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Tuesday
Sep302014

Victim Lawyers Seek Lien On Ponzi Victim Distributions To Satisfy Contingency Fees

A Louisiana law firm that signed up hundreds of victims in the aftermath of the $600 million ZeekRewards Ponzi scheme has now filed notice in a North Carolina federal court that it intends to assert charging liens against over $130,000 in interim distributions mailed out today by the court-appointed receiver.  Marc Michaud, a New Orleans lawyer in the firm of Patrick Miller LLC (the "Law Firm"), filed a Notice of Attorney's Charging Liens asserting "attorney’s charging liens and other privileges for legal services performed and costs incurred by Attorney in connection with the representation of the 404 Class 3 Claimants listed on Exhibit 'A'."  According to the Notice, the Law Firm intends to assert charging liens in the amount of $134,042.78 - constituting 25% of the interim distribution made to those claimants pursuant to contingency fee contracts entered into between victims and the lawyers.

Background

The filing is the latest in a contentious battle between the Law Firm and the court-appointed receiver, Kenneth D. Bell over entitlement to claim distributions.  In December 2013, Bell sought court approval for distribution procedures, which included, among other things, a provision that payments would be made directly to victims.  The Law Firm filed a sharply-worded objection, claiming that the payments should be sent directly to their firm and characterizing the Receiver's decision as a refusal to consider their clients' claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Law Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form.  The Receiver also noted that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

On April 1, 2014, the Court approved the Receiver's Motion in all aspects.  Several days later, the Law Firm filed a Motion for Clarification and/or Reconsideration, which, in the Receiver's words, "again challeng[es] the Court’s decision by seeking to change the approved distribution process to require the Receiver to aid the Movants’ attorneys in collecting their attorneys’ fees from the Movants."  Characterizing the reason for the motion as the Law Firm's inability "to let go of their pecuniary interests," the Receiver explained that he sought to make payments directly to victims to prevent duplicative payments, to ensure aggregate net winners do not receive distributions by using multiple addresses, and even ensuring that the Receiver does not unwittingly violate the Department of Treasury’s Office of Foreign Assets Control’s (OFAC) regulations.  While observing that his plan "may not assist Movants’ attorneys’ efforts to collect their fees," he argued that no clarification of the Order was necessary.  

Contingency Fees for Assisting With Victim Proof of Claim?

An attorney's lien is used to create a security interest in favor of an attorney with a contract entitling him to a portion of the proceeds.  With the filing of the Notice, it remains unknown how the Law Firm intends to collect their claimed entitlement to each affected victim's distribution, or if there has been resistance from victims for complying with the demands for payment.  The exhibit attached to the Notice lists over 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with the Law Firm.

Here, the Law Firm essentially seeks over $100,000 from hundreds of victims of one of the largest Ponzi schemes in history for "assisting" the victims in filing Proof of Claims with the Receiver during the claims process.  The claims process in Zeek Rewards was entirely electronic and was done through an internet portal established by the Receiver.  As explained in an earlier Ponzitracker post,

After filling out claimant information and registering various contact information, a claimant would identify the type of claim they have from seven listed categories.  For affiliate claims, which are believed to be the majority of the claims, the claimant would be required to provide a variety of specific details related to various purchases made, including subscription fees, sample bids, retail bids, auction items purchased, and training materials.  Once the total amount of each category is listed, the claimant will then be required to list the date, amount, and reason for each payment and the corresponding payment type.  Cnce all payments to Zeek have been provided, the claimant will then be required to list all payments the received from Zeek, the reason, and the payment type.  

After this information is provided, the Claimant will be required to answer several questions relating to their involvement in Zeek.  This includes:

  • A list of all usernames they created;
  • A list of all lawsuits or legal proceedings they are involved in;
  • Whether they were an employee or officer, or related to any employee or officer of, Zeek;
  • Whether they sponsored or assisted any entity or person become an affiliate; 
  • Whether they paid cash to Zeek on behalf of any other entity or person;
  • Whether another person or entity paid cash to Zeek on their behalf or transfer bids to their account; and 
  • A listing of their upline/downline.

While the extent of the Law Firm's assistance is unknown in compiling and inputting this information, it is for this task that the Law Firm ultimately seeks hundreds of thousands of dollars in fees.  Assuming each Proof of Claim took one hour, the amount sought by the Law Firm would equate to over $2,000 per hour per claim.

Perhaps surprisingly, this is not the first time this situation has arisen in the context of a Ponzi scheme distribution.  In August 2013, a victim of Scott Rothstein's $1.2 billion Ponzi scheme sought to reject charging liens filed by two Florida law firms that claimed entitlement to millions of dollars in contingency fees from a recent settlement.  However, that investor disputed the charging liens on the basis that one of the law firms did not actually represent it and that the other had forfeited any entitlement to fees by withdrawing as counsel.  At least one of those law firms ultimately prevailed.

The Notice is below (h/t to ASDUpdates)

 

ZeekDoc258 Main

Tuesday
Sep302014

Massachusetts Man Indicted For $6 Million Ponzi Scheme

Two years after being charged with fraud by Massachusetts securities regulators, a former Belmont resident and prominent Shaklee distributor was arrested and charged with operating a Ponzi scheme that duped over a dozen investors out of at least $6 million.  John William Cranney, also known as Jack Cranney, was indicted on four counts of wire fraud, sixteen counts of mail fraud, and three counts of money laundering.  Each of the wire fraud and mail fraud counts carries a maximum prison term of twenty years, while each money laundering count carries a 10-year maximum term.  Cranney was scheduled to make his first appearance in a Texas federal court today.

The Massachusetts Securities Division previously levied civil fraud charges against Cranney in July 2012, alleging that Cranney used his affiliation as an independent distributor with Shaklee Corporation ("Shaklee") to lure in family, friends, and colleagues.  Shaklee is a multi-level marketing system of independent distributorships that sell health and personal nutrition products, and Cranney's family was credited for introducing Shaklee to the east coast.  Cranney was affiliated with Shaklee since 1967, and served as a "sponsor" for approximately 50,000 distributorships in a business model similar to Avon or Mary Kay Cosmetics.

Through these connections, Cranney held himself out as a financial advisor and operated several shell companies including Cranney Capital I, LLC, Cranney Capital II, LLC, Cranney Capital III, LLC, Cranney Industries, and Cranney Capital I Employee Stock Ownership Plan ("Cranney ESOP"). Beginning in mid-2002, Cranney solicited potential investors by offering short to medium-term investments with annual returns ranging from 10% to 12% annually.  These investments were memorialized in the form of promissory notes, and when the note matured, many investors opted to "roll-over" their investment into a new promissory note offering similar returns.  Additionally, Cranney also told investors that they could "roll over" money held in their IRA or 401(k) accounts to the Cranney ESOP without incurring withdrawal fees or penalties even though the investors were not employed by Cranney.  

Based on these representations, criminal authorities allege that Cranney raised at least $6 million from over a dozen investors (Massachusetts securities regulators allege that Cranney raised over $10 million from at least 36 investors nationwide).  However, according to authorities, instead of making investments as promised, Cranney misappropriated investor funds to fund his Shaklee distributorships, pay personal expenses, and meet investor redemptions.  When the financial markets began experiencing difficult times in 2008, Cranney began to default on making payments of principal and/or interest to investors, and soon altogether ceased returning investor funds.  

After state regulators filed charges against him in July 2012, Cranney subsequently filed for personal bankruptcy in March 2013.  Cranney's personal residence was sold to satisfy creditor claims, and authorities also seized money from two Shaklee distributorships controlled by Cranney.  Cranney has maintained that he did not run a Ponzi scheme, and that the "investments" alleged by regulators were, in reality, loans.  At a hearing in May 2013 in a Massachusetts bankruptcy court, many of Cranney's victims fought the trustee's efforts to convert the case to a Chapter 7 liquidation on the basis that investors could benefit from Cranney's "vast experience in handling and making money."  It is unknown if that position has since changed.  

Friday
Sep262014

SEC Alleges California Marketing Company, eAdGear, Is $129 Million Ponzi And Pyramid Scheme

The Securities and Exchange Commission has filed an emergency action accusing a California marketing company of operating a massive Ponzi and Pyramid scheme that took in at least $129 million from investors.  eAdGear, Inc., along with principals Charles S. Wang and Qian Cathy Zhang, of Warren, New Jersey, and Francis Y. Yuen, of Dublin, California, were charged with multiple violations of federal securities laws in a complaint filed in San Francisco federal court.  The Court granted the Commission's request for an emergency asset freeze and temporary injunctive relief, and the Commission is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil monetary penalties

According to the Commission's complaint, eAdGear was formed in December 2011 with Wang and Yuen serving as the company's sole officers and owners.  The company claimed to use search engine optimization to help paying "clients" increase their the page rankings of their website on various popular search engines, and claimed to share 70% of the daily revenue generated with investors.  Investors would pay between $300 and $6,000 to purchase a "business package" from eAdGear, and many investors purchased multiple membership accounts to increase their returns.  Investors were also incentivized to recruit new investors through the payment of commissions valued at approximately 5% - 15% of the new investor's membership package.  The original investor could also receive commissions based on the new investor's recruitment of investors.

To convince investors of the scheme's legitimacy, eAdGear also distributed marketing materials purportedly showing members that had generated astronomical returns; for example, an investor named "Cathy" was depicted as turning a $6,000 investment into a regular $180,000 per month return that translated into an annual return of $3.6 million.  Based on these representations, eAdGear and the defendants raised more than $129 million from tens of thousands of investors.  A 2012 PowerPoint Presentation distributed to potential investors demonstates some of these claims as well as the company's business model:

However, through December 31, 2013, eAdGear had generated approximately $212,000 in sales to non-investors - a figure the Commission also characterizes as false given that the primary "customer" believed that the recorded purchase was actually an investment.  Nor was eAdGear's product or service designed to increase an advertiser's page rankings; rather, eAdGear is accused of being in the primary business of raising money from investors.  The Commission also accuses the defendants of misappropriating investor funds for their personal use, including the diversion of millions of dollars for real estate purchases and loans.  Investor funds were also used to make Ponzi-like payments to existing investors.  According to the Commission's complaint, eAdGear was notified via multiple third parties that their business model was not legal, including notification that PayPal was suspending eAdGear's account in 2011 as well as legal advice from an unnamed multi-level marketing attorney who advised that the company's business model was not legal in the United States.

A copy of the Complaint is below:

 

Ead Gear

 

Tuesday
Sep232014

Cincinnati Money Manager Pleads Guilty To $8.7 Million Forex Ponzi Scheme

A Cincinnati man has pleaded guilty to charges that he masterminded a forex-based Ponzi scheme that raised at least $8.7 million from friends, acquaintances, and even members of a church group.  John R. Bullar, 52, pleaded guilty today in an Ohio federal court to one count of wire fraud and one count of money laundering.  Each of tne charges carries a maximum 20-year prison term as well as criminal monetary penalties.  In a parallel action filed by the U.S. Commodity Futures Trading Commission, Bullar and his company were also charged with violations of federal commodities laws.

Bullar owned and operated Executive Management Advisors ("EMA"), which he represented to potential investors as a successful commodities-trading firm.  Bullar told investors that their funds would be used to trade commodity futures and commodities options, touting himself as an experienced futures trader with significant experience with trading floors at the Chicago Board of Trade and the Chicago Mercantile Exchange.  Investors received regular account statements showing purported profits that they understood were derived from trading profits.  In total, nearly $9 million was raised from investors that included Bullar's friends and members of a church group.

However, of the millions of dollars raised by Bullar, only a fraction was used to trade commodities futures and options as promised.  Indeed, of the approximately $786,000 deposited in his trading account, Bullar lost more than $230,000 in the form of trading losses and fees.  Of the remaining millions of dollars in investor funds, Bullar misappropriated or embezzled approximately $6 million for his own use, including the payment of personal expenses, cash withdrawals, the purchase of property and vehicles, and for landscaping and other home improvements.  Additionally, Bullar used investor funds to pay "returns" to existing investors - a classic hallmark of a Ponzi scheme.  

The scheme ultimately collapsed in 2013 after Bullar was unable to satisfy investor redemptions.  While one investor had requested the redemption of their $1.5 million investment to close on a real estate transaction, Bullar admitted to that investor that he was unable to satisfy that request due to his operation of a fraudulent investment scheme.  Bullar later admitted the same to another investor, and indicated he knew he would be going to prison for the fraud.  

The CFTC complaint against Bullar is below:

Enf Bull Ar Complaint 092314

Tuesday
Sep232014

Appellate Court: Ponzi Schemer's Loss Calculation Must Account For Payments To Victims

In a decision that could have far-reaching implications, a federal appeals court has vacated a convicted Ponzi schemer's 11-year prison sentence after finding that the loss amount used in calculating the relevant sentencing guidelines improperly failed to account for money returned to victims in the form of fictitious "interest" payments. Jason Snelling, of Cincinnati, Ohio, was originally sentenced in October 2012 to a 131-month term after previously pleading guilty to three counts of conspiracy, obstruction, and tax evasion. While the resentencing will likely reduce Snelling's 131-month sentence, he must also deal with two other prison sentences related to the scheme, including a 40-year prison sentence being served consecutively to Snelling's other sentences.

History

Snelling and others operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they held themselves out as successful day-traders and solicited investors by promising guaranteed annual rates of return ranging from 10% to 15%. Ultimately, dozens of investors entrusted millions of dollars to Snelling and his companies. However, rather than utilize investor funds as promised, Snelling and his partner ran a Ponzi scheme whereby they used incoming investor funds to pay returns to existing investors, as well as to support lavish lifestyles that included purchases of a boat, furniture, and even plastic surgery.

After a tip by an investor whose accountant questioned the legality of the operation, authorities filed civil and criminal charges against Snelling and his partner, including state and federal charges against Snelling. In connection with the federal charges, Snelling ultimately pleaded guilty to one count each of three counts of conspiracy, obstruction, and tax evasion.

District Court Sentencing

While the plea agreement included Snelling's admission of guilt to the charges, it also referenced the disagreement between the government and Snelling regarding the offense-level calculations to be used by the U.S. Probation Office to calculate the sentencing-guidelines range included in a Presentence Investigation Report ("PSR"). Snelling argued that, under the U.S. Sentencing Guidelines, any funds returned to investors during the course of the fraud in the form of "profits" or "interest" should be used to offset the initial loss attributable to his fraud. Indeed, the commentary to U.S.S.G. § 2B1.1 provided that a loss would be reduced by, among other things:

(i) The money returned, and the fair market value of the property returned and the services rendered, by the defendant or other persons acting jointly with the defendant, to the victim before the offense was detected. The time of detection of the offense is the earlier of (I) the time the offense was discovered by a victim or government agency; or (II) the time the defendant knew or reasonably should have known that the offense was detected or about to be detected by a victim or government agency.

The government opposed Snelling's position, taking the position that Snelling “should not get credit for payments to perpetuate the scheme made with other victims’ money.” In other words, the Government maintained that Snelling's payment of fictitious returns to victims served simply to further the fraud and create the impression that the venture was legitimate. At sentencing, despite Snelling's protests, the Government adopted the Government's position and held that:

the loss should not be reduced, particularly because the monies did not represent profits . . . any return of money was to induce further investment . . . .

Based on the Government's methodology, the Court held that the intended loss for purposes of federal sentencing guidelines was $8,924,451.46. Using the highest calculated offense level of 35 for mail and wire fraud and after applying a three-level reduction based on Snelling's acceptance of responsibility, the Court applied U.S.S.G. § 2B1.1(b)(1)(K) to arrive at a sentencing range of 121 to 151 months. Based on that calculation, Snelling was ultimately sentenced to a 131-month term.

The Appeal

Snelling timely appealed, claiming that the district court committed error by using a loss figure of $8,924,451.46, representing the total amount of money taken in from investors, instead of of $5,336,187.78, which represented the total losses after accounting for the total amount returned to investors over the life of the scheme. This difference was crucial, as different sub-sections of U.S.S.G. § 2B1.1(b)(1) applied based on whether or not the loss figure was greater than or less than $7 million. As a result, while the calculation used by the district court resulted in a range of 121 to 151 months, a calculation using the loss figure urged by Snelling would have resulted in a maximum range of 97 - 121 months.

The Sixth Circuit agreed with Snelling's position, specifically noting that:

Snelling’s argument, based on the text of the Guidelines alone, is persuasive. His reading of the Guidelines is further bolstered by U.S.S.G. § 2B1.1 Application Note 3(F)(iv), which specifically addresses Ponzi-scheme loss calculations. Application Note 3(F)(iv) states that, when calculating the loss figure in a Ponzi scheme, the “loss shall not be reduced by the money or the value of the property transferred to any individual investor in the scheme in excess of that investor’s principal investment.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Snelling argues that the language of this note implies that courts are expected to reduce loss figures by the sums returned to investor victims, and that the note seeks to limit such reduction to no more than the principal invested. Thus, the Sentencing Commission, while contemplating that loss figures should be reduced according to the amount of money returned, does not want a single investor’s returns to be deducted beyond the amount originally invested: “[T]he gain to an individual investor in the scheme shall not be used to offset the loss to another.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Again, Snelling’s argument is persuasive. The fact that the Application Notes limit deductions from loss figures to no more than the sums originally invested implies, quite strongly, that the loss figures are to be reduced in the first place.

(emphasis added). The Court also looked to previous editions of the sentencing guidelines, pointing to language in the pre-2001 editions that entirely omitted any language calling for a reduction based on the sums returned to victims.

Addressing the government's position, the Sixth Circuit conceded that while there certainly was appeal to prohibiting a Ponzi schemer from benefiting from making payments to carry out the fraud, the relevant concern was whether the district court properly applied the sentencing guidelines. Based on the finding that the district court did commit error by failing to account for the payments made by Snelling to his victims, the Sixth Circuit vacated Snelling's sentence and remanded the case back to the district court for resentencing.

Implications

The Sixth Circuit candidly admitted that adopting Snelling's position would, in essence, ultimately mitigate the sentence a Ponzi schemer would ultimately face. Indeed, it is well-acknowledged that a Ponzi schemer's ability to consistently deliver the returns promised to investors serves to create an aura of legitimacy around the scheme and ultimately entice new investors. However, the Sixth Circuit noted that it was restricted to the question of whether the sentencing court adhered to the sentencing guidelines as written, and vacated the sentence based upon its finding of error.

The theoretical implications of such a position are significant.  Historically, the government's calculated loss figures were typically rarely disturbed; indeed, the Sentencing Guidelines state that courts "need only make a reasonable estimate of loss … based on available information.” Moreover, and especially in the common scenario where the Ponzi schemer pleads guilty, the post-collapse investigation into the scheme is only in the infant stages and rarely is enough information available to calculate the amount of funds ultimately disbursed to victims.

The biggest takeaway of the Sixth Circuit's decision, assuming it is adopted by other courts in loss calculations, are that scheme perpetrators will essentially be actively mitigating their future prison sentence by continuing their scheme.  Indeed, in the situation of two Ponzi schemes that raise an identical amount of funds from victims, the scheme that makes a higher payout to victims theoretically would result in a lower prison sentence for that perpetrator based on the net loss calculation.  Arguably, such a scenario technically incentivizes a Ponzi schemer to return as much as possible to investors with the knowledge that the returns will not only attract new investors but also serve to ultimately reduce any prison sentence.

The Sixth Circuit's opinion is below:

 

14a0244p-06