.

     Vijay Dixit, 60, was arrested in connection with an alleged Ponzi scheme involving more than Rs 200 crore. Dixit has been accused of promising investors exceptionally high and guaranteed returns in real estate projects.

     Authorities ordered a probe into an alleged Ponzi scheme run through HBN Company. The scheme allegedly defrauded 1,000 people of about Rs 5 crore.

     Authorities arrested SpeakAsia promoter Ram Sumiran Pal, 37, in connection with an alleged Ponzi scheme run that defrauded over 24 lakh investors of over Rs 2,276 crore. Satish Pal, 36, was also arrested in connection with the scheme.


     The House of Representatives and Senate approved legislation to amend the Securities Act to prohibit pyramid and Ponzi schemes. The bill defines a Ponzi scheme as “an investment scheme that provides investors with returns derived substantially from investments made by other investors in the scheme, rather than from genuine profits." The act promises fines or imprisonment of up to 10 years for persons convicted of operating illegal investment schemes.

New Zealand

     David Ross appealed his prison sentence of 10 years and 10 months on the grounds that it was manifestly excessive or inappropriate. Additionally, the liquidators of Ross Asset Management are in talks with 3 former investors to recover about $3.8 million of payments that they received. The liquidators are considering claw back actions of about $100 to $115 million.

     Eric Bartoli, 59, was arrested in connection with a $65 million Ponzi scheme that was conducted in the United States and Latin America more than 10 years ago which defrauded 800 investors. Bartoli allegedly offered large returns in oil, telecommunications and craft companies. Bartoli operated his scheme through his mutual fund, Cyprus Funds Inc. Bartoli has been on the run for 10 years, and the U.S. authorities had requested Bartoli’s extradition two years ago. He was arrested while jogging in a park, wearing a track suit and a bulletproof vest.


     Mayor Samuel Co and his wife Priscilla Ann were arrested on charges relating to the Aman Futures Ponzi scheme. The scheme is believed to have defrauded 15,000 investors. Co and his wife have been on the run for 6 months.


     The trustee of the Marc Dreier Ponzi scheme estate sought court approval to make a distribution to creditors. The proposed plan will pay priority and secured creditors in full, and holders of about $375.4 million in unsecured claims will recover between 4.9% and 12.6%.

     HSBC Institutional Trust Services (Ireland) Ltd. was sued for $540 million in connection with the Bernard Madoff Ponzi scheme. An investment fund, Defender Ltd., has sued the bank alleging that it failed to conduct due diligence, monitoring or supervision of the actions of the Madoff firm. The fund alleges that HSBC failed to advise that it was not in a position to confirm the existence of its assets and that it failed to communicate its concerns about the Madoff business.

     JP Morgan reached a deferred prosecution agreement with the government in connection with allegations that it engaged in criminal conduct in the Bernard Madoff scheme. It was reported that the problems arose because JP Morgan did not file suspicious activity reports at a time when it clearly suspected fraud. JP Morgan tentatively agreed to pay $2 billion to settle criminal charges relating to its handling of the Madoff account.

     The Madoff trustee was barred from pursuing claims against the spouses of Madoff’s sons. The court concluded that the trustee’s claims were barred by the doctrine of in pari delicto because  the women did not qualify as insiders. The trustee had claimed that they were unjustly enriched by $54.5 million. SIPC v. Bernard L. Madoff Investment Securities, LLC, 2013 U.S. Dist. LEXIS 172952 (S.D.N.Y. Dec.5, 2013).

     The Madoff trustee and his firm requested $31.5 million in fees and $810,000 in expenses for about 82,000 hours of time that they have spent administering the Madoff case between May 1 and July 31, 2014.

     A group of investors who received fictitious profits from the Arthur Nadel Ponzi scheme will pay more than $1.3 million to settle clawback claims. The investors sued by the receiver for $2.5 million have settled the claims with the receiver. Investors lost about $162 million in the scheme, and the receiver has collected and returned approximately $52 million to about 350 investors,

     The receiver in the David Salinas $50 million Ponzi scheme obtained approval to distribute about $10 million to victims of the scheme. It is anticipated that the victims will receive a 35% to 40% distribution. Salinas was accused of masterminding the scheme in which he was to sell corporate bonds but then used the money to make improper loans to affiliated parties. Brian Bjork, an associate, pleaded guilty to charges in connection with the scheme. Salinas and Bjork formed Select Asset Management and J. David Financial to run the scheme that defrauded over 150 investors.

     Victims in a class action against the SEC asked the Fifth Circuit to overturn a lower court’s decision that barred their lawsuit accusing the SEC of facilitating the Allen Stanford scheme. The lower court ruled that the discretionary function of the Federal Tort Claims Act shielded the SEC from the lawsuit.

     The court in the ZeekRewards case approved about $1.6 million in fees and expenses for the receiver and his professionals. This brings the total to about $5.2 million for fees and expenses in the case, which is less than 2% of the $330 million recovered to date. The receiver also filed a motion for approval of procedures to sue Zeek insiders and net winners who profited by $1,000 or more from the scheme. The receiver intends to sue all of the net winners in one action rather than filing separate actions. The inventory and personal property of ZeekRewards went up for auction to generate additional recoveries for victims. It is estimated that about 77,000 profited from the scheme but that about 840,000 lost at least part of their investment. Finally, the receiver sent out about 80,000 notices of claim determinations to claimants, giving them an opportunity to agree or object to the determinations. The receiver’s website is at www.zeekrewardsreceivership.com.

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, December 22, 2013

Ponzi Scheme Victims: Are Courts Looking Under Rocks for Reasons to Bar Recovery?

Posted by Kathy Bazoian Phelps
     What is the defrauded investor to do? Defrauded out of their retirement savings, home equity, and lines of credit, investors often only have litigation claims against third parties to redress their losses. Most people – except usually the Ponzi schemer – feel sorry for the victims. Yet our judicial system seems to continually find ways to block recovery for victims, dismissing their claims before they can even get their case in front of a jury.
     The recent flurry of legal decisions coming out of Ponzi scheme cases have all too frequently barred defrauded victims any legal redress in court, either directly or through a court-appointed fiduciary such as a bankruptcy trustee or federal equity receiver.  Some of the more common roadblocks are:

Roadblocks for Investors
  • Investors don’t have standing to bring claims.
  • While investors may be entitled to their net losses, they are not entitled to expected profits.
  • Investors cannot bring class actions pursuant to Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb ("SLUSA").
  • Heightened pleading standards for class actions pursuant to Private Securities Litigation Reform Act, 15 U.S.C. § 77a, et seq. ("the PSLRA").
  • Investors get sued to give back monies they were paid during the scheme on fraudulent transfer theories.
Roadblocks for Trustees and Receivers
      Quite often, the Ponzi schemer ends up in bankruptcy or a receivership, and a trustee or receiver is appointed to administer the assets for the benefit of the defrauded investors. This should be good news for the investor, right? Now a fiduciary is charged with the task of locating the assets and filing the lawsuits to recover money for the benefit of the victims. But trustees and receivers encounter their own barriers to recovery, denying them the ability to recover funds for the benefit of the victims. The more common roadblocks encountered by trustees and receivers are:
  • They don’t have standing to bring claims.
  • Since they stand in the shoes of the wrongdoers, they are barred by the in pari delicto doctrine from bringing third party claims.
  • They are barred from pursuing certain fraudulent transfer claims under the settlement payment defense in 11 U.S.C. § 546(e).
A New Roadblock to Recovery?
     A recent decision in the Madoff case highlights a few other less obvious problems that trustees and receivers face in recovering money for victims. SIPC v. Bernard L. Madoff Investment Securities, LLC, 2013 U.S. Dist. LEXIS 172638 (S.D. N.Y. Dec. 5, 2013).
  • Standing by Assignment
     As a way around the standing problem, fiduciaries often try to obtain assignments of investors’ claims so that they can acquire standing and take claims that are free of the in pari delicto taint. Whether standing may be acquired through assignment of claims depends in part on state law and in part on the terms of assignment.
     The court in the Madoff case held that the SIPA Trustee did in fact acquire standing from the assignments that he had obtained from the customers of Madoff to bring claims against certain feeder funds for aiding and abetting fraud and unjust enrichment. 2013 U.S. Dist. LEXIS 172638. The court said, “the Second Circuit has held, in the context of a non-SIPA  bankruptcy, that ‘a trustee may assert claims assigned to it by a bankrupt's creditors for the benefit of the estate, because those claims can become property of the estate under § 541(a)(7).’" Id. (citing In re CBI Holding Co., Inc., 529 F.3d 432, 459 (2d Cir. 2008). In finding that the Madoff trustee had standing to bring validly assigned common law claims, the court concluded that, “where nothing in § 78fff-2(b) explicitly restricts the Trustee's authority to obtain assignments under the Bankruptcy Code, and where such an assignment raises none of the concerns addressed in JPMorgan II, the Trustee has standing as an assignee of creditor claims to assert those creditors' common law causes of action against third-party defendants.”
     This alone would have been a great victory for defrauded customers. However, what the court gave in one hand, it took back with the other.
  • Assignments Created a SLUSA Barrier
     The court then considered the second question of “whether the Trustee’s pursuit of those claims is precluded by SLUSA.”
     SLUSA provides that "[n]o covered class action based upon the statutory or common law of any State . . . may be maintained in any State or Federal court by any private party alleging[] a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A).
     A “covered class action” is "any single lawsuit in which . . . damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members." 15 U.S.C. § 78bb(f)(5)(B)(i).
     However, SLUSA also includes a "counting" provision, under which "a corporation, investment company, pension plan, partnership, or other entity, shall be treated as one person or prospective class member, but only if the entity is not established for the purpose of participating in the action." 15 U.S.C. § 78bb(f)(5)(D).
     The court in Madoff considered whether the Trustee's aggregation of claims through assignment constitutes a "covered class action" under SLUSA. The court found that it does and that the Trustee was, therefore, barred from bringing the claims. The court reasoned:
     Courts generally have held that bankruptcy trustees should be treated as a single entity under SLUSA in order to avoid undermining a trustee's ability under the Bankruptcy Code to pursue claims owned by the debtor. See LaSala v. Bordier et Cie, 519 F.3d 121, 136 (3d Cir. 2008) ("Giving effect to Congress's desire not to preempt claims that pass from a debtor corporation to its bankruptcy estate is important because to do otherwise would work a significant change in the bankruptcy system that Congress created and, according to the legislative history cited above, intended to leave undisturbed."). Here, however, the Trustee is not attempting to pursue claims belonging to the debtor, a single entity, for the benefit of many; rather, he seeks to assert claims belonging to many creditors as a single entity. Thus, the Court must look through the Trustee's form to the source of the Trustee's claims in order to properly apply SLUSA on the facts of this case.
     This case is a reminder to trustees, receivers and investors that, when planning a strategy to avoid standing and in pari delicto issues, they should keep in mind that the solution to one problem might create another. Regardless, given all these roadblocks, the economic outcome for investors is that investors are all too frequently barred from pursuing their direct claims against third parties. Also, they cannot rely on a bankruptcy trustee or equity receiver to succeed in bringing either the debtor’s claims or assigned claims. It seems to be an increasingly steep climb for investors.
     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.
Don't forget to cast your vote in The Ponzi Blog's DECEMBER POLL: Do you think prison sentences for schemers are the right length?

Monday, December 16, 2013

Are prison sentences for Ponzi schemers the right length?

Go to The Ponzi Scheme Blog to take the December Poll.

Are the prison sentences being imposed in these cases too long, too short, or just right?

Cast your vote before December 31, 2013.

Sunday, December 15, 2013

Does a Ponzi Scheme Finding Preclude Money Laundering Charges?

Posted by Kathy Bazoian Phelps

     In U.S. v. Simmons, 2013 U.S. App. LEXIS 24617 (4th Cir. Dec. 11, 2013), the Fourth Circuit overturned convictions on money laundering charges in connection with money that the defendant moved as part of his Ponzi scheme.

     Keith Simmons operated a $35 million Ponzi scheme from 2007 to 2009 that defrauded 400 investors. Simmons was convicted on one count of securities fraud, one count of wire fraud, and two counts of money laundering.  The court sentenced him to a prison sentence of 50 years. The fraud counts arose from Simmons’ role in the Ponzi scheme and not any particular instances of fraud. The money laundering counts arose from two discrete payments to investors made in 2008. Those two payments involved the diversion of “investor money back to other investors in Ponzi-fashion . . . to induce further investments by investors and their friends and family members.”

     The court considered whether there was a merger of the money laundering and fraud charges under the Supreme Court case United States v. Santos, 553 U.S. 507 (2008). The key question considered by the Simmons court was whether the two payments giving rise to the money laundering convictions involved “proceeds” of unlawful activity or were “essential expenses” of maintaining the Ponzi scheme. The court further considered whether payments of purported returns to early investors are understood to constitute "essential expenses" of Ponzi schemes rather than transactions dispensing a Ponzi scheme's profits.

     Simmons argued that it was improper to convict him separately of money laundering for payments that were essential to accomplishing his fraud, while the government argued that Simmons’ fraud did not depend on payments to investors and that the payments were not essential to the fraud.
The Fourth Circuit split on the issue. The majority concluded that the money laundering convictions cannot stand and that “a defendant cannot be convicted of money laundering merely "’for paying the essential expenses of operating the underlying crime.’" The court found, “The evidence admitted at Simmons's trial irrefutably established that the ongoing success of his Ponzi scheme depended on payments to earlier investors, including those payments charged in the money-laundering counts.” The court also noted:
In addition to the evidence proving that this particular Ponzi scheme relied on payments to early investors, such payments are understood to constitute essential features of Ponzi schemes. In fact, we have defined a Ponzi scheme as one ‘in which early investors are paid off with money received from later investors in order to prevent discovery and to encourage additional and larger investments.’ United States v. Loayza, 107 F.3d 257, 259 n.1 (4th Cir. 1997).
     The court cited other decisions that had reached the same conclusion, including United States v. Van Alystyne, 584 F.3d 803, 815 (9th Cir. 2009), in which the Ninth Circuit reversed the defendant's money-laundering convictions on the ground that the payments of purported returns to early investors were "inherent" to the defendant's underlying scheme to defraud.

     The dissenting opinion in the Simmons case, however, noted that there is a distinction between an expense of the fraud, on the one hand, and payments to conceal the fraud and promote future frauds, on the other hand. The dissent argued that, in using a portion of the money Simmons obtained through wire and securities fraud, Simmons was then able to use the proceeds of the fraud to return money to investors. He was then able to engage in additional fraud from which he obtained additional proceeds “because the payments to Bazluki and Lux deflected potential suspicion that otherwise might arise with respect to his initial fraudulent transactions.”

     In disagreeing with the majority, the dissent stated:
The majority could only make its analysis work if Simmons were convicted of some single crime prohibiting a Ponzi scheme because under a Ponzi scheme, the proceeds from earlier fraudulent transactions are used to engage in future transactions. But Simmons was not charged with a crime prohibiting a Ponzi scheme; he was charged with committing distinct crimes of wire fraud, securities fraud, and money laundering, and his payment of monies to investors who had already been defrauded was not an expense of the fraud; it was a transaction of money laundering.
     This decision in a criminal case highlights the differing approaches to Ponzi schemes in civil proceedings as well. Some believe that Ponzi schemes are a single tangled unit; others believe that activities that take place during a Ponzi scheme should be considered on a transaction-by-transaction basis. The debate arises in many contexts in Ponzi scheme cases, including:
  • The Ponzi scheme presumption: Are all transfers made during the course of a Ponzi scheme necessarily made with actual fraudulent intent, or must a particular transfer have been made in furtherance of the Ponzi scheme?
  • Amendment of complaints and the relation back doctrine: Are all claims to recover transfers made during the course of a Ponzi scheme related, or can they be viewed as distinct claims that may be time-barred if not timely brought?
  • The ordinary course defense to preferences: Are all payments made during the course of a Ponzi scheme necessarily part of the fraud and therefore not ordinary, or can some payments be considered ordinary course?
  • Constructive trust defenses to fraudulent transfer claims: Can a fraudulent transferee defendant assert that the money paid to it was earmarked or set aside in a trust for its benefit such that no property of the estate was actually transferred?
  • Trust assertions over property of the estate: Can investors in a Ponzi scheme successfully argue that their funds are not property of the Debtor and obtain a priority in the return of the funds to them ahead of general unsecured creditors or other investors?
     These and other issues arising in Ponzi scheme cases constantly test the definition and meaning of calling something a Ponzi scheme. What do you think: Are Ponzi schemes one big tangled web, or should the transactions be viewed separately?

Sunday, December 8, 2013

The Discovery Battlefield in Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps

   Two recent decisions in Ponzi schemes cases highlight the importance of the discovery process and the discovery tactics that can be employed to either elicit or withhold information.

   Testimony of SEC Employees Not Required in Bernard Madoff Scheme

   In a case arising out of the Bernard Madoff scheme, a group of defendants in the Citco and Fairfield Greenwich Ltd. cases sought to take the depositions of two SEC employees. Anwar v. Fairfield Greenwich Ltd., 2013 U.S. Dist. LEXIS 168989 (S.D.N.Y. Nov. 26, 2013). In that case, the Defendants contended that the testimony of those witnesses would show that "the Defendants could not reasonably have been expected to discover the Madoff fraud at an earlier time since the SEC itself was unable to do so despite its employees' frequent visits and interactions with BLMIS and its officers and employees, including Bernard L. Madoff." The plaintiffs in the case, along with the SEC, argued that the testimony sought lacked "meaningful relevance."

   Under Rule 45 of the Federal Rules of Civil Procedure, the court evaluated whether there would be an undue burden in compelling the testimony of the two witnesses and balanced the parties' interests by considering whether the information was necessary or available from another source. The defendants argued that the testimony was "critical" because it would "help establish that the Defendants could not 'have reasonably foreseen that the Fairfield defendants would fail to perform the expected due diligence and monitoring of the Fund's investments held by BLMIS . . .'" In comparison to the SEC’s investigation of Madoff, the defendants noted, "Madoff's ability to conceal the fraud from even the most determined investigators and examiners is highly relevant to whether the defendants could or should have uncovered Madoff's scheme."

   The court disagreed with the defendants, finding that the testimony would be "of marginal relevance," and stated:
The mere fact that a government agency charged with assessing BLMIS's regulatory compliance failed to discover Madoff's wrongdoing in a timely manner hardly suggests that the Defendants could not have done so had they taken additional steps in the course of auditing FGG. Indeed, in order to capitalize on the SEC's conceded failure to uncover the fraud at an earlier time, the Defendants would have to establish that they and the SEC were similarly situated, and that the SEC competently discharged its regulatory and investigative functions.
   Testimony of Receiver in Arthur Nadel Scheme Was Required

   In litigation pending in the Arthur Nadel Ponzi scheme case, the court-appointed receiver refused to answer questions at his deposition in connection with a fraudulent transfer lawsuit that he had commenced against Wells Fargo Bank. The receiver asserted the attorney-client privilege, contending that all of his knowledge about the case came from his communications with his lawyer, and that "Wells Fargo asked questions that seek legal theories, strategies, and conclusions conveyed to Receiver by his attorneys." Wiand v. Wells Fargo Bank, N.A., 2013 U.S. Dist. LEXIS 166375 (M.D. Fla. Nov. 22, 2013). The receiver claimed that the disputed questions, while appearing to request factual information, require interpretation of legal terms of art. Because his answers would necessarily reveal the legal conclusions of his attorneys, Receiver maintains that he properly refused to answer them.

   Wells Fargo argued that the "Receiver is using the attorney-client privilege to 'shield facts from discovery simply because those facts were conveyed to him by his attorneys.'" Wells Fargo also argued that the "Receiver's refusal to answer questions conflicts with the 'sword and shield' doctrine. That doctrine states that 'a party who raises a claim that will necessarily require proof by way of a privileged communication cannot insist that the communication is privileged.'"

   The court identified the following standard for what questions must be answered at a deposition:
During a deposition, a person may instruct a deponent not to answer a question only: (1) when necessary to preserve a privilege, (2) to enforce a limitation ordered by the court, or (3) to protect a witness from an examination being conducted in bad faith or in such a manner as to unreasonably annoy, embarrass, or oppress the deponent. Fed. R. Civ. P. 30(c)(2).   
   While the court concluded that some of the deposition questions encroach on privileged communications, it concluded that some were factual in nature and should be answered. The court directed the receiver to respond to the following 7 questions and limited the deposition to one hour:

(1) Does the receiver know whether its position is that under [the] origination [column], these are assets of the identified company or assets of the debtor?
(2) If Art Nadel has transferred money from Victory Fund to Scoop Capital, as the transferee, do you believe that Art Nadel controls Scoop Capital?
(3) Is it your understanding that the destination account is the account into which the wired amounts were sent? 
(4) Do you believe that those accounts listed under destination account [on Exhibit B] were the recipient of the wired funds? 
(5) How did Wachovia execute a transfer if it wasn't a transferor bank? 
(6) Factually what's the period of time in which the receiver believes it can recover for the fraudulent transfer claims? What period of time? 
(7) Does the receiver believe that all transfers dating back to 2002 are subject to recovery in this action? 
   Are Discovery Games Worth it?

   These two cases leave the question pending about whether it is worth it to object to propounded discovery in the absence of compelling circumstances.
   In the Madoff case, one has to wonder why the relevance objections over the SEC employee testimony made it all the way to court and then became the subject of a written opinion. Perhaps it is because trial lawyers love relevance objections as it provides another opportunity to state and remind the court of the party's theory of the case. Did the defendants accomplish that objective in this case, or did the defendants unnecessarily associate themselves with the admitted negligence of the SEC in failing to detect Madoff’s fraud?

   In the Nadel case, it's questionable whether the receiver came out ahead in his efforts to block discovery. Plaintiffs must be careful in trying to hide behind their attorneys, particularly where the plaintiff is a fiduciary like the receiver in that case. It is a risky strategy. The court might conclude that the receiver is trying to hide something or, worse yet, it could create an appealable issue if the receiver succeeds in the efforts to block discovery. Even though the receiver probably has no first-hand knowledge of anything, is it really worth the fight? 

   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