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Recent SEC Releases
Wednesday
Jul162014

Pennsylvania Man Charged With $5 Million Ponzi Scheme

Federal authorities unveiled charges against a Pennsylvania man and accused him of orchestrating a $5 million Ponzi scheme..  Walter "Buddy" Lambert, 73, was charged with sixteen counts of mail fraud, five counts of wire fraud, and one count of interfering with the due administration of the Internal Revenue Service.  The criminal charges come over three years after the Federal Bureau of Investigation raided Lambert's offices, and nearly four years after almost a dozen lawsuits were filed against Lambert by victims.

Lambert was the chief executive officer of Blue Mountain Consumer Discount Company ("Blue Mountain"), a consumer loan company owned by the prominent Cinelli family.  The company solicited potential investors with the promise that their investment would be used to make high-interest loans to consumers at an annual rate ranging from 23% - 26%.  In return, investors were promised steady annual returns of 10% that were paid in cash and usually not disclosed to the Internal Revenue Service.  In total, more than twenty investors entrusted more than $5 million with Blue Mountain.

However, authorities alleged that Lambert failed to use investor funds as promised.  Instead of making high-interest consumer loans, Lambert diverted investor funds for his own personal use, including the payment of Blue Mountain overhead and expenses, the purchase of a life insurance policy on himself, buying personal items and collectibles for himself and family members, and making 6% loans to himself, his children, and other "preferred" consumers.  To hide his fraud, Lambert is also accused of doctoring Blue Mountain's books and filing falsified income tax returns with the IRS.  In addition to paying the majority of interest payments to investors in cash, Lambert also paid a 1% kickback to a local attorney, Nicholas R. Sabatine, III, in exchange for Sabatine's referral of clients to Blue Mountain.  Sabatine was charged in October 2013 with filing a false tax return in 2009.

Francis Cinelli and his family are currently named in multiple lawsuits seeking more than $5 million on claims that they failed to supervise Lambert.  Both Cinelli and Blue Mountain have filed bankruptcy, with Cinelli listing the majority of his creditors as Blue Mountain victims.  

Wednesday
Jul162014

Trustee: TelexFree Was A "Ponzi/Pyramid Scheme"

The Chapter 11 bankruptcy trustee appointed over TelexFree, Inc., TelexFree, LLC, and TelexFree Financial, Inc. ("collectively, "TelexFree") has responded to the amended complaint filed against TelexFree by the Securities and Exchange Commission (the "Commission") by stating that his preliminary investigation demonstrates that TelexFree was operated as a Ponzi/Pyramid scheme.  Stephen Darr, the court-appointed bankruptcy trustee, filed his Answer to the Commission's amended complaint that was part of its emergency enforcement action filed the day after TelexFree filed voluntary petitions for bankruptcy under Chapter 11.  Darr's statements mark the first substantive statements concerning TelexFree since his appointment in early June.  

The Answer filed on behalf of TelexFree essentially consists of a thorough admission to the allegations contained in the Commission's Amended Complaint filed on May 27, 2014.  Indeed, Darr's response  to the Commission's first two paragraphs of its Preliminary Statement accusing TelexFree of being a "massive Ponzi and Pyramid scheme" is as follows:

1. On information and belief, the Trustee admits that the various individual debtors cited in paragraph 1 appear to have been engaged in a multi-level marketing enterprise, which,  while purporting to be in the business of selling telephone service plans using Voice-over Internet Protocol (“VoIP”) technology, they were in fact engaged in a Ponzi or pyramid scheme which, in part, involved promising to pay investors for placing ads on the Internet and recruiting other investors to do same. The Trustee admits so much of the allegations in paragraph 1 that assert that the Debtors were headquartered in Marlborough, Massachusetts and that at least from April 2012, the owners of the Debtors were James Merrill and Carlos Wanzeler. 

2. Based on information currently available to the Trustee, the Trustee admits that the individual defendants operated a Ponzi/pyramid scheme as evidenced by, among other things, the revenues from the retail sales of the VoIP were less than one (1%) percent of the amounts needed to satisfy the promises to the investors who had placed the Internet ads. Further, based upon the information available to the Trustee, it appears that the early investors were paid not from sales of the VoIP services but rather from the money received from the later investors, thus evidencing a classic Ponzi/pyramid scheme.
The remainder of the Response indicates that, while Darr has no personal knowledge as to the overwhelming majority of the allegations, Darr believes most allegations to be true based on "the information furnished to the Trustee and the Trustee's preliminary investigation."  This includes the allegations made by the Commission not only pertaining to TelexFree, but to the other individual defendants including principals and alleged top promoters.  Darr indicated that information avaialble to him suggested that substantial sums were transferred to TelexFree principals, and opined that the allegations that named promoters:
knew or was reckless with respect to his/her promoting of TelexFree and that his[/her] promotional activities aided and abetted the fraudulent and deceptive pyramid scheme are accurate
Darr also admitted that the information available to him supported the Commission's allegation that the majority of the $340 million raised by TelexFree is unknown.  
Interestingly, while the TelexFree bankruptcies continue to be pursuant to Chapter 11 of the Bankruptcy Code, meaning that the debtors intend to reorganize and at some point emerge from bankruptcy, the Trustee's Answer contains a Prayer for Relief stating that:
Since the Trustee has assumed control over the assets and estates of the Debtors, the
Debtors have ceased all operations and all other business activities other than to liquidate assets and to pay back creditors.
Thus, it appears that a conversion from a Chapter 11 to a Chapter 7, which liquidates the debtor, is likely.
Previous Ponzitracker coverage of TelexFree is here.

The Answer is below (special thanks to ASDUpdates):

 

Doc 220

 

Tuesday
Jul152014

Authorities, Rothstein Trustee Reach Agreement To Divide $50 Million In Forfeited Assets

Marking the end of a dispute that had already made its way to the U.S. Court of Appeals for the Eleventh Circuit, the U.S. Department of Justice and Rothstein Rosenfeldt Adler ("RRA") bankruptcy trustee announced they had reached an agreement concerning distribution of approximately $50 million in criminal forfeiture proceeds.  In a press release from the U.S. Attorney's Office for the Southern District of Florida, it was announced that $28 million will go to qualifying victims in the criminal case, while approximately $21 million will revert to the RRA bankruptcy estate.  Victims of Scott Rothstein's $1.2 billion Ponzi scheme, whose law firm RRA was forced into bankruptcy after his scheme collapsed, are already expected to recover 100% of their net losses.

The dispute over forfeited assets traces its roots to the immediate aftermath of Rothstein's scheme's collapse in late 2010.  In an effort to secure available assets for victims of Rothstein's scheme, authorities sought forfeiture of a significant amount of real and personal property traceable to Rothstein, including houses, luxury boats and vehicles including a Bugatti, bank accounts, 304 pieces of jewelry, and investments collectively valued at approximately $50 million.  The RRA bankruptcy trustee, Herbert Stettin, immediately objected on the basis that the forfeited proceeds would be used solely to compensate victims of Rothstein's Ponzi scheme and not all of the creditors who suffered losses as a result of RRA's collapse.

While the RRA trustee maintained that certain of the forfeited assets, including bank accounts in the name of Rothstein's law firm, rightfully belonged in the bankruptcy estate, U.S. District Judge James Cohn sided with the government.  After Stettin appealed the ruling to the Court of Appeals for the Eleventh Circuit, a ruling in June 2013 overturned the district court's decision and ruled that the funds in the bank accounts were commingled with the firm's receipts from clients and thus not subject to forfeiture directly; rather, the government was left with the option of resorting to other substitute asset provisions.  Thus, while the decision technically left the government an alternate option, many viewed the ruling as a clear victory for Stettin and the RRA estate.

The agreement announced yesterday marks an end to the multi-year feud over the division of the forfeited assets.  While both the DOJ and the RRA estate will retain roughly half of that amount, the press release emphasizes that Rothstein's Ponzi victims will recoup 100% of their losses under the liquidation plan proposed by Trustee Stettin.  This outcome is unprecedented in Ponzi scheme jurisprudence, and was possible in large part due to the significant contributions made by TD Bank which was accused of playing an indispensable part of Rothstein's scheme.   The bank's role has been costly, with over $250 million in legal settlements and judgments to date as well as a payment of $72 million to the bankruptcy estate.  Ironically, TD Bank's settlement with the RRA trustee allowed it a lower-priority claim that could allow it to collect if additional funds remain after payment of higher-priority claims.

Tuesday
Jul152014

Read The Trustee's Lawsuit Against The Madoff Sons Here

The court-appointed bankruptcy trustee tasked with recovering assets for victims of Bernard Madoff's massive Ponzi scheme has sought leave from a New York Bankruptcy court to file an amended complaint accusing Madoff's sons of profiting by more than $150 million from the "family piggy bank."  Irving Picard, the court-appointed bankruptcy trustee overseeing the liquidation of Bernard L. Madoff Investment Securities ("BLMIS"), is seeking court approval to file his Third Amended Complaint against Andrew H. Madoff, the estate of Mark D. Madoff, and Stephanie S. Mack, Mark Madoff's widow.  

The Complaint, which is reproduced below, contains new allegations that the Madoff brothers were aware of the massive fraud perpetrated by their father, including claims that the brothers backdated trades, orchestrated the creation of seven-figure investment accounts out of thin air to support real estate purchases, and even deleted sensitive emails on the eve of a 2005 audit by the Securities and Exchange Commission.

Download the lawsuit here.

 

Madoff Amended Complaint

 

Monday
Jul142014

Former Banker Charged For Role In $1.2 Billion Rothstein Ponzi Scheme

He assisted in soliciting investors. He assisted in helping me handle the bankers. He assisted in helping me prepare fake opinion letters. He assisted me in coming up with plans of action to deceive investors and others. He assisted me in moving money between accounts in order to facilitate the Ponzi scheme. He assisted me in controlling our accountants. He assisted me with preparation of the initial set of deal documents.He assisted in holding off auditors who would have likely discovered the Ponzi scheme. He assisted my CFO, who was also a coconspirator, in making sure that balance statements were correct. That's on overview, I'm certain that there's more.

- Scott Rothstein, on Frank Preve's role in his fraud.

A former prominent south Florida banker now faces a criminal fraud charge over allegations that he conspired with convicted Ponzi schemer Scott Rothstein to keep the scheme afloat in its waning days. Prosecutors filed a criminal information charging Frank Prevé, 70, with a single count of conspiracy to commit wire fraud.  While Prevé could face up to a five-year maximum prison sentence if convicted, the use of a criminal information suggests that Prevé plans to enter into a plea agreement with authorities.  Prevé's lawyer has maintained that he did not have "direct knowledge" of Rothstein's scheme. Rothstein is currently serving a 50-year prison term after pleading guilty to carrying out the largest Ponzi scheme in Florida history.

According to authorities, Prevé worked with George Levin to solicit investors for Rothstein's scheme since 2007, at first offering potential investors the ability to invest in promissory notes.  The promissory notes offered investors annual rates of return ranging from 12% to 30%, and typically carried a 180-day term, and Prevé and Levin sought to profit by keeping any excess return paid by Rothstein on the investments. Through the issuance of the promissory notes, the pair raised nearly $60 million from 90 investors to invest in Rothstein's scheme.

While representations were made to Levin's investors that the purported settlement funds called for in Rothstein's purported legal settlements would be wired in before Prevé and Levin purchased the settlements, email correspondence showed that Prevé often purchased settlements from Rothstein while knowing that required documentation was missing.  

As Rothstein's scheme grew, he pressed Levin for additional funding and claimed that he was experiencing problems in his ability to keep the scheme going.  To convince Levin, Rothstein claimed that his clients, the alleged plaintiffs entering into the settlements, had filed complaints with the Florida Bar and that the scheme could grind to a halt if he was disbarred.  According to Rothstein, the only way he could continue the scheme was with $100 million in fresh financing from Levin and Prevé.  This was followed by the cessation of payments on the settlements that Levin and Prevé had already purchased - bringing Levin's investment strategy to a halt and threatening the returns he had promised to his investors.

In early 2009, Levin formed the Banyan Income Fund, L.P. ("Banyan") as a "feeder fund" with the stated purpose of investing solely with Rothstein.  Between May and October 2009, Banyan raised approximately $100 million from 83 investors to invest with Rothstein.  In the Private Placement Memorandum ("PPM") provided to investors, Banyan represented that a settlement would undergo a verification process that included an independent third-party verifier to review the unredacted settlement documents and bank account balances to ensure everything was in order.  As with the earlier investments, Prevé again failed to obtain the necessary documentation represented in the PPM's, and Rothstein again failed to make payments on a majority of the purchased settlements.  Several months later, Rothstein's scheme collapsed, and Banyan investors lost the majority of the $100 million they had invested.

Prevé is now the 22nd individual to face criminal charges related to Rothstein's scheme.  

For more Ponzitracker coverage of Rothstein's scheme, click here.