May 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   It’s springtime, and Ponzi schemes are in full bloom. Here is a summary of stories that were reported this month. 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.

   Leonard Ansill was arrested in connection with an alleged $1.1 million Ponzi scheme in which he offered investments to six investors that were supposedly funded with mortgages that he never actually held.

   Daniel Bonventre, Jerome O’Hara, and George Perez, former employees of Bernard L. Madoff Investment Securities LLC, had their request for separate trials rejected by the court. The three were indicted together, along with Annette Bongiorno and Joann “Jodi” Crupi, for their conduct in the Madoff Ponzi scheme. The three sought to have their cases heard separately from the others to avoid being tainted with the conduct of the other defendants. The court stated, “Bonventre, O'Hara and Perez have not shown that a joint trial with the other Defendants will prejudice them to a degree amounting to a miscarriage of justice." The court also ordered the early turnover by the government of the government’s exhibit copies and list.

   James Brandolino, 44, pleaded guilty and was sentenced to almost 9 years in prison and ordered to pay more than $3.8 million in restitution for a $5 million Ponzi scheme that defrauded 60 investors. Brandolino had futures trading losses of $850,000, and he misappropriated more than $2 million, using the money to purchase a BMW, Rolex watch and a piano. 

   Jason Franklin Brown, son of Ponzi schemer Jack E. Brown, was the subject of an involuntary bankruptcy petition. Jason Brown owes about $1.5 million for his part in what has been called a family Ponzi scheme. It is alleged that Jason Brown received about $542,000 in “bonuses” over the course of the last three years, none of which he reported to the Internal Revenue Service. He also allegedly received a $52,000 yearly salary and a $26,400 yearly housing allowance for “preparing $40 tax returns and doing some light bookkeeping.” 

   Robert A. Christy, of Georgia, and his company, Crabapple Capital Group LLC, had their CFTC registration revoked. The order of the CFTC found that Christy and Crabapple violated CFTC regulations in connection with their operation of a Ponzi scheme. Christy was ordered to pay $2.6 million in sanctions for his Forex fraud. 

   James F. Ellis, 70, was sentenced to about 3 years for his role in the Wilton Manors Ponzi scheme run by George Elia. Ellis helped bring more than $6 million to Elia’s Ponzi scheme, and he pocketed about $3 million from the scheme, paying for 3 homes, two BMWs and expensive cruises. Ellis pleaded guilty midway through his trial.

   Mark A. Ellison, David D. Swenson and Jeremy Snow Swenson pleaded not guilty to fraud charges connection with an alleged real estate investment scheme run through DBSI, Inc., which was supposedly a profitable real estate investment company. Ellison was general counsel for DBSI, which ran an $80 million Ponzi scheme.

   Edward Fitzgerald, 60, was arrested in Florida and is expected to be brought back to Southern California to face charges relating to an alleged $16 million Ponzi scheme. Fitzgerald is a former yacht broker and is accused of buying and selling boats with other people’s money. 

   Alan G. Flesher, 65, Wayne D. Flesher, 62, and Nancy Carol-Khalial, 65, were sentenced to 17½ years, 6 years and 4 years, respectively, and ordered to pay $27.4 million in restitution for their role in a $41 million Ponzi scheme which defrauded 790 investors. They pleaded guilty to running a scheme through their companies, Unlimited Cash Inc. and Douglas Network Enterprises Inc. They sold ATMs and Ad Toppers, which were advertisement-displaying video screens mounted on top of ATMS and vending machines. Victims were told they would earn income from ATM transaction fees and advertisement revenue generated by Ad Toppers, which would show ads for companies such as Coca-Cola, Gold’s Gym, and Paramount Pictures. Victims lost about $27 million in the scheme.

   James Fry, 59, an investment manager who raised millions of dollars for the Thomas Petters $3.65 billion Ponzi scheme, went on trial. Fry is the only person charged in connection with the Petters case who did not plead guilty and says that he was duped along with the investors. Fry is charged with lying to investors about the Petters’ investment program and lies of omission by keeping information from investors about the criminal background of Frank Vennes, who has pleaded guilty to participating in the Petters scheme. Fry operated Arrowhead Capital Management, the investment firm that he used to lure in investors, and also set up a hedge fund in Bermuda. Fry received more than $30 million throughout the course of the scheme, and Vennes had received about $48 million in total commissions.

   Kevin Harris, Keelan Harris, Karen Starr, Complete Developments LLC and Investment International Inc. were prosecuted by the CFTC and ordered to pay restitution and penalties of over $23 million in connection with their $23 million foreign currency Ponzi scheme.

   Jerry Lynn Helms, 48, pleaded guilty to running a Ponzi scheme in which he advised investors he would buy heavy equipment at auctions and then resell it to companies that would pay higher values. Helms defrauded local North Carolina investors out of several hundred thousand dollars.

   James Jackson Jr., 47, was arrested and accused of taking $1.7 million from 17 victims in a Ponzi scheme targeting elderly investors. Jackson allegedly ran the scheme through his companies, American Senior Advisory Group and Covenant Planning Group. Jackson told investors that their money was going to a company called AFG, but in fact their money was never invested. Jackson forged the signatures of local lawyers on what he called "deposit agreements" provided to the victims. 

   Mahmoud “Mike” Karkehabadi, 55, was sentenced to 27 years for his B-move producer Ponzi scheme which he ran through his company, Alliance Group Entertainment. Prosecutors alleged that it was a $9 million Ponzi scheme, but the jurors found the loss was between $500,000 and $3 million for 21 investors. Karkehadbadi promised investors returns of 18% to 35% no matter how well a movie did.

   Jeffrey Kelly, 45, pleaded guilty to charges relating to $1.5 million Ponzi scheme. Kelly had misrepresented that he was investing money in an assortment of financial products including annuities, stocks and real estate investment trusts, but he was spending the money on personal and business expenses instead.

   James Stanley Koenig, 61, was found guilty of running a Ponzi scheme after a trial that lasted 3 months. Koenig defrauded about 2,000 investors out of $250 million in a real estate and securities investment Ponzi scheme which he ran through Asset & Real Estate Investment Co. Koenig’s co-conspirators, Gary Armitage, 62, and Jeffrey A. Guidi, each previously entered into plea agreements. Koenig represented that his companies specialized in assisted-living centers and that they were profitable for tax-sheltered property exchanges. Koenig and his co-conspirators used investor funds to pay returns to existing investors and to pay personal expenses, including the purchase of an 80-acre castle, a Lear jet and expensive cars. Koenig had failed to disclose a prior conviction and prison terms to investors relating to a gold-selling scam.

   George Lindell, 65, and Holly Hoaeae, 39, of Hawaii were indicted on charges relating to the operation of an $8.6 million Ponzi scheme. Lindell and Hoaeae had induced investors to invest in “The Parking Lot,” which was to generate between 6% and 8% returns. Instead of investing funds into safe holdings such as bonds, they used the funds for personal expenditures, such as the construction of a residence in Lahaina, Maui, the purchase of a Lexis automobile, payment of a $27,967 debt on a truck loan, and payment of $28,500 for a New Zealand safari. 

   Klaus Link, 66, was sentenced to 5½ years and ordered to pay $500,000 in restitution in connection with a $1.7 million Ponzi scheme that he ran though his company, Tri-Link Consultants Ltd., which defrauded about 20 investors. Link used investor funds to fund his own lavish lifestyle, including renovations to his home, luxury vehicles and tailored suits.

   Peter B. Madoff’s house was put up for sale by the U.S. Marshalls at an asking price of $4.495 million. Peter Madoff is currently serving a 10 year sentence for his role in the Bernard Madoff Ponzi scheme, and he was ordered to forfeit all of his and his family’s assets. 

   Stephen E. Maiden, 40, pleaded guilty to charges in connection with an $8.9 million Ponzi scheme that he ran through his hedge fund, Maiden Capital Opportunity Fund, based in Charlotte, North Carolina. Maiden touted his past educational and professional experience as an investment banker to attract investors. Maiden delivered false account statements rather than profits to his victims.

   James Mason, 66, of North Carolina, was charged with operating a foreign currency Ponzi scheme that defrauded at least 500 investors out of about $5 million. Mason operated JHM Forex Only Pool and Forex Trading at Home Association. It is alleged that Mason did not engage in much Forex trading, but that he directed investors to an online account portal where they could track their account balances, which were false.

   Edward May, 76, asked to be released from prison because he has virtually lost all of his eyesight and the prison is not equipped to handle his disability. May, of Detroit, was convicted of running a $200 million Ponzi scheme and is only 17 months into a 16 year sentence. May had pleaded guilty to fraud but wants to be released from prison while he pursues appeals. May’s fraud involved representations to investors that he had telecommunications deals with Las Vegas hotels which would generate double-digit returns. 

   Robert Medhus, 65, agreed to plead guilty to charges that he defrauded investors out of more than $900,000 in a securities Ponzi scheme. Medhus allegedly used investors’ funds for his own personal use rather than investing it in securities. 

   Philip Milton and Trade LLC of Florida were the subject of consent orders obtained by the CFTC requiring them to pay restitution and penalties in connection with their $28.4 million commodity pool Ponzi scheme. The order also required relief defendants BD, LLC, CMJ Capital, LLC, Center Richmond, LLC, and TWTT, LLC, to disgorge $545,200, $2,826,981.37, $1,253,862.62, and $100,000, respectively. The CFTC also named William Center and Gregory Center in its complaint, which alleges that the parties defrauded at least 2,000 customers and misappropriated at least $9.6 million of the pool funds for personal use. Litigation continues against William Center and Gregory Center.

   Michael Morawski, 56, and Frank Constant, 59, were sentenced to 10 years and 7½ years in prison, respectively, for their role in a $21 million Ponzi scheme that defrauded 267 investors. The defendants used a real estate investing company, Michael Franks LLC, to run the scheme that promised victims between 7% and 9% interest annually over 3 to 5 years for investments in apartment buildings in Illinois, Texas and Alabama. 

   Al Moriarty, 79, was arrested in connection with an alleged $20 million Ponzi scheme in which he promised investors 10% returns. Moriarty targeted the elderly with little investment experience.

   Timothy Melvin Murphy, 70, former commander of the Joint Forces Training Base, was sentenced to 8 years in prison and ordered to pay $2.95 million in restitution for running a Ponzi scheme that defrauded 26 investors out of about $3 million. Murphy ran his scheme through his California business, Capital Investors Inc., promising investors returns of 12% from investments in truck-leasing companies. Rather than investing the victims’ money, he used it for personal expenses, including refurbishing and maintaining a classic car collection and for treatments at a weight-loss clinic. 

   Steven Palladino, 55, was the subject of an emergency enforcement action brought by the SEC in Massachusetts, in which a temporary restraining order and asset freeze were imposed against Palladino and his company, Viking Financial Group, Inc. The SEC alleges that about 30 investors were defrauded in a $5.5 million Ponzi scheme run by Palladino and his wife, Lori Palladino, 52. Palladino and his wife are currently free on $250,000 bail following their indictment. The SEC contends that Palladino spent about $30,000 at the high end department store Hermes and that he pocketed tens of thousands of dollars in insurance proceeds and a 401k check.

   Daniel Parrilli, 62, John Lauer, 48, and Christopher Anderson, 57, were sentenced in connection with a $3.5 million Ponzi scheme involving a scheme to distribute comic books, movies and collectibles through Sundown Entertainment Incorporated. The trio, who had met in prison, raised $7 million from 150 investors, promising up to 150% to investors in a short period of time. The revenues from the distribution business were insufficient to pay the promised returns so they kept raising more money to pay off earlier investors. The three pleaded guilty. Parrilli was sentenced to 70 months and ordered to pay about $3.65 million in restitution, Lauer was sentenced to 31 years and ordered to pay about $457,000, and Anderson was sentenced to 95 months and ordered to pay more than $3.7 million in restitution.

   Larry Michael Parrish, 49, pleaded guilty to a Ponzi scheme that defrauded about 70 investors of $9.2 million. Parrish ran his scheme through IV Capital, which he represented was an investment and trading company that traded in international exchanges. He told investors that he could generate a minimum gross monthly profit margin of 5% and 2% on smaller investments. Parrish invested a small portion of the funds, but lost that money in trading activity and bad investments, he spent about $5.2 million to make payments to investors, and he used the rest for personal expenses, including rent, electronics, a golf outing for friends, and a Harley-Davidson motorcycle.

   Jason Pascua pleaded guilty to charges relating to a Ponzi scheme that he ran though J2 Marketing in which he defrauded 31 families in Hawaii of $1.5 million. Pascua ran a company that purported to be in the concert and nightclub promotions industry, and promised investors short-term investment opportunities that promised returns of 25% to 50%.

   Tom Petters, 56, is trying to get his 50 year prison sentence thrown out. Petters was convicted of running a $3.7 billion Ponzi scheme, but is now claiming that his defense attorney never told him that prosecutors had offered a 30 year prison sentence in exchange for a guilty plea. Petters is scheduled to be released in 2052, just before his 95th birthday.

   Richard Reynolds aka Richard F. Adkins, 52, is the subject of a motion to revoke his temporary release from custody. Reynolds is accused of running a $5.38 million Ponzi scheme and has been allowed to go home four days a week to work on his own defense, despite a $10 million bail.  The prosecutor contends that Reynolds violated the conditions of release when he went to a building next door to his wife’s apartment. Reynolds is alleged to have stolen from at least 140 investors, using his relationships with various ministers, pastors and evangelists to solicit investors.

   Arnand Sekaran, 44, was sentenced to 2.5 years in prison for his role in a $2.3 million Ponzi scheme run by Wasson Capital Ltd. Sekaran formed Wasson as an asset management firm in New York that was to invest funds in the U.S. options market. About 10 investors lost about $2 million. Sekaran sent fabricated statements to investors showing inflated values of their investments.

   Elizabeth Sichler, 60, who had pleaded guilty to a $2.3 million Ponzi scheme, did not get her 55 month prison sentence vacated. Sichler had been seeking a new sentence on the grounds that her attorney did not properly inform her of her appeal rights prior to the deadline. The court denied the request, finding that Sichler “did not specifically instruct counsel to file an appeal, nor did she tell him that she wanted to file an appeal.” Sichler had run a Ponzi scheme in which she misappropriated funds from a trust account maintained to temporarily hold taxes, fees and other costs in real estate deals and used money from new clients to cover the earlier thefts.

   Nickolas Skaltsis of New Hampshire was cited by the N.H. Bureau of Securities Regulation for securities fraud, the sale of unregistered securities and failure to be licensed. Skaltsis failed to respond to a cease-and-desist order and was ordered to pay restitution to 15 victims of $304,000 and penalties of $82,500. Skaltsis had issued at least 21 unsecured promissory notes in the name of Liberty Realty Trust to 15 investors who were told that their money would be used to acquire and renovate distressed real estate. Instead, Skaltsis used the money for personal expenses.

   Jeffrey J. Sykes, 54, was sentenced to 10 years in prison and ordered to pay almost $17 million in restitution for operating a $40 million Ponzi scheme through his company, Gemstar Capital Group, based in California. The investors thought they were trading in U.S. Treasury Bills when, instead, Sykes used their money for personal expenses and other ventures not approved by the investors.

   Quantum Title was indicted by a grand jury on charges relating to running $3 million Ponzi scheme. The money was missing from the company’s escrow account for 14 transactions where the payoff was not sent to the original mortgagor. It is alleged that principals of Quantum Title, Michael Martinez, 52, and Kathy Norman, 52, took the money and used it for other purposes and to pay off older transactions. 

   Lee Peck Eu Unitt, 48, was found guilty of charges relating to a Ponzi scheme that she operated with her husband, Peter Unitt III. Unitt used her clients’ money to pay other clients and to support an extravagant lifestyle that included family vacations to Malaysia, Cancun and Aruba, expensive cars and other personal expenses. Peter Unitt has also been charged in connection with activities run through his law firm, the Crest Group LLC, in which Lee was a secretary, business manager and paralegal. 

   Christopher Varlesi, 54, was sentenced to 5 years after pleading guilty to charges in connection with a $1.5 million Ponzi scheme which defrauded 18 investors, including his family and friends. The scheme was run through Gold Coast Futures and Forex, which was an investment trading pool. Varlesi falsely reported to investors that he was trading gold, commodity futures and foreign currency when, in fact, he was using most of the investor funds for his own benefit, including $120,000 to pay for a year’s rent for an apartment in the Trump International Hotel and Towers in Chicago. Varlesi created false account statements and he provided promissory notes to some investors, promising the return of the principal amount plus guaranteed interest ranging from 5% to 7½% per month.

   Anthony Vassallo sought to withdraw his guilty plea relating to his $45 million Ponzi scheme which he had run through his money management firm, Equity Investment Management and Trading, Inc. On the day that Vassallo was scheduled to be sentenced, his lawyer asked to withdraw Vassallo’s guilty plea, stating that Vassallo pleaded guilty only because he couldn’t prepare a defense while stuck in jail. Prosecutors say that the motion is “without any legal or factual basis.”

   Arnett Waters, 63, was sentenced to 17 years in connection with a gold and rare coins Ponzi scheme that he operated through A.L. Waters Capital LLC and Moneta Management, LLC, which he operated with his wife Janet Waters. Waters pitched two investment funds, Port Huron Partners, LP and Port Huron Partners II, LP, in which he raised about $1 million from investors. Waters also operated two rare coin dealerships which sold coins to investors at inflated prices. Waters used the investors’ funds for luxury travel and personal expenses. Waters was also charged with obstruction of justice for making misrepresentations to the SEC during an investigation and for concealing a bank account. Waters ultimately pleaded guilty.

   Michael Winans Jr., who was convicted of running a Ponzi scheme and sentenced to 14 years in prison after pleading guilty, is now asking the public for donations to pay for his legal representation. Winans request to delay his imprisonment was denied. Winans had admitted in court to stealing millions of dollars, but now has released a video stating that “there are numerous stories out there that claim I stole millions of dollars from innocent people. That is not true.”

INTERNATIONAL PONZI SCHEME NEWS 

Canada
   Marlon Gary Hibbert, 49, and Verna Hibbert, 48, were accused of running an $8.6 million Ponzi scheme that defrauded parishioners in Pastor Hibbert’s church, called The Life Centre Word of Faith Ministries, and non-profit organizations, called Dominion World Outreach Ministries and Fight for Justice. In connection with his investment fund, Hibbert required that investors invest a minimum of $10,000 and promised them monthly returns of up to 8.5% through foreign exchange trading. It is alleged that a lot of the investors’ money went to Panama. Police also charged Lorraine Bahlmann, 47, with fraud, alleging she was an administrative clerk responsible for mailing or e-mailing inaccurate account statements to victims showing they were earning healthy returns on their investments while they were in reality facing large losses.

   The Alberta Securities Commission ruled that Dale St. Jean and Gregory Tindall of Calgary were running a Ponzi scheme that had raised $52 million from investors. Investors were promised returns ranging from 15% to 22%. The Commission reported that a panel had also found that TransCap Corp. and Strata-Trade Corp. were involved in the Ponzi scheme. St. Jean and Tindal have also been accused by the U.S. SEC in connection with a hedge fund investment fraud that allegedly defrauded U.S. investors of $34 million.

China
   Lin Haiyan, 39, was sentenced to death by a Chinese court for running a $70 million Ponzi scheme since 2007. Haiyan, a Chinese woman, promised friends, family, former classmates and others high returns with little risk. Although she appears to have started her business as a legitimate investment program, her investments in futures and speculative stocks suffered losses but she kept on soliciting new investments anyway. China permits the imposition of the death penalty for about 55 types of crimes, including economic crimes. However, the death penalty sentence of Wu Ying, another Chinese woman found guilty of running a Ponzi scheme, was commuted to a life sentence in 2012. Wu Ying had turned a nail salon into a $60 million Ponzi scheme. China does not publicly report execution figures; however, it has been estimated that 4,000 prisoners were executed in China in 2011.

Germany
   Finanzgericht Köln, the Financial Court Cologne, handed down a decision relating to the tax treatment of profits derived from a Ponzi scheme. Victims of Ponzi schemes may suffer dramatic damages not only in losing their money to the fraudsters or by avoidance actions of trustees and liquidators once they received payments from the scheme. The German tax authority argued that payments received from Ponzi schemes are subject to taxation at least until such time that the Ponzi scheme has been discovered. In a decision that benefits victims and tax payers, the Fiscal Court of Cologne held that profits derived from Ponzi schemes are not subject to taxation. However, it is expected that the German equivalent to the Internal Revenue Service will appeal this judgment to the Federal Financial Court. The decision can be accessed (in German) at www.justiz.nrw.de/nrwe/fgs/koeln/j2013/10_V_216_13_Beschluss_20130410.html.

Reported by Bernd H. Klose, www.raklose.de 
Member of FraudNet, www.icc-ccs.org/home/fraudnet

India
   The repercussions from the recently disclosed alleged Ponzi scheme of Sudipta Sen, run under the name Saradha Group, continue to be disclosed. There have been a number of suicides by defrauded investors from the Ponzi scheme which had offered investors the opportunity to invest in a range of ventures, including real estate and motor vehicles. Saradha had utilized about 300,000 agents on a commission basis to recruit new investors. It is estimated that hundreds of thousands of Indian investors may have invested billions of dollars into the Saradha Group ventures.

   Bail was denied for Sudipta Sen and Debjani Mukherjee despite Sen’s plea that he be released on bail so he could return depositors’ money by selling his property. 

   The government in West Bengal set up a Rs crore relief fund to compensate victims of the Saradha Group. A portion of the relief fund will be funded by a 10% tax on cigarettes. The question is being asked why people who smoke should fund the victims’ losses.

   Investigators learned that more than 100 former police officers were on the Saradha Group payroll.
Police raided the offices of The Rose Valley Company in a Ponzi scheme that is similar to the recently busted Saradha Group. 

   The Securities and Exchange Board of India passed an order against Basil International, another alleged Ponzi scheme, directing the company and its directors not to collect any more funds from investors or to dispose of any assets. Basil had taken as much as Rs 92 crore from investors, promising returns of 11% to 14%.

Panama
   Quintin Earl Sponagle, 48, was arrested in Panama and extradition proceedings are underway so that Sponagle may face charges in connection with a $4 million Ponzi scheme in Canada. Sponagle allegedly defrauded 179 investors in his company, Jabez Financial Services Inc., a company registered in Panama but not authorized to trade securities in Nova Scotia, by promising them up to 214% returns per year. Sponagle had fled to Nova Scotia in 2006. 

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

   A class action was filed against The Entrust Group in connection with a $27.5 million self-directed IRA Ponzi scheme. The lawsuit was filed against Entrust Arizona LLC nka Vantage Retirement Plans, the Entrust Group Inc., Entrust Administration Inc. and Hugh Bromma. Investors were allegedly lured into the scheme by self-described “real estate investing guru” Mike Watson, who was not named in the complaint. Watson charged attendees thousands of dollars to attend his real estate investment seminars and would then entice investors to invest.

   A 12 foot, 8,000 pound section of the Berlin Wall was auctioned off for $24,000 to pay back the victims of the Ponzi scheme of Ben DeHaan. DeHaan had been convicted of running a $7.3 million Ponzi scheme.

   The receiver for the $80 million Ponzi scheme of First United Funding LLC and Corey N. Johnston sued Security Financial Bank for the return of fraudulent transfers. Johnson allegedly ran his scheme “by overselling participations, selling loan participations in loans that did not exist, and by engaging in other fraudulent conduct." The receiver alleges that Security Financial Bank profited as a result of the wrongful conduct.

   Bernard Madoff spoke with CNNMoney to reflect on the consequences of his actions. Madoff had to make a collect call because he only now makes $40 a month doing menial prison labor. Madoff acknowledged, “I was responsible for my son Mark’s death and that’s very, very difficult.” He also said, “I live with the remorse, the pain I caused everybody. Madoff also spoke to FOX Business Network, stating that his bank, JPMorgan Chase willfully ignored his illegal activity and that “there is no question that JPMorgan is guilty. They would have to be idiots to not realize what was going on. They should have reported me to the SEC or Treasury.”

   A bankruptcy judge ordered the Moss Adams accounting firm to pay $180,000 in legal fees as sanctions for a contempt finding for not complying with a bankruptcy trustee’s subpoena for documents related to Frederick Darren Berg’s Meridian Mortgage $100 million real estate investment Ponzi scheme. Although the court found that there was not intentional withholding of documents, the court found that Moss Adams did not fully comply with a 2010 subpoena. Moss Adams had audited some of the Meridian Mortgage funds, and the trustee had sued Moss Adams for negligence in the preparation of the audits of six Meridian funds between 2001 and 2007. 

   Sedgwick LLP moved to dismiss claims against it by the receiver of the Medical Capital Holdings Inc. $1 billion Ponzi scheme. The claims are for malpractice and the receiver is seeking $200 million in damages. Sedgwick, bringing its third motion to dismiss, argues that it cannot be responsible for work performed by other law firms. The receiver alleges that Sedgwick assisted Medical Capital in making unauthorized loans.

   Repet Group and America TBS, companies based in California, were sued along with their principals, Sheng Xu, Hairong Cao, and Shubin Zhao, by lender Wuxi City Runyuan Keji Xiaoe DakKuan Co. for damages in connection with Ponzi scheme activity where the defendants would allegedly payoff old loans with newer loans. Wuxi City is claiming millions of dollars in damages for RICO violations, breach of contract, fraud, conversion, unjust enrichment and vicarious liability. The complaint states, “Reminiscent of the recent spate of mortgage fraud scandals to have plagued this country, defendants knowingly utilized materially false and forged audit reports and other documents to inflate the collateral of business entities they controlled in China in order to obtain loans ostensibly for the capital requirements of those same enterprises. Rather than use these loans for their intended purposes, however, defendants conspired with others known and unknown to transfer said funds out of the People's Republic of China and into the United States for their personal use.”

   The court in the bankruptcy case of Scott Rothstein’s law firm, Rothstein, Rosenfeldt & Adler, approved the disclosure statement and set a confirmation hearing for July. Many of the law firm’s investors are opposed to the proposed repayment plan and a proposed settlement with TD Bank that the investors argue would cause investors to lose direct claims against TD Bank.

   Convicted Ponzi schemer Nevin Shapiro filed a complaint with the Florida Bar relating to his lawyer’s conduct at the trial of Juan Rene Caro. Shapiro told the district court that he committed perjury on witness stand when testifying at the trial of Caro, who is currently serving an 18-year sentence for his $132 million check-cashing scheme. Shapiro stated that his lawyers, Guy Lewis and Michael Tein knowingly allowed him to lie. Shapiro also admitted, among other things, that he lied when he was asked about his investment company. He had testified that he operated a grocery brokerage business, but in reality the operation was a front for his Ponzi scheme. 

   Victims of Ponzi schemer David Smith are eligible to file a petition for remission with the U.S. Department of Justice for compensation. Those who invested during the period February 3, 2005 through to July 15, 2008 will be eligible.

   The court in the Ponzi scheme case of R. Allen Stanford approved an interim distribution to victims of $55 million to about 17,000 claimants. The distribution constitutes about a 1 cent distribution on the $5.1 billion of claims in the case.

   A bankruptcy court denied a motion to convert the Chapter 11 bankruptcy case of Vaughan Company Realtors to Chapter 7. The motion would have likely removed the trustee, who has filed about 100 fraudulent transfer actions seeking repayment from investors who had profited from the scheme.

   The court approved the claims process in the ZeekRewards receivership case, which established a claims bar date of September 5, 2013, and approved a centralized claims website. The receiver estimates that there are nearly 1 million claimants, so additional procedures were established for noticing purposes, including email and publication. One mailing to all claimants would cost about $500,000. The court also approved the Receiver’s request that “Retail Profit Points” that had accumulated would not serve as a basis for a claim against the estate. These were points that had accumulated from alleged daily profits.

Ponzi Scheme Sentences: Maybe 150 Years Isn’t So Bad

Posted by Kathy Bazoian Phelps

   On June 29, 2009, Bernard Madoff received a prison sentence of 150 years for his Ponzi scheme that resulted in about $17.3 billion in losses. That type of prison sentence is effectively a life sentence and appears to accomplish two of the most important objectives of the U.S. criminal justice system - punishment and deterrence. We have seen some stiff prison sentences come out of Ponzi scheme operations over the past several years, and the general trend seems to be some correlation between the length of the sentence and the amount of losses suffered by the defrauded victims.

Long Prison Sentences
   In addition to Madoff, recently we have seen some other long Ponzi scheme prison sentences: Allen Stanford received 110 years for $8 billion in losses. Thomas Petters received 50 years for $3.65 billion of losses. Scott Rothstein received 50 years for $1.2 billion in losses. Marc Dreier received 20 years for $380 million in losses. And the list goes on and on.

   There are, of course, a few aberrations of large sentences for disproportionately small losses, like Karen P. Bowie of Texas, who received 80 years for $4.7 million in losses. The unevenness in the length of prison sentences may cause some to complain about the unfairness of the sentencing process. And others may feel dissatisfied when they hear that inmates such as Madoff seem happier in prison than he was running his scheme or that others are playing croquet in prison.

The Death Penalty?
   Let’s compare this level of discontent with the United States criminal justice system with what goes on in other parts of the world. This week, a Chinese court just sentenced a Chinese woman, Lin Haiyan, 39, to the death penalty for running a $70 million Ponzi scheme. Given China’s history, death will most likely be by firing squad. Yikes!

   So what did Lin Haiyan do to merit the death penalty? She promised friends, family, former classmates and others high returns with little risk. She appears to have started her business as a legitimate investment program, but she kept on soliciting new investments even after her investments in futures and speculative stocks suffered losses and then made payments to earlier investors in a Ponzi scheme-like fashion.

   China permits the imposition of the death penalty for about 55 types of crimes, including some economic crimes. China does not publicly report execution figures. However, it has been estimated that 4,000 prisoners were executed in China in 2011 and that there are a few thousand executions each year.

   However, whether Haiyan will actually be executed remains to be seen. The death penalty sentence of Wu Ying, another Chinese woman found guilty of running a Ponzi scheme, was commuted to a life sentence in 2012. Wu Ying had turned a nail salon into a $60 million Ponzi scheme, but an outcry of opposition may have led to the change in her sentence.

   The frauds that the Madoffs and Haiyans of the world commit make paupers of their victims, who can number in the tens or hundreds or thousands. The victims are then left to burden their friends and family, or society, who thus also become victims. And there is also the emotional trauma and wreckage left behind.

   All of this raises many questions. So far, our response in the U.S. has been to impose long prison sentences (which often amount to life sentences), along with virtually complete asset forfeiture. The death penalty is (thankfully) off the table because that can only be imposed for first degree murder and, possibly, certain crimes against the state. Kennedy v. Louisiana, 554 U.S. 407 (2008).

   Have long sentences and forfeiture worked as a deterrent? If not, what else can we do to deter would-be Madoffs and Haiyans from committing fraud and victimizing so many of us? I am certainly not advocating the death penalty, but do question the effectiveness of what we have now since Ponzi schemes just seem to keep proliferating. How should we punish perpetrators when deterrence fails and their victims demand justice? What do you think?

Insurance Coverage for Ponzi Scheme Losses?

Posted by Kathy Bazoian Phelps

   It sounds like a good idea: Insure against losses from investing in a Ponzi scheme. Insurance policies, including homeowner’s policies, can provide coverage from losses from fraud, embezzlement or forgery. But does it work to provide compensation for losses in a Ponzi scheme?

   Last year, the Second Circuit affirmed a district court’s dismissal of a Madoff customer’s complaint against a homeowners policy, but not for the reasons you might expect. Horowitz v. American International Group, Inc., 498 Fed. App’x 51 (2d Cir. 2012).

   Horowitz purchased a homeowner’s insurance policy from AIG with a Fraud Safeguard endorsement providing for up to $30,000 in coverage for losses resulting from fraud, embezzlement or forgery. Horowitz had invested a total of $4,327,230.55 with Madoff and had withdrawn $4,553,000, leaving a balance that Horowitz believed to be more than $8.5 million of expected profits.

   AIG denied coverage, finding that Horowitz had not suffered a loss under the policy terms. After Horowitz sued AIG, the district court dismissed the complaint, finding that the Madoff Ponzi scheme was not a peril covered by the policy and that a Ponzi scheme is not a predictable peril. The Second Circuit disagreed, finding that "a Ponzi scheme is likely just the sort of fraud anticipated by the policy drafters." Id. at 53.

   That should mean a win and $30,000 of insurance benefits for Horowitz, right? Not in that case. Even though Ponzi scheme losses were covered, the Second Circuit found that, "in our view the dispute in this case turns not on whether the peril, i.e., the Madoff fraud, is a covered event, but on the Horowitzes' remaining arguments concerning which losses flowing from that fraud are directly attributable to the covered conduct and thus recoverable under the policy." Id.

   The Second Circuit rejected Horowitz’ interpretation of "loss" and found that "the covered loss is limited only to the ‘something’ of value’ that the Horowitzes were induced to part with as a result of the fraud." In other words, their expected profits of over $8.5 million were not "something of value" and therefore not a covered loss.

   The decision is in line with decisions on other issues in Ponzi scheme cases ranging from fraudulent transfer claims to claims distribution that draw a distinction between an investor’s capital investment and expected profits. The Second Circuit expressly rejected Horowitz’s alternative methodologies of loss calculations:
   (1) the full account balance as reflected in their final BLMIS statement;
   (2) earnings reasonably expected on their capital investment based on a growth assumption or implied interest rate;
   (3) net loss in constant dollars;
   (4) non-recoverable tax payments; or
   (5) legitimate growth on investments during the pre-Ponzi period.

   The lesson here is that while an investor can obtain insurance in the hope of recouping some of the losses in a Ponzi scheme, to recover, the investor must prove an actual loss of value and not merely a loss of expected profits.

   For other decisions relating to Madoff investors’ claims against their insurance policies, see Lissauer v. Fireman’s Fund Insurance Companies, 459 Fed. App’x 67 (2d Cir. 2012); Chaitman v. Chubb Insurance Co. of New Jersey, 2012 N.J. Super. Unpub. LEXIS 2738 (Sup. Ct., App. Div. Dec. 14, 2012).

"Ponzi Schemes Explained" on The Not So Legal Show

Posted by Kathy Bazoian Phelps

The Not So Legal Show is fun, funny, and informative. Producer Stephanie Cohen recently interviewed me about Ponzi schemes. To view the show, click here, and let me know what you think.

Two Ponzi Presentations This Month

Posted by Kathy Bazoian Phelps

   I'm looking forward to my two presentations this month. At the California Bankurptcy Forum in San Diego, May 17-19, I'm on a panel that's presenting Beverly Hills Cop - Issues in Parallel Criminal, Bankruptcy, Forfeiture Proceedings. For more information, click here. Then, on May 29, I'm giving a presentation for the Los Angeles Chapter of the Association of Certified Fraud Examiners on Ponzi Schemes: A Fraud Examiner's Role. For more information on this one, click here. I hope to see you at one or both of these.

April 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   April was a remarkably busy month for Ponzi scheme news, especially in India. Here is a summary of stories that were reported this month. Be sure to read the international news, because Ponzi schemes are not just limited to the U.S. 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.

   Gary Thomas Armitage, 62, was sentenced to 10 years in connection with a plea agreement regarding a $250 million real estate and investment Ponzi scheme that defrauded about 2,000 investors. Armitage’s co-defendant, James Stanley Koenig, is currently standing trial. Another co-defendant, Jeffrey A. Guidi, previously entered into a plea deal in which he agreed to testify against the other two defendants and to pay $293,619 in restitution.

   Jonathan Arrington, 52, Michael Kratville, 52, and Michael Welke, 38, were indicted on charges related to a $4 million Ponzi scheme that defrauded more than 100 people. The three men told investors with Elite Management Holdings Corp. that returns of 4% to 6% were guaranteed and that the investment was low risk because only 10% of their principal investment would be invested at one time. It is alleged that the three spent more than $700,000 for themselves, buying golf memberships and for travel and dining.

   Gershon Barkany, 29, was charged in connection with an alleged Ponzi scheme that defrauded victims of more than $50 million. Barkany assured victims in his real estate scheme that he would only close on real estate purchases after he had located a buyer for the property at a higher price. Barkany had allegedly told investors that he would invest their money in "risk-free" investments in properties in New York City and Atlantic City and then sell the properties at a profit.

   Ray Bitar, 41, pleaded guilty to charges in connection with an internet Ponzi scheme known as Full Tilt Poker. Bitar, the mastermind of the Full Tilt Ponzi scheme, struck a deal with authorities because he is awaiting a heart transplant. He was immediately sentenced to time already served since the court noted that his heart troubles were so serious that prison would likely be a "sentence of death." Bitar is the second of 11 senior partners of Full Tilt who have been charged. Howard Lederer and Christopher Ferguson are two of the biggest names allegedly involved in the scheme.

   Frank Bluestein was barred from the investment industry and ordered to pay more $4.4 million. The SEC accused Bluestein of raising more than $35 million that flowed to Edward May in a Ponzi scheme. The victims thought they were investing in telecommunications.

   Jay and Tracy Brooks and their companies J. Brooks Financial and Brooks Real Estate Holdings, of South Carolina, were accused of running a Ponzi scheme for purposes of establishing a new school, Compass Academy. Instead of investing the money as promised, the Brooks used the funds to repay a promissory note on their house, to buy jewelry and to pay for other personal expenses.

   Whileon Chay of New York and his company 4X Solutions were charged by the CFTC in connection with a $4.8 million Ponzi scheme. The CFTC alleges that Chay and 4X fraudulently solicited approximately $4.8 million from at least 19 pool participants and promised them 24% to 36% returns per year. Instead of investing money in Forex trading, Chay allegedly used the money for personal expenses, including paying for luxury resorts, expensive restaurants, limousine service and exotic car rentals.

   Bradley Collins was ordered to repay $2.2 million in connection with a Ponzi scheme that he ran, using his Christian beliefs to defraud investors. Collins allegedly defrauded 129 victims of about $30 million, sometimes dressing as a pastor to help convince his victims to invest. Collins pleaded guilty and was sentenced to 8 years.

   Beverly Joan DeRonde, 61, was sentenced to 48 months in prison and ordered to pay about $680,000 in restitution for operating a Ponzi scheme that involved over 70 individuals. DeRonde solicited loans, promising very high returns, claiming she was using the money to help her husband start a boat repair business and that she was going to buy her husband presents.

   Donald DeWaay of Idaho was indicted in connection with his activities through his company DeWaay Financial Network LLC, which allegedly failed to conduct due diligence and misled investors in connection with the DBSI Ponzi scheme that defrauded 8,500 investors. DeWaay and his company are also the subject of a class action suit. DBSI had filed bankruptcy in 2008 after losses on properties that were valued at more than $2 billion. Also indicted were Douglas Swenson, Jeremy Swenson, and Mark Eillson.

   Jim Donnan, former University of Georgia football coach, was indicted, alongside Gregory L. Crabtree, for operating a Ponzi scheme through GLC Limited, Inc. aka Global Liquidation Center, a company dealing in closeout merchandise. They sold short-term investments and promised returns of 50% to 200%. The SEC had filed a complaint last year alleging that Donnan and others were operating an $80 million Ponzi scheme that allegedly defrauded 94 investors. Donnan and Crabtree both pleaded not guilty. It is alleged that Donnan contributed $4.7 million to the scheme but took out more than $13 million. Crabtree allegedly took out at least $1.6 million.

   Charlotte Durante, 68, was convicted of running a $1.8 million Ponzi scheme. At her trial, she denied that she stole $1.8 million from mostly African-Americans and Haitians. She said "It was never my intention, never a thought in my mind, not to pay back the money." Durante said that all of the 83 investors knew their money was to be used to help her daughter establish the Museum of Lifestyle and Fashion History. The prosecutor pointed out that none of the 26 investors who testified said they had ever heard of the museum. Rather, the investors testified that Durante promised 18% interest on their investments and that she was using the money to help struggling families make down payments on home loans. The model was that once the families got conventional loans, she would return their money with interest.

   David Friehling, Bernard Madoff’s auditor, saw his sentence postponed again, which is the sixth time since his 2009 guilty plea. Friehling has pleaded guilty to nine federal charges of helping conceal Madoff’s fraud. Friehling never audited Madoff’s business from 1991 to 2008, yet each year he told federal regulators that Madoff’s company had a "clean audit record." The delay is because Friehling is expected to testify for prosecutors against Daniel Bonventre and other former Madoff employees at a trial scheduled for Oct. 7.

   Sean Healy was enjoined by the SEC from trading securities. Healy is serving a 15 year sentence for running a $20 million Ponzi scheme under the name Sand Dollar Investing Partners that defrauded 50 investors.

   Peter Heckmann, 53, pleaded guilty to charges in connection with a $1 million Ponzi scheme in which he stole funds from Kaui residents by promising them returns of 10% to 15% within 2 weeks for investing in his recording studio. Heckmann had worked as a record producer and recording engineer, claiming that his "Raining Heart Records" is a "World Music record label." Heckmann had fled Hawaii when he learned of the charges against him, but was captured in March.

   Glenn Kane Jackson, 46, pleaded guilty to charges relating to a $4 million Ponzi scheme he ran with his wife, Gina McGee, through a company called Highlands Capital Partners LP. They promised high yields through low-risk investments in foreign currency exchanges. Many of the victims had invested based on the recommendation of real estate agent and former Tiburon mayor, Kirk Hanson, who was under investigation himself until his death ended the investigation. Gina McGee had previously pleaded guilty in 2011 and has since been released from jail.

   Yusaf Jawed, 44, of Oregon, pleaded guilty to charges in connection with the Ponzi scheme that he ran through his adviser company, Grifphon Asset Management, which managed Jawed’s funds, Gripfhon Alpha Fund LP, and Grifphon Iota Fund LP. Jawed has agreed to forfeit $6.4 million in ill-gotten gains and make restitution to investors. Jawed lured in over 100 investors and defrauded them of at least $37 million. Jawed allegedly spent millions of dollars of investor funds for his personal use, including expenditures on luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.

   Joe Don Johnson, 43, from Oklahoma City, was sentenced to 118 months in prison and ordered to pay about $4.5 million in restitution in connection with his securities Ponzi scheme run with William McKye. McKye was found guilty of securities fraud last year for running a scheme through Global West Funding Ltd., Co., Global West Financial LLC, Global West Financial LLC, Sure Lock Financial LLC, Sure Lock Loans LLC, and The Wave-Goldmade Ltd. Johnson used these businesses to market investment contracts whereby investors were guaranteed a monthly rate of return from 6.5% to 20% for 6 to 60 months. About 115 victims were defrauded out of $4.5 million.

   Philip Lochmiller, Sr., 65, saw his conviction affirmed by the Tenth Circuit, which rejected his arguments that his conviction should be overturned due to prejudicial jury instructions and a lack of evidence. Lochmiller was convicted of a scheme that he operated with his son, Philip Lochmiller, Jr. and Shawnee Carver, that defrauded over 400 investors out of $30 million.

   James H. Mason, 66, of North Carolina, has been charged with running a $4.7 million Ponzi scheme that allegedly solicited victims to invest in the foreign currency market. Mason solicited investments into his companies, JHM Forex Only Pool and Forex Trading at Home Association, allegedly defrauding at least 500 investors. He allegedly established a website so investors could access their online accounts, which reflected false profits. Mason allegedly only put a portion of the investor money into foreign currency exchange and used a substantial amount of the money to pay for personal and business expenses and for real estate and cars.

   David Wilson McQueen of Michigan was jailed in connection with an alleged $46.5 million Ponzi scheme after his bond was revoked because he committed bank fraud while free on bond. McQueen allegedly defrauded about 800 victims and will remain jailed until his trial next year.

   Garry Milosevich, 67, of Wisconsin, was sentenced to 6½ years in prison and ordered to pay $775,000 in restitution in connection with a Ponzi scheme that defrauded 19 victims of about $2.8 million. Co-defendant Daniel Tepoel had previously been sentenced to 11½ years for his role in the scheme. Milosevich and Tepoel had solicited individuals to invest in "prime bank guarantees," which were bogus instruments that did not actually exist.

   Philip Milton, the managing member of Trade LLC, was ordered to pay $10.8 million in restitution and $7.7 million in fines in connection with his $28 million Ponzi scheme that defrauded about 2,000 investors through four investment clubs that used a supposed proprietary software trading program. Trade LLC agreed to pay nearly $36.4 million in a consent order.

   Hendrix Montecastro, 40, saw his sentencing delayed until June. Montecastro was convicted, along with his mother, Helen Pedrino, 61, for running a multimillion real estate Ponzi scheme. The co-defendants had convinced investors to turn over control of their assets, equity and charge cards for real estate and foreign currency investments.

   Jim Morrissett, 53, of Texas, pleaded guilty to charges in connection with a Ponzi scheme that he ran through Red Earth Resources and Alpine Petroleum LLC. The oil and gas investment scheme defrauded victims of $6.8 million.

   Shervin Neman aka Shervin Davatgarzadeh, 31, was arrested on charges relating to a $3 million Ponzi scheme that he ran through Neman Financial, Inc., in which he falsely promised investors that their money would be used to purchase foreclosed real estate and stocks, including pre-initial public offering shares by Facebook, Groupon, LinkedIn and Angie’s List. Neman’s scheme allegedly targeted primarily members of the Persian-Jewish community in Los Angeles. The SEC had sued Neman in a civil action, and Neman was ordered not to commit securities fraud. Yet, the very next month, Neman solicited $2 million from another victim, making false promises that he could obtain pre-IPO shares in Facebook.

   Wayne Ogden, 49, of Utah pleaded guilty to new charges related to his involvement in a Ponzi scheme. This was his third conviction for charges relating to different Ponzi schemes. Ogden admitted to running a scheme through his real estate investment company, Paradigm Acceptance LLC, and has agreed to pay at least $3.58 million in restitution. Ogden had been convicted by a jury in February of other charges and, as part of his plea agreement, prosecutors will recommend a 10 year sentence in that case to run concurrently with a sentence from the new charges and will recommend that Ogden be ordered to pay at least another $4.86 million in restitution. Ogden was also been previously convicted of running a real estate Ponzi scheme in 1998, defrauding 500 investors out of an estimated $7 million. Ogden had been barred from soliciting investment funds and engaging in real estate investments without permission from parole officers in connection with his release from prison in 2000, yet he operated Empire Investment Group in 2001 and 2002, leading to his return to prison for a parole violation.

   Lori Palladino, 52, pleaded not guilty to charges that she participated in a Ponzi scheme alongside her husband, Steven Palladino, 55. Palladino was the bookkeeper for the business she ran with her husband, Viking Financial Group, Inc., which claimed to be a private lending company that borrowed from investors and loaned that money out at a higher interest rate. Palladino ran the back office and signed checks, but claims that she has just been included because she is the wife of Steven Palladino. It is alleged that the investors’ money was used to buy vacations, cars, gambling trips, their children’s education, and rent and gifts for Steven’s mistress.

   Larry Parrish sought a delay of his trial on charges relating to an alleged a $9.2 million Ponzi scheme that defrauded about 70 investors and promised them 60% returns. Parrish, who allegedly ran the scheme through his IV Capital fund, is requesting copies of emails in which he allegedly communicated with a government witness who handled deposits and withdrawals from a Bermuda bank account.

   Jason Pascua was indicted in connection with an alleged $1.4 million Ponzi scheme that allegedly defrauded 29 Hawaiian families by promising them 25% to 50% returns on their investment in his concert and promotion business known as J2 Marketing Solutions.

   Daniel F. Peterson was accused by the SEC of misusing a new law known as the JOBS Act to lure investors into a scheme that promised investors 10-year returns of up to 1,300% for early investors. Peterson and his company, USA Real Estate Fund 1, did not have a guaranteed investment product, nor were they affiliated with two Wall Street firms that he said he had partnered with for future offerings. The complaint is the first time that the SEC has accused someone of referring to the JOBS Act as part of a fraudulent scheme. The SEC alleged that Peterson has raised $400,000 from 21 investors.

   Perry Sawano and his company, Providence Financial Services, which does business as Integrity Financial Consulting, were the subject of a temporary restraining order and asset freeze sought by the Colorado Securities Commissioner accusing them of operating a Ponzi-like scheme. It is alleged that Sawano and Integrity Financial Consulting defrauded approximately 26 clients out of about $2.7 million, misrepresenting that the funds had been invested in entities or products that, in reality, were defunct or non-existent. The complaint also names three firms, RMC Financial, LLC, Delta Real Estate Fund LTD, and Aspen Ridge Investments, Inc., as defendants, alleging that they were used by Sawano as a conduit to funnel investor money to Sawano and Integrity Financial Consulting.

   Profitable Sunrise, a British company, and Inter Reef Ltd dba Profitable Sunrise, were charged by the SEC with allegedly operating a fraudulent scheme that took in tens of millions of dollars from tens of thousands of investors. The companies promised investors that "with every sunrise" they could profit, receiving daily returns ranging from 1.6% to 2.7%, from the business of making loans to other businesses at higher rates. In some instances, investors were promised returns of nearly 4,000%. The SEC named several Czech Republic companies as relief defendants, which were used to collect money from investors. These companies are Melland Company S.R.O., Solutions Company S.R.O., Color Shock S.R.O., and Fortuna K.S.R.O.

   Jeffrey L. Ripley, 60, and Danny Lee VanLiere, 61, pleaded no contest to charges in connection with a $9 million Ponzi scheme operated under the name of API Worldwide Holdings LLC. The scheme defrauded at least 140 victims of amounts ranging from $3,000 to $600,000 each by convincing mostly elderly investors to cash their CD’s that were maturing to invest them in API.

   Eric N. Schmickle, 37, who had been sentenced to 3 years in prison, was ordered to pay $3.6 million in restitution along with his company, Q Wealth Management, and to pay a fine of $1.5 million. The order, obtained by the CFTC, finds that Schmickle, Q Wealth, and his commodity pool operator company, Aquinas SF, operated a commodity futures Ponzi scheme. He defrauded 10 pool participants by fabricating false account statements and tax forms that showed fake investment gains.

   Brian Charles Solomon was arrested in connection with an alleged Ponzi scheme that he ran which guaranteed investment returns of as much as 15%. In order to lure in investor funds, Solomon claimed he was the director of Alpha Omega Funds LLC and senior managing partner of SolomonKeegan Group. Instead of investing the funds, he used the funds to pay tuition at a private school and for rent.

   Louis Soteriou pleaded guilty to charges in connection with a Ponzi scheme run with his filmmaker partner, Malcolm Parker. Parker also pleaded guilty to separate charges. The scheme involved investments of about $28 million in a film called "Birth of Innocence." Only about $700,000 of investor funds went to make the movie. It is alleged that millions of dollars went to make Ponzi scheme payments, and about $3.8 million went to underwrite Soteriou’s spiritual journey of trying to reach a higher level of spiritual consciousness.

   William Sullivan II, 45, has asked for dismissal of the SEC case against him relating to his role in the Ponzi scheme of Bridge Premium Finance run by Michael Turnock. Sullivan had entered into a settlement with the SEC but declined to admit or deny the allegations against him in the settlement itself. The court did not approve the settlement, which had provided for payment of a $130,000 penalty and payment of $94,000 in scheme profits. The court declined to reconsider its refusal to accept the settlement without an admission, so now Sullivan is saying he is innocent, is asking for dismissal, and is asking that all of the monies in his accounts be unfrozen and returned to him.

   Stephen Walsh was barred from tapping $3.7 million from the sale of his house to fund his criminal defense. The Second Circuit found that Walsh had used tainted funds to acquire the property. Walsh is accused of running a Ponzi scheme through his broker-dealer company, WG Trading Investors LP, that allegedly defrauded victims of about $554 million.

   Arnett L. Waters, 63, was sentenced to 17 years and ordered to pay over $9 million in restitution on charges relating to a Ponzi scheme run through his securities company, A.L. Waters Capital, LLC. He obtained about $839,000 from investors by selling units in a sham investment, and also defrauded coin customers by obtaining millions of dollars by selling coins at inflated prices.

   M. Viktoria Wilson, 24, was ordered to stand trial for lying to investigators about her husband’s whereabouts. Her husband, Joel I. Wilson, 30, is accused of defrauding investors through an investment company called The Diversified Group. Joel Wilson told investors that he would use their funds to purchase distressed properties, refurbish them, and sell them for a profit. It is believed that about $10 million was invested in the scheme.

INTERNATIONAL PONZI SCHEME NEWS

Canada

   Robert Sellars, 76, pleaded guilty to charges in connection with a $35 million Ponzi scheme that promised about 350 people, many of whom were clients of his former insurance business, Sellars Financial Inc., to invest in a scheme that promised annual returns of 15 to 36%. Some investors were told that their money was being invested in gold mining operations and European money markets.

   The Nova Scotia Securities Commission is investigating Douglas C. Rudolph, Peter A. D. Mill and CFG*CN Ltd., which is also known as Canglobe Financial Group and Canglobe International Capital Inc., each of which are the subject of a cease-trade order. It is alleged that Rudolph and Mill "directly or indirectly, promoted high yield returns on investments in the securities of CanGlobe International Capital Inc. and/or CFG*CN Ltd. to investors resident in Nova Scotia and elsewhere through word of mouth and personal invitation." It is further alleged that Rudolph made cash withdrawals from the account, transferred money to his personal account, paid personal expenses, and paid law firms and accounting firms.

India

   Sudipta Sen, the man accused of running a massive Ponzi scheme under the name Saradha Group, was arrested. It is reported that the scheme raised more than $3.5 billion from about 250,000 investors, by promising poor and middle-class investors in India returns as high as 40%. If true, the scheme is one of the largest schemes ever in India. The Saradha Group had interests in real estate, tour groups, newspapers and television stations, and owned approximately 100 companies. Many of the companies were incorporated in a one-week period in January 2011, and they shared a common address: 455 Diamond Harbour Road, Behala, Kolkata. They each listed working capital of Rs. 5 lakh each ($9,196), and their email addresses were the same. India’s market regulator, the Securities and Exchange Board of India (SEBI), began investigating the Saradha Group in 2010. SEBI ordered one of the companies run by Saradha Group, Saradha Reality, to wind up operations in three months. Saradha Reality had installment plans ranging from 12 to 60 month, where the minimum investment was Rs 100 per month. At the end of the investment period, the investor had the option of getting an allotment of land, a flat, or a refund of the invested principal plus returns that averaged between 12% and 24%. Sen was otherwise able to run the scheme by providing glossy brochures, high returns of 15% to 50%, and he had an estimated 250,000 to 350,000 people investing their money and bringing others into the scheme for 15% to 40% commissions. The starting amount for investment was as little as 100 rupees ($1.83), and promises of land and holiday packages were made to investors.

   The Crime Investigation Department of the state of Andhra Pradesh have warned prospective investors against investing in what appears to be a Ponzi scheme run by Russian Sergey Mavrodi, who founded Mavrodi Mondial Moneybox India last year. New reports state that Mavrodi describes his program as "a Community of people who are changing the world" and, as "people who have no guarantee of repayment of their funds." According to its website, investors in MMM India must exchange at least Rs 5,000 ($90) into a Mavrodi-invented currency called the Mavro to join the scheme. Mavrodi had been arrested in 2003 and sentenced by a Russian court in 2007 on fraud-related charges relating to an earlier scheme he ran in the Soviet Union. Mavrodi was released in 2007 because he had served most of his sentence in pretrial custody. Mavrodi then set up MMM branches in Russia, Ukraine, the Baltic States and others, with his website stating that he had the hope of "destroying the global financial system."

   The Ponzi scheme of Abhay Gandhi has now reached the size of Rs 100 crore, although previously thought to be Rs 4 crore. Gandhi was arrested last November, and investigators have been analyzing the losses and the property owned by Ghandi.

   The Securities and Exchange Board of India stopped a bid by a West Bengal company, Sumangal Industries, to sell an unregistered potato bond scheme that promised returns ranging from 20% to 100% in 15 months. The scheme would collect funds from investors to purchase potatoes from the market on behalf of the investors when the price is low, preserve them in cold storage, and then later sell them when the market price rises.

   Qutubuddin alias Raja Nizamuddin Saiyad was arrested from his house for running a scheme that promised investors 15% on their investments and by hiring agents and promising to pay them a 5% commission for attracting investors. Saiyed had fled to Dubai and been on the run for a year until his recent arrest.

   The Securities and Exchange Board of India issued an alert warning of a goat-rearing Ponzi scheme. The Sheep Husbandry Department was promising 2% monthly returns and to double investors’ money in 3 to 4 years. This is not the only recent goat Ponzi scheme to hit India. Just last year, the scheme of Beetal Livestock & Farm was disclosed, in which investors were told that they could double their money by purchasing a goat and that the goat would bear four kids per year on average.

   The West Bengal Police’s crime investigation department arrested Tarun Trikha, the main promoter of TVI Express, that lured in investors promising huge cash returns for finding new investors to join the scheme.

   A new financial code has been proposed by the B N Srikrishna Commission to change the meaning of "financial products" and "financial services." The proposal is that once a product is classified as a "financial product," the code would require that it be registered under the relevant laws and follow consumer-protection norms in order to stop illegal investment schemes.


NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

   Eight victims of the $400 million Agape World Ponzi scheme run by Nicholas Cosmos obtained a $4.1 million judgment against two of Cosmo’s sub-brokers, Martin C. Hartmann III and Laura Ann Tordy. The sub-brokers worked for brokers to help them solicit investors and received commissions from the brokers. The court found that Hartmann and Tordy were liable to the plaintiffs for selling them a total of $1.36 million of phony investments in Agape World and receiving more than $3 million in commissions.

   The Moss Adams accounting firm was sanctioned for not complying with a bankruptcy trustee’s subpoena for documents related to Frederick Darren Berg’s Meridian Mortgage $100 million real estate investment Ponzi scheme. A court ruled that Moss Adams did not fully comply with a 2010 subpoena and must compensate the trustee for the cost of the legal battle to get the information. Moss Adams had audited some of the Meridian Mortgage funds and also did Berg’s personal taxes. The trustee had sued Moss Adams for negligence in the preparation of the audits of six Meridian funds between 2001 and 2007. The trustee believes that the sanctions will be in excess of $250,000. Moss Adams blamed a copying firm for not delivering some boxes of its documents. The court found that Moss Adams failed to preserve emails on the company’s Outlook server after receiver served the subpoena. The trustee contended that the documents could provide information useful to his suit against Moss Adams, which seeks $150 million.

   Investors in the GLR Growth Fund Ponzi scheme run by John Geringer, Christopher Luck and Keith Rode, have filed a lawsuit against Santa Cruz County Bank, alleging misrepresentation and conspiracy to commit fraud. Investors say that they decided to invest after speaking with Santa Cruz County Bank Vice President Chuck Maffia, who was listed on the fund's marketing materials as a banking reference. The lawsuit further alleges the bank "knew fraud was being committed by Geringer, Luck and Rode" because the GLR Growth Fund had an account at the bank overseen by Maffia. Greinger, Luck and Rode have pleaded innocent to charges in connection with the $60 million investment fund that they were allegedly operating as a Ponzi scheme.

   The trustee of the Bernard Madoff made a third distribution to victims in the amount of $506 million. The payments are made to 1,103 Madoff account holders and the average check will be for about $459,000. The Trustee has recovered about $9.3 billion so far, and this payment brings the total distributed to about 58% of that amount.

   The Second Circuit ruled that investors of Bernard Madoff cannot sue the SEC for its failure in uncovering the Ponzi scheme. The court ruled that the "discretionary function" exception to a law permitting people to sue the U.S. government applies to the cases filed by the Madoff victims. The court stated: "Despite our sympathy for plaintiffs’ predicament (and our antipathy for the SEC’s conduct), Congress’s intent to shield regulatory agencies’ discretionary use of specific investigative powers" defeats the investors’ claims. The lower court had dismissed claims of Phyllis Molchatsky and Steven Schneider who had sued the SEC for grossly negligent oversight of Madoff’s firm.

   A court ruled that the New York Attorney General Eric Schneiderman can proceed with a $410 million settlement with J. Ezra Merkin, overruling the Bernard Madoff trustee’s efforts to stay the Attorney General’s settlement. The trustee had argued that only he can sue investors who allegedly participated in the Madoff fraud. The New York Attorney General had sued Merkin to pay investors in his hedge funds that were not otherwise going to be paid by the trustee because they were not Madoff customers. The court found that the trustee had waited too long to seek a stay of the litigation and "had lost his right to complain."

   Defrauded investors Thomas Carroll and Kimberly Baker in the $7 million Ponzi scheme run by Lizette Morice through her real estate investment firm, Gaddel Enterprises Inc., were granted permission to sue other investors who profited from the scheme. Morice allegedly told mortgage brokers and individual investors that Gaddel purchased foreclosed properties and resold them to large corporations at a profit and that investors could share in the profits for a minimum contribution of $1,000. No real estate transactions ever took place. The court granted summary judgment against three insider investors named in the lawsuit who profited from the scheme. The lawsuit sought the return of the investment profits and principal, as well as salaries and commissions. In an earlier ruling, the court declined to grant summary judgment against two other investors, finding that there was a dispute as to whether they knew of the scheme.

   Wells Fargo Bank NA and Wachovia Bank NA succeeded in having claims for aiding and abetting dismissed, which had been brought against them by the receiver of Arthur Nadel’s Ponzi scheme estate. The court found that the receiver had not demonstrated that the banks actually knew about the scheme. However, other claims for negligence and unjust enrichment withstood the motion to dismiss.

   Lorence Harmer, the former chief executive officer of Polaroid, has been sued by both the receiver in the Thomas Petters case and the bankruptcy trustee for Polaroid for nearly $6 million. Harmer was responsible for locating manufacturing facilities in China, which he did, but it was later revealed that he had received kickbacks from a Chinese manufacturer totaling over $5 million. Harmer had signed a promissory note to repay these amounts, but the Ponzi scheme was revealed before he had made any payments. The Petters receiver also contends that Harmer received nearly $500,000 in bonuses and fees to create the appearance of legitimacy in the business and that Harmer knew or should have known that Petters was a fraud.

   Ted Mondale, executive director of the Minnesota Sports Facilities Authority and the son of Vice President Walter Mondale, has agreed to return $50,000 to the receiver of the Thomas Petters case to resolve a $150,000 clawback case pending against him. Petters had made a personal loan to Mondale at 10% which was due in 2006 but was never repaid.

   Alleged co-conspirator defendants of Scott Rothstein, including Frank Preve, were denied access to the notes of bankruptcy trustee Herbert Stettin that were written in connection with Stettin’s deposition of Scott Rothstein. The trustee has sued Preve and others for the return of fraudulent transfers. The defendants argued that, even though they had been permitted to take their own deposition of Rothstein, they hadn’t been given enough time. The trustee argued that prior court orders prohibited the disclosure of the notes from the interview and they were protected by attorney-work product in any event. The court agreed, finding that the defendants had not show good cause for modifying the court’s orders preventing disclosure.

   TD Bank’s settlement tab continued to grow in connection with settlements of litigation related to the Scott Rothstein Ponzi scheme. TD Bank has now paid at least $330.2 million in settlements, the three newest of which are: $33 million to a group of investors known as the FEP victims; $18.5 million to the family of auto dealer Ed Morse; and $700,000 to three investors – Platinum Estates, Opmonies2, and Jonathan Brush. A plan proposed by the trustee for Rothstein former law firm, Rothstein Rosendfeldt Adler, would allow TD Bank a claim of $132 million that it could recover if more money comes into the estate.

   The wife of Scott Rothstein, Kim Rothstein, 39, has obtained a 3 month delay in her sentencing for a conspiracy charge so that she can testify in a related case. Kim faces up to 5 years in prison for concealing and trying to sell more than $1 million in jewelry, and she could get a reduced sentence in return for cooperation with prosecutors in the trial of the two men accused of helping sell the jewelry.

   The claim of former U.S. Sen. Alfonse D’Amato of New York was disallowed in the bankruptcy case of Rothstein Rosenfeldt Adler. D’Amato had filed a $1 million claim arising from his investment in a fund that had in turn invested in the Rothstein Ponzi scheme. D’Amato had invested $1 million with the Banyan Income Fund, which had invested over $775 million with Rothstein. Banyan had filed its own bankruptcy, and D’Amato had already filed a claim in the Banyan bankruptcy, so the Rothstein court found that the claim in the Rothstein bankruptcy was duplicative. D’Amato had not filed a response to the Rothstein trustee’s objection to his claim.

   The receiver in the Allen Stanford case asked permission to make a $55 million interim distribution to about 17,000 claimants. The payment amounts to about a 1% distribution to creditors in the $5.1 billion Ponzi scheme.
 
   The Allen Stanford receiver also asked for approval of an accord he has reached with the Antiguan court-appointed liquidators in connection with a battle over control of $300 million of assets outside of the U.S. The agreement would result in payment to the Antiguan liquidators of fees of $36 million from Stanford’s frozen funds in the U.K. and payment to the Justice Department and the Stanford receiver of about $23 million in Canadian funds and $132.5 million in Swiss funds.

   The SEC continues to seek to find Allen Stanford civilly liable for his multi-billion Ponzi scheme and is pursing summary judgment on its civil claims. Stanford has asked for a time extension so that he can obtain sealed exhibits from his criminal trial.

   The Second Circuit issued a ruling that impacts the manner of distribution of funds to defrauded victims in the Ponzi scheme case of Westridge Capital Management, Inc., WG Trading Company LP, and WG Trading Investors LP, run by Steven Walsh, 67, and Paul Greenwood, 64. One group of investors had opposed the receiver’s distribution plan because it offered identical treatment to different types of investors who had assumed different levels of risk, and another group of investors had objected to the plan, contending that a constant dollar adjustment should be made to their claims to adjust for inflation for longer-terms investors. The Second Circuit affirmed the lower court’s ruling which had overruled both of those objections and affirmed the pro rata net investment plan proposed by the receiver.

   The receiver of ZeekRewards posted a letter on his website stating that net winner investors have until May 31, 2013 to negotiate a settlement of the receiver’s fraudulent transfer claims against them for the profits they received. The statement came with a warning that "The time for court action is drawing closer." He threatened: "I am sending this message to make sure that net-winners understand that there is an opportunity for settlement, but that the window for the opportunity is closing." The receiver has determined that about 80,000 users of the program appear to have profited, while about 840,000 appear to have lost money.

   The ZeekRewards receiver also asked the court to deny objections to his proposal to establish a claims process. The objections to the claims process were filed by counsel for a parallel class action filed on behalf of Zeek victims. The objecting parties complained that the proposed notices to be sent to interested parties violated attorney rules of professional conduct by permitted the receiver to communicate directly with parties who are already represented by counsel. The receiver refuted this claim, noting that the rules are intended to protect adverse parties, which is different from the claims process which is designed to help these parties. The receiver also refuted the objecting parties’ accusation that he was somehow seeking to limit a claimant’s access to legal representation, noting that any claimants are free to seek the assistance of counsel. Finally, the objecting parties complained that the proposed release sought in the Claims Process is improper. The receiver responded by noting that, as part of the claims process, and in exchange for receiving pro rata distributions, the claimants would be required to release claims against the receiver and the receivership estate, not against the current or former Zeek employees or entities.

Announcing: "The Depths of Deepening Insolvency"

Posted by Kathy Bazoian Phelps

   I am pleased to announce that the American Bankruptcy Institute has published The Depths of Deepening Insolvency: Damage Exposure for Officers, Directors and Others, which I co-wrote with Prof. Jack Williams. The 178 page book is written from both the plaintiffs’ and defendants’ perspectives. It offers a historical analysis of the doctrine, its significance in calculating damages in a variety of liability scenarios, the interplay of the doctrine with fiduciary duties, and potential defenses that may be asserted to deepening insolvency allegations, as well as a state-by-state list of significant case law on this issue. It is available from the ABI bookstore. The table of contents is available here. A peek inside is available here.

   Also, a podcast that I just did with Prof. Williams, Exploring the Depths of Deepening Insolvency, is available at the ABI Podcast website.

Should All Ponzi Scheme Investors Be Treated Equal?

Posted by Kathy Bazoian Phelps

   Everyone loses in a Ponzi scheme. The question is – who loses how much? There is certainly no right that "All investors shall be treated equally." The Second Circuit has just spoken on this issue in a decision that is likely to be often cited in the battles among trustees or receivers and different constituencies of investors.

   The Second Circuit affirmed a distribution plan that treated all of the investors the same in CFTC v. Walsh, 2013 U.S. App. LEXIS 6801 (2d Cir. April 3, 2013). Disputes among different groups of defrauded investors arose in the nearly $1 billion Ponzi scheme case of Westridge Capital Management Inc., which was run by Stephen Walsh and Paul Greenwood.

   The receiver, Robb Evans & Associates, had about $815 million to distribute on about $959 million of investors’ claims pursuant to his proposed plan of distribution filed in April 2011. That plan sought to treat all investors equally, providing a pro rata distribution of available funds based on a net investment claim calculation. In this calculation, each claim is the net of the dollars out less the dollars in, and each investor would receive approximately 85% of its net investment.

   There were essentially two objections to the distribution plan:

   1. One group of investors objected to the pro rata plan because it didn’t distinguish between investors who had selected riskier investments compared to those who had chosen safer investments. They argued that it would be unfair and inequitable to treat those who took greater risk the same as those who sought to avoid risk.

   2. Another group of investors objected to the plan because it did not provide a "constant dollar" adjustment for inflation to compensate longer-term investors. This objection was also made by some investors when the trustee proposed a second distribution in the Madoff case last year, as reviewed in this blog’s July 2012 Ponzi Scheme Roundup. They called the adjustment "time based damages." These Madoff investors requested time-based damages of interest at 9% from the time their funds were first invested. The issue has not yet been resolved by the bankruptcy court in the Madoff case, but last August the court ordered Picard to maintain a reserve for the time-based damages issue of at least 3% of the proposed distribution pending a final determination.

   The lower court in the Westridge case had approved the receiver’s plan over both of these objections, finding that the groups of investors were "similarly situated" and that "a net pro rata distribution is equitable." The court also rejected the constant dollar method, finding that it favored "a more limited number of investors."

   Now, two years after the distribution plan was first proposed, the Second Circuit has spoken on these issues. On the issue of treating different groups of investors differently, the court rejected the concept of an enhanced distribution to investors due to their increased risk, affirming the use of a pro rata distribution in a Ponzi scheme case. The court noted that an imbalance that would result, causing a reduction in the distributions to some investors while permitting other investors to receive back more money than they had invested. The court stated, "It was well within the district court's discretion to conclude that, as a matter of equity, some of the similarly situated victims should not profit at the expense of the other victims." Id. at *51.

   The Second Circuit also readily held that the district court’s rejection of an inflation adjusted distribution was not an abuse of discretion, finding no "authority that supports the proposition that an inflation adjustment is required as a matter of law when there is to be a distribution of assets to a group of similarly situated victims and those assets are insufficient to make all of the victims whole." Id. at *52.

   Leaving the door open for a possible different outcome in cases with funds in excess of a 100% payout on net investment claims, the court stated, "In the event that the Receiver does recover sufficient funds to provide all of the fraud victims with more than their respective net investments, the district court will be free to consider whether to approve an inflation adjustment if the Receiver proposes one, or to consider whether to require such an adjustment if it is not proposed." Id. at *54.

   Now that the Second Circuit has spoken on the issue, the question is whether that will be the end of the tug of war. Some advocates of different priority schemes for different categories of investors and of a constant dollar method for calculating claims believe that such priorities and adjustments should be statutory. Is it time for an amendment to the Bankruptcy Code, statutory receivership provisions, or state statutes on the subject? Or does fiddling with priorities and interest on claims unduly complicate the analysis and create other problems?

Please Take Subpoenas Seriously: A Recent Sanction Ruling in a Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

   The Moss Adams accounting firm was sanctioned for not complying with a bankruptcy trustee’s subpoena for documents related to Frederick Darren Berg’s Meridian Mortgage $100 million real estate investment Ponzi scheme. The court ruled that Moss Adams did not fully comply with a 2010 subpoena and must compensate the trustee for the costs of the legal battle to get the information. A copy of the court’s unpublished decision is here.

   Moss Adams had audited some of the Meridian Mortgage funds and also did Berg’s personal taxes. The trustee in the Meridian case served a subpoena on Moss Adams in his effort to reconstruct the debtor’s records, most of which had been seized by the FBI. Following service of the subpoena, the trustee commenced litigation against Moss Adams for negligence in the preparation of the audits of six Meridian funds between 2001 and 2007. For over two years, the trustee and Moss Adams have battled whether Moss Adams has produced all records responsive to the subpoena. Among other things, Moss Adams blamed a copying firm for not delivering some boxes of its documents. The court found that Moss Adams did not issue a litigation hold and failed to preserve emails on the company’s Outlook server after receiving the subpoena, among other actions which the court found did not comply with the subpoena.

   The amount of the sanctions is to be determined by separate motion, and the trustee has said that he believes the sanctions will be in excess of $250,000.

State Restitution Funds to Ponzi Scheme Victims: A Good Idea?

Posted by Kathy Bazoian Phelps

   Should a state provide funding to reimburse victims of Ponzi schemes? Is it possible for states to promulgate fair and comprehensive laws in this regard? Does funding at the state level to reimburse victims give those victims a disincentive from exercising caution and avoiding the frauds in the first place? These are difficult questions that a few states have already decided and others may join. Laws are on the books in Indiana and Montana, and New Hampshire is thinking about it.

Indiana

   In 2010, Indiana became the first state to adopt legislation establishing a "Securities Restitution Fund." The law gave the Indiana Securities Commissioner the ability to award victims a portion of their losses up to $15,000, or 25% of unrecovered awards, whichever is less. Eligible victims are required to show proof that restitution was awarded by a court or administrative agency. The fund was established with an initial $2 million from Securities Division fines paid by violators of the Indiana Securities Act. The Fund continues to be derived from the Enforcement Fund, which is funded by fines and does not depend on any tax dollars. The Indiana legislation is here. For more information about the Indiana Securities Restitution Fund and to apply for restitution from it, click here. Frequently asked questions are here.
Pros and Cons of Indiana Restitution Fund:

Good Faith Considerations: The law contemplates consideration of "whether a victim contributed to the infliction of the victim's monetary injury." Additionally, no restitution assistance shall be awarded if the victim participated or what happens if a victim were overly greedy or willfully blind to the fraud when deciding to invest, or how that kind of determination should be made. The issue of good faith is often an extremely costly and hotly contested issue when the issue arises in litigation in Ponzi scheme cases.

Double Recovery Considerations: The law also contemplates a right of subrogation for the state, which presumably would solve the problem of a potential double recovery by the victim. On the other hand, the law provides that the state could commence its own action or intervene in an action brought by the victim, but it is hard to imagine the state pursuing this course of action, particularly where the amount at issue is capped at $15,000.

Scope of the Class of Victims Covered: It is noteworthy that this Restitution Fund only applies to victims of securities violations. Victims of other types of Ponzi schemes – of which there is an infinite variety – therefore appear out of luck. A Ponzi scheme can involve just about any business model, not just securities. One must question why securities Ponzi scheme victims are afforded special treatment under this law.

Impact of the Fund: And then there is the over-arching question of whether any of this matters because it is unclear how often the Fund will be used. On August 23, 2012, Indiana authorities announced in a press release, available here, that the first payment from the Securities Restitution Fund, in the amount of $15,000, would be made to Steve Brodie. Brodie lost his life savings of $400,000 to Keenan Hauke, who was the manager of a hedge fund called Samex Capital Partners, LLC, and who bilked over 30 investors out of $7 million to $10 million. Hauke pled guilty to federal securities fraud charges and was sentenced to over 10 years. Although $15,000 makes just a small dent in the total damage, at least it’s something.Montana

   In 2011, Montana established the "Securities Restitution Assistance Fund," to be financed by court-ordered contributions from white collar criminals and those who voluntarily contribute to the fund. The relief to be provided is phrased as follows: "There is an account in the state special revenue fund to the credit of the commissioner for use only for securities restitution assistance. . . The fund may be used by the commissioner only to pay awards of restitution assistance under this part." The purpose is stated to be "to provide restitution assistance to victims who: (1) were awarded restitution in a final order issued by the commissioner or were awarded restitution in the final order in a legal action initiated by the commissioner; and (2) have not received the full amount of restitution ordered before the application for restitution assistance is due." Victims can receive the lesser of 25% of their losses or $25,000, and only if "the person ordered to pay restitution has not paid the full amount of restitution owed to the victim."

   Recently, the Montana law was enhanced. On March 7, 2013, Montana Governor Steve Bullock signed House Bill 81 into law, making public funds available for the Securities Restitution Assistance Fund. It authorizes the deposit of a percentage of securities registration, filing or renewal fees into the Fund.

   The original 2011 law is here. Montana House Bill 81 is here. For more information about the Montana Restitution Assistance Fund and to apply for restitution from it, click here. The regulations of the Montana Securities Department relating to the fund are here.

   The first payment from this fund, in the amount of $13,750, was made in July 2012 to Reece Cobeen, who had invested $55,000 in phony promissory notes sold by Terry Parks, purportedly to help rebuild homes in Louisiana after Hurricane Katrina. Parks promised Cobeen a 24% annual return on the investment. Parks was convicted on three counts of investment fraud and was sentenced to 10 years
Pros and Cons of Montana Restitution Fund

Good Faith Considerations: This law appears to leave no room for consideration that a victim applying for relief may have unclean hands. It certainly could not be the intent to compensate those that are in cahoots with the violator, but what about those victims who were overly greedy and chose not to vet the investment program into which they were pouring their money? And, worse yet, what if laws like this provide some assurance to would-be victims that the state will have their back if something goes wrong, leaving an investor emboldened to gamble on a high-risk high-reward investment without conducting proper due diligence? While this most certainly cannot be the intent or objective of the law, more detailed guidelines prohibiting payments to those not in good faith could go a long way in removing the disincentive to conduct due diligence that this law arguably creates.

Double Recovery Considerations: The law also does not appear to have contemplated the possibility that victims may have received recoveries from other sources, such as payment in connection with a claim filed in a bankruptcy case, or a restitution or restoration payment made by the federal government in connection with a related forfeiture proceeding.

Scope of the Class of Victims Covered: Like Indiana, Montana has limited this source of recovery to victims of securities violations only. One only needs to glance at the newspaper to see the wide variety of non-securities frauds that this excludes.New Hampshire

   Will New Hampshire join Indiana and Montana in providing relief to fraud victims?

   New Hampshire Senate Bill 180 is entitled, "Establishing a recovery fund for victims of the Financial Resources Mortgage (FRM) fraud, continually appropriating a special fund and making an appropriation therefor." At present it has been favorably reported out of a Senate committee and is awaiting final action. The New Hampshire fund would deal with victims of just one fraudulent scheme – Financial Resources Mortgage. It would establish the "FRM Recovery Fund," to provide "recovery assistance" to victims of the FRM fraud. The text of the required application form is set forth in the bill. The Fund will be financed with $3 million per year in tax money. New Hampshire Senate Bill 180 is here.

   FRM and its principals, Scott Farah and Donald Dodge, defrauded 250 investors out of about $33 million. Farah was sentenced to 15 years in prison. Dodge was sentenced to 6½ years.
Pros and Cons of New Hampshire FRM Restitution Fund

Scope of the Class of Victims Covered: The New Hampshire bill is far narrower than the already narrow restitution fund laws in Indiana and Montana, which are limited to securities fraud. This bill appears to appropriate tax dollars to pay victims of one particular fraudulent scheme – the FRM scheme only. One would think that tax-paying victims of different fraudulent schemes would find this quite objectionable.

Double Recovery Considerations: The bill requires an application process that takes into consideration mortgages retained and distributions received from the bankruptcy case or other sources.

Good Faith Considerations: The bill also contemplates that recovery shall be prohibited if it is determined that the claimant engaged in fraud or related wrongful conduct or the claimant profited from the scheme.The Controversy: Victim Assistance vs. "Moral Hazard"

   Proponents of these types of state restitution funds have good intentions – let’s get money back to the victims. According to a press release issued when the Indiana law was enacted, the Indiana Secretary of State argued that the law will "protect investors from financial attacks," and "directly help victims avoid fraudsters and recover more of their losses when they do become victims of financial crimes." That press release is here.

   Opponents, however, argue that the state has no responsibility to compensate the victims of financial fraud, even if state agencies were negligent, and that "Doing so would also create a ‘moral hazard,’ an increased willingness to make risky bets that betters can lose and taxpayers can’t win." See "Editorial: Lawmakers should reject fund for FRM victims", Concord Monitor in New Hampshire, March 20, 2012. The editorial cites The Ponzi Scheme Blog for our listing of the many Ponzi scams that have been exposed. The Concord Monitor editorial is here.

   What do you think? Should the states assist fraud victims or does it create a moral hazard?