February 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     Below is a summary of the activity reported for February 2014. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     Dawn Wright-Olivares, 45, and her step-son, Daniel Olivares, 31, pleaded guilty to charges relating to their roles in the ZeekRewards $850 million Ponzi scheme. Wright-Olivares worked as the chief operating officer and Olivares worked as the master computer programmer. The two were charged with knowing that the daily reward of 1.5% promised to investors was arbitrary and not related to the company’s net profits, yet they did not disclose this to investors. After learning about criminal investigations of ZeekRewards, they withdrew large amounts of money and caused the forgiveness of loans made to them by the company. Criminal charges have not been filed against the scheme’s mastermind, Paul Burks.

INTERNATIONAL PONZI SCHEME NEWS

Australia

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

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

China

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

England

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

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

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

India

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

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

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

New Zealand

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

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

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

Russia

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

South Africa

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

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

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

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

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

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

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

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

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

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

     The United States Supreme Court, on a 7-2 vote, ruled that class actions by victims of the Allen Stanford Ponzi scheme may proceed in state court against Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings Plc. Chadbourne & Park LLP v. Troice, 2014 U.S. LEXIS 1644 (Feb. 26, 2014). The defendants in those actions had argued that the lawsuits were barred by the Securities Litigation Uniform Standards Act (SLUSA), but the Supreme Court declined to extend the reach of SLUSA to apply to their claims.
 
     Thirteen members of the New Birth Missionary Baptist Church who were victims of the Ephren Taylor Ponzi scheme settled their claims against Taylor and Bishop Eddie Long. The parishioners accused Long of encouraging them to invest in Taylor’s company which turned out to be a Ponzi scheme. The victims lost more than $1 million investing in ventures that did not really exist. Taylor had guaranteed 20% returns. The SEC had charged Taylor with running an $11 million Ponzi scheme in 2012.

Fourth Circuit Finds Good Faith in Ponzi Scheme Transaction

Posted by Kathy Bazoian Phelps

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

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

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

     The difficulty for courts in evaluating good faith is where to draw the “in the know” line. If the recipient actually knew of the fraud, the answer is easy – no good faith. But what if the facts are less clear? Does the court consider and how does it weigh:

• Red flag warnings?
• What Warren Buffet would have known?
• What an elderly uneducated homemaker would have known?
• What someone similarly situated to the transferee would have known?

     And what if the recipient isn’t an investor, but is a well-established financial institution? Does the analysis change? Banks are generally just running a business and are paid fees or loan repayments by Ponzi scheme perpetrators as part of its ordinary business operations. Or were they? 

     That was the question in Taneja. First Tennessee Bank had extended a line of credit to the debtor on which the debtor made some payments. Although the bank ultimately lost more than $5.6 million, the trustee sued the bank to recover payments made on the line of about $4 million. 

     The Fourth Circuit reviewed and affirmed the findings of the Bankruptcy Court, some of which the court recited as follows:

• The bank did not have any information that would [reasonably] have led it to investigate further, and the bank's actions were in accord with the bank's and the industry's usual practices.
• The bank did not have any actual knowledge of the fraud Taneja was perpetrating on it and others.
• The bank did not have any information that would [reasonably] have led it to investigate further.
• The bank's actions were in accord with the bank's and the industry's usual practices.

     The Court further reviewed the testimony of the bank employees, adopting their explanations of:

• Why FMI's and Taneja's conduct did not raise indications of fraud despite FMI's failure to sell their mortgage loans in the secondary market in a timely manner.
• The severe decline in the market for mortgage-backed securities in 2007 and 2008, which provided additional objective evidence of the state of the warehouse lending industry during that period.
• The bank’s additional investigation into the collateral securing some of FMI's loans and that they did not discover any problems at that time.

     The Court then reviewed the following evidence submitted by the trustee which the trustee argued should have alerted the bank to the fraudulent scheme:

• FMI's delay in providing collateral documents to the bank in connection with some of FMI's mortgage loans.
• FMI's failure to sell many of its mortgage loans in the secondary market
• FMI, rather than secondary purchasers, directly made payments to the bank on certain loans
• Taneja told that one of FMI's loan processors had left FMI unexpectedly, resulting in delays in FMI's production of its mortgage loan documentation
• In a meeting between the bank employee and Taneja's attorney, the bank asked whether FMI's unsold loans were fraudulent, and the attorney responded that the loans were valid and executed in "arms-length" transactions.

     The Court was not persuaded by the trustee’s arguments and found that such issues were “common” and “consistent” in this type of business relationship. In analyzing the appropriate standard to apply, the Court reiterated that both the subjective and objective components of the analysis of good faith should be applied, as it previously determined in its decision in Goldman v. City Capital Mortg. Corp. (In re Nieves), 648 F. 3d 232 (4th Cir. 2011). The Court’s standard in that case was:

Under the subjective prong, a court looks to "the honesty" and "state of mind" of the party acquiring the property. Under the objective prong, a party acts without good faith by failing to abide by routine business practices. We therefore arrive at the conclusion that the objective good-faith standard probes what the transferee knew or should have known taking into consideration the customary practices of the industry in which the transferee operates.

     The trustee in Taneja argued on appeal that “the bank, as a matter of law, was unable to prove good faith without showing that ‘each and every act taken and belief held’ by the bank constituted ‘reasonably prudent conduct by a mortgage warehouse lender.’" The Taneja Court, however, declined “to adopt a bright-line rule.”  It stated that it would not require:

that a party asserting a good-faith defense present evidence that his every action concerning the relevant transfers was objectively reasonable in light of industry standards. Instead, our inquiry regarding industry standards serves to establish the correct context in which to consider what the transferee knew or should have known. 

       The Taneja court also declined “to hold that a defendant asserting a good-faith defense must present third-party expert testimony in order to establish prevailing industry standards.

     There was a dissent to the Taneja decision, however, in which Judge Wynn stated, “Importantly, good faith has not just a subjective, but also an objective ‘observance of reasonable commercial standards’ component.” The dissent, while agreeing that the bank could meet its burden as to the objective component without presenting testimony on prevailing industry standards, disagreed that that the bank had met its burden without presenting any third party testimony. The dissent concluded that the employees’ testimony was evidence of their “subjective good faith, not of objective good faith, taking in consideration industry standards.” The dissent concluded that “the issue is whether First Tennessee Bank, which bore the burden of proof, failed to proffer any evidence or elicit any testimony to support a finding that it received transfers from FMI with objective good faith in the face of certain alleged red flags. It did.”

     Overcoming a defendant’s good faith defense is not an easy task, especially in the case of investor-transferees. Ponzi schemes tend to target and trap the elderly, retired, uneducated and unsophisticated. In such instances, the objective standard would be what an elderly unsophisticated investor would know, and not what Warren Buffet would have known. For more sophisticated investors, however, beware. Burying your head in the sand will not likely be tolerated.

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

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

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

Expanded Scope of Ponzi Scheme Presumption Upheld on Appeal

Posted by Kathy Bazoian Phelps

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

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

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

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

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

   On the issue of intent, the district court stated:

[W]hen Petters raided Polaroid by pledging its trademark assets – assets that should have been available for Polaroid’s own financing needs, and ultimately, for its creditors – Petters either intended to render those assets unavailable to Polaroid, or at the very least, “should have seen this result as a natural consequence of [his] actions.”

   On the issue of whether the transfer was “in furtherance” of the Ponzi scheme, the court noted:

[A]s the architect and chief perpetrator of the Ponzi scheme, and the owner of PGW, Petters’ motivations – whether based on fears of personal financial ruin or criminal liability, or concern for PGW specifically, or all three – such motivations are indistinguishable from Petters’ motivation in perpetuating the operation of the Ponzi scheme. Petters’ personal interests were entirely intertwined with the Ponzi scheme and the scheme’s continuation.

   In conclusion, the court stated:

For all of the foregoing reasons, given this particular factual context, the Court finds that the Ponzi scheme presumption applies to the facts presented here to satisfy the requirement of actual fraudulent intent under both federal and state law. There can be no dispute that Tom Petters operated a massive Ponzi scheme. Through his control of Polaroid, he looted Polaroids’ assets in order to appease the Ritchie Entities, whose loan money had gone not to Polaroid, but to pay off other investors. Petters effected the transfer in a desperate attempt to keep his Ponzi scheme afloat in its waning days. Appellants’ appeal regarding the application of the Ponzi scheme presumption is therefore denied.

   It remains to be seen if this decision will stick. The defendants have appealed to the Eighth Circuit.

How to Calculate Penalties for Financial Institutions in Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps

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

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

So how did the Department of Justice arrive at the figure of $1.7 billion and the OCC arrive at the figure of $350 million?  What are the variables that the government considers in assessing fines and what objectives does the government hope to accomplish?

• To punish?
• To deter the wrongdoing institution?
• To deter financial institutions generally?
• To reimburse victims?

In the case of JPMorgan, is $2 billion – a number that seems exorbitant to the non-behemoth bank – sufficient to provide a specific deterrent to JPMorgan? Is that number a general deterrent to the players in the financial industry? While that number would put many banks out of business, did it even make a dent in JPMorgan’s bottom line?

 

The Ponzi Scheme Blog’s JANUARY POLL asked readers to vote on how to calculate fines in circumstances like these.  The choices and responses in terms of percentages were:

 

     a.     The percentage of the bank's profits from the scheme?    (42%)

     b.     A percentage of the bank’s annual net profits?   (7%)

     c.     An amount sufficient to pay all victim losses?   (35%)

     d.     Other (14%)

 

For the “Other” category, here are some of the comments received:

“I would vote for at least B. A percentage of annual profits. My history is in banks less than $2 billion in size. Even in larger institutions management should know what is going on and take action to stop these greedy practices. Everyone loves a positive bottom line and if regulators do not take appropriate actions to effect that, then nothing will change.” Rob Whitesides

“I'm in favor of B or C, with criminal prosecutions of both the institution, and complicit Bank officers.” Evan Smith

“There is an assumption here that fining is the right form of punishment for e.g. JPM and the Madoff scam. I'm not sure I fully agree with that. Yes, the amounts are absolutely large, but a fraction of earnings for a large bank like JPM. That makes them akin to just a cost of doing business! Why are there no criminal prosecutions against individuals and/or the bank, even from the Justice Department? I suspect the reasons could be (a) that a criminal prosecution against the bank could result in the bank endangering its banking license and (b) that it would provide a prima facie case for civil lawsuits. If that results in justice being done and being seen to be done, why are we protecting these banks in this way? So, now that means that large banks are not only too big to fail and too big to manage but now, also, too big to jail! JPM must be having a field-day laughing at the regulators and the Justice Department!” Nicholas Warren

“A contribution sufficient to make victims whole taking into consideration all other recoveries from other defendants plus the costs of recoveries, including the fees and costs of the trustee, legal counsel, and other professionals retained to assist in those recoveries.” Susan

The poll results reflect opinions ranging from a hurt-the-bank-financially viewpoint to a compensate-the-victims viewpoint. A look at the facts in the case of JPMorgan’s failures in the Madoff scheme reveal that neither one of those objectives was met. To assist in trying to quantify the impact of the fines in the JPMorgan case, some benchmark numbers are as follows:

• JPMorgan’s earnings were $17.92 billion in 2013.
• Jamie Dimon, chairman and chief executive of JPMorgan, got a 74% pay increase for 2013.
• Most employees at JPMorgan did not get pay increases for 2013 because profits declined due to legal bills and settlements.
• The $2 billion in fines assessed in connection with the Madoff case are about 1 week of revenue for JPMorgan.
• The net investment losses for customers in the Madoff scheme are about $17.5 billion (and that’s not counting lost expected profits which would bring that number closer to $60 billion).
• The balance maintained by Madoff at JPMorgan peaked at $5.6 billion in August 2008.
• JPMorgan continued to provide banking services until Madoff’s arrest, at which time the balance in the account had fallen to $550 million.
• The Government’s Complaint to forfeit $1.7 billion of proceeds from JPMorgan pursuant to the deferred prosecution agreement states: “The Defendant Funds [the $1.7 billion] represent proceeds of Madoff’s fraud, and constitute some of the billions of dollars that flowed through the Madoff Securities accounts at JPMC during the course of the Ponzi scheme, including from the point in October 2008 that JPMC reported to regulators in the United Kingdom that JPMC had suspicions about the legitimacy of Madoff Securities.” (emphasis added).
• The Complaint further states that “The $1.7 billion that JPMC has agreed to forfeit to the United States pursuant to the Deferred Prosecution Agreement represents a portion of the funds leaving the Madoff Securities accounts at JPMC from October 29, 2008 (i.e., the date of JPMC’s report to SOCA) until Madoff’s arrest on December 11, 2008, and is in an amount substantially greater than the value of all funds redeemed by JPMC from the Madoff-linked feeder funds.” (emphasis added).

These facts reveal that the $2 billion in fines are not at all related to: JPMorgan’s profits; the amount of money that it handled for Madoff; the amount of losses of the victims, or any other relevant data point. Looking at these figures, one is left with the distinct feeling that the $2 billion fine may be of no consequence to JPMorgan at all. Here is what the $2 billion fines failed to do:

The fines do not compensate the victims whose money was lost on JPMorgan’s watch – this would have required about $17 billion in fines.

The fines did not have a real financial impact on JPMorgan – this would have required more than one week of revenue. How about 9 or 10 weeks of revenue, or $17 billion so the victims could be made whole?

The fines probably won’t have a general deterrent effect on other banks – any bank can absorb fines of one week’s revenues, right?

If banks are “too big to jail,” why at least can’t we hold them financially responsible in a meaningful and impactful way for their wrongful conduct?

January 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     2014 began with a continued, but unfortunate, strong showing of activity in Ponzi scheme cases. Below is a summary of the activity reported for January 2014. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

     Juan Jose Alvarez de Lugo, 53, was sentenced to 4 years in prison in connection with a $5 million Ponzi scheme that defrauded at least 22 victims. Alvarez de Lugo built up a real estate business with a sophisticated website and promotional materials and misrepresented that he was working with governmental agencies to buy, rebuild and then sell “social housing projects” to help the poor. He targeted contacts from his home country Venezuela to invest and promised them annual returns of 20%.

     James W. “Bill” Bailey, Jr. lost his appeal seeking to overturn his 32 year sentence. The Fourth Circuit Court of Appeals upheld his sentence arising from charges in connection with a $15 million Ponzi scheme that he operated through Southern Financial Services and that defrauded about 76 victims. The basis of the appeal was Bailey’s claim that the court had wrongly accepted a second plea agreement that contained corrections to a previous agreement. The court noted that Bailey had personally confirmed the corrected plea agreement and the lower court had “validly accepted a reformation of the original plea agreement.”

     Anthony Barreiro, 64, and Ernest Ray Parker aka Ray Parker Gaylord, 50, were indicted on charges that they were running a $3.4 million Ponzi scheme through their antique businesses, Charles Gaylord & Co. and ARTLoan Financial Inc. Barreiro and Parker represented to investors that their money would be loaned to investors to buy artwork and the art would be held at ARTLoan as collateral. It is alleged that the two kept $1.5 million and that $1.8 million was used to make Ponzi payments. ARTLoan filed for bankruptcy in 2011.

     Arvin Lee Black II aka Lee Black, 34, pleaded guilty to charges relating to a $21 million Ponzi scheme that defrauded more than 50 victims. Black ran a stock day trading company called Sole Group LLC and promised investors returns of 5% with little risk.

     Christopher Blackwell, 34, was sentenced to 210 months in prison and ordered to pay $8.6 million in restitution in connection with an $8.6 million Ponzi scheme. Blackwell had pleaded guilty to the scheme in 2011 and then fled to Greece. Blackwell had promised investors big returns on low risk ventures.

     Bryan Caisse, 50, a U.S. Naval Academy grad, was indicted on charges relating to his alleged operation of a $1.2 million Ponzi scheme that defrauded more than 20 victims. Caisse was supposedly running a hedge fund called Huxley Capital Management in which he promised investors annual returns of 8% in connection with short-term loans. Caisse instead used the money to fund his lifestyle. Caisse tried to delay angry investors by pretending he had suffered brain damage and a broken hip in a car accident. He had fled the country with a one-way ticket to Colombia and is reportedly now trying to raise bail from the same people who were his victims.

     Anthony D’Agostino, 77, was found guilty on all counts relating to a $20 million alleged Ponzi run through Commercial Mortgage & Finance. D’Agostino, the former president of the company, insists he was not running a Ponzi scheme. About 1,400 people lost money in the scheme. Commercial Mortgage is still in business but is being operated by a board of creditors who lost their money.

     David George Dreslin, 54, was arrested in connection with an alleged $6 million real estate development Ponzi scheme. Dreslin solicited investors through his company, Dreslin Financial Services, promising them high returns in a short period of time and that their investment would be safe. Dreslin did not actually own the real estate he represented. His business partner, Gary Gauthier, 64, was also arrested and is accused of soliciting investors into the scheme. Gauthier is the former host of a Christian radio show called “It’s God’s Money.”

     Glen Galemmo, 48, pleaded guilty to charges relating a Ponzi scheme that defrauded about 200 victims. The plea agreement said that Galemmo collected $116 million, but more than 160 investors are suing Galemmo and claim that they lost up to $300 million. Galemmo had promised clients more than 30% returns through investments in his company, Queen City Investments.

     Kamalu Gonzales, 47, was sentenced to 78 months in prison and ordered to pay $830,000 in restitution in connection with a $1 million Ponzi scheme that defrauded at least 16 victims. Gonzales diverted about $410,000 for his own purposes despite his representations that he was a successful investor and trader on the foreign currency exchange market.

     Randal Kent Hansen, 65, was convicted on charges in connection with a $10 million Ponzi scheme that he ran through two hedge funds known as RAHFCO Funds LP and RAHFCO Growth Fund. The scheme, which he ran with Anthony John Johnson, defrauded about 90 investors from whom he took more than $20 million.

     Jason Nicholas James, 38, was arrested on charges related to a Ponzi scheme involving at least $350,000, run under the guise of a used-car dealership. James was using the identity of his brother, Jeremy Michael James, and other alias that included Jay James and J. James.

     Herbert Kay was indicted on charges that he ran an investment Ponzi-like scheme that defrauded at least 5 people out of about $200,000. Kay entered not guilty pleas to all of the charges, stating that his business simply failed and “There’s just nothing nefarious here.”

     Douglas Edward Kacos, 58, and Thomas Doctor, 60, will not be receiving any jail time in connection with their no contest pleas to charges of money laundering. As part of the $9 million Ponzi scheme run by Jeffrey Ripley, 60, and Danny VanLiere, 61, through their company, API Worldwide Holdings, that defrauded 140 investors, Kacos and Doctor ran funds through Kacos’ restaurant, New Beginnings Restaurant.

     Pastor Charles Lawrence Kennedy, 71, was sentenced to one year and a day in prison and ordered to pay about $315,000 in restitution in connection with a Ponzi scheme that defrauded about 100 investors. Kennedy solicited funds for a scheme run by Stanley Wayne Anderson and Edwin Alexander Smith through CFO-5 LLC and Trinity International Enterprises Inc. Investors were told that significant profits were generated through the trading of European medium term notes, when in fact no such program existed. Kennedy solicited funds from fellow pastors and members of their congregations through his company, Keys to Life Corporation, and promised them that for every $1,000 invested, the minimum return would be $1,000,000 which would be paid in 90 days. Kennedy collected $460,000 from 9 investors and forwarded $315,000 of that sum to Trinity.

     Jason Keryc, 34, Anthony Ciccone, 39, and Diane Kaylor, 36, each pleaded not guilty at their arraignment in connection with their involvement of the $400 million Ponzi scheme masterminded by Nicholas Cosmo. Two other associates, Bryan Arias, 40, and Shamika Luciano, 31, have also been charged in connection with the scheme. Cosmo had taken in more than $400 million from 5,000 investors through his companies, Agape World and Agape Merchant Advance. It is alleged that each of the defendants made money the scheme in the following amounts: Keryc $16 million; Ciccone $10.7 million; Kaylor $4.7 million; Arias $1.7 million; and Luciano $275,000.

     Ryan W. Koester was sentenced to 2 years in prison and 14 years probation and ordered to pay more than $517,000 for his role in a $1.5 million Ponzi scheme that defrauded 24 investors. Koester operated his scheme through his company, Rykoworks Capital Group LLC, claiming to be an expert in foreign commodities trading. Instead of investing the money in foreign markets, he used them for living expenses and risky internet trading.

     Terry Kretz, 61, Daryl Bornstein, 54, and Robert Haley, 54, pleaded guilty to charges relating to a Ponzi scheme run through investment company, Hanover Corporation. They offered investors promissory notes bearing high interest rates, representing that the money would be used for specific purposes such as stock options and startup companies.

     Anthony Lupas Jr., 79, surrendered to a federal prison for inmates “who have special health needs.” Lupas was deemed not competent to stand trial after it was determined that he had “lost his perception of reality.”  Lupas was a lawyer who had defrauded his clients out of $6 million in a Ponzi scheme.

     Bernard Madoff returned to prison after recovering from a heart attack that occurred last December.

     Peter Barnett Madoff, 68, the younger brother of Bernard Madoff, was disbarred as an attorney by the New York appeals court for his role in the Bernie Madoff Ponzi scheme. Peter Madoff was sentenced 10 years in prison after pleading guilty to federal conspiracy and securities fraud charges relating to the scheme. Peter Madoff admitted that he failed to report benefits as income on his tax returns and that he falsely placed his wife on the payroll of the Madoff firm.

     Barry Minkow pleaded guilty to charges of stealing $3 million from parishioners of San Diego Community Bible Church of which he was the pastor. Minkow gained notoriety for his $100 million Ponzi scheme operated through his carpet cleaning company ZZZZ Best. Minkow, at 21, was the youngest person at the time to take a company public, but was sentenced to 25 years in prison in 1988 for the scheme. He was released in 1995, became the pastor of the church two years later, and founded the Fraud Discovery Institute which helped the FBI and other law enforcement agencies to detect white collar crimes. In the meantime, he continued to engage in fraudulent activities, and was sentenced to 5 years in prison in 2011 for securities fraud. He faces an additional 5 years for this latest conviction.

     Hendrix Montecastro was sentenced to 81 years and 8 months in prison in connection with his $142 million Ponzi scheme. His mother, Helen Pedrino, 62, was sentenced to 7 years in prison. They were also ordered to pay more than $6 million in restitution.

     Steven Palladino, 56, his wife Lori Palladino, 51, and his son Gregory Palladino, 28, pleaded guilty to charges relating to an alleged $10 million Ponzi scheme that they ran through Viking Financial Group that allegedly defrauded about 40 victims. Steven Palladino was sentenced to 10-12 years in prison and 5 years of probation, while Lori and Gregory were each sentenced to 2 years in a house of correction.

     James Pantazelos lost his appeal of his sentence in which he argued that his criminal-history score overstated the significance of his criminal history because his prior criminal history involved nonviolent offenses. The Seventh Circuit affirmed his 114 month sentence. U.S. v. Pantazelos, 2014 U.S. App. LEXIS 1142 (7th Cir. Jan. 22, 2014). Pantazelos had operated a $4.3 million Ponzi scheme through Destiny’s Partners, Inc.

     Larry Michael Parrish, 49, was sentenced to 9 years in prison and order to pay $4 million in restitution in connection with $9.2 million Ponzi scheme that defrauded 70 investors. The scheme was run though IV Capital Ltd. as an investment firm that supposedly traded in international exchanges. Parrish guaranteed monthly returns of at least 2.5%.

     Tom Petters, 54, filed new motions to have the judge removed from his case and to alter the recent order that denied Petters his previous effort to have his 50 year prison term reduced. Petters also asked to be released on bail pending a ruling on his motions. Petters filed the motions with the assistance of his “jailhouse lawyer,” John Gregory Lambros, who is an inmate with Petters serving time for his role in an international cocaine distribution ring in the 1980s. Lambros is not actually an attorney and is scheduled to be released in 2014. Petters was convicted in connection with his $3.65 billion Ponzi scheme.

     Aubrey Lee Price, 47, was arrested in Georgia on charges relating to an alleged Ponzi scheme he had run though PFG, LLC and Montgomery Asset Management, LLC fka PFG Asset Management, LLC. Price had disappeared in 2012 and had left a suicide note, but authorities remained skeptical and had conducted a massive manhunt. In 2013, a court declared Price dead, but on New Year’s Eve, Price was pulled over in a routine traffic stop for a tinted window violation. Officers became suspicious when he gave them evasive answers, and they learned that Price was wanted by the FBI. Price defrauded investors by promising high returns in supposed low risk securities investments. Instead, Price use the investors’ funds to purchase a failing bank, Montgomery Bank & Trust, and then used the bank to embezzle at least $21 million.

     R. Christopher Reade, 43, a Las Vegas attorney, pleaded guilty to charges that he helped his client, Rick Young, launder $2.3 million from a $16 million Ponzi scheme. Young claimed he had developed an automated trading program that traded according to his strategies simply by “flipping a switch.” Young is serving 25 years in prison and was ordered to pay $13.3 million in restitution.

     Hans Seibt, 72, was sentenced to 10 years in prison and ordered to pay $1.3 million in restitution. Seibt used his companies, HSLV Development Corp., Clark and Nye County Development Corp., and SWN Land Corp., to solicit investments of $10,000 or more in the land scheme and promised investors returns of 10% to 12%.

     Luis Alonso Sena, 61, was arrested in connection with charges relating to a $7 million alleged Ponzi scheme that lured in more than 70 individuals. Sena is the pastor of Zion Living Word Christian Center in California. He purported to run a foreign currency investment company through Architects of the Future Investments, promising investors up to 20% returns per month.

     Richard Trabulsy had his new plea agreement approved by the court after his first plea agreement was thrown out after a dispute over the length of his sentence. Trabulsy worked with John Bravata at BBC Equities, which ran a $50 million real estate Ponzi scheme that defrauded more than 400 investors.  Bravata is serving a 20 year sentence. His son, Antonio Bravata, was also convicted in connection with the scheme and is serving a 5 year sentence.

     WCM777 changed its name to Kingdom777. The name change came with the announcement that Kingdom777 acquired the assets of WCM777 on December 30, 2013. The founders, Dr. Phil Ming Xu and Tiger Liu will not be officers in the new company and are referred to as “founders. Police in Peru raided the local WCM777 operation, which prompted the head of the organization to declare his love for the Peruvian people. Xu also promised “a promotion plan with a payout ratio of 130%.” The state of California issued a Desist and Refrain Order that bans the company in California, which also named executives Ming Xu and Zhi Liu, and Harold Zapata and World Capital Market Inc.

     Joel Wilson, 31, was arrested in Germany and accused of running a $500,000 Ponzi scheme. Wilson represented that he would use investors’ funds to purchase, fix up and resell homes in Michigan but instead used the money for himself and to make Ponzi-like payments. He ran the alleged scheme through his company, Diversified Group Advisory Fund LLC. Wilson left for German in 2012 during the investigation of the alleged Ponzi scheme. Shawn Dicken, 40, was also charged in connection with the scheme.

INTERNATIONAL PONZI SCHEME NEWS

Canada

     The Ontario Securities Commission approved a settlement that will permanently bar Kevin Warren Zietsoff, 41, from participating in the capital markets. Zietsoff operated a $15 million Ponzi scheme and defrauded more than 80 victims in Canada and the U.S. He sold promissory note securities without a license, misrepresenting that he was a successful trader and that the notes were either low risk or risk free.

     The Nova Scotia Securities Commission levied $500,000 of fines against Quintin Sponagle and Trevor Hill in connection with a alleged $3.2 million Ponzi scheme that they ran through Jabez Financial Services Inc. The scheme allegedly defrauded 137 investors, who were promised returns up to 214%.

     Earl Jones, currently serving an 11 year sentence after pleading guilty to a $50 million Ponzi scheme, could be released from prison in light of a recent Quebec court ruling. The Quebec Superior Court ruled that a federal government decision that abolishes early parole for white collar crime is unconstitutional. Jones waived his right to a parole hearing in June.

China

     Hong Kong-based company Mega Holding has been accused of running a Ponzi scheme that allegedly defrauded 35,000 people.

     It was reported that over 20, and maybe hundreds of, retired senior officials from the Ministry of Foreign Affairs were swindled in a $24.8 million (150 million yuan) scheme run through the Xin Lu Yuan Company operated by Zhang Zhouming, 46. The company had claimed that it owned 6 mines in China and overseas and more than 1,000 acres of forest and that each adviser could earn a bonus of 500 yuan for introducing a new investor to the company. Zhang was arrested in 2012. The scheme involved more than 1,700 investors who lost a total of about $430 million (2.6 billion yuan).

England

     Matthew Ames, 38, pleaded not guilty to charges that he ran a £1.6 million Ponzi scheme under the guise of saving the rainforest. Ames was charged with fraud in connection with his two green investment firms, Forestry for Life and the Investor Club. Investors were promised 15% returns from teak tree plantations and rainforest protection projects. Instead of investing the money, however, Ames used the money to fund a lavish lifestyle and to purchase a Lamborghini and a Caribbean rental.

     Nigel Goldman, 56, disappeared from his mansion in Spain after he was accused of stealing more than £3 million from investors in an alleged Ponzi scheme run through his Tangiers-based company, International Financial Investment. Goldman offered investments in commodities such as bullion, and stocks and shares. Goldman is a British poker champion who has twice been jailed for fraud. In 2012, he wrote “High Stakes: How I Blew £14 Million” - his memoirs describing his history of dishonesty.

Germany

     Dresden based financial service provider Infinus Group was dismantled as a Ponzi scheme. Public prosecution of Dresden arrested six senior representatives of Infinus for giving untrue statements about the financial situation of Infinus. Public prosecution suspects that payments to the investors were made with investments of new clients. According to the public prosecution, 25,000 investors lost approximately EUR 400,000,000. Following the search and arrest detention, 17 of the 22 companies belonging to the Infinus Group filed for insolvency. It is reported that the creditors’ claims total nearly EUR 1 billion. Reported by Bernd Klose, www.raklose.de/.

Kazakhstan

     A new law was signed to prohibit Ponzi schemes in Kazakhstan. The law, which amended the criminal code, provides for 7 to 12 year long prison terms for those orchestrating a Ponzi scheme and bans advertising of Ponzi schemes.  According to the General Prosecutor’s Office, from 2010 to 2013, there were a total of 61 criminal cases relating to Ponzi schemes and about 4,000 victims with about $5 million of losses.

New Zealand

     Rene Alan Chalmers, 43, was sentenced to 4 years and 3 months in prison in connection with a $1.5 million Ponzi scheme through his company, Chalmers Cameron Investments. Chalmers had previously plead guilty to charges of theft and making false statements to investors, which arise from his supposed trading foreign currency business and misleading banks when buying properties.

Peru

     The government shut down an office of WCM777, which recently changed its name to Kingdom 777, due to regulatory scrutiny it has been receiving in a number of countries.

Philippines

     Police arrested suspect Elvy Mansilangan-Lu, known as the “Queen of the Ponzi Scheme,” in connection with an alleged Ponzi scheme run through Minerva Co. The scheme was supposedly a double your money investment scheme in which victims, mostly Muslim investors, lost about P200 million.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

     The receiver of the Acorn Capital Management Ponzi scheme run by Donald Anthony Walker Young defeated a motion to dismiss his claims to recover allegedly fraudulent transfers made to two of Acorn’s limited partners, Diana and William Wister, in the amount of about $11.8 million.

     Francisco Javier Herrera Navarro, the ex-director of commodities trading company, Agra Canada and its subsidiary Agra USA, must pay $42 million to Rabobank in connection with a personal guarantee that he made promising to repay Agra’s obligations and the amounts due on receivables that Agra Canada sold to Rabobank. A New York state appeals court reversed a lower court's denial of the bank’s motion for summary judgment and said that Navarro unconditionally waived all defenses when he signed the guarantor agreement. The losses were in connection with a Ponzi scheme run though the companies that were operated by Eduardo Guzman Solis.

     JPMorgan Chase & Co. reached agreements with various governmental agencies to pay $2.6 billion in fines to resolve criminal and civil allegations that it failed to stop Bernard Madoff’s Ponzi scheme. JPMorgan agreed that it ignored red flags in the Madoff banking arrangement for and failed to report suspicious activity. In connection with a deferred prosecution agreement, JPMorgan will pay $1.7 billion to settle the government’s charges, $350 million to the Office of the Comptroller of the Currency, $325 million to the Madoff trustee, and $218 million to settle class action claims. The $1.7 billion from JPMorgan will go in the Madoff Victim Fund to be distributed to the Madoff victims. 193 investors – the “net winners” who withdrew more money than they invested and who are not otherwise entitled to share in the recovery - have asked to be excluded from the JPMorgan settlement.

     The U.S. Supreme Court asked the Obama administration for its input on the issues raised in the Madoff trustee’s appeal seeking permission to sue HSBC and other financial institutions. The trustee’s claims were dismissed by the lower court on the grounds that the trustee lacked standing to bring the claims, among other things. The Trustee’s claims against JPMorgan will be dropped in light of the settlement reached with that bank.

     The Madoff trustee’s settlement with Jeffry Picower was upheld on appeal. Two investors, Adele Fox and Susan Marshall, sought to pursue their own claims against Picower but were stayed by the court overseeing the Madoff case because those claims were “derivative” of the trustee’s claims. The trustee’s settlement brought in a total of $7.2 billion to be paid to the estate and the government, which makes up a large part of the $9.5 billion that the trustee has recovered in the case.

     A New York appellate court overturned an order dismissing claims against accounting firm Konigsberg, Wolf & Co. and its president, Paul Konigsberg, brought by Madoff investor Mark Weinberg. Weinberg alleges that the firm and its partner, Steven Mendelow, steered him to invest in a Madoff feeder fund FGLA Equity. The appellate court found that Weinberg had adequately pled claims of fraud, aiding and abetting fraud and negligent hiring and supervision.

     U.S. Bankruptcy Court Judge Burton R. Lifland, the judge overseeing the Bernard Madoff Ponzi scheme case, died at age 84 after suffering from bacterial pneumonia. Judge Stuart M. Bernstein will take over the Madoff case.

     The receiver of the Arthur Nadel Ponzi scheme has reached a settlement with Choice Direct Mail Inc. and Ty Hardin to settle claims that they hid money from the receiver. The receiver had obtained a judgment against Donald Rowe, the publisher of a Sarasota investment newsletter that had strongly touted Nadel’s investment program. Rowe was ordered to pay $4 million but was subsequently accused of hiding assets to avoid paying the receiver. Last year, the law firm of Band Weintraub PL agreed to pay almost $1 million to settle claims that it was “front and center” in a conspiracy to hide Rowe’s money from the receivership. In this new settlement, the receiver will recover nearly $750,000 and Choice Direct mail, and Ty Hardin have not admitted any liability. The Nadel Ponzi scheme involved losses of $162 million by 350 investors. 

     The bankruptcy trustee in the Tom Petters case filed a motion to take a district court appeal directly to the 8th Circuit Court of Appeals. The appeal relates to the bankruptcy court’s ruling to consolidate separate entities.

     The former partner of Scott Rothstein, Stuart Rosenfeldt, filed a motion to avoid testifying in the upcoming criminal trial of a junior lawyer in their firm, Christina Kitterman, who has been accused of playing a role in the Rothstein Ponzi scheme. Rosenfeldt plans to plead the Fifth and refuse to answer questions that might incriminate him since Rosenfeldt still faces possible indictment from his association with Rothstein. Rosenfeldt denies any wrongdoing.

     The Fifth Circuit upheld a lower court’s ruling that Trustmark National Bank could not withhold $1.98 million from the receiver in the Ponzi scheme case of R. Allen Stanford. Trustmark had secured a letter of credit by issuing a certificate of deposit to Stanford who placed the cash collateral in a Trustmark deposit account. A creditor of Stanford was allowed to present its letter of creditor to Trustmark for payment, but Trustmark was not allowed to offset that with Stanford’s cash collateral and Trustmark was ordered to turnover the cash collateral to the receiver. See Trustmark National Bank v. Janvey, 2014 U.S. App. LEXIS 357 (5th Cir. Jan. 8, 2014)

     The receiver of the WexTrust Capital Ponzi scheme case is seeking compensation for him and his professionals in the amount of about $1 million. This request is in addition to about $20 million that has previously been paid in fees. The Ponzi scheme involved losses of $238 million, and the 1,300 victims have shared about $5 million in recovered funds so far. Secured creditors have been paid about $55.1 million. The case remains open due to ongoing unresolved issues with the IRS and family members relating to certain real property. The scheme was run by Joseph Shereshevsky and Steven Byers, who are serving 22 year and 13 year prison terms, respectively.

     In the ZeekRewards $600 million Ponzi scheme case, a lawyer representing a group of victims has objected to the receiver’s proposed process to distribute assets to victims, arguing that if the distributions go directly to the victims, they will not be able to first deduct their 25% fee from each claim. One lawyer has asked that future distributions to 740 victims be paid solely to his law firm because he entered into a contingency fee agreement with them to file a class action, which was later found to be in violation of the stay order in the case. The receiver takes issue with the contingency fee being charged for filling out the online claims form, noting that “whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.” More than 170,000 individuals have submitted claims.

     Four Oaks Fincorp Inc. and Four Oaks Bank & Trust Company in North Carolina reached a deal with the government to pay a penalty of $1.2 million without admitting wrongdoing or liability in connection with the ZeekRewards scheme. Authorities say that the bank permitted Rex Ventures Group, the parent company of ZeekRewards, to move $60 million because the bank permitted money to move in a manner which took the bank out of its usual intermediary position between the third party processor and the Federal Reserve. The bank allowed the third party processor to directly submit Automated Clearinghouse requests for payments directly to the Federal Reserve, which removed the controls of the bank required by the Bank Secrecy Act to ensure that the bank satisfied its “know your customer” obligations.

     The Office of Comptroller of the Currency announced a policy shift which would make it easier to target lenders in certain types of enforcement actions. The new “streamlined” procedures apply to banks with more than $50 billion in assets. The agency is insisting that banks have strong risk-management grades and that boards stand up to management, questioning and challenging management’s actions that threaten to take undue risk. The new procedures will allow the agency to skip a judicial hearing in obtaining a safety-and-soundness order, which can be enforced through assessment of civil money penalties.

     The State of California is considering legislation to align California law with federal income tax law. Senate Bill 797 is intended to provide relief to victims of Ponzi schemes by offering them tax relief and to “ensure the state doesn’t re-victimize these innocent Californians.” SB 797 allows innocent victims to carryover or carryback net operating losses for each taxable year beginning on or after January 1, 2008.

     Congress took away half of the $50 million that the SEC had set aside for technology initiatives. SEC Chairman Mary Jo White said that the cutback “will affect the pace and extent of our continued progress.” The SEC was to use the funds for technology upgrades that would have helped it, among other things, better detect trading and accounting frauds that are often the subject of Ponzi schemes.

Jumping Through Hoops to Get Trustee Standing in Ponzi Scheme Cases

Posted by Kathy Bazoian Phelps

   In Ponzi scheme cases, the issue of trustee standing to bring third party claims can be very challenging. The Supreme Court has made clear that a trustee may pursue the debtor’s claims against third party defendants, but may not pursue creditors’ claims. Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416 (1972). What makes the issue so challenging in Ponzi scheme cases is determining which claims belong to creditors and which belong to the debtor. Does the defrauded victim hold a claim for a particularized injury, or does the trustee hold the claim belonging to the debtor for generalized injury to the debtor as claims are filed against a debtor for victims’ losses in a Ponzi scheme?

   To avoid being thrown out of court on standing issues, trustees and their attorneys often employ a belt and suspenders approach to litigation. Trustees obtain assignments from creditors of their claims so the trustee then owns all possible claims and will be covered under either scenario. The theory is that, after the assignment, Caplin no longer applies because the trustee is pursuing claims that the estate owns, not the creditors’ claims. Pursuant to 11 U.S.C. § 541(a)(7), the estate includes, “Any interest in property that the estate acquires after the commencement of the case.”

   This strategy, however, has had mixed success depending on how and when the assignment is documented, as is fully discussed in § 13[2][d] of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis® 2012). At the circuit level, the cases have gone different ways, but a close look at these cases reveals differences in material facts that led to the different results:

• The Ninth Circuit appeared to reject the assignment strategy in Williams v. Cal. 1st Bank, 859 F.2d 664 (9th Cir. 1988), where the court held that the creditors remained the “real parties in interest” because “the bulk of any recovery” had been reserved specifically for them. 
• But then the Fourth Circuit approved it in Logan v. JKV Real Estate Servs. (In re Bogdan), 414 F.3d 507 (4th Cir. 2005), where the assignment was an unconditional assignment of all claims, making the trustee the real party in interest in that case. 
• More recently in Grede v. Bank of NY Mellon, 598 F.3d 899 (7th Cir. 2010), the Seventh Circuit also approved the trustee’s standing based on an assignment of the creditors’ claims, where the trustee was a liquidating trustee and the claims were assigned pursuant to a plan of reorganization. 

   A recent decision from the United States District Court for the District of Idaho nicely reconciles the differing outcomes in these cases and lays out a possible roadmap for trustees. Zazzali v. Eide Bailey LLP, 2013 U.S. Dist. LEXIS 163282 (N.D. Idaho Nov. 14, 2012). In that case, the confirmed chapter 11 plan created a litigation trust called the Private Actions Trust (“PAT”), to which the creditors had assigned their personal claims against the Ponzi schemer’s accountants. When the PAT sued the accountants, the accountants responded with a motion to dismiss, arguing that under Caplin and Williams, the trustee lacked standing to pursue creditors’ claims.

   The court rejected this argument, concluding that Caplin and Williams apply only to bankruptcy trustees, and that the plaintiff was the trustee of a post-confirmation trust and not a bankruptcy trustee. The court instead relied on the Seventh Circuit’s decision in Grede, which specifically approved the standing of a post-confirmation trustee that resulted from creditors’ assignments of their litigation claims. The court also relied on two bankruptcy court decisions that had come to this same conclusion. In Calvert v. Zions Bancorporation (In re Consolidated Meridian Funds) 485 B.R. 604 (Bankr. W.D. Wash. 2013), the court held that under confirmed plan, the liquidating trustee is bound by the terms of the new contract and contract principles apply. Reaching the same result was Zazzali v. Hirschler Fleischer, P.C., 482 B.R. 495 (Bankr. D. Del. 2012), a decision that arose out of the same case and the same PAT that was before it.

   Grede, Calvert and the Zazzaili decisions clarify that in chapter 11, the assignment strategy may well succeed in creating standing for the trustee if it is executed in the context of a confirmed chapter 11 plan that creates a post-confirmation litigation trust.

   But what if the case is in chapter 7? Can a chapter 7 trustee ever establish standing through assignments of creditors’ claims? Based on the case law, a trustee could certainly try to solicit assignments from creditors, but those assignments would have to be unconditional assignments for the benefit of all creditors, as in Bogdan, to have any hope of success. Conditional assignments based on a promise to return some or all of the proceeds of the claims to the assigning creditors, as in Williams, are problematic for the purposes of establishing standing under the confines of Caplin.

   In the alternative, the chapter 7 trustee could, under 11 U.S.C. § 706(b), move to convert the case to chapter 11. That section states, “On request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.” Upon conversion, the trustee, with the US Trustee’s consent, could become the chapter 11 trustee and then seek confirmation of a plan that creates a post-confirmation trust and accomplishes the necessary assignments. This strategy is more costly and time-consuming, though, so the claims would have to be of sufficient size and merit to justify this strategy. And, of course, the court deciding the issues would have to agree to follow the rationale in Grede and the Zazalli decisions that distinguish a liquidating trustee from a chapter 7 trustee.

   Is all of this jockeying and strategizing over the issue of trustee standing necessary? Is there a significant enough distinction between a trustee and a post-liquidation trustee to justify polar opposite results for creditors? Shouldn’t a fiduciary appointed to administer assets for the benefit of creditors (e.g., a chapter 7 trustee, liquidating trustee, or equity receiver) be permitted to bring claims that those very creditors are asking the fiduciary to pursue on their behalf? The developing case law requires trustees and creditors to consider all of the moving parts in strategizing over the pursuit of litigation claims, including the character of the fiduciary bringing the claims and the character of the assignments made by the creditors. Would it be easier to amend the bankruptcy code to clarify that the trustee has full standing to pursue creditors’ claims when those claims can be brought by each creditor in a group of similarly situated creditors?

How Much Control Does a Trustee Have in a Ponzi Scheme Case?

Posted by Kathy Bazoian Phelps

   Consider three recent events in the Bernard Madoff Ponzi scheme case, which demonstrate a certain unevenness and perhaps even inconsistency in the authority vested in the trustees who are administering these types of cases. Trustees act under the authority of the Bankruptcy Code or the Securities Investor Protection Act, as is applicable in the Madoff case, with the objective of maximizing returns for the people who lost money in connection with a Ponzi scheme.

1. The Trustee is in charge on the fraudulent transfer front. 

   The Second Circuit recently affirmed the Madoff trustee’s control over fraudulent transfer claims and an injunction barring two creditors from pursuing their own claims against a fraudulent transferee defendant that the Trustee had sued. Marshall v. Picard (In re Bernard L. Madoff Investment Securities LLC), 2014 U.S. App. LEXIS 600 (2d Cir. Jan. 13, 2014). The Trustee had entered into a settlement with Jeffry Picower resolving the Trustee’s fraudulent transfer claims against Picower. The settlement resulted in recovery of $5 billion for the estate and about $2.2 billion to be forfeited to the government. Creditors Susanne Stone Marshall and Adele Fox separately sued Picower under state law tort theories, but the lower court enjoined such actions when it approved the Trustee’s settlement with Picower. 

   That injunction provided that: 

[A]ny BLMIS customer or creditor of the BLMIS estate who filed or could have filed a claim in the liquidation, anyone acting on their behalf or in concert or participation with them, or anyone whose claim in any way arises from or is related to BLMIS or the Madoff Ponzi scheme, is hereby permanently enjoined from asserting any claim against the Picower BLMIS Accounts or the Picower Releasees that is duplicative or derivative of the claims brought by the Trustee, or which could have been brought by the Trustee against the Picower BLMIS Accounts or the Picower Releasees . . . .

   The court agreed that the claims asserted in appellants' Florida actions were "duplicative or derivative" of those claims that could have been or were asserted by the Trustee in the New York action and, accordingly, were barred by the terms of the injunction. The Second Circuit explained, “Although appellants seek damages that are not recoverable in an avoidance action, their complaints allege nothing more than steps necessary to effect the Picower defendants' fraudulent withdrawals of money from BLMIS, instead of ‘particularized’ conduct directed at BLMIS customers.”

2. It is unclear what power the trustee has to bring third party tort claims. 

   The Supreme Court is struggling with what to do with the Madoff trustee’s appeal of a decision denying him the ability to bring claims against certain financial institutions that he asserts are liable for damages for aiding and abetting the fraud, among other things.

   On October 9, 2013, the Madoff trustee filed a petition for writ of certiorari seeking review of a Second Circuit decision that upheld the dismissal of his claims on the basis that the trustee did not have standing to sue the banks and that the trustee “stands in the shoes” of Madoff’s firm and therefore cannot sue the banks for losses caused by Madoff’s fraud.

   The Trustee contends that there is a split in the circuits on these issues and that the appeals court misinterpreted the U.S. Securities Investor Protection Act, which the Trustee argues authorizes trustees to sue wrongdoers to recoup money. 

   Apparently still undecided about whether to grant cert, the Supreme Court docket in the case of Picard v. JPMorgan Chase & Co. et al, contains this notation dated January 13, 2014: “The Solicitor General is invited to file a brief in this case expressing the views of the United States.” 

www.supremecourt.gov/Search.aspx?FileName=/docketfiles/13-448.htm 

   While the Madoff case may have a different outcome because it is a SIPA proceeding, bankruptcy trustees generally have standing to bring tort claims against third parties if the claim belongs to the debtor, but not if the claim belongs to individual creditors. Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 433-34 (1972). However, bankruptcy trustees are frequently barred from bringing such claims under the in pari delicto doctrine which imputes wrongful conduct of the debtor’s agents to the debtor in whose shoes the trustee stands. See, e.g., Baena v. KPMG LLP, 453 F.3d 1, 6 (1st Cir. 2006); Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 354-60 (3d Cir. 2001).

   It remains to be seen whether the U.S. government will weigh in on the subject and whether the Supreme Court will grant cert of the Madoff trustee’s appeal. If so, this case could have significant ramifications for trustees and for the creditors for whose benefit the trustees act in filing lawsuits against third parties. 

   As a footnote to this issue, JPMorgan, which is one of the defendants in the Trustee’s lawsuits to recover from financial institutions on aiding and abetting theories, recently entered into a Deferred Prosecution Agreement (available here) with the government and agreed to pay $1.7 billion in forfeited funds along with $350 million to the Office of the Comptroller of the Currency, $325 million to the Madoff trustee, and $218 million to settle class action claims. In the DPA, JPMorgan admitted to many of the allegations made by the Madoff Trustee in his complaint, making the Trustee’s claims even more compelling on a factual basis. Although the Trustee has now settled with JPMorgan, as of now, unless the Supreme Court grants cert, the Trustee has no authority to bring these claims against the other banks because they have been dismissed on procedural grounds. It is the defrauded victims and creditors who stand to lose if the Supreme Court says no.

3. Issues regarding distribution of funds to creditors are complicated and confused.

   In a SIPA proceeding like the Madoff case, the distribution scheme is controlled by the statute. Distributions to go first to “customers” and only to other creditors if there are funds leftover in the general fund.

   In a case under the bankruptcy code, there is no distinction between customers, defrauded victims, and other general unsecured creditors.

   However, when a parallel government forfeiture action intersects with either a SIPA or a bankruptcy proceeding, many of the distribution rules and priorities get turned on their head.

   This is the result in the Madoff case. The government, in connection with its forfeiture proceeding, recently appointed a special master to distribute forfeited funds to “victims.” The government’s definition of “victims” however, is different than the definition of “customers” under SIPA guidelines or “creditors” under the Bankruptcy Code.

   The special master recently posted a letter on his website at www.madoffvictimfund.com, and he sent the letter to each of the “customers” in the SIPA proceeding. In his letter, he explained:

   Some may not understand why there are two separate programs to help people who invested in Madoff: a "forfeiture" program and a "bankruptcy" program. The answer is that these two programs have different objectives. The U.S. Congress created the bankruptcy process to allow insolvent firms to reorganize, or to be liquidated in an orderly manner in accordance with established priorities. Where a former broker dealer firm such as Madoff Securities is being liquidated, the law limits distributions of most bankruptcy estate assets to "customers". The term customer is defined very narrowly to require a claimant to have held a direct account with Madoff Securities. Since more than 80% of investors in Madoff did not have a "direct" account, bankruptcy law creates significant disparities among former investors as to who can recover. Out of approximately 16,500 claims in the bankruptcy proceedings, claims covering only 2,186 accounts were "allowed" (roughly 18%). More than 14,000 bankruptcy claims were rejected, most commonly because the individual invested through a feeder fund or similar entity.

   Separately, Congress also created forfeiture laws to allow law enforcement authorities to seize the proceeds of criminal activity. By law forfeited assets are used to help "victims" of the criminal activity that gave rise to the forfeitures. 

   The statements made in the letter are not entirely accurate (treating a bankruptcy and a SIPA proceeding as interchangeable, which they are not), but the letter does provide a glimpse into the nature of the problem. For the lucky few who are both “customers” and “victims,” they should receive distributions from both the Madoff trustee and the special master. For those who are general unsecured creditors but not “customers” or “victims,” e.g, a landlord or a janitor who were not paid, they will get nothing out of either distribution scheme. Getting money back to the empty-handed landlord and janitor is an issue completely out of the control of both the Madoff trustee and the special master and leaves one questioning the fairness of the distribution schemes.

   In addition to the conflict between who is a “customer” under SIPA, who is a “victim” under forfeiture laws, and who is a “creditor” under the Bankruptcy Code, each of these systems strains under the tug of war over the assets that will get distributed to the customers, victims or creditors. The government seeks to forfeit all proceeds of the crime, which is usually most if not all of the assets to be administered in a bankruptcy or SIPA proceeding. Trustees seek to gain control over the very same assets as part of their duties and distribution guidelines. So should those assets be distributed to “victims” under the forfeiture laws, to “customers” under SIPA, or to all creditors pursuant to the bankruptcy code? Depending on who is administering the assets (a SIPA trustee, a bankruptcy trustee or the government), the money will end up in the hands of different categories of claimants, again leaving one questioning the fairness of these clashing systems.

   Efforts are increasing among the Department of Justice and bankruptcy groups to foster a level of cooperation and coordination among the different systems when there are parallel forfeiture and bankruptcy proceedings to most efficiently and cost-effectively administer assets of the fraudster to maximize recoveries for those who lost money in the Ponzi scheme. The Federal Judicial Center recently posted a YouTube video entitled "Asset Forfeiture and Bankruptcy Case Coordination" at:

www.youtube.com/watch?v=kQlPZLpg6HE&feature=c4-overview&list=UUIcgGfaeUGYJSo7bLeUr1hw

This video provides an excellent discussion of the issues that arise in this context.

So Do Trustees Have Control?

   It is not an exaggeration to call this a mess. It is a patchwork of uncoordinated, conflicting and sometimes inequitable and dysfunctional rules that are borrowed from other circumstances to apply in Ponzi scheme cases. Our present system for pursuing just compensation for Ponzi scheme victims is certainly not one that we would create if we were to start from scratch. Maybe it’s time to think about doing that. 

   All of these issues are fully discussed in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012).

Guest Blog: Why I Voted That Ponzi Scheme Perps’ Sentences Are Too Long

By Hon. Steven Rhodes

I confess. I was the one. In The Ponzi Scheme Blog DECEMBER POLL, I cast the sole vote that prison sentences for Ponzi scheme perpetrators are too long.

After spending two years co-writing The Ponzi Book with Kathy Phelps, I certainly understand the social, emotional, and financial devastation that Ponzi schemes cause, as well as the outrage that victims so justifiably feel. As Kathy has well-chronicled in this blog, the numbers are staggering – the numbers of newly-exposed schemes, the numbers of defrauded victims, and the numbers of dollars lost.

Still, longer sentences are not the answer. They accomplish nothing and are very expensive. Worse, they are unjust.

Let’s consider the expense first. Our country has 5% of the world's population and 25% of the world’s prison population. We have 2,240,000 people behind bars.

Here are the yearly costs per inmate for some sample states:

• California - $47,000
• Florida - $28,000
• Illinois - $38,000
• Michigan - $28,000
• New Jersey - $55,000
• New York - $60,000
• Wisconsin - $38,000

The yearly cost per inmate in the federal prison system is $30,000.

We spend an astounding $63,000,000,000 per year to incarcerate prisoners. That’s a lot of money that isn’t going to teachers, police or reducing the national debt.

And what do we get when we spend this tax money on the extraordinary sentences that we give to Ponzi scheme perps? Ponder these sentences:

• Bernie Madoff - 150 years
• Marc Drier - 20 years
• Alan Stanford - 110 years
• Tom Petters - 50 years
• Scott Rothstein - 50 years
• Sam Israel - 20 years
• Lou Pearlman - 25 years
• Peter Lombardi - 20 years
• Nicholas Cosmo - 50 years

The conventional wisdom is that incarceration serves three purposes. It prevents and deters the defendant from repeating the crime (special deterrence). It also deters others from committing the crime (general deterrence). And it punishes the crime (retribution).

 

Would the potential for even longer incarceration deter Ponzi scheme perps? The answer is that sociopaths like Ponzi scheme perps are not deterred by the potential of incarceration. Once convicted, two things deter their recidivism. First, while incarcerated, they can’t repeat the crime. Second, after release, they may be too notorious to dupe investors a second time even when they do try, although we have no reliable statistics on this point.

A much better way to deter Ponzi scheme perps is to educate our students and indeed ourselves on how to avoid them. For this, I certainly do commend Kathy’s wonderful new book, Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams. How many could be educated with the money saved from giving shorter prison sentences to Ponzi scheme perps?

In any event, nothing suggests that the present sentences have any deterrent effect. Kathy’s monthly roundup blogs summarize the news reports of the ongoing onslaught of Ponzi schemes.

Punishing Ponzi scheme perps is therefore the more important function of incarceration. In our system, the length of incarceration reflects the severity of the crime. This is the doctrine of proportionality. To demonstrate the disproportionality of Ponzi scheme perps’ sentences, these are the average sentences in 2011 for these violent crimes, according to the U.S. Department of Justice, Bureau of Justice Statistics:

• Murder - 24 years
• Kidnapping - 9 years
• Rape - 14 years
• Robbery - 8 years
• Assault - 5 years

The average sentence for property crimes was 5 years.

The sentences given to the Ponzi scheme perps listed above - 20 to 150 years - are simply not proportionate to these sentences for violent crimes that involve physical injury or death. And that’s so even considering the amounts of money those perps have stolen, the numbers of their victims, and the devastation they have caused.

What if, instead, Ponzi scheme perps like Madoff and the others listed above receive shorter sentences (but still forfeit their assets) and have extended parole supervision in their home communities, where they would have to start their lives over with nothing and make their ways in society among their victims? Would that result in injustice? I don’t think so.

 

Announcing The Ponzi Scheme Blog’s JANUARY POLL

Posted by Kathy Bazoian Phelps

 

Cast your vote in this month’s poll. This one relates to how the government should assess fines against financial institutions that have participated in, failed to report suspicious activity in, or taken other action to assist in perpetuating a Ponzi scheme.
 

Specifically, the question is:
 

How should the dollar amount of fines for a bank's participation in a Ponzi scheme be determined?
 

For background purposes, let me recap the two largest such fines in the past few months levied in two of the more notorious Ponzi schemes:

• JPMorgan tentatively agreed to pay $2 billion for involvement in Bernard Madoff scheme (total customer losses in Madoff are about $19.5 billion) 
• TD Bank was assessed fines of $52.5 million for involvement in Scott Rothstein scheme (total victim losses in Rothstein are at least $500 million in the $1.4 billion scheme)

To get a flavor for the number of fines and the dollar amount of those fines assessed against financial institutions in all kinds of cases, see FinCEN’s report of fines in enforcement actions in all cases at http://www.fincen.gov/news_room/ea/, or the Office of the Controller of Currency website summarizing enforcement actions and fine amounts at http://apps.occ.gov/EnforcementActions/.

Here are the choices in the JANUARY POLL, but please feel free to post comments or email me any other ideas you have on how to calculate the dollar amount of the fines being assessed. Should those fines be:

 

     a. A percentage of the bank's profits from the scheme?

     b. A percentage of the bank’s annual net profits?

     c. An amount sufficient to pay all victim losses?

     d. Other?

 

Results of The Ponzi Scheme Blog’s DECEMBER POLL

Posted by Kathy Bazoian Phelps

The DECEMBER POLL asked the following question:

“Are prison sentences for Ponzi schemers the right length?”

The choices were:

     (a) Should be longer
     (b) Should be shorter
     (c) Are just right
     (d) Don’t know

 

The results were:

• The overwhelming majority voted that prison sentences should be longer (80%).
• A very small minority (only one vote) felt that prison sentences should be shorter (3%).
• A somewhat larger percentage felt that sentences are just right (16%).
• Nobody was uncertain about their opinion on this one!

Stay tuned for The Ponzi Scheme Blog’s JANUARY POLL.

 

To avoid investing in a Ponzi scheme in the first place, read about my new book Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams at www.ponzi-proof.com