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Recent SEC Releases
Thursday
Feb282019

FBI Affidavit Claims California Solar Company Is $800 Million Ponzi Scheme

A California company that purported to build and lease mobile solar generators failed to disclose to investors that it was running a "Ponzi-type arrangement" using new investor money to pay old investors, according to an FBI agent's 60-page affidavit.  The allegations come after DC Solar Inc., owned by California residents Jeff and Paulette Carpoff, had its headquarters raided by FBI agents in December 2018 and filed for Chapter 11 bankruptcy protection earlier this month in a Nevada bankruptcy court.  According to the affidavit, which is embedded below, the company is believed to have raised approximately $810 million from at least 12 investors.

According to the FBI agent's affidavit (the "FBI Affidavit"), the Carpoffs operated two closely held businesses collectively as DC Solar beginning no later than December 2009.  DC Solar purported to be in the business of building, assembling, and leasing mobile solar generators ("MSGs"), which essentially consisted of solar panels placed on a wheeled trailer.  The company told interested investors that MSGs were in high demand from cellular companies to provide emergency power to cellular towers or to power light structures at sporting events. 

DC Solar solicited potential investors to purchase MSGs that would then purportedly be leased out by DC Solar to third parties.  The company touted the favorable tax treatment of the investment and the ability to "finance" nearly 75% of the $150,000 purchase price that would then be repaid through lease payments from third parties.  For example, the federal tax code allowed purchasers of alternative energy sources like an MSG to claim significant tax credits of up to 30% of the purchase price as well as other savings.  Investors were told that they would only have to pay $45,000 in cash of the $150,000 purchase price per MSG, with the remainder financed by a DC Solar subsidiary.  The $45,000 purchase price is also the maximum tax credit a purchaser would be able to claim from the purchase - in essence offsetting the entire initial cash outlay.  That investor would then execute a promissory note to pay the remaining 70% of the purchase price to a DC Solar entity with the understanding that the resulting lease revenues would be sufficient to cover payments on the promissory note.  As the FBI Affidavit explained,

The purported lease revenue from third parties was a critical component of the transaction because the investment funds provided no money other than that initially contributed by the investors that covered only approximately 30% of the transaction. Without some mechanism for payment of the remaining approximately 70% of the sales transaction, the transaction would facially be a sham. As such, the existence of lease revenue from third parties to Company D was required in order for the investors to obtain their tax benefits and to entice investors to make the initial investment of $45,000 per MSG.

At least 12 investors were identified that provided nearly $700 million to DC Solar through the creation of nearly three-dozen investment vehicles.  DC Solar also obtained nearly $100 million in investments from two financial institutions under similar circumstances.

Integral to DC Solar's claims to investors was its ability to generate sufficient MSG lease revenues to cover investors' promissory note payments.  Potential investors were told that DC Solar generated tens of millions of dollars in lease revenues from third parties leases comprised of both long-term and short-term lease arrangements.  

According to the FBI Affidavit, these claims were false.  As the Affidavit explains,

In truth, the evidence developed in the investigation to date demonstrates that over 90% of the money that Company D has claimed as lease revenue, and which it has used to pay the investment funds, was actually the result of transfers from Company S. The money from Company S is investor money as Company S has very little other significant sources of revenue or income other than through the investment funds. The evidence developed so far demonstrates that Company S is the primary source of income for Company D and merely pays obligations due to investors with money raised from that investor and later investors.

Based on my training and experience, I recognize the flow of investor money from Company S to Company D and then from Company D to the investment funds has permitted and continues to permit Individual 1 and others to conceal the absence of third party leases and to create the appearance that the MSGs are generating lease revenue when they are not. In my training and experience, the use of investor money to lull investors into believing the transaction is legitimate and profit making is evidence of a Ponzi-type investment fraud scheme.

In short, the Affidavit claims that more than 90% of the purported lease revenues were simply the result of circular transactions comprised of other investor funds.  The Affidavit also claimed that, in contrast to DC Solar's representations that more than 12,000 MSGs were in use as of March 2018, only 3,000 to 5,000 MSGs were actually in use.  Instead, the Affidavit alleges, the "vast majority of the MSGs that the Company has manufactured and sold to the investment funds are stored in lots throughout California..."

The Affidavit alleges that investor funds were diverted to, among other things, purchase over 20 real estate parcels and 90 vehicles, fund approximately $19 million in private jet travel, and apparently fund an independent baseball team.  That team, the Martinez Clippers, recently indicated to the league commissioner that the Carpoffs "weren’t going to be in a position to operate the team."

Ponzitracker is not aware of any response to date by the Carpoffs or DC Solar.  

The FBI Affidavit is below:

 

FBI Pleadings DC Solar 

 

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