December 2012 Ponzi Scheme Roundup

 Posted by Kathy Bazoian Phelps

The last month of 2012 finished the year with a continued high volume of Ponzi scheme news. Here is the summary of the 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.

Eric Aronson, 43, had previously been indicted with two other men as part of an alleged $26 million Ponzi scheme but had been out on bail until he just surrendered to new charges. The first charges alleged that Aronson promised investors up to 400 percent interest in a business that imported paving stones from Australia. Aronson was also charged with defrauding a California man out of $25,000 by falsely claiming he could market the businessman’s health food bars on the “Dr. Oz” television show. Aronson was sentenced to 40 months prison in 2000 for securities fraud.

Noah Aulwes, 56, has been sentenced to 10 years in prison in connection with his Ponzi scheme which defrauded 36 investors. Aulwes pleaded guilty in August to securities fraud, money laundering and first-degree theft. He misappropriated about $200,000 of investors’ funds for his personal benefit and to make “Ponzi-type” payments to other investors. He misappropriated about $90,000 of investors’ funds invested in the Philippines.

Jason “Bo” Beckman, 42, filed a sentencing memorandum trying to avoid a lengthy sentencing for his role in a $195 million Ponzi scheme run by Trevor Cook. Beckman offered to deliver a $19 million check to the scheme’s victims, provided that he only receives a one-year prison sentence. The Ponzi scheme is believed to be the second largest financial fraud in Minnesota history. It involved promises of above-average returns because one of Cook’s companies, Crow Fores, could supposedly take out interest-free loans by virtue of its Jordanian operators’ adherence to Islamic sharia law that forbade charging interest. The scheme targeted about 700 investors. Two of Cook’s co-conspirators used their influence as Christian radio talk show hosts to pitch the investment, while Beckman used his position as a money manager to recruit investors. Cook was previously sentenced to 25 years in prison.

Stephen Blankenship, 64, of Connecticut, known as “Danbury’s Bernie Madoff,” was sentenced to 41 months in prison and ordered to pay restitution in connection with a Ponzi scheme that defrauded about a dozen victims of more than $500,000. The court rejected Blankenship’s assertion that he was too sick for prison. Blankenship had solicited customers to invest in his company, Deer Hill Financial Group, LLC, promising them high rate of return. In order to create the appearance of legitimacy, Blankenship sent investors fraudulent account statements reflecting fictitious holdings, fictitious transactions, fictitious prices for the securities, and phony balances, all of which were intended to convince investors that their money was secure and appreciating.

Jack E. Brown, a tax preparer accused of running a large Ponzi scheme, is refusing to answer questions by his bankruptcy trustee. Brown is accused of running a scheme that promised returns as high as 15 percent and of never actually investing the $10 million that he took in.

Ray Thomas Brown was charged by the CFTC with operating two commodity schemes which defrauded investors of about $1.2 million. It is alleged that Brown fraudulently solicited members of the public to participate in a commodity pool while acting as an unregistered commodity pool operator, and that Brown fraudulently duped persons to authorize him to trade their commodity futures accounts. Brown’s fraud allegedly included misrepresentations and omissions about his past trading success, trading profits, trading expertise and personal history, the dissemination of false account statements, and the misappropriation of customer funds.

Anthony D’Agonstino, 77, was indicted in connection with allegations that he ran a Ponzi scheme through his company, Commercial Mortgage and Finance. The scheme may have involved about 1,400 investors and about $20 million.

Benjamin Daniels of California, Dominic O’Dierno of Oregon, and Stephen Persad of Oregon were charged by the SEC with failing to register as broker-dealers before engaging in securities transactions. The SEC’s investigation found that the three were serving as primary points of contact between investors and a hedge fund manager named Yusaf Jawed, who has been charged with running a $37 million Ponzi scheme. They have not been charged, however, with having knowledge of the fraud.

Brian Ray Dinning was charged in connection with a $2 million Ponzi scheme, which involved purported investments in South African gold and diamond mines. Dinning’s bond request was denied when the court found that Dinning had a history and character that showed a pattern of running from problems.

Alex Dowlatshahi, Christopher Mills, and Robert Wilson had final judgments entered against them in favor of the SEC in connection with a Ponzi scheme that benefitted themselves, David Ronald Allen and other companies including China Voice Holding Corp. The judgments permanently enjoin Dowlatshahi and Mills from further securities violations. Dowlatshahi and his companies, Lucrative Enterprises Corp., Synergetic Solutions LLC, Integrity Driven Network Corp., Darius Assets Holding Corp., are ordered to pay disgorgement and prejudgment interest. Mills and his companies, Sleeping Bear LLC and Silver Summit Holdings LLC, are ordered to pay disgorgement and prejudgment interest. Wilson and his companies, Strategic Capital and Green Horseshoe Holdings, Inc., are ordered to pay disgorgement and prejudgment interest.

James William Downing, 49, was sentenced to 15 years in prison in connection with his Ponzi scheme that he ran through Health Solutions for Life. Downing defrauded investors of $340,000.

Eliott Jay Dresher, 66, was sentenced to 6½ years in prison and ordered to pay $8.8 million in restitution for his scheme that defrauded about 26 victims out of $13.5 million by falsely promising that he was using their money to finance a business that distributed NASCAR merchandise to retailers such as Costco and Ross. Dresher guaranteed substantial monthly returns between 20 and 25 percent every six months.

Timothy Durham filed an appeal of his conviction for which he was sentenced 50 years for stealing $200 million from investors in Fair Finance.

Brian D. Fox, the former chief executive of Powder River Petroleum International Inc., has been ordered to pay nearly $500,000 in fines and forfeitures in connection with charges by the SEC that he ran a Ponzi scheme.

Ian Campbell Gent, 70, was sentenced to 8 years in prison after being convicted on charges relating to a $6 million Ponzi scheme that defrauded 94 investors. Gent was working for Guy Gane in soliciting funds to invest in waterfront real estate through Watermark M-One Financial Services. Gane promised investors 10 percent returns, but no investments were made.

John Robert Graves, 53, of Virginia, and his wife, Sara Turberville Graves, 45, pleaded guilty to a scheme that defrauded 11 investors out of $1.3 million. John Graves had resigned from the FBI in 1999 and founded Brooke Point Management in 2003, through which he sold insurance and offered financial advice and investments. He was also a registered investment advisor with and SEO of Compas Financial Advisers. The Graves targeted elderly investors. John Graves received an 11 year 3 month sentence and Sara Graves received a 3 year sentence.

Wendell and Allen Jacobson were ordered to forfeit millions of dollars of profits from the operation a Ponzi scheme through Management Solutions Inc. The scheme involved about 200 investors who had invested more than $200 million. The receiver of Management Solutions and the defrauded investors continue to disagree on the best method of liquidation and distribution of the assets of the company.

Michael Johnson, the CEO of Herbalife, was accused by investor Bill Ackman of running pyramid and Ponzi scheme and defrauding people out of $3.8 billion. Ackman claims that 1.9 million Herbalife salespeople have not made money since the company was founded 32 years ago, and each person would have paid about $2,000 for supplies and training. Ackman claims that Herbalife makes most of its money not by selling products but by recruiting sales staff, which pay a sign-on fee. Johnson responded to the accusations by stating, “This is a ridiculous assertion by people who are trying to manipulate our stock.”

Jeffrey Kelly, 44, of Ohio, was arrested in connection with charges that he took more than $1.5 million from about 15 people in a Ponzi scheme that he ran through his insurance and investment company J.G. Kelly Financial Group. Kelly solicited clients to invest in funds called Superior Financial Resources and J.G. Kelly Equities Group. Kelly was arrested while he was working as a boat captain at Disney World

Michael E. Kelly, 63, suffering from colon cancer, was ordered freed from custody just one day after he pleaded guilty to one charge relating to a massive Ponzi scheme that scammed mostly elderly investors out of $342 million by promising safe, high returns from timeshares in Mexico. Kelly had been serving time since 2006 and was sentenced to time already served. Kelly faces a far lengthier prison term if he survives and is convicted on any of the 13 remaining counts.

Linda Kennedy of California, the former president of 21st Century Financial in Paso Robles, was sentenced to 5 years in prison and ordered to pay restitution after pleading guilty to charges in connection with her operation of a Ponzi scheme.

Stephen J. Klos, 86, saw his sentencing continued. Klos accepted a plea deal in connection with his $3.5 million Ponzi scheme that defrauded 10 elderly victims in the Seattle area. Klos agreed to a sentence for one year in jail and $2.3 million in restitution. Klos faces a sentence range of 51 to 68 months if the judge declines to accept the plea and imposes his own sanctions, or if Klos has failed to repay the victims of his Ponzi scheme $2.3 million as he promised in July.

Jason T. Knapp, 29, was charged with running a Ponzi scheme through his company SteepleChase Group, by promising returns of 18 to 20 percent for short-term investments. Knapp worked as a financial advisor for Dawson James Securities Inc. and solicited his clients to invest in his scheme.

The Fifth Circuit denied the motion of Gilbert Lopez and Mark Kuhrt for release pending sentencing. They were convicted on November 19, 2012 of conspiracy and wire fraud for their roles in Allen Stanford’s multi-billion-dollar Ponzi scheme. United States v. Lopez, 2012 U.S. App. LEXIS 26292 (5th Cir. Dec. 21, 2012).

Peter Madoff, 67, the brother of Bernard Madoff, was sentenced to 10 years in prison and ordered to forfeit $143.1 billion for his role in the Madoff Ponzi scheme. Peter Madoff pleaded guilty to charges for falsifying books and records and agreed not to oppose a request by prosecutors for a maximum sentence of 10 years. Peter Madoff helped create false and misleading documents designed to make it appear that the firm had an effective compliance program. He also transferred millions of dollars within the Madoff family to avoid tax payments to the Internal Revenue Service and put his wife on the firm’s payroll.

Mary Ann McCall was arrested for defrauding Ponzi schemer James Koenig. McCall met Koenig though match.com in 2007and then advised him that she had breast cancer. She moved into Koenig’s house and never paid for it. Koenig was arrested and jailed for defrauding hundreds of investors out of millions of dollars. The original indictment alleged more than 700 victims with about $250 million in damages. Koenig’s assets were frozen in connection with his scheme, and the house is now in foreclosure.

Marc Perlman of California saw a default judgment and permanent injunction entered against him and his firm, iGlobal Strategic Management LLC, in connection with the operation of a commodity pool Ponzi scheme that defrauded 17 people of at least $670,000. According to the CFTC, Perlman, who is deaf himself, solicited funds mostly from the deaf community. At least $365,000 of iGlobal investor funds were misappropriated to make payments of fictitious profits, for cash withdrawals and personal expenses including electronics, groceries, restaurants, and to pay utility bills and rent at Perlman’s personal residence.

Edward Shannon Polen, 37, pleaded guilty to running a $16 million Ponzi scheme. Polen admitted that, between January 2007 and March 2011, he operated three investment Ponzi schemes in which he solicited and received approximately $16 million from more than 50 investors. Polen admitted that the investment schemes, identified individually as the “John Deere Investment,” the “Greenway Investment,” and the “Tennesseein Valley Authority Coal Ash Cleanup Investment,” were totally fraudulent, and he never intended to invest any of the funds he received from investors.

Robert Schnepp, 51, former high school basketball coach in Florida, was arrested in connection with an alleged Ponzi scheme that defrauded investors of about $200,000. Schnepp told friends, teachers and fellow coaches that he was an investment adviser and began soliciting money from them. Schnepp sent out fake quarterly statements indicating the investments were doing well. Schnepp was not a licenses investment adviser during that time period.

Feisal Sharif of Connecticut was charged by the CFTC with operating a commodity pool Ponzi scheme named First Financial that solicited approximately $5.4 million from at least 50 people. Sharif enticed investors by guarantying monthly and yearly returns of one to ten percent on their investments. To falsely assure pool participants that their funds were safe in the pool’s trading accounts, Sharif allegedly fabricated trading account statements from First Financial and from futures commission merchants.

Martin Sigillito, 63, was sentenced to 40 years in connection with his Ponzi scheme which defrauded more than 150 investors out of $52.5million. Sigillito, a lawyer and American Anglican bishop, told investors that their money was going to real estate investments in the United Kingdom through a program known as the British Lending Program, that there was little or no risk, and they would earn high rates of return. Sigillito ran the scheme with James Scott Brown, who previously received a 3 year sentence.

Vincent Singh, 43, was ordered to remain in jail pending a pre-trial hearing in January in connection with an alleged $20 million Ponzi scheme that defrauded around 190 victims. Singh allegedly operated the scheme through his business, Perfect Financial Group, which supposedly made hard money loans. According to federal authorities, Singh represents a flight risk and has already been charged with obstruction of justice, so there was not sufficient reason to release him.

Rick D. Snow was sentenced to 10 years in prison for his role in the Fair Finance Ponzi scheme. Co-defendants Timothy Durham and James Cochran were sentenced to 50 and 25 years, respectively.

David L. Spector, 52, was sentenced to 5 years of probation and ordered to pay more than $600,000 in restitution in connection with charges relating to mortgage fraud and a Ponzi scheme. Spector would conduct real estate mortgage refinance closings but would transfer the proceeds of the mortgages obtained by his clients in a Ponzi scheme fashion.

Trigon Group, Inc. and Darren L. Palmer were permanently enjoined in an action by the CFTC and ordered to return $20.6 million in ill-gotten gains in connection with a commodity pool Ponzi scheme. The consent order states that the defendants solicited at least $40 million from at least 57 investors.

Darrell Underwood and Cynthia Underwood lost their motion to overturn 2009 convictions for their role in a Ponzi scheme. “Darrell Underwood, aided and assisted by Cynthia Underwood, solicited investors for a real estate venture, convincing investors to invest in Walkwood Properties by telling them the company would invest the money in properties subject to foreclosure. Petitioners promised investors a 50 percent return on the investment within a 60-to-120 day period. Throughout 2007 and into early 2008, investors received payments, leading them to believe the housing transactions were generating the promised returns on the investments. Evidence introduced at trial, however, established Petitioners were using investors’ funds to pay other investors and for Petitioners’ own enrichment.” Underwood v. United States, 2012 U.S. Dist. LEXIS 173514 (E.D. Va. Dec 6, 2012)

Kaveh Vahedi, 51, pleaded guilty to charges related to his $12 million Ponzi scheme that he ran through his company KGV Investments in which he defrauded 30 investors.

INTERNATIONAL PONZI SCHEME NEWS

British Columbia

Rashida Samji, alleged perpetrator of a large Ponzi scheme, filed bankruptcy in the face of 58 lawsuits by investors against her, her alleged accomplice, Arvin Patel, and their companies, Worldsource Financial Management Inc. and Coast Capital. It has been alleged that Samji raised $83 million from 218 investors for what she purported to be a “secure investment” in a winery that would yield six to 30 per cent annually. Many of the defrauded investors are from the Surrey Indo-Canadian community. Some of the lawsuits also name three financial institutions through which Samji allegedly funneled money from her scheme - TD Bank, Royal Bank and Vancity Savings Credit Union.

China

A report was issued by Sin Chew Daily cautioning investors about investing in Nanning-Asean Economic Development Zone, which might be a Ponzi scheme. The report said that investors were asked to invest 69,800 yuan (RM35,000) and then told that they would be able to receive returns of about RM5.2mil within three years.

An investor protest took place at a branch of Huaxia Bank in Shanghai over products that the investors claim have not paid out as promised. Investors who had invested funds in a wealth management product (WMP) issued by Zhongding Wealth Investment Centre, sold at Huaxia Bank, have lost their savings. Forty investors protested against Huaxia Bank in Shanghai after they learned that Zhongding would be defaulting on its repayment to them. Zhongding had offered 11 percent interest which was more than triple the benchmark deposit rate set by the central bank. The products were structured as limited partnership interests that provided private equity stakes in auto companies and pawn shops. Huaxia Bank says that it is not a distributor of this product and that any sales person who sold it did so without bank authorization. This type of “wealth management” product is unregulated in China, causing concerns that there may be systemic problem in the country’s entire financial system.

New Zealand

The order freezing the assets of David Ross and his company, Ross Asset Management, will continue until February. Ross in the meantime is receiving $1,000 per week to live on. Ross Asset Management was placed in receivership in November. The receivers of Ross Asset Management, a Wellington fund manager, also applied to the High Court to liquidate the companies. The receivers thus far have identified $10.2 million of the $449.6 million that was believed to be managed by Ross for 900 investors.

Christopher John Collecutt, 57, was sentenced to 2 years, 2 months and 3 weeks’ imprisonment in connection with his Ponzi-style scheme that he ran as a self-employed foreign exchange trader. Collecutt traded from home under the name CFX Trading, and defrauded 59 investors out of about $1.5 million.

Taiwan

A 52 year old woman surnamed Huang was sentenced to 12 years in prison in connection with a NT$20 billion Ponzi scheme where she embezzled tuition fees paid for a spiritual workshop she founded. Huang’s sister and husband, each surnamed Lin, each got a 10 year sentence. Huang would promise NT$80,000 in interest payments every 8 months for every NT$1million that victims deposited. Huang collected over NT $19.9 billion from 8,056 people. The money was in luxury real estate.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

A murder plot was revealed in connection with the Ponzi scheme of Jason “Bo” Beckman. Federal prosecutors said that Gerald Durand proposed to Christopher Pettengill, two co-conspirators in the Ponzi scheme with Beckman, that they arrange to kill Beckman to collect and split the proceeds of his $2.5 million life insurance policy.

The receiver of Benny Judah filed his final report disclosing that $10.3 million will be distributed to investor victims who have combined losses of $35.9 million. Judah is serving a 25 year sentence after pleading guilty to charges in connection with his Ponzi scheme in which he knowingly sold and delivered unregistered securities.

The Bernard Madoff trustee, Irving Picard, asked the court to block an $80 million settlement with the founders of Fairfield Greenwich Group. Picard said that that settlement, if allowed to proceed, will “thwart the Trustee’s efforts to recover funds for equitable distribution to the victims of the Ponzi scheme.” Picard separately entered into a settlement with the funds where they will receive distributions on $270 million in approved claims. If the $80 million settlement succeeds, then these investors will receive more than others who invested directly or indirectly with Madoff. Picard has estimated as much as $7 billion was invested by various Fairfield funds with Madoff, including investments by the Sentry funds. The settling defendants include Fairfield Greenwich’s founder partners, Walter Noel Jr., Andres Piedrahita and Jeffrey Tucker, who will cover the bulk of the settlement.

Bernie Madoff investors Adele Fox and Susan Marshall argued before the Second Circuit that an injunction issued against them prohibiting them from pursuing claims against the estate of Jeffry Picower should be overturned. Picower’s estate entered into a settlement with the Madoff trustee and the government providing for payment of $7.2 billion. About $5 billion of the settlement is to be paid to the estate of Bernard L. Madoff Investment Securities LLC, and $2.2 billion was to be forfeited the government. Picard has recovered $9.28 billion for Madoff victims, excluding the $2.2 billion in the government forfeiture, and about $2.89 billion has been distributed.

The family of Shimon Levy, an investor and business partner of Scott Rothstein, settled a lawsuit with the Rothstein Rosenfeldt Adler bankruptcy estate for $150,000. The Levys had been sued for recovery of $4.8 million of payments that had received from Rothstein. The Levys had invested approximately $50.6 million in the Ponzi scheme and were repaid approximately $49 million. The settlement involves the payment of $150,000 and a lower priority treatment for the Levys’ $5.6 million claim. The Trustee was satisfied with the Levy’s claims that the Rothstein transactions were made in “good faith.”

The receiver of Small Business Capital Corp. reported fees, along with his attorney, of about $377,000. The scheme involved 400 investors that had invested $42 million into funds managed by SB Capital. The CEO of SB Capital, Mark Feathers, denies charges of fraud. The receiver reported that investors might recoup $11 million in liquid assets and $25.45 million from loans.

An accord was reached between the receiver of the R. Allen Stanford estate and the Stanford Antiguan liquidators to jointly control the remaining assets, coordinate victim claims, and to cooperate on asset recovery and information sharing.

The SEC commenced proceedings against the Chinese arms of five top accounting firms - Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young – in connection with a probe of possible accounting fraud of nine U.S.-listed Chinese companies. The SEC has been attempting to obtain documents relating to possible accounting irregularities at those firms, but Chinese secrecy laws have stymied those efforts. Although the SEC has been in discussions with Chinese regulators on cross-border cooperation, including access to documents, those efforts have not yielded an agreement. The SEC action accuses the affiliates of violating U.S. securities laws that require foreign public accounting firms to provide the SEC with audit work papers involving any company trading on U.S. markets. Many of the Chinese companies under investigation traded on U.S. exchanges through “reverse mergers” and have since been deregistered by the SEC.

The receiver of ZeekRewards is battling with investors over the service of subpoenas by regular mail rather than by personal service. Additionally, counsel for victim Fun Club USA, Michael Quilling, has filed a motion seeking the appointment of himself as an examiner that would act as a representative on behalf of all “affiliates.”

The former lawyer for Bernard Madoff, Lee Sorkin, on behalf of Trudy Gilmond and Kellie King, filed a motion to terminate the receivership of ZeekRewards, taking issue with the SEC’s determination that ZeekRewards business involved the sale of securities Gilmond and King are currently being pursued by the receiver for the return of false profits.

The ZeekRewards receiver provided updates to victims on the $600 million Ponzi scheme case. The receiver estimated that approximately 840,000 affiliates invested more than they withdrew, but about 77,000 affiliates withdrew an amount in excess of their total investment. The receiver is preparing to institute a claims process and is in discussions with many net winners regarding the repayment of profits. The receiver may institute litigation to recover clawbacks. The receiver is also continues to oppose the appointment of an examiner along with efforts to terminate the receivership.

Ponzi Scheme Distribution Plans: Rising Tide Method Upheld by Seventh Circuit

Posted by Kathy Bazoian Phelps

One of the most hotly contested issues in Ponzi scheme cases is how to distribute to the defrauded investors the funds that are ultimately recovered. It often seems that no two investors are created equal, so their interests are pitted against one another in the pursuit of “equity.”

Designing the most equitable plan for the distribution of the remaining assets to defrauded investors in a Ponzi scheme case is challenging, to say the least. Someone always ends up unhappy. How do you calculate the loss amount, and then how do you treat the amounts withdrawn by investors during the course of the Ponzi scheme? Some investors received partial payments, some investors received full reimbursement of their principal investment, some received profits as well, and others got absolutely nothing back.

How should a receiver allocate the available cash among these different categories of investors? And does the selected distribution plan impact investor behavior in future Ponzi scheme cases?

The Seventh Circuit recently affirmed the Rising Tide methodology for the distribution of the remaining funds in the receiver’s possession at the end of the receiver’s administration in the Ponzi scheme case run by William Huber.  SEC v. Huber, 2012 U.S. App. LEXIS 24547 (7th Cir. Nov. 29, 2012). Huber was sentenced to 20 years in prison for his scheme that defrauded 118 investors of $22.6 million. United States v. Huber, 455 Fed. App’x 696, 697 (7th Cir. 2012).

In that case, the receiver had the choice of distributing the remaining $1 million to the investors on a pro rata basis, or treating the 11 investors that had already received money as withdrawals from the scheme on a different basis. The receiver chose the latter distribution plan and obtained the approval of the district court to count the withdrawals to those 11 investors as partial compensation for those investors’ losses. The court had adopted the “Rising Tide” method, rather than using the “Net Loss” method.

On appeal, the Seventh Circuit stated, “Under the rising tide method, withdrawals are considered part of the distribution received by an investor and so are subtracted from the amount of the receivership assets to which he would be entitled had there been no withdrawals. (When there are no withdrawals, rising tide yields the same distribution of receivership assets as net loss.)”  SEC v. Huber, 2012 U.S. App. LEXIS 24547, at *3-4.

The Method of Calculation

The Seventh Circuit described the difference between the Rising Tide method and the Net Loss methods as follows:

To understand the difference between the two methods, imagine that three investors lose money in a Ponzi scheme. A invested $150,000 and withdrew $60,000 before the scheme collapsed, so his net loss was $90,000. B invested $150,000 but withdrew only $30,000; his net loss was $120,000. C invested $150,000 and withdrew nothing, so lost $150,000. Suppose the receiver gets hold of $60,000 in assets of the Ponzi scheme--one-sixth of the total loss of $360,000 incurred by the three investors ($90,000 + $120,000 + $150,000). We'll call these recovered assets “receivership assets.” Under the net loss method each investor would receive a sixth of his loss, so A would receive $15,000, B $20,000, and C $25,000 . . .

Id. at *4.

The mathematical calculations can get complicated under the Rising Tide method, but are designed to bring the total distributions made to investors (including both amounts withdrawn during the scheme and amounts to be distributed to by the receiver) as close to each other as possible.  The Seventh Circuit described this process as follows:

In our example, the total of withdrawn plus receivership assets is $150,000 ($60,000 + $30,000 + $0 [the withdrawals] + $60,000 [the receivership assets]), but there is only the $60,000 in such assets to distribute. A, having been deemed (as a consequence of the rising tide approach) to have “recovered” $60,000 before the collapse of the Ponzi scheme, is entitled to nothing from the receiver, as otherwise the remaining sum of withdrawals and receivership assets--a total of $90,000 ($30,000 in withdrawals, all by B, and $60,000 in receivership assets)--would be insufficient to bring the remaining investors up to anywhere near A’s level. For remember that under the net loss method each investor would have received the same fraction of receivership assets as his fraction of the loss, and thus A would have received $15,000, B $20,000, and C $25,000. The result, since under the rising tide method withdrawals are treated as compensation, is that A would have been “compensated” to the tune of $75,000 ($60,000 withdrawn + $15,000 in receiver assets), B $50,000 ($30,000 + $20,000), and C $25,000 (the balance of receiver assets, C having had no withdrawals).

Id. at *4-5.

The result of the Rising Tide method of distribution is that those investors who received payments during the Ponzi scheme will receive a lower percentage dividend at the time of the receiver’s distribution. Despite this disparate treatment at the end of the case, the Seventh Circuit affirmed the use of the Rising Tide method, noting that it is “the method most commonly used (and judicially approved) for apportioning receivership assets.” Id. at *5.

The Equities of the Chosen Method of Calculation

Those investors who received payments during the Ponzi scheme argue against the Rising Tide method, commenting that they should not be penalized for having withdrawn some of their money.

The Seventh Circuit analyzed how the ultimate distribution plan in a Ponzi scheme case might affect the behavior of Ponzi scheme investors. For example, if Rising Tide methods were adopted, this would discourage “partial exit in the form of withdrawals because withdrawers are denied any further recovery.” Id. at *7. However, as the court observed, “it also encourages a withdrawer to withdraw his entire investment, since he won’t be treated as well in the distribution of receiver assets if it turns out that he invested in a Ponzi scheme.” Id. at *7.

The court also considered how the equities of a particular case might lead to a different conclusion. For example, if the facts of the case were that a large number of investors would receive nothing under the Rising Tide method, i.e., 45 to 55%, then the net loss method might be preferred. Id. at *8.

The battles among different categories of investors continues as receivers, trustees, and courts struggle with how to balance the interests of investors who have been defrauded, only some of which have already received money back from the Ponzi schemer. While it is clear that there is not a one size fits all answer to the question, it is quite unclear whether the selected distribution plan has any impact on future Ponzi scheme cases. The Seventh Circuit’s focus on deterrence begs the question of whether an investor is at all impacted by what has happened in Ponzi scheme cases before it in making the decision to withdraw funds from an investment program.

The Rising Tide method of distribution as well as other methods of distribution are discussed at length in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012), §20.04 and Appendix 1.

November 2012 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

The Ponzi scheme news for the month of November was as strong and steady as ever. Here is the summary of the 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.

Mark Akins was ordered to pay $340,000 restitution in connection with a Ponzi scheme that defrauded 82 investors of more than $1 million. Akins was accused of being the chief marketer of the fraud run by Frederick H. K. Baker, in which investors were told their money was being invested in foreign currency trading using a foolproof algorithm that paid 15% profits every month. Akins was sentenced to 27 months in prison earlier this year. Baker is serving a 41-month prison sentence and must pay $776,336 in restitution.

Philip Barry, previously convicted of operating a Ponzi scheme that defrauded investors of $27 million, saw his conviction affirmed on appeal. The Second Circuit concluded that any evidentiary error was harmless in the face of the evidence of the fraud, including a seized note on which Barry had written to himself, “I’m just a crook running a Ponzi scheme.” United States v. Barry, 2012 U.S. App. LEXIS 23275 (2d Cir. Nov. 13, 2012).

Jack Brown, the owner of Brown’s Tax Service, has been accused of running a Ponzi scheme. Brown’s Tax Service was closed, and a sign was posted that read: “Due to health issues, Brown’s Tax Service is closed as of November 6, 2012.” However, Brown’s Tax Service has been accused of running a scheme in which nearly a thousand investors lost more than $4 million.

James R. Cruise Jr. was charged in connection with a real estate Ponzi scheme that defrauded 25 investors of more than $1.2 million. An administrative complaint was filed seeking a cease and desist order against Cruise and his company, The Austin Group.

Brad Demuzio of Idaho was sentenced to prison after being charged by the CFTC with operating a $1.8 million commodity pool and foreign currency exchange Ponzi scheme through his company, Demuzio Capital Management. Demuzio defrauded at least 16 investors and falsely represented that their principal was safe and that they were earning profits.

Ramon Desage was ordered to stop gambling while awaiting trial in connection with charges that he ran a $75 million Ponzi scheme. DeSage is accused of running a Ponzi scheme using his company Cadeau Express,which described itself as a “unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers.”

Alex Dowlatshahi and Christopher Mills must disgorge more than $766,000 in ill-gotten gains from the Ponzi scheme run by David Allen, the co-founder of China Voice Holding. The specific findings were: “Court finds Dowlatshahi jointly and severally liable for disgorgement of ill-gotten gains with his entities: (1) Lucrative [Enterprises Corp.] to disgorge ill-gotten gains of $300,454, (2) [Strategic Capital] Synergetic [Solutions LLC] to disgorge ill-gotten gains of $24,091, and (3) relief defendants Darius Assets to disgorge ill-gotten gains of $305,989.” The court also found that Mills should disgorge ill-gotten gains of $2,165 and found Mills jointly and severally liable for disgorgement of ill-gotten gains with his entities: (1) Sleeping Bear [LLC] to disgorge ill-gotten gains of $116,219 and (2) Silver Summit [Holdings LLC] to disgorge ill-gotten gains of $18,025.”

Tim Durham, 50, who was convicted of charges relating to his Ponzi scheme run through Fair Finance Co., was sentenced to 50 years in prison.  Durham had objected to a pre-sentencing report that recommended 225 years in prison and restitution of $209 million. Durham has asked for a five year prison term. Durham’s co-defendants, Jim Cochran and Rick Snow, are also scheduled to be sentenced and face 145 years and 85 years, respectively. The defendants misappropriated funds from Fair Finance, leaving the company without the ability to repay about 5,000 investors who had purchased more than $200 million unsecured investment certificates. Durham and Cochran used investor funds to sustain their lavish lifestyles, which at one point included more than 40 classic and exotic cars worth over $7 million, a $3 million private jet, and a $6 million yacht in Miami.

Jedidhah “Jed” Duarosan, of Maui, Hawaii, was scheduled be sentenced in connection with charges relating to the operation of a Ponzi scheme in which she collected approximately $882,000 from six Maui families. Duarosan fired her attorney at her sentencing hearing and asked to be represented by David Miller, who Duarosan claimed to be a federal judge. The court ordered Duarosan, who was free after posting a bond, to be held in jail overnight pending a hearing to determine who represents Duarosan.

James F. Ellis, 69, of Florida was indicted in connection with an alleged $11 million Ponzi scheme that targeted members of the Wilton Manors gay community. Ellis is accused of being the front man for adviser George Elia, who is accused of defrauding investors through his company, International Consultants & Investment Group Limited Corp. Ellis allegedly pretended that Elia was a financial whiz capable of generating large returns for investors. Elia had promised investors quarterly returns of 40%. Ellis received monthly payments from Elia that often totaled $20,000 - $25,000 which were “kickbacks” given in exchange for Ellis’s recruitment of new investors to Elia’s scheme.

Robert E. Estupinian was sentenced to 66 months in prison in connection with the Ponzi scheme run through Vesta Strategies. Vesta represented that it was a safe and financially secure Section 1031 exchange company, that client deposits would be held by Vesta, and that client deposits would be returned at the time of redemption. Vesta collapsed in 2008 with $25 million owed to depositors. Estupinian, along with John D. Terzakis and Peter Ye, pleaded guilty to charges in connection with the scheme. Terzakis was previously sentenced to 84 months.

Donald R. French, Jr. of Florida is thought to be the youngest Ponzi schemer ever. He launched his $10 million scheme at the age of 21. French saw his arraignment postponed in connection with charges that he ran a Ponzi scheme through his company, D3 Capital Management, which promised investors returns of up to 50% per year with investments in foreign currencies, emeralds and a solar energy project in Italy. He used investor funds to buy a home in Rome and to travel to 30 countries. He was also a high roller in Las Vegas. French was detained in South Africa and brought back to Las Vegas for passing bad checks.

Joseph Greenblatt, 50, of New York was sentenced to 6 to 18 years and ordered to pay more than $23 million in restitution for stealing more than $31 million through his Ponzi scheme run through Maywood Capital, a real estate investment company.

Robert Hague-Rogers, 76, was sentenced to 10 years in federal prison and ordered to pay $9.34 in restitution in connection with a Ponzi scheme that he ran through HR Financial Services and HR Sales and Marketing. Rogers made unauthorized loans against employer-sponsored health plans to repay investors holding promissory notes with interest rates of up to 15%. He used the funds for personal expenses including leases of luxury vehicles, house payments and taxes, and private life insurance policies.

Lawrence H. Heim, 72, of Oregon, was sentenced to 51 months in prison and ordered to pay $4,057,003.87, in connection with the $4 million Ponzi scheme he ran through U.S. Gold & Silver Investments, Inc. Heim operated a website and hosted a radio program in which he advertised the sale of gold and silver coins and calculated the future value of gold. Many of Heim’s approximately 48 victims were elderly individuals who had purchased coins with funds from their retirement savings.

Michael Jenkins and Harbor Light Asset Management were charged by the CFTC in connection with a Ponzi scheme in which they allegedly solicited at least $1.79 million from about 377 people. Jenkins allegedly used $748,827 of investors’ funds to trade gold and oil futures, stock index futures, and E-mini futures in his personal accounts and to pay for charges at department and discount stores and gasoline stations, and for cellular phone bills and airline tickets. The CFTC complaint, filed on November 20, 2012, alleges that HLAM’s investment agreement falsely represented to investors that their investment was solely for investing in E-mini futures and that investors’ funds would be immediately wired to a specific trading account. However, according to the complaint, most of investors’ funds were misappropriated by HLAM and Jenkins.

James F. Lagona was arrested in connection with obstruction of justice charges, among others, that he tried to use political influence to alter an upcoming sentence relating to a $5.8 million Ponzi scheme. Lagona was found guilty in connection with a scheme that defrauded 90 victims and that was run by Guy Gane and his company, Watermark Financial Services.

Robert Roland Langguth of Texas pleaded guilty to charges in connection with an alleged Ponzi-style scheme that he ran through Capital Finance, Paris Properties, and Paris RE Inc. in which he allegedly sold ownership shares in real estate bridge loans, even though he was not licensed to sell real estate or securities. The arrest warrant stated that Langguth stole between $7 million and $20 million from up to 250 victims.

Irwin Lipkin, 74, pleaded guilty to charges related to Bernard Madoff’s Ponzi scheme. Lipkin was Madoff’s first employee in 1964 and retired in 1998, and has said that he was not aware of the Ponzi scheme before he retired. Lipkin did plead guilty, however, to falsifying the books on Madoff’s order in making accounting entries in financial records that he knew were inaccurate. Lipkin and his wife illegally remained on the Madoff payroll after his retirement in 1998 and received benefits although they did not work. Lipkin’s son, Eric Lipkin, pleaded guilty in 2011 to charges that he reported people were Madoff employees so they could receive retirement benefits.

Gilbert Lopez, 70, and Mark Kuhrt, 40, two former accounting executives at Stanford Financial Group Co., were convicted on criminal charges related to their alleged assistance to R. Allen Stanford in concealing the Stanford Ponzi scheme from investors. Prosecutors told jurors that Lopez and Kuhrt meticulously tracked about $2 billion that Stanford “sucked out” of the bank to fund risky private ventures including Caribbean airlines, resort developments and international cricket tournaments. They further charged that the accountants didn’t disclose these loans or additional funds that Stanford took to underwrite a lavish personal lifestyle of private jets, yachts and waterfront mansions. They face possible sentences of more than 20 years in prison.

Jeffery Lowrance, 51, a United States citizen based in Panama, who operated a New Zealand registered company, was sentenced to more than 14 years in prison and ordered to repay more than $17 million. Lowrance had defrauded 452 investors of $31 million in connection with his Ponzi scheme which he ran through Mentor Investing Group, Inc. and First Capital Savings & Loan, Ltd. Both businesses claimed to buy and sell foreign currencies and to engage in FOREX trading. Lowrance misrepresented to potential investors that they would be paid as much as 4 to 7% monthly interest.

Andrew Mackey, 62, of New York, was sentenced to 27 years in prison and ordered to pay $6,650,067 in restitution in connection with a Ponzi scheme that defrauded more than 160 investors who invested almost $12.3 million in his company, ASM Financial Funding Corp. Mackey falsely promised investors monthly returns of 10-20% from allegedly lucrative offshore deals. One of his investment programs was known as the Wealth Enhancement Club. Mackey also used more than 30 salespeople as intermediaries, paying them $1.1 million in commissions for recruiting new investors. Mackey’s common-law wife, Inger Jensen, 54, was also convicted and received a 14 year sentence.

Syed Qaisar Madad, 65, was charged in connection with a $50 million Ponzi scheme. Madad was the CEO and co-owner of Technology for Telecommunication and Multimedia, Inc. (“TTM”). TTM, which first claimed to be in the business of securing large orders for the supply of equipment to a video-conferencing company, later transitioned to investments and trading. Madad stated that his investment strategy centered around both beginning and ending the trading day with 100% cash. He claimed to achieve extraordinary returns that regularly exceeded 30% and some years approached 65% despite never investing more than 10% to 15% of his cash in the market at any given point. Madad used millions of investor funds to pay his own personal expenses and the expenses of his wife’s business.

Billy W. McClintock, 70, and Dianne Alexander aka Linda Dianne Alexander, 70, were charged with running a $15 million Ponzi scheme that defrauded at least 220 investors. The fraud was allegedly a “prime bank” scheme that promised annual returns of 38% that was to be generated by a secret, highly exclusive organization in Europe known as “The Trust.” McClintock and Alexander told investors that the Trust was created after World War II by a group of extremely wealthy families, that the Trust owned European banks, and that it had the power to create money through fractional banking and the sale of bank debentures. They also represented that access to the Trust was open only to close friends and family members of current investors, and was subject to strict secrecy rules. The Trust does not exist.

Paul R. Melbye, 47, of Texas, pleaded guilty to charges related to the Ponzi scheme of Provident Royalties LLC that Melbye ran with Joseph Blimline. It is alleged that Melbye took money from more than 7,700 investors promising 18% annual returns. Melbye, acting on behalf of Provident Royalties made omissions to investors such as that Blimline had received millions of dollars in unsecured loans; that Blimline had been previously charged with securities fraud violations by the state of Michigan; and that funds from investors in later oil and gas projects were used to pay individuals who invested in earlier oil and gas projects.

Brian Keith Miller, 47, was sentenced to 6 years and 8 months in prison for running a Ponzi scheme which defrauded 32 victims of nearly $1 million. Miller led some investors to believe he worked at the investment firm Anderson and Strudwick after he had been fired. Miller used some of the proceeds to pay about $2,000 per month on a $380,000 mortgage and other proceeds were used to repay personal loans, buy vehicles and furniture, pay for travel and leisure activities, and make home improvements.

Aaron Olson was sued by his uncle, Eric Olson, in connection with a Ponzi scheme run by Aaron Olson through his investment company, KMO Associates. Aaron and Eric had previously been sued by Park Construction, which alleged that Eric was engaged in a partnership with Aaron. Eric denied the charges and had filed a complaint against Aaron alleging that Eric was a defrauded investor and was not part of the fraudulent scheme. Eric has sought to consolidate his case with the Park Construction lawsuit.

Anand Sekaran, president and director of Wasson Capital Ltd., pleaded guilty to running a $2.3 million Ponzi scheme that defrauded more than 10 investors. As part of his plea agreement, Sekaran agreed to pay $2.3 million in restitution and forfeit for the proceeds obtained as a result of the offense.

Feisal Sharif of Connecticut was charged by the CFTC of operating a $5.4 million Ponzi scheme that defrauded at least 50 people.  The investors invested in a commodity pool named First Financial, LLC, and they were promised guaranteed monthly and yearly returns of 1 to 15%. To falsely assure pool participants that their funds were safe in the pool’s trading accounts, Sharif allegedly fabricated trading account statements from First Financial and from futures commission merchants.

Jason Snelling, 48, was sentenced to a total of 40 years in prison by a court in Franklin County, Indiana for running a $9 million Ponzi scheme. Snelling ran a bogus day trading business through CityFund Advisoryand Dunill Investments by creating fictitious trading statements and failing to do anything more than deposit investor funds and then spend them to pay earlier investors and to pay personal expenses. Snelling had previously been sentenced by other courts in Ohio on other charges related to the scheme and is currently serving time in Ohio as a result of a plea deal he signed with the United States Attorney for the Southern District of Ohio. Snelling’s partner, Jerry Smith, is currently awaiting two state court trials on related charges.

Robert Telthorst, 52, of Topeka, pleaded guilty to charges in connection with a Ponzi scheme in which he stole more than $460,000 from client trust funds. Telthorst admitted to taking money from the account for himself and then covering up the theft by taking money from other clients’ trust accounts.

Kaveh Vehedi, 51, of California, has agreed to plead guilty to charges in connection with a Ponzi scheme he ran through KGV Investmentsin which he sold himself as a successful international broker, claiming connections to projects in Dubai, China, and San Diego. The scheme promised 50% returns within nine months to some investors, and he defrauded 31 people to invest over $12 million. Vehedi allegedly used the proceeds to pay for luxury vehicles, private school tuition and his own properties.

Joseph Weigel, 77, a lawyer from Milwaukee, was the subject of a proceeding in the Wisconsin Supreme Court over his license. It was alleged that Weigel ran hundreds of millions of dollars through his firm’s trust accounts like a Ponzi scheme, using money from new cases to pay off older clients.

Ron Wilson, 65, of South Carolina was sentenced to nearly 20 years and ordered to pay $57,401,009 in restitution in connection with his $59 million Ponzi scheme that he ran through his company, Atlantic Bullion & Coin Inc. Wilson collected about $90 million from 798 investors in 25 different states by promising them profits from the purchase and appreciation of silver which Wilson was to purchase and hold at a Delaware depository. The losses were about $57.4 million. Wallace Lindsey Howell has also been charged in connection with the scheme. In addition, Joey Preston and Tracy Neily have also been accused of fraud in connection with the scheme and the South Carolina Securities Division is seeking a permanent bar on selling of securities of these two individuals. Preston and Neily acted as securities agents, although they were not registered and did not tell clients that neither they nor the investment was registered. 

INTERNATIONAL PONZI SCHEME NEWS

Afghanistan

A new report by Kroll Investigative Firm reveals that Kabul Bank, the largest financial institution in Afghanistan, has turned out to be a Ponzi scheme. According the audit, Kabul Bank was an institution linked to President Hamid Karzai’s government and was siphoning money from the funds deposited at the bank. The audit found that $861 million, which is around five percent of the total economic output of the nation, had been spread around to 19 different people and companies. In total, hundreds of millions of dollars is said to have been sneaked out of Afghanistan, with some of it even in airplane food trays.

Australia

The Australian Securities and Investments Commission (ASIC) began seeking large fines and disqualification orders against the operators of a massive Ponzi scheme that was run through the Integrity Plus Unit Trust and the Super Save Superannuation Trust. The scheme involved about 700 Australians who lost more than NZ$60 million. The scheme was run through other countries as well, such as the US, Hong Kong, Vanuatu, the Bahamas, Anguilla, Turks and the Caicos Islands, though it was principally operated by David Hobbs of New Zealand. Investors were lured into subscribing to so-called investment education packages and setting up personal offshore companies. Hobbs made false representations such as that the offshore investments were legal, that there was no risk of losing money because it was “capital guaranteed” or “principal protected,” and that the returns would be “around 4% per month.”

Canada

Milowe Brost was freed from custody after a judge lowered his bail from $1 million to $2,000. Brost faces charges in connection with an alleged Ponzi scheme that defrauded investors of at least $100 million.

Ross Bayne and Lloyd Culham were found guilty of illegally trading securities in a civil suit and were ordered to pay more than $500,000. Bayne ran Arcadia Investments and, with Culham, persuaded investors to invest in a scheme that involved a fake bank and a Danish lawyer, Eli Heckscher. Bayne was involved with a fraudulent investment company, Morgan European Holdings, which was not registered to trade in securities. Bayne and Culham told investors that MEH had a special link to a global bank called the World Trade Bank, though no such bank exists.

Germany

Eleven conmen were indicted at Regional Court in Duesseldorf for running a Ponzi scheme using Business Capital Investors, a company located in New York and Panama. The fraudsters sold shares in BCI to more than 1,700 customers promising an annual return of 15.5%. The annual payments were made with the money of the investors joining later. The Ponzi scheme was discovered one year ago when 120 policemen made a raid on the conmen and seized, among other things, a yard on the Dutch Antilles which was acquired with the money of the victims. The total damage is believed to BCI as high as EUR 60 million.

Report by Bernd H. Klose, www.raklose.de

Member of FraudNet, www.icc-ccs.org/home/fraudnet.

Stuttgart Regional Court has sentenced a 79 year old investment adviser to two years imprisonment. The investment adviser persuaded long time customers of his investment advisory firm to invest with a US company promising a yield of 15%. What makes the case so remarkable is the fact that the investment adviser had consulted two well-known law firms to receive advice if the investments introduced to him by the US company was safe. Both law firms denied and advised not to invest any money into the US company. However, the investment adviser persuaded eight long standing customers to investments in the amount of EUR 1.5 million. He himself invested EUR 145,000. None of the investors - including the investment advisor – received any return.

Report by Bernd H. Klose, www.raklose.de

Member of FraudNet, www.icc-ccs.org/home/fraudnet.

The Public Prosecution Mannheim has indicted Ulrich “Richie” Engler, who was extradited from the U.S. to Germany earlier this year for running a massive Ponzi scheme. According to the indictment, Engler is accused of having swindled 1,295 investors from Germany, Austria and Switzerland of EUR 29,000,000.00. Engler offered an investment into US based companies and promised interest up to 6% per year. According to the indictment, Engler never intended to make any payments to the investors, but intended to spend their money for his own lavish lifestyle and to sustain the fraud scheme. It is unclear yet as to when Mannheim District Court will schedule the trial.

Report by Bernd H. Klose, www.raklose.de

Member of FraudNet, www.icc-ccs.org/home/fraudnet.

India

Abhay Gandhi was arrested in connection with a Ponzi scheme that he ran through AISE Capital Management. Gandhi was wanted in four cases of cheating and breach of trust, and he is accused of investing investor dollars overseas to avoid paying back investors. Gandhi had promised investors 10% returns every month. Gandhi has been charged under section 409 of the IPC, which carries with it the possibility for life imprisonment. Gandhi has identified Janaksinh Parmar as having a role in sheltering Gandhi and accepting a large fee for providing Gandhi safe passage out of the country.

The Securities and Exchange Board of India (Sebi) served show-cause notices to Beetal Livestock & Farm (P) Ltd, a company that had claimed to have large goat-rearing farms in northern parts of the country and had solicited investments from the public with a promise of 2% monthly returns, and doubling of money in three to four years. The business model involved having investors pay a few thousand rupees to become owner of a goat, to be reared by Beetal. Investors were told that as each goat gives birth to four kids a year, the new goats would be sold to other investors — giving up to four-fold appreciation in the first year itself. Beetal told investors that the investments could give manifold returns in subsequent years, with each of the four new goats giving birth to 3-4 kids the following years.

Mohmamd Shoeb Diwan was arrested in connection with a Ponzi scheme run through Aliya Enterprises, of which he was the director. Qutubuddin Saiyed, the owner of Ailya, was previously arrested in connection with the case. The scheme promised investors double returns on their investments.

Israel

A 43 year old man from Bnei Brak was convicted in a Tel Aviv court in connection with a Ponzi scheme that stole more than 5 million shekels from investors. The man used the money to purchase an apartment building for himself and to buy other personal things.

New Zealand

The receivers of Ross Asset Management, a Wellington fund manager, released a report stating that they have identified $10.2 million of the $449.6 million that was believed to managed by Ross for 900 investors. The Financial Markets Authority had obtained a freezing order on the assets of the company’s director, David Ross, 62, and associated entities. The receivers, PricewaterhouseCoopers, have noted characteristics of a Ponzi scheme in that investors’ money was coming into accounts and those funds were being used to pay other investors.

Philippines

President Benigno S. C. Aquino has ordered a fast-tracked investigation of a scheme run by Manuel Amalilio through the Malaysian-owned Amman Future Trading. It is believed that 15,000 investors were involved in the scheme that involved 12 billion peso ($290 million). Aman Futures supposedly promised profits of 20 to 30% in eight days and 50-86% in 18 to 20 days for investments made allegedly on the company’s non-existent palm oil, mining and futures businesses. It is reported that charges are being prepared against company chief executive officer Manuel Amalilio, Mohammad Suffian Saaid, and an associate, who are now in hiding. Anwar Alvin Zainal, an insurance agent believed to be an incorporator of the Aman Futures Group Phils. that operated the scheme, was kidnapped and murdered this week in Zamboanga del Sur. Pagadian City Mayor Samuel Co and his wife were also officially designated as accused in the scam.

South Africa

Giel Mans, accused of masterminding a $5 million Ponzi scheme and of faking his own kidnapping and trying to bribe a prosecutor, now claims he has a secret stash of diamonds located in a safe deposit box in London that are worth $10 million and will compensate his victims. Mans argued that he would only reveal the secret if he is released from jail on bail. The court declined to release him on bail after prosecutors expressed concern that Mans would likely flee if released. Mans, known as a diamond dealer, solicited investors for his diamond business, promising lucrative returns from his purchase of the best diamonds and the resale of those diamonds at a huge profit abroad. Rather than purchase expensive diamonds, Mans merely falsified receipts from various diamond suppliers.

United Kingdom

Nicholas ‘Beano’ Levene, 48, was sentenced to 13 years in connection with a Ponzi scheme that involved between £32 million and £200 million. Levene had offered shares in blue-chip companies, including HSBC, the Royal Bank of Scotland, Imperial Energy and Rio Tinto. He claimed he had access to shares unavailable to ordinary investors, which he would trade at a supposedly huge profit. In fact, he just invested and lost the investors’ money in the stock market. Levene also spent more than £18 million funding his lavish lifestyle, including £588,000 for his son’s bar mitzvah.

David Bowerman, 35, was sentenced to 8 years in prison in connection with his Ponzi scheme that defrauded more than 250 investors, including terminally ill cancer patients, out of up to £7.5 million. Bowerman sold fake bonds and offered loans under the pretense that his experience as an FSA-approved financial advisor would help boost their credit rating. He spent investors’ funds on three Caribbean cruises and flashy cars including a £38k Audi sports car, a BMW and an Aston Martin, and he is reported being seen lighting cigarettes with a £50 note. Bowerman then set up an online bookmaker called Shearer Hare and encouraged friends and family to invest heavily in it - using the funds to give the impression of a profit-making business. The business generated £4.85m but £3.8m soon disappeared through online betting by Bowerman with an unknown amount blown on his increasingly lavish lifestyle. 

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

 

In connection with the Ponzi scheme of John Farahi, which targeted the Persian community in Beverly Hills California, David Tamman, 45, a former Nixon Peabody securities partner, was found guilty on charges of conspiracy, obstruction of justice, alteration of records, and accessory to mail fraud and securities violations. Farahi, through his company New Point Financial Services Inc., recruited investors through a daily Farsi-language radio show, promising that their money would be used to buy low-risk corporate bonds backed by the federal bank bailout initiative known as the Troubled Asset Relief Program. Investors lost at least $7 million.

Fairfield Greenwich Group, one of Madoff’s feeder funds, along with other related entities, settled their part of a class action suit for as much as $80.3 million. The settlement will be funded by founder Walter Noel and other individuals associated with the firm. The settlement, which needs a judge’s approval before taking effect, provides $50.3 million to the class, which will get an additional $30 million if that money isn’t used to resolve other legal claims. A provision in the agreement allows Fairfield Greenwich to cancel the settlement if too many investors opt out of the deal to pursue individual claims. The investors are continuing to pursue claims in the case against Citco Group Ltd. and PricewaterhouseCoopers LLP.

Fortress Credit purchased more than $2 billion of claims from Rye Select Broad Market Fund in the Madoff case. Rye settled a lawsuit brought by the Madoff trustee and assigned unspecified additional amounts of each of the two claims to Fortress that it was granted under the settlement.

A Bank of New York Mellon Corp. unit, Ivy Asset Management, agreed to pay $210 million to the state of New York to resolve a number of lawsuits claiming that the bank concealed doubts about Madoff’s business. An additional $9 million will be contributed by other individual defendants in the cases. Ivy had been paid more than $40 million to give advice and conduct due diligence for clients invested in Madoff investments, and those clients lost more than $236 million in the Madoff scheme. The New York Attorney General announced that the settlement funds will be returned to investors. The Madoff trustee, Irving Picard, also reached a settlement with Ivy for $24 million.

Appellate arguments were heard in the cases filed by Irving Picard, the Madofftrustee, against various financial institutions, including HSBC Holdings PLC, JP Morgan Chase & Co, UBS AG, and Uni-Credit SpA. Picard’s lawsuits against the banks were dismissed by the district court on standing and in pari delicto grounds. Picard argues that he is not an ordinary bankruptcy trustee and has additional rights and powers under the Securities Investor Protection Act. The banks answered pointing to language in SIPA which they argue gives Picard the same rights and powers as an ordinary bankruptcy trustee and thus is barred from suing.

In litigation pending in connection with the Meridian MortgagePonzi scheme, new evidence was presented to the court in the case of the liquidating trustee against Moss Adams, the accounting firm for Meridian Mortgage. The trustee told the court that Moss Adams had withheld “smoking-gun emails” which demonstrated that Moss Adams knew that one of its employees had a romantic relationship with Meridian founder Frederick Darren Berg. The lawyer for the trustee stated that “The auditor cannot be, if you will, in bed figuratively or literally with the client,” as such a relationship “would absolutely violate the most basic premise of auditing.” The employee, Dan Matthias, said his relationship with Berg lasted about 6 months and says that it is far-fetched to suggest that he could have influenced the audit work of more senior people in a different part of the firm.

The receiver of the Arthur Nadel Ponzi scheme obtained approval to distribute another $22 million to about 340 defrauded investors. This distribution, combined with an earlier distribution of $26 million, will bring the total distributed to investors to almost 37%. Most of the latest money comes from a settlement paid to the receiver by the law firm Holland & Knight, which agreed to pay $25 million to settle a lawsuit accusing it of failing to report illegal activities at the Scoop Management hedge funds operated by Nadel.

The trustee of the bankruptcy case of Thomas Petters lost his claims to recover allegedly fraudulent transfers in the amount of $2 million paid to College of St. Benedict. A federal judge has dismissed the Trustee’s fraudulent transfer claims against the College of St. Benedict, allowing the organization to keep $2 million that was donated by Petters from Ponzi scheme proceeds. Petters, through the Thomas J. Petters Family Foundation, had paid $2 million to get his parents‘ names on the school’s auditorium.

The Petters trustee filed a lawsuit against BMO Harris Bank for aiding and abetting the Petters fraud by ignoring Petters’ huge deposits. It is alleged that M&I Bank, now owned by BMO Harris, was complicit in the Ponzi scheme and ignored multiple red flags to protect its lucrative banking relationship, where more than $35 billion flowed through the account. The trustee alleged that none of the $35 billion in deposits were from retail stores, which were supposedly a source of income for the Petters’ operation, and nearly $70 million was transferred to personal accounts controlled by Petters.

The fraudulent claims of trustee of the bankruptcy of Scott Rothstein’s law firm, Rothstein, Rosenfeldt Adler against the Dan Marino Foundation for $259,000 were dismissed. The court found that Marino had provided value in exchange for the funds.

Jonathan Hullick, former chief operating officer and executive vice-president of Gibraltar Private Bank and Trust Co., has sued Gibraltar and Boston Private Financial Holdings for wrongful termination in 2008 in relation to the Ponzi scheme of Scott Rothstein. Hullick claims that while working for Gibraltar he spotted suspicious activity in the bank accounts of Rothstein and Rothstein’s law firm, and reported it to Steven D. Hayworth and other Gibraltar executives, who assured him the accounts were “taken care of.” Hullick further alleges that he was asked to “relax regulatory requirements” and when he refused, the bank fired him. The complaint further alleges that Rothstein admitted this year that he had asked Hayworth to fire Hullick, and that Hayworth promised he “would take care of it.”

A new group of 35 investors sued TD Bank and Scott Rothstein seeking $72 million in damages, alleging that the bank was “Rothstein’s key conspirator in the Ponzi scheme.” It is alleged that the bank legitimized the illegal enterprise, disregarded red flags that should have exposed the fraud, lied to investors and covered up incriminating documents.

The trustee in the Rothstein bankruptcy case has hired GrayRobinson to help track down missing jewelry. GrayRobinson had represented JR Dunn Jewelers, who had been sued by the trustee. That lawsuit settled, and GrayRobinson will now help the trustee tracking the most valuable diamond connected to the Rothstein fraud, which is an 8.91-carat unmounted gem worth almost $700,000.

The receiver of Stanford Financial, along with several investors, filed a lawsuit for $1.8 billion against the law firms, Greenberg Traurig and Hunton & Williams, for their role in designing the “architecture” of the Ponzi scheme and “essentially hijacking the sovereign island nation of Antigua through the use of political corruption, loans made with funds stolen from Stanford’s investors, and even writing the laws that governed Stanford International Bank’s operations.” Attorney Carlos Loumiet worked at both law firms, but was not named as a defendant in the lawsuit. Yolanda Suarez, a protégé of Loumiet, was named in the suit. The claims alleged in the complaint are negligence, aiding and abetting breaches of fiduciary duty, breach of fiduciary duty, fraudulent transfer, unjust enrichment, negligent retention and negligent supervision.

In connection with the Ron Wilson Ponzi scheme, the South Carolina Attorney General’s office filed a complaint requesting that Joey Preston be ordered to return approximately $1 million that Preston allegedly made as commissions in connection with Wilson’s silver-buying Ponzi scheme. It is alleged that Preston violated the South Carolina Uniform Securities Act by bringing in investors without being properly registered and without doing proper due diligence on the investment he was recommending. The state’s complaint claims Preston held “silver parties” at his home for Wilson, where guests received a seminar on silver investment.

The receiver in the ZeekRewards case posted a letter on his website updating investors and expressing his intention to pursue fraudulent transfer claims against those who had profited from the Ponzi scheme. The receiver estimates that there are about 800,000 victims and total losses of $500 million to $600 million. The receiver has recovered about $300 million so far.

Paul Burk, 65, the owner of ZeekRewards.com’s parent company, Rex Venture Group, LLC, has denied that he operated a Ponzi scheme in response to a class-action lawsuit filed against him and his companies. Burks has said that said that plaintiffs “knowingly and voluntarily purchased bids” to participate in ZeekRewards.com.

Kelsey Grammer was dismissed from a lawsuit in which he had been named and accused of receiving dirty money from a Ponzi scheme affiliated with the website Staropoly.com. TV actress Lydia Cornell had sued Grammer, claiming that the website, which was billed as a new social network, was nothing more than a Ponzi scheme that caused her to lose money.

The quest for turnover of records from the FBI continues in the Ponzi scheme case of Blue Mountain Consumer Discount Co. Investors chose not to serve a subpoena for about 20 boxes of documents seized by the FBI, even though those records are thought to be needed in connection with lawsuits filed against Francis Cinelli and the CEO of the company, Walter “Buddy” Lambert. The court overseeing the matter had suggested that the victims serve a subpoena to force the FBI to release the documents. The attorneys for the victims stated at a hearing that they have not, and do not intend to, file a subpoena out of concern that it will interfere with the FBI’s criminal investigation.

The government announced that it will return $9,000,000 in forfeited funds to the victims of the Ponzi scheme that was run by the late Ashvin Zaveri of New York. More than 120 victims may be eligible to receive a share of the forfeited funds. Zaveri was indicted in 2009 on charges related to his scheme that defrauded investors of approximately $35,000,000 in connection with “oil and natural gas exploration partnerships” available through his company Zaveri Oil & Gas Ltd.