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Recent SEC Releases
Wednesday
Jun202018

SEC Busts $102 Million Ponzi Scheme Targeting Financial Advisor Books Of Business

At the same time he was misappropriating investor funds, Santillo threw himself a party at a nightclub in Las Vegas for which he commissioned a song about himself to be played. The lyrics to that song refer to (Perry) Santillo as "King Perry" and describe his typical attire: "ten-thousand-dollar suit everywhere he rides." The song also depicts his lifestyle as follows: "pop the champagne in L.A., New York to Florida; buy another bottle just to spray it all over ya."

- SEC Complaint

The Securities and Exchange Commission filed an emergency enforcement action in a New York federal court, alleging that five men and their associated companies raised more than $100 million from hundreds of victims with promises of guaranteed returns.  Perry Santillo, Christopher Parris, Paul LaRocco, John Piccarretto, and Thomas Brenner, along with First Nationle Solution LLC ("First Nationle"), United RL Capital Services ("United"), and Percipience Global Corp. ("Percipience"), were charged with violating the antifraud provisions of the federal securities laws.  The Manhattan district court also granted the SEC's request for an asset freeze and temporary restraining order against the defendants, based partly on allegations of Defendants' significant misappropriation of funds for their personal use.

According to the Commission's Complaint, Santillo and Parris sought out retiring investment professionals nationwide with the goal of purchasing those professionals' "books of business" consisting of the clients they had serviced and advised during their career.  The scheme's victims appear to be concentrated in several states, with over $25 million raised from 147 Florida investors, $21 million raised from at least 80 California investors, and over $8 million raised from nearly 75 Ohio investors.  After purchasing or taking over those books of business, the Defendants or other sales people would then contact those clients and seek to persuade them to withdraw their funds from traditional investments and invest in companies controlled by various Defendants including First Nationle, Percipience, and United RL. 

First Nationle was touted to investors as a holding company for several companies with insurance and risk products managing over $145 million in assets that offered investors three-year promissory notes with annual interest payments ranging from 3.3% - 6% as well as "bonuses" rnaging from 10% - 19% that were credited after the investment was made.  Percipience claimed to be in the business of funding loans for the purchase of single-family homes, offering preferred stock to potential investors carrying one- or three-year "lock periods" and annual returns ranging from 7% - 8% also with bonuses upon investment.  Finally, United RL purported to offer financing to physician and medical practices for the purposes of owning toxicology laboratories and offered promissory notes to potential investors with maturity dates of 1-3 years and offering annual returns of 7% along with 7% "bonus" payments.  In total, the Defendants raised more than $102 million from at least 637 investors.  

The Commission alleges that each of those offerings was a sham, noting that it was unable to find any evidence showing more than minimal business functions for the companies.  Instead, the Commission claims that each company operated as a Ponzi scheme in which new investor funds were used to pay returns to existing investors.  Of the $102 million raised from investors, more than $38.5 million was allegedly paid out as Ponzi payments to existing investors while at least $20 million was misappropriated by the Defendants for unrelated personal expenditures including sustaining luxury lifestyles.  For example, the Commission alleges that Santillo used stolen investor funds to pay for housing in multiple states, lease cars, and spending at a Las Vegas resort and casino.  Santillo is accused of using investor funds to have a song written about him, including lyrics referring to him as "King Perry" who wore "ten-thousand-dollar suites everywhere he rides" and would "pop the champagne in L.A., New York to Florida; buy another bottle just to spray it all over ya."

The SEC's Complaint also underscores the critical role that due diligence must play in investment decisions, as there appear to be a number of red flags that were easily discoverable that might have caused a prudent investor to at a minimum ask more questions.  For example. each of the five Defendants was previously registered with the Financial Industry Regulatory Authority ("FINRA"), which oversees registration and regulation of investment professionals.  A review of each of those Defendants' BrokerCheck, which is a publicly-available resource offered by FINRA, shows that each had been suspended or barred from associating with FINRA members.  For example, Defendant Piccarreto was registered with FINRA from 2014-2015 but was suspended for 23 months in July 2017 for participating in the unregistered offering of securities and for making misleading statements to FINRA.  

A copy of the SEC's Complaint is here.

Tuesday
May012018

Feds Allege Mississippi Man Ran $85 Million Timber Ponzi Scheme

"Greed is not good. Greed drove this individual to lie, cheat and steal from fellow Mississippians, and led him to prey upon others outside our state, simply to personally benefit himself."

- U.S. Attorney D. Michael Hurst, Jr. 

In what may be the largest Ponzi scheme in Mississippi history, civil and criminal authorities charged a 58-year old man with raising at least $85 million from investors who thought they were profiting from the harvesting of timber.  Arthur Lamar Adams, 58, made his first appearance today after being arrested earlier in the day on two counts of wire fraud and one count of bank fraud.  Each of the wire fraud counts carries a maximum twenty-year prison sentence while the bank fraud charge carries a maximum thirty-year term.  The type of charging instrument used, a criminal information, suggests that Adams and prosecutors have reached a plea agreement.  According to the New York Times, Adams' lawyer has confirmed that his client is cooperating with prosecutors.  

Adams founded Madison Timber Properties, LLC ("Madison"), which held itself out as a timber harvesting company.  The company began soliciting potential investors in 2004, offering annual returns ranging from 12% to 15% through the harvest of timber from plots of lands owned by third parties.  In many cases, investors were told that they had sole rights to timber harvested from specific plots of lands.  Investments were typically memorialized by a one-year promissory note that could be rolled over, a timber deed and cutting agreement, a security agreement, a tract summary with the purported timber value, and a title search certificate.  Adams and Madison raised at least $85 million from 150 investors throughout the southeastern United States that would purportedly be used to purchase additional timber tracts.  

Many of these promises, however, were false according to authorities.  For example, Adams is accused of never having obtained the requisite harvesting rights to the land as he had claimed.  Many of the investment documents were allegedly forged by Adams, including the timber deed and cutting agreements as well as the tract summary showing the purported timber value.  In many cases, Adams is accused of pledging the same plots of land (to which he had no rights) to multiple parties.  Adams also allegedly misappropriated investor funds for unauthorized purposes, including for his own personal benefit and the development of unrelated construction projects in Oxford and Starkville, Mississippi.  New investor funds were also used to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

In parallel civil proceedings, the Securities and Exchange Commission filed an enforcement action accusing Adams and Madison of violations of federal securities laws.  Adams and Madison agreed to the entry of an asset freeze and permanent injunction.  

A copy of the SEC's Complaint is here.

Thursday
Nov022017

After Mistrial, Feds Will Retry Accused $100 Million Ponzi Schemer

Nearly eight years after a Utah man was indicted on charges he masterminded a $100 million Ponzi scheme, federal authorities announced that they will retry the man after a recent trial ended in a mistrial.  Rick Koerber was originally indicted in 2009 on twenty-two charges relating to his operation of several companies that promised investors monthly returns ranging from 1% - 5% through real estate investments.  Koerber initially prevailed in having the indictment dismissed when a federal judge agreed that prosecutors had waited too long to file charges, but an appeals court reversed the decision and set the stage for a recent trial that resulted in a mistrial.  If convicted of the 17 charges he is facing, Koerber could spend the rest of his life in prison.

Background

Koerber, who called himself a "Latter day capitalist," garnered a growing following for his purported real estate investing prowess and was well known in the community not only for his membership in the Latter Day Saints Church but also for hosting a radio show and frequent real estate seminars.  Through his companies, Founders Capital and Franklin Squires, Koerber touted his "equity milling" program that promised lucrative returns through buying and selling residential real estate.  Investors came in droves, entrusting tens of millions to Koerber's operations.  Even Koerber's radio show changed its opening theme song to, "Money, Money, Money" by Abba.  Koerber also appealed to listeners' religious beliefs, even remarking to one listener who questioned his motives that "God is a capitalist."  In total, Koerber raised approximately $100 million from investors.  

However, the collapse of the real estate bubble in 2007 was catastrophic to Koerber's operations, as the majority of Franklin Squires's assets were in the form of real estate that quickly erased any equity as housing prices declined.  He was indicted in May 2009, and a superseding indictment handed down six months later included twenty-two charges including wire fraud, money laundering, and tax fraud.  

District Court Dismisses Indictment

 In April 2014, nearly five years after the first indictment was handed down, Koerber filed a Motion to Dismiss for Impermissible Delay citing multiple grounds, including the violation of Koerber's right to a speedy trial.  The Speedy Trial Act (the "Act"), codified at 18 U.S.C. § 3161, requires that the trial of a defendant entering a plea of not guilty was to start within 70 days of the later of the filing of the indictment or appearance by the defendant in front of a judicial officer.  While the Act also allows for certain extensions, Koerber's motion argued that at least 125 non-exempt days had passed without a trial or other resolution.  

At a hearing, the Government conceded that while a "technical" violation of the Act had occurred, the Court should "cure" the violation by entering an Order pursuant to the Act essentially making a finding that the "ends of justice" warranted a retroactive continuance and outweighed the best interests of the public and Koerber.  However, the Court cited precedent standing for the proposition that such a retroactive mechanism was prohibited and that a violation of the Act would have occurred even of such actions were taken.  

In deciding whether or not to grant dismissal with prejudice, which would prevent prosecutors from re-filing the charges, the Court referenced the seriousness of the offenses and also the "Government's problematic conduct in prosecuting this case," including a "pattern of neglect," tactical delays, an inappropriate use of attorney-client privileged information, and ex parte interviews with Koerber that violated his due process rights.  Noting that prejudice to Koerber was presumed, the Court opined that re-prosecuting Koerber would be impossible and ordered that the case be dismissed with prejudice.

The Appeal

The Tenth Circuit faulted the district court's analysis in dismissing the charges on two grounds.  First, while the district court correctly embarked on an analysis of the seriousness of the offenses pursuant to 18 U.S.C. § 3162(a)(2), the Tenth Circuit found that this analysis had included several unrelated factors - the presumption of innocence, issues with the "indefiniteness of the information contained in the indictments," and the government's alleged misconduct.  Rather than stopping its analysis at the seriousness of the allegations, the Tenth Circuit found the district court had abused its discretion by considering:

the indictment’s allegations, which are beyond what this factor measures: the seriousness of the charged offenses

...

The strength of the allegations and of the evidence against a defendant is irrelevant to [the seriousness of the offense] factor.

...

The district court strayed off-course by weighing the strength of the government’s allegations instead of the seriousness of the charged offenses themselves.

The Tenth Circuit concluded that the district court abused its discretion in both weighing the seriousness of the offense and applying that finding to whether or not dismissal with prejudice was warranted.

Next, the Tenth Circuit agreed with the government's argument that the district court had failed to "fully consider Koerber's responsibility in the [Act] delay," noting that the "district court was not free to ignore Koerber’s other acts that may have partially contributed to the STA violation."  The government pointed to instances where Koerber "disregarded his STA rights by waiting passively and acquiescing to the postponement of his case," including his waiting months or even years to file motions directed at certain specific events or dates.  The Tenth Circuit agreed, noting that:

One such motion is Koerber’s April 2012 motion to suppress statements from the February 2009 interviews. The district court held a hearing in November 2012 and additional argument in April 2013. Not until August 15, 2013, did the district court grant Koerber’s motion.

The Tenth Circuit ordered the district court to review whether Koerber's actions contributed to delays under the Act, and whether those delays would change the district court's review of the second factor of its analysis given the government's conduct.  

The First Trial and Jury Controversy

Trial began in late August 2017 and lasted for eight weeks, with jurors deliberating for seven days before announcing they were unable to reach a verdict.  While the District Judge overseeing the trial declared a mistrial, Koerber's attorneys declared victory in noting that their private discussions with certain jurors following the trial suggested that 11 out of the 12 jurors had voted for acquittal.  However, in a recent filing indicating their intent to retry Koerber, federal prosecutors took issue with that characterization and instead indicated that:

“Based upon what we learned from these candid and informative discussions, and based upon the serious crimes alleged and unresolved, the United States will move forward with retrying this case.”

Unsurprisingly, Koerber's attorney fired back and described a scene of a 'rogue' juror trying to influence the remaining jurors to convict Koerber:

“It was described how that one juror attempted to influence the others with private meetings outside the courthouse, private gifts and benefits, and undisclosed conflicts of interest that had been concealed from the court during the voir dire process and throughout the trial...When it appeared that the rest of the jury was ready to render at least a partial verdict acquitting Mr. Koerber, that one juror refused to go along and, in a last-ditch effort, tried to bargain with the other jurors — if they would just vote guilty on any one count, pick one, he would agree to acquit on the rest....And when the other jurors pointed out how improper it was to even make such a proposal, that one juror terminated deliberations.”

 Prosecutors have asked U.S. District Judge Robert J. Shelby to set a scheduling hearing to determine a new trial date.

Wednesday
Nov012017

SEC Investigating Mortgage Company That Raised $1 Billion From Investors

The Securities and Exchange Commission has asked a Miami federal judge to enforce subpoenas against nearly 250 companies affiliated with Woodbridge Group of Companies, LLC ("Woodbridge") in connection with the Commission's investigation into whether "the company is perpetrating a fraud on its investors."  In a proceeding filed today seeking an order compelling the production of various financial- and investor-related documentation, the Commission disclosed its ongoing investigation into Woodbridge's receipt of more than $1 billion in investor funds relating to various real-estate offerings.  The move comes after the Commission successfully brought a similar action against Woodbridge after the company refused to produce any of its emails and several officers, including CEO Robert Shapiro, invoked their Fifth Amendment rights in sworn investigative testimony.   

According to the Commission, Woolbridge, based in Sherman Oaks, California, has raised over $1 billion from thousands of investors nationwide through various products offered for investment.  These products include the First Position Commercial Mortgage ("FPCM"), which the company describes as:

 “[a] private third-party loan to Woodbridge [which] provides higher returns with shorter terms secured by commercial real estate. Private lenders select a commercial mortgage in Woodbridge’s inventory to serve as collateral for their private loan. They are recorded on title and acquire a first lien position on the mortgage. And every lender is paid monthly interest from the moment they loan to Woodbridge at a fixed annual 5% interest with a return of principal at the end of the one-year term.” 

In other words, investors loan money to Woodbridge which purportedly uses those funds to acquire properties and in return pays investors a 5% annual return as well as records those investors on the property title. According to the Commission, Woodbridge forms a limited liability company for each one of the properties it acquires in order allegedly for liability purposes.  Woodbridge also raises money using investment offerings through entities such as Woodbridge Mortgage Investment Fund III, LLC.

The Commission began investigating Woodbridge in September 2016 for what it described as "possible significant violations of the securities laws," including "the offer and sale of unregistered securities, the sale of securities by unregistered brokers, and the commission of fraud in connection with the offer, purchase, and sale of securities."  While the Commission first informally reached out to the company to request documents in late 2016, the lack of any response forced the Commission to issue a formal subpoena for certain documents including email correspondence between Woodbridge principals, investors, and sales agents.  While Woodbridge produced documents in response to the subpoena, the Commission took issue with its failure "to produce many of the requested documents critical to the investigation."  In addition,

Many key witnesses, including, but not limited to, Mr. Shapiro, D.R., Woodbridge’s Managing Director of Investments, and N.P., Woodbridge’s Controller, have invoked their Fifth Amendment rights in sworn investigative testimony, and have thus refused to answer any substantive questions or provide any of their e-mails. 

The Commission then provided several prioritized requests for certain documents, including emails, but was informed by Woodbridge's counsel that only one person at the company was available and capable of searching for emails and that the company could not afford to contract with a third-party vendor.  After Woodbridge's counsel attempted to meet with senior leadership at the Commission to discuss the investigation, the Commission filed an action in July 2017 seeking to compel Woodbridge's compliance with the subpoena.  The Court granted that request on September 20, 2017, ordering Woodbridge to produce responsive documents and emails using Court-ordered search terms.   

In connection with the discovery that Woodbridge formed separate companies to purportedly hold their commercial properties, the Commission sent out subpoenas to the 236 LLCs it had identified. The Commission alleged that:

The 236 LLC subpoenas sought basic information about the formation, ownership and bank account information about the LLCs, in order to garner further insight into their affiliation and connection with Woodbridge and its President, Robert Shapiro. However, despite service of the subpoenas, and demand letters sent approximately six-weeks later, the Commission has not received a response from 235 of the LLCs. 

According to the Commission, its investigation demonstrated that "many, if not all, of these LLCs may be Woodbridge affiliates with Shapiro as their Manager."  The 235 subpoeaned LLCs failed to respond to the Commission's subpoenas, and the Commission filed an action yesterday seeking to compel their compliance.

A quick Google search shows that several state securities regulators have investigated various Woodbridge entities.  For example, several Woodbridge Mortgage Investment Fund entities entered into a consent order in May 2015 with the Massachusetts Securities Division in which the entities neither admitted nor denied that they had sold unregistered securities, agreeing to cease selling unregistered securities to Massachusetts residents, offering rescission to those investors, and also agreeing to pay a $250,000 civil penalty.  Similarly, the Michigan Department of Licensing and Regulatory Affairs recently issued a Notice and Order to Cease and Desist in August 2017 to Woodbridge Mortgage Investment Fund II, LLC, ordering the entity to cease and desist from selling unregistered securities and from omitting to state material facts. 

A copy of the Commission's Application is here.

Monday
Feb132017

For Galemmo Ponzi Victims, Recovery Chances Depend On Clawbacks 

When a Cincinnati money manager's $100 million Ponzi scheme collapsed over three years ago, authorities seemingly acknowledged the bleak prospects of recovery in declining to seek appointment of a receiver to marshal and gather assets for victims.  Galemmo, a former purported savvy trader who touted consistent gains amidst market turmoil, quickly pleaded guilty and received a 15-year prison sentence.  With the seizure of several million dollars in Galemmo's assets held up on appeal, victims' sole hope for any recovery rested on an unlikely scenario: compelling other 'victims' who profited from their investment during the scheme to turn over those profits to be collectively divided among the less fortunate victims.  With the assistance of a Cincinnati law firm, those victims have started to see results.

The Scheme

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities. Touting himself as an experienced trader, Galemmo promised outsized returns through investments in stocks, bonds, futures, and commodities.  Investors were told Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Galemmo assured investors that Queen City was audited annually, and provided monthly statements showing steady returns.  Galemmo raised more than $100 million from individuals, trusts, and even charities.

However, Galemmo's touted trading prowess was pure fiction.  Instead, Galemmo used new investor funds to pay his promised returns - a classic hallmark of a Ponzi scheme.  Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003.  Investors received fictitious account statements, and Galemmo paid himself tens of millions of dollars in fictitious management fees, which he used to purchase real estate, pay fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes. 

The scheme collapsed in July 2013 when investors received an email from Galemmo stating that the funds were shutting down and directing all further inquiries to an IRS agent.  Victims filed a lawsuit later that month, and Galemmo was later arrested.  He agreed to plead guilty shortly thereafter, and recently received a 15-year sentence.  

The prospect of recovery for victims appeared bleak, with one source reporting that the Department of Justice estimated that victims could recoup 10% to 20% of their investment.  Authorities were able to quickly seize what remained of Galemmo's assets, which included over $500,000 in cash, various real estate including a condo in Florida and Galemmo's former office building, and over $100,000 in automobiles.

Clawbacks

One of the largest sources of recovery for victims of Ponzi schemes typically comes from lawsuits against fellow investors who were fortunate enough to ultimately profit from their investments either through an extended investing horizon or the receipt of "commissions" based on the investment of others they referred to the scheme.  Aptly known as "clawback" suits in Ponzi jurisprudence, the suits seek recovery of fictitious profits consisting of amounts in excess of that investor's net investment in the scheme.  Because the scheme operator does not generate the promised returns from legitimate activities, these transfers are nothing more than the redistribution of new investor funds.  While extensive caselaw generally recognizes that clawback targets can keep the amount of transfers adding up to their total investment in the scheme (absent signs that the investor did not act in good faith in receiving the transfers), the law is clear that any receipt of funds over an investor's net investment can be recovered as "false profits."  

The Cincinnati law firm of Santen & Hughes began pursuing those "net winners," as they are called in Ponzi jurisprudence, for their false profits from Galemmo's scheme.  One net winner, Michael Willner, settled for $1.4 million after he sent the following email to Galemmo investors in the immediate aftermath of the scheme's collapse:

To those of you that I brought into the fund you have my deepest and most sincere apologies...I am embarrassed and shamed by my actions. Like most of us I ignored the poor statements and lack of transparency in favor of the high returns. In hindsight, these warning signs should have alerted me to probe deeper and ask appropriate questions.

One married couple settled for $327,000 while another investor and an associated company agreed to pay $386,000 to resolve a clawback suit.  Late in 2015, the Santen & Hughes lawyers sought court approval to distribute a total of $3.4 million to Galemmo's victims that represented the proceeds of clawback settlements.  Based on the government's estimate that Galemmo's victims suffered approximately $35 million in net losses, the distribution represented a recovery of roughly 10% for victims.  Coupled with another distribution in 2016, victims have received a total of $5.2 million to date - roughly 15% of their losses.

A Cincinnati judge recently entered a $865,000 judgment against another net winner.  Combined with another $450,000 in judgments entered against three other net winners, victims can now expect to receive an additional $1.3 million in distributions.  Combined with the estimated $6 million in assets seized by the government, it appears that the efforts of Santen & Hughes will be partly responsible for returning nearly 25% of victims' losses.  Any further recovery will be directly dependent on the firm's ability to identify additional net winners and any other third parties that played a role in the scheme.