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Recent SEC Releases
Monday
Oct172016

Another Cay Clubs Principal Indicted On Bank Fraud And Tax Charges

A Florida man is facing bank fraud and tax charges for his involvement in the alleged $300 million Cay Clubs Ponzi scheme, making him the third person to be criminally charged in what was one of the largest schemes in Florida history.  David Schwarz, 60, is facing one count of conspiracy to commit bank fraud, three counts of bank fraud, three counts of false statements to a financial institution, and one count of interference with the administration of the IRS.  Each of the conspiracy and bank fraud offenses carries a maximum 30-year term, while the interference offenses each carry a maximum three-year term.  Schwarz has been freed on bond, which interestingly was immediately appealed by prosecutors.  

Cay Clubs Scheme

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Dave Clark served as Cay Clubs' chief executive officer, while his wife Cristal Clark served as a managing member and the company's registered agent.  Schwarz served as CFO of Cay Clubs.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxury resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company was alleged to have lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs allegedly used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  While the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Schwarz and others alleging that the company was nothing more than a giant Ponzi scheme, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Authorities subsequently filed criminal charges against Dave and Cristal Clark, seemingly unrelated to the Cay Clubs fraud and instead stemming from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

After a five-week trial in Summer 2015, a federal jury deliberated for four days before acquitting Cristal Clark of all charges and deadlocking on the charges against Dave Clark.  After the mistrial, prosecutors retooled their strategy by shifting their focus from the misrepresentations made to investors to the obtaining of loans from financial institutions in creating artificial sales transactions.  After a December 2015 retrial, Dave Clark was convicted on all charges and subsequently sentenced to a 40-year prison sentence.  

Schwarz Charges

In the indictment filed on October 11, 2016, authorities alleged that Schwarz was a 1/3 owner of Cay Clubs and used his relationship with Dave Clark to conspire to divert loan proceeds obtained using straw borrowers and fraudulent loan applications.  The indictment indicates that Schwarz and Clark would use various Cay Clubs corporate entities to orchestrate sales of condominiums to certain Cay Clubs employees and family members. The pair allegedly executed false and fraudulent loan applications, which included representations indicating that cash to close would be provided by the purported borrower to secure the mortgage loan.  The applications also included false information about the straw borrowers' employment, wages, and financial situation.  In turn, the mortgage loans that were extended based on these representations were subsequently deposited into Cay Clubs accounts and used to perpetuate the fraudulent scheme.  

Clark and Schwarz also allegedly shared in the loan proceeds while taking elaborate steps to conceal these distributions.  This included paying Clark's salary to a third party and failing to issue a corresponding W-2 or 1099 to Clark, failing to issue any K-1 to Schwarz or Clark for any of the transfers or distributions, failing to file IRS partnership returns for the Cay Clubs entities, filing false tax returns with the IRS understating their receipts from Cay Clubs, and providing false testimony to the Commission.  

Bond Issues

After Schwarz was arrested in Orlando last week, he appeared before a U.S. Magistrate Judge to ask for a bond governing the conditions of his release.  That magistrate judge entered an order granting bond to Schwarz that was "substantially lower than that requested by the government," providing that Schwarz could use his residence as collateral for the large majority of the $500,000 bond.  The government immediately filed an appeal, taking issue with Schwarz being permitted to use his house as collateral given evidence that Schwarz paid off more than $200,000 of the residence using fraudulent scheme proceeds.  

In their motion, the government reproduced a calculation of the potential sentencing guidelines if Schwarz was convicted of any of the bank fraud charges, indicating that the resulting calculation would be life in prison.  Alleging that Schwarz received a large amount of money that remains unaccounted for, the government requested a $250,000 surety bond with the added condition that Schwarz be required to demonstrate that the source of the funds is legitimate and not tied to criminal proceeds.  According to court notes, it appears that the government reached an agreement with Schwarz' counsel today at a hearing.

A copy of the Indictment and Appeal of Bond Order are below:

 

Schwarz Indictment by jmaglich1 on Scribd

 

 

Bond Appeal by jmaglich1 on Scribd

 

Tuesday
Jun282016

Government Cries Foul Over Alleged Ponzi Mastermind's Recently Discovered "Handwritten Notebooks"

As trial nears for a North Carolina man accused of running one of the largest Ponzi and pyramid schemes in history, the government has raised questions over the defendant's intention to use recently-disclosed "handwritten notebooks" that, while allegedly dating back to 2011, were never turned over or otherwise disclosed to the government.  Paul Burks, 69, was indicted in October 2014 on multiple fraud charges over his operation of ZeekRewards, which the Securities and Exchange Commission had previously accused of being a Ponzi and pyramid scheme that duped tens of thousands of victims out of hundreds of millions of dollars.  

ZeekRewards was an online penny auction website that attracted users at an exponential pace due to a lucrative investment program that promised annual returns exceeding 200% and provided incentives for participants to recruit new investors.  The program, allegedly masterminded by Burks, attracted over one million participants before the Commission filed an emergency enforcement action in August 2012 alleging the venture was a massive Ponzi and pyramid scheme.  After a receiver was appointed, a subsequent investigation revealed that over 700,000 participants suffered collective losses exceeding $700 million.
 

As Burks and the government prepare for trial, a trial that has already been delayed several times due to the massive amount of documentary and computer evidence, the government has made several requests to limit or exclude Burks from using certain evidence.  These requests, known as motions in limine, ask the court to rule in advance of trial on certain evidence that might be prejudicial, irrelevant, or inadmissible.  On June 28, 2016, the government filed a Motion in Limine Regarding Defense Experts (the "Motion"), asking the court to limit Burks' use of recently-produced "Handwritten Notebooks" that were marked as an exhibit Burks intended to use at trial.

As the Motion explains, Burks first disclosed in April 2016 that he had discovered notebooks containing his handwritten notes and impressions during 2011 - a time when authorities allege that ZeekRewards was a full-blown Ponzi and pyramid scheme that was growing exponentially and taking in hundreds of millions of dollars from unwitting participants.  The government highlights the convenience of this revelation, noting that Burks had not disclosed the existence of the notebooks despite receiving a grand jury subpoena, testifying before the grand jury that he had produced everything to the best of his knowledge, and being ordered by the court to turnover all relevant discovery.  As the Motion notes,

There can be no legitimate dispute that the Handwritten Notebooks – if they actually existed on the dates they purport to have been created – were responsive to the Grand Jury Subpoena, and, thus, Defendant’s failure to produce them was in violation of that Subpoena and his testimony that he had produced all documentation responsive to the subpoena was untrue.

The Motion does not take issue with the introduction of the Handwritten Notebooks as evidence; rather, it seeks to limit the methods used to introduce the notebooks into evidence.  As the government notes, the Handwritten Notebooks factor prominently in reports prepared by experts retained by Burks in an effort to "offer (improper) opinions regarding Defendant’s state of mind at the time of the offense."  While the contents of the notebooks and the accompanying expert reports are unknown, it is likely that they are in contrast with the government's burden to demonstrate that Burks had criminal intent.  The Motion argues that, before the Handwritten Notebooks may be referenced by other witnesses, they must first be introduced through and authenticated by Burks himself through his testimony.

The motive for the government's position becomes clear: Burks is faced with the choice of whether or not to testify at trial.  There is no obligation for a defendant to testify on his or her own behalf, and that decision cannot be used as a factor for conviction or acquittal by the jury.  Anecdotal evidence suggests that the majority of criminal defendants are advised by their counsel not to testify at trial on the theory that the government has failed to prove their case beyond a reasonable doubt.  The government argued that presenting Burks with such a choice is consistent with pertinent caselaw, quoting authority that "a defendant’s rights would not be violated simply because he had to choose between not testifying and laying [the required] foundation."  

The Motion also suggests that Burks could be subject to contempt proceedings for his failure to produce the notebooks.  

A copy of the Motion is below.  As always, Ponzitracker is grateful to ASDUpdates for monitoring the Zeek docket.

motion in limine

 

Tuesday
Jun212016

SEC: Pro Athletes Duped Out Of Over $30 Million In 'Ponzi-Like' Scheme

The Securities and Exchange Commission filed an emergency enforcement action against a California investment adviser halting what it called a "Ponzi-like" scheme that allegedly defrauded several high-profile professional athletes out of tens of millions of dollars.  The sealed complaint filed in a Dallas federal court just before Memorial Day named Ash Narayan, of Newport Coast, California, along with The Ticket Reserve Inc. a/k/a Forward Market Media, Inc. ("Ticket Reserve"), Richard M. Harmon, and John A. Kaptrosky as defendants.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, pre-judgment interest, and the imposition of civil monetary penalties.  In addition, the Commission requested the appointment of a receiver over Ticket Reserve.

Narayan was an investment advisor and Managing Partner in the California office of RGT Capital Management, Inc. ("RGT"), a Dallas-based firm.  In addition, and often without disclosure to relevant parties, Narayan (i) was a member of Ticket Reserve's board of directors, (ii) owned millions of shares of Ticket Reserve stock, and (iii) was secretly compensated for steering client funds to Ticket Reserve.  Narayan also touted himself as a devout Christian who also was a Certified Public Accountant ("CPA").  Narayan advised over 50 clients while employed at RGT, including many high net worth professional athletes.  According to the Associated Press, these clients included Major League Baseball pitchers Jake Peavy and Roy Oswalt as well as National Football League quarterback Mark Sanchez.

Ticket Reserve was founded in 2002, with its CEO likening its business model of allowing fans to reserve tickets to future high-profile sporting events as "monetizing anticipation."  Narayan not only served on Ticket Reserve's board of directors but also owned millions of shares and acted as the company's primary fundraiser.  

While his clients believed that he was implementing a conservative low-risk strategy to preserve their earnings, the Commission alleges that Narayan caused more than $33 million of client funds to be transferred to Ticket Reserve.  According to the Commission, a majority of these transfers were made without Narayan's clients' authorization or knowledge through forged or faked authorization documents.  Additionally, Narayan's clients were not told that (i) Narayan was a director and majority shareholder of Ticket Reserve, (ii) Narayan received millions of dollars in "finder's fees" for directing client funds to Ticket Reserve, (iii) Ticket Reserve was not a conservative investment and was actually in dire financial straits, and (iv) Narayan was, in fact, not licensed as a CPA.  According to the Associated Press, Peavy alone invested more than $15 million while both Sanchez and Oswalt each invested nearly $8 million.  Each of the athletes is said to have thought they were investing a much smaller amount in Ticket Reserve, with at least one having no idea he was invested in the company.

In addition to Narayan's role, the Commission also accused Ticket Reserve's CEO, Harmon, and COO, Kaptrosky, of participating in the fraudulent scheme.  The Complaint alleges that the men carefully orchestrated the payment of finder's fees to Narayan, seeking to keep the fees under 10% of the investment amounts to appear "kosher."  These fees were structured as "director's fees" and "loans" in an effort to both conceal the purpose of the payments as well as to assist Narayan in avoiding taxes.  Yet Narayan made no effort to repay these "loans" until he was fired from RGT in early 2016 and learned that the Commission had opened an investigation.  Narayan entered into an agreement to repay the loans and had repaid approximately $350,000 to date.  Yet, according to the Commission, these payments are not being used to repay Ticket Reserve's investors but rather are being used to pay the company's ongoing expenses.

The Commission alleges that Ticket Reserve also used investor funds to make payments to other investors - a classic hallmark of a Ponzi scheme.  

The Complaint requests the appointment of a receiver over Ticket Reserve.  A receiver is tasked with securing and marshaling company assets for the benefit of defrauded victims.  In addition, the receiver is vested with authority to initiate actions on behalf of the company, including fraudulent transfer actions seeking to recover unauthorized or unlawful fraudulent transfers to company insiders or agents.  Upon securing assets, it is likely the receiver will seek court approval for implementation of a claims process to make payments to investors with approved claims.

A copy of the Commission's Complaint is below:

comp-pr2016-124 by jmaglich1

Thursday
May052016

Utah Company Now Faces Criminal Charges Over Alleged $28 Million Ponzi Scheme

Nearly four months after being accused by the Securities and Exchange Commission of operating a $23 Ponzi scheme, a Utah company's founder has now been indicted on 19 criminal fraud charges.  Chad Roger Deucher, 43, the owner of Marquis Properties, LLC ("Marquis") is scheduled to make his first appearance later this month on eighteen counts of wire fraud and one count of fraud in the sale of securities.  Each charge carries a maximum 20-year prison term along with monetary penalties.  

According to authorities, Marquis held itself out as an experienced property-management company that specialized in acquiring and managing high-quality cash-flowing properties.   The company solicited potential investors by representing that it would manage various properties located in Indiana, Missouri, and Ohio, collect monthly rental income, and make annual distributions of up to 22% that were touted as passive investment income.  Potential investors were told that the various investments offered by Marquis were safe and risk-free because investment returns would be secured by a first deed of trust on property and that investments would be "over-capitalized."  From April 2010 to June 2015, Marquis raised at least $28.2 million from hundreds of investors.

However, authorities allege that Marquis operated a classic Ponzi scheme by making numerous misrepresentations to investors and using new investor funds to pay purported returns to existing investors. For example, while Deucher sought to assuage any concerns over risk by offering property as collateral for investments, he failed to disclose that Marquis did not own the property offered as collateral and that the property was already encumbered.  Further, rather than purchase real estate with investor funds, as had been represented to investors, the Commission charged that Marquis had diverted investor funds to pay returns to existing investors and to pay personal expenses including the transfer of nearly $400,000 to Mr. Deucher's wife.  While Marquis stopped paying returns to investors in June 2015, the SEC previously alleged that Mr. Deucher had recently represented to an investor that repayment would begin shortly. 

Monday
May022016

Credit Union Says It Should Get 100% Payout Ahead Of Other Ponzi Victims

In a rare move, a credit union that was among the victims duped by a South Carolina man in a $90 million Ponzi scheme has asked a federal judge to order the immediate return of 100% of its loss while the remaining victims have received less than 20% of their losses.  The National Credit Union Administration Board (the "NCUA"), as the liquidating agent for the Taupa Lithuanian Credit Union ("Taupa"), filed a motion with U.S. District Judge J. Michelle Childs to order Beattie Ashmore, the court-appointed receiver overseeing the recovery of assets for victims of Ronnie Wilson's Ponzi scheme, to return a $100,000 investment made with Taupa funds pursuant to the Federal Credit Union Act (the "Act").  The Receiver has opposed NCUA's request.

Ronnie Wilson's Scheme

Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") for at least a decade, representing to potential investors that they could realize profits from ownership of silver without having to actually physically possess the silver.  To accomplish this, Wilson purported to purchase and warehouse silver on behalf of investors. Investors were told that their silver would be held in safe-keeping at a Delaware depository, and were provided with regular account statements allegedly showing regular appreciation in their holdings.   In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, in reality, Wilson used the majority of investor funds not for the purchase of silver, but to perpetrate a massive Ponzi scheme in which "profits" paid to existing investors were simply the re-distribution of incoming investor funds.  While investors were told that Wilson kept nearly $17 million of silver at a Delaware depository, they later discovered that the depository had never heard of Wilson.  Of the $90 million raised from investors, authorities and the court-appointed receiver have since pegged investor losses at approximately $60 million.  The receiver previously forecast a dim possibility of a meaningful recovery.  Wilson was sentenced to a 19-year prison term.  

Last month, U.S. District Judge Childs approved the Receiver's request to make a 19% initial distribution to scheme victims using funds gathered as a result of his efforts.  The amount and number of future distributions will be dictated by the Receiver's success in marshaling additional assets whether through litigation or asset sales.  Ponzi scheme victims historically are lucky to recoup more than pennies on the dollar of their losses.  

NCUA's Motion

One of Wilson's many victims was John Struna, who allegedly fraudulently obtained $25,000 on four separate occasions from NCUA that he subsequently transferred to ABC as a $100,000 investment.  The Receiver disclosed that his investigation showed that Struna had received nearly 50 transfers into his accounts through the assistance of former Taupa CEO Alex Spirikaitis.  Following discovery of the fraud, the NCUA filed a lawsuit against Struna and was granted the right to attach a claim Struna could file with the Receiver for the right to participate in victim distributions.

While the NCUA agreed that it was entitled to equally share in distributions with other Wilson victims "at a minimum," it argued that the Act afforded it the power to recover its entire $100,000 investment immediately without any consideration as to its stature with other victims.  NCUA pointed to the interplay between two provisions of the Act:  first, the provision under 12 U.S.C. § 1787(b)(16)(A) allowing the liquidating agent could recover any fraudulent transfers made within five years of its appointment, and second, the section in 12 U.S.C. § 1787(g) providing that:

Except as provided in this section, no court may take any action, except at the request of the Board of Directors by regulation or order, to restrain or affect the exercise of powers or functions of the Board as a conservator or a liquidating agent.

In essence, the NCUA argued that the receivership court was without jurisdiction to restrain or otherwise hinder its ability to recover the $100,000 fraudulently transferred from Taupa to ABC.  Couching the argument in public policy terms, the NCUA also argued that the recovery of the $100,000 by the federal insurance fund served a public purpose in maintaining a strong, healthy, self-sustaining federal insurance fund.  Finally, NCUA suggested that the receiver was required to exhaust his administrative remedies in the Ohio district court action governing the Taupa receivership.  

The Receiver saw NCUA's claims a different way.  First, he pointed to the well-known maxim that a receivership court sits in equity and argued that the court should take into account the bad acts and fraud committed by NCUA through its former CEO Spirikaitis. The receiver then took issue with NCUA's claim that 12 U.S.C. § 1787(g)'s provision stripped the receivership court of its power to affect the distribution, noting that NCUA itself had requested authority from the Ohio district court to "file a claim against Ronnie Gene Wilson."  The receiver's brief makes the distinction between the NCUA requesting authority to file a claim with the receiver (which happened) and the NCUA requesting that the Ohio district court order the receiver to file a claim as to his right to the money (which did not happen).  Finally, while NCUA points to purported administrative remedies the receiver is required to follow as a creditor, the receiver points out that he is not a creditor and in fact NCUA's brief acknowledges that he is a debtor of the NCUA.  In any event, the receiver argues, he has never been afforded notice of the administrative process touted by NCUA.

Takeaways

NCUA's motion remains pending before the receivership court.  Similar requests to that made by NCUA are not uncommon as victims often point to their supposedly disparate or different standing with other victims to justify advantageous treatment.  However, courts frequently exercise their equity powers in denying such relief.  NCUA's request, while similar in the general sense to these requests, is unique in that it draws on the interplay between a federal credit union liquidation and a federal equity receivership.  Indeed, this statutory framework appears to be isolated to credit unions as similar requests do not appear in the context of financial institutions holding claims.  Nonetheless, NCUA's request still seeks to benefit itself at the undeniable expense of other less fortunate victims - many elderly and perhaps less able to withstand such a loss than a federally-insured credit union.  Further, a result in NCUA's favor undermines a court's ability to exercise its equity powers in ensuring that victims receive equal treatment.  

NCUA's Motion and the Receiver's response are below.

NCUA Motion and Receiver's Response by jmaglich1