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Recent SEC Releases
Saturday
Aug292015

Bar Owner Liable For Promoting $18 Million Ponzi Scheme

A Texas federal judge has ruled that a California bar owner who solicited investors for a suspected $18 million oil and gas Ponzi scheme is liable for nearly $400,000 in civil penalties, interest, and disgorgement stemming from the lucrative commissions he received.  Roland Barrera, the owner of a nightclub and speakeasy in Costa Mesa, California, was ordered to pay the amount after U.S. Magistrate Judge Mark Lane granted summary judgment to the Securities and Exchange Commission in an ongoing suit brought in December 2013 to halt the scheme allegedly perpetrated by Robert Helms and Janniece Kaelin.  The decision by the Commission to include promoters of the alleged scheme, while not unprecedented, is rare amid a flurry of enforcement actions brought to combat suspected oil-and-gas frauds.

According to the complaint filed by the Commission, Helms and Kaelin began soliciting investors in 2011 for Vendetta Royalty Partners ("VRP"), a limited partnership they controlled.  Formed in 2009, VRP initially acquired oil-and-gas royalty interests from another limited partnership the two men controlled.  However, beginning in 2011, VRP filed documents with the Commission seeking to raise $50 million through the sale of limited-partnership interests.  In offering documents, potential investors were told that (1) 99% of the raised proceeds would be used to purchase oil-and-gas royalty interests, (2) that Helms had extensive experience in the oil-and-gas industry, (3) that investors would receive periodic reports on VRP's progress, and (4) no legal proceedings were pending against the company.  Potential investors were told to expect a return ranging from 150% - 200% in just several months.  In total, approximately $18 million was raised from nearly 100 investors in a dozen states.  This included a $3 million investment solicited by Barrera and another defendant, Deven Sellers, from a California investor who was told that he could realize outsized returns and that Sellers and Barrera would only receive a small commission from his investment.  In reality, Sellers and Barrera pocketed nearly $400,000 in commissions off that investment. 

However, VRP did not achieve the profitable returns promised by Helms and Kaelin.  Indeed, rather than invest 99% of raised offering proceeds in oil-and-gas royalty interests, only 10% was in fact invested as advertised.  These investments generated de minimus returns.  The representations made to investors were also false.  Helms did not have 10 years of experience in the oil-and-gas industry; rather, his sole experience came from operating VRP.   Investors were never provided with periodic progress reports, and were not informed of significant pending litigation against VRP by an existing investor accusing the company of fraud.  Instead, nearly $6 million was paid to existing investors in the form of "income distributions" that was, in reality, funds from new investors in a classic example of a Ponzi scheme.  Millions of dollars were also allegedly misappropriated by Helms and Kaelin for their own personal benefit.

According to Bizjournals, summary judgment was also entered against the scheme principals Helms and Kaelin.

The SEC's Complaint is below:

comp-pr2013-256 by jmaglich1

Tuesday
Aug252015

Alleged Schemer Wins Request For Victim Tax Returns; Government Objects

Both federal prosecutors and a defrauded victim are fighting a court order requiring the government to provide a Las Vegas man on trial for allegedly masterminding a $190 million Ponzi scheme with copies of the last ten years of tax returns for the scheme's wealthiest victims.  Ramon Desage, 64, was arrested back in June 2012 and is currently awaiting trial on 52 charges including 19 counts of wire fraud and 28 counts of money laundering. Recently, his lawyers successfully petitioned the presiding magistrate judge to order the government to produce tax returns for several wealthy victims and their spouses on the basis that the failure to claim any scheme proceeds could serve as the basis for impeachment at trial.  This week, both the government and one of the affected victims have filed papers challenging that ruling as error.

Desage was arrested in mid-2012 on a complaint by the Internal Revenue Service that he used his company, Cadeau Express, to defraud investors out of at least $75 million in an elaborate Ponzi scheme.  That company, whose website is still active, describes itself as a "unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers."  The IRS alleged that Desage and Cadeau Express defrauded at least four wealthy investors, using some of these funds to pay off over $20 million of gambling debts owed by DeSage.  While the IRS initially alleged that Desage defrauded investors out of at least $75 million, a subsequent indictment levied dozens of additional charges and pegged the amount of victim losses as at least $190 million.  Desage was also accused of failing to report nearly $90 million in income from the Internal Revenue Service from 2006 to 2009.

In June, Desage filed a "Motion for Discovery of Tax Returns," seeking the production of tax returns for four wealthy victims named in his indictment as well as for those victims' spouses and business partners.  Arguing that the returns, which are normally considered confidential, Desage stated:

Mr. Desage expects that Mr. Richardson's, Mr. Vechery's and Mr. Foonberg's personal and corporate tax returns will show that they did not take into account their receipts of cash from Mr. Desage.  These omissions from their tax returns will constitute significant impeachment material regarding the credibility of these alleged victims.  Thus, the tax returns are crucial to Mr. Desage's defense that he did not defraud investors/lenders.

While the government opposed Desage's motion, Magistrate Judge Fehrenbach entered an order on August 13, 2015 granting the request and concluding that Desage's efforts were not a fishing expedition and that he had made a plausible showing that the tax records were favorable to his defense.  In so finding, the Court cited the government's obligation under Giglio v. United States to disclose potential impeachment evidence to the defense.

The government filed an objection today to Magistrate Judge Fehrenbach's order.   The government asserted that Magistrate Judge Fehrenbach's Order was "clearly erroneous," first taking issue with the finding that Desage's "plausible" showing justified production of the tax returns.  Rather, the government argued that Desage was required to, and failed to, articulate "specific facts, beyond allegations, relating to materiality."  Next, the government argued that the tax returns did not constitute impeachment evidence under Giglio, noting that the materiality requirement of such evidence again doomed such an effort.  Finally, the government argued that the tax returns were not favorable to Desage's defense since any cash payments were simply the return of funds previously stolen by Desage.

Notably, an objection was also filed by victim William Richardson, who invested over $50 million with Desage of which over $30 million remains outstanding.  In that objection, Mr. Richardson cited to the Crime Victims Rights Act ("CVRA"), a 2004 "broad and encompassing" law that sought to create "enforce[able] rights" for victims.  In providing a list of eight rights to crime victims, the first right listed was the "right to be reasonably protected from the accused."  The objection first noted that while the indictment only alleged that Mr. Desage had committed wire fraud against Mr. Richardson for the years 2011-2012, the Order erroneously required production of Mr. Richardson's tax returns for the remaining years during the 2005 - 2014 period.  Next, the objection argued that any distributions received from Desage during those years were not reportable income, as supported by a letter from Mr. Richardson's accountant, and thus were not required to be reported on the relevant tax returns.  In short, Mr. Richardson argued, like the government, that his tax returns were not "material" and thus should not be produced. 

As prosecutors noted, allowing Desage's request would be akin to a "rank fishing expedition that puts the victims' sensitive financial data in the hands of the defendant, effectively victimizing them a second time."

Copies of Desage's Motion, the Order, and the Government's objection are below:

 

Motion for Production of Tax Returns

 

 

 

Order Granting Motion for Tax Returns

 

 

 

US objection to order allowing tax returns.pdf

 

Saturday
Aug222015

Utah Man And Cousin Indicted For Alleged $140 Million Ponzi Scheme

A Utah man and his cousin have been indicted on forty-eight charges that they operated a massive real estate Ponzi scheme estimated to have raised at least $140 million from hundreds of investors.  Wayne Palmer ("Palmer"), 60, was charged with 14 counts of wire fraud, 17 counts of mail fraud, and 17 counts of money laundering, while his cousin, Julieann Palmer Martin ("Palmer Martin"), 47, faces 11 counts of wire fraud, 9 counts of mail fraud, and 17 counts of money laundering.  The mail fraud and wire fraud counts each carry a maximum twenty-year sentence, while the money laundering charges each carry a ten-year maximum sentence.  Wayne Palmer was previously the subject of an enforcement action filed by the Securities and Exchange Commission in 2012.  

Palmer operated National Note of Utah ("National Note"), which he formed in 1992, and had worked in the real estate financing business since 1976.  Palmer Martin joined National Note in 1993 and served various roles, including "Client Development Manager."  National Note purportedly purchased real estate loans and funded new loans, and also dabbled in other unrelated ventures such as flipping rental properties, operating a mint, and extracting precious metals.  Palmer traveled across the country teaching real estate investment seminars, in which he offered investors two-to-five year investment opportunities that paid annual returns of 12%.  Potential investors were told that their funds would be used to buy and sell mortgage notes, underwrite and make loans, or buy and sell real estate.  In a brochure provided to investors, Palmer "guaranteed" "double digit returns" with "no worries about reductions in earnings," touted the reliability of the "monthly payments," and assured investors of the "safety of principle."   Between 1995 and 2012, National Note has raised over $140 million from at least 600 investors.  

According to authorities, National Note took on the characteristics of a Ponzi scheme as early as 2004 when the majority of funds raised from investors were simply loaned to National Note affiliates.   By 2009, over 90% of National Note's outstanding loans were to various affiliates.  While Palmer represented that National Note was highly profitable, the indictment alleges that National Note and its affiliates never had net income or positive net equity from 2004 to 2012 sufficient to meet its investor obligations.  Scheduled interest payments to National Note investors ceased in October 2011.  

The case is one of several high-profile alleged Ponzi schemes uncovered in Utah, which prompted a CNBC segment dubbing Utah as "Ponziland."  Authorities point to the large Mormon population as a primary target for fraudsters in what is termed "affinity fraud," and efforts to combat this fraud, including a 2010 public service campaign aimed at educating citizens, have fallen short.  Recently, Utah became the first state to pass legislation mandating the creation of a white collar crime registry that will feature a public database of offenders convicted of certain financial/securities crimes. 

The indictment is below:

8.19.2015 Criminal Indictment Wayne Palmer and Julieann Palmer Martin

Thursday
Aug202015

California School Pays $480,000 To Remove Schemer's Name From Scoreboard

credit: calcoastnews.comA California university will pay nearly half a million dollars to remove the name of a man convicted of running a $22 million Ponzi scheme from a 53-foot advertisement on a scoreboard in the school's athletic facility.  California Polytechnic State University, San Luis Obispo ("Cal Poly") will end a dispute that has spanned nearly one year by paying $480,000 to a bankruptcy trustee tasked with recovering funds on behalf of victims scammed by Al Moriarty.  While a bankruptcy judge must still approve the settlement, the school hopes that approval will come before the football team's home opener on September 19th.  

Moriarty was a Grover Beach businessman who was well known in the community for his philanthropy, having donated extensively to area charities and also coaching various community sporting teams.  Beginning in the early 1990's, Moriarty used his company, Moriarty Enterprises, to solicit potential investors with the promise of 10% returns purportedly derived from providing home loans to educators.  While specifics on the investments remain unknown, Moriarty was able to raise tens of millions of dollars from dozens of investors.  

While the investments initially performed as promised, Moriarty began defaulting on scheduled interest payments during the economic downturn due to what he blamed on financial headwinds.  Investors turned to the courts when Moriarty defaulted, and nearly 20 lawsuits were pending against Moriarty in November 2012.  Moriarty would file for bankruptcy the following month.  A criminal investigation ensued and culminated in Moriarty's arrest in May 2013.  He was charged with seven felonies, including the fraudulent sale of securities and material misstatements and omissions in connection with the sale of securities.  Moriarty pleaded no contest to the charges on August 4, 2014, and received a five-year prison sentence on September 17, 2014.  According to the San Luis Obispo Sheriff's Office, Moriarty is due to be released from prison on December 20, 2015, despite serving less than 1/3 of that sentence.

Moriarty was known not only for his philanthropy, but also for his extensive ties to local and national athletics.  His wife, Patricia Rooney, is part of the iconic family that owns the Pittsburgh Steelers.  Moriarty played football at Cal Poly, and also previously coached local football and basketball teams.  As a Cal Poly alumnus, Moriarty donated generously to his alma mater, This generosity included the donation of $625,000 in 2009 in exchange for the prominent placement of Moriarty Enterprises on Cal Poly's football stadium.

Despite Moriarty's bankruptcy filing and subsequent arrest, the name "Moriarty Enterprises" still remained prominently featured on the scoreboard at Cal Poly's Alex G. Spanos Stadium.  Indeed, because of his bankruptcy filing, the naming rights to the stadium were transferred to the bankruptcy trustee in an effort to realize potential value for creditors.   

The school was well aware that any action taken to modify or remove the scoreboard could result in severe financial consequences - including punitive damages and the possibility of being held in contempt.  After Cal Poly balked at repaying the $625,000 received from Moriarty, the trustee filed a lawsuit seeking the return of the funds and claiming that Moriarty was insolvent at the time the donation was made.  A bankruptcy judge later ordered Cal Poly to resolve the lawsuit before removing the name.  

The scoreboard has been covered since mid-June while Cal Poly and the trustee participated in a court-ordered mediation.  In resolving the trustee's lawsuit, Cal Poly has agreed to pay $480,000 - funds that will be paid from a school foundation rather than sourced from school tuition.  Cal Poly has indicated that it plans to cover the name with either "#CalPoly" or "Go Cal Poly" before the September 19th home opener.

Tuesday
Aug182015

Massachusetts TelexFree Victims Share $3.5 Million Bank Settlement 

Nearly $3 million was distributed this week to over 14,000 victims of the massive alleged TelexFree Ponzi/pyramid scheme as a result of a Massachusetts securities regulator's settlement with a Massachusetts bank that provided banking services in the alleged fraud.  The settlement, distributed by way of more than 14,000 checks each for an amount of $205.52, came after a settlement between the Massachusetts Securities Division ("MSD") and Fidelity Co-operative Bank ("Fidelity") stemming from Fidelity's provision of banking services to TelexFree and its principals.  Notably, Fidelity's president, John Merrill, is the brother of former TelexFree principal James Merrill who is currently awaiting trial on criminal fraud charges related to TelexFree.  Fidelity neither admitted nor denied wrongdoing in its settlement with the MSD.

Background

TelexFree raised billions of dollars from hundreds of thousands of investors through the sale of a voice over internet protocol (“VoIP”) program and a separate passive income program.  The latter was TelexFree's primary business, and potential investors were solicited with the promise of annual returns exceeding 200% through the purchase of "advertisement kits" and "VoIP programs" for various investment amounts.  Not surprisingly, these large returns attracted hundreds of thousands of investors worldwide, and participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses.  Ultimately, while the sale of the VoIP program brought in negligible revenue, TelexFree's obligations to its "promoters" quickly skyrocketed to over $1 billion.

TelexFree filed for bankruptcy in April 2014 after multiple failed attempts to modify the passive income program both to rectify regulatory deficiencies and to curb increasing obligations.  While TelexFree had intended to use the bankruptcy proceeding to quietly eliminate outstanding liabilities and reemerge as a legitimate entity, the filing immediately attracted scrutiny and was followed shortly by enforcement actions filed by the Securities and Exchange Commission (the "Commission") and Massachusetts regulators.  At the Commission's request, the bankruptcy proceeding was subsequently transferred to Massachusetts, where multiple enforcement proceedings brought by the Commission and the MSD were pending.   An independent trustee was subsequently appointed, and TelexFree's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges.  Mr. Wanzeler remains a fugitive in Brazil, where extradition is difficult due to Mr. Wanzeler's Brazilian citizenship.

Fidelity Bank Relationship With TelexFree

Shortly after TelexFree's bankruptcy filing, the MSD began looking into Fidelity based on its past banking relationship with TelexFree. TelexFree opened several accounts at Fidelity in August 2013 through an account opening process that the MSD would later describe as "inadequate" and "insufficient."  In the ensuing months, TelexFree made significant deposits of investor funds - funds that authorities alleged were the result of a massive worldwide fraud.  In late November 2013, Fidelity's president, John Merrill, instructed the bank's compliance officer and Bank Secrecy Act ("BSA") officer to review the TelexFree account relationship.

The resulting investigation revealed that Brazilian authorities had recently shut down a scheme also known as TelexFree based on suspicions the company had been a pyramid scheme.  John Merrill was notified of these and other alarming facts, as well as an outside consultant used by Fidelity to deal with BSA issues and compliance.  That outside consultant concluded that TelexFree should be treated as a high risk customer based on its banking activity, and advised Fidelity and John Merrill that the account relationship required an "appropriate monitoring level for a high risk customer."

Based on those recommendations, Fidelity notified TelexFree on December 3, 2013 that it should close all of its accounts at the bank before December 31, 2013. Despite these warnings, Fidelity continued to provide banking and deposit services to TelexFree during that period and even following the December 31, 2013 deadline imposed by Fidelity.  During this period, TelexFree principals Wanzeler and James Merrill transferred nearly $10.5 million out of Fidelity to outside accounts - including a $3.5 million wire transfer by Wanzeler to an overseas account held in Singapore at the Oversea-Chinese Banking Corporation.  

Following the MSD's investigation, Fidelity agreed to enter into a consent order in which it agreed to settle any potential actions brought by the MSD while neither admitting nor denying to any allegations.  By the terms of the consent order, Fidelity agreed to establish a $3.5 million escrow account at Fidelity Bank for eventual distribution to Massachusetts TelexFree victims.  The distribution this week represented a distribution of approximately $2.9 million from that account, with the approximately-14,000 TelexFree victims residing in Massachusetts each receiving a $205.52 check representing their portion of that settlement.  

Fidelity's entry into the consent order hardly resolves its legal exposure to the TelexFree fraud.  While approximately 14,000 TelexFree victims reside in Massachusetts, the consent order only resolved any allegations that the MSD could bring against Fidelity.  Thus, each of the victims retains any potential claims he or she might have against Fidelity - and the court-appointed trustee has estimated that as many as 1 million TelexFree victims might exist.  Additionally, the bankruptcy trustee may also bring claims, including avoidance actions, against the bank for its role.  While Fidelity neither admitted nor denied the conduct described in the consent order, the allegations, if true, suggest that the bank could have significant liability under the Bank Secrecy Act for, among other things, the failure to maintain an adequate anti-money laundering program and whether appropriate suspicious activity reports ("SARs") were filed.  The Department of Justice made similar allegations against a North Carolina bank for its relationship with another massive Ponzi/pyramid scheme, ZeekRewards, in early 2014.

A copy of the Consent Order is below:

Fidelity Consent Order 9-22-14