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Recent SEC Releases
Monday
Jul202015

Two Canadian Banks Pay $36 Million To End Ponzi Lawsuits

Two prominent Canadian banks agreed to pay $36 million to settle independent lawsuits alleging the banks aided massive Ponzi schemes that bilked victims out of a total of nearly $4 billion.  TD Bank, part of Canada's Toronto-Dominion Bank, and BMO Harris, also known as Bank of Montreal, disclosed the settlements last week that represented the culmination of years of contentious litigation.  TD Bank agreed to pay $20 million to resolve a class action suit brought by European victims of a $223 million Ponzi scheme peddling purported interests in life settlements, while BMO Harris will pay $16 million to two Florida funds that suffered losses in Thomas Petters' massive $3.65 billion Ponzi scheme.  The settlements, which require court approval, represent two of the largest settlements against financial institutions implicated in Ponzi schemes.

TD Bank

TD Bank provided banking services to participants in a massive Dutch-based Ponzi scheme that duped victims worldwide out of at least $223 million.  The scheme, operating as Quality Investments, promised investors lucrative returns from the sale of fractionalized interests in life insurance policies.  The company used some of the funds it raised from investors to purchase these life insurance policies, for which it orchestrated the creation of dozens of Florida entities to maintain and hold the policies.  Investors were instructed to wire funds to the account maintained by a "trustee" at TD Bank, where it was promised that the funds would stay until they were used to purchase life insurance policies. 

However, according to the class action plaintiffs, TD Bank failed to properly monitor the trust accounts purportedly holding investor monies, and ignored the transfer of tens of millions of dollars to recipients in high-risk countries such as Cyprus and Turkey known for money-laundering.  Under U.S. anti-money laundering laws, such as the Bank Secrecy Act, TD Bank was required to investigate such suspicious activities and to file reports known as suspicious activity reports ("SARs") with authorities upon the occurrence of such actions.  TD Bank denied liability for losses suffered by Quality Investments victims, and maintained that it provided routine banking services which did not result in the alleged losses. 

BMO Harris

BMO Harris is the successor by merger to M&I Marshall & Ilsley Bank ("M&I Bank").  The lawsuit against BMO Harris stemmed from the involvement of a now-bankrupt pair of Palm Beach "feeder funds" that collectively invested more than $1 billion in the massive $3.65 billion Ponzi scheme masterminded by Minnesota businessman Thomas Petters.  When the scheme collapsed in late 2009, Palm Beach Finance Partners LP and Palm Beach Finance II (collectively, "Palm Beach Funds") filed bankruptcy shortly thereafter and cited their Petters' exposure as the reason.  The Securities and Exchange Commission subsequently levied civil fraud charges against two investment management and advisory firms, along with their principals, that controlled the Palm Beach Funds, on accusations the firms and principals facilitated Petters' scheme and later took steps to conceal mounting losses.

According to Petters, the investment of the Palm Beach Funds and others would be used to finance consumer merchandise transactions from suppliers to big box retailers such as Costco and Sam's Club. Investors were instructed to wire funds directly to two purported suppliers, which would then upon receiving the funds send payment for the merchandise to one of several depository accounts maintained by Petters at M&I Bank.  According to Petters, these funds would be used first to repay investors and second to pay a commission to Petters.  For the assurance of certain investors, including the Palm Beach Funds and associated entities, Petters and M&I executed a Deposit Asset Management Agreement ("DAMA"), that assured third parties that deposits into one of Petters' M&I Bank accounts would be properly transferred to the appropriate parties - including the Palm Beach Funds.

However, Petters was not operating a legitimate business venture, as there were no purchase orders, sales, or contracted suppliers or retailers.  Instead, Petters was operating a classic Ponzi scheme by using new investor funds to make payments to existing investors.  Petters did so by transferring funds from the bank accounts purportedly maintained by the "suppliers" and remitting those funds to the accounts he maintained at M&I Bank.  There, funds were used to make payments to existing investors as well as to support Petters' lavish lifestyle.

A liquidating trustee appointed for the Palm Beach Funds, Barry Mukamal, sued BMO Harris, as successor to M&I Bank, in 2011 and asserted multiple claims including fraudulent transfer claims under Florida law and the U.S. Bankruptcy Code seeking recovery of transfers made to BMO Harris during the six-month period preceding the collapse of Petters' scheme.  A federal bankruptcy judge dismissed that complaint, and the trustee subsequently filed an amended complaint.  The court dismissed the tort claims in the amended complaint, but denied the motion to dismiss the fraudulent transfer claims.  After conducting discovery, the trustee filed an amended complaint in June 2014.

The Palm Beach Funds trustee also used some legal maneuvering to increase his claims against BMO Harris.  In November 2011, the Palm Beach Funds filed avoidance actions against the purported entities serving as Petters' suppliers, Nationwide International Resources, Inc. and Enchanted Family Buying Companies (the "Petters Suppliers").  In that suit, the trustee sought to recover all transfers made from the Palm Beach Funds to the Petters Suppliers from November 2005 to September 2008, which totaled over $1 billion.  The Petters Suppliers had been placed in receivership in 2008 shortly after the scheme's collapse, but the trustee was permitted to file the suits to preserve applicable statutes of limitation.  It was not until February 2014 that he was granted permission to prosecute the suits by the U.S. District Court for the District of Minnesota.   After he secured judgments against the Petters Suppliers in July 2014, the trustee filed another suit against BMO Harris asserting claims as a subsequent transferee pursuant to 11 U.S.C. 550.  That suit also sought the avoidance and recovery of all transfers from the Petters Suppliers to BMO Harris for the six-year period preceding the scheme's collapse pursuant to Minnesota state fraudulent transfer laws.  That suit sought more than $24 billion from BMO Harris.

After a two-day mediation and several months of continued negotiations, the trustee and BMO Harris agreed to settle for $16 million. 

Takeaways

These two settlements are notable not only for their high value, but also because of the rarity of such outcomes.  Recoveries against financial institutions by court-appointed receivers and trustees have historically been difficult in the current legal environment.  The TD Bank settlement is yet the latest in a series of high-profile cases tied to the bank's involvement in several Ponzi schemes, including the massive $1.2 billion Ponzi scheme carried out by Scott Rothstein that ultimately saw the bank pay hundreds of millions of dollars to resolve claims.  The BMO Harris outcome demonstrates the success of a legal strategy that sought not only to recover payments made to M&I Bank from Petters, but also payments made by the Petters Suppliers to M&I Bank, which ultimately significantly reduced the bank's settlement exposure.

The Motion to Approve Compromise filed in the Palm Beach Funds case is below:

2670 Motion to Compromise Controversy With BMO Harris Bank N.a., In Add...

Friday
Jul172015

Former Stockbroker Charged With $15.5 Million Ponzi Scheme

A Pennsylvania former stockbroker was hit with civil fraud charges by the Securities and Exchange Commission and accused of operating a Ponzi scheme that sold fake certificates of deposit ("CDs") and raised more than $15 million from victims.  Malcolm Segal, 69, was charged with multiple violations of federal securities laws in a complaint filed earlier this month by the Commission.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains plus pre-judgment interest, and civil monetary penalties.

According to the Commission, Segal began purchasing numerous CDs in 2009 on behalf of clients of an unnamed registered investment adviser (the "Adviser").  During this time period, Segal worked as a financial adviser at Cumberland Brokerage Corporation. In 2009 alone, Segal purchased at least 134 CDs with interest rates ranging from 1.14% to 2.75% for a total of nearly $11.7 million.  The CDs were not purchased in the names of the individual investors, but rather in the name of "Clients of [the Adviser]."  As such, Segal retained control over the redemption of the CDs, and subsequently redeemed at least 76 of those CDs for sales proceeds of over $5 million.  Instead of returning those proceeds to the relevant investors, Segal paid Ponzi-style proceeds to investors and also financed lavish lifestyle.

In April 2011, Segal moved from Cumberland to Aegis Capital Corp. ("Aegis")  At or around that time, Segal began soliciting investors to purchase CDs that in reality did not exist.  Investors were instructed to wire funds to a bank account in the name of J&M Financial, which Segal controlled, and were told that Segal would purchase the CDs and subsequently keep them in his vault for "safe keeping."  To assure potential investors of the safety of the program, Segal represented that Aegis sponsored and oversaw the CD program.  After wiring their funds to the bank account directed by Segal, investors would receive a "confirmation" from Segal that included, among other things, the issuer, settlement date, rate, and location of the CD purchased on that investor's behalf.  For some investors, the names of the banks provided by Segal that issued the purported CDs had actually been closed by federal and state banking authorities weeks before the transaction.  

As the scheme continued and Segal's obligations to existing investors ballooned, he increased the promised "interest rates" promised on the CDs.  To explain the increase, Segal claimed that Aegis was offering the lucrative rates through their "Bulk CD Program," and that the significantly large number of CDs offered by the bank allowed him to offer 12% annual rates.  

However, Segal ceased purchasing CDs on behalf of investors beginning in 2011.  Instead, Segal misappropriated investor funds for a variety of unauthorized purposes, including the payment of fictitious returns to earlier investors - a classic hallmark of a Ponzi scheme - as well as the payment of personal expenses and even the purchase of a south Florida residence.  In late 2013, faced with the prospect of dwindling available cash and mounting investor redemptions, Segal allegedly began misappropriating funds from customer accounts to meet his rising obligations.  His scheme ultimately collapsed when an investor reported missing funds from their account to Segal's employer.

The Commission's complaint is below:

 

comp-pr2015-135

 

Tuesday
Jul142015

New York Lawmaker's Son-In-Law Pleads Guilty To $6 Million Ponzi Scheme

The son-in-law of a prominent New York state lawmaker has pleaded guilty to operating a Ponzi scheme that duped victims out of approximately $6 million.  Marcello Trebitsch, also known as Yair Trebitsch, entered a guilty plea to a single count of securities fraud today in a New York federal court.  Trebitsch, whose father-in-law is currently fighting federal corruption charges, was charged in April with securities fraud and wire fraud.  He could face up to twenty years in prison under the securities fraud charge, although federal sentencing guidelines will likely call for a reduced range.  He has agreed to pay nearly $6 million in restitution to his victims.

According to the complaint, which was filed under seal on April 10, 2015 by way of a sworn affidavit by a Federal Bureau of Investigation special agent, Trebitsch began soliciting investors in or around 2009 forAllese Capital, LLC ("Allese"), which Trebitsch touted as a successful investment fund that he operated with his wife.  Trebitsch, whose wife Michelle is a certified public accountant and is the daughter of former New York Assembly Speaker Sheldon Silver, told potential investors that Allese employed a successful trading strategy through the day-trading of large cap stocks that resulted in annual returns ranging from 14% to 16%.  Trebitsch assured investors that little to none of their funds would remain invested in the market overnight, and also claimed that he cleared his trades through a major Wall Street investment bank that also had agreed to invest $50 million in Allese.  In total, Trebitsch raised at least $7 million - a majority of which was raised from a single victim.

After Trebitsch's largest investor requested a partial redemption of his investment in June 2014, Trebitschultimately disclosed through his attorney that he had experienced significant trading losses and that, after accounting for Trebitsch's $400,000 "fee," no money remained.  

The Complaint alleged that a forensic review of Trebitsch's bank accounts demonstrated that only a small portion of investor funds were used to engage in trading, and that Trebitsch suffered net trading losses.  A subsequent search warrant executed at Trebitsch's house apparently turned up a handwritten note that appeared to be authored by Trebitsch and stating that he "reckognize [sic] the tremendous pain along with financial," followed by the crossed-out word, "pain."  

The Complaint is below:

US v Trebitsch by jmaglich1

Wednesday
Jul082015

Criminal Charges Filed In Alleged $1.5 Billion Medical Factoring Ponzi Scheme

Authorities have filed criminal charges against the president and two former executives of a Las Vegas investment company, alleging the company operated a massive $1.5 billion Ponzi scheme.  Nearly two years after the Securities and Exchange Commission filed civil fraud charges, the U.S. Department of Justice announced the indictment of Edwin Fujinaga, the former president and CEO of MRI International Inc. ("MRI"), and former MRI executives Junzo Suzuki, 66, and Paul Suzuki.  All three of the men were charged with eight counts and mail fraud and nine counts of wire fraud, while Fujinaga was also charged with three counts of money laundering.  The scheme ranks among the top Ponzi schemes ever uncovered.  Each of the men could face dozens of years in prison if convicted of the charges.  

Fujinaga formed MRI in 1998, claiming the company engaged in the business of purchasing accounts from U.S. medical providers with outstanding balances to be collected from insurance companies.  Potential investors were told that Fujinaga and MRI were able to purchase these accounts at a discount, which would then yield a profit if a larger amount was collected from the insurance company.  MRI primarily targeted investors living in Japan, and often hosted these investors in the United States for presentations and tours of MRI's office in Las Vegas.  Investors were provided promotional materials extolling the investments, including representations about the safety of the investor's principal and the use of investor funds, and were promised annual returns of up to 10.32% annually.  An investment was memorialized by a "certificate of investment," which was obtained after an investor either wired money or sent a check to one of MRI's accounts at Wells Fargo Bank in Las Vegas.  Potential investors were assured that an independent third party would hold and manage their funds to ensure they were used properly.  In total, authorities allege that MRI raised over $1.5 billion from thousands of investors worldwide.  

However, in reality, MRI used investor funds for a variety of unauthorized purposes, including the payment of principal and interest to earlier investors - a hallmark of a Ponzi scheme.  Indeed, between January 2009 and March 2013 alone, over $600 million was used to pay claims for principal or interest by existing investors.  Fujinaga also used investor funds to pay business expenses, to siphon funds to other businesses he controlled, and to support Fujinaga's luxury lifestyle through the payment of his credit card bills, alimony and child support (totaling $25,000 per month), the purchase of luxury cars, and the purchase of homes in Las Vegas, Beverly Hills, and Hawaii.  By 2011, MRI began defaulting on payments, and authorities estimate that at least 8,000 people invested in MRI.

After Fujinaga and MRI received an inquiry from the Commission in March 2013, he allegedly hired a shredding company to destroy key documents.  He later fired an executive assistant who questioned his actions.  Fujinaga also failed to appear for a scheduled deposition, citing fatigue and illness, and MRI never produced documents requested in an investigative subpoena.  The Commission filed an enforcement action in September 2013, and a Nevada federal judge entered a final judgment of over $580 million against Fujinaga and MRI in January 2015.  Fujinaga and MRI are currently appealing that judgment.

In addition to the charges, the U.S. is also seeking a forfeiture judgment of over $1.5 billion against each defendant.

A copy of the indictment is below:

 

MRI Indictment by LVReviewJournal

 

 

Tuesday
Jul072015

SEC Alleges California Woman Ran $68 Million Oil-And-Gas Ponzi Scheme 

A California woman was charged with masterminding a $68 million Ponzi scheme that touted lucrative oil-and-gas interests to primarily Chinese-Americans both in the United States and abroad.  The Securities and Exchange Commission filed an enforcement action accusing Bingqing Yang, her management companies Luca International Group, LLC, Luca Resource Group, LLC, and Luca Energy Fund, LLC, (collectively, the "Luca Managers"), Lei (Lily) Lei, Anthony V. Pollace, and Yong (Michael) Chen of violating multiple federal securities laws.  Pollace has agreed to pay a $25,500 penalty to settle charges that he played a small role in the alleged fraud.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil monetary penalties from the remaining defendants.

According to the Commission, Yang and others began targeting Chinese-American investors in September 2007 through Chinese-language television, radio and newspaper advertisements, and investment seminars.  Potential investors were promised annual returns ranging from 20% to 30% through an investment in several investment funds (the "Luca Funds") that purportedly were able to achieve highly lucrative returns by developing and operating oil and natural gas wells in Texas, Montana, North Dakota, Louisiana, and the Gulf of Mexico.  In brochures and powerpoint presentations, potential investors were told there was "zero risk of losing entire principal."  At least one potential investor expressed their confidence and trust in the investment based on Yang's Chinese heritage.

Yang also targeted Chinese citizens who sought to obtain permanent residence in the United States through the EB-5 Visa program, which provides foreign nationals with a method for obtaining a green card by making an investment in the United States.  Chinese citizens were solicited at investment seminars that took place in China, and Yang ultimately raised over $8 million alone from investors who thought they were investing in an opportunity to acquire EB-5 visas.  In total, Yang and the Luca Managers raised at least $68 million from investors.

However, the Commission alleges that Yang made numerous misrepresentations in touting the investment opportunity, incuding that the Luca Funds were profitable when in reality they were losing millions of dollars in their oil and gas investments.  Investors were not told that Yang paid herself approximately $1 million in a "trademark licensing fee" in March 2012 despite the company not having any trademark logos on record and later backdating a trademark licensing agreement in March 2013.  Nor did Yang disclose that investor funds would be used use to support a lavish lifestyle that included the purchase of a 5,600 square foot house in California (which Yang disguised as a letter of intent to make a deposit on a Chinese oil drilling rig), to pay her personal taxes, to pay for family travel to China and Hawaii, to pay private school tuition, and to pay for martial arts and choir lessons for her children.  Yang is also accused of using over $500,000 in investor funds to take potential Chinese investors on a 10-day expenses-paid trip to Pebble Beach, California that included a speech by a former U.S. President.  

Yang is also accused of misrepresenting the true nature of the various oil and gas ventures to potential investors.  While distributing projections that assumed a 100% success rate for each well, Yang failed to disclose that the true success rate of the wells was less than 60% and that the returns were based on a flawed assumption that the wells would be drilled in the first year.  

A copy of the Commission's complaint is below:

SECvLuca