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

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

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

Friday, February 28, 2014

February 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     Below is a summary of the activity reported for February 2014. 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.

     Barbra Alexander, 66, of California, was convicted on 28 counts relating to a $6.7 million real estate Ponzi scheme. Alexander is the former producer of the financial talk show “Money Dots.” She operated APS Funding along with Michael Swanson, 65, and Beth Pina, in which about 45 investors placed their money and were promised 12% interest in connection with hard money short term loans for real estate. Swanson and Pina have also been convicted.

     Stanley Wayne Anderson, 69, pleaded guilty to charges relating to a Ponzi scheme run through CFO-5 LLC and Trinity International Enterprises, with the assistance of Lawrence Kennedy Jr. and Edwin Alexander Smith. The three men are accused of defrauding investors of about $5 million. Kennedy was previously sentenced to 12 months in prison, and Smith was sentenced to 30 months. Kennedy had conducted business through Keys to Life Corp. which solicited investment funds for Trinity. Investors were promised returns of between 200% and 1,000%.

     Douglas Bates, 55, pleaded guilty to charges that he assisted Scott Rothstein in connection with Rothstein’s Ponzi scheme. Bates had been charged with assisting Rothstein by inflating legal bills and signing a false letter. He was involved in about $60 million of Rothstein’s $1.4 billion fraud.

     Michael Berman and his company Discount Gold Brokers have been accused in a lawsuit of running a nationwide Ponzi scheme. Thomas Hendrix sued Berman and Discount Gold Brokers claiming that they defrauded victims by failing to deliver large orders of precious metals and coins, or by sending only a partial order and pocketing the difference.

     Annette Bongiorno, Joann Crupi, Daniel Bonventre, George Perez and Jerome O’Hara put on much of their case in defense as the prosecutors rested in the criminal trial of these defendants. The defendants are former employees of Bernard Madoff who hope to blame Madoff and prove that Madoff kept them in the dark. Bonventre, who ran the investment advisory unit at Madoff’s company, sought to have Dr. Paul Babiak, a psychologist who wrote “Snakes in Suits,” testify in his defense that Madoff was a psychopath. Bonventre testified in his own defense saying “Now, I think he’s a terribly ill man, and it’s difficult to reconcile everything I knew for 40 years and what I know now.” The court also dismissed two counts against Bonventre relating to arranging for his son to get a no-show job at Madoff’s firm. The court also granted the defense request to play excerpts of an October 2007 video of Madoff in action at a conference asserting that the then-current securities regulations provided a sufficient safeguard against fraud. Bongiorno also took the witness stand in her own defense.

     Janet Brown, the wife of deceased Jack Brown, agreed to plead guilty to charges relating to a $10 million Ponzi scheme run through Browns Tax Service. Janet Brown was charged with lying during a bankruptcy hearing when she was questioned about holding jewelry. She said she was not, but then turned over a bag of jewelry appraised at $25,000 to her attorney a few days later. Jack Brown had promised returns of 15% to his clients from supposed day trading, but instead used much of the money to fund a lavish lifestyle.

     Frank Castaldi’s 23 year sentence was upheld by the Seventh Circuit, which held that the punishment was reasonable and that the lower court had properly considered Castaldi’s cooperation with the government. U.S. v. Castaldi, 2014 U.S. App. LEXIS 3394 (7th Cir. 2014). The lower court had imposed a sentence that was nearly double the length of the term requested by the prosecutors.

     Robert Custis was banned from appearing or practicing before the SEC as an attorney under Rule 102(e) of the Commission’s Rules of Practice due to his involvement with Yusaf Jawed and his Ponzi scheme run through Grifphon Asset Management LLC and Grifphon Holdings LLC. The SEC accused Custis of making false and misleading statements to investors in the Grifphon scheme.

     Russell Erxleben, 57, was sentenced to 90 months in prison in connection with a $2 million Ponzi scheme that he ran through his companies, WALTEC Consultants, LRE Holdings, and The MDM Group. The investment scheme involved post-WWI German government gold bonds and works of art. Erxleben had previously been sentenced to 10 years in prison in 1999 after pleading guilty to charges in connection with a $30 million foreign currency trading scheme.

     David N. Hawkins, 46, was sentenced to 2½ years in prison and ordered to pay $204,000 in restitution in connection with a $1.2 million Ponzi scheme to which he pleaded guilty. Hawkins was a sheriff’s deputy who took advantage of his position as a law enforcement officer to gain the trust of investors to invest in his foreign currency exchange business. A total of 73 people invested, and all but 3 had been repaid.

     Kimberly Jeffreys pleaded guilty to one charge relating a real estate Ponzi scheme that she was accused of running with her husband, Greg Jeffreys. The Jeffreys had been accused of running a real estate Ponzi scheme that defrauded investors out of millions of dollars. Kimberly admitted that she had knowingly provided false financial statements reflecting that she and her husband had assets exceeding $30 million so that they could secure loans for the construction of a property.

     Michael Anthony Jenkins and his company, Harbor Light Asset Management LLC, were ordered to pay a total of $5.2 million in connection with charges that they were operating a commodities Ponzi scheme and had violated the federal Commodity Exchange Act. The court ordered them to pay $1.3 million in restitution and $3.9 million in penalties. Jenkins had defrauded more than 377 North Carolina residents out of at least $1.8 million, convincing them to invest in “E-mini futures” and promising them that their money would be sent to a specific trading account. He provided them with statements showing false trades, profits and inflated values.

     Kenneth Kenitzer, 70, was sentenced to 6 years in prison for his role in an $83 million Ponzi scheme run through Equity Investments Management & Trading. The scheme defrauded more than 300 individuals of about $40 million which they were not repaid. Kenitzer was an officer in the company that promised returns as high as 36% a year based on a computerized trading program. Anthony Vassallo had previously received a prison sentence of 16 years in connection with the scheme.

     Christina Kitterman, 39, was found guilty at her criminal trial in connection with the Ponzi scheme of Scott Rothstein and his law firm, Rothstein Rosendfeldt Adler. Kitterman was accused of assisting the Rothstein fraud by pretending to be a Florida Bar official in telephone conversations and in a meeting with investors. Kitterman had pleaded not guilty, and her lawyers asserted that Rothstein named another lawyer, not Kitterman, as the one who participated in an investor meeting. Rothstein testified at the trial that he hired Kitterman and that she told investors that Rothstein’s law firm’s accounts had been frozen in connection with a pending bar investigation. Kitterman took the stand in her trial and insisted that she did not lie for Rothstein. Prosecutors will likely ask for a 9 year prison sentence, while Kitterman will seek a sentence below 5 years. The court may evaluate perjury implications arising from her testimony at trial in connection with sentencing.  Rothstein also testified at the trial of Christina Kitterman that democratic candidate for Florida governor, Charlie Crist, engaged in contributions-for-favors quid pro quo. Rothstein said: "For certain [campaign] contributions, people were appointed to the bench." Crist has called the statements “gibberish.”

     Michael Kratville, was found liable for operating a $4.7 million Ponzi scheme that defrauded 130 victims. He ran the scheme through Elite Management Holdings Corp., NIC and MJM Enterprises, LLC. Kratville promised returns of 6% per month and claimed that he ran an “investment club exempt from the Securities and Exchange Commission rules.” In reality, the funds were being sent to an investment firm in Spain. Kratville was sued by the CFTC in 2007, and was ordered to pay restitution of $524,000 and penalties of $1.17 million. Additionally, a court ordered about $10 million in civil sanctions against Elite Management Holdings, MJM Enterprises, Kratville and Jonathan Arrington. Last year, Kratville’s business partner Michael Welke agreed to pay $257,000 in restitution and $130,000 in penalties. Kratville, Welke and Arrington are all facing criminal charges related to the scheme.

     Gary H. Lane, 60, a former Bank of America Merrill Lynch financial advisor, was sentenced to 10 years in prison for running a $2.7 million Ponzi scheme that defrauded at least 6 investors. Lane convinced investors to place money in an account outside of Bank of America, promising that the funds would be invested in U.S. Treasury bonds that would pay more than 6% interest with a 2 year maturity. Instead, the money was placed in his wife’s E*Trade account. Merrill Lynch fired Lane and has not been named in any lawsuits. The firm made full restitution to the victims.

     Gregory P. Loles, 54, was sentenced to 25 years in prison in connection with a $27 million Ponzi scheme that he ran through Apeiron Capital Management Inc., an investment advisory firm. Loles falsely represented that Apeiron was a registered investment management firm and that he would invest his victims’ funds in “Arbitrage Bonds,” which Loles promised would deliver safe and steady returns. Lole defrauded parishioners in the church in which he was a manager and also misappropriated church funds. He defrauded more than 50 victims and, instead of investing their money, he paid personal expenses, purchased a large home with a pool, tennis court and multi-car garage for his sports cars, and funded his other business operations.

     Derek Lurie, 40, was charged in connection with running a Ponzi-like scheme through his company, American Escrow, which allegedly defrauded investors of more than $500,000. It is alleged that American Escrow survived by using new escrow funds to pay off tax and insurance payments due at different times throughout the year. An employee of the company, Jacqueline Cruz, was indicted earlier this year on charges relating to 122 company checks that she wrote to herself totaling more than $400,000.

     Daniel McCorry was ordered to pay the state of New Jersey more than $335,000 for his role in defrauding elderly victims to invest in the $8.5 million Ponzi scheme run by Michael Kwasnick through Liberty State Financial Holdings Corp. and its subsidiary Liberty State Benefits of Pennsylvania. The companies were purportedly in the business of buying life insurance contracts from elderly people and collecting their benefits when they die. McCrory and Joseph Schifano induced about 30 annuity holders to give up their contracts in exchange for promissory notes in Kwasnick’s company.

     Ron Earl McCullough and David Christopher Mayhew were charged by the CFTC with running a foreign exchange Ponzi scheme that allegedly defrauded 11 investors of about $2.3 million. They promised very high short-term returns from foreign exchange trading, but instead of investing the money they spent much of it for personal expenses, which included online forex trading courses.

     David Wilson McQueen, facing charges in connection with a $46.5 million alleged Ponzi scheme, saw one of his co-defendants flip and agree to testify against him. Jason Eric Juberg agreed to plead guilty to charges relating to the sale of unregistered securities through Michigan-based, American Benefits Concepts, Inc. As part of the plea agreement, charges were dropped against Jubert’s father, Donald Juberg. Trent Francke, another target in the investigation, previously pleaded guilty and agreed to testify against McQueen. Two other co-defendants, Penny Hodge and John Bertuca, also pleaded guilty and agreed to testify.

     John J. Packard, 63, and Michael J. Stewart, 66, were arrested in connection with an alleged Ponzi scheme run through Pacific Property Assets. Pacific Property filed bankruptcy in 2009, having $100 million of bank debt and $91 million owed to about 647 investors. They promised investors that they would use the funds to purchase, renovate, operate and resell or refinance apartment complexes in Southern California and Arizona. The SEC sued them in 2012 and alleged that they formed a new company, Apartments America, to replicate Pacific Property’s business model.

     Melody Nganthuy and her companies, My Forex Planet Inc., Wal Capital, S.A., and Top Global Capital, Inc., were charged by the CFTC with operating a $3.7 million foreign exchange scheme. The scheme allegedly fraudulently solicited at least $3,764,214 from over 174 customers. Phan used forex training classes to solicit clients to open accounts at Wal Capital. The CFTC complaint alleges that the defendants used customer funds for unauthorized purposes, such as paying other customer withdrawals and for business expenses such as radio ads and marketing.

     Roderick Rieman, 69, was sentenced to 4 years in prison and ordered to pay $6.6 million in restitution, along with his associate, Michael Crook, 55, who was sentenced to 3½ years in prison and ordered to pay $6.6 million in restitution in connection with a Ponzi scheme that they ran through Z Touch Systems, Global Payment Solutions, Bluko Information, and Smart Restaurant Solutions. Rieman and Crook defrauded about 126 investors out of $6.6 million in connection with their supposed insurance and investment business.

     Bradley Schiller, 37, was sentenced to 6½ years in prison and ordered to pay $5.3 million in restitution in connection with his $10 million Ponzi scheme. Schiller had spent the money raised from investors for the purpose of commodities futures trading on a Range Rover, country club fees and payments to investors while he lost the rest of the money trading.

     Laurie Schneider, 39, pleaded guilty to charges relating to her operation of a $6.9 million Ponzi scheme through her company, Janitorial Close-Out City Corp., which defrauded 30 investors. Schneider promised investors up to a 60% return in 18 months on a supposed deal to buy machinery in China and sell it in the U.S. at a steep markup. Schneider allegedly spent the investors’ money on a country club membership, a power boat, luxury cars and travel.

     Charles G. Shomo, 63, pleaded guilty to charges that he defrauded more than 30 investors out of more than $620,000 through his company, P&G Enterprises. Shomo offered investors promissory notes with a one year maturity. There was no plea agreement.

     Kari Sonovich, 42, was arrested and charged in connection with a $3 million investment scheme that allegedly targeted victims of the Equity Investment Management and Trading Ponzi scheme run by Anthony Vassallo and Kenneth Kenitzer. Sonovich recruited investors to invest with her company, B&B Consulting Group LLC, and represented that she would place their funds with an international trader who promised returns of up to 500% every 90 days.

     George Theodule, 52, was sentenced to 12½ years in prison in connection with a $68 million Ponzi scheme that targeted as many as 2,500 investors, many of which were from the Haitian community. Theodule had promised investors that he would double their investment in 90 days by investing in stock options. He used the company names Creative Capital Consortium and A Creative Capital Concepts to run the fraud. He invested about $18 million in stock options but lost it all. The rest of the investor’s funds were spent on Theodule’s lavish lifestyle, including exotic cars, motorcycles, jewelry and Vegas trips.

     Deepal Wannakuwatte, 63, of California, was arrested on charges that he allegedly ran a $100 million Ponzi scheme through his companies, International Manufacturing Group, Inc. and Rely Aid Global Healthcare Inc. Wannakuwatte represented to investors that their funds would be used to finance contracts to supply gloves to the U.S. Department of Veterans Affairs and that he had contracts totaling $100 million per year. In reality, actual sales totaled about $25,000 per year and investors were paid with money from other investors not from profits from glove contracts. General Electric Capital Corp. had sued Wannakuwatte’s companies last year for $4.6 million, and the court in that pending lawsuit ordered that Wannakuwatte give GE a $3 million private King Air plane that had been pledged as collateral.

     WCM777 is now subject to regulatory actions and investor alerts in 7 jurisdictions: Peru, Massachusetts, California, Colorado, Louisiana, New Hampshire and New Brunswick.

     Eliyahu Weinstein aka Eli Weinstein aka Edward Weinstein aka Eddi Weinstein, 38, of New Jersey, was sentenced to 22 years in prison and ordered to pay $215.4 million in restitution in connection with his $200 million real estate Ponzi scheme. Weinstein targeted victims from the Orthodox Jewish community, misrepresenting that he had inside access to below market prices for real estate. Weinstein spent millions of dollars on jewelry, Jewish ceremonial art, credit card bills, gambling and legal expenses. His accomplice, Vladimir Siforov, has also been charged in connection with the scheme but remains at large.

     Dawn Wright-Olivares, 45, and her step-son, Daniel Olivares, 31, pleaded guilty to charges relating to their roles in the ZeekRewards $850 million Ponzi scheme. Wright-Olivares worked as the chief operating officer and Olivares worked as the master computer programmer. The two were 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.



     Ronald Morris Coles, 66, a former art dealer currently sitting in jail awaiting sentencing for running a $6 million Ponzi scheme, spoke at his sentencing hearing. Coles denied that his scheme was a “calculated fraud” but admitted that it involved “robbing Peter to pay Paul.” He also stated that he could have been more ruthless, stating: “If I wanted to, I could have gotten five, six million dollars in 24 hours and we wouldn’t  be here. . . I could be having pina coladas right now.”

     Bill Vlahos, accused of running a $144 million Ponzi scheme, was seen on the run at a local pub, but has not yet been picked up. Vlahos, accused of running a Ponzi scheme through his race horse business, BC3, was questioned at a hearing in connection with his bankruptcy case. Investors had placed more than $140 million into the Edge, a betting syndicate


     It was reported that a Ponzi scheme entitled “Pure Capital Investment” has attracted a large number of Malaysians. The get-rich-scheme promises investors that they will receive a return of more than 100% on their investment of RM 38,474 if they bring at least 3 new investors to the scheme. Malaysian investors are lured into the scheme by all-expense paid trips to China where they are told that the scheme is not against the law and that this is their chance to become multi-millionaires.


     Matthew Ames was found guilty on counts relating to a £1.6 million Ponzi scheme operated through his two companies, Forestry for Life and The Investors’ Club. The companies claimed to invest money in teak tree plantations that generated carbon credits which could then be traded for profit. Ames promised investors returns of 15%. Ames terminated the employment of any employees who questioned the legitimacy of his companies. At the time of his arrest, Ames was in the process of setting up a new company, the Carbon Neutral Business Director, when he could no longer attract investments into his other companies.

     David Reid pleaded guilty to charges that he ran a Ponzi scheme through his company, Washington Mortgage Centre, which defrauded about 50 victims of £3 million.

     Benjamin Wilson, 35, was sentenced to 7 years in prison in connection with a $34.94 million Ponzi scheme that he ran through SureInvestment and that defrauded more than 300 victims. Wilson had pleaded guilty last year to charges of dishonesty and operating a collective investment scheme. He had promised investors average annual returns of 60%. At Wilson’s sentencing, the court said that Wilson committed an “utterly shameless confidence fraud” that was “an abuse of trust on a massive scale.” Wilson spent the investor’s money on a Ferrari, horse racing, travel and a luxury property.


     Tata Group, an Indian conglomerate that operates over 100 companies worldwide issues a warning to consumers that its name “Tata” is being wrongfully used by a British Virgin Islands company, Tata Agro Holding Ltd. Tata Group disavowed any connection with the company and warned that Tata Agro had been soliciting investors and promising daily returns between 1.9% and 3.1%. Tata Agro represented that it was a subsidiary of Tata Group and that it was an agricultural investment company. Tata Agro also had a “referral program” which promised commissions.

     Sudipta Sen, the chairperson of Saradha Group, was sentenced to 3 years in prison. Sen admitted that various arms of Saradha Group did not properly deposit money deducted from employee’s salary. This resolves one of many complaints in connection with the Saradha Ponzi scheme that involved around 1.7 million investors an about Rs 20,000 crore.

     The offices of Pearls Golden Forest (PGF) and Pearls Agrotech Corp Ltd. (PACL) were searched by regulators following charges that the companies allegedly defrauded investors by promising agriculture land to investors. Documents obtained in the search reveal that the companies allegedly operated a Ponzi scheme to defraud about 5 crore investors of Rs 45,000 crore. The Central Bureau of Investigation named PGF director Mirmal Singh Bhangoo and PACL director Sukhdev Singh in a case of criminal conspiracy and cheating.

New Zealand

     The Financial Markets Authority dropped its complaint against David Ross because he pleaded guilty to charges relating to a Ponzi scheme run through his company, Ross Asset Management. Ross was sentenced to 10 years and 10 months in prison for his nearly $400 million Ponzi scheme.

     The liquidator of Ross Asset Management is preparing to file clawback actions to seek to recover up to $25 million from investors who received money during the course of the Ponzi scheme. Ross pleaded guilty last year to stealing $115 million from 700 investors and was sentenced to 10 years in prison.

     Charles Huggins stood trial for allegedly running a $5 million (£3.13 million) Ponzi scheme. Huggins defrauded wealthy clients such as comedian Steve Harvey and football player Emmitt Smith by promising them he was investing in diamond and gold mining in West Africa, but instead used the money to fund other business ventures.


     “ProfMedia” broadcasting company was fined 100,000 rubles for advertising the MMM Ponzi scheme operation over the radio. Regulators alleged that the broadcaster ran MMM advertisements on two of their radio stations without clarifying who was providing the services described. Regulations require that the service provider must be named in the advertisement. MMM was originally set up in the 1990’s by Sergey Mavrodi, who was arrested in 2003 and sentenced in 2007. After his release from prison, he set up similar schemes again using the name MMM with the stated ambition of “destroying the global financial system.”

South Africa

     The Net Income Solutions alleged Ponzi scheme, known as Defencex, will not be investigated further. The bank accounts of Defencex were frozen last year with a balance of R320m. It has been reported that the scheme solicited more than R800m from about 200,000 investors. Last year, the Reserve Bank had ordered the inspection of the business affairs of Defencex, Cycle4Dollars, Net Income Solutions and its director, Chris Walker. Although a court labeled the scheme as an “illegal deposit-taking scheme,” the Reserve Bank has not get lodged a complaint with regulators or police, so no further investigation is taking place at this time.


     Rio Casino, owned by Caesars Entertainment Corp., was found liable by a jury to return about $1,480,000 million that was gambled at the casino by Salvatore Favata. Favata operated a $32 million Ponzi scheme through National Consumer Mortgage in which he promised investors returns of 30% to 60%. Favata gambled much of the money he received from investors, and over $10 million was used to purchase cashier’s checks that were transferred to Rio Casino to be used at the casino’s sportsbook. Although the jury found that in the one year prior to National Consumer’s bankruptcy filing Rio Casino had received $6,840,000, Rio Casino had established defenses to the fraudulent transfer and preference claims brought by the trustee to all but $1,480,000 of the transfers. In 2007, Favata plead guilty and was sentenced to 5 years in prison.

     Victims of Glen Galemmo and his company Queen City Investments filed a lawsuit against Fifth Third Bank, U.S. Bank and PNC Bank to recover more than $450,000 that they had invested in Galemmo’s $100 million Ponzi scheme. The victims allege that the banks allowed their checks to be deposited into accounts other than the accounts where the victims allege they were to be deposited. Galemmo has pleaded guilty but has not yet been sentenced.

     The bankruptcy court approved a settlement with JPMorgan Chase & Co in the Bernard Madoff case which resolved two lawsuits. JPMorgan will pay $218 million to settle a class action lawsuit against it and $325 million to settle claims brought by the Madoff trustee.

     The special master over the Madoff Victim Fund has extended the deadline for victims to submit claims to share in the $4 billion of forfeited funds to be distributed by the government to victims of the Bernard Madoff scheme. About 9,000 claims have been filed to date, and the special master has agreed to extend the deadline to April 30 to accommodate those claimants who need more time to file their claims. The special master has also reported that approximately 94% of the claims received so far have come from individuals who either did not file a claim with the trustee-administered fund or whose claim there was disallowed because they were not direct investors with Madoff.

     A group of investors led by Touchstone Group LLC sought court approval of a $6 million settlement of their claims against Mantria Corp. relating to an alleged $54 million Ponzi scheme that targeted the elderly and retired.

     Ritchie Capital Management and 5 other hedge funds filed a complaint against JPMorgan Chase, Bank of America and others, alleging that they aided and abetted Thomas Petters’ $3.7 billion Ponzi scheme. They claim they lost $177 million in the scheme. The plaintiffs are: the plaintiffs: Ritchie Capital Management LLC; Ritchie Special Credit Investments Ltd.; Rhone Holdings II Ltd.; Yorkville Investment I LLC; Ritchie Capital Structure Arbitrage Trading Ltd.; Ritchie Capital Management Ltd. The defendants are: JPMorgan Chase & Co.; JPMorgan Chase Bank NA; JPMorgan Private Bank; Wells Fargo & Co. as successor by merger to Wachovia Capital Finance (Central); Wells Fargo Bank NA; Wachovia Capital Finance Corporation Central; UBS Loan Finance LLC; UBS AG; UBS AG Stamford Branch; Merrill Lynch Business Financial Services Inc.; LaSalle Business Credit LLC; Bank of America Business Capital; Bank of America Corp.; The CIT Group Inc.; The CIT Group/Business Credit Inc.; PNC Bank NA; Fifth Third Bank; Webster Business Credit Corporation; Associated Commercial Finance Inc.; Chase Lincoln First Commercial Corporation; Richter Consulting Inc.

     As reported in The Ponzi Scheme Blog, a broader reading of the Ponzi scheme presumption was upheld in connection with the Thomas Petter case in the Stoebner v. Ritchie Capital Management, L.L.C. (In re Polaroid Corp.) litigation. The appellate court affirmed the bankruptcy court’s finding that the Ponzi scheme presumption can be applied to find fraudulent intent by attributing the requisite intent to a controlling entity.

     The jury in the trial on the SEC lawsuit against the Thomas Petters’ hedge fund manager, Marlan Quan and Quan’s companies Acorn Capital Group and Stewardship Investment Advisors, came back with a mixed verdict. The SEC had sued Quan in 2011, alleging that Quan had misled clients in putting money into the Petters’ scheme and that those investors lost $221.4 million in the scheme. The SEC was seeking the return of $33 million in commissions paid to Quan. The jury found that Quan had breached 5 of the 7 securities laws, but cleared him on another count and an aiding and abetting claim. The SEC said that based on the verdict, it will seek a fine and a court order restraining Quan’s activity in the securities industry.

     The Antiguan-based receiver of the R. Allen Stanford and Stanford International Bank Ponzi scheme has sent letters to local victims threatening to sue them for money they received from the scheme.

     The United States Supreme Court, on a 7-2 vote, ruled that class actions by victims of the Allen Stanford Ponzi scheme may proceed in state court against Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings Plc. Chadbourne & Park LLP v. Troice, 2014 U.S. LEXIS 1644 (Feb. 26, 2014). The defendants in those actions had argued that the lawsuits were barred by the Securities Litigation Uniform Standards Act (SLUSA), but the Supreme Court declined to extend the reach of SLUSA to apply to their claims.

     Thirteen members of the New Birth Missionary Baptist Church who were victims of the Ephren Taylor Ponzi scheme settled their claims against Taylor and Bishop Eddie Long. The parishioners accused Long of encouraging them to invest in Taylor’s company which turned out to be a Ponzi scheme. The victims lost more than $1 million investing in ventures that did not really exist. Taylor had guaranteed 20% returns. The SEC had charged Taylor with running an $11 million Ponzi scheme in 2012.

Tuesday, February 25, 2014

Fourth Circuit Finds Good Faith in Ponzi Scheme Transaction

Posted by Kathy Bazoian Phelps

     What “good faith” means when someone accepts payments from a Ponzi scheme perpetrator is not clearly defined anywhere. Good faith becomes relevant when a trustee or receiver sues an investor or other recipient of funds from the Ponzi schemer during the course of the scheme on a fraudulent transfer theory. The transferee’s primary defense is the good faith value defense under Bankruptcy Code section 548(c) or applicable state law.

     The Fourth Circuit recently affirmed a bank’s good faith defense to a trustee’s fraudulent transfer claim in Gold v. First Tennessee Bank, N.A. (In re Taneja), 2014 U.S. App. LEXIS 3279 (4th Cir. Feb. 21, 2014), and in the process, helped move the discussion forward on how to evaluate and prove good faith.

     The importance of proving good faith for defendants in fraudulent transfer litigation is that it is a zero sum game. If they prove it, along with value provided, they win. If they can’t establish good faith and value, and the plaintiff otherwise proves the prima facie case, the defendant loses. The purpose of the good faith defense is to let innocent transferees off the hook; if the recipient didn’t know and could not have known about the fraud, and gave something up in exchange, it is arguably not fair to hold that recipient liable to return innocently obtained property for which it has provided value. In other words, don’t hold liable the innocent, but require those “in the know” to return the money.

     The difficulty for courts in evaluating good faith is where to draw the “in the know” line. If the recipient actually knew of the fraud, the answer is easy – no good faith. But what if the facts are less clear? Does the court consider and how does it weigh:
  • Red flag warnings?
  • What Warren Buffet would have known?
  • What an elderly uneducated homemaker would have known?
  • What someone similarly situated to the transferee would have known?
     And what if the recipient isn’t an investor, but is a well-established financial institution? Does the analysis change? Banks are generally just running a business and are paid fees or loan repayments by Ponzi scheme perpetrators as part of its ordinary business operations. Or were they? 
     That was the question in Taneja. First Tennessee Bank had extended a line of credit to the debtor on which the debtor made some payments. Although the bank ultimately lost more than $5.6 million, the trustee sued the bank to recover payments made on the line of about $4 million. 
     The Fourth Circuit reviewed and affirmed the findings of the Bankruptcy Court, some of which the court recited as follows:
  • The bank did not have any information that would [reasonably] have led it to investigate further, and the bank's actions were in accord with the bank's and the industry's usual practices.
  • The bank did not have any actual knowledge of the fraud Taneja was perpetrating on it and others.
  • The bank did not have any information that would [reasonably] have led it to investigate further.
  • The bank's actions were in accord with the bank's and the industry's usual practices.
     The Court further reviewed the testimony of the bank employees, adopting their explanations of:
  • Why FMI's and Taneja's conduct did not raise indications of fraud despite FMI's failure to sell their mortgage loans in the secondary market in a timely manner.
  • The severe decline in the market for mortgage-backed securities in 2007 and 2008, which provided additional objective evidence of the state of the warehouse lending industry during that period.
  • The bank’s additional investigation into the collateral securing some of FMI's loans and that they did not discover any problems at that time.
     The Court then reviewed the following evidence submitted by the trustee which the trustee argued should have alerted the bank to the fraudulent scheme:
  • FMI's delay in providing collateral documents to the bank in connection with some of FMI's mortgage loans.
  • FMI's failure to sell many of its mortgage loans in the secondary market
  • FMI, rather than secondary purchasers, directly made payments to the bank on certain loans
  • Taneja told that one of FMI's loan processors had left FMI unexpectedly, resulting in delays in FMI's production of its mortgage loan documentation
  • In a meeting between the bank employee and Taneja's attorney, the bank asked whether FMI's unsold loans were fraudulent, and the attorney responded that the loans were valid and executed in "arms-length" transactions.
     The Court was not persuaded by the trustee’s arguments and found that such issues were “common” and “consistent” in this type of business relationship. In analyzing the appropriate standard to apply, the Court reiterated that both the subjective and objective components of the analysis of good faith should be applied, as it previously determined in its decision in Goldman v. City Capital Mortg. Corp. (In re Nieves), 648 F. 3d 232 (4th Cir. 2011). The Court’s standard in that case was:
Under the subjective prong, a court looks to "the honesty" and "state of mind" of the party acquiring the property. Under the objective prong, a party acts without good faith by failing to abide by routine business practices. We therefore arrive at the conclusion that the objective good-faith standard probes what the transferee knew or should have known taking into consideration the customary practices of the industry in which the transferee operates.
     The trustee in Taneja argued on appeal that “the bank, as a matter of law, was unable to prove good faith without showing that ‘each and every act taken and belief held’ by the bank constituted ‘reasonably prudent conduct by a mortgage warehouse lender.’" The Taneja Court, however, declined “to adopt a bright-line rule.”  It stated that it would not require:
that a party asserting a good-faith defense present evidence that his every action concerning the relevant transfers was objectively reasonable in light of industry standards. Instead, our inquiry regarding industry standards serves to establish the correct context in which to consider what the transferee knew or should have known. 
       The Taneja court also declined “to hold that a defendant asserting a good-faith defense must present third-party expert testimony in order to establish prevailing industry standards.
     There was a dissent to the Taneja decision, however, in which Judge Wynn stated, “Importantly, good faith has not just a subjective, but also an objective ‘observance of reasonable commercial standards’ component.” The dissent, while agreeing that the bank could meet its burden as to the objective component without presenting testimony on prevailing industry standards, disagreed that that the bank had met its burden without presenting any third party testimony. The dissent concluded that the employees’ testimony was evidence of their “subjective good faith, not of objective good faith, taking in consideration industry standards.” The dissent concluded that “the issue is whether First Tennessee Bank, which bore the burden of proof, failed to proffer any evidence or elicit any testimony to support a finding that it received transfers from FMI with objective good faith in the face of certain alleged red flags. It did.”
     Overcoming a defendant’s good faith defense is not an easy task, especially in the case of investor-transferees. Ponzi schemes tend to target and trap the elderly, retired, uneducated and unsophisticated. In such instances, the objective standard would be what an elderly unsophisticated investor would know, and not what Warren Buffet would have known. For more sophisticated investors, however, beware. Burying your head in the sand will not likely be tolerated.

Tuesday, February 11, 2014

Should Fraudulent Transfer Claims Be Permitted Against Net Winners in Ponzi Scheme Cases?

   Investors, trustees, receivers, courts, and even politicians have strong views on whether or not fraudulent transfer claims should be permitted against net winners in Ponzi scheme cases.

   That is the question in the FEBRUARY POLL of The Ponzi Scheme Blog. Cast your vote before the end of the month. And if your answer is not a straight “yes” or “no,” post a comment and let us know what it depends on.

Monday, February 10, 2014

Expanded Scope of Ponzi Scheme Presumption Upheld on Appeal

Posted by Kathy Bazoian Phelps

   Over the past few years, we’ve watched as courts have expanded and retracted the use of the Ponzi scheme presumption. One of the broader expansions of the presumption resulted from a decision in the Thomas Petters Ponzi scheme in Stoebner v. Ritchie Capital Management, L.L.C. (In re Polaroid Corp.), 472 B.R. 22 (Bankr. D. Minn. 2012). An analysis of that decision was reported in this blog in “Is the “Ponzi Scheme Presumption” Expanding into New Territory?

   That decision was recently upheld on appeal to the district court. The appellate court affirmed that the Ponzi scheme presumption can be applied to find fraudulent intent by attributing the requisite intent to a controlling entity. See Ritchie Capital Management, L.L.C.  v. Stoebner (available here). The district court quoted extensively from the bankruptcy court opinion and relied upon the following facts, among others, in agreeing with the bankruptcy court that the Ponzi scheme presumption applied to avoid the lien that Polaroid granted to Ritchie Capital Management. Here are some statements that the district court made:

  • Tom Petters operated a Ponzi scheme.
  • The past operation of a freestanding business by the ‘legitimate’ related entity and the abstract possibility of continuing such an operation do not bar the application of the presumption.
  • Tom Petters – the architect and purveyor of the Ponzi scheme – controlled Polaroid as its Chairman and sole board member. And Tom Petters effected the transfer despite the objections of Mary Jeffries, Polaroid’s CEO.
  • The Ponzi scheme presumption short-circuits the inquiry into actual fraudulent intent because “transfers made in the course of a Ponzi scheme could have been made for no other purpose other than to hinder, delay or defraud creditors.”
  • The transfer occurred solely because Tom Petters, who had the authority to effect it over the objections of Polaroid’s management, intended it to occur.
  • Polaroid was technically a stand-alone operating company.
  • However, Polaroid was inextricably intertwined with the Ponzi scheme from the outset of Tom Petters’ acquisition of the company. 
  • Petters purchased Polaroid entirely, or nearly entirely, with the fruits of his Ponzi scheme transactions.
  • Polaroid fell under the ownership of PGW – the entity that Petters also controlled as sole shareholder, board chair, and CEO. 
  • As PGW’s subsidiary, Polaroid’s financial stability was dependent on PGW.
  • Tom Petters exerted ultimate control over the debtor-transferor Polaroid, just as he did over PGW and PCI. 
  • Petters was the 100% beneficial owner of Polaroid’s stock and its sole board member.
  • At least one of the reasons for the acquisition of Polaroid was Petters’ desire to appear wealthy to potential investors in his ostensible diverting business.
  • The Bankruptcy Court therefore attributed Tom Petters’ intent to the Polaroid Corporation as transferor, “because Petters controlled that artificial entity.”

   On the issue of common control, the district court concluded:

   Thus, while it is true that Polaroid was not operating a Ponzi scheme, Polaroid was purchased with the proceeds of the scheme, and was controlled, for all practical purposes, by the purveyor of the scheme. Its financial fate was inextricably linked to that scheme.

   On the issue of intent, the district court stated:
[W]hen Petters raided Polaroid by pledging its trademark assets – assets that should have been available for Polaroid’s own financing needs, and ultimately, for its creditors – Petters either intended to render those assets unavailable to Polaroid, or at the very least, “should have seen this result as a natural consequence of [his] actions.”
   On the issue of whether the transfer was “in furtherance” of the Ponzi scheme, the court noted:
[A]s the architect and chief perpetrator of the Ponzi scheme, and the owner of PGW, Petters’ motivations – whether based on fears of personal financial ruin or criminal liability, or concern for PGW specifically, or all three – such motivations are indistinguishable from Petters’ motivation in perpetuating the operation of the Ponzi scheme. Petters’ personal interests were entirely intertwined with the Ponzi scheme and the scheme’s continuation.
   In conclusion, the court stated:
For all of the foregoing reasons, given this particular factual context, the Court finds that the Ponzi scheme presumption applies to the facts presented here to satisfy the requirement of actual fraudulent intent under both federal and state law. There can be no dispute that Tom Petters operated a massive Ponzi scheme. Through his control of Polaroid, he looted Polaroids’ assets in order to appease the Ritchie Entities, whose loan money had gone not to Polaroid, but to pay off other investors. Petters effected the transfer in a desperate attempt to keep his Ponzi scheme afloat in its waning days. Appellants’ appeal regarding the application of the Ponzi scheme presumption is therefore denied.
   It remains to be seen if this decision will stick. The defendants have appealed to the Eighth Circuit.

Sunday, February 2, 2014

How to Calculate Penalties for Financial Institutions in Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps

The Ponzi Scheme Blog’s JANUARY POLL asked how fines should be calculated for financial institutions engaged in wrongful conduct in Ponzi schemes. While much has been written recently about banks being “too big to jail,” they are clearly not too big to fine. But how do government agencies calculate the dollar amount of the fines they impose when a bank fails to comply with existing regulations?

Bank fines and Ponzi schemes are in the news a lot these days. And some of the dollar amounts are extraordinary. In connection with the Bernard Madoff Ponzi scheme, JP Morgan reached agreements with various governmental agencies and others to pay $2.6 billion in fines and settlements to resolve criminal and civil allegations that it failed to stop Madoff’s Ponzi scheme and that it failed to comply with the Bank Secrecy Act. In a deferred prosecution agreement, JPMorgan agreed that it ignored red flags in the Madoff banking arrangement for about 15 years. JPMorgan will pay $1.7 billion to settle the government’s charges, $350 million to the Office of the Comptroller of the Currency, $325 million to the Madoff trustee, and $218 million to settle class action claims.

So how did the Department of Justice arrive at the figure of $1.7 billion and the OCC arrive at the figure of $350 million?  What are the variables that the government considers in assessing fines and what objectives does the government hope to accomplish?
  • To punish?
  • To deter the wrongdoing institution?
  • To deter financial institutions generally?
  • To reimburse victims?
In the case of JPMorgan, is $2 billion – a number that seems exorbitant to the non-behemoth bank – sufficient to provide a specific deterrent to JPMorgan? Is that number a general deterrent to the players in the financial industry? While that number would put many banks out of business, did it even make a dent in JPMorgan’s bottom line?
The Ponzi Scheme Blog’s JANUARY POLL asked readers to vote on how to calculate fines in circumstances like these.  The choices and responses in terms of percentages were:
     a.     The percentage of the bank's profits from the scheme?    (42%)
     b.     A percentage of the bank’s annual net profits?   (7%)
     c.     An amount sufficient to pay all victim losses?   (35%)
     d.     Other (14%)
For the “Other” category, here are some of the comments received:
“I would vote for at least B. A percentage of annual profits. My history is in banks less than $2 billion in size. Even in larger institutions management should know what is going on and take action to stop these greedy practices. Everyone loves a positive bottom line and if regulators do not take appropriate actions to effect that, then nothing will change.” Rob Whitesides
“I'm in favor of B or C, with criminal prosecutions of both the institution, and complicit Bank officers.” Evan Smith
“There is an assumption here that fining is the right form of punishment for e.g. JPM and the Madoff scam. I'm not sure I fully agree with that. Yes, the amounts are absolutely large, but a fraction of earnings for a large bank like JPM. That makes them akin to just a cost of doing business! Why are there no criminal prosecutions against individuals and/or the bank, even from the Justice Department? I suspect the reasons could be (a) that a criminal prosecution against the bank could result in the bank endangering its banking license and (b) that it would provide a prima facie case for civil lawsuits. If that results in justice being done and being seen to be done, why are we protecting these banks in this way? So, now that means that large banks are not only too big to fail and too big to manage but now, also, too big to jail! JPM must be having a field-day laughing at the regulators and the Justice Department!” Nicholas Warren
“A contribution sufficient to make victims whole taking into consideration all other recoveries from other defendants plus the costs of recoveries, including the fees and costs of the trustee, legal counsel, and other professionals retained to assist in those recoveries.” Susan
The poll results reflect opinions ranging from a hurt-the-bank-financially viewpoint to a compensate-the-victims viewpoint. A look at the facts in the case of JPMorgan’s failures in the Madoff scheme reveal that neither one of those objectives was met. To assist in trying to quantify the impact of the fines in the JPMorgan case, some benchmark numbers are as follows:
  • JPMorgan’s earnings were $17.92 billion in 2013.
  • Jamie Dimon, chairman and chief executive of JPMorgan, got a 74% pay increase for 2013.
  • Most employees at JPMorgan did not get pay increases for 2013 because profits declined due to legal bills and settlements.
  • The $2 billion in fines assessed in connection with the Madoff case are about 1 week of revenue for JPMorgan.
  • The net investment losses for customers in the Madoff scheme are about $17.5 billion (and that’s not counting lost expected profits which would bring that number closer to $60 billion).
  • The balance maintained by Madoff at JPMorgan peaked at $5.6 billion in August 2008.
  • JPMorgan continued to provide banking services until Madoff’s arrest, at which time the balance in the account had fallen to $550 million.
  • The Government’s Complaint to forfeit $1.7 billion of proceeds from JPMorgan pursuant to the deferred prosecution agreement states: “The Defendant Funds [the $1.7 billion] represent proceeds of Madoff’s fraud, and constitute some of the billions of dollars that flowed through the Madoff Securities accounts at JPMC during the course of the Ponzi scheme, including from the point in October 2008 that JPMC reported to regulators in the United Kingdom that JPMC had suspicions about the legitimacy of Madoff Securities.” (emphasis added).
  • The Complaint further states that “The $1.7 billion that JPMC has agreed to forfeit to the United States pursuant to the Deferred Prosecution Agreement represents a portion of the funds leaving the Madoff Securities accounts at JPMC from October 29, 2008 (i.e., the date of JPMC’s report to SOCA) until Madoff’s arrest on December 11, 2008, and is in an amount substantially greater than the value of all funds redeemed by JPMC from the Madoff-linked feeder funds.” (emphasis added).
These facts reveal that the $2 billion in fines are not at all related to: JPMorgan’s profits; the amount of money that it handled for Madoff; the amount of losses of the victims, or any other relevant data point. Looking at these figures, one is left with the distinct feeling that the $2 billion fine may be of no consequence to JPMorgan at all. Here is what the $2 billion fines failed to do:
The fines do not compensate the victims whose money was lost on JPMorgan’s watch – this would have required about $17 billion in fines.
The fines did not have a real financial impact on JPMorgan – this would have required more than one week of revenue. How about 9 or 10 weeks of revenue, or $17 billion so the victims could be made whole?
The fines probably won’t have a general deterrent effect on other banks – any bank can absorb fines of one week’s revenues, right?
If banks are “too big to jail,” why at least can’t we hold them financially responsible in a meaningful and impactful way for their wrongful conduct?