July 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

      There has been no slowdown in Ponzi scheme news over the summer. Here is a summary of stories that were reported for the month of July. 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.
 
     Arnulfo M. Acosta had his appeal to vacate, set aside or correct his sentence denied. Acosta v. U.S., 2014 U.S. Dist. LEXIS 103879 (S.D. Cal. July 24, 2013). Acosta appealed his 87 month sentence, which arose from a $40 million Ponzi scheme that defrauded 1,700 investors, based upon allegations of ineffective counsel and that his sentence reflects constitutionally-impermissible racially disparate treatment. The appellate court rejected both arguments and upheld his sentence.

     Steven Bingaman, 57, of New York, had previously pleaded guilty to charges relating to his Ponzi scheme in which he defrauded investors by promising to use their funds for financing but instead using them to pay personal expenses such as country club dues and home mortgages. Bingaman’s sentence was doubled to 4 to 12 years due to Bingaman’s failure to pay back the $1.1 million he had agreed to pay back in exchange for a reduced prison sentence. Bingaman only brought a $100,000 money order as of the deadline.

     John Bravata’s Ferrari and Maserati were sold at auction by the government following his conviction for running a $50 million Ponzi scheme that defrauded hundreds of investors. Bravata ran his scheme through BBC Equities, LLC and Bravata Financial Group LLC, representing that he was running a successful real estate investment fund that would generate guaranteed returns of 12% annually. Over 400 investors invested $50 million in the scheme.

     James Douglas Cassity, 67, pleaded guilty to charges relating to a $600 million Ponzi scheme that he and his son, Brent Douglas Cassidy, 46, ran though National Prearranged Services, Inc. Brent Cassidy pleaded guilty earlier this month. The company sold prearranged funeral contracts for up to $10,000 each to as many as 150,000 customers, but the money was used for the principals’ personal expenses and to pay for previous customers’ funerals.

     Some victims of Cornerstone Financial, Inc., a Montana company, will receive restitution payments of over $242,000 from Montana’s new Securities Restitution Assistance Fund. Cornerstone ran one of the largest Ponzi schemes in Montana history. Robert Congdon and Keith Kovick, the two principals of Cornerstone, are currently serving time in federal prison. The Securities Restitution Assistance Fund was created in 2011 so that state victims of securities fraud can receive 25% of their losses, or $25,000, whichever amount is less. Twenty of the 100 victims of Cornerstone filed claims and will be receiving payments.

     Brendan W. Coughlin, 46, Henry D. Harrison, 47, Paul R. Melbye, 47, and W. Mark Miller, 59, all of Texas, were sentenced to prison and ordered to pay $2.3 million in restitution for their role in the nearly $500 million Ponzi scheme of Provident Royalties Inc. Coughlin and Harrison were sentenced to 21 months, Melbye to 18 months, and Miller to 6 months plus 6 months home confinement. The scheme’s mastermind, Joseph Blimline, is currently serving a 12 year sentence.

     Ramon DeSage is facing a new federal indictment for tax evasion. DeSage is already accused of running a $191 million Ponzi scheme through Cadeau Express, Beryt and Merits Incentive, and now is accused of failing to pay federal income tax on more than $87 million in unreported income.

     Jose L. Nino de Guzman Jr., 30, of Washington, pleaded guilty to charges in connection with a $30 million Ponzi scheme involving bogus real estate investments in Peru. De Guzman ran his scheme through NDG Investment Group LLC and defrauded more than 200 investors by sending them false updates even though he had only purchased a few, if any, properties and never generated a profit. De Guzman used the money to fund his lavish lifestyle, including the purchase of $600,000 yacht, a $365,000 diamond ring, and a $200,000 Bentley.

     Garrett "Denny" Denniston, 62, of Connecticut, was sentenced to 8 years and ordered to pay $3 million in restitution in connection with charges relating to a $3 million Ponzi scheme that he ran through his company called ConsensusOne. The scheme defrauded 54 investors.

     Armand R. Franquelin and Martin A. Pool, 43, were sued by the SEC in connection with an alleged $12 million Ponzi scheme that defrauded victims out of their IRAs. They allegedly ran the scheme by convincing investors to convert funds in their IRA accounts to self-directed IRAs through Destiny Funding LLC, a company owned by Franquelin and Pool which would be invested in another of their companies, Elva Group. The scheme, which supposedly involved buying, developing and selling residential real estate, defrauded about 130 investors.

     John Henley Fowler, 64, and his son, Jeffrey Robert Fowler, 35, of Florida, agreed to consent judgments in favor of the SEC. Both of them waived their rights to jury trials and any appeals of the SEC’s proposed final judgments. The Fowlers had raised about $4.3 million from 70 investors in a Ponzi scheme that purported to be a gold futures investment program. Julianne Chalmers allegedly solicited investors to invest in the program by purchasing promissory notes.

     Glen Galemmo and his wife Kristine Galemmo of Ohio have been accused of operating a Ponzi scheme they allegedly ran through Queen City Investments in which they promised investors 432% returns. They were sued by a group of investors after Galemmo sent an email stating that his funds were shutting down. Galemmo claimed that his strategy was to identify "severely-undervalued" stocks, and he represented that he had total assets of $200 million under management.

     Celia Gallardo, 42, was sentenced to 5 years in prison and ordered to pay $2.389 million in restitution connection with charges that she ran a Ponzi scheme through her companies, Gold Feather Realty and Gold Credit Investment. Gallardo had pleaded guilty to charges relating to her real estate scheme in which she took investors’ money to pay for trips abroad, house payments, and payments to earlier investors.

     John Geringer, Christopher Luck and Keith Rode are scheduled to go to trial this month after pleading not guilty to charges relating to an alleged $60 million Ponzi scheme through their company, Geringer, Luck and Rode LLC, which managed an investment fund called GLR Growth Fund. A civil suit filed by the SEC is pending.

     Anderson Scott Hall of Florida saw his trial continued to August in connection with criminal charges related to his alleged Ponzi scheme that he ran through Abaco Securities International. It is alleged that Hall held out Abaco to be a legitimate investment company and that he would induce investors to transfer their retirement savings from legitimate life insurance companies to his control.

     David Lee Hardin Jr., 59, of California, was sentenced to 3 years in prison and ordered to pay $1.5 million in restitution in connection with his Ponzi scheme that he ran through a group of companies called Covenant Mortgage, Covenant Marketing, Covenant Debt Solutions, Covenant Insurance and HRE Mortgage. Hardin had promised investors returns to be generated through home sales and fees from debt settlement services. Hardin had pleaded guilty to the scheme in March 2013.

     Dan Harkey, the CEO of Point Center Financial, was found guilty of breaching his fiduciary duties to his investment clients with "malice, fraud and oppression." Harkey was ordered to pay more than $4.5 million, but the jury then doubled the award to $11.6 million. Harkey was found liable for 11 counts of elder abuse in a Ponzi-like scheme in which he preyed on older people to invest their life savings in projects involving commercial real estate.

     Glenn Kane Jackson, 47, was sentenced to 7 years in prison and ordered to pay $8.6 million in restitution and fines in connection with his Ponzi scheme that defrauded 13 investors. Jackson’s wife, Gina McGee, had previously pleaded guilty to charges that she and Jackson had run a scheme through Highlands Capital Partners LP.

     Albert Kaleta agreed to settle the SEC’s claims against him and his company, Kaleta Capital Management, for $3.2 million relating to a $15 million Ponzi scheme involving promissory notes in which BusinessRadio Network LP dba BizRadio and Daniel Frishberg Financial Services Inc. dba DFFS Capital Management Inc. had also been named as relief defendants by the SEC. Kaleta had previously agreed to pay the receiver $1 million. The receiver had also sued Barrington Financial Advisors and its CEO, William Heath, who had acquired DFFS Captial Management’s assets through allegedly fraudulent transfers. The settlement with Barrington and Heath requires payment of $50,000 from each of them.

     Patrick Kiley, 75, was sentenced to 20 years in prison and ordered to pay over $155 million in restitution to victims for his role in the $194 million Ponzi scheme that defrauded more than 700 investors. Kiley had lured in 70% of the investors into the Trevor Cook Ponzi scheme through his Christian radio show, "Follow the Money." Trevor Cook operated Crown Forex SA and JDFX Technologies along with Christpher Pettingill, Jason 'Bo' Beckmann, and Gerald Durand, in which they pitched risk-free returns to potential investors. Kiley has continually claimed his innocence, saying that he was duped just like the investors, but he was convicted following a jury trial last year. Beckman, 43, was sentenced to 360 months, and Durand, 62, was sentenced to 240 months. Pettengill, 56, was previously sentenced to 90 months. Cook had previously pleaded guilty and is serving a 25 year prison sentence.

     Jeffrey J. Kinseth, 58, of Iowa, pleaded guilty to charges relating to his $1 million Ponzi scheme that he operated through Virtual Vision, promising investors substantial returns from the trading of futures or foreign currency. Kinseth defrauded 11 investors and issued false account statements and phony emails to assure investors that their money was growing.

     James Stanley Koenig was sentenced to 42 years and 8 months in prison in connection with his $250 million Ponzi scheme that defrauded more than 1,000 victims. Koenig was found guilty in his criminal trial of running a scheme through Asset & Real Estate Company and fifty affiliate companies, telling investors that the companies specialized in senior housing centers and selling them ownership shares in the property. Attorney General Kamala Harris said, "This individual ran a ruthless Ponzi scheme that robbed investors, including vulnerable elderly people, of their life savings."

     Jason Konior, 39, pleaded guilty to charges in connection with a $2.9 million Ponzi scheme in which he promised investors he would provide matching funds up to 9 times the amount of their investments in his fund, Absolute. Absolute had a "first loss" investment program in which Konior claimed that he would place the combined funds—the investors’ funds and the additional funds to be provided by Absolute—in a brokerage account designated by Absolute in which investors could trade securities. Konior represented that the hedge funds would be responsible for trading losses, and they would share any profits with Absolute.

     David Kugel, 67, Eric Lipkin, 38, and Enrica Cotellessa-Pitz, 54, former employees of Bernard Madoff’s company, have all been permanently barred by the SEC from the securities industry. The three had previously pleaded guilty to their role in the Madoff scheme. Kugel assisted by helping create fictional trades and account statements. Lipkin assisted Madoff for more than 10 years by helping employees to carry out a fictitious investing strategy. Cotellessa-Pitz, who worked for Madoff for 30 years, helped falsify accounting records and financial statements to mislead SEC examiners.

     Duncan MacDonald III, 50, and Gloria Ann Solomon, 71, pleaded guilty to charges relating to a $10 million Ponzi scheme run through Global Corporate Alliance. The scheme involved the sale of health care benefit programs with promises of high returns based on management fees and securing more investors. Global was supposedly a health insurance company that had more than 100,000 premium-paying policy holders when in fact it never had more than 40 policyholders. MacDonald and Solomon allegedly manufactured enrollment numbers to induce investments from at least 80 investors who believed that the premium payments would be funding their returns.

     Shawon McClung, 27, pleaded guilty to charges in connection with a $1.7 million Ponzi scheme that promised returns of 15% to 100% every 14 to 30 days. McClung stated that he had software to make automated trades on the foreign currency market, but he did not actually trade their money.

     Shawn Merriman’s victims will begin receiving disbursements totaling about 16.5 cents on the dollar for their losses in Merriman’s $20 million Ponzi scheme, in which Merriman promised his victims annual returns of 7% to 20%. The money will come from Merriman’s Idaho assets. There are 94 victims, but only those due $4,100 or more will receive checks. Merriman was previously sentenced to 12½ years in prison and ordered to pay $20.1 million in restitution.

     Everett Charles Miller, 43, pleaded guilty to charges in connection with his $41.2 million Ponzi scheme that he ran through his company, Carr Miller Capital LLC. Miller promised mostly elderly investors returns of 7% to 20% in 9 months. Miller invested the money in money-losing ventures and spent a lot of money on luxury boxes for sporting events, lavish parties and many luxury vehicles.

     Steven Palladino and his company, Viking Financial Group, were found liable for securities fraud in a civil case filed by the SEC. Palladino had promised about 33 investors interest of 7% to 15% per month on investments in connection with short-term loans to those unable to obtain traditional financing. Palladino spent hundreds of thousands of dollars on gambling, vacations, luxury vehicles and tuition, and he was ordered to disgorge $3.1 million.

     Elaina Patterson, 53, pleaded not guilty to charges that she ran a $2.1 million Ponzi scheme using her position at Bank of America to defraud 31 investors. Patterson resigned from Bank of American in 2011 after her scheme began to unravel. Patterson had promised interest of 10% to 15% and issued allegedly fake certificate of deposit receipts and tax forms. She had also set up accounts in investors’ names without their knowledge and put her own address on the accounts, using the money for personal expenses such as multiple vacations, and college and private school tuition for her children.

     Thomas Petters, 56, made a last ditch attempt to reduce the 50 year prison sentence that he received in connection with his $3.65 billion Ponzi scheme. Petters argued that he was unaware of a purported 30 year sentence offer until after his conviction. Petters’ lawyer filed a brief on the sentencing issue, which is now in the court’s hands. Both Petters’ defense attorneys and investigators say that they had personal conversations with Petters about the 30 year cap in a plea agreement.

     Bebe and Marco Ramirez had their home and their offices at USA Now Regional Center, raided by the FBI in connection with an investigation of al alleged Ponzi scheme that defrauded wealthy Mexican investors. Mexican nationals were promised permanent residence in the U.S. after 4 months they invested $500,000 in a business venture that would create at least 10 jobs in two years.

     Thomas Redmond Jr., of Indiana, was sentenced to 4 years in prison in connection with a Ponzi scheme that defrauded 10 victims of about $580,000. Redmond was found guilty on charges related to a scheme that targeted the elderly at his church by promising returns for supposed investments in two different companies.

     Bryant Ismail Rodriguez had his motion to vacate his sentence denied. Rodriguez v. U.S., 2013 U.S. Dist. LEXIS 94819 (S.D.N.Y. July 2, 2013). Rodriguez was convicted on charges relating to a Ponzi scheme that he ran though a consumer electronics distribution company called Communications and Electronics Inc. and was sentenced to 108 months in prison. Rodriguez was supposedly supplying major electronics retains chains such as Circuit City with merchandize at a substantial profit, but he had no business with any electronics retail chains. Rodriguez’s claims of ineffective counsel were denied by the court.

     Kimberly Rothstein, the wife of convicted Ponzi schemer Scott Rothstein, had her sentencing delayed to allow her more time to cooperate with prosecutors. Kim Rothstein faces 5 years in prison for concealing and trying to sell more than $1 million in jewelry that investigators wanted to seize.

     Jeffrey Shalhoub, 38, of New York, was indicted in connection with a Ponzi scheme in which he defrauded at least 12 investors of about $300,000, holding himself out as a commodities pool operator for The 9 Group Ltd. The case had already been prosecuted civilly by the CFTC. Shalhoub had promised his clients returns of 5.2% per week, showing them false statements reflecting those returns even though the investors were actually losing money. Shalhoub had neither admitted nor denied the charges in the CFTC action but agreed to pay penalties and reimbursements.

     Trendon T. Shavers, 30, of Texas, and his company, Bitcoin Savings & Trust, were sued by the SEC alleging that they were operating a Ponzi scheme involving Bitcoin, a virtual currency. The complaint alleges that Shavers promised returns of 1% per day and no risk in connection with purported trading of Bitcoins. The company raised at least 700,000 Bitcoin, which were valued at $4.5 million a few years ago and now may be worth as much as $60 million. Bitcoin is a peer-to-peer payment system that promises to be secure and anonymous. The system was created in 2009 by an anonymous person and has been used to buy a range of products from consumer goods to illegal drugs. The SEC alleges that Shavers returned about 500,000 Bitcoin to investors but that he transferred about 150,000 Bitcoin to his personal account. It is believed that there are at least 66 investors but that the number may rise.

     Jill Marie Silvey, 51, was sentenced to 15 years in prison and ordered to pay restitution for her $2 million Ponzi scheme. Silvey was convicted earlier this year on about 52 fraud-related charges. Silvey had told investors that she was lending their money to homeowners who could not afford traditional home loans in exchange for monthly interest payments. About 20 investors were defrauded when she used their money to make payments to earlier investors and to buy expensive cars, clothing and furniture.

     Nickolas Skaltsis pleaded guilty, was sentenced to a terms of between 18 months and 5 years, and was ordered to pay restitution of his victims of almost $278,000. Skaltsis defrauded at least 21 investors in a $300 million Ponzi scheme by promising them returns of up to 24% for investments in real estate.

     Leon Randy Sinclair III, 61, was sentenced to 20 years in prison for his role in a Ponzi scheme that defrauded dozens of elderly investors out of $16 million. Sinclair promised lifelong annuity payments to his investors and their descendants after they die.

     Reed Slatkin, 64, was released from prison after serving his 10 year prison sentence. Slatkin had pleaded guilty to charges related to his $600 million Ponzi scheme that defrauded 800 investors, many of which were his friends and fellow Scientology members.

     Maxwell B. Smith III, 73, of New Jersey was sentenced to a total of 22 years and ordered to pay almost $8 million in restitution in connection with a $9.8 million Ponzi scheme that he ran through a phony investment fund called Health Care Financial Partnership Municipal Loans. Smith had falsely reported that Health Care Financial was a lucrative investment fund with paperwork showing more than $300 million in assets. Smith told investors that he managed the fund by financing and refinancing loans to healthcare facilities such as nursing homes, and he promised annual tax-free interest of between 7.5% and 9%. Smith used investor funds for personal expenses that included fine dining, entertainment, about $400,000 in mortgage payments on his home and a relative’s home, $120,000 in home renovations, $78,000 for luxury furnishings, and rental payments for a villa in Gordes, France, for several weeks each summer for almost 15 years.

     Jason M. Snelling lost his appeal to have his sentence overturned, Snelling v. State, 2013 Ind. App. Unpub. LEXIS 833 (Ind. July 3, 2013). Snelling had pleaded guilty to charged in connection with a Ponzi scheme that he ran with Jerry Smith through CityFund Advisory and Dunhill Investment Advisors, Ltd. Snelling appealed his sentence of 8 years, but Snelling’s arguments that the court did not properly consider mitigating factors were rejected on appeal.

     David Tamman, the lawyer for John Farahi, who ran a Ponzi scheme through his company, Newport Financial Services, Inc., saw his sentencing delayed when he sought to replace his attorneys. Tamman was convicted for his role in the scheme.

     Michael James Turnock, 69, of Colorado, was sentenced to 6½ years in prison and ordered to pay $4.1 million in restitution in connection with a Ponzi scheme that was run through his company, Bridge Premium Finance LLC. Bridge Premium claimed to be in the business of insurance premium financing and promised investors annual returns of up to 12%. Investors were told that they were "100 percent protected" through various forms of collateral.

     Eliyahu Weinstein is engaged in plea negotiations with the government over charges relating to a $6 million Facebook stock scam. Weinstein has previously pleaded guilty to other unrelated charges in connection with a $200 million Ponzi scheme and is now negotiating an agreement relating to charges that he, along with Alex Schleider, 47, and Aaron Muschel, 63, defrauded a New Zealand man out of more than $6 million.

     Guy Andrew Williams, 42, and Brent F. Williams, 66, both of Arizona, were convicted by a jury of charges relating to a $100 million Ponzi scheme they ran through investment funds known as the "Mathon" entities. The majority of the Mathon investors were members of the Church of Jesus Christ Latter-Day Saints and were told that their money would be used to make short terms loans to third party borrowers at a high interest rate. Instead, the investors’ money was used to pay extravagant salaries and bonuses exceeding $10 million and to make millions of dollars of "loans" to companies they secretly controlled.

     M. Viktoria Wilson, the wife of Joel I. Wilson, who has been accused of running a Ponzi scheme, won her motion to dismiss to charges of lying to investigators about her husband’s whereabouts after an arrest warrant had been issued. Joel Wilson has been accused of defrauding investors through his investment company, The Diversified Group, in a $10 million Ponzi scheme.

International News

Canada

     Dale Joseph Edgar St. Jean and Gregory Dennis Tindall were ordered to disgorge $9.6 million of ill-gotten gains and to pay penalties of about $2 million as a result of their $52 million Ponzi scheme. They were also banned from trading securities, as were their companies, TransCap Corp. and Strat-Trade Corp. The scheme had promised investors safe investments of returns of 15% to 22%, but their money was used to pay returns to earlier investors.

China

      It was reported that Zeng Chengjie was executed by lethal injection for operating a Ponzi scheme that defrauded about 60,000 victims out of $460 million. Zeng had been sentenced to death for "illegal fund-raising" after it was alleged that he used investor funds to support his company that placed bids for city development projects. A change in leadership resulted in Chinese politicians withdrawing their investments, which then triggered panic among civilian investors. Zeng’s family was not notified before his execution and did not see his body before it was cremated.

India

      Sumangal Industries was restrained from the securities market in connection with a potato purchase scheme that promised up to 100% returns in 15 months. The scheme guaranteed returns and informed investors that, due to the company’s expertise in the trading of potatoes, the company could buy potatoes when the price was low, store them until the price rose, and then sell them at a profit. The company was ordered to refund investor money within 3 months. The investment program was known as the "Flexi Potato Purchase Scheme."

      Michael Gulakhev, 25, and his Indian wife, Jennifer Menezes, were arrested for their role in the Ponzi scheme run through Mavrodi Mondial Moneybox India (MMM India). The couple was handling the firm’s publicity and coordination via the internet. Twenty bank accounts belonging to the couple have been frozen.

      The Securities and Exchange Board of India (Sebi) approved a proposal to amend the securities laws to give Sebi more power to regulate Ponzi schemes. Sebi can now carry out search and seizure operations, attach assets, and seek information or telephone call data records from any person or entity relating to a securities investigation by it.

Israel

      Eran Mizrahi, 41, known as the "Israeli Madoff," was sentenced to 12 years in prison in connection with his $16 million Ponzi scheme. Mizrahi was fined $83,000 and ordered to pay each of his victims $71,600 in compensation.

New Zealand

      David Ross, 63, accused of running a Ponzi scheme through Ross Asset Management, had his hearing on certain financial charges delayed to August. Ross is accused by the Financial Markets Authority of running $400 million Ponzi scheme that affected about 1,200 investors. Ross has now been charged with providing a financial service when he was not registered to do so, making false or misleading statements to get authorization as a financial advisor, and supplying information to the authority that he knew to be false or misleading.

      A letter of complaint was sent to the Financial Markets Authority by an investor in the David Ross Ponzi scheme claiming that the FMA filed to perform its statutory obligations in conducting due diligence on Ross. The letter requests that the Ombudsman ascertain whether the FMA carried out proper due diligence before Ross was approved as a financial advisor.

In the News

      The receiver in the Ponzi scheme case of Benny Judah, 54, has asked for authority to close out the bank accounts and the operations of the receivership estate. The receivership returned almost $10.4 million to victims whose losses were initially estimated to be about $35 million. Judah had pleaded guilty to charges relating to his scheme, was sentenced to 20 years in prison, and was ordered to pay $59.8 million in restitution. Judah had operated a $40 million Ponzi scheme guaranteeing 10% annual returns from the sale of 5 year debentures supposedly backed by income from heavy equipment leases.

      A jury returned a verdict in favor of Westport National Bank and its parent company, Connecticut Community Bank, after about 200 Madoff investors had sued the bank, claiming combined losses of $60 million. The lawsuit alleged that the bank breached its duties as the custodial bank in charge of their money. The investors alleged that when their accounts were transferred to Westport, no assets actually existed in the custodial accounts and the bank’s one-man custodial department did little to determine whether the trading information provided by Madoff’s firm was accurate. The bank separately agreed to pay $7.5 million to a group of 240 investors in a related case.

      Victims of the Lou Pearlman Ponzi scheme may get a small $.04 distribution on their claims out of the Pearlman bankruptcy proceedings. Victims must still approve the plan proposed by the bankruptcy trustee, which is scheduled to take place in September.

      The bankruptcy plan in the case of Rothstein Rosenfeldt Adler, the law firm of Scott Rothstein, was approved. It is expected to pay victims 100% of their lost funds. Most of the money to fund the plan is coming from a settlement with TD bank, which is paying about $363 million to Rothstein investors through various judgments and settlements. The $141 million of allowed claims are expected to be paid in full from the $79.2 million in cash on hand held by the trustee plus the additional $72.45 million to be paid by TD Bank. TD Bank has also retained a lower priority claim to recover the $132.45 million that it has paid in settlements and judgments so far. The trustee is also continuing to pursue fraudulent transfer claims.

      First Reliance Bank is now named in a class action lawsuit against the estate of John Schurlknight and his law firm, Schurlknight and Rivers Law Firm. It is alleged that the bank had actual knowledge of the scheme run by Schurlknight and that the law firm was defrauding its clients out of millions of dollars.

      About 135 net winner investors in ZeekRewards have agreed to settlements with the receiver that will result in recovery of about $1.82 million, reflecting 56% returns on their investments. The receiver believes that about $291.6 million was transferred to about 77,000 net winners.

Custodial Bank Wins Jury Verdict in Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

A group of investors in the Madoff case suffered a loss when the jury verdict was announced in favor of Westport National bank and its parent, Connecticut Community Bank. Read the following article for more information about the jury verdict and the related settlement with some of the investors: http://dealbook.nytimes.com/2013/07/18/jury-largely-sides-with-bank-in-madoff-related-case/?ref=business\

This result is in contrast to the large jury verdict of $67 million last year against TD Bank in the Coquina v. TD Bank case. The contrasting results in the jury verdicts in these two bank liability cases may have much to do with the way the juries responded to the facts and legal theories involved. The Connecticut Community Bank case involved complex issues of contract interpretation and fiduciary duties relating to custodial agreements, while the TD Bank involved aiding and abetting fraud allegations with a bank officer who asserted his Fifth Amendment privilege and refused to testify in response to questions about his allegedly fraudulent conduct. If a bank liability case gets to a jury, practitioners on both sides of fight should keep in mind that fraud may be easier for a jury to understand than contract interpretation or fiduciary duties.

As Many Ponzi Schemers Go Into Prison, One Comes Out

Posted by Kathy Bazoian Phelps

   Reed Slatkin is 64. And he is now free, after having served his 10 year prison sentence. Slatkin had pleaded guilty to charges relating to his $600 million Ponzi scheme that defrauded 800 investors. In one of the early and more notorious Ponzi schemes of this generation, Slatkin defrauded Hollywood celebrities and fellow Scientology members. He returned money to only select investors, many of which were his friends in Scientology. 

   Out of the financial and emotional wreckage caused by the Slatkin Ponzi scheme came some significant law, including a Ninth Circuit decision holding that a criminal guilty plea can be used as conclusive evidence of fraudulent intent for purposes of proving an actual fraudulent transfer claim. Johnson v. Neilson (In re Slatkin), 525 F.3d 808 (9th Cir. 2008). 

   Since many Ponzi schemers are sentenced these days to what is effectively a life sentence (e.g. Bernard Madoff for 150 years; Allan Stanford for 110 years), it will be interesting to see what this Ponzi schemer does with his life on the other side.

The Victim Balancing Act in the Petters Ponzi Scheme Case Continues

Posted by Kathy Bazoian Phelps

   The unique circumstances of Ponzi schemes require careful consideration to mete out justice in unwinding them and in redressing the injuries to defrauded victims. Investors who got out early were often paid back in full, plus some. Other investors who invested later may have received little to nothing. Fraudulent transfer law is used to seek recovery of money paid out to investors, whether earlier or later. Many questions unique to Ponzi scheme cases must be evaluated in the process of trying to do equity. For example:

• How should courts balance the interests of earlier versus later investors?
• Should net winners and net losers be treated differently?
• How far back can the trustee look in seeking to recover money paid to investors?
• How should courts apply good faith criteria to Ponzi scheme victims asserting a good faith value defense to fraudulent transfer claims, where they relied and trusted family and friends in a typical affinity scheme?

   Unfortunately, many judges are either reluctant or unwilling to pause and ponder the special circumstances and dynamics of Ponzi schemes in evaluating these questions. Recently, however, the bankruptcy court in the Thomas Petters Ponzi scheme case took the time to recognize "the patchy and incomplete match between the phenomenon [of failed investment schemes] and the existing state of the law." In re Petters Co., 2013 Bankr. LEXIS 2523, at *9 (Bankr. D. Minn. June 19, 1013). (The court then cited The Ponzi Book to "highlight the deep underlying tensions in any legal response to failed, large-scale, and long-term fraudulent schemes" due to "shortfalls of existing statutory remedies.")
"In the law . . . there is no specific, dedicated set of legal remedies to address the failure of a Ponzi scheme, as such." Id.   The Petters court wrote a thoughtful Preface to its opinion that resolved the statute of limitations issues which arose in response to the trustee’s fraudulent transfer claims. In evaluating what statute of limitations should apply, the court was mindful of the impact in terms of dollars that its decision would have on all parties, noting:
In the most practical sense, the outcomes on these issues could control whether some defendants could be liable to the estates at all; and it could set the outside exposure of other defendants that had longer and more sustained transactional relationships with the Debtors. Conversely, it would either limit or expand the estates’ maximum possible recoveries from the clawback. Ultimately, the ruling would affect the size of the pot of recovered funds from which creditors' readjusted rights would be serviced, after the full task of recapture via avoidance was completed.   Acknowledging the Ponzi scheme "phenomenon," the Petters court analyzed established boundaries, and the lack of boundaries, in statutory law and the relevant case law in resolving the several statute of limitations questions raised in the case.

   The court noted that the Minnesota Uniform Fraudulent Transfer Act does not contain its own statute of limitations, and that perhaps Minnesota was the only state that removed the statute of limitations provision from its version of the Uniform Fraudulent Transfer Act. The court considered two competing interpretations of the statute of limitations: (1) six year limitation period "upon a liability created by statute"; or (2) six years with a possible extension because "the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud." The difference is that the latter interpretation would permit the trustee to reach back for an extended period of time because of the "discovery allowance" period.

   The court also considered how to coordinate the statute of limitations restrictions of Bankruptcy Code § 546(a) with the state law statute of limitations. The defendants argued that the two limitations periods of § 546(a) ran at the same time so that the six year state limitations period ran backwards from the date that avoidance action was commenced. The trustee argued that the state statute of limitations was tolled from the entry of the order for relief until the avoidance action was commenced, so the limitations period would run backwards from the date of the order for relief.

   Finally, the court also considered the trustee’s request to reach back further based on non-statutory tolling doctrines.

   Here are the court’s conclusions on the statute of limitations questions:

   Ruling #1: "The Trustee’s avoidance claims under MUFTA are subject to a six-year limitations period. However, the discovery allowance of Subd. 1(6) may operate to extend the scope of transfers subject to avoidance to those made before that six-year period, if the Trustee proves the factual basis for it."

   Ruling #2: "As long as the Trustee commenced any individual action in this avoidance docket by the deadline under § 546(a)(1), his avoidance power can reach, at minimum, transfers that took place within the full length of the six-year base limitations period under Subd. 1(6), dating back from the date of the subject Debtor’s bankruptcy filing."

   Ruling #3A: "The extension of avoidance at the Trustee’s instance under color of the discovery allowance of Subd. 1(6) to any transfer that took place earlier than the six-year base period of that subdivision will turn on whether the predicate creditor for a particular adversary proceeding had discovered the facts constituting the fraud of the Petters Ponzi scheme, as they applied to such a transfer."

   Ruling #3B: "The discovery allowance of Subd. 1(6) is the only basis on which the Trustee may obtain an easing or extension of that six-year period. The doctrines of fraudulent concealment, equitable tolling, and adverse domination are not available to him as bases for tolling as a matter of law, or they do not lie on their merits on the configuration of parties in the Trustee’s litigation."

   These rulings set the boundaries in the Petters case for how far back the trustee can reach to "recapture ill-gotten gains." The court sought not to subjectively determine "fairness," but to respect existing law:
Our legal system is structured to protect seated property rights and to promote the reliance that underpins free commerce and the ready flow of capital. A deal is a deal, presumptively final as made; and transfers of property regular on their face are to be treated as final unless there is a specific basis, justified in established law, to disturb and reverse them. Particularly when a recapture in "clawback" would ensnare unwitting recipients of past payment--those who transacted with the fraud's purveyor without knowledge of the wrongdoing--the need for definitive, principled, and limiting substantive rules is obvious.   Id. at *11 (footnote omitted). Yet, despite providing the parties with well-reasoned rulings on the statute of limitations issues, the court felt the need to reflect on the difficulty of fairly balancing the parties’ interests:
And yet there is that nagging point under it all: the money given to earlier recipients was likely mulcted from later-coming investors and lenders; so how "just" is it to allow earlier participants to keep the benefit of funds that had been "stolen" from others before they received them?   It is indeed nagging that statutes of limitations may unfairly protect earlier-investing net winners at the expense of later-investing net losers. It is also further nagging that the payments that these statutes allow net winners to keep are from funds stolen from net losers. It is, however, pretty rare to find a decision in a Ponzi scheme case that doesn’t leave you with a nagging feeling . . .

June 2013 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

   The month of June saw more Ponzi schemes revealed, more arrests, more guilty pleas, and more prison sentences. Here is a summary of stories that were reported this month. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

   Matthew James Addy, 34, of Pennsylvania was sentenced to more than 4 years in prison and ordered to pay $2.7 million in restitution in connection with his $3.4 million Ponzi scheme that defrauded more than 40 investors. Addy, a former youth pastor, ran his scheme through his company Edward J. & Co., which was supposedly a wholesaler that operated LaPorte Jewelers. Addy preyed upon members of religious groups with which he was associated. He had pleaded guilty to one count of securities fraud. It was alleged that he gave fictitious invoices and fake updates to investors and that he lied about industry and business connections.

   Aldo Baccala, 72, had his preliminary hearing on charges relating to an alleged $20 million Ponzi scheme that defrauded 55 investors. Baccala allegedly promised investors double-digit returns for investments in a nursing home in the Carolinas, a Nevada car wash, and a mushroom farm in Colusa. The judge dismissed 17 felony charges but found sufficient evidence on 135 counts relating to grand theft, securities fraud and elder financial abuse in the alleged Ponzi scheme that targeted many retired people.

   Gershon Barkany, 29, of New York, pleaded guilty to charges in connection with a $62 million real estate scheme. Barkany had defrauded investors by promising to invest their funds in "risk-free" properties in New York City and Atlantic City, and that he would then sell them at a profit. The deals were supposed to be risk-free because if Barkany was unable to find a buyer before closing, then the owner of the properties would refund their money. No such deals existed.

   Craig Berkman, 71, pleaded guilty to a $13.2 million Ponzi scheme that defrauded more than 120 investors by promising them pre-IPO shares of Facebook, LinkedIn, Group and Zynga. Berkman allegedly used the money to pay off creditors in his bankruptcy case, to pay off investors from an earlier scheme, and for personal expenses. Berkman had served as Oregon’s Republican Party chairman from 1989 to 1993.

   Steven Bingaman, 57, did not pay back any of the $1.1 million of restitution that he had agreed to pay in exchange for less prison time. At his sentencing hearing, prosecutors recommended 5 to 15 years, rather than the 2 to 6 years that was previously contemplated. Bingaman had defrauded victims out of $2 million and had promised to pay back $1.1 million over the past 11 months, which he failed to due. The announcement of the sentence was delayed to July.

   Brian Bjork was sentenced to 4 years and ordered to pay $1.1 million in restitution after pleading guilty to running what federal prosecutors called a "scam within a scam." Bjork was accused of defrauding 8 investors of $1.4 million in connection with the $50 million Ponzi scheme run by David Salinas, who fatally shot himself 2 years ago. Salinas ran a corporate bond Ponzi scheme that defrauded many college basketball coaches. Bjork used his position as treasurer of the Houston Athletics Foundation to write checks disguised as bond investments, which he then used for his own personal expenses.

   Julius Blackwelder, 59, was sentenced to 46 months in prison in connection with his $1.5 million Ponzi scheme that defrauded investors, mostly church members and associates of the Church of the Latter Day Saints, in which Blackwelder was known as Bishop Julius. Blackwelder lost money in commodities trading and has been restricted from future trading. He allegedly provided fraudulent account statements and false updates containing fictitious trades. He spent much of the investors’ funds on the construction of a 7,000 square foot mansion.

   John Bravata lost his bid to block the auction of his assets, including his Maserati and Ferrari, which were to be sold at auction by the government following his conviction for running a $50 million Ponzi scheme that defrauded hundreds of investors. Luxury cars, boats and a motorcycle that previously belong to Bravata will be auctioned. Bravata ran his scheme through BBC Equities, LLC and Bravata Financial Group LLC, representing that he was running a successful real estate investment fund that would generate guaranteed returns of 12% annually. Over 400 investors invested $50 million in the scheme.

   Ronald and Bonnie Brito pleaded guilty to charges related to their role in a $16 million Ponzi scheme that defrauded at least 250 investors. The scheme was run through GetMoni.com, where investors could supposedly earn profits by loaning money to building contractors at high rates of interest. Co-conspirator John Missitti previously pleaded guilty and is scheduled to be sentenced in September.

   Emilee Peterson Buckley, 39, was sentenced to 5 years in prison and ordered to pay $11.3 million in restitution after pleading guilty to running a Ponzi scheme through her company, Calypso Financial. Buckley had misrepresented to investors that Calypso had a net worth of $60 million and was making money from Utah properties with valuable water rights, a precious metals mine, and foreign trading in Hong Kong and Europe. She had promised returns of up to 15% and had brought in more than $13 million in investor dollars.

   Razel Canedo was accused of targeting Filipinos in a Ponzi scheme that promised to help the Filipino community by bringing Filipino nurses to the U.S. She sold promissory notes that offered returns of up to 50%. No nurses arrived from the Philippines, but it is alleged that Canedo was building a giant house in the Philippines and was sending money to her family.

   Randy Carpenter, 55, pleaded guilty to charges relating to his role in a $100 million North Carolina real estate Ponzi scheme. The scheme related to the development of the Village of Penland, which was to be a complex of luxury homes with shops and boutiques in the Blue Ridge Mountains. Investors were told that they could borrow money from banks for the lots and that the company overseeing the projecting would repay the loans. Carpenter was the engineer and surveyor of the project and received $2 million in fees relating to the transactions. He failed to report all of the earnings on his tax returns.

   David Connolly of New Jersey was sentenced to 9 years in prison and ordered to pay more than $18.7 million in restitution for his role in a $50 million real estate investment Ponzi scheme that defrauded about 200 victims. Connolly had pleaded guilty in February. He had promised victims that their money would buy specific properties that would generate monthly rental income, but he used the investors’ money for other purposes.

   Richard Dalton, 65, and his wife, Marie Dalton, 60, were sentenced to 10 years and 5 years, respectively, after pleading guilty to charges relating to a $17 million Ponzi scheme they ran through Universal Consulting Resources LLC in which they guaranteed returns to more than 100 investors of 48% to 120%. They represented that they were trading in bank notes or diamonds and that investors would get a monthly profit-sharing check. The investors’ dollars were used to make Ponzi payments to investors and to pay for personal expenses such as $35,000 in custom dental work, the wedding of the Daltons’ daughter, and a house.

   James Duncan and Maurice McLeod saw their sentencing postponed after they pleaded guilty to charges in connection with a Ponzi-type scheme that caused losses of $17 million along with mortgage fraud that caused losses of $124.5 million. Duncan and McLeod testified against co-conspirators Hendrix Montecastro and Helen Pedrino in a trial that led to their conviction. Other co-conspirators include Charlie Choi, Cindi Kelly and Thuan Du.

   Charlotte Durante, 68, was sentenced to 7 years in prison for her role in a $1.8 million Ponzi scheme in which she promised investors, mostly Haitian investors, returns of up to 18% to front cash for her real estate clients. The money was actually used to benefit her daughter’s history museum, the Museum of Lifestyle & Fashion History.

   George Elia, 69, was sentenced to 12 years in connection with his role in the Wilton Manors Ponzi scheme. Elia had pretended to be a successful investment advisor, but more than 40 people lost about $10 million in the scheme. Elia had used some investor money to buy a Rolls-Royce, two Bentleys and about $500,000 in jewelry. Elia and his wife had fled to Cypress in 2012 when investors had filed a lawsuit, but he was arrested a few months later during a visit to Las Vegas.

   Donald R. French Jr., 26, was sentenced to a little more than 10 years in connection with charges that he ran a $10 million Ponzi scheme through D3 Capital Management LLC, promising investors returns of up to 50% by investing their funds in foreign currencies, emeralds and a solar-energy project in Italy. French pleaded guilty in March.

  James Fry, 59, was found guilty following his trial in connection with his role in the Tom Petters Ponzi scheme. Informant Deanna Coleman testified at the trial and testified that Fry did not know about the Ponzi scheme. But on cross-examination, she testified that Fry’s firm, Arrowhead Capital Management, continued to invest in new transactions with Petters even though Petters was consistently paying obligations late. Fry was not accused of knowing about the Petters Ponzi scheme, but rather he was charged with lying to investors about how his fund worked. Fry had earned about $30 million in fees by bringing in investors.

   Robert Hurd, 72, of Los Angeles, was charged by the SEC with defrauding investors out of $1.2 million through his company, Your Best Memories International, in which he sold unregistered securities to raise money for his memory-improvement company. Hurd claimed that one of his products had FDA approval to treat Alzheimer’s disease. The investor funds were funneled to Hurd’s other company, Smokey Canyon, and were used to pay for Hurd’s private car collection. The SEC also sued Kenneth Gross, 76, who worked for Hurd and Your Best Memories.

   Francisco Illarramendi, 45, did not oppose the prosecutor’s request to hold a $2 million tax refund in escrow pending his September sentencing in connection with his $500 million Ponzi scheme to which he has previously pleaded guilty. The scheme, run through Michael Kenwood Capital Management Group, the Kenwood Short Term Liquidity, and Venezuela and Special Opportunties funds, may be the largest ever in Connecticut. The prosecutor requested that the tax refund be held because Illarramendi owes the government for his court-appointed lawyers and is subject to an "enormous mandatory restitution." His assets have been frozen in a civil suit commenced by the SEC. Illarramendi’s wife has asked that a portion of the check go to her for living expenses.

   Wendell Jacobson and Allen Jacobson and their company Management Solutions Inc. of Utah were the subject of a hearing to determine whether they were operating a Ponzi scheme. Victims disagree with the SEC and the receiver that it was a Ponzi scheme and challenged the assessment of the insolvency of the company given by receiver’s accountant. The SEC alleged in 2011 that they were running a $200 million Ponzi scheme, and the distinction will make a difference in how much the investors receive back when the company is liquidated.

   Yusaf Jawed had his sentencing postponed from June to September 9, 2013. His request was unopposed. Jawed ran a $37 million Ponzi scheme through Grifphon Asset Management that defrauded more than 100 investors. His guilty plea calls for a 6½ year prison sentence.

   Michael W. Kwasnik, 44, of Philadelphia was sentenced to time served of 5 months and ordered to pay $1.2 million in restitution in connection with charges of misappropriating $1.1 million from a client. Kwasnik has been suspended from the practice of law and is still awaiting the civil and criminal consequences of an alleged Ponzi scheme that he ran which defrauded 73 investors who lost $8.5 million.

   Duncan J. MacDonald III, 50, and Gloria Solomon, 71, were charged by the SEC with running a $10 million Ponzi scheme through their company, Global Corporate Alliance. Global was supposedly a health insurance company that had more than 100,000 premium-paying policy holders when in fact it never had more than 40 policyholders. MacDonald and Solomon allegedly manufactured enrollment numbers to induce investments from at least 80 investors who believed that the premium payments would be funding their returns.

   Syed Qaisar Madad, 66, a Pakistani-American residing in California, was sentenced to 12½ years for his role in a $30 million Ponzi scheme that he ran though Telecommunication and Multimedia. Madad had pleaded guilty to charges relating to the scheme in which he promised to use a day-trading strategy to generate high returns. Instead, he lost about $9 million in trading and misappropriated over $15 million of investors’ money for personal expenses, such as a house for his daughter, jewelry for his wife and daughters, vehicles, about $6 million to pay personal credit card bills, and donations to charities in Pakistan, India, Egypt and the U.S.

   Chris Mathis, 48, former Chief Magistrate in Floyd County, Georgia, faced some of his victims at his criminal trial relating to charges that he was running a Ponzi scheme. Mathis had purchased a cattle farm and took money from investors in connection with that business. It is alleged that he would take money from one investor and instead of buying cattle with it, he would make payments to earlier investors who expected returns.

   Robert Medhus, 65, of North Dakota, pleaded guilty to 16 felony charges in connection with a Ponzi scheme that defrauded 19 investors out of at least $935,000. Medhus is said to have used fake account statements printed with his company’s name, Associated Financial, to defraud investors and used their money for his own use rather than investing it in securities.

   Stephen Merry, Timothy Durkin, David Petersen and Yaman Sencan were indicted on charges relating to a multimillion scheme in which they promised a steady stream of profits at little or no risk by using a sophisticated computer program to take advantage of temporary price differences among different stock markets. The defendants ran the scheme through Westover Energy Trading Partners and Ramco & Associates.

   Elaina Patterson, 53, was indicted on charges relating to a $6 million Ponzi scheme in which she allegedly defrauded 31 investors. Patterson used her position as a personal banker at Bank of America to push fake investment opportunities on her friends and family, promising 10% to 15% and issuing fake certificate of deposit receipts and Form 1099s. She then allegedly began to steal from customers so she could fund withdrawals from investors. She set up accounts in investors’ names without their knowledge, put her own address on the accounts, deposited the investors’ funds and used the money both to fund payments to other investors and to funnel money into her own accounts. She made Ponzi scheme payments of almost $3.8 million, for a net theft of more than $2.1 million.

   Sharon Nekol Province, 69, of Missouri pleaded guilty to charges that she ran a $600 million Ponzi-like scheme selling pre-paid funeral services to about 150,000 customers. National Prearranged Services Inc. sold prearranged funeral contracts where customers paid an upfront sum for the contract. Related insurance companies, such as Lincoln Memorial Life Insurance Company and Memorial Service Life Insurance, issued life insurance policies related to the contracts and customers believed that their funds would be kept in trust or the insurance policy. Instead, their funds were used for unauthorized purposes and to make Ponzi-like payments. The company operated for about 16 years from 1992 to 2008.

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

   Jeff Ripley, 60, and Danny VanLiere, 61, were sentenced 6 to 20 years in connection with their Ponzi scheme that defrauded at least 140 investors of between $3,000 and $600,000 each for a total of over $9 million. VanLiere was ordered to pay $3.1 million in restitution, and Ripley was ordered to pay $5.3 million. Their company, API, was ordered to pay $7.6 million in restitution.

   Scott Saidel, the lawyer who represented the wife of Ponzi schemer Scott Rothstein, consented to disbarment in Arizona after pleading guilty to helping Kim Rothstein plead guilty to hiding more than $1 million in jewelry. Saidel is also licensed to practice law in Florida.

   Duane Hamblin Slade pleaded guilty after his earlier criminal trial resulted in a hung jury. Slade was accused of running a $160 million Ponzi scheme that targeted wealthy Mormons through his company Mathon Investments. Victims, who were largely from the Morman community, made loans to third-party borrowers at high interest rates and were promised rates as high as 120%. The trial for Guy Williams and his father Brent Williams, who have pleaded not guilty, is set to begin June 17.

   Maxwell B. Smith, 73, was sentenced to 7 years in prison and 3 subsequent years of supervised release for his role in a Ponzi scheme run through Health Care Financial Partners that defrauded investors out of more than $9 million. Smith had pleaded guilty to selling securities in the form of sham bond offerings, promising them dividend interest of between 7.5% and 9% with tax-free returns. Smith used the investor funds on personal expenses such as gambling, entertainment, travel, and renting a villa in France.

   Christopher Varlesi, of Chicago, was ordered to pay more than about $638,000 in restitution and $700,000 civil penalty in connection with allegations by the CFTC that he ran a Ponzi scheme through his company, Gold Coast Futures and Forex. The court also imposed a lifetime trading ban on Varlesi. Varlesi had purported to buy and sell securities and commodities but was not registered or licensed. He allegedly obtained at least $1.4 million from 15 investors, but spent the money on personal expenses, including his children’s tuition and spa treatments.

   Anthony Vassallo, 34, of California, was sentenced to 16 years in connection with his $80 million Ponzi scheme that defrauded more than 300 investors. Vassallo had misrepresented that he had developed software that enabled him to make profits of about 3% per month, or 36% per year in securities trading that he did through his company, Equity Investments Management & Trading, with co-conspirator Kenneth Kenitzer. Kenitzer has pleaded guilty and is awaiting sentencing.

   Eugene Wilson Sr., 56, of Indiana, was sentenced to 5 years in prison and 4 years of supervised release for his role in a $1.5 million Ponzi scheme. Wilson promised a high rate of return when taking investor funds and promised to keep the funds in an escrow account. Instead, he immediately wired the funds to third party accounts mostly in Europe.

   Carl David Wright, 52, a former schoolteacher, agreed to plead guilty to his role in a $1 million Ponzi scheme that he ran through Commodity Investment Group. Wright allegedly promised false returns of 20% to 30% on investors’ money which he said he would invest in hedge funds, commodities, and Quick Trip convenience stores. The CFTC has also filed a civil enforcement action against Wright.


INTERNATIONAL PONZI SCHEME NEWS

Australia

   Technocash, an Australian electronic transfer company, closed its accounts in advance being named by the SEC for having received funds from the Ponzi scheme known as Profitable Sunrise. Profitable Sunrise had offered investors returns of 1.6% and 2.7% per business day and allegedly defrauded about $100 million from investors as part of a $6 billion money laundering scheme allegedly run by Liberty Reserve. Technocash had acted as agent for cross-border payments for businesses and individuals working in multiple currencies.

Canada

   Earl Jones, previously sentenced to 11 years in prison for operating a $50 million Ponzi scheme, waived his right to a parole hearing. Jones did not give any reason why he waived his right to a hearing, and his next review has been scheduled for September 2015.

Dubai

   Advanced Global Trading was accused of being either a boiler room scam or a Ponzi scheme. The company sells voluntary carbon credits to retail investors. While carbon credits can be sold or traded legitimately, investors are warned to be careful with this type of investment. There are allegations that Advanced Global Trading is artificially inflating the price of carbon credits that it trades by selling them to new customers. The company allegedly makes a commission on each transaction and will continue to make money as long as new investors continue to buy carbon credits from existing investors.

Japan

   Kumiko Mikajiri, 69, Susumu Masubuchi, 59, and Katsuya Oishi, 74, were charged with operating a cow-raising Ponzi scheme through their company, Agura Bokujo. The scheme solicited investors to purchase "wagyu" cows with an initial investment of $35,000 to $58,000 per cow, and the cows would then yield returns from their calves. Returns were promised of up to 8% per year, and Agura Bokujo further promised that it would buy back the cow after a few years. Tens of thousands of investors lost about $4.2 billion in the scheme. The company filed bankruptcy in March 2011 after the major Tokyo earthquake, when many investors sought to cancel their contracts out of fear that the cows had consumed contaminated hay from a nuclear power plant. There were 71,000 investors at the time of the bankruptcy.

India

   A new animal Ponzi scheme called "Cattles & Ghee" came under scrutiny by SEBI. The scheme, operated by HBN Dairies & Allied Ltd., raised money for the purchase of cattle and promised investors that their money would double through returns linked to the ghee produced by them.

   Subhransu Lenka, the head of Astha International Limited, a money circulation company, was arrested in connection with a scheme that took about Rs 500 crore from investors.

   Three Russian nationals and 13 Indians have been accused of wrongdoing in the alleged Ponzi scheme called Mavrodi Mondial Moneybox (MMMIndia), a scheme involving Russian national Sergey Mavrodi, Alexei Muratove, Michael Glukhov and Kilin Adery. Investors were promised returns of 30% per month, but the basis of the scheme was that it was for people "who want to help each other." The investment was called "providing help" and returns on investment were called "taking help." Over 70,000 people had invested in the scheme, which was operated as "a double-the-money-scheme." The Russians went on a hunger strike and were then hospitalized. A court has ruled that they be turned over to the Mumbai Economic Offences Wing.

   Premchand Kamble was sentenced to 3 months in jail in connection with a Ponzi scheme that he ran through his company Unique Finance Corporation. About 300 investors were defrauded to invest their money in purchasing cars, and they were promised returns of Rs 7,000-8,000 per month to be generated from renting the cars to BPOs and call centers.

   The Odisha Police seized 1,000 silver coins each weighing 100 grams worth Rs 44 lakh from the personal locker of Prashant Das, the chairman and managing director of Seashore Group, located at a private bank. Seashore Group has been accused of running a Ponzi scheme.


New Zealand

   The Serious Fraud Office accused financial advisor David Ross, 63, of operating a $450 million Ponzi scheme through his firm, Ross Asset Management, that defrauded more than 900 investors. Ross was arrested and has been charged with false accounting and one charge of theft in what is believed to be New Zealand’s biggest Ponzi scheme. Ross had promised returns of 30% to 40% to investors and claimed to have invested money with a broker named Bevis Marks, but no such person actually existed.


Russia

   The Russian government is considering amendments to the Criminal Code that establish preventive measures against Ponzi schemes. The amendments propose jail terms and fines for active participants and organizers of Ponzi schemes. The bill defines a Ponzi scheme, which is referred to as a "financial pyramid" in Russian, as "activities to attract monetary funds or other assets from physical persons with repayment of income from earlier attracted funds in cases when organizers are not engaged in investment or any other legal business." Existing laws only provide after Ponzi scheme organizers are charged with fraud, but the amendments provide for preventative measures.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

   The SEC and alleged Ponzi schemer Mark Feathers each filed motions to resolve the SEC’s claims that Feathers was running a $42 million Ponzi scheme through his company SB Capital Corp. The SEC is seeking more than $12.3 million from Feathers which is the approximate amount that the 400 investors lost, plus a $300,000 penalty. Feathers contends that documentation from SB Capital to investors fully disclosed the company’s operations and that the investors consented to borrowing so that he could continue to pay interest at the rate of 7.5%.

   The trustee of Bernard Madoff’s company’s Ponzi scheme proceeding appealed a ruling that permits New York Attorney General Eric Schneiderman to proceed with a $410 million settlement with J. Ezra Merkin. The trustee also has claims against Merkin and sought a stay of the Attorney General’s litigation and settlement while the Trustee pursued his claims. The trustee contends that the district court abused its discretion and erred in holding that the Trustee had delayed and waited too long to assert his own claim as trustee.

   The Madoff trustee lost an appeal to the Second Circuit regarding his claims against JP Morgan, HSBC Holdings PLC, UniCredit SpA and UBS AG. The Second Circuit affirmed the lower courts’ rulings that the trustee "stands in the shoes" of Bernard L. Madoff Investment Securities LLC and that he is barred by the doctrine of in pari delicto from pursing claims against the banks. As a result of the ruling, the trustee will be unable to pursue approximately $19 billion of claims against JP Morgan, $8.6 billion against HSBC and UniCredit, and $2 billion against UBS.

   The liquidators of the U.K.-based Madoff Securities International Limited commenced a civil case in London’s High Court against defendants including Madoff’s brother, Peter Madoff, his son, Andrew Madoff, Stephen Raven and Bank Medici founder Sonja Kohn. The liquidators are seeking to recover $80 million in connection with loans between Madoff’s London and New York operations and payments to Kohn for research.

   Bernard Madoff’s art, including drawings by Andy Warhol and Henri Matisse, will be sold to help raise money for victims.

   The trustee in the Lou Pearlman bankruptcy case has filed a liquidation plan providing for a 4 cent distribution to creditors. The trustee has recovered about $35 million, much of which will go to secured creditors. Unsecured creditors lost at least $260 million. Pearlman was known as the creator of the bands ‘N Sync and the Backstreet Boys but also ran a classic Ponzi scheme in which he assured investors that their money was safe in FDIC-insured accounts. Pearlman is serving his 25 year prison sentence.

   The CFTC sued U.S. Bank for alleged violations of the Commodity Exchange Act in its role in the Peregrine Financial Group, Inc. fraud run by Russell Wassendorf, Sr. The CFTC alleged that U.S. Bank knowingly transferred funds from Peregrine’s accounts which held customer funds, for such things as a divorce settlement payment, a restaurant and as security for a loan. U.S. Bank has denied responsibility. Peregrine and Wassendorf had defrauded more than 24,000 customers of about $215 million. Wassendorf is currently serving a 50 year sentence.

   The dispute between Tom Petters and his former lawyer continues over whether Petters’ lawyers told him about a 30-year plea deal that would have been a better deal than the 50 years he received had he accepted it. Petters says his lawyer never conveyed the deal to him, and his lawyer has now responded saying that Petters knew of the potential plea deal offer and rejected it several times. The attorney-client privilege was waived, and the lawyers have filed paperwork including a handwritten note from Petters appearing to reflect that he was aware of the 30 year deal.

   TD Bank entered into a $44 million settlement with investor Platinum Partners Value Arbitrage Fund, L.P. in connection with the Scott Rothstein Ponzi scheme. Platinum had alleged that TD bank played a role in helping Rothstein defraud investors by, among other things, telling investors that Rothstein’s accounts held "hundreds of millions of dollars" that didn’t actually exist. The settlement will be paid by a $18 million cash payment and then payment to satisfy Platinum’s approximately $26 million obligation to Rothstein’s law firm’s bankruptcy trustee in connection with an earlier settlement of a fraudulent transfer lawsuit brought by the trustee against Platinum. Platinum is also retaining its $54 million claim in the bankruptcy case.

   The Eleventh Circuit handed a victory to the trustee of the law firm of Scott Rothstein - Rothstein Rosenfeldt and Adler - in a battle over assets that had been forfeited by the government. The court found that the government could not trace funds in the bank account of the law firm to proceeds of crime since the bank accounts contained both tainted and untainted funds. The court recommended that the government pursue forfeiture of substitute assets such as Rothstein’s shareholder interest in his law firm and that the government file a claim in the pending bankruptcy case of the law firm.

   Defrauded victims of John Schurlknight filed a class-action against his estate seeking recovery of between $6 and $10 million that he allegedly stole from them. Schurlknight died in 2012, after he was accused of running a Ponzi scheme through his law firm, Schurlknight and Rivers Law Firm. The lawsuit names Schurlknight’s wife, his two college-aged children and Citizens Bank of Florence, accusing the family of living a lavish lifestyle using funds stolen from Schurlknight’s clients. As part of his scheme, Schurlknight would settle or otherwise resolve clients' personal injury claims without a client's knowledge, forge the client's name to a settlement check and steal 100% of the proceeds. The clients would believe that their cases were ongoing.

   A putative class action against the SEC in connection with the R. Allen Stanford Ponzi scheme was dismissed. The action alleged that the SEC facilitated the $7 billion Stanford scheme, but the court found that the SEC was protected by a law that bars lawsuits over federal official’s discretionary decisions.

Second Circuit Bars Madoff Trustee’s Claims Against Banks in Madoff Ponzi Scheme Case

Posted by Kathy Bazoian Phelps

   The Madoff trustee and Madoff victims hoped to hold the banks liable for alleged wrongdoing. The banks hoped to escape liability on the theory that the Madoff trustee, standing in the shoes of Madoff’s company, was a wrongdoer that should be barred from suing the banks.

   The Second Circuit has now spoken on the issue. The court affirmed the dismissals of the lawsuits that the Madoff trustee had filed against JPMorgan Chase Bank and HSBC Bank. Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Investment Securities LLC), 2013 U.S. App. LEXIS 12551 (2d Cir. June 20, 2013). There will be no recovery through the trustee for the billions of dollars in damages allegedly caused by the banks’ conduct in aiding and abetting Madoff’s fraud. And this seemed to be a relatively easy decision for the Second Circuit.

   Some perspective on the Second Circuit’s view of these issues is helpful, however, in analyzing this decision. The Second Circuit is quite fond of its Wagoner rule, established in Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991), in which it held that "A claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors not to the guilty corporation."

   Citing its own Wagoner rule, the court held that the in pari delicto doctrine deprived the trustee of standing to pursue the debtor’s claims. It is important to note that no other circuit, nor indeed most courts – including lower courts in the Second Circuit – agrees with the Wagoner rule, because it combines in pari delicto and standing issues. See The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, at 13.02[2][e].

   Although alone in its view of in pari delicto as a threshold standing bar to trustees’ claims, the Second Circuit nevertheless went through a more traditional analysis of the in pari delicto doctrine to reach its holding that bars the Madoff trustee from bringing the claims against the banks. The court summarily rejected the trustee’s first six arguments, noting that they "are resourceful, but they all miss the mark." Picard v. JPMorgan, at *21.

• On the trustee’s argument that a SIPA trustee is exempt from the Wagoner rule, the court stated that the trustee cited no authority.
• On his argument that the in pari delicto doctrine should not apply because he is not a wrongdoer, the court pointed out that neither were the other trustees in the cases in which the court did apply the doctrine.
• On his argument that applying the doctrine impeded the enforcement of the securities law under Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 105 S. Ct. 2622 (1985), the court summarily stated that Bateman Eichler was inapposite.
• On his argument the "adverse interest" exception to the defense should apply, the court stated that the exception was "narrow" and only applied when the fraud was committed against the corporation and not on its behalf, citing Kirschner v. KPMG LLP, 15 N.Y.3d 446, 912 N.Y.S.2d 508, 938 N.E.2d 941, 952 (N.Y. 2010).
• On his equitable argument that the proceeds of a recovery by a SIPA trustee would benefit the blameless customers of the wrongdoer, the court cited the New York Court of Appeals in Kirschner v. KPMG LLP, 938 N.E.2d 941, 958 (N.Y. 2010), rejecting the trustee’s argument.
• On the trustee’s argument that the defense should not be sustained at the pleading stage, the court observed that the New York Court of Appeals had held otherwise and that it "is appropriate where (as here) the outcome is plain on the face of the pleadings." Picard v. JPMorgan, at *6.

   The court then noted that the trustee’s claim for contribution is "the only one that may escape the bar of in pari delicto," but rejected it anyway. The trustee sought contribution for payments made to BLMIS customers under SIPA on the theory that the defendants are joint tortfeasors with BLMIS under New York law. The court held that under N.Y. C.P.L.R. § 1401 (McKinney), the party seeking contribution must have been compelled in some way, such as through the entry of a judgment, to make the payment against which contribution is sought. However, the payments to BLMIS’s customers under SIPA for which the trustee sought contribution were not compelled by Madoff’s fraud liability. Rather, they were an obligation under federal law, SIPA, which provides no right to contribution.

   The court focused most of the rest of its attention in the opinion on rejecting the trustee’s argument that he has standing to pursue his claims under Redington v. Touche Ross & Co., 592 F.2d 617 (2d Cir. 1978), under St. Paul Fire & Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989), under bailment law, and under SIPA itself.

   As to Redington, the trustee argued that the Supreme Court’s subsequent reversal of that decision addressed only the merits of the plaintiff’s claim and left intact the Second Circuit’s holding that a SIPA trustee has standing. The court held otherwise, stating that "Redington should be put to rest; it has no precedential effect. Even if Redington retained some persuasive value, it would not decide this case." Picard v. JPMorgan, at *36.

   The trustee argued that under St. Paul Fire & Marine Insurance, 884 F.2d 688 (2d Cir. 1989), a trustee may bring a claim if the "claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor." Id. at 701. The Second Circuit, however, held that this decision did not broadly grant trustees standing to pursue creditors’ claims, because such a reading would put it in conflict with Caplin v. Marine Midland Grace Trust Co. of N.Y., 406 U.S. 416, 92 S. Ct. 1678 (1972), which held that the trustee has no standing to pursue creditors’ claims.

   In responding to the trustee’s two additional theories supporting his standing argument, the Second Circuit noted that, "The Trustee attempts to blunt the force of Caplin and its progeny by arguing that a SIPA liquidation is unique and is therefore not controlled by precedent under the bankruptcy code." Picard v. JPMorgan at *42. The trustee had argued that BLMIS’s customers were bailors, and that he, as a bailee, had a sufficient interest to pursue recovery on customers’ claims to recover their lost property. The court rejected this ground for standing, finding that nothing in SIPA, the bankruptcy code or common law supports it.

   Finally, the court rejected the trustee’s claim of standing based on a theory of subrogation arising under SIPA due to his previous payments on the claims of BLMIS’s customers. The court held that although 15 U.S.C. § 78fff–3(a) gave SIPC the right of subrogation as to the customers’ claims against the estate, nothing in that provision suggested that it also granted to the trustee subrogation of the customers’ claims against third parties.

   Curiously, in its final footnote, the court suggested a path that could lead to the defendants’ liability. "Picard and SIPC contend that, absent his exclusive authority to bring these customer claims, the Defendants would in effect be immunized from suit. But it is not obvious why customers cannot bring their own suits against the Defendants. In fact, the Defendants make clear that customers have already filed such actions." Id. at *58 n.29. Of course, this suggestion ignores the questions of whether creditors would have standing to pursue the same types of claims that the trustee sought to pursue or whether they may encounter their own legal barriers to recovery. And, even if they could legally bring their own claims, could they realistically finance litigation against well-funded institutions like JPMorgan and HSBC?

   This case, and many other recent decisions, go to great lengths to justify bars to recovery by bankruptcy trustees, SIPA trustees, and even regulatory receivers. This raises the question of why we have these fiduciaries in the first place. Absent the wave of recent decisions applying in pari delicto as a bar to these fiduciary plaintiffs, one would have thought that the point of the statutory schemes (Bankruptcy Code and SIPA) and the equitable case law (regulatory receiverships) in appointing fiduciaries was to redress the wrongs of the defrauded victims in fraud cases. One must now question what we had understood to be a basic premise of those laws. Are fiduciaries intended to be mere paper pushers, reconstructing the fraud that left victims penniless, but creating a paper trail that leads to nowhere?