July 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

INTERNATIONAL PONZI SCHEME NEWS

Australia

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

Canada

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

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

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

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

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

England

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

Germany

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

India

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

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

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

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

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

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

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

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

Ireland

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

South Africa

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

Turkey

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

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

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

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

    Colony Insurance co. was given permission to rescind a professional liability insurance policy issued Kwasnik Kanowitz & Associates because the court found that lawyer Michael Kwsanik lied on the firm’s application for professional liability insurance. Kwasnick had run a $8.5 million Ponzi scheme through Liberty State Financial Holdings Corp. and its subsidiary Liberty State Benefits of Pennsylvania. The companies were purportedly in the business of buying life insurance contracts from elderly people and collecting their benefits when they die.

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

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

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

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

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

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

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

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

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

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

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

Scott Rothstein Ponzi Scheme: A Settlement, Finally

Posted by Kathy Bazoian Phelps

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

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

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

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

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

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

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

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

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

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

    In addition to the economic division, an interesting piece of this settlement is the manner in which the parties propose to distribute the forfeited assets. They have agreed to allow the same individual who is the RRA Trustee to serve as the Restitution Receiver. The justification, which seems to be a good one, is:

The Settlement Agreement contemplates that slightly more than $28,000,000 of assets will be finally forfeited and disbursed/restored to Qualifying Victims. In order to ensure that the distribution of these funds to Qualifying Victims and RRA creditors is maximized, the Settlement Agreement contemplates Goldberg being appointed as the Restitution Receiver. The benefit of Goldberg filling that role is that he and his professionals are already aware of and familiar with the collateral source recovery provisions in the RRA Plan. Moreover, as a result of the collateral source reporting that was required by the RRA Plan, Goldberg and his professionals are in the best position to apply, in consultation with the Government and under the District Court’s supervision, the provisions of 18 U.S.C. § 3664(j). Indeed, having a single person responsible for harmonizing distributions from both the RRA Trust and the Rothstein Criminal Case is the most efficient and effective method to ensure that no person receives an amount exceeding their losses.

    This settlement seems to be a practical, economical, and sensible resolution to litigation that has gone on way too long. Both “creditors” of the bankruptcy estate, as defined under the Bankruptcy Code, and “victims,” as defined under the forfeiture statutes, deserve to be paid. It is nice to see two arms of the government cooperate to achieve distributions to both sets of claimants who rightfully deserve compensation. Hopefully this type of practical resolution will serve as an example to the Government, bankruptcy trustees, and federal equity receivers in the future when forfeiture and bankruptcy proceedings collide.

Ponzi Scheme Trustee’s Claws Do Not Always Reach Overseas

Posted by Kathy Bazoian Phelps

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

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

     A district court recently held, however, that the Trustee may not sue to recover from the subsequent transferees. In an opinion dated July 7, 2014 (attached here), the court held that section 550(a) does not permit “the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor.” The court stated:

The Court concludes that (1) the application of section 550(a)(2) here would constitute an extraterritorial application of the statute, and (2) Congress did not clearly intend such an application. Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded here by considerations of international comity. 

     The court evaluated whether the presumption against extraterritoriality should apply and, if so, “whether Congress intended for the statute to apply extraterritorially.” It considered, among other things, the following:

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

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

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

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

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

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

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

Posted by Kathy Bazoian Phelps

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

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

    On appeal, the court considered essentially 3 questions.

1. Was the settlement that provided for payment of 15% of the $7.5 million settlement amount to the receivership estate reasonable, or was it a windfall to the receivership estate?

 

    The objecting creditors in the bankruptcy case argued that any payment to the receivership estate was unreasonable and “gratuitous” because the settlement agreement itself provided that the payment was to go to the Trustee, not the Receiver. The appellate court disagreed, finding that the bankruptcy court had correctly found that an allocation was appropriate due to the fact, among other reasons, that the Receiver had released claims against the Defendant to recover a fraudulent transfer. The court noted:

This claim could not have been brought by the Trustee on behalf of the Bankruptcy Estates, because the property transferred did not belong to PCI, but to Petters. Thus, allocating a portion of the settlement payment to the Receiver based on the Receiver's release of claims that belonged solely to the Receivership does not effectuate a gratuitous transfer from the Bankruptcy Estate to the Receivership.

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

    The court also upheld the bankruptcy court’s finding that there was no inherit conflict in allocating the proceeds arising from the dual roles as Trustee and Receiver.

[T]he process used to arrive at the allocation included multiple assurances of trustworthiness. First, the allocation resulted from a mediated settlement before retired United States District Court Judge James Rosenbaum. Additionally, the Creditors' Committee, which acts as a fiduciary for the PCI Bankruptcy Estate, participated fully in the mediation and supports the proposed allocation. Further, as discussed earlier, the division of the settlement proceeds is a purely mathematical calculation that is objectively fair. Finally, although the allocation was not formally documented in the Settlement Agreement, the Trustee's verified motion to approve the Settlement Agreement gave creditors and other interested parties full notice of and an opportunity to object to the intended disposition of the settlement proceeds.

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

    The objecting creditors relied on language in the Coordination Agreement among the U.S., the Trustee and the Receiver, which stated:

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

    The court first questioned the creditors’ standing to object on this ground, noting that the creditors were not a party to the Coordination Agreement. The court then held as follows:

Even if Ritchie were to have standing under the Coordination Agreement, the proposed allocation does not violate the Agreement's provision stating that parallel claims by the Receiver and Trustee will inure to the benefit of the bankruptcy estates. As noted above, the proceeds to be allocated to the Receivership constitute recovery on a claim that only the Receiver could bring because the transfer challenged by the Receiver was of property belonging to Petters, rather than PCI. Further, the Coordination Agreement provides that proceeds which constitute a "recovery based solely on a claim made by the Receiver . . . will be turned over to the United States for the benefit of victims through remission.

    Not only does the proposed allocation not violate the Coordination Agreement, it advances the Agreement's express goals of maximizing recovery to victims and creditors and minimizing expenses through coordination of the Receiver and Trustee's respective efforts.

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

June 2014 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

     Below is a summary of the activity reported for June 2014. The reported stories reflect: 7 guilty pleas or convictions in pending cases; over 139 years of newly imposed sentences for individuals involved in Ponzi schemes; at least 8 newly discovered schemes allegedly involving over $147 million; and an average age of approximately 52 for the alleged Ponzi schemers in the stories reported. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

     Thomas Abdallah aka Tom Abraham, 49, Kenneth Grant, 66, Mark M. George, 56, Jeffrey L. Gainer, 49, Nancy Gainer, 50, Jerry A. Cicolani Jr., 45, and Kelly Hood, 35, were charged in a complaint filed by the SEC with operating a $20 million Ponzi scheme involving a fictitious oil and fuel-trading business. The complaint also named KGTA Petroleum Ltd., NATG, LLC and Turnbury Consulting Group LLC. Investors were allegedly told that they could earn 2% to 4% monthly with no risk by buying notes in KGTA. The scheme allegedly defrauded 47 people.

     Russell Adler, 52, was sentenced to 2½ years in prison after he pleaded guilty a few months ago to charges relating to the Ponzi scheme run by Scott Rothstein and through their firm, Rothstein Rosenfeldt Adler. Adler pleaded guilty to charges that he violated federal campaign finance laws.

     Fuad Ahmed and his company, Success Trade Securities, were barred from the securities industry by FINRA for allegedly running a Ponzi scheme that defrauded 59 people, including current and retired NFL and NBA players. FINRA ordered Ahmed to pay $13.7 million to investors.

     Robert J. Andres and Robert Holloway were hit with a $44 million judgment in connection with a Ponzi scheme run through Winsome Investment Trust and U.S. Ventures. The CFTC obtained a default judgment in connection with its lawsuit alleging that Andres and Holloway took in at least $50 million from 243 people to invest in a commodity futures pool. Among other things, the two claimed to have a 40% interest in a "Safekeeping Receipt" from the Union Bank of Switzerland, which supposedly represented 500 metric tons of gold having a face value of $7.7 billion.

     Brian Arias, 41, pleaded guilty to charges in connection with the Nicholas Cosmo Ponzi scheme run through Cosmo’s Agape companies. Arias admitted that he knew he was lying to investors about the way their money was being invested and the promised high returns. Cosmo promised investors returns of up to 80%, and the scheme took in $400 million from 5,000 investors. Cosmo is serving a 25 year prison sentence.

     Aldo Joseph Baccala, 73, was sentenced to 20 years in prison and ordered to pay $6.4 million in connection with a $17 million Ponzi scheme run through Baccala Realty that defrauded more than 50 investors. Baccala had promised investors returns of 12% on notes for investments in properties such as assisted living facilities, a car wash, and other businesses.

     Michael Balboa, 45, was sentenced to 4 years in prison in connection with a $390 million Ponzi scheme that Balboa ran through Millennium Global Investments. Balboa provided fake valuations to inflate month-end market prices on Nigerian warrants.

     Alice Belmonte, 47, was sentenced to 3 to 9 years in prison in connection with her $4 million Ponzi scheme that defrauded more than 10 victims. Belmonte is a disbarred lawyer who had lured in investors to buy foreclosed properties and promised them large returns.

     Janet Brown was sentenced to one year in prison on charges of bankruptcy fraud relating to her late husband, Jack Brown, and his $12 million Ponzi scheme run through Brown’s Tax Service. She had pleaded guilty to charges that she withheld $25,000 in jewelry from the bankruptcy trustee.

     Edwards Exploration LLC was sued by a group of investors alleging that the company defrauded them in a $12 million Ponzi scheme. The company’s now-deceased founder, Spencer Edwards, persuaded the investors to invest in oil and gas interests.

     Fred Davis Clark Jr., 56, and Cristal R. Clark aka Cristal Coleman Clark, 41, former executives of Cay Clubs, were arrested in connection with what had been an alleged $300 million Ponzi scheme. The SEC’s civil enforcement action against Cay Clubs was recently dismissed on statute of limitations grounds, but the Clarks were arrested in Honduras on conspiracy and obstruction charges and brought back to the U.S. Cay Clubs lured investors in the residential real estate scheme by promising 15% annual returns to be generated by refurbishing low end properties into five star resorts.

     Jenny Coplan, 55, pleaded guilty to charges in connection with a $4 million Ponzi scheme run through Immigration General Services LLC. Coplan promised investors more than 60% per year for investing in federal bail and immigration bonds. Coplan provided false financial information and promised that investors’ funds were insured by the Federal Deposit Insurance Company.

     Shawn Kristi Dicken, 40, was sentenced to 140 months to 20 years in prison and ordered to pay restitution in an amount estimated to be $1.5 million for her role as the lead salesperson for The Diversified Group Advisory Firm LLC. Dicken had marketed investments to investor, representing their investments were without risk, completely liquid, and had a guaranteed rate of return between 9.5% and 10.44%. The Ponzi scheme was allegedly operated by Joel Wilson, who was arrested in Germany after fleeing the country following charges against him.

     James Ronald Donahoo II, 36, pleaded guilty to charges in connection with a Ponzi scheme that he ran through Paradigm Investing, Inc. Donahoo had promised investors returns of 3% per month by investing in bridge loans. He raised at least $2.5 million from investors. Instead of investing in loans, he used $1.5 million to fund businesses, to purchase $11,000 worth of fur coats, travel, jewelry and a Mercedes Benz. Following the scheme’s collapse, Donahoo began traveling around the country by bicycle to promote philanthropic causes, referring to himself as the “Bamboo Cyclist.”

     Henry Millward Fisher, Jr. 60, was sentenced to 25 years in prison, with 5 years suspended, in connection with a $1 million Ponzi scheme that defrauded 23 investors and involved 6 properties. Fisher had previously served jail time in the 1990s for defrauding investors of more than $7 million in a similar Ponzi scheme.

     Claus Foerster was barred from the securities industry by FINRA after FINRA accused him of stealing nearly $3 million from 13 clients. Foerster allegedly solicited investments through his fund known as S.G. Investments, which was not actually an investment fund but a bank account controlled by Foerster.

     Richard Freer’s attorney sought the release of about $20,000 of the $50,000 cash that Freer has to pay back $7.8 million to his 90 defrauded victims. Freer’s attorney asked to be paid and argued that “The uses of the defendant’s funds for payment of counsel fees will not . . . materially affect his ability to make restitution in these matters.” The lawyer’s request was denied, and the court found that the remaining funds would instead go to Freer’s victims. Freer, 68, is currently serving a 12 to 30 year sentence after pleading guilty to operating a $10.1 million Ponzi scheme.

     Michael Frew was permanently barred from the brokerage industry in connection with allegations that he was running a Ponzi scheme. Frew represented that he would invest with a real estate developer to rehabilitate properties in areas hit by natural disasters. He promised investors returns of 10% to 14% annually. Frew had refused to cooperate with the FINRA investigation which was opened one month after Frew had resigned from Wells Fargo Advisors following that firm’s investigation into whether he had received funds from customers. Frew ultimately consented to FINRA’s findings without admitting or denying the charges.

     Tate George’s, 46, sentencing was delayed for a few months to allow the lawyers to determine how much money the victims of the real estate Ponzi scheme lost. The figure has been estimated at about $2 million, but the government is claiming that the amount is higher.

     James D. Helgeson was fined by Montana’s Commissioner of Securities and Insurance and acknowledged that he participated in TelexFree. Helgeson was also a former pitchman for ZeekRewards. Helgeson must notify Montana for the next five years “prior to his participation in any multilevel distribution company.”

     Thomas Kimmel, 68, was convicted on charges that he ran a Ponzi scheme through his company, Sure Line Acceptance Corporation, which claims to be the financing wing of Automacion, a used car company. Kimmel made false promises to investors who he found through his organization, Faithful Stewards, which offered “debt-free conferences” and “God’s Plan for His Money Conferences” to churches.

     Paul Konigsberg, 78, pleaded guilty to charges that he assisted in the Bernard Madoff Ponzi scheme. Konigsberg, who was Madoff’s former accountant, fabricated records to cover up the Ponzi scheme and was charged with conspiracy, falsifying records of a broker-dealer, fabricating records of an investment adviser, and falsifying statements to the U.S. about employee-benefit plans. Konigsberg told the judge, “I was not aware of Madoff’s horrific and evil Ponzi scheme . . .” But he admitted that he knew that some of the investors’ account statements had been altered and that he used those when filing their taxes.

     Robert P. McDermott Sr., 52, was sentenced to 3 years in prison in connection with a Ponzi scheme in which he stole at least $270,000 from about 50 clients. McDermott had represented that he would place customer funds paid in advance for funeral services into insurance policies, annuities or trusts, but he failed to do so. Insurance companies honored some of the policies even though McDermott never paid the premiums, leading to recovery of about $110,000.

     Patricia S. Miller, 67, was arrested on charges that she orchestrated a Ponzi scheme in which she used her position as a financial advisor to lure in investors. She allegedly promised them high returns if they invested in investment clubs called KS Investment and Buckharbor.

     Earl Abdulmalik Mohammed, 47, was sentenced to 9 years and ordered to pay restitution in the amount of $6.5 million in connection with a $6 million Ponzi scheme that he ran through Global Gold and Metals Trading. Mohammed lured investors to buy precious metals online by selling products below market value but then would fail to deliver the package, claiming that the Postal

Service had lost it.

     Michael Morawski lost his appeal of his 10 year prison sentence in connection with a $16.8 million Ponzi scheme. U.S. v. Morawski, 2014 U.S. App. LEXIS 10968 (7th Cir. 2014). The court rejected Morawski’s claim that his sentence was based on an inflated estimate of losses

     Robert Palmer, 45, and Mark Driver, 50, pleaded guilty to charges that they ran a $3 million Ponzi scheme through Princeton Partnership. They lured in funds from elderly investors for the purpose of real estate investments and life insurance annuities, but kept the money for their personal use.

     Rudolf “Rudi” Pameijer, 63, was sentenced to 18 years in prison and ordered to pay $1.8 million in restitution for his role in a Ponzi scheme that defrauded 24 investors. Pameijer sold fraudulent investment contracts and securities in the form of promissory notes through his company, Plan America LLC, and promised returns of 3% to 15% allegedly based on the performance of foreign markets. The scheme also involved Pameijer’s daughter, Lindsay Pameijer, 34, and Ryan W. Koester, 42, who ran Rykoworks Capital Group LLC. Pameijer spent the investors' funds on his own lavish lifestyle include cars, a boat, his son’s college tuition and his daughter’s wedding and honeymoon in St. Lucia.

     James M. Peister, 62, was charged in connection with an alleged $17 million Ponzi scheme that defrauded at least 74 investors through several commodity pools, including Northstar International Group, Inc., North American Globex Fund, L.P., and North American Globex Group, Inc. Peister had been charged by both the SEC and the CFTC in 2011 but had settled both of those cases. Peister pleaded not guilty to the recent criminal charges.

     Dee Allen Randall, 63, of Utah, was indicted on charges that he ran a Ponzi scheme through his businesses, including Horizon Mortgage & Investment, Horizon Financial & Insurance Group, and Horizon Auto Funding, that defrauded about 700 people out of at least $72 million. Randall promised investors returns of 9% to 17% on their investments in real estate, auto leases and insurance products.

     Richard Reynolds aka Richard Adkins, 53, was sentenced to 20 years in prison following his conviction on charges that he defrauded more than 141 investors out of $5.38 million, using his connections with ministers, pastors and other religious leaders to recruit new investors. The scheme was run through his companies, United Consultant Investment Corp., Buffalo Exchange, and Buffalo Extension, and Reynolds promised investor quarterly returns of 100%.  Following the sentencing, Reynolds said that he “will fry this court.”

     Brian C. Rose aka John Hankins, 34, Brent Lovall, 30, and Ray Spears aka Brock Hamilton, 44, were charged with defrauding 160 investors out of $15 million. Rose had operated under the name Earth Energy Exploration and then renamed the business after it came under investigation New Century Coal, supposedly mining blue gem coal. Rose pleaded not guilty to the charges.

     Stuart Rosenfeldt, 59, former partner of Scott Rothstein, pleaded guilty to bank fraud, campaign finance violations and financial irregularities in connection with their firm, Rothstein Rosenfeldt Adler. Rosenfeldt was never charged with having knowledge of the Ponzi scheme itself but was accused of making hundreds of thousands of dollars of illegal campaign contributions and using law enforcement to force a prostitute and her boyfriend to leave town before the prostitute exposed her relationship with Rosenfeldt. Rosenfeldt is the fifth former lawyer of the Rothstein law firm to be convicted.

     Ephren Taylor II, 31, was arrested on charges that he defrauded investors out of more than $5 million. The charges allege that Taylor, through his company City Capital Corporation, and the company’s former COO Wendy Connor, “participated in a conspiracy to defraud investors.” Taylor allegedly pushed churchgoers to invest in small businesses he knew wouldn’t be profitable, and also offered investments in “100 percent risk free” sweepstakes machines, or computers with games where players can win cash prizes. The returns promised range from 12% to 20% on the business investments and up to 300% in the sweepstakes machines.

     TelexFree had a bankruptcy trustee appointed, and the trustee is seeking records from the lawyers and other professionals previously working with Telexfree since the books and records of the company were previously seized by the government along with all of the company’s bank accounts. The Nevada Public Utilities Commission rejected the company’s application to become a telecom provider. James Merrill was freed on bail under tight restrictions.

     Deepal Wannakuwatte, 63, and his company International Manufacturing Group, filed for bankruptcy protection as part of his plea agreement with federal prosecutors. Wannakuwatte listed $134 million of debt and $15.9 million in assets on his individual schedules. He agreed to forfeit his real estate and bank accounts and to surrender $8 to $12 million in tax refunds. Wannakuwatte claimed he had $100 million worth of contracts to sell latex gloves to veterans hospitals, but in fact only had $25,000 per year.

INTERNATIONAL PONZI SCHEME NEWS

Australia

     Joe Camilleri sued the Legal Services Board for more than $140,000 seeking payment for funds stolen from him by lawyer Philip Linacre, 61, in connection with a $12 million Ponzi scheme. Linacre had promised returns of between 13% and 23%. Camilleri has sued the Legal Services Board which has refused to refund his money out of the Legal Practitioners Fidelity Fund.

     Ronald David Williams and Gary David Maile, former directors of Selection One Finance Pty Ltd., were sentenced to 4 years and 3 months each after pleading guilty to breaches of their director duties. Williams and Maile had promised investors returns of 3% per month.

Canada

     Chi-Ho Chan aka Moses Chan, 38, was charged with two counts of fraud in connection with an alleged scheme targeting Calgary’s Asian community that brought in more than $6 million. Chan operated an investment and immigration scheme. The investment scheme involved promises in a share of profits from the sale of electronics imported from Hong Kong and sold in the U.S.

England

     Investors in the Rienzi “Joe” Silva Ponzi scheme have filed a £1.2m lawsuit against the solicitors that provided conveyancing services to Abbey Brokers. The lawsuit alleges that Barrington Charles Edwards and Company is liable for the losses as it breached its fiduciary duty and client trust by making payments into third party accounts used in Silva’s fraud.

     A fraud investigation was opened against a number of companies which form part of the Rican Group after complaints were received about an alleged Ponzi scheme. Richard Cannon, 54, was charged with two counts of fraud in connection with the alleged scheme.

     Defrauded investors in the Ponzi scheme run by John Anderson, Kenneth Peacock and Kautilya Nanda Pruthi were invited to claim their share of the £914,000 "likely" available for distribution by the Financial Conduct Authority. The scheme had offered investors returns of up to 20% per month on short-term fixed deposits. The money to be distributed represents about 1% to 2% of the money lost.

Germany

     The German Federal Finance Court issued a decision that any payments received from a Ponzi scheme, or payments that were reinvested, are taxable as investment income even if the Ponzi scheme fails. See File No. VII R 25/123. Reported by Bernd Klose, http://www.raklose.de/.

     The German Federal Court issued a decision that victims of Ponzi schemes are entitled to be refunded their complete investment. In the case in question, the liquidator of the Ponzi scheme argued that under the agreements entered into between the victims and the fraudulent company, the fraudulent company would have been entitled to fees and commission. Additionally, even if the victims were not defrauded, the victims would have suffered losses due to the structure of the investment and the proposed investments. The German Federal Court held that the victims had been defrauded from the very first moment on and had no chance to receive any promised return. The victims, therefore, should not suffer any losses which would have accrued hypothetically. See File No. IX ZR 176/13. Reported by Bernd Klose, http://www.raklose.de/.

India

     Hundreds of investors filed a complaint against Future India and Infrastructure Industry Ltd., demanding that the firm be investigated for collecting more than Rs 5 crore from investors, promising high returns, but then failing to return their money. A complaint had previously been filed against the managing director of the company, Sreemat Kumar Mallik.

     Permission was sought to confiscate properties of alleged Ponzi scheme company, Rose Valley. There are at least 15 criminal cases against the company brought on the basis that the company defrauded investors.

Ireland

     Breifne O’Brian, 52, pleaded guilty to charges that he ran a multi-million euro Ponzi scheme.

New Zealand

     Convicted Ponzi schemer David Ross, 64, is appealing his 5 year, 5 month prison sentence. Ross was found guilty of defrauding more than 700 investors out of $115 million. Ross contends that his 65-month “minimum non-parole period” is “crushing.”

South Africa

     A court ordered Dean Rees, the former attorney who helped Barry Tannenbaum run his Ponzi scheme, to pay nearly R159 to the Tannenbaum estate. The judge found “beyond any doubt” that Rees knew that he was colluding in a Ponzi scheme. Rees denied those allegations. Tannenbaum is a fugitive, but it is believed that he fled to Australia with his wife after being accused of defrauding investors out of more than $12 billion in what is known as the Frankel Scheme. The scheme lured in 880 investors, offered returns up to 216%, and represented that funds were used to buy active pharmaceutical ingredients from foreign countries which were then sold to generic makers to make antiretroviral drugs.

     Frederick Johannes Greyling aka Frik Strauss had a warrant for his arrest issued, which was then stayed as a result of a medical certificate reflecting that he was being treated for a psychiatric condition. Greyling is accused of running a Ponzi-like scheme in which he promised interest at more than 10% per month.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

     Investors in the fundraising branch of the Church of God Ponzi scheme will receive a 70% distribution on their claims. The court approved the final distribution in the case that involved $85 million of investor funds.

     The Supreme Court granted a request to remove JP Morgan Chase & Co. from the list of respondents in the Bernard Madoff trustee’s case against various banks for their alleged role in the Madoff Ponzi scheme. JPMorgan has settled its claims with the trustee for $543 million.

     The Second Circuit declined to overrule the lower court’s approval of a $50.3 million settlement between an investor class and Fairfield Greenwich Ltd., a hedge fund that funneled $7 billion in the Madoff Ponzi scheme. Other defendants in the case had argued that any entity participating in the settlement could not pursue claims in any other jurisdiction. The Second Circuit did not agree and held that “Nothing in the final order precluded non-settling defendants from asserting in the District Court or in other litigation any claims or defenses that may be available to them.”

     The Supreme Court declined to review the dismissal of the Madoff trustee’s claims against banks such as HSBC Holdings Plc, that were dismissed on the grounds that the Trustee did not have standing and on the basis of the in pari delicto doctrine.

     The receiver in the Arthur Nadel Ponzi scheme won a favorable ruling from the Eleventh Circuit in connection with a fraudulent transfer claim. Wiand v. Lee, 2014 U.S. App.LEXIS 10154, (11th Cir. Jun 2, 2014). The court held that the receiver had standing to bring fraudulent transfer claims and also found that prejudgment interest could be awarded, but remanded for further proceedings.

     The College of St. Benedict in Minnesota will return $600,000 of the $2 million that it received from Tom Petter’s Ponzi scheme in connection with a settlement of a fraudulent transfer claim against it.

     A Florida appellate court upheld the lower court’s decision to deny a motion to transfer a defamation lawsuit filed by A.J. Discala against Mark A. Nordlicht and 7 other defendants. The lawsuit claims that the defendants made defamatory comments by falsely linking him to Scott Rothstein’s Ponzi scheme.

     A group of insurance companies headed by Ironshore Indemnity Inc. filed a motion for summary judgment against Banyon Income Fund LP, a hedge fund that had invested in Scott Rothstein’s Ponzi scheme. The motion seeks to void approximately $70 million of coverage granted to Banyon on the basis that Banyon allegedly made deceitful claims about the business operations in order to obtain coverage when the Rothstein scheme was disclosed. The motion alleges that Banyon had assured the insurance companies that it had only obtained pre-funded settlements and had documented settlements before advancing funds. However,“[i]n reality, the Banyon Entities knowingly advanced money before settlements were funded and without any documentation.”

     Broward Circuit Judge Nick Lopane is under investigation in connection with his handling of a divorce case involving a lawyer, Sabrina Kurzman, who worked for Scott Rothstein’s law firm, Rothstein Rosenfeldt Adler.

     Victims of the Martin Sigillito Ponzi scheme have filed lawsuits against two banks and a law firm alleging that they knew about the scheme for years and assisted in it. The Sigillito scheme defrauded 111 victims out of $56 million, promising high returns from low risk real estate investment opportunities in the British Lending Program. One lawsuit was filed against St. Louis Bank and PNC Bank, which had merged with Pioneer Bank, which had merged with National City Bank. The other lawsuit was filed against Spencer Fane Britt & Browne, alleging that a lawyer from the firm knew that the money from new investors was being used to pay earlier lenders.

     The Supreme Court declined to review the dismissal of claims brought by the receiver of the Allen Stanford businesses against Stanford employees. The lower court had held that the receiver did not have standing to bring the claims.

     The receiver of WCM777 received permission to sell properties of the company and to close frozen bank accounts. It is alleged that WCM777 was a pyramid scheme involving between $65 million to $80 million.

     The receiver and his professionals in the ZeekRewards case were awarded their fees and costs. The receiver and his firm were awarded approximately $750,000 for the first quarter of 2014.

     The ZeekRewards receiver filed lawsuits against two multi-level marketing attorneys, Howard N. Kaplan and Kevin D. Grimes, alleging malpractice, negligence, breach of fiduciary duty and aiding and abetting breach of fiduciary duty. The receiver alleged that Kaplan and Grimes “played an indispensable role in the scheme.” Among other things, it is alleged that Grimes created a “compliance course” that ZeekRewards offered for $30 and then paid $5 of that to Grimes.

Deepening Insolvency Comes Up for Air

Posted by Kathy Bazoian Phelps

     Deepening insolvency is alive and well, at least in the Eastern District of New York. That court recently found that deepening insolvency is an appropriate measure of damages resulting from a breach of fiduciary duty claim. Federal Nat’l Mtge. Assoc. v. Olympia Mortgage Corp., 2014 U.S. Dist. LEXIS 79479 (E.D.N.Y. June 10, 2014).

     Olympia Mortgage moved for entry of judgment on its claims for breach of fiduciary duty, among others, against Avruhum Donner, who was the former president and a principal shareholder of Olympia. The court found that, “Donner owed a fiduciary duty to Olympia, that he breached that duty, not only by causing the fraudulent transfers to be made, but also by engaging in various schemes to disguise Olympia's financial condition, and that, as a result of this breach, Olympia incurred damages in the form of increased indebtedness to Fannie Mae, among others.”

     In measuring damages on the breach of fiduciary duty claim, the court allowed the use of deepening insolvency to calculate the amount of the loss. The court reasoned as follows:

    With respect to the $43,918,500.42 claim, Olympia argues that Donner used the Check Kiting, Nominee Loan and other schemes to infuse cash into the company and to hide its liabilities, thus enabling Olympia to continue operating even though it was insolvent. Olympia further asserts that this continued appearance of solvency permitted the continued perpetration of the fraud against Fannie Mae, resulting in the increase of Olympia's liability to Fannie Mae from around $3 million in December 1997 to around $43 million in October 2004, and that Donner is liable for the entire increased amount.

    The theory on which Olympia relies, "deepening insolvency," posits that an "insolvent corporation suffers a distinct and compensable injury when it continues to operate and incur more debt." In re Global Service Group, LLC, 316 B.R. 451, 457 (Bankr. S.D.N.Y. 2004). Some courts have found deepening insolvency to provide an independent cause of action, while others have treated it as a theory of damages. See id at 457-58 (collecting cases). In this Circuit, deepening insolvency is considered "a basis for damages that may result from the commission of a separate tort." In re Allou Distributors, Inc., 395 B.R. 246, 264-65 (Bankr. E.D.N.Y. 2008). Thus, one seeking to recover under this theory "must show that the defendant prolonged the company's life in breach of a separate duty, or committed an actionable tort that contributed to the continued operation of a corporation and its increased debt." Global Service Group, 316 B.R. at 458. Here, there can be no doubt that Donner's participation in the Check Kiting and Nominee Loan schemes amounted to a breach of his fiduciary duty. And the evidence submitted provides an adequate basis upon which to infer that the perpetration of these schemes served not only to prolong the life of an already insolvent Olympia, but also to increase its debt to Fannie Mae while simultaneously depleting the assets available for repayment. I am satisfied that Olympia's $43,918,500.42 liability to Fannie Mae was caused, in no small part, by Donner's breach of his fiduciary duty, and Olympia's motion for the entry of default judgment in that amount is granted.

     For a more detailed discussion about the theory of deepening insolvency, either as an independent claim for relief or as a theory of damages, see The Depths of Deepening Insolvency: Damage Exposure for Officers, Directors and Others and The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.

Eleventh Circuit Decides Important Ponzi Scheme Issues

Posted by Kathy Bazoian Phelps

     The Eleventh Circuit issued an opinion this week that has to make receivers happy. See Wiand v. Lee, 2014 U.S. App. LEXIS 10154 (11th Cir. Jun. 2, 2014). Fraudulent transfer claims are most often the bread and butter of a receivership estate in a Ponzi scheme case. But two hurdles often encountered by receivers in the “clawback” battles are:

1. Does the receiver have standing to bring fraudulent transfer claims?

2. Can the receiver recover prejudgment interest if successful on those claims?

The Eleventh Circuit has now addressed both questions.

Standing

     On the standing issue, there has been considerable debate as to whether a receiver is even the proper party to bring fraudulent transfer lawsuits, because the receiver’s claim must be on behalf of the receivership entity and not merely seeking redress for generalized harm to all creditors. Courts have been engaging in varied analyses to reach their decisions on this question.

     Some confusion stems from two circuit court decisions that called into question a receiver’s standing to bring fraudulent transfer claims. In Eberhard v. Marcu, 530 F.3d 122, 132-34 (2d Cir. 2008), the Second Circuit drew a distinction where the receiver is receiver over a an individual rather than a corporation, finding that when the receiver is appointed to represent the estate of an individual (rather than an entity), the receiver lacks standing to bring fraudulent transfer claims because outside of the receivership and only creditors of the individual can bring such a claim. See also Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir. 1997).

     Since those decisions, the Fifth Circuit found that the receiver of Stanford Financial, an entity, does not have standing to bring fraudulent transfer claims if those claims are brought on behalf of creditors. Janvey v. Alguire, 539 Fed. App’x 478 (5th Cir. Aug. 30, 2013). In a previous decision, Janvey v. Democratic Senatorial Campaign Committee, Inc., 712 F.3d 185 (5th Cir. 2013), the Fifth Circuit had considered the issue of receiver standing in facts also arising out of the Stanford Ponzi scheme. In that case, the Fifth Circuit held that “a federal equity receiver has standing to assert only the claims of the entities in receivership.” Interestingly, the Fifth Circuit issued that substitute opinion to replace Janvey v. Democratic Senatorial Campaign Comm., Inc., 699 F.3d 848, 853 (5th Cir. 2012), to “confront and correct errors of law pertaining to standing and imputed knowledge” that were contained in its original opinion.  The Stanford receiver has filed a petition for writ of certiorari to the Supreme Court asking for resolution on the question of whether a receiver has standing to assert claims on behalf of the receivership’s creditors.

     This new decision from the Eleventh Circuit in Wiand v. Lee, arising out of the Arthur Nadel Ponzi scheme, goes a long way to clear up the confusion. In citing and relying upon Judge Posner’s often cited decision in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), the Eleventh Circuit explained: 

A receiver of entities used to perpetrate a Ponzi scheme does not have standing to sue on behalf of the defrauded investors but does have standing to sue on behalf of the corporations that were injured by the Ponzi scheme operator. Although the corporations constitute the "robotic tools" used by the Ponzi operator, they are "nevertheless in the eyes of the law separate legal entities with rights and duties." The money they receive from investors should be used for their stated purpose of investing in securities, and thus the corporations are harmed when assets are transferred for an unauthorized purpose to the detriment of the defrauded investors, who are tort creditors of the corporations. Although the corporations participate in the fraudulent transfers, once the Ponzi schemer is removed and the receiver is appointed, the receivership entities are no more the "evil zombies" of the Ponzi operator but are "[f]reed from his spell" and become entitled to the return of the money diverted for unauthorized purposes.

Under Lehmann, the Receiver has standing to sue on behalf of the receivership entities because they were harmed by Nadel when he transferred profits to investors, such as the Lee Defendants, from the principal investments of others for the unauthorized purpose of continuing the Ponzi scheme. Although the receivership entities were the instruments of Nadel's fraud, they were distinct legal entities whose purpose was to use client funds to invest in securities, and they were harmed when Nadel diverted the funds for unauthorized uses. Applying Lehmann to FUFTA, the receivership entities became "creditors" of Nadel at the time he made the transfers of profits to Lee and others because, as FUFTA requires, they had a "claim" against Nadel. They had a "claim" against Nadel because he harmed the corporations by transferring assets rightfully belonging to the corporations and their investors in breach of his fiduciary duties, and a "claim" under FUFTA includes "any right to payment" including a contingent, legal, or equitable right to payment. Fla. Stat. § 726.102(3). See also Cook v. Pompano Shopper, Inc., 582 So. 2d 37, 40 (Fla. 4th DCA 1991) ("A tort claimant or contingent claimant is as fully protected under the Uniform Fraudulent Transfer Act as a holder of an absolute claim."). The receivership entities were thus creditors because they had a right to a return of the funds Nadel transferred for unauthorized purposes for the benefit of their innocent investors. See Lehmann, 56 F.3d at 754. The Receiver's claim thus fits within the statutory language of FUFTA, which requires the existence of a creditor and a debtor.

 

Wiand v. Lee, 2014 U.S. App. LEXIS 10154, at *16 - 19 (citations and footnote omitted).

     This is about as good of an explanation as receivers may ever get on the standing issue and helps reconcile the distinctions being drawn by courts on whether the debtor is an individual or an entity that has been defrauded by its principals.

 

Prejudgment Interest

     Wiand v. Lee also contains a good discussion on the question of whether a receiver should be awarded prejudgment interest on a fraudulent transfer claim. The receiver sought $437,734 in prejudgment interest by applying Florida’s statutory interest from the time of the transfers. The magistrate had recommended that the receiver be denied prejudgment interest “on equitable grounds,” but the Eleventh Circuit disagreed. The court noted that “Florida endorses the ‘loss theory’ of prejudgment interest according to which prejudgment interests is ‘merely another element of pecuniary damages.’” Although an award of prejudgment interest may be subject to equitable factors, the court found that the lower court had abused its discretion in not considering the governing equitable factors. Instead, the lower court had concluded that, “allowing recovery of prejudgment interest against the Lee Defendants would be inequitable because they invested in the Hedge Funds assuming their legitimacy, paying prejudgment interest would result in an award greater than the amount of their profits, and because ‘the Lee Defendants have suffered enough.’"

     So now we know that “Defendants have suffered enough” is not good enough to disallow prejudgment interest. The Eleventh Circuit remanded for further consideration on this issue.

Did the Second Circuit Get SLUSA Right in the Madoff Ponzi Scheme Case?

Posted by Kathy Bazoian Phelps 

     In a very short and summary opinion, the Second Circuit concluded that nothing in a recent Supreme Court decision gave it any reason to revisit its prior ruling that SLUSA bars state law class action claims against banks in connection with the Bernard Madoff scheme. In re Herald, Primeo, and Thema, 2014 U.S. App. LEXIS 9871 (2d Cir. May 28, 2014).

     As discussed previously in this blog, the Supreme Court in Chadbourne & Park LLP v. Troice, 134 S. Ct. 1058 (2014), declined to bar certain class action claims in the Stanford Financial Ponzi scheme case on the grounds that: (1) the certificates of deposits sold were not “covered securities”; and (2) the fraud was not “in connection with the purchase or sale of a covered security.”

     The Second Circuit found no application of Troice in the Madoff case. Simply put, the court said, “Because the fraud perpetrated by Madoff Securities was ‘material to a decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered security,' Troice, 134 S. Ct. at 1066, the Supreme Court's ruling confirms the logic and holding of In re Herald.’”

     The Second Circuit distinguished the Stanford Financial case from Madoff, stating, “the closest that the plaintiffs in Troice could get to statutorily defined ‘covered securities’ was the allegation that Stanford induced purchase of the uncovered securities by, among other misrepresentations, vague promises that the Stanford Investment Bank had significant holdings in various covered securities.” Quoting Troice, the court noted, “Thus, a plaintiff in Troice was entirely distinguishable from ‘a victim who took, tried to take, or maintained an ownership position in the statutorily relevant securities through 'purchases' or 'sales' induced by the fraud.’"

     The Second Circuit reached the following conclusion and put an end to the class action claims against the allegedly wrongdoing banks:

 

Madoff Securities, by contrast, fraudulently induced attempted investments in covered securities, albeit through feeder funds (not alleged in the instant complaints as anything other than intermediaries), and the defendant banks are alleged to have furthered that scheme. Madoff Securities' victims thus "tried to take . . . an ownership position in the statutorily relevant securities," i.e., covered securities. That Madoff Securities (a Ponzi scheme) fraudulently failed to follow through on its promise to place the investments in covered securities does not in any respect remove this case from the ambit of SLUSA as defined in Troice.

     Is this type of distinction fair to defrauded victims? In Stanford, they thought they were purchasing certificates of deposits. In Madoff, they handed their money to feeder funds for investment purposes, sometimes not even knowing how their money was being invested. The straightforward and uncontested fact is that there were no sales or purchases of “covered securities” by anyone in Madoff, just like in Stanford. Is there a fair reason to say that one group can sue to recoup losses and the other cannot? The Second Circuit has interpreted Troice to make such a distinction. 

     In addition to the concern that this interpretation leads to an uneven application of the law in Ponzi scheme cases, is this result the right one in the Madoff case? First the Madoff trustee was barred from suing some of these very same banks. Now the investors are barred from seeking recovery from the banks. So who is it that gets to hold the banks accountable and obtain recoveries to reimburse the defrauded victims for their losses? At least one bank, JPMorgan, has admitted knowledge of suspicious activity while engaged in the banking activity necessary to perpetuate the scheme. The only comfort so far is that the government pursued charges against that bank and reached an agreement with the bank to pay about $2 billion. This is better than nothing, but not enough to make the victims whole.