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Recent SEC Releases
Saturday
Jan312015

Authorities: Bankrupt Canadian Company Was $75 Million Ponzi Scheme

Five Canadian nationals have been charged with operating a massive Ponzi scheme through a now-bankrupt short-term lender and financier.  Founder David Burns Holden, 52, his wife Rosa Holden, 57, and executives Anthony Consentino, Andrew Gaudet, and Edmond Chin Ho were  charged with money laundering, fraud, and an offense of criminal organization. David and Rosa Holden also face three bankruptcy and insolvency act charges.  Each are scheduled to appear in court on March 2, 2015.

Holden founded and operated Seaquest Corp. and Seaquest Capital Corp. (collectively, "Seaquest"), which told prospective investors that they could realize lucrative returns of up to 36% annually through profitable short-term secured loans carrying high rates of interest to borrowers that could not qualify for traditional bank financing.  Operating under a slogan "Managing to Outperform," the companies touted Holden's experience in the financial industry, including studies at the prestigious Richard Ivey School of Business.  In total, hundreds invested at least $92 million with Seaquest.

However, Seaquest declared an intent to file bankruptcy in late 2011, indicating that its liabilities outstripped its assets by at least $50 million.  After efforts failed to secure a viable restructuring plan, the company was declared bankrupt in late 2011.  At that time, the Canadian government began investigating the circumstances behind Seaquest's demise.  It was discovered that Holden had previously served time in prison not once, but twice, for fraud-related offenses, including a six-year stint in 2000 for investment fraud.  

A chief restructuring officer appointed over Seaquest issued a dim view of the company in November 2011:

The investment portfolio is comprised of a large number of highly speculative and illiquid loans and shareholdings, the majority of which consist of loans and advances to non‐arm’s length companies, indirect subsidiaries and affiliated companies.  Most of the loans are unsecured.   The few secured loans are to companies that are themselves underperforming, inactive or insolvent.   None of the portfolio investments is being serviced at the present time.  In summary, there is little or no prospect for meaningful recovery in the short term, or over the long term of the investment portfolio, without additional funding.   

Additionally, it was observed that "Seaquest appears to have incurred substantial operating losses that have been funded, at least in part, by portfolio investors."  Ultimately, it was determined that Seaquest owed dozens of creditors more than $75 million.

A three-year investigation by the Royal Canadian Mounted Police culminated in the charges that Seaquest was operating a massive Ponzi scheme that ultimately collapsed over mounting liabilities.    

The chief restructuring officer's November 2011 summary of Seaquest is below:

Thursday
Jan292015

After Sentencing Delay Over Undisclosed Assets, Illinois Man Gets 25-Year Sentence For $34 Million Ponzi Scheme

A day after his original sentencing was postponed over revelations that as much as $1 million in undisclosed assets might be stashed in the Caribbean, an Illinois man was sentenced to serve twenty-five years in prison for a Ponzi scheme that took in more than $100 million from hundreds of investors and ultimately resulted in over $34 million in losses.  Daniel Spitzer, 55, received the sentence from U.S. District Judge James Zagel after previously pleading guilty to ten counts of mail fraud in July 2014 on the eve of trial.  While Spitzer expressed remorse for his actions, Judge Zagel was not swayed and handed down a sentence that he felt represented the "severe" damage inflicted on Spitzer's victims.  

Spitzer owned and operated multiple entities, including Kenzie Financial Management, Kenzie Services, LLC, Draseena Funds Group, Corp., DN Management Company, LLC, and Nerium Management Company.  Through these entities, he controlled twelve investment funds (the "Kenzie Funds") that purported to be engaged in various forms of foreign currency trading.  Beginning around 2004, Spitzer and Alfred Gerebizza, a sales agent for the Kenzie Funds, solicited investors based on representations that the Kenzie Funds were worth hundreds of millions of dollars, had never lost money, and in fact had achieved annual returns ranging from 4.5% to 13.54% from 2004 to 2009.  Spitzer told investors that he specialized in world currencies - which he claimed was the largest asset class in the world.  Investors were assured that Spitzer had numerous risk management mechanisms in place, and that their funds would be conservatively invested whilst providing lucrative returns. In total, more than $105 million was raised from over 400 investors.

However, Spitzer was not the forex trading whiz he professed to be.  Nor were investor funds used for their stated purpose.  Instead, Spitzer ran a classic Ponzi scheme whereby he raised funds under false pretenses and subsequently used those funds as his own personal piggy bank to support a lavish lifestyle that included residences in Illinois and the Caribbean and gambling trips to Las Vegas with expenses totaling nearly $1 million.  Spitzer also paid out approximately $71 million in Ponzi-style payments to investors that purportedly represented earned interest and principal redemptions, as well as millions of dollars in commissions to sales agents.  

Spitzer was charged both civilly and criminally in 2010, and subsequently pleaded guilty to the criminal charges in July 2011 while his co-conspirator, Gerebizza, was convicted of fraud in July 2014 and is currently awaiting sentencing.  

While Spitzer was originally scheduled to be sentenced yesterday, Judge Zagel ordered the sentencing postponed when Spitzer's lawyer informed the court that he had recently learned that as much as $1 million in undisclosed assets existed in the form of securities being held offshore in St. Vincent.  At Spitzer's sentencing, Judge Zagel indicated that those assets would be recovered and added to the pot of assets set aside for restitution to Spitzer's defrauded victims.  

The Superseding Indictment is below:

Spitzer Indictment

Wednesday
Jan282015

Extradited From Brazil, Florida Man Denied Bail For Alleged $300 Million Ponzi Scheme

Ten years after Billboard Magazine rated his concert promotion business the third largest in the world, a Florida man recently extradited from Brazil will remain jailed until he can face trial on charges that he operated a $300 million Ponzi scheme after being deemed a flight risk by a U.S. Magistrate Judge.  Jack Utsick, 72, appeared in a Miami federal courtroom earlier today in an effort to persuade U.S. Magistrate Judge Edwin Torres to allow him to remain free until he could face trial on multiple criminal charges filed after he fled to Brazil in 2007.  Accused of a $300 million Ponzi scheme, Utsick's attorney unsuccessfully attempted to secure his client's release by informing the Court that "even Bernie Madoff got bail." However, Madoff, unlike Utsick, confessed his scheme to authorities and did not flee to a country notorious for its lenient stance on extradition.  Utsick potentially faces decades in prison if convicted of the nine counts of mail fraud filed by prosecutors.

Utsick formed The Entertainment Group Fund, Inc. ("TEGFI") in 1994, which he used to produce concerts and other stage productions often using the trade name, "Jack Utsick Presents."  Utsick later formed Worldwide Entertainment, Inc. ("Worldwide") in 2003, which he operated in the same fashion as TEGFI and which later became his principal entity to conduct his business of promoting and producing tour-related concert and stage productions and other entertainment ventures.  These projects included theatrical productions and concerts for well-known artists such as Shania Twain, Elton John, Santana, The Pretenders and Aerosmith.  To finance the often-significant upfront costs of these entertainment ventures, Utsick often sought to raise funds from potential and existing investors.  

Beginning in 2003, Utsick and his entities would form separate limited liability companies ("LLCs") which represented one of his planned entertainment ventures.  Utsick provided various written materials to investors, including promissory notes and private placement memoranda, and promised investors eventual interest payments often ranging from 15% to 25% that purportedly would be derived from the revenues generated from the applicable entertainment venture.  These investments were usually for a term of a year or less, and Utsick often convinced investors to roll-over their principal and supposed "profits" into additional investments.     

However, despite Utsick's claims that these ventures would yield significant profits to investors, the reality was that nearly all of the shows produced by Utsick in fact lost money (and at least one project was never even produced).  While investors were told that their funds were invested in a certain project, Utsick commingled all investor funds in two operating accounts which he used for the payment of all personal and business expenses.  Utsick paid millions of dollars in commissions to Robert Yeager and Donna Yeager for their efforts to recruit potential investors, and also diverted investor funds to an options trading account where he suffered at least $17 million in trading losses.  Authorities estimate that over 3,000 investors may have suffered collective losses of at least $300 million.

The Securities and Exchange Commission charged Utsick with multiple violations of federal securities laws in April 2006, and a receiver was appointed over TEGFI, Worldwide, and two entities controlled by the Yeagers.  The receiver, Michael Goldberg, grappled with multiple unique issues including ownership and lease interests in theaters and entertainment venues nationwide, as well as the discovery that the receivership entities had pledged millions of dollars to finance a National Lampoons movie.  Goldberg even ended up suing Paris Hilton for her alleged failure to promote the movie in breach of her contractual obligations - ultimately winning a $160,000 judgment.  To date, Goldberg has returned approximately $35 million to eligible victims representing a pro rata return of 21.37% of allowed claims.  The receivership website is here.

After the filing of the Commission's enforcement action, Utsick fled to Brazil when it became apparent that criminal charges were imminent.  After criminal charges were filed, Utsick sought to obtain Brazilian citizenship in an effort to thwart extradition.  The United States and Brazil signed a treaty in 1964 that provides for the extradition of anyone accused of a crime with a maximum sentence of one year or more (the equivalent of a felony).  However, Brazil amended its constitution in 1988 to prohibit the extradition of Brazilian citizens to any country, leaving the possibility of extradition available only for those with proven involvement in the narcotics trade.  Nearly 30 years later, Brazil's official policy remains to prohibit the extradition of its citizens.  Utsick's attempt at citizenship was unsuccessful, and he was ultimately held in custody for 18 months before being extradited back to the U.S. in December 2014.  

Utsick's next court appearance is Monday, February 2, 2015 for his arraignment on nine counts of mail fraud.

The superseding criminal complaint against Utsick is below:

Jack Utsick Superseding Indictment

 

 

 

Tuesday
Jan272015

SEC Charges Wisconsin Man With $10.4 Million Ponzi Scheme

A Wisconsin man was charged by the Securities and Exchange Commission with operating a Ponzi scheme that took in more than $10 million from at least 122 investors.  Loren Holzhueter, 69, was the subject of an emergency enforcement action filed by the Commission last week alleging that Holzhueter used his connections in the local farming community and church to run a Ponzi scheme through his insurance brokerage, Insurance Service Center Inc. ("ISC").  Holzhueter and ISC are charged with multiple violations of federal securities laws, and the Commission is seeking injunctive relief, disgorgement of ill-gotten gains, civil monetary penalties, and prejudgment interest.  

According to the Commission, Holzhueter has owned a tax preparation business, Quality Tax and Accounting Services ("QTAS") since 1985.  In the 1990s, Holzhueter joined ISC, where he continued to sell his services through QTAS.  After purchasing ISC in 2004, Holzhueter attempted to rapidly expand ISC's business by acquiring other insurance agencies and taking on debt.  This expansion strategy also included raising money from family and friends, with some told that their investment would be used to open investment accounts with ISC while others were told that their funds would be used to expand ISC's operations or to buy out business partners.  Holzhueter promised these investors varying fixed annual rates of return ranging from 2% to 8%, and assured them that they could withdraw their investments at any time or that they could "reinvest" the interest by declining to withdraw the interest payments from their accounts.  Some investors were provided with a periodic "Summary Sheet" showing the terms of their investment and the balance at a given date.

However, the Commission alleged that Holzhueter was operating the classic Ponzi scheme by intermingling investor funds for a variety of undisclosed uses, including the funding of general operations, payroll for ISC's employees, personal expenses for Holzhueter, and the payment of Ponzi-style payments to existing investors purportedly representing interest payments and/or the return of invested principal.  Nor were investors advised that, as of November 2013, the Internal Revenue Service had executed a search warrant on ISC's business and was conducting an active investigation.  Indeed, Holzhueter is alleged to have not only concealed the IRS investigation, but also to have raised nearly $3 million from additional investors.

The Commission filed its complaint on Wednesday, January 21, 2015, and a hearing was held the following  day before U.S. District Judge James D. Peterson.  Holzhueter's counsel was provided notice of the hearing, where they were permitted to present argument.  While Holzhueter's lawyers denied liability, they did concede that the Commission had set forth a prima facie showing of violations of federal securities laws in their complaint.  The Court agreed and instructed the parties to confer on the terms of a temporary restraining order to maintain the status quo, with deference given to the inclusion of language allowing ISC to continue to operate based on the fact that any repayment to defrauded investors would come from ISC's continued operations.  The Commission and Holzhueter's counsel were subsequently unable to reach an agreement on the exact language of a temporary restraining order, and both parties recently filed motions submitting alternate versions of a proposed order for the Court's entry.  One of the primary sticking points appears to be Holzhueter's request for institution of a litigation bar that would effectively insulate Holzhueter and ISC from any litigation during the pendency of the Commission's action - a provision the Commission contended would "serve only to grant ISC blanket immunity from suit without any transparency or assurances that its assets are being safeguarded for defrauded investors."

The Complaint filed by the Commission is below, as well as the competing motions for entry of a temporary restratining order:

Sec Complaint

 

Dkt 18 - Sec Motion

 

Dkt. 19 - Defs Motion for Tro

 

Monday
Jan262015

Ohio CPA Gets 21 Years For Role In $40 Million Ponzi Scheme

An Ohio man was sentenced to serve twenty-one years in federal prison for his role in funnelling investors to the massive "Black Diamond" Ponzi scheme that ultimately duped over 400 investors out of at least $40 million.  Jonathan Davey, 50, of Newark, Ohio, received the sentence from U.S. District Judge Robert J. Conrad, Jr., who remarked that Davey's conduct "was driven by greed that the Court rarely sees."  In addition to the prison sentence, Davey was ordered to pay nearly $22 million in restitution to defrauded victims.  

Black Diamond was a foreign currency ("forex") trading operation masterminded by Keith Simmons.  Beginning in 2007, and using a network of co-conspirators and feeder funds, Simmons solicited investors under the guise that their funds would be used in the purportedly highly successful Black Diamond trading platform.  Simmons quoted Bible verses in pitching potential investors while also promising 4% monthly returns that were never at risk because no more than 20% of invested funds would be at risk at any time. 

Davey served as administrator for several of the hedge funds involved in the Black Diamond Ponzi scheme, and raised over $10 million from investors though his own hedge fund, "Divine Circulation Services'.  Davey told investors that he was operating a legitimate hedge fund, and that he had conducted due diligence on Black Diamond.  However, neither was true.  Additionally, when the Black Diamond scheme began to collapse, Davey orchestrated a separate Ponzi scheme in which he raised over $5 million to use to pay fictitious 'returns' to old investors.  While investors were told that Davey managed a total of over $120 million, in reality the amount on hand was less than $1 million.  

In addition to making Ponzi-style payments to investors of nearly $20 million that purportedly represented investing returns, Davey and others diverted investor funds for a variety of unauthorized personal expenses.  In one example, Davey used an offshore shell company in Belize to fund the construction of an Ohio mansion.  Additionally, Simmons was said to have paid women for sex and furnished "lavish love condominiums" with investor funds.  Simmons was recently sentenced to a fifty-year term.