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

Thursday, July 31, 2014

July 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

    Below is a summary of the activity reported for July 2014. The reported stories reflect: 10 guilty pleas or convictions in pending cases; over 20 years of newly imposed sentences for people involved in Ponzi schemes; at least 8 newly discovered schemes allegedly involving over $440 million and over 25,000 victims; and an average age of approximately 51 for the alleged Ponzi schemers in the stories reported. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

    Barbra Alexander, 66, a Monterey financial talk show host of “Money Dots,” was sentenced to 9 years in prison in connection with an $8 million Ponzi scheme that defrauded 49 victims of about $6.3 million. The scheme was aided by Michael Swanson, 65, and Beth PiƱa who were both previously sentenced. Alexander and Swanson operated APS Funding, which promised 12% returns on short-term loans for real estate buyers. Alexander used the money for jewelry, a kitchen model, and investments in Money Dots.

    Jon Anderton, 58, was found to be in compliance with his restitution payment order. Anderton had been convicted in connection with a $1.2 million Ponzi scheme that defrauded 3 investors in Hawaii. Anderton had agreed in a plea agreement to make about $314,000 in restitution payments a year in order to stay an 18 month prison sentence.

    Bar-K Inc. was accused of defrauding 1,500 California residents in the Bay Area out of $700 million. Walter Ng, Kelly Ng, and Bruce Horwitz are also named in a class action lawsuit relating to an alleged Ponzi scheme in which the company would represented it would lend the investors’ funds to homebuyers and developers and then pay dividends to investors from the loan proceeds. Bar-K formed a fund, R.E. Loans in 2002, which filed bankruptcy in 2011.

    Ron Battistella pleaded no contest to charges stemming from a $1.3 million Ponzi scheme that promised 10% annual returns. Battistella ran a car dealer and promised investors that their investments were backed by the cars in his showroom.

    David Benjamin, 48, a former Broward Sheriff’s Office lieutenant, was sentenced to 5 years in prison for his role in the Scott Rothstein Ponzi scheme. Benjamin was paid about $180,000 for assisting Rothstein by, among other things, having another lawyer’s ex-wife arrested falsely to gain an advantage in a child custody fight. Jeff Poole, 49, was also sentenced to one year and one day in connection with that false arrest. Poole had faced up to 10 years but got less because he cooperated with prosecutors.

    Charles B. Blackwelder, 69, and his daughter, Cara Lynne Grumme, 41, were arrested and charged with running a $23 million Ponzi scheme. The scheme lured investors to buy shares in residential and commercial rental properties and was run through CFS LLC. More than 300 senior citizens in Indiana were defrauded. The Indiana Secretary of State Securities Division had filed an enforcement action last year against Blackwelder, his son Chad Blackwelder, and Grumme relating to CFS Inc. and a receiver was appointed over that entity.

    Annette Bongiorno, 65, argued that her prison sentence should be limited to 8 years. Bongiorno was convicted recently on charges that she aided Bernard Madoff’s Ponzi scheme. The sentencing guidelines provided for a life term, and the probation department recommended 20 years. Jerome O’Hara and George Perez, 48, argued that their prison sentence should be limited to home confinement and community service. Jo Ann Cruppi argued that she should also be entitled to leniency, although no specific sentence was recommended for her. They were each convicted on charges that they aided Bernard Madoff’s Ponzi scheme. The sentencing hearings were postponed until September due to “voluminous paperwork.” In the meantime, the defendants and the government continued their battle over what assets of the defendants should appropriately be forfeited. The court agreed to permit additional briefing on the subject of when the defendants knew of the fraud, giving prosecutors an opportunity to try to show that the defendants were aware of the scheme from the outset of their employment.

    Philippe Bourciquot, 46, was charged in connection with an alleged $3.1 million Ponzi scheme that targeted Haitian-Americans. Bourciquot appeared on radio shows where he solicited investors and promised them guaranteed monthly returns of 8%. About 300 people were defrauded.

    Stephen Caputi, 57, had his 5 year prison sentence for assisting Ponzi schemer Scott Rothstein reduced to 40 months and 3 years probation. His restitution order was also reduced from $29.1 million to about $6.77 million. Caputi had pleaded guilty and admitted to posing as a TD Bank official on 3 occasions to defraud investors. The reductions were due to his cooperation with the government in the prosecution of others and for his assistance in the recovery $1 million from a Moroccan account into which funds had been deposited in Caputi’s name.

    Robert Cassandro, 47, was sentenced to 15 months to 4 years in connection with an $11 million Ponzi scheme that defrauded his relatives and friends. He promised returns in investments in 30 single family homes he was building and pledged the houses as security for the loans.

    Linda Deavers, 61, was found guilty on charges relating to a $3.5 million Ponzi scheme that targeted investors in Florida. Deavers ran the scheme through Angel Annie Humanitarian Trust LLC and promised large returns from special European trading programs.

    Archie Larue Evans, 43, was sentenced to 7 years in prison and ordered to pay $3.7 million to his victims in connection with a Ponzi scheme that defrauded victims of $2.5 million. The scheme was run through Evans’ Gold & Silver LLC. Evans had initially pleaded guilty and then tried to rescind his guilty plea. He also sought delays of his sentencing due to unspecified illness. Evans had persuaded church members in the Tilly Swamp Baptist Church in which he was a pastor to investor in Gold & Silver LLC, promising quarterly interest payments of between 105% and 12%. Evans carried a gun into the courthouse for his sentencing, but it was confiscated, and Evans may now face charges as a felon in possession of a firearm and for having a firearm in a federal courthouse.

    Mary Faher, 56, was charged in connection with an alleged Ponzi scheme that defrauded senior citizens out of millions of dollars. Faher’s alleged conduct in falsely claiming that victims’ investments were protected and in making false guarantees of high rates of return, were in connection with the Ponzi scheme run by Joel Wilson. Wilson had been extradited from Germany earlier this year on charges that $8 million was missing in connection with a scheme run through his company, Diversified Group. Faher was alleged paid an 8% commission on funds she sent to Wilson. Shawn Dicken was convicted earlier this year for her role in the scheme.

    James Jackson Jr., 48, was convicted by a jury on charges relating to a $2.2 million Ponzi scheme that defrauded about 16 investors. Jackson used his two companies, American Senior Advisory Group and Covenant Planning Group, to defraud investors, telling them that their money would be invested through a company called AFG.

    Walter P. “Buddy” Lambert, 73, was charged in connection with an alleged $5 million Ponzi scheme run through Blue Mountain Consumer Discount Co. Lambert promised investors 9% to 10% returns on their investments which were supposedly tax free and would be paid in cash. Lambert also allegedly paid a 1% kickback to Nicholas R. Sabatine III who was separately charged and who has pleaded guilty. Francis Cinelli, whose family trust operated Blue Mountain, was sued by the trustee in his bankruptcy case alleging that he falsified evidence to hide more than $2 million in income. Cinelli has not been charged criminally.

    Christopher Luck, 56, and John Geringer, 48, pleaded guilty to charges that they ran a $60 million Ponzi scheme with their partner, Keith Rode, 45, through their company, Geringer, Luck and Rode LLC. They had managed an investment fund called GLR Growth Fund.

Patricia McKittrick, 72, had her 6½ year prison sentence reduced by one year. McKittrick had appealed the sentence that she had obtained in connection with a $7 million Ponzi scheme, claiming that prosecutors delayed in charging her.

    Claude Darrell McDougal, 55, pleaded guilty to charges that he ran a Ponzi scheme through US Financial Alliance Consultants LLC. The scheme promised returns of 6% to 15% annually, and about 25 investors lost $2.5 million in the scheme. The victims thought they were investing in securities. McDougal admitted that he used about $1.19 million of investor funds on his personal expenses including dinners, jewelry, electronics, and furniture.

    Dorris Nelson, who had previously pleaded guilty to running a $137 million Ponzi scheme through the Little Loan Shoppe, was denied her request to withdraw her guilty plea to 110 federal crimes. Nelson argued that at the time of her guilty plea she lacked access to evidence that could have been used in her defense.

    Frank Preve, 70, the former head of the Banyon Group, was charged with fraud for his alleged role in the Scott Rothstein $1.2 billion Ponzi scheme. Banyon Group invested in Rothstein’s scheme, and Preve, along with George Levin, solicited investors for the scheme. It was alleged that Preve was aware a few months before the scheme collapsed that Rothstein was not keeping his commitments, but that he failed to require necessary documentation or to tell his investors.

    Dee Allen Randall, 63, was charged in connection with a $72 million Ponzi scheme that defrauded about 700 people. Randall had a good reputation in the insurance industry and was an active member of the Mormon Church. He ran the scheme through his companies, including Horizon Financial & Insurance Group, Horizon Auto Funding, Horizon Financial Center and Horizon Mortgage & Investment.

    Richard Reynolds aka Richard Adkins was denied his request to stay the start of his 20 year prison sentence so that he could prepare “software and marketing plan assets” to fulfill his required $4.45 million restitution obligation. Reynolds had threatened the judge by saying “I will fry this court” on his way out of the courtroom after having been sentenced.

    Lawrence Schmidt, 54, was sued by the SEC seeking an injunction against him in connection with a $22 million Ponzi scheme that he ran through his companies FutureGen Capital and Commercial Equity Partners. Schmidt is believed to have fled the country when his tax lien scheme collapsed. The SEC also named related defendants, FGC Distressed Assets Investment #1, FutureGen Capital DDA CG Fund, FGC Tax Lien Fund #2, FGC Trading Fund #1, FGC SPE No. 1, FGC SPE No. 2 and FGC CM Note Fund. The SEC complaint alleges that “Commercial Partners' supposed business model was to issue debt securities to investors, many of whom were unsophisticated with limited assets, promising to pay a fixed rate or return, and invest those funds in tax liens. Schmidt failed to register these securities offering with the Commission."

    Martin T. Sigillito aka Marty Sigillito aka Biship Sigillito, 65, lost his appeal of a number of issues ranging from his indictment through his sentencing. U.S. v. Sigillito, 2014 U.S. App. LEXIS 13729 (8th Cir. July 18, 2014). Sigillito was convicted on charges relating to a $70 million Ponzi scheme that he ran known as the “British Lending Program.” Sigillito is an attorney and an Anglican bishop that engaged in the BLP along with Derek Smith, a real estate investor in the United Kingdom. Smith, and two others, testified for the government, and Sigillito was convicted.

    Frank Spinosa, the former vice president of a subsidiary of TD Bank, may be liable for aiding and abetting securities fraud violations in connection with conduct relating to the Scott Rothstein Ponzi scheme. Spinosa allegedly told investors that their funds existed and were in “locked” accounts. Spinosa, who had been sued by the SEC, attempted to have the claims of the SEC dismissed against him. While some claims were dismissed, the court declined to dismiss the aiding and abetting claims, finding that the allegations “support an inference that defendant Spinosa knew of Rothstein’s wrongdoing because, if the court accepts the allegations as true, as it must at this stage, there is no legitimate purpose for defendant Spinosa's actions.” SEC v. Spinosa, 2014 U.S. Dist. LEXIS 88697 (S.D. Fla. June 30, 2014).

    TelexFree was a Ponzi/pyramid scheme, the bankruptcy trustee of TelexFree acknowledged in his answer to the SEC complaint. “On information and belief, the Trustee admits that the various individual debtors cited in paragraph 1 appear to have been engaged in a multi-level marketing enterprise, which, while purporting to be in the business of selling telephone service plans using Voice-over Internet Protocol (“VoIP”) technology, they were in fact engaged in a Ponzi or pyramid scheme which, in part, involved promising to pay investors for placing ads on the Internet and recruiting other investors to do same.” Co-owners of TelexFree, James Merrill, 53, and Carlos Wanzeler, 45, were indicted this month in connection with the scheme. Merrill pleaded not guilty. A Brazilian affiliate of TelexFree, Ympactus, was raided by police in Brazil in an enforcement action called “Operation Orion.” Ympactus is closely associated with Carlos Costa, who has not been indicted.

    Jeffrey Watts, 41, pleaded guilty to charges relating to a $5.8 million oil and gas Ponzi scheme that he ran through his company, Blue Alpha Energy. Watts falsely represented that his company invested in oil and gas wells in Texas that were owned and operated by Arrowhead LG, LLC, an otherwise unrelated entity. The scheme defrauded approximately 45 investors.

    Tyson D. Williams, 42, and D. Stanley Parrish, 42, were the subject of an SEC complaint charging them with running a $7 million mortgage-backed securities Ponzi scheme. The complaint alleges that they used their company, STV Ventures, to defraud about 50 investors by selling them collateralized mortgage obligations as unregistered brokers. The SEC is seeking an injunction, disgorgement of ill-gotten gains and civil penalties.



    A court ruled that victims of a Ponzi scheme run through Neovest had to pay 30% of the costs of their financial advisor’s appeal. The financial advisor, Wealthsure Pty Ltd., was initially ordered to pay all of the costs of the appeal, but the victims were later ordered to pay a percentage of the costs of the appeal.


    Investors in The League are considering action against the League founders, Adam Gant and Emanual Arruda. The 150 investors lost $330 million and have alleged that it was a Ponzi scheme. It is alleged that there may have been 4,280 investors in The League who lost 90% of their money.

    Sylvain Belair, the former general manager of Cosmodome, was charged in connection with an alleged real estate project in China. The scheme involved at least 47 investors who invested over $2 million. Patrick Boisvert has also been charged in connection with the scheme.

    Authorities took action against Rezwealth Financial Services and associated parties Pamela Ratmoutar, Justin Ratmoutar, Tiffin Financial Corporation, Daniel Tiffin, 2150129 Ontario Inc., Sylvan Blackett, 1778445 Ontario Inc., and Willoughby Smith. A judgment was entered against the defendants banning any further activity in connection with the foreign currency trading scheme that defrauded Ontario residents. Investors were sold investment products known as “loan agreements” which investors understood to be for the purpose of trading FX under a scheme known as “Blackett Investments.” It was alleged that Blackett defrauded at least 56 investors out of more than $3 million and that Rezwealth defrauded at least 45 investors out of about $2.9 million.

    David Horsley, former executive of Sino-Forest Corp., settled with the Ontario Securities Commission. The settlement provides that Horsley is permanently banned from being a public company officer or corporate director and orders him to pay a $700,000 fine to the OSC and to pay $5.6 million to investors in connection with a class action settlement.

    Rashida Samji was found by regulators to have run a Ponzi scheme that defrauded more than 200 victims out of at least $100 million. Samji offered returns of 12% per year and claimed that the investors’ funds would be deposited into a trust account that would secure borrowing to a winery so that it could expand internationally. Samji worked with Arvin Patel, a former investment advisor at Coast Capital Savings who recommended her investment to clients at the credit union.


Adam Worwicker, 41, pleaded guilty to charges that he ran a £1.6 million Ponzi scheme. Worwicker persuaded his clients at his accounting firm, Fisher Phillips, to invest their money with him.


    Prokon, a renewable energy developer and wind farm operator, has been accused of running a Ponzi scheme that raised nearly €1.4 billion by selling profit participation certificates to investors. The company filed an insolvency proceeding in January, and more than 4,000 creditors gathered to discuss how the company would proceed to settle the €391 million in outstanding investor claims. Prokon had promised returns of up to 8% from “environmentally responsible” investments. The company continues to operate wind turbine parks in Germany, Poland and Finland.


    More political leaders are under investigation in connection with the Saradha Group Ponzi scheme.

    A complaint was lodged against the Gulshan Group when it failed to pay back its investors. The main company was Gulshan Nirman India Ltd.

    Subrata Adhikari, the managing director of Sumangal Group, was arrested in connection with an alleged Ponzi scheme that brought in Rs crore from about 5,000 investors. Sumangal promised investors 30% to 100% returns on their investments within 15 months.

    Kolkata Weir Industries Ltd. is under investigation for running an alleged Ponzi scheme involving Rs 47.90 crore and as many as 105,809 people. The management of the company then launched a new company called Quill Kisan Credit Producer Company and persuaded investors to convert their certificates to the new company.

    Surprise inspections were conducted at four locations of Prayag Group and three locations of Palian Group in connection with a probe that they are operating an unauthorized investment Ponzi scheme.

    Ramesh Das and Rupak Khandel, the director and manager of Surya Micro Finance, respectively, were arrested on allegations that they were operating a Ponzi scheme that defrauded Rs 30 lakh to Rs 40 lakh investors.

    Prashant Wasankar was arrested in connection with an alleged Ponzi scheme that ran 20 years and the defrauded about 5,000 investors. The amounts involved are unknown, but estimates range up to 1,500 crore. Wasankar was a stock broker and investment advisor and used his company, Wasankar Wealth Management Limited, to run the scheme.

    Police arrested Sunil Saldhana, promoter of the  VCare Ponzi scheme, for assaulting an investor. Saldhana had defrauded about 15,000 Christians by promising an Israel tour for 6 days and claiming that the money collected would be used to set up schools and hospitals. The investors lost Rs 34 crore.


    Breifne O’Brien, 52, pleaded guilty to charges in connection with a Ponzi-like scheme in which he defrauded investors of around €11 million and used the money to buy properties for himself. O’Brien used fake letters to persuade investors that he had connections to international businessman and lawyers and that he was involved with property investments overseas along with a shipping insurance business.

South Africa

    The Satinsky Group was accused of running a Ponzi scheme. The chief executive, Albert Venter, denied that the business is a Ponzi scheme. The scheme was called the “New Car From R699pm” deal, and sold consumers on the idea that they could subsidize their monthly car finance installments by placing advertising stickers on their cars in return for a monthly advertising fee. Satinsky Group abruptly terminated its partnership agreement with Hong Kong based advertising company, Blue Lakes. About 20,000 people had bought into the scheme, thinking they would get a rebate on their vehicle installments in exchange for advertising.


    The imam of an Ankara mosque was suspended in connection with an alleged Ponzi scheme that defrauded victims of 7 million Turkish Liras (approximately 2.4 euros). The imam promised to distribute a “share of the profit” in the future.


    Digital Domain was sued by the state of Florida and was alleged to be a “de facto Ponzi scheme.” The lawsuit seeks to recover $20 million in state incentives granted to the company before it failed. Digital Domain’s CEO, John Textor, was also named in the lawsuit in addition to director John M. Nichols, director John W. Kluge II, director Kevin C. Ambler (a former state legislator), director Jeffrey W. Lunsford, director Keith “Casey” L. Cummings, director Kaeil Isaza Tuzman, accounting and consulting firm Singerlewak LLP, financial services firm Cowen & Co., investment banking firm Roth Capital Partners, investment banking firm Morgan Joseph Triartisan, private equity first Palm Beach Capital, Falcon Mezzanine Partners and partner Rafael Fogel, and Digital Domain California directors Mark Miller, Cliff Plumer and Carl Stork, a former Microsoft executive.

    The accounting firm of DeWitt & Shrader PC agreed to pay a $1.8 million settlement in connection with claims of negligence and fraud arising from services provided to Ponzi schemer Keenan Hauke and his hedge fund, Samex Capital Partners LLC. The receiver of the Hauke Ponzi scheme estimates that the scheme involved about $9 million and around 100 investors. The settlement funds will go toward reimbursing the victims.

    Colony Insurance co. was given permission to rescind a professional liability insurance policy issued Kwasnik Kanowitz & Associates because the court found that lawyer Michael Kwsanik lied on the firm’s application for professional liability insurance. Kwasnick had run a $8.5 million Ponzi scheme 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.

    A district court judge ruled that the trustee in the Bernard Madoff may not invoke federal bankruptcy law to recover money transferred outside of the U.S. between foreign entities. The court held that the Trustee may not sue to recover from the subsequent transferees. In an opinion dated July 7, 2014, the court held that section 550(a) does not permit “the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor.” The court concluded that: “(1) the application of section 550(a)(2) here would constitute an extraterritorial application of the statute, and (2) Congress did not clearly intend such an application. Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded here by considerations of international comity.” See Ponzi Scheme Trustee’s Claws Do Not Always Reach Overseas.

    The Madoff trustee filed an amended complaint against Bernard Madoff’s two sons, Andrew Madoff, 46, and Mark Madoff, now deceased. The amended complaint adds detail regarding the sons’ alleged knowledge of the scheme and seeks the return of more than $153 million that they took in the form of bonuses, salaries, loans, and allegedly fabricated trading profits. That figure is about $16 million higher than in the original complaint. The complaint alleges, among other things, that the brothers obstructed an SEC audit of the Madoff investment advisory business and that they identified problematic emails to be deleted and withheld from the SEC

    The judge presiding over the Bernard Madoff criminal trial denied a strange motion supposedly filed on Madoff’s behalf claiming that U.S. intelligence agencies used “bio-electric sensors” to influence the case against him. The letter sought to disqualify the U.S. Attorney’s office in Manhattan, but might have been a fake. Madoff’s signature did not match his typical one and another name listed below Madoff’s was Frederick Banks, signed as “legal asst.” Banks has previously been sentenced to 11 ½ years in total in connection with various convictions for crimes including fraud. The motion was denied as “meritless,” but the order did not determine that the letter was fake.

    A lawsuit against JPMorgan CEO, Jamie Dimon, and board members brought by investors in the Madoff scheme was dismissed. In the face of $2.6 billion in penalties and settlements bring paid by the bank in connection with the Madoff scheme, investors had sued Dimon and the Board for allegedly turning a blind eye to the fraud, alleging breach of fiduciary duty, securities law violations, and waste of corporate assets. The court found that the investors had not shown that they first demanded that the bank’s board pursue the legal claims or that a majority of the board could not have exercised disinterested and independent business judgment in considering that demand.

    The group of 55 investors known as the Razorback Group are seeking additional sanctions against TD Bank for its role in the Scott Rothstein Ponzi scheme. The investors allege that TD Bank, who settled previous claims by the group, violated the rules of discovery by not giving accurate information and by withholding other information.

    The liquidating trustee of the RRA Trust ( in the bankruptcy case of Scott Rothstein’s former law firm, Rothstein Rosenfeldt Adler) and the U.S. Government reached a settlement on how to divide about $50 million of forfeited assets seized from Scott Rothstein. The trustee and the government have been engaged in a lengthy a costly battle over the assets that led to an Eleventh Circuit decision on some of the issue giving rise to certain rights for the trustee in the assets. The settlement provides for about $28 million to go to qualified victims under the forfeiture statutes and about $21 million to creditors in the bankruptcy case. The trustee will also serve as the “restitution receiver” to distribute the funds to the victims as well as to the creditors. See Scott Rothstein Ponzi Scheme Case: A Settlement, Finally.

    The Eleventh Circuit upheld a $67 million jury verdict against TD Bank which was obtained by investor Coquina Investments in connection with the Scott Rothstein Ponzi scheme. Coquina Investments v. TD Bank, N.A., 2014 U.S. App. LEXIS 14388 (11th Cir. July 29, 2014). The jury had found TD Bank liable for its conduct in misrepresenting to investors that their money was safe and could not be distributed to other investors. TD Bank appealed, arguing that Coquina did not have standing to sue because it only acted as a conduit for investors’ money and was not itself injured. The appellate court affirmed the jury verdict, noting that Coquina invested with Rothstein in its own name and suffered an economic loss from the scheme.

    The United States Court of Appeals for the District of Columbia upheld the lower court’s ruling that Stanford Financial investors may not file claims with SIPC for their losses in the Stanford Financial Ponzi scheme. SEC v. SIPC, 2014 U.S. App. LEXIS 13722 (D.C. Cir. July 18, 2014). The SEC sought to require the SIPC to reimburse “customers” as defined under the Securities Investor Protection Act for their losses from the purchase of fictitious certificates of deposits in the Stanford Ponzi scheme. The appellate court affirmed the lower court’s conclusion that the investors did not fall within the statutory definition of “customers.” This decision affects about 20,000 investors who will not getting any relief from SIPC.

    The trustee of the TelexFree bankruptcy case filed a motion to vacate the claims bar date in the case that had previously been set for August 14, 2014. The trustee cited concerns such as incomplete bankruptcy schedules, due process concerns, the need for time to develop a protocol for the filing and administration of claims, and the fact that over 1 million claims could be filed in the case.

    Certain defendants that had been sued by the receiver of Zeek Rewards for recovery of alleged fraudulent transfers have filed counterclaims against the receiver along with a motion to dismiss the receiver’s claims against them. The defendants are Durant Brockett, Rhonda Gates, Trudy Gilmond, Jerry Napier, Darren Miller, Aaron Andrews, and Sharon Andrews and were each identified as having received over $1 million in false profits. The defendants’ counterclaims include breach of contract, tortious interference, violations of North Carolina’s Unfair and Deceptive Trade Practices Act, and deprivation of constitutional rights claims. If the claims are challenged by the receiver as frivolous and he prevails, the defendants could find themselves liable for attorney’s fees. The receiver continues to pursue fraudulent transfer claims against other defendants as well.

The Zeek Rewards receiver reached a settlement with Paul R. Burks, Dawn Wright-Olivares, and Daniel Olivares. The settlement provides that they will enter into a $600 million consent judgment “to be satisfied with substantially all of their assets.”

Monday, July 21, 2014

Scott Rothstein Ponzi Scheme: A Settlement, Finally

Posted by Kathy Bazoian Phelps

    The intersection of bankruptcy and forfeiture proceedings can lead to considerable fighting over the assets that were once in the possession and control of the perpetrator. The recent filing of a motion to approve a settlement in the hard fought battle over forfeited assets in connection with the Scott Rothstein case is, therefore, welcome news.

    Litigation between the bankruptcy estate of Scott Rothstein’s law firm, Rothstein Rosenfeldt Adler, and the United States government regarding forfeiture and restitution issues has been ongoing for years. Protracted litigation resulted in an Eleventh Circuit decision in U.S. v. Rothstein Rosenfeldt Adler, P.A. (In re Rothstein Rosenfeldt Adler, P.A.), 717 F.3d 1205 (11th Cir. 2013), which then led to even further litigation. The fight over the forfeited assets in Rothstein has been lengthy and extremely costly.

    In a joint motion filed on July 14, 2014 (attached here), the liquidating trustee of the Rothstein law firm bankruptcy case (the “RRA Trustee”) and the government are seeking approval of a settlement that provides for a division of the property as between the government and the bankruptcy estate. As a result, a portion will be distributed to restitution victims pursuant to the government forfeiture statutes and a portion will be distributed to the creditors of the bankruptcy estate. As previously discussed in this blog, those two categories of claimants are not necessarily the same. See Who Are the Victims in the Bernard Madoff Ponzi Scheme? for a discussion on the distinction.

    The new Rothstein settlement provides, among other things, the following:

1. The RRA Estate shall receive approximately $23 million in cash and assets.

2. The government shall retain about $28 million to be distributed to Qualifying Victims.

3. The RRA Trustee agrees to support entry of a final order of forfeiture which forfeits the Restitution Assets (defined in the agreement) to the Government.

4. The Remaining Assets (defined in the agreement) shall be released to the Trustee for distribution pursuant to the terms of the RRA Plan of reorganization.

5. The RRA Trustee shall also be appointed as the Restitution Receiver and shall distribute the proceeds of the Restitution Assets to the Qualifying Victims.

6. The forfeited assets from the Kim Rothstein case (Scott Rothstein’s currently imprisoned wife) and a few other related criminal cases shall be treated as Remaining Assets.

    In addition to the economic division, an interesting piece of this settlement is the manner in which the parties propose to distribute the forfeited assets. They have agreed to allow the same individual who is the RRA Trustee to serve as the Restitution Receiver. The justification, which seems to be a good one, is:
The Settlement Agreement contemplates that slightly more than $28,000,000 of assets will be finally forfeited and disbursed/restored to Qualifying Victims. In order to ensure that the distribution of these funds to Qualifying Victims and RRA creditors is maximized, the Settlement Agreement contemplates Goldberg being appointed as the Restitution Receiver. The benefit of Goldberg filling that role is that he and his professionals are already aware of and familiar with the collateral source recovery provisions in the RRA Plan. Moreover, as a result of the collateral source reporting that was required by the RRA Plan, Goldberg and his professionals are in the best position to apply, in consultation with the Government and under the District Court’s supervision, the provisions of 18 U.S.C. § 3664(j). Indeed, having a single person responsible for harmonizing distributions from both the RRA Trust and the Rothstein Criminal Case is the most efficient and effective method to ensure that no person receives an amount exceeding their losses.
    This settlement seems to be a practical, economical, and sensible resolution to litigation that has gone on way too long. Both “creditors” of the bankruptcy estate, as defined under the Bankruptcy Code, and “victims,” as defined under the forfeiture statutes, deserve to be paid. It is nice to see two arms of the government cooperate to achieve distributions to both sets of claimants who rightfully deserve compensation. Hopefully this type of practical resolution will serve as an example to the Government, bankruptcy trustees, and federal equity receivers in the future when forfeiture and bankruptcy proceedings collide.

Friday, July 18, 2014

Ponzi Scheme Trustee’s Claws Do Not Always Reach Overseas

Posted by Kathy Bazoian Phelps

     Bankruptcy trustees often sue to avoid and recover fraudulent transfers pursuant to the provisions of the Bankruptcy Code. These are often referred to as “clawback” actions. Transfers of property of a debtor may be avoided pursuant to section 548 and may be recovered from the initial transferee pursuant to section 550(a)(1) or from subsequent transferees pursuant to section 550(a)(2).

     In the Bernard Madoff Ponzi scheme case, the Trustee sued overseas feeder funds that had withdrawn funds from the Madoff scheme (the initial transferees). The Trustee also sued the customers and managers of the feeder funds who were transferred funds from those feeder funds (the subsequent transferees). At first glance, the Trustee’s claims appear to be consistent with the provisions of the Bankruptcy Code.

     A district court recently held, however, that the Trustee may not sue to recover from the subsequent transferees. In an opinion dated July 7, 2014 (attached here), the court held that section 550(a) does not permit “the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor.” The court stated:
The Court concludes that (1) the application of section 550(a)(2) here would constitute an extraterritorial application of the statute, and (2) Congress did not clearly intend such an application. Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded here by considerations of international comity. 
     The court evaluated whether the presumption against extraterritoriality should apply and, if so, “whether Congress intended for the statute to apply extraterritorially.” It considered, among other things, the following:

  •  [T]he transaction being regulated by section 550(a)(2) is the transfer of property to a subsequent transferee, not the relationship of that property to a perhaps-distant debtor.
  •  [T]he relevant transfers and transferees are predominantly foreign: foreign feeder funds transferring assets abroad to their foreign customers and other foreign transferees.
  •  Although the chain of transfers originated with Madoff Securities in New York, that fact is insufficient to make the recovery of these otherwise thoroughly foreign subsequent transfers into a domestic application of section 550(a).
  •  [A] mere connection to a U.S. debtor, be it tangential or remote, is insufficient on its own to make every application of the Bankruptcy Code domestic.

    The Trustee is seeking to use SIPA to reach around such foreign liquidations in order to make claims to assets on behalf of the SIPA customer-property estate — a specialized estate created solely by a U.S. statute, with which the defendants here have no direct relationship. Without any agreement to the contrary (which the Trustee does not suggest exists), investors in these foreign funds had no reason to expect that U.S. law would apply to their relationships with the feeder funds.

     The holding of the case appears limited to the use of “section 550(a) to pursue recovery of purely foreign subsequent transfers.”

     The court did, however acknowledge the Trustee’s policy concern that if section 550(a) does not apply extraterritorially, this “would allow a U.S. debtor to fraudulently transfer all of his assets offshore and then retransfer those assets to avoid the reach of U.S. bankruptcy law.” This does seem to be a disturbing prospect. Yet, the court dismissed the argument, stating that, “the desire to avoid such loopholes in the law ‘must be balanced against the presumption against extraterritoriality, which serves to protect against unintended clashes between our laws and those of other nations which could result in international discord.’”

     The court’s solution to this potential intentional fraud problem may be a boon for lawyers in foreign jurisdictions. The court stated, “Assuming that any such intentional fraud occurred, the Trustee here may be able to utilize the laws of the countries where such transfers occurred to avoid such an evasion while at the same time avoiding international discord.” However, a few paragraphs later, the court noted that, for example, BVI courts have prohibited recovery by a feeder fund from its customers under certain common law theories – “a determination in conflict with what the Trustee seeks to accomplish here.” In other words, a trustee can use the laws in foreign jurisdictions to combat actual fraudulent transfers, but may not do so if the laws in those other jurisdictions prohibit such actions.

     The consequences of the decision, particularly if upheld by the Second Circuit or ultimately the Supreme Court, will be the increased use of laws and lawyers in foreign jurisdictions to pursue recovery of transfers that took place overseas. Organizations such as the International Chamber of Commerce's FraudNet, of which the author is a member, are great resources to locate asset recovery specialists in jurisdictions across the globe.

Monday, July 14, 2014

Can a Receiver and a Trustee, Who Are the Same Person, Settle with Himself?

Posted by Kathy Bazoian Phelps

    Thomas J. Petters’ $3.65 billion Ponzi scheme has raised all kinds of interesting legal issues, the most recent of which involves the interplay between Thomas Petters’ individual receivership estate and the bankruptcy of Petters’ companies. David Kelley was first appointed as the receiver for Thomas Petters, and then became the Chapter 11 trustee for the Petters’ companies after he filed a bankruptcy petition for those entities.

    Kelley settled fraudulent transfer claims against VICIS Capital MasterFund and then allocated the settlement proceeds between the bankruptcy estate and the receivership estate. The district court approved the settlement in the receivership case with no objections made. The bankruptcy court also approved the settlement, but over the objection of a few creditors in the bankruptcy case. The objecting creditors appealed the bankruptcy court ruling, which was recently affirmed on appeal. Ritchie Capital Management, LLC v. Kelley, 2014 U.S. Dist. LEXIS 79815 (D. Minn. June 12, 2014).

    On appeal, the court considered essentially 3 questions.

1. Was the settlement that provided for payment of 15% of the $7.5 million settlement amount to the receivership estate reasonable, or was it a windfall to the receivership estate?
    The objecting creditors in the bankruptcy case argued that any payment to the receivership estate was unreasonable and “gratuitous” because the settlement agreement itself provided that the payment was to go to the Trustee, not the Receiver. The appellate court disagreed, finding that the bankruptcy court had correctly found that an allocation was appropriate due to the fact, among other reasons, that the Receiver had released claims against the Defendant to recover a fraudulent transfer. The court noted:
This claim could not have been brought by the Trustee on behalf of the Bankruptcy Estates, because the property transferred did not belong to PCI, but to Petters. Thus, allocating a portion of the settlement payment to the Receiver based on the Receiver's release of claims that belonged solely to the Receivership does not effectuate a gratuitous transfer from the Bankruptcy Estate to the Receivership.

 2. Did Kelley have a conflict due to his dual roles as trustee and receiver?

    The court also upheld the bankruptcy court’s finding that there was no inherit conflict in allocating the proceeds arising from the dual roles as Trustee and Receiver.
[T]he process used to arrive at the allocation included multiple assurances of trustworthiness. First, the allocation resulted from a mediated settlement before retired United States District Court Judge James Rosenbaum. Additionally, the Creditors' Committee, which acts as a fiduciary for the PCI Bankruptcy Estate, participated fully in the mediation and supports the proposed allocation. Further, as discussed earlier, the division of the settlement proceeds is a purely mathematical calculation that is objectively fair. Finally, although the allocation was not formally documented in the Settlement Agreement, the Trustee's verified motion to approve the Settlement Agreement gave creditors and other interested parties full notice of and an opportunity to object to the intended disposition of the settlement proceeds.

 3. Did the allocation violate the coordination agreement with the government?

    The objecting creditors relied on language in the Coordination Agreement among the U.S., the Trustee and the Receiver, which stated:
If there is a recovery (by settlement or following litigation) based on parallel claims pursued by Kelley, as the Receiver and Trustee, the proceeds of the recovery will inure to the benefit of the bankruptcy estates; unless there is a judgment or recovery based solely on a claim made by the Receiver, in which case, the proceeds will be turned over to the United States for the benefit of victims through remission of assets after the bankruptcy estates have been reimbursed for all fees and expenses paid or incurred in conjunction with the action that resulted in the recovery.

    The court first questioned the creditors’ standing to object on this ground, noting that the creditors were not a party to the Coordination Agreement. The court then held as follows:
Even if Ritchie were to have standing under the Coordination Agreement, the proposed allocation does not violate the Agreement's provision stating that parallel claims by the Receiver and Trustee will inure to the benefit of the bankruptcy estates. As noted above, the proceeds to be allocated to the Receivership constitute recovery on a claim that only the Receiver could bring because the transfer challenged by the Receiver was of property belonging to Petters, rather than PCI. Further, the Coordination Agreement provides that proceeds which constitute a "recovery based solely on a claim made by the Receiver . . . will be turned over to the United States for the benefit of victims through remission.
    Not only does the proposed allocation not violate the Coordination Agreement, it advances the Agreement's express goals of maximizing recovery to victims and creditors and minimizing expenses through coordination of the Receiver and Trustee's respective efforts.

    Both the bankruptcy and the district court took a realistic view of the situation and seemed to keep their eye on the prize – to get money back to defrauded victims and creditors.