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Recent SEC Releases
Tuesday
Oct282014

Banker Who Faked His Death Gets 30-Year Sentence For $50 Million Ponzi Scheme

A former minister-turned-bank-director who faked his own death and was even declared legally dead at one point was sentenced to a 30-year prison term for operating a Ponzi scheme that duped victims out of tens of millions of dollars and caused a federally insured bank to go out of business.  Aubrey Lee Price, 48, received the sentence after pleading guilty earlier this year to bank fraud, wire fraud, and securities fraud charges.  In addition to the prison sentence, Price was also ordered to forfeit $51 million - representing the proceeds from his criminal acts.

Price formed PFG, LLC, and Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC, in 2009. Potential investors were told that the fund sought "positive total returns with low volatility" through investing in low-risk securities such as equity securities traded on the U.S. markets.  Investor funds were kept in a Goldman Sachs bank account where, despite statements showing consistent trading gains, Price is alleged to have suffered massive trading losses of at least $20 million.  

Price also used investor funds to acquire Montgomery Bank & Trust ("MB&T"), a failing South Georgia bank, in order to gain control of millions of dollars of the bank's cash assets and reserves.  According to the Securities and Exchange Commission, Price transferred at least $10 million from the bank to a trading account at Goldman Sachs, and attempted to conceal the fraudulent nature of his activity by providing fictitious account statements and representation letters to bank regulators.  In total, Price is accused of embezzling at least $21 million from MB&T.

In June 2012, Price boarded a ferry terminal in Key West, Florida.  He left behind a rambling suicide note in which he indicated that he was "incapable of continuing in this life," and that he "created fales statements, covered up my losses and deceived and hurt the very people I was trying to help."  Price repeatedly alluded that he planned to kill himself, and he had not been seen since boarding the ferry. 

A routine traffic stop based on suspicion of illegally-tinted windows landed Price in jail after authorities became suspicious of his story.  Authorities discovered that Price fit the description of a "Jason" that rented a house in Ocala, Florida, and a subsequent raid of that house turned up more than 200 marijuana plants.  Price was returned to a Statesboro, Georgia jail to await trial on bank fraud charges filed by Georgia federal prosecutors.

After his capture, Price told wild stories about his life on the lam, claiming that he first spent time in an unnamed Latin American country where he was allegedly involved with a shadowy figure named "Pedro."  According to Price, "Pedro" on at least one occasion threatened Price that his children's lives were at stake if he did not cooperate.  "Pedro" then offered Price a job overseeing his cocaine operation, where Price claimed he became an expert "cocaine taster."  After he moved back to North Florida, he soon took over marijuana operations and purported to have spent time in more than twenty "grow houses."  

Price then assumed the identity of "Jason," recently-divorced man with a past drug addiction.  In return for doing gardening and other yard work, an elderly couple let him stay in a small shed on their land.  In that shed, Price began growing marijuana plans - and told acquaintances that his sick uncle lived in the shed and would shoot any intruders.  

A hearing will be held in the near future to determine the amount of restitution Price must pay to his victims.  
Monday
Oct272014

Massachusetts Regulators Allege EmGoldex Is Massive Pyramid Scheme

Massachusetts securities regulators have filed civil fraud charges against a Massachusetts company that touted annual returns exceeding 1,000% through trading in "investment gold bars," alleging that the company was nothing more than a recruitment arm for a massive pyramid scheme.  Emgoldex Team USA, Inc. ("EmGoldex USA"), as well as officers Matthew Michael D'Agati, James Vincent Piemonte, Jonathan Herman Siegler, and Joseph Zingales, were accused of promoting multi-level marketing investments in EmGoldex, a company located off the coast of Africa.  The action seeks the imposition of sanctions, injunctive relief, disgorgement and remuneration of ill-gotten gains, and civil fines.

EmGoldex represents itself as an internet-based store offering investors the ability to profit through purported investments in gold bars.  Through various recruiting efforts concentrated in social media and word of mouth, potential investors are enticed with the prospect of massive fast, easy, and risk-free profits.  Emgoldex USA, the company named in the complaint by the Massachusetts Securities Division, purportedly operated as one of the recruiting arms of EmGoldex, using websites, social media, and live functions to recruit investors to join their recruiting downline.  Because EmGoldex offered significant incentives for the recruitment of additional investors, the efforts by EmGoldex USA to recruit new investors resulted in significant recruitment commissions.  

According to the MSD, Respondents and EmGoldex USA focused exclusively on recruiting new investors to join the EmGoldex Marketing Program (the "Marketing Program"), which was advertised as a prerequisite to purchase gold bars from EmGoldex.  Investors joining the Marketing Program were required to submit a "prepayment" for a set of investment gold bars valued at approximately 7,000 euros but which was typically significantly offset through "credit bonuses" payable later for the recruitment of new investors.  After submitting the prepayment, an investor would receive a coupon for a personalized website and an activation code allowing entry into the Marketing Program.  According to the MSD, an investor must then only recruit two new investors to become eligible for gold that can be exchanged with EmGoldex for a significant profit over their initial prepayment.  These profits ranged from 520% to 1,105% annually.  Additionally incentives programs were also offered that allowed even higher rates of return.  In total, EmGoldex USA raised nearly $500,000 from hundreds of investors.

At least one of the accused was apparently skeptical of this business model.  In late April 2014 - shortly after the Massachusetts Securities Division filed civil fraud charges against another Massachusetts company accusing it of being a massive $300 million Pyramid and Ponzi scheme - D'Agati emailed EmGoldex support services seeking advice on how to address questions surrounding EmGoldex's business model and whether it was a pyramid or Ponzi scheme.  The complaint indicated that EmGoldex's response made little sense, instead containing "legal jargon" and citing various European internet commerce laws governing enforceability of electronic contracts.  Despite this failure to address the issue, D'Agati and the remaining respondents continued to solicit investors.

However, according to the MSD, EmGoldex USA was nothing more than an illegal scheme that ensnared hundreds of Massachusetts residents in a massive Ponzi scheme.  These efforts allowed Respondents to earn significant "downline" commissions, and did not disclose to investors that (1) there were no gold bars or other product, and (2) their returns were entirely based on efforts to recruit new investors.  

The MSD's Complaint is below:

 

emgoldex

EmGoldex Et Al Complaint Docket No 2014 0056

 

 

Friday
Oct242014

ZeekRewards Founder Indicted For $850 Million Ponzi Scheme

Over two years after the Securities and Exchange Commission accused ZeekRewards of being a massive Ponzi and pyramid scheme, a grand jury indicted the company's founder on a multiple fraud charges.  Paul Burks, 67, was charged with mail fraud, wire fraud, mail and wire fraud conspiracy, and tax fraud conspiracy.  Burks is expected to appear in federal court in the coming days to make his initial appearance.  If convicted and sentenced to the maximum term, Burks could face decades in federal prison.

Background

Burks has operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place incremental bids on merchandise in one-cent increments.  Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions.  Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler.  Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix."  None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com.  According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits.  The daily "award" was usually 1.5% of the individual's 'investment'.  Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points now numbers nearly $3 billion.  Assuming a 1.5% daily "award", this would require daily cash outflows of $45 million should all investors seek to receive their "award" in cash.  

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix".  The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.  

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of Ponzi schemes.  Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadilty increased, reaching approximately $2.8 billion in August 2012 despite availabie cash reserves of less than 4300 million.  Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.

Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.  

Timing of Charges

Burks becomes the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing.  The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment.  The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty to the fraud, since the guilty plea or conviction of a Ponzi schemer allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.  

Tax Fraud Conspiracy

While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, the Burks indictment also includes a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme.  While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.

More Ponzitracker coverage of ZeekRewards is here.

The indictment is below (h/t to ASDUpdates):

 

File.stamped.burks.indictment

 

Thursday
Oct232014

“Bamboo Cyclist” Gets 4-Year Sentence For $2.5 Million Ponzi Scheme

A Utah man once known as the “Bamboo Cyclist” was sentenced to serve a four-year prison term for masterminding a Ponzi scheme that duped victims out of nearly $3 million.  James Ronald Donahoo, II, of Pleasant Grove, Utah, received the sentence after pleading guilty this past summer to wire fraud, money laundering, and failure to file a tax return.  The sentence reflects the term agreed to in the plea agreement between Donahoo and prosecutors, and Donahoo will also serve a three-year period of supervise release following his release from prison.  Additionally, Donahoo was ordered to pay approximately $2.7 million to his defrauded victims.

Donahoo operated Paradigm, Inc. ("Paradigm"), a Utah corporation that Donahoo represented was in the business of making bridge loans or "hard money loans" to small businesses. Donahoo told potential investors that they could earn monthly returns ranging from 1% to 3% through investments in “hard money” loans or bridge loans. Investors were assured that their investment was safe, with Donahoo representing that each dollar invested was secured by a corresponding amount in the bank.  Investors were also shown monthly bank statements for Paradigm that purportedly reflected their investment growth.  In total, Donahoo raised at least $2.5 million.

However, Donahoo did not invest in “hard money” or bridge loans; rather, $1.5 million of investor funds were used to invest in various businesses overseen by Donahoo’s friends and family.  while Paradigm did invest approximately $1.5 million in various businesses, none of investors' funds were used as represented.  Approximately $267,000 was used to make Ponzi-style payments to existing investors, while Donahoo also misappropriated funds to sustain a lavish lifestyle that included the purchase of more than $11,000 in fur coats, trips to Hawaii, jewelry, and a Mercedez Benz.

After several investors obtained judgments against Donahoo following the scheme's collapse, he reportedly began traveling the country by bicycle billing himself as the "Bamboo Cyclist" as he promoted various philanthropic causes.  Donahoo promoted his cause through various social media sites, including YouTube.  One website apparently formed by one of Donahoo's victims suggested that these efforts, including Donahoo's claim that he was soliciting "micro loans" for 3rd world countries, were simply a continuation of Donahoo's deceit.  One of the YouTube videos is embedded below:

 

Tuesday
Oct142014

Zeek Receiver Blasts Victim Lawyers' Attempt To File Lien On Distributions

With thousands of allowed claims in this matter, it is impractical to allow third parties to interfere with the distribution process. The Receiver is simply not equipped to assess the validity of every interest asserted by a third party in the distribution proceeds of every victim. To allow otherwise would inundate this matter with third-party claims. Further, the Receiver is ill- equipped to address the validity of such claims given that each claim, in effect, becomes another case in and of itself. 

- Kenneth Bell, court-appointed receiver

The court-appointed receiver overseeing recovery efforts for victims of the $600 million Zeek Rewards Ponzi scheme had strong words for a Louisiana law firm that recently filed papers asserting attorney charging liens of over $130,000 against an interim distribution made to victims.  Kenneth D. Bell, the receiver, filed his objection to the Notice of Attorney's Charging Liens (the "Notice") filed by Patrick Miller LLC (the "Law Firm"), arguing that the Notice should be stricken or, in the alternative, the Court should decline to rule on the Notice and instead confirm that the Receiver is free to make distributions to affected victims.  

Background

The filing is the latest in the back-and-forth between the Law Firm and Bell, and comes after the filing of the Notice on September 29, 2014. 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.  

An attorney's charging lien is used to create a security interest in favor of an attorney with a contract entitling him to a portion of the proceeds.  When the Notice was filed, it was unclear how the Law Firm intended 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 listed over 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with the Law Firm.

The Objection

In the Objection, the Receiver stated that the Notice "appears to be an attempt by Mr. Michaud to circumvent the Court’s prior orders regarding this issue and insert himself as the recipient of money that belongs to victims."  Of note, it appears that all but eight of the hundreds of affected victims were not recipients of the first interim distribution made earlier this month, as the Receiver claimed that the Law Firm had failed to follow an earlier court order requiring the amendment of certain claimants' mailing information to reflect their actual address rather than that of the Law Firm.  The Receiver also insinuated that, in failing to comply with the order, the Law Firm may also have violated rules governing attorney conduct in both Louisiana and North Carolina by placing the financial interest of the Law Firm over that of their clients.  

The Objection also observes that, while the Receiver did not address the merits of whether the Law Firm was entitled to compensation for whatever assistance it provided to victims during the claims process, neither he nor the Court should be forced to act as the Law Firm's enforcer where "the agreements’ enforceability and unconscionability plainly may be at issue."  Rather, the contingency fee contract explicitly provides for mandatory arbitration to resolve disputes.  Further, the Objection cites a North Carolina case for the proposition that a charging lien can only attach to a judgment, rather than a non-legal administrative proceeding such as the claims process.  The Receiver also notes that charging liens are not particularly favored in North Carolina:

Here, a charging lien is inappropriate given that Mr. Michaud continues to represent these victims in a matter which has not yet been resolved; there is no evidence of either an avoidance of payment or a dispute as to the amount of fees; and there is no indication that these victims have received notice that Mr. Michaud seeks to claim 25% of this first distribution. 

In closing, the Receiver requested an Order directing the Law Firm to timely update the contact information for its clients to reflect their actual address so as to allow the Receiver to make their interim distributions.  

The Objection is below:

Zeek Doc 260