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Recent SEC Releases
Friday
Feb012019

New Jersey Couple Accused Of $5 Million Ponzi Scheme

A Princeton couple has been accused by New Jersey authorities of running a $5 million Ponzi scheme to fund a lavish lifestyle that included "country clubs, private schools, and tropical vacations."  Ford and Katherine Graham were named in a lawsuit filed by the New Jersey Bureau of Securities accusing the couple of numerous violations of the New Jersey Uniform Securities Law.  The complaint seeks disgorgement of any profits, restitution for investors, imposition of civil penalties, and injunctive relief. 

Ford Graham controlled and operated a number of companies including CCC Holdings, Specialty Fuels Americas, LLC, Aries Energy Group Venture, LLC, Rattler Partners, LLC, and Vulcan Energy International, LLC (the "Companies").  Beginning in 2013, Graham solicited investors for the companies through promises that their funds would be used for specific oil and gas projects carrying little to no risk.  For example, one purported project claimed that investor funds would be used to acquire a controlling interest in a company that purportedly had a claim against oil company British Petroleum deriving from the 2010 oil spill in the Gulf of Mexico that was worth between $7 million and $9 million.  Another investment opportunity promised guaranteed 6% annual returns from a "Dominican Republic Oil Transaction," while yet another investment promised that funds would be used to build a tank.  In total, Graham raised more than $5 million from unsuspecting investors.

According to the New Jersey Bureau of Securities, Graham's claims were false and in reality investor funds were used to perpetrate a Ponzi scheme in which new investor funds were used to pay purported returns and distributions to existing investors as well as funding the Grahams' lavish lifestyle.  The complaint details the alleged misappropriation of investor funds from various investments, including transfers to other investors and to Katherine Graham, spending at an Antiguan resort and at the couple's country club, and payments to the private school where the Grahams' child attended.  While Ford Graham is accused of playing a primary role in recruiting investors, the complaint also alleges that Katherine Graham - who received a law degree from Tulane University - encouraged at least one investor to invest based on the safety of the investment, that she was also planning to invest, and that time was of the essence if the investor wanted to realize the promised return. 

A copy of the complaint is below:

Graham Filed Complaint by on Scribd

Monday
Jan282019

Ninth Circuit Allows Recovery Of Investor Referral Fees Paid In $120 Million Ponzi Scheme

A federal appeals court has ordered that a receiver can recover referral fees paid to a Ponzi scheme investor who referred friends and family to the scheme because those referral services did not provide value to the scheme.  The U.S. Court of Appeals for the Ninth Circuit issued a decision in Hoffman v. Markowitz affirming the district court's previous award of partial summary judgment in favor of the court-appointed receiver over Nationwide Automated Systems, Inc. (NASI).  While the Ninth Circuit declined to find that the referral fees are "per se voidable" and issued an unpublished opinion, the decision may provide a template for receivers to pursue similar fees in ongoing and future actions.

The Scheme

NASI raised more than $120 million from roughly 2,000 investors with the promise of guaranteed returns of 20% for each automated teller machine (ATM) an investor purportedly purchased and leased back to the company.  Each investor signed a contract memorializing their investment which included the serial number and location of each ATM but also prohibited the investor from "interfering" with the ATM's operation by contacting any location where the ATM was installed or any ATM service provider. 

A bank account analysis showed that NASI raised more than $120 million from January 2013 to August 2014 alone.  After NASI began bouncing checks to investors in August 2014, the Securities and Exchange Commission brought an emergency enforcement action and obtained the appointment of William Hoffman as Receiver.  Gillis and Wishner were later arrested and sentenced to prison terms of ten and nine years, respectively.

The Markowitz Clawback Suit

In addition to the promised sizeable returns, NASI also paid a referral fee of $500 to $1,000 to each investor or non-investor who referred investors to the scheme.  The district court granted the receiver's request to pursue clawback claims against various third parties including those who received referral fees.  The receiver filed suit against Howard Markowitz and alleged that Markowitz received nearly $750,000 in referral fees from NASI.  The district court entered partial summary judgment in the receiver's favor in August 2017 and allowed the recovery of all referral fees paid to Markowitz, and that decision was appealed.  

On appeal, the Ninth Circuit noted that the California Uniform Voidable Transactions Act (CUVTA) made payments from a Ponzi scheme to a third party voidable when made with either actual or constructive intent unless the transferee could show that they received the transfer in good faith and that they provided reasonably equivalent value for the transfer.  Here, the receiver alleged that the referral fees were voidable under CUVTA because Moskowitz's referral services provided no value to NASI investors and instead only served to further deepen the scheme's insolvency through the increase in underlying liabilities. Other courts around the country have split on this issue, but the receiver urged the Ninth Circuit to follow the decision reached by the U.S. Court of Appeals for the Fifth Circuit in Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) which held that referral services for a Ponzi scheme did not provide any value to the scheme.  

The Ninth Circuit declined to adopt a brightline rule holding that referrals to a Ponzi scheme are "per se voidable because they never provide value," but did observe that Markowitz conceded that the only service he provided in return for the referral fees was the referral of new investors to the scheme. Based on these facts and the reasoning in Warfield, the Court sided with the receiver and affirmed the district court's finding that Markowitz was required to disgorge nearly $750,000 in referral fees to the receiver.  While the decision was not published and cannot serve as binding precedent, it is yet another tool available to receivers seeking to maximize recovery for defrauded victims. 

A copy of the Ninth Circuit's opinion is below:

 

17-56290 - hoffman v markowitz by on Scribd

 

 

Friday
Jan252019

Ponzi in Paradise? Florida Keys Men Accused Of $7 Million Ponzi Scheme

Three Florida Keys residents were arrested by state authorities and accused of running a Ponzi scheme that duped investors out of at least $7 million.  Jose Luis Leon, 56, Richard Renner, 56, and Natalie Marie Rogers, 53, were arrested earlier this month on charges of racketeering, conspiracy to commit racketeering, securities fraud, organized fraud, and 1st degree grand theft.  The trio could face significant prison time if convicted of all charges, as the racketeering charges alone carry a maximum 30-year prison sentence.  The charges come after at least five victims filed civil suits against the company and obtained judgments.  

Renner and Leon were the general partners of Strategic Holdings Group Ltd. ("SHG"), a Florida company organized in 2001.  In allegations by authorities and various civil lawsuits against SHG, Leon and Renner purportedly solicited investors through word-of-mouth and advertising by claiming to pay annual returns exceeding 8% (and in some instances 3% quarterly) through various investments including oil-and-gas ventures and the funding of an international bank.  Investors were required to reinvest all purported profits into their account for a one-year "lock up period," after which they could request a withdrawal of any earnings.  While little is known about SHG’s purported victims, one civil suit alleges that Leon's brother-in-law was a victim.  Below is a "Fact Sheet" that was distributed to at least one investor:

While investors were provided with periodic statements showing their account balance and consistent earnings, investors apparently began encountering difficulties in withdrawing their funds beginning no later than 2016.  SGH was administratively dissolved in 2017, and one investor alleged in a civil suit that Leon's father-in-law had called Leon a "crook" and indicated that Leon's house was in foreclosure.  At least five investors sued SGH, Renner, and Leon for their failure to return their funds and have since obtained final judgments totaling more than $2 million.

According to the Florida Office of Financial Regulation, SGH operated a Ponzi scheme whereby investor funds were misappropriated by Leon and Renner for personal expenses including mortgage payments, credit card bills, and cash withdrawals.  

Leon and Renner remain jailed on $1 million bond each while the Miami Herald reports that Rogers is free after posting $30,000 bail.  

Friday
Jan112019

Stanford Ponzi Victim Ordered To Return Entire $79 Million Principal Investment To Receiver

Allen Stanford's Mug ShotOften in the aftermath of a Ponzi scheme once the dust has settled and a Receiver or Trustee has taken stock of the remnants of what was once touted as a guaranteed and safe investment opportunity, the focus shifts to what assets could potentially be recovered for the benefit of defrauded victims.  One of the most common recovery mechanisms is to attempt to "clawback" any amounts transferred to investors in excess of their original investment - often called "false profits."  But in rare situations, investors have been targeted for the return of their entire principal investment based on allegations that they allegedly lacked good faith when they received that principal amount.  Recently, a federal appeals court determined that the receiver overseeing R. Allen Stanford's failed $7 billion Ponzi scheme was entitled to recover a Stanford investor's entire $80 million principal investment because the victim failed to act in good faith.  The decision is notable not only because of its rarity but also because the SEC initially opposed the Stanford receiver's plans to target certain investors' principal investments.

Stanford's Scheme and the Receiver's Appointment

"Everybody who got money from Stanford has two things in common: One, they don't want to give it back. Two, they claim they're completely innocent and had no idea anything untoward was going on,"

Janvey attorney Kevin M. Sadler

Stanford's scheme advised clients from 113 countries to purchase more than $7 billion in certificates of deposit from the Stanford International Bank ("SIB") in Antigua.  The SEC instituted civil proceedings in February 2009, and a receiver, Ralph Janvey, was appointed to marshal assets for victims.  Criminal charges were brought later that year, and Stanford is currently serving a 110-year prison sentence for what is considered one of the largest Ponzi schemes in history.   

Following his appointment, Janvey filed numerous clawback lawsuits against victims and other third parties that he contended wrongfully received illicit scheme proceeds.  The suits, brought under Texas's passage of the Uniform Fraudulent Transfer Act ("TUFTA"), alleged that the transfers to the investors were made with the actual or constructive intent to hinder, delay, or defraud, and that equity requires that those profits be returned to the receivership where they may be distributed in a pro rata fashion to those less-fortunate investors. Proceeding under a theory of actual intent to hinder, delay, or defraud, which can be satisfied through the finding that the perpetrator operated a Ponzi scheme, shifts the burden to the clawback defendant to demonstrate both that they showed good faith and provided reasonably equivalent value for the transfers.

In analyzing reasonably equivalent value, courts have made a distinction in analyzing whether the transfer encompassed an investor's principal investment or profits in addition to that investment.  Courts have found that an investor can provide reasonably equivalent value for any amount up to that investor's principal investment because the return of those funds extinguishes that victim's claim for return of their principal.  Of course, an investor must still demonstrate good faith in receiving those transfers in order to satisfy their defense under TUFTA.  However, courts have found that an investor cannot provide reasonably equivalent value for their receipt of distributions in excess of their original investment - often called "false profits" because they are typically funds from other investors - and courts routinely allow recovery of those false profits under TUFTA or other theories.  

Janvey's decision to file clawback suits was unique in that the SEC opposed any clawback suits seeking to recover an investor's partial or full principal investment.  After Janvey indicated in his April 2009 Report that such efforts could potentially recoup more than $300 million in transfers, the SEC filed an Emergency Motion seeking to modify the Order Appointing Receiver to prohibit Janvey from pursuing clawback actions against innocent investors because those suits "contravene[d] Commission practice and [was] supported by neither logic nor the law."  Like the courts' analysis of clawback suits, the SEC also drew a distinction between suits seeking false profits - which it supported - and suits targeting "innocent" investors for the return of principal - which it did not support.  The Court ultimately denied the SEC's motion and allowed Janvey's suits to go forward.

The Clawback Suit

Gary D. Magness and his related entities (collectively, "Magness) were one of Stanford's largest U.S. investors, purchasing $79 million in Stanford CDs between December 2004 and October 2006 - several years before the scheme's collapse.  Following a July 2008 Bloomberg report that the SEC was investigating Stanford, Magness's investment committee decided at an October 2008 meeting to seek, at a minimum, the accumulated interest owing on Magness's investment.  Magness has maintained that this decision was not due to the Bloomberg report but rather because of his own mounting liquidity issues in the run-up to the financial crisis. 

After Magness's financial advisor approached Stanford's issuing bank for a redemption, Magness ultimately received approximately $88.2 million in cash later that month as purported "loans" repaid by the accrued interest and principal investment.  This amount included approximately $8.5 million in purported profits on Magness's CD investment.  Stanford was charged by the SEC several months later.

Janvey sued Magness to recover all $88.2 million he had received before SIB's collapse.  Magness subsequently returned the $8.5 million he had received in "false profits" following the Court's award of partial summary judgment to the Receiver for those transfers. The case ultimately went to a jury to decide whether Magness had received the returns constituting his principal investment in good faith.  The jury decided that Magness had inquiry notice that Stanford's bank was engaged in a Ponzi scheme, but not actual notice.  Inquiry notice was defined in the jury instructions as:

[K]nowledge of facts relating to the transaction at issue that would have excited the suspicions of a reasonable person and led that person to investigate.

In what would be the focus of appellate efforts, the jury also concluded that any investigation by Magness would have been futile.  The jury instructions defined a futile investigation as when:

a diligent inquiry would not have revealed to a reasonable person that Stanford was running a Ponzi scheme.

Notwithstanding the jury verdict, The Receiver asked the lower court to enter judgment in his favor and argued that the jury's finding of inquiry notice defeated Magness's good faith defense under TUFTA.  The court denied that motion, finding the Receiver was only entitled to recover Magness's $8.5 million in false profits, and the Receiver appealed that Order to the Fifth Circuit.

The Appeal

The Receiver's main argument on appeal was that the trial court had impermissibly created a "futility exception" to TUFTA's good faith defense.  That futility exception derives from bankruptcy law where courts interpreting the Bankruptcy Code's fraudulent transfer provision (11 U.S.C. 548(c)) have allowed a transferee to rebut a finding of inquiry notice by demonstrating that the complexity of the fraudulent scheme would have rendered any investigation futile.  Despite TUFTA's silence on the topic, the district court held that a transferee with inquiry notice must conduct a diligent investigation into the facts giving rise to the inquiry notice or otherwise that any investigation would have been futile.  

The Fifth Circuit noted that the Texas Supreme Court had not addressed whether or not TUFTA's good faith provision requires a diligent investigation or corresponding futility exception.  In reviewing other relevant and persuasive decisions, the Fifth Circuit noted that:

in fact, no court has considered extending TUFTA good faith to a transferee on inquiry notice who later shows an investigation would have been futile.

Even though TUFTA was based on the Bankruptcy Code's fraudulent transfer provision under Section 548, the Fifth Circuit noted that it had previously declined to rely on that provision to interpret good faith under TUFTA.  This, the Court reasoned, was supported by the absence in Section 548 or its legislative history of any definition of good faith as well as the lack of clear consensus from other courts as to the application of a good faith defense or the corresponding availability of a futility exception under Section 548.  In declining to find the availability of a futility exception to TUFTA's good faith requirement, the Fifth Circuit concluded that 

No prior court considering TUFTA good faith has applied a futility exception to this exception, and we decline to hold that the Supreme Court of Texas would do so.

Implications

Assuming that the Fifth Circuit's decision withstands any appellate scrutiny, the holding presents potentially enormous ramifications in Ponzi scheme jurisprudence.  In essence, the decision allows a trustee or receiver to point to a news article or other red flag and then argue that any principal redemptions subsequent to that event were done on inquiry notice and thus deprive that transferee of the good faith defense.  This is important because the vast majority of investors in a Ponzi scheme are not fortunate enough to receive enough distributions to exceed their principal investment and previously would not typically have been subject to a receiver's scrutiny or clawback efforts.  The potential for principal distributions to now be within a receiver's grasp upon the existence of a certain event placing any recipients on inquiry notice greatly expands both the potential number of clawback targets as well as the ultimate size of the receiver's recoveries.  

A copy of the Fifth Circuit's decision is below:

 

Janvey v Magness by jmaglich1 on Scribd

 

Janvey v Magness by on Scribd

 

 

Wednesday
Jan092019

Saying "Restitution Comes First," Judge Slashes Prison Sentences For Brothers Convicted Of Running Ponzi Scheme

"The longer you're incarcerated, the longer the victims go without any money...Restitution comes first." 

- Ingham County Judge Rosemarie Aquilina

A Michigan judge drastically reduced the sentences of twin brothers convicted of operating a multi-million dollar real estate Ponzi scheme, reasoning that their ability to pay restitution to defrauded victims weighed in favor of a reduced prison sentence.  James and Thomas Mulholland had their 10-to-20 year prison sentence reduced to 3.75-to-20 years by Ingham County Circuit Court Judge Rosemarie Aquilina after an appellate court vacated the brothers' previous sentence over an error in applying sentencing guidelines.  With the new lower sentence range and because they have been in prison since 2016, the brothers will be eligible for parole in mid-2020.

The Mulholland twins - who incredibly are one of at least three sets of twins accused of running Ponzi schemes (see here and here) - were convicted by a Michigan jury in 2016 of eight charges stemming from their operation of Mulholland Financial.  The company, which they started in 1987, invested in residential real estate in Michigan.  Shortly after forming the company, the Mulhollands began raising money from investors to purportedly buy, maintain, and rent residential housing.  Prospective investors were promised a guaranteed 7% annual return which would purportedly be generated from company profits.  The Mulhollands recruited clients of thier insurance business as well as those clients' friends and relatives, and many of those clients were retirees with limited or no investment experience.  Despite Mulholland Financial's dissolution in 2006, the brothers continued raising funds until 2010.

Perhaps unsurprising given the company's real estate focus, the financial downturn was devastating to Mulholland Financial and resulted in the twin brothers filing bankruptcy in February 2010.  In late 2012, the Securities and Exchange Commission filed a civil enforcement action against the brothers alleging that they conducted a fraudulent and unregistered securities offering and accusing them of making numerous misrepresentations about the business and the use of investor funds.  For example, despite the brothers allegedly telling investors in late 2009 that the business was doing well and would be expanding soon, the SEC alleged that Mulholland Financial had been experiencing financial hardship since at least January 2009 and frequently operated at a loss during 2009.  The SEC also alleged that the brothers used investor monies raised in 2009 to, among other things, "shore up their money-losing business" and make repayments to existing investors - the hallmark of a Ponzi scheme.  The Mulhollands consented to the entry of final judgments in 2012 ordering them to pay disgorgement and civil monetary penalties.

The Mulhollands were later charged by Michigan authorities several years later.  After an August 2016 trial where a jury convicted the brothers of eight charges, a sitting Ingham County judge sentenced each of the brothers to 10-20 years in prison and ordered them to pay approximately $200,000 in restitution.  The restitution paled in comparison to the estimated $18 million in losses because Michigan law limits the awarding of restitution only to victims whose cases resulted in the conviction.  The Michigan Court of Appeals vacated the brothers' sentences last year over errors in the application of applicable sentencing guidelines, including the improper maximum scoring for one scoring variable that allowed an increase where victims experienced serious psychological injuries.  At a hearing this week, Judge Aquilina observed that keeping the Mulhollands in prison would only delay their ability to pay the $208,000 in restitution they owe to victims and reduced the twins' sentences to 3.75-to-20 years in prison.  

The brothers will be eligible for parole in mid-2020.