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Recent SEC Releases
Saturday
May092015

Wells Fargo Settles Florida Ponzi Case For $3.175 Million

Just before a jury was set to deliberate following a 16-day trial, Wells Fargo agreed to pay $4 million to settl claims it aided and abetted a Florida Ponzi scheme that caused tens of millions of dollars in losses to thousands of victims.  Jonathan Perlman, the receiver appointed over companies previously operated by George Theodule, reached the settlement with Wells Fargo over claims that Wachovia, a bank purchased by Wells Fargo, turned a blind eye to a massive Ponzi scheme conducted by George Theodule that targeted the Haitian community and caused tens of millions of dollars in losses.  The settlement is notable not only because of the historic difficulty in holding financial institutions liable for their involvement in Ponzi schemes, but also because it will allow Perlman to begin distributing funds to Theodule's defrauded investors.  

The Scheme

Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC").  Using these companies, and a variety of other entities and investment clubs he formed, Theodule told potential investors in the Haitian community that he was a financial expert and could double their money in just 90 days.  As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone.  Based on these representations, Theodule is said to have raised more than $30 million from as many as 2,500 investors from July 2007 to December 2008.

However, authorities alleged that Theodule's claims of trading success were completely false, and that in reality, Theodule was operating a massive Ponzi scheme.  Theodule's trading records showed trading losses of at least $18 million, and the remainder of investor funds were diverted to support Theodule's lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas. Theodule wasarrested in August 2013 and was later sentenced to a 12-year prison sentence after pleading guilty to a single count of wire fraud.

Wells Fargo's Involvement

Theodule initially maintained a banking relationship with Washington Mutual ("WaMa"), but began looking for a new bank after WaMu informed Theodule his accounts would be closed due to suspicious banking activity.  Thereafter, Theodule moved his accounts to Wachovia (which was later acquired by Wells Fargo) where he proceeded to open thirty-six accounts in the ensuing five weeks.  Significant investor funds began pouring into the accounts, which Wachovia classified as "investment business" accounts, and Theodule also began making large withdrawals of investor funds.  Perlman alleged that Wachovia ignored obvious red flags, failed to conduct the requisite due diligence, and even made special accommodations for Theodule's benefit including the delivery of large amounts of cash through the drive-through window.  Perlman alleged that internal bank documents showed the bank's knowledge of suspicious activity, including a decision to freeze one of the accounts that essentially acted as a funnel for investor deposits to Theodule's main account.  This freeze was subsequently removed four days later after a Creative Capital employee faxed the bank a business plan.

From May 9, 2008 to July 31, 2008, Theodule deposited over $10 million while simultaneously withdrawing a similar sum.  On July 24, 2008, Wachovia informed Theodule's wife, who was President of one of Theodule'scompanies, that it was closing several accounts on the basis that there was:

“no evidence of any investing going on and that funds were merely washing through the account from hand to hand.” 

Most of the accounts were closed in the ensuing weeks.

Litigation

Perlman sued the bank in December 2010, later amending the complaint to assert various causes of action including aiding and abetting breach of fiduciary duty, aiding and abetting conversion, negligence, wire transfer liability, and recovery of fraudulent transfers.  The court later dismissed the negligence, wire transfer liability, and aiding and abetting fraudulent transfer claims, but allowed the remaining counts to survive.  However, the court later granted Wells Fargo's motion for reconsideration on the basis of several decisions finding no liability on the part of financial institutions in similar scenarios, and dismissed all claims.  

Perlman successfully appealed this decision to the Eleventh Circuit Court of Appeals, which found thatPerlman had adequately alleged a "plausible inference of actual knowledge by Wells Fargo of the Ponzischeme which it then aided and abetted by permitting the fraud to continue through the use of its accounts after it had actual knowledge of the scheme.”  A trial took place on April 20, 2015, lasting for over two weeks before the parties reached a settlement on the eve of jury deliberations.

The settlement comes on the heels of similar settlements reached by Perlman with other financial institutions tied to Theodule's scheme, including a $2.75 million settlement with Bank of America and a $1.25 million settlement with TD Ameritrade.  Perlman also has a pending lawsuit against OptionsXpress in which he is seeking $13.9 million.  

The settlement is noteworthy as it marks one of the largest recoveries from banks in Ponzi litigation. Additionally, an attorney representing Perlman announced that the funds realized from the settlement would allow the receiver to begin returning funds to victims through a claims process.  

The Receiver's website is here

A copy of the Receiver's amended complaint is below:

DKT. 6 Amended Complaint Efiled 2-28-14 (00306138xBCD72)

Wednesday
May062015

Zeek Receiver Seeks $6 Million From Foreign Net Winners

The court-appointed receiver tasked with recovering funds for victims of the $600 million ZeekRewardsPonzi scheme has filed a fresh wave of clawback lawsuits seeking to recover more than $6 million in false profits" realized by the scheme's European and South American investors.  Receiver Kenneth D. Bell continued his efforts to recover false profits from international investors in filing eight lawsuits in the Western District of Carolina, where the receivership is pending, against dozens of investors residing in Israel, Ireland, France, Denmark, Netherlands, Brazil, Germany, and Sweden.  Each of the defendants profited by at least $50,000 from their participation in the scheme, with some defendants receiving hundreds of thousands of dollars in what was nothing more than the redistribution of funds received from other investors.  The Receiver is seeking a judgment in the amount of each defendant's net winnings, as well as the entry of an injunction prohibiting the dissipation of each defendant's assets pending satisfaction of that judgment.  

Courts routinely favor the use of clawback litigation to recover false profits from investors under the Uniform Fraudulent Transfer Act (“UFTA”), which has been passed by nearly every state in substantially similar form. Under the UFTA, transfers made to a creditor are deemed fraudulent when, among other factors, no reasonably equivalent value was exchanged.  An investor is understood to give reasonably equivalent value, assuming they received the transfer in good faith, for any amount up to that investor’s total investment.  Thus, an investor who received 100% of their total contribution cannot typically be compelled to return those funds unless they did not receive the transfers in good faith.  (A recentPonzitracker article describes such a scenario).  However, an investor who received funds in excess of their original investment is not as lucky, for in a Ponzi scheme, those purported “profits” are, in reality, simply the redistribution of other investor funds.  Courts have found that an investor cannot give value in receiving these false profits, and routinely allow the recovery of such transfers as fraudulent transfers. 

The Receiver is seeking the following aggregate amounts from each set of net winners:

  • Israel: $1,880,176.80;
  • Ireland: $633,947.67;
  • France (one additional defendant): $446,613.38;
  • Denmark: $681,716.57;
  • The Netherlands: $172,482.99;
  • Brazil: $1,344,131.41;
  • Germany: $421,078.10; and
  • Sweden: $430,639.17.

Rather than initiate litigation in each of the countries where the net winners reside, Bell is proceeding with the suits in the Western District of North Carolina - where the receivership is being conducted out of and where Zeek was headquartered before its collapse - based on those defendants' contacts with the district through their involvement in (and receipt of funds from) the ZeekRewards program.  However, even if the Receiver is able to obtain judgments against those foreign defendants, additional litigation may be required in those defendants' home countries to enforce and collect on those judgments.  

Bell began filing international clawbacks last year with a suit against Canadian investors, and has since filed suits against investors from countries including Australia, the British Virgin Islands, New Zealand, and Norway.  While Bell had indicated that he intended to pursue foreign net winners who received at least $1,000 in false profits from the scheme, this initial wave of clawback lawsuits has focused on net winners who profited by more than $50,000 from the scheme.  Bell also recently won approval to pursue nearly 10,000 American net winners who received at least $1,000 in false profits.  

A copy of the Israeli Complaint is below.  As always, thank you to Don at ASDUpdates.com.

 

Complaint (2) by jmaglich1

 

Tuesday
May052015

SEC Busts $62 Million "Man Camp" North Dakota Ponzi Scheme

The Securities and Exchange Commission filed civil fraud charges against a North Dakota company and two of its principals, alleging that the company raised at least $62 million in a Ponzi scheme - likely the largest ever in North Dakota - that promised lucrative returns through the development of "man camps" that served as temporary housing for oil field workers.  North Dakota Developments, LLC, along with Robert Gavin and Daniel Hogan, were charged with multiple violations of federal securities laws in an action filed in North Dakota district court.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.  

Gavin is an 80% owner of NDD and resides in Malaysia, while Hogan was a 20% owner of NDD who resided in the United Kingdom.  Beginning in May 2012, NDD began marketing the sale of interests in several temporary housing projects located in North Dakota and Montana that would house oil field workers in the Bakken oil field region.  These investments were marketed through NDD's website, www.nddgroup.com, as well as print and online advertisements, seminars, conference calls, and flyers.  In addition, NDD utilized agents who were paid commissions for the successful recruitment of new investors.  Potential investors were offered the ability to purchase "units" in NDD's projects that would yield impressive returns as a result of NDD's purported development and management.  

For example, one project known as Watford West was advertised as a modular housing unit on State Road 85 in Arnegard, North Dakota.  Watford West was sold in three phases beginning in May 2012, and a brochure distributed to potential investors advertised projected first year income of 36% to 42%.  NDD  further estimated that investors would average returns of 48% - 56% over the following ten years, and also offered investors the option of a 23.5% guaranteed investment return.  A purchase price for each "unit" varied, but typically ranged from $50,000 to $90,000.  While investors were given the option of managing their own "unit," doing so resulted in a required $24,000 lease "payment" to NDD.  Not surprisingly, every investor gave NDD responsibility for managing their units.  In total, NDD raised at least $62 million from hundreds of investors from both the US and foreign countries.  

However, the "man camps" did not experience the success or performance represented by NDD.  For example, the Commission alleges that the Defendants knew by late 2013 that the Waterford West project was suffering significant delays and would not be as profitable as previously promised.  Other projects have experienced similar issues, with each having varying levels of inoperability - including one that has twice been denied approval by local authorities.  Recently, Waterford West had occupancy of approximately 30% with average nightly rates of $80 - well below what was promised investors.  Yet, despite learning of these delays, the Commission alleged that the Defendants continued to make promises of lucrative first-year returns. 

Despite the significant funds raised from investors, the Commission claims that less than $100,000 remained in NDD's operating account in early 2015 as a result of Gavin and Hogan's significant misappropriation of investor funds.  This includes nearly $2 million in investor funds used to fund an unrelated oil-and-gas project, $5.5 million for the unrelated purchase of several real estate parcels, $500,000 to fund an unrelated engineering project, and over $3 million for the men's personal expenses.  Further, more than $10 million is alleged to have been paid in undisclosed commissions to agents for recruiting new investors - a total that amounts to nearly 20% of all funds raised.  The Commission also alleges that millions of dollars in new investor funds were used to pay returns to existing investors in Ponzi-like fashion.

The Complaint indicates that Defendants have stopped paying returns to investors due to the unprofitability of Watford West and the lack of available funds.

According to Ponzitracker's Ponzi Scheme Database, the scheme is just the third Ponzi scheme to be discovered in North Dakota since 2008.  Given the size of the scheme, it is likely the largest financial fraud in North Dakota's history.

The Commission's Complaint is below:

 

Complaint Nd

 

Monday
May042015

Rothstein Ally Gets Sentence Reduction; Is Rothstein Up Next?

A disbarred lawyer serving a five-year prison term for his role in Scott Rothstein's massive $1.2 billion Ponzi scheme had his sentence decreased by nearly two years as a result of the substantial assistance he provided to federal prosecutors that led to the convictions of three other individuals linked to Rothstein's fraud.  Douglas Bates, 56, previously pleaded guilty to a wire fraud conspiracy charge on the eve of trial and just after another lawyer linked to Rothstein's scheme was convicted of similar charges at trial.  Prosecutors, citing the substantial assistance Bates provided that led to the conviction of two police officers and Rothstein's former law partner, filed a motion seeking the reduction that was granted by U.S. District Judge Donald Middlebrooks. With this marking the first government-requested sentence reduction following the conviction of dozens of Rothstein associates, the question now becomes when (and if) such a request will be made for Rothstein himself, who famously began cooperating with prosecutors days after he surrendered to authorities in late 2009.  

Background

Beginning as early as 2005, Rothstein promised lucrative returns to potential investors through investments in highly confidential legal settlements purportedly emanating from sexual harassment, whistle-blower, and qui tam actions against large corporations.   According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to payment of that settlement at a discount.  Investors were sworn to secrecy, and Rothstein and his law firm became well-known in Ft. Lauderdale. All told, the scheme raised over $1 billion from investors, with Rothstein spending freely on lavish houses, exquisite cars, and fine jewelry.  After the scheme collapsed in late 2009, Rothstein first fled to Morocco before returning to surrender to authorities.  He later pleaded guilty was was sentenced to a 50-year prison term.  

Rothstein's 'Extraordinary' Cooperation

While much has come to light of Rothstein's lavish lifestyle prior to the scheme's collapse, his actions and whereabouts following his arrest have been shrouded in secrecy following reports he was extensively cooperating with authorities to implicate others involved in his scheme.  Indeed, it is likely Rothstein realized that he would not live out the entirety of his 50-year prison sentence.  It was later revealed that Rothstein is a member of the federal witness protection program, and his only public sightings since his arrest have come in court or at court-ordered depositions. While details have been scant as to the substance of his cooperation, prosecutors have characterized Rothstein's assistance as "extraordinary" as they have obtained the convictions of nearly three dozen individuals linked to the fraud.  On the civil side, a court-appointed bankruptcy trustee has successfully recovered hundreds of millions of dollars for Rothstein's victims - a recovery that has resulted in the unprecedented 100% return of investor losses. While reports are conflicting as to Rothstein's role in that result, ironically it was Rothstein's role with a TDBank employee that resulted in a large portion of the eventual recoveries.

Is A Reduction In Rothstein's Sentence Forthcoming?

Rothstein has been quite clear that his extensive cooperation has not been entirely for altruistic reasons. This is illustrated by the following exchange which took place during a 2011 deposition:

Q: Good answer. So, you hope that that's what is going to happen, but other than that no promises by the government or anybody?

A:  I'm hopeful at the end of all this, the government will see fit to ask Judge Cohn to reduce my sentence. There's no promise made to me.

Scott Rothstein 2011 deposition testimony

Rule 35 of the Federal Rules of Criminal Procedure governs the correction and reduction of a federal criminal sentence.  Subsection (b) provides that,

(1) In General. Upon the government's motion made within one year of sentencing, the court may reduce a sentence if the defendant, after sentencing, provided substantial assistance in investigating or prosecuting another person.

On the day before the first anniversary of Rothstein's sentence, prosecutors filed a Motion for Reduction of Sentence and Stay of Ruling.  The Motion stated that Rothstein's cooperation, which had begun before he entered his guilty plea, was ongoing and would not be complete until a future time.  Upon the completion of Rothstein's cooperation, the Motion indicated that a subsequent motion would be filed requesting a hearing at which Rothstein's nature, extent, and value of such cooperation would be detailed.

Fast forward four years.  During that time period, prosecutors have strung together an impressive (and undefeated) string of convictions for those who played various roles in Rothstein's fraud, including lawyers from Rothstein's firm, accountants and bookkeepers, and even Rothstein's family members.  Together, those convictions have resulted in over 60 years of prison sentences.  

Rothstein received his 50-year sentence in June 2010 - a sentence that was 10 years longer than the term requested by prosecutors.  Thus, he has served nearly 5 years of his sentence to date.  While any reduction would be at the sole discretion of prosecutors, Rothstein could be out of prison at the ripe age of 76 assuming that he receives a deal similar to that given to Doug Bates.  While Bates received a 33% reduction in his sentence for his cooperation, it is likely that many other considerations will factor into any reduction proposed for Rothstein.  While it certainly benefits prosecutors to encourage defendants to cooperate with the government, the breadth of Rothstein's fraud - his Ponzi scheme was one of the largest ever and was the largest in Florida's history - as well as the potential resulting public outcry may give pause to some before recommending a reduction that could allow Rothstein to emerge a free man one day.  

While prosecutors timely filed the Rule 35 motion, a hearing and subsequent ruling has been delayed while prosecutors determine the extent of Rothstein's cooperation.  Given the undeniable success prosecutors have achieved, of which a substantial portion is likely due to Rothstein's cooperation, it is likely that Rothstein's cooperation has amounted to the "substantial assistance" required under the statute.  With only a few active prosecutions remaining, it is likely that prosecutors have charged most if not all of the potential targets related to Rothstein's scheme.  This includes the prosecution of former TD Bank Vice President Frank Spinosa, at which Rothstein might be required to testify.

Notably, Rothstein himself has acknowledged that any chance for reduction is far from certain given a well-reported hiccup in his cooperation.  Rothstein is referring to his wife's arrest and subsequent prison sentence for concealing assets from authorities, including a large jewelry collection that included a 12-carat diamond ring.  Rothstein later admitted that he had been less than forthcoming with authorities about those assets.  It remains to be seen whether authorities will be willing to forgive that transgression in light of Rothstein's otherwise significant cooperation.

Previous Ponzitracker coverage of the Rothstein scheme is here.

Friday
May012015

North Carolina Man Charged With $2 Million Forex Ponzi Scheme

The Commodity Futures Trading Commission filed civil fraud charges against a North Carolina man, accusing him of operating a foreign exchange trading Ponzi scheme that took in over $2 million from at least two dozen investors.  Barry C. Taylor, along with his companies OTC Investments LLC and Foreign Currency Trade Advisors, LLC, was charged with multiple violations of the Commodity Exchange Act.  The CFTC is seeking injunctive relief, disgorgement of ill-gotten gains, restitution to defrauded victims, an accounting of funds, and civil monetary penalties.  

The CFTC's complaint alleges that Taylor solicited potential investors with the promise that their funds would be used for foreign exchange trading that generated a guaranteed minimum monthly return of at least 2%.  Investors were assured that Taylor would only receive "administrative fees and commissions" from any amount exceeding the 2% profits paid out to investors, and Taylor guaranteed that investors could not sustain a loss higher than 15% without the automatic cessation of trading.  In total, Taylor and his companies took in nearly $2.5 million from at least 24 investors.

After a participant requested a redemption of their investment in late 2014, Taylor sent an email to several investors indicating that the recent foreign currency market swings had resulted in the suspension in trading of their funds.  Taylor further indicated that he hoped to begin trading the following week.  However, the CFTC alleged that these claims were false, as Taylor's accounts had already been frozen at one currency trading firm prior to the events in the currency market while he continued to trade at another currency trading firm.  The CFTC also alleged that Taylor's promises of guaranteed 2% profits were in stark contrast to actual trading losses suffered of nearly $500,000 as of January 2015.  Taylor allegedly used participant funds for his own personal expenses, including the purchase of real estate, luxury watches, entertainment, and living expenses. Despite the alleged trading losses and diversion of investor funds for personal expenses, Taylor allegedly used investor funds to make interest payments to existing investors in Ponzi-like fashion to add to the scheme's legitimacy.  

Interestingly, while the CFTC's complaint pinpoints the beginning of Taylor's scheme as no later than August 2011, an interesting internet forum post suggests that the scheme may have started at least a year earlier.  The aptly-named Scam.com, which provides a centralized forum for posters to trade notes over various scams du jour, contains a post with an initial post on September 19, 2010 stating that:

I invested 10,000.00 with Mr. Taylor over a year ago to invest in the forex market. I was told that it had gained about 10% in 6 months. I requested my funds and it was supposed to take 60 days to get them. I was then told the balance had lost 50%. It has now been 9 months and i have gotten 25% of my money and a whole lot of broken promises. I never got any documentation and suspect that I was a victim of a ponzi scheme.

Interesting, a later post in January 2011 from BCTAYLOR - which seems to be an abbreviation for Barry C. Taylor - claims that:

In the first place the money was never invested with me personally. It went into a fund that I was one of 5 traders. In addition, the poster reached a settlement with the fund months ago and has received 80% of the settlement. The balance will be paid once this post has been removed. This should never have been posted against me individually.The CFTC's complaint is below:

Despite subsequent questions for information from BCTAYLOR, that was his first and last post.  The original poster later posted (in quotes) that:

"There were informational errors unknown to me when I posted the previous report and I am withdrawing my complaint at this time! I have received the information I requested and reached an agreement with the company. Mr. Taylor was only the trader and my contact with the company. I realize that the forex market is erratic and proifts come and go quickly. Anyone investing in the forex market should be aware that their capital is at risk and subject to be lost."

A copy of the CFTC's Complaint is below:

Enf Otc Complaint 042115