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Recent SEC Releases
Friday
Nov162018

SEC, CFTC Accuse Utah Man Of $170 Million Silver-Trading Ponzi Scheme

State and Federal regulators have accused a Utah man and his company of scamming hundreds of investors out of up to $170 million on promises that trading in silver could yield annual returns of 20% to 40%.  Gaylen Dean Rust and his company Rust Rare Coin, Inc. were the subjects of enforcement actions filed by the Commodity Futures Trading Commission ("CFTC"), Securities and Exchange Commission ("SEC"), and the State of Utah Division of Securities ("State of Utah") alleging that Rust and Rust Coin operated a massive Ponzi scheme and violated federal securities and commodities laws.

Rust Coin has been in business since 1983, operating as a coin and precious metal dealer in Salt Lake City.  Rush served as Rust Coin's President and sole Director and was assisted by his wife, Denise Rust, and son, Joshua Rust, who served as the Secretary and Manager, respectively, of Rust Coin.  Beginning no later than 2008, Rust and Rust Coin began soliciting potential investors for an exclusive investment opportunity involving the purchase and sale of silver (the "Silver Pool").  Potential investors were told that their money would be pooled with other investors' funds to purchase and store physical silver for investment, and that the physical silver would be stored at one of two Brink's, Incorporated ("Brink's") depositories in Salt Lake City and Los Angeles. 

Those potential investors were told that Rust and Rust Coin were able to buy and sell silver based on market trends that resulted in annual returns ranging from 20% to 25% and at times reaching 40%.  Those investors were not provided with any written agreement, disclosures, or prospectus, but rather received a single-page receipt documenting their investment.  Rust and Rust Coin raised staggering amounts from investors.  The SEC alleges that Rust raised over $85 million from roughly 300 investors from just January 2017 to August 2018.  According to the CFTC, this total increases to over $170 million during the period from May 2013 to August 2018.

As the CFTC states, "the Silver Pool was a sham."  Rust and Rust Coin did not consistently obtain extraordinary annual returns ranging from 20% to 40% from astutely timing the purchase and sale of silver, but instead allegedly used funds from new investors to pay returns to existing investors - the classic hallmark of a Ponzi scheme.  Indeed, many of the representations Rust and Rust Coin made to investors were demonstrably false.  For example, neither Rust nor Rust Coin had any contract with Brink's to store or hold any silver at any of their locations in the United States.  And while Rust claimed that he had an account with HSBC Bank through which he traded silver held in the Silver Pool, neither Rust nor Rust Coin ever had an account with HSBC Bank to trade silver.  

According to authorities, it appears that Rust and Rust Coin instead misappropriated investor funds for personal expenses such as mortgage payments and transfers to other entities controlled by Rust.  For example, over $1 million was transferred to a Rust business that specialized in horse racing while another nearly $10 million was transferred to another Rust-controlled entertainment company where it was used for upkeep for a music and production studio.  From January 2017 to August 2017, over $70 million of the $85 million raised was used to make payments to investors.  

Ironically, one of the investors named in the CFTC and Utah's Complaint may have inadvertently drawn attention to his status as a net winner.  H.H., who was employed by Rust Coin as an IT specialist from July 2017 to July 2018, received a $35,000 share in the Silver Pool as part of his employment and later decided to invest $96,000 of his own funds based on the promises of outsized returns.  This resulted in an initial investment of $129,000.  Yet when H.H. was terminated from Rust Coin in July 2018, he sought to terminate his investment and ultimately received a wire transfer of $171,793.02 representing his initial investment and employment benefit of $129,000 and purported investment gains of approximately $42,793.  Given the appointment of a Receiver and the significant gains that investors have suffered, it is a near certainty that H.H. will be asked - either voluntarily or through litigation - to return the excess "net profits" he received by virtue of his investment that were actually stolen funds from other investors if the operation was a Ponzi scheme.  

At the request of the CFTC and State of Utah, a U.S. District Judge for the District of Utah entered an Order appointing Jonathan O. Hafen as a Temporary Receiver to marshal and secure assets belonging to Rust, Rust Coin, and other defendants and relief defendants.  It is unclear as to whether any assets remain for potential distribution to investors, although the SEC alleges in its complaint that approximately 99% of the funds raised from January 2017 to August 2018 were either paid to investors or misappropriated.  

A copy of the SEC's complaint is here.

A copy of the CFTC's Complaint is here.

Friday
Nov022018

Mississippi Man Gets 20 Years For State's Biggest Ponzi Scheme 

source: https://newsms.fm/website-provides-info-to-victims-of-100m-ponzi-scheme/A Mississippi man will serve nearly twenty years in federal prison after pleading guilty to masterminding the largest Ponzi scheme in Mississippi's history. Arthur Lamar Adams, 58, was sentenced to 19.5 years in prison for a Ponzi scheme that prosecutors argued caused losses ranging from $65 million to $150 million to approximately 300 investors.  The sentence was handed down after a hearing featuring testimony from several victims, including U.S. Senator Roger Vicker, and U.S. District Judge Carlton Reeves' rejection of Adams' attorney's argument that funds returned to victims during the course of the scheme should decrease the total loss amount used in determining the relevant sentencing range.  As there is no parole in the federal prison system, Adams can only hope to be eligible for release after serving 85% of his sentence.

Background

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.  

Investigation and Recovery

At the SEC's request, Judge Reeves appointed Alysson Mills as a receiver tasked with recovering assets for defrauded victims (among other things).  The Receiver has focused her efforts on "recruiters" used by Adams who received millions of dollars in commissions for luring new victims, recently filing suit against several "recruiters" and seeking the return of more than $16 million in commissions.  One of those recruiters, Michael Billings, is accused by the Receiver of personally recruiting more than $80 million in new investor funds for the scheme for which he personally received more than $3.5 million in commissions.  The Receiver indicated in her most recent report that she had identified "at least ten" recruiters and sub-recruiters and that more complaints are expected to be filed in the event her negotiations are unsuccessful.  

One key question will be whether any of Adams' victims profited by receiving more funds in purported "interest" or principal distributions than their initial investment.  Those investors might then be subject to efforts by the Receiver to recover those "false profits" to distribute to defrauded victims.  These efforts are typically the largest sources of recovery in the aftermath of failed Ponzi schemes.  Of note, Adam's attorney has gone on record with his belief that no investor will have to "pay back any money."  Ultimately, any decision will be made by the Receiver after a forensic accounting.

The Receiver also identified a number of third parties to whom Adams had made significant contributions or expenditures who could potentially be a source of recovery, including:

 

  • Cash gifts of at least $213,000 to his children;
  • Over $400,000 to the Ole Miss Athletic Foundation in the past ten years;
  • Over $100,000 to the Berachah Church;
  • Over $130,000 to the R.B. Thieme, Jr., Bible Ministries; and
  • Nearly $60,000 to Century Club Charities, Inc.

The Receiver indicated that she intends to bring claims against third parties to recover additional funds but declined to identify those potential parties.  The Receivership estate currently has approximately $2.1 million o hand as well as various interests in entities holding land interests.

A copy of the SEC's Complaint is here.

The Receiver's website is here.

Wednesday
Oct172018

Convicted Ponzi Schemer Tried Buying Prayers, Casting Spells On SEC Attorneys 

The federal trial of a Maryland woman accused of a $20 million trial not only ended this week with a jury taking five hours to convict her of all charges but came after revelations that the woman had spent hundreds of thousands of dollars to buy prayers and allegedly cast "hoodoo spells" on government attorneys investigating the scheme.  Dawn Bennett, 56, was convicted of seventeen charges including conspiracy, securities fraud, wire fraud, and bank fraud.  She will face potentially dozens of years in federal prison at sentencing.

Bennett, a former financial advisor who once hosted a radio show called "Financial Myth Busting with Dawn Bennett," was the owner of DJB Holdings LLC ("DJB").  DJB was a retail sports apparel business that had never turned a profit since its inception in 2010 and by December 2014 had incurred millions of dollars in expenses and outstanding liabilities.  As her financial advisory income significantly dropped, Bennett began soliciting former and current clients to invest in DJB in exchange for a 36-month convertible note promising a 15% interest rate.  Bennett later switched to selling short-term promissory notes following regulatory scrutiny, and ultimately raised over $20 million from dozens of affluent investors - many who were customers of her broker dealer. 

However, the representations regarding DJB's financial status and viability were significantly overstated.  According to an August 2017 action filed against Bennett by the SEC, the year end 2015 financial information provided to investors contained the folllwing misrepresentations:

  • Overstated sales by over $3.8 million, or 424%;
  • Overstated gross profit by nearly $2.5 million, or 3,382%;
  • Understated expenses by over $3.6 million, or 73%; and 
  • Overstated net income by over $6.1 million, or 124%, and again inaccurately reflected a profit of $1.1 million rather than the actual net loss of nearly $5 million.

Investors were also not told that Bennett used factoring arrangements in which she sold future company revenues to non-bank lenders who had direct and priority access to DJB bank accounts and made significant withdrawals to repay their advances.  According to the SEC, Bennett used over $10 million of the $20 million raised from investors for improper and undisclosed purposes including over $3 million in payments to earlier investors, $2.1 million for unrelated legal expenses, and nearly $1.5 million to the Dallas Cowboys for back rent on a luxury suite Bennett personally leased.  

After learning she was under investigation, Bennett used investor funds to finance a highly untraditional response.  According to testimony at her recent trial, Bennett paid a man in Washington over $700,000 to arrange for Hindu priests to perform religious ceremonies aimed at easing her troubles - including a "yagya" ritual costing over $7,000 in which five priests purportedly prayed for her for 29 consecutive days.  The trial featured an email Bennett wrote to the Washington man in which she indicated:

I am in a very very tough fight going against my enemies and I need all the help I can get.

 That purveyor of Hindu religious ceremonies was an unlikely witness at Bennett's trial, defending his practices and testifying that "we don't necessarily pray with a guaranteed outcome."

FBI agents executing a search warrant at Bennett's Maryland home last year also made an unlikely discovery when they found instructions for placing people under a "Beef Tongue Shut Up Hoodoo Spell" along with personal information of several SEC attorneys working on Bennett's case.  Those agents also found lids of Mason jars in Bennett's freezer that contained the initials of those SEC attorneys, as evidenced by a picture taken from the affidavit provided by one of the FBI agents.  That affidavit also stated that handwritten notes on "Dawn J. Bennett-styled stationary" contained directions "such as slitting open animal tongue, the instructions called on the spell-caster to state the name of the individual on whom to cast the spell followed by "I cross and cover you[,] come under my command[.] I command you to hold your tongue."

Bennett will be sentenced at a future date after the U.S. Probation Office prepares a Presentence Investigation Report containing a recommended (but not binding) sentencing range.

Thursday
Sep202018

Three Men Charged With $345 Million Ponzi Scheme

Authorities filed civil and criminal fraud charges against three men on allegations that they masterminded "one of the largest Ponzi schemes ever charged in Maryland" that raised at least $345 million from hundreds of investors nationwide.  Kevin B. Merrill, 53, Jay B. Ledford, 54,  and Cameron Jezierski, 27, were the subject of an emergency enforcement action filed by the Securities and Exchange Commission that included a request for an asset freeze and appointment of a receiver.  The trio also face fourteen criminal charges, including mail fraud, wire fraud, money laundering, conspiracy, and identity theft charges.  If convicted of all charges, each could face dozens of years in prison.

According to authorities, the trio operated a number of entities including Defendants Global Credit Recovery, LLC; Delmarva Capital, LLC; Rhino Capital Holdings, LLC; Rhino Capital Group, LLC; DeVille Asset Management LTD; and Riverwalk Financial Corporation (the "GCR Entities").  The GCR Entities solicited investors through promises of steady returns from the deeply-discounted purchase of consumer debt portfolios.  Consumer debt, including automobile, credit card, and student loan debt, is often bundled into portfolios and sold in bulk to investors, which the GCR Entities told investors they were purchasing for their benefit.  While the scheme involved the actual purchase of some debt portfolios, authorities allege that the vast majority of purported debt purchases were fraudulent and that the actual purchases of debt portfolios were used as part of the scheme to solicit more investors. 

Using a dizzying array of interwoven entities and bank accounts, the trio solicited investors across the nation including both individual and institutional investors. Potential investors were often provided with documentation describing the investment structure and also viewed presentations offering projections about the anticipated investment returns.  These promises included offering some investors 100% of collections of up to 25% of their principal investment annually - meaning those investors were offered annual returns of up to 25% along with the option for even higher returns.  Potential investors also received "due diligence" documents prepared by Ledford or Jezierski providing a supposed analysis of the portfolio(s) they were purchasing as well as the anticipated purchase price. In total, the GCR Entities are believed to have raised over $345 million from at least 230 investors. 

But authorities allege that the GCR Entities had not been in the business of buying consumer debt since 2014, and that the purported investment opportunity was a giant Ponzi scheme that used new investor funds to pay returns to existing investors.  Approximately $197 million was paid out as purported remittances, collections, or profits, meaning that investors are facing total losses of roughly $150 million.  Unfortunately, authorities believe that a significant portion of those losses were diverted to sustain the trio's extravagant lifestyles.  The indictment alleged that investor funds were used to buy over 20 high-end automobiles, at least nine houses, and over $8 million in jewelry, as well as at least $25 million in casino gambling. 

The sheer amount of real estate, automobiles, and jewelry sought to be forfeited from Defendant Kevin Merrill alone is staggering.  Among other things, the indictment seeks to forfeit the following assets from him that were allegedly purchased with proceeds of the fraud:

  • 6 properties, including a 7,700 square foot mansion in Naples, Florida that Merrill purchased earlier this year for $10.5 million;
  • A 2018 35' Formula Boat;
  • An interest in a Gulfstream Aircraft G200;
  • A 9+ carat diamond ring; and
  • 7 Richard Mille watches.

The list of automobiles is truly a who's who of luxury automobiles.  The list includes 25 (yes, 25) high-end automobiles including:

  • 2014 Lamborghini Aventador Roadster
  • 2016 Ferrari 488
  • 2017 Audi R8 5.2 Plus
  • 2017 Lamborghini Huracán convertible
  • 2018 Rolls-Royce Dawn
  • 2017 Rolls-Royce Wraith
  • 2018 McLaren 720S
  • 2008 Bugatti Veyron
  • 2013 Ferrari California
  • 2014 BMW M6 Gran Coupe
  • 2014 Ferrari F12 Berlinetta
  • 2014 Pagani Huayra
  • 2017 Lamborghini Aventador
  • 2018 Ferrari 488 Spider
  • 2018 Lamborghini Huracán 

The Court overseeing the SEC's enforcement action granted the SEC's request to appoint Gregory Milligan as Receiver over the GCR Entities.  

A link to the SEC's Complaint is here.

A link to the Indictment is here.

Tuesday
Sep182018

Receiver Awarded $2.4 Million Bonus For 110% Recovery

There has never been a case like this one in all the years and in all the cases over which this Court has presided...In what appears to the Court to be the first of its kind, the investors have received not only all the monies they invested in the Ponzi scheme but have received substantial monies above and beyond their initial investments. All due largely to the extraordinary achievements of the Receiver that many of them now seek to vilify.

-U.S. District Judge Christopher A. Boyko
Receiver Mark DottoreIn a fitting end to an SEC enforcement action filed back in 2006, a federal judge agreed that a court-appointed receiver was entitled to a $2.4 million bonus for his "singularly remarkable and unheard of accomplishment" in recovering enough funds to pay victims over 110% of their losses - a feat that is likely unparalleled and especially extraordinary considering the average Ponzi scheme recovery has been estimated at pennies on the dollar.  Over the objection of those same investors, United States District Judge Christopher Boyko entered the Order approving the bonus in July 2018, remarking that "no party was able to find another Ponzi scheme resulting in 100% recovery of losses let alone an additional 10% recovery for investors on top to date, with more to come. Therefore, the recovery in this matter by the Receiver for the investors can truly be said to be without precedent." 

The Scheme

Dadante, a former casino host who touted his alleged ties to Donald Trump, was charged by the Securities and Exchange Commission in April 2006 on allegations that he was running a $50 million Ponzi scheme that touted outsized returns through supposedly low-risk trading strategies with his investment company. Investors were told that Dadante had a connection with a Goldman Sachs executive who provided him with exclusive access to initial public offerings - supposedly resulting in guaranteed annual returns ranging from 10% to 20%. In total, Dadante raised approximately $50 million from over 100 investors.  The Court subsequently appointed Mark Dottore as Receiver.

However, Dadante's exclusive Goldman Sachs connection was a complete fabrication. Instead, the promised above-average returns were possibly only by paying existing investors through incoming investor funds - the classic hallmark of a Ponzi scheme. After criminal charges were filed in 2007, Dadante was sentenced to a 13-year prison term.

The Receivership and Recovery

While Dadante took in approximately $50 million from investors, the fact that his scheme lasted for several years while paying out 10% to 20% interest resulted in a corresponding decrease in the net losses suffered by investors. In fact, after adjusting for interest payments to investors, Dottore estimated that the total losses due to Dadante's fraud were $28 million.

Dottore, who is not a lawyer, embarked on a campaign spanning nearly a decade to recover funds for Dadante's victims. This included assisting investors in filing tax refunds for taxes paid on illusory profits as well as recovering more than $8 million through a settlement with Dadante.  The cornerstone of this campaign, however, was litigation filed against Ferris Baker Watts ("Ferris"), the former brokerage house where Dadante was a prominent client. There, Dadante enlisted the services of a broker to purchase and illegally manipulate the shares of Innotrac Corp., a lightly traded technology company. Even though Dadante's purchases raised eyebrows among Ferris employees, the brokerage ultimately extended him nearly $19 million to finance the trading. Dadante eventually accumulated several million shares of Innotrac - making him a 34% owner of the company.

After the scheme was exposed, Dottore seized the 4.3 million Innotrac shares as part of the receivership estate.  However, Dadante had also accrued a significant margin balance to purchase those shares which remained after the receivership and led to threats to redeem the debt and thus trigger a sale of the Innotrac shares.  After the Receiver was able to ward off a margin call, he sued Ferris based on its relationship with Dadante and ultimately reached a settlement in which Ferris agreed to pay $7.2 million in cash and extinguish Dadante's multi-million dollar margin debt and thus retain the Innotrac shares.  But the jubilation of that settlement would be short-lived.

By the time of that settlement, Dottore had already faced the ire of victims who argued that the Ferris lawsuit was ill-advised and simply an attempt to inflate already-inflated bills.  As Judge Boyko recounted in his Order, investors moved to terminate the receivership in 2007 citing outsized expenses and dismal recoveries.  After a court-ordered accounting, investors moved to liquidate the receivership based on, among other things, the argument that the Innotrac stock "lacked any real value."  This included, among other things, the following motions filed in 2007:

  • Regalbuto Plaintiffs’ Motion to Show Cause Why Receiver Mark Dottore Should Not Be Held in Contempt (Sep. 11, 2007);
  • Regalbuto Plaintiffs’ Motion to Remove Receiver for Cause and Show Cause Why Receiver Should Not Be Held In Contempt (Aug. 1, 2007);
  • Regalbuto Plaintiffs’ Motion for Further Accounting (July 11, 2007); 
  • Regalbuto Plaintiffs’ Motion for Accounting, (May 3, 2007); and
  • Motion to Terminate Receivership, (Jan. 26, 2007).

As Judge Boyko observed, a 2007 liquidation "would have resulted in a loss to all investors of most of their initial investments."

This crusade continued outside the courtroom and in local newspapers, with one 2008 news article featuring an investor comment that "the judge and Dottore have it all screwed up." Another investor apparently created a website with "letters and harsh opinions on..Dottore."  

One main source of investors' ire following the Ferris settlement? That Dottore refused to immediately liquidate the Innotrac holdings at the then-prevailing prices that would have equaled a sizeable recovery. Around 2009, the price of those shares ranged from $2 to $4 per share - meaning that the Innotrac position fluctuated from $8 million to $17 million.  Instead, Dottore believed that Innotrac's valuation had been unfairly depressed as a result of the Ferris litigation and its Dadante ties.  The settlement also came at the onset of the economic downturn beginning in 2008 which also contributed to its lower valuation.  Dottore resisted attempts to liquidate the Innotrac shares until 2013 when he sold for $8.20 a share for total proceeds of $35.4 million.  

A "Success Fee?"

Dottore's lawyers disclosed at a 2014 hearing that he had recovered $47 million in cash in addition to securing forgiveness of $12 million in Dadante's debts, which would allow investors to recover their cumulative allowed losses of approximately $28 million as well as at least an additional 10%.  After Dottore's lawyers were directed by Judge Boyko to research whether a "success fee" was warranted , the matter was taken under advisement. 

In light of the "unprecedented recovery," the Court asked the Magistrate Judge for a Report and Recommendation as to whether the Receiver was entitled to any additional compensation.  In that R&R, the Magistrate Judge weighed multiple factors including the "complexity of problems faced, the benefits to the receivership estate, the quality of work performed, and the time records presented."  Finding that each of the factors weighed in favor of additional compensation, the Magistrate Judge used a 30% increase in the Receiver's "low hourly rate" to arrive at an additional compensation award of $1.2 million.  

Some investors objected to the Magistriate Judge's R&R, claiming that the Receiver was not entitled to any additional compensation and that any compensation should be paid to those investors.  Judge Boyko concluded that those objections were without merit, finding both that the Receiver's extraordinary result as well as relevant caselaw supported an award of additional compensation.  Notably, the Court discerned that a substantial portion of the Innotrac stock had been purchased with margin debt - not investor funds - and thus could not be classified as profits realized from returns on investor funds.  The Court further noted that:

This receivership faced serious obstacles from the beginning which the Receiver moved to counter, including the attempts by the various brokerage firms to call in the margin debt and force the sale of Innotrac stock while its value was low. Many of the investors brought suit against the Receiver and other investors, while some investors demanded he sell the stock early in the case when its value was minimal. Furthermore, and perhaps more damaging, were the efforts of some investors advocating that the Court find the IPOF Fund was not a limited partnership and to end the Receivership. This potentially would have exposed individual investors to liability for margin debts owed to the various brokerage firms. The Receivers efforts directly thwarted these ill-conceived efforts of some investors. It is not unusual for investors to disagree with a Receiver's strategy in receiverships, but it is wholly a different matter for the Receiver to save many investors from themselves.

Furthermore, there are accounts of contentious hearings, physical confrontations and conduct aimed at thwarting the Receiver's efforts to maximize the value of the Receivership by some of the same investors on whose behalf the Receiver was working.

The Court ultimately adopted the Magistrate Judge's R&R in part, finding that the Receiver was entitled to additional compensation but determining that the amount should be based on the upper end of comparable fees according to a report previously commissioned by the Court.  In recalculating the Receiver's fees for the entire receivership based on that increased rate, the Court calculated an award of $2.424 million to the Receiver.  

Under Appeal

For now, Dottore's bonus will have to wait as multiple groups of investors appealed the Order.  Whether or not the additional award is upheld, it will not change the extraordinary outcome that Dottore and his team were able to achieve.  Ponzitracker has already recognized that the recovery is likely the highest in known Ponzi cases, even among esteemed company such as the Madoff and Rothstein cases.

A copy of Judge Boyko's Order is below:

Dottore Order by jmaglich1 on Scribd