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Recent SEC Releases
Sunday
Dec072014

On Second Try, Nebraska Attorney Pleads Guilty To $4 Million Ponzi Scheme

After a failed first attempt, a Nebraska attorney successfully entered a guilty plea to charges that he operated a Ponzi scheme that duped approximately 100 victims out of $4 million.  Michael Kratville, 53, entered a guilty plea to a single charge of wire fraud on Thursday that was accepted by U.S. District Judge Joseph Bataillon.  The plea came two days after Kratville's first attempt to plead guilty failed after his responses during his plea colloquy failed to satisfy Judge Bataillon that he was indeed pleading guilty to criminal conduct.  The wire fraud charges carries a maximum 20-year prison term, although federal sentencing guidelines will likely result in a much lower recommended sentence.

Kratville, along with co-conspirators Jon Arrington and Michael Welke, operated Elite Management Holdings Corp. ("Elite Holdings"), which promised potential investors significant returns through purported low-risk investments in commodities, precious metals, and foreign currencies.  A variety of representations were made to investors, including that the program had a long and successful track record, that investors could expect monthly returns ranging from 4% to 6%, that Kratville had spent ten years developing the investment program, and that Warren Buffett's children invested in Elite Holdings as a result of Buffett's personal friendship with Kratville.  Ultimately, the trio raised nearly $5 million from investors.

However, the trading program was not the phenomenal success it was marketed as to investors.  Rather, from November 2006 to July 2007, Elite Holdings suffered trading losses of approximately $3 million trading futures, forex, and forex options.  Additionally, the trio misappropriated approximately $1.5 million of investor funds to pay for golf club memberships, travel and dining, and other personal expenses.  Kratville, Arrington, and Welke were each indicted on fourteen fraud charges in April 2013.

Early last week, Kratville appeared in court to admit to a single count of wire fraud.  In what is known as a plea colloquy, Kratville was advised by Judge Bataillon of the nature of the charge, the potential penalties and prison sentence resulting from the plea, and Kratville's right to proceed to trial and contest the charges.  In connection with that exchange, Kratville was also asked a series of questions to satisfy the court that he was making a knowing, intelligent, and voluntary guilty plea.  Kratville's responses were increasingly non-committal and wavering, including that he "failed to correct" false statements contained on Elite Holdings' website and that he "assumed" that the wire transfer constituting the basis for the wire fraud charge had been consummated.  Judge Bataillon refused to accept the guilty plea, observing that

“To plead guilty, he has to admit he violated the law. And I am not hearing that."

Both Arrington and Welke successfully (and on their first try) entered a guilty plea to a single wire fraud charge.  Under the terms of Arrington's plea agreement, prosecutors agreed to recommend a maximum prison term of eight years.  Each of the men is also the subject of civil proceedings brought by the Commodity Futures Trading Commission. 

 

Sunday
Dec072014

30-Year Sentence For Michigan Man Who Ran $46 Million Ponzi Scheme

“He created the books, he ran the fraud, he’s the mastermind behind the scene.  He’s not the victim. He’s one of the worst kinds of financial predators. He’s so arrogant he thinks he’s infallible.”

- Assistant U.S. Attorney Matthew Borgula 

A Michigan man who started his own Ponzi scheme after discovering that he had been entrusting investor funds to a collapsed Ponzi scheme learned that he will spend the next 30 years in federal prison.  David McQueen, 44, learned his fate last week from U.S. District Judge Gordon Quist, who raised doubts as to the veracity of McQueen's professed regrets.  In addition to his lengthy sentence, McQueen was also ordered to pay $36 million in restitution to victims, although any significant recovery appears highly unlikely.  A federal jury convicted McQueen of fifteen fraud charges earlier this year, and he has been is custody since the verdict awaiting sentencing.  

McQueen initially began investing in a Florida company known as Maximum Return Transactions ("MRT").  Operated by James Clements and Zeina Smidi, MRT promised investors monthly returns ranging from 5% to 11% from trading in foreign currencies.  Beginning in 2006, McQueen began receiving 10% monthly returns from MRT.  After receiving the promised returns for several months, McQueen devised a plan to recruit investors to MRT through his connection and promised monthly returns of 5% (with McQueen pocketing the remaining 5%).  McQueen's entity, Accelerated Income Group ("AIG"), also recruited insurance agents to sell the investment to their clients.  For a short period of time, this form of arbitrage was successful.

However, in mid-2007, MRT stopped making payouts to investors (and was later alleged of being a Ponzi scheme in a civil enforcement action filed by the Securities and Exchange Commission).  However, rather than notifying AIG's investors of the failure of MRT, McQueen continued soliciting investors with promises of the lucrative monthly returns.  In an attempt to reconstruct the returns from MRT, McQueen placed nearly 1/3 of investor funds in a variety of speculative investments that resulted in severe losses.  Despite these losses, investors continued to receive falsified account statements showing consistent account gains.  

In August 2009, federal authorities executed search warrants and seized approximately $430,000 from McQueen.  In a last-ditch attempt to rescue his scheme, McQueen took approximately $400,000 in hidden funds from a New Zealand bank account to make more speculative investments - which also failed.

Prosecutors have been unable to recover any significant amount of investor funds, and have estimated that a best case scenario for victims is "small checks over time."

Thursday
Dec042014

Authorities Charge "Bernie Madoff of Orange County" With $11 Million Ponzi Scheme

A California man dubbed as the "Bernie Madoff of Orange County" by the California Department of Insurance, along with his female co-worker, have been arrested and charged with dozens of felonies for what authorities allege was a $11 million Ponzi scheme.  Joseph Francis Bartholomew, 75, was charged with one felony count of the use of a device or scheme to defraud and 28 felony counts of using an untrue statement in the purchase or sale of a security with sentencing enhancements for aggravated white collar crime over $500,000 and loss greater than $3.2 million.  Wendy King-Jackson, 54, was charged with one felony count of the use of a device or scheme to defraud and two felony counts of the use of an untrue statement or omission in connection with the purchase or sale of a security with sentencing enhancements for aggravated white collar crime over $500,000 and loss greater than $3.2 million.  The California Department of Insurance has characterized the alleged scheme as one of the largest Ponzi schemes they have ever investigated.  The two were arraigned on the charges earlier today.

Bartholomew owned and operated MBP Insurance Services ("MBP"), where Jackson worked as an insurance agent.  Beginning in July 2005, MBP pitched potential investors on the ability to purchase products based on fraudulent insurance policies that offered above-average rates of return that often ranged from 15% to 40%.  Investors were led to believe that the investments were legal and legitimate, and were not informed that MBP had not been authorized by the California Department of Corporations.  In total, at least 27 investors entrusted over $11 million to MBP and Bartholomew, including a former Major League Baseball player.

However, Bartholomew is accused of running a Ponzi scheme by using incoming investor funds to pay promised returns to existing investors.  Beginning in September 2011, certain investors failed to receive their promised regular interest payments from MBP and, by September 2013, MBP was no longer making any monthly investor payments.

Bartholomew, who faces up to 42 years in prison if convicted of all charges, is currently being held on $11.3 million bail.  In order to be released on bond, Bartholomew must demonstrate that the posted bond must not be traceable to criminal activity.King-Jackson faces a maximum 16-year sentence.

Wednesday
Nov262014

Ponzitracker Selected As Top 100 "Blawg" By ABA Journal

The ABA Journal has announced the inclusion of Ponzitracker in its annual compilation of the top 100 legal blogs on the internet.  The 8th Annual ABA Journal Blawg 100, compiled by staff and reader submissisions, was selected from more than 4,000 "blawgs" maintained in the site's "blawg directory."  This is the second year that Ponzitracker has been included in the Blawg 100.  In addition to being featured in ABA Journal's current magazine issue, readers are also invited to submit their votes for the top "blawg" here until December 15, 2014.

Ponzitracker is honored to be included in the Blawg 100.  The blog was originally started with the simple goal of serving as an eduational and informational resource for those interested in Ponzi schemes, both nationally and internationally.  While focusing solely on news articles at its inception in 2011, the blog has since expanded to include maps of current and previous Ponzi schemes, rankings of top schemes, and a comprehensive (and free!) database of legal pleadings plucked from dozens of Ponzi receiverships and bankruptcy proceedings.  

Additionally, in 2014, Ponzitracker announced several new features, including top investor recoveries in Ponzi schemes and the Ponzi Database - an extensive and exhaustive compilation of all Ponzi schemes reported during the last six years.  The resource, which is free, not only includes relevant information about each scheme but has also enabled the analysis of various underlying trends which provide a previously-unavailable insight into the proliferation and scale of these financial frauds.  

In short, thank you to those who have made Ponzitracker a regular on your blog list.  Please consider casting your vote for the top "blawg" here.  Remember voting ends December 15, 2014.

Saturday
Nov222014

Ponzi Victims Successfully Recover $1.4 Million From Net Winner In $100 Million Ponzi Scheme

Victims of the largest Ponzi scheme in Ohio history will now recover at least a small portion of their losses after reaching a settlement to recover $1.4 million in "false profits" received by a more fortunate investor.  Glen Galemmo, a former money manager currently serving a 15-year prison sentence, took in more than $100 million from hundreds of investors who trusted the Ohio man's promises of above-average returns through investments in undervalued stocks.  While authorities have not sought the appointment of a receiver to collect assets for victims, a pair of Cincinnati attorneys have spearheaded efforts to recover funds that might be used to temper losses.

The Scheme

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities. Touting himself as an experienced trader, Galemmo promised outsized returns through investments in stocks, bonds, futures, and commodities.  Investors were told Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Galemmo assured investors that Queen City was audited annually, and provided monthly statements showing steady returns.  Galemmo raised more than $100 million from individuals, trusts, and even charities.

However, Galemmo's touted trading prowess was pure fiction.  Instead, Galemmo used new investor funds to pay his promised returns - a classic hallmark of a Ponzi scheme.  Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003.  Investors received fictitious account statements, and Galemmo paid himself tens of millions of dollars in fictitious management fees, which he used to purchase real estate, pay fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes. 

The scheme collapsed in July 2013 when investors received an email from Galemmo stating that the funds were shutting down and directing all further inquiries to an IRS agent.  Victims filed a lawsuit later that month, and Galemmo was later arrested.  He agreed to plead guilty shortly thereafter, and recently received a 15-year sentence.  

The prospect of recovery for victims appeared bleak, with one source reporting that the Department of Justice has estimated that victims could recoup 10% to 20% of their investment.  Authorities were able to quickly seize what remained of Galemmo's assets, which included over $500,000 in cash, various real estate including a condo in Florida and Galemmo's former office building, and over $100,000 in automobiles.

Investors Take Matters Into Their Own Hands

Earlier this fall, the Commodity Futures Trading Commission ("CFTC") filed a civil enforcement action against Galemmo and Queen City.  While government agencies such as the CFTC and the Securities and Exchange Commission that initiate civil enforcement actions typically request the appointment of a receiver when there appear to exist substantial assets that could be recovered and later distributed to victims, here the CFTC did not request the appointment of a receiver.

One of the largest sources of recovery for victims of Ponzi schemes typically comes from lawsuits against scheme investors fortunate enough to ultimately profit from their investments.  Aptly known as "clawback" suits in Ponzi jurisprudence, the suits seek recovery of "false profits" consisting of amounts in excess of that investor's net investment in the scheme.  Because the scheme operator does not generate the promised returns from legitimate activities, these transfers are nothing more than the redistribution of new investor funds.  While extensive caselaw generally recognizes that clawback targets can keep the amount of transfers adding up to their total investment in the scheme (absent signs that the investor did not act in good faith in receiving the transfers), the law is clear that any receipt of funds over an investor's net investment can be recovered as "false profits."  

One of the "net winners," as they are known, in Galemmo's scheme was Michael Willner.  Willner was one of Galemmo's original investors, whose initial investment of several million dollars allegedly multiplied several times according to fictitious account statements provided by Galemmo.  Willner also allegedly served as a recruiter for new Galemmo investors, and the lawsuit alleged that Galemmo paid commissions to Willner for referred investors.  Willner allegedly withdrew "millions" of dollars in excess of his original investment.

Willner sent out an incriminating email to fellow investors in the days after Galemmo's announcement that the funds would be shutting down, stating: 

“To those of you that I brought into the fund you have my deepest and most sincere apologies...I am embarrassed and shamed by my actions. Like most of us I ignored the poor statements and lack of transparency in favor of the high returns. In hindsight, these warning signs should have alerted me to probe deeper and ask appropriate questions.

While Willner allegedly received "millions" in excess of his original investment, the settlement takes into account his financial condition, and also discloses that a majority of the settlement amount will come from a federal tax refund due to Willner.  The remainder will come from the sale of Willner's interest in a private company that was purportedly purchased with funds traceable to Galemmo's scheme.

The settlement seeks to create a class composed of all victims that invested with Galemmo from 2002 until the scheme's collapse in 2013.  While the motion to approve the settlement does not provide details on the disbursement of settlement funds, it is likely that some kind of claims process will have to occur and be approved by the overseeing Ohio judge.  The eventual distribution to each investor will be known only after a determination of each investor's approved loss and the total amount of losses.  

The law firm behind the lawsuit, Santen & Hughes, was the same law firm that filed the initial lawsuit accusing Galemmo of running a fraud in the wake of the scheme's collapse.  The firm has also filed other lawsuits against third parties seeking recovery for Galemmo victims, including a suit against several prominent financial institutions related to their dealings with Galemmo.  The firm was able to interview Galemmo before he reported to federal prison, and it is possible that other net winners could be pursued.  

The motion seeking approval of the settlement is below:

Galemmo - Joint Motion for Order Preliminarily Approving Class Action Se... (2)