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Recent SEC Releases

California Women Charged With $8 Million Ponzi Scheme Targeting Vietnamese Community

Two California women were arrested on charges that they orchestrated a Ponzi scheme that took in at least $8 million from unsuspecting victims, many of whom were part of the Vietnamese-American community.  Lananh Thi Phan, 54, and Diane H. Do Bui, 49, are facing felony charges of grand theft and securities fraud in connection with the scheme, and are being held on $10 million and $5 million bail, respectively.  Each could face decades in prison if convicted of the charges and sentenced to the maximum term.  

Phanh, a licensed realtor, worked with Bui, a notary public, to solicit victims.  Victims were told that their funds would be used for a variety of investments, including investments in foreign gold, a bail bonds business, and even a "secret" venture that the women would not disclose.  Indeed, according to authorities, Phan told investors that if she told them the nature of their "secret" venture, "you would do it and everyone would do it." While the intended use of their funds was not entirely clear, the promised returns were clearly lucrative; the women promised that a $25,000 minimum investment would yield a monthly payment of $1,500 in what was an approximate annual return of more than 70%.  However, after investors received several of the promised monthly payments, authorities alleged that the women would reach out to the victims to convince them to roll their payments back into their investment with the promise of even higher returns.  In total, Phanh and Bui raised more than $8 million from victims.

However, while investors were led to believe that their funds were safe and akin to money sitting in a bank waiting to be used, authorities alleged that the women used investor funds to operate a Ponzi scheme and support their luxurious lifestyles that included Phan's collection of high-end Louis Vuitton purses.  Indeed, according to authorities, the alleged investment ventures did not exist.  Instead, the women are accused of using investor funds to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

While authorities are aware of at least 18 victims, they believe that additional victims may be involved.  

A significant red flag often seen in Ponzi schemes is the perpetrators' deliberate concealment of or ambiguity concerning the nature of the purported investment.  While this is often done to create an aura of secrecy or exclusivity, and even intimidation in situations where investors push for answers, it should also cause concern to potential investors who have a right to know how their funds are being used.  Coupled with a situation like the above where neither of the perpetrators were likely licensed to sell securities, such secrecy or ambiguity surrounding an investment strategy is a definite cause for concern.


Life Sentence For Ponzi Schemer Convicted of Triple Homicide

In a story perhaps more suited for a movie screen, a California man received a life sentence after a mandatory DNA sample from a 2008 Ponzi scheme conviction tied him to a previously-unsolved triple homicide.  Robin Kyo Cho, 55, received the sentence this week for the 2003 killings of a Korean woman, her 2-year old son, and a live-in nanny.  Cho, who had maintained his innocence, previously lived in the same apartment building as the deceased victims and was interviewed by police at the time of the killings without any follow-up.  Including sentencing enhancements, Cho was ordered to serve 105 years in prison without the possibility of parole.

After the discovery of the three victims, authorities initially focused on the widowed husband but were unable to nail down a motive.  The case took on international significance, even making the Korea Times' top 10 list of news items of 2003.  However, the case remained unsolved for several years until late 2008, when a DNA sample collected by authorities through a mandatory program for convicted felons matched a piece of evidence discovered at the scene and widely thought to be linked to the killer.  That DNA sample belonged to Cho, who had just pleaded guilty to a $2 million Ponzi scheme and was required to submit a DNA sample as part of his sentence.

Beginning in 1998, Cho admitted to soliciting funds from at least 11 investors under the guise that investors would receive an annual return ranging from 4% - 6% as well as the guaranteed return of their principal investment at the end of the investment period.  While Cho promised that his investments were low-risk, they were instead high-risk and resulted in the near-total loss of all investor funds.  Cho was arrested in June 2006 and charged with 52 counts of violating the California Corporations Code by selling unqualified securities, 52 counts of selling securities by misrepresentations, 12 counts of grand theft, one count of selling securities with intent to defraud and one count of forgery. 

While Cho faced over 60 years in prison under the charges, he was able to secure an arrangement with prosecutors whereby he would plead guilty and receive a sentence of five years of probation.  However, as a condition of his sentence, Cho was required to submit a DNA sample that would be stored in a statewide database.  When Cho's sample turned up a match to the unsolved murders, he was initially brought in for questioning by authorities and subsequently the subject of surveillance.  After authorities discovered unused .38 caliber bullets in a crumpled newspaper Cho had thrown away - the same caliber of bullets used in the murders - Cho was arrested.

Despite maintaining his innocence, Cho was convicted by a jury of the murders in July 2012. Prosecutors based their case largely on the matching of DNA samples, and also speculated that a financial motive factored in due to Cho's collapsing Ponzi scheme.  While prosecutors had sought the death penalty, the jury recommended that he be sentenced to life in prison without the possibility of parole.  


Convicted $200 Million Ponzi Schemer Wins Resentencing After Appeals Court Tosses Two Convictions

An Indianapolis man currently serving a 50-year prison sentence for masterminding a massive Ponzi scheme that caused more than $200 million in losses will be resentenced after a federal appeals court reversed two of his wire fraud convictions based on prosecutor "oversight."  Timothy Durham, 51, was convicted last year of ten counts of wire fraud, one count of securities fraud, and one count of wire fraud conspiracy, and was subsequently sentenced to a 50-year term.  His co-conspirators, Jim Cochran and Rick Snow, received sentences of 25 years and 10 years, respectively.  After all three men appealed their sentences, the U.S. Court of Appeals for the Seventh Circuit affirmed Cochran and Snow's sentences, but found that two of Durham's wire fraud convictions were based on insufficient documentation and thus due to be reversed.


From at least 2005 through November 2009, Durham served as chief executive officer of Fair Finance Company ("Fair Finance"), with Cochran serving as Chairman and Snow serving as chief financial officer.  Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a legitimate finance company that purchased finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%.  Fair Finance would then profit off the difference between the purchase price and the money collected from the arrangement.  Purporting to continue the historically profitable business, Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5,000 investors.  

However, rather than continuing Fair Finance's business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them.  By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments.  Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles.  These living expenses included more than 40 classic and exotic cars worth `over $7 million, a $3 million private jet, and a $6 million yacht in Miami. While investors would later file $215 million in claims, a bankruptcy trustee would recover less than $6 million.

The company was eventually forced into involuntary bankruptcy, and a grand jury indicted Durham, Cochran and Snow in March 2011.  Maintaining their innocence, the men were later convicted at trial, and prosecutors sought a 225-year sentence for Durham who they labeled the "greediest, most selfish, and remorseless" Ponzi schemer.  At sentencing, U.S. District Judge Jane Magnus-Stinson handed down a 50-year sentence to Durham, remarking that she considered the punishment an "effective" life sentence.

The Appeal

The men raised several issues on appeal, including the sufficiency of the evidence on two counts of wire fraud against Durham, the sufficiency of the wiretap application, jury instruction issues, and that prosecutorial misconduct during closing arguments.  Rejecting all of the issues except Durham's two wire fraud convictions, the Seventh Circuit found that the evidence presented by the government was insufficient to show that the transfers were made in furtherance of the fraudulent scheme. The transfers, both involving transfers from Fair Finance to a holding company owned by Durham, were supported in the record only by single-page printouts reflecting each transfer and a single email asking an employee to make one of the transfers.  

Noting that the government apparently intended to introduce additional evidence but neglected to do so, the Seventh Circuit rejected the government's "hail mary" reasoning that the jury could infer that the two transfers were used to originate fraudulent loans without the resulting documentary evidence. Adopting such reasoning, the Court noted, would "essentially transform every wire transfer from Fair to Fair Holdings into a criminal act."  Further, the argument was not raised at trial.  

The Wiretaps

While the reversal of the two wire fraud convictions will likely result in a reduced sentence for Durham, the Seventh Circuit handed the government a key victory in affirming the propriety of the use of wiretaps - techniques that were once reserved for investigating narcotics and organized crime.  The federal statute governing the issuance of wiretaps requires that the government must make:

a full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous.

Durham's lawyers argued that the government failed to demonstrate the necessity of obtaining wiretaps; courts have construed the wiretap statute as requiring that wiretaps are not used routinely as the first step of an investigation.  United States v. Thompson, 944 F.2d 1331, 1340 (7th Cir. 1991).  However, the Seventh Circuit concluded that the 45-page affidavit submitted by the government in support of the wiretap "easily established the necessary foundation for the wiretap" and disclosed that the government "first used a variety of other techniques to gather information."  In conclusion, the Court observed that:

What matters is that other available investigative procedures had been tried, or were inadvisable or unlikely to succeed under the circumstances.  


With two of the twelve convictions now reversed, the Seventh Circuit ordered that Durham be resentenced for the remaining ten fraud counts.  The case will be sent back to the district court, where Judge Magnus-Stinson will decide whether a lower sentence is warranted for Durham.  While each of the wire fraud counts carry a maximum twenty-year prison term, a calculation under federal sentencing guidelines will result in a lower range.

If Judge Magnus-Stinson does hand down a reduced sentence, Durham will lose his infamous position in the Wall Street Journal's recent ranking of the top 10 White Collar Crime prison sentences, where his 50-year sentence had placed him in a tie for 10th along with convicted Ponzi schemers Thomas Petters and Scott Rothstein.

A copy of the Seventh Circuit's opinion is below:


Durham Opinion



Madoff's Last Living Son Dies Of Cancer

The sole living son of convicted Ponzi schemer Bernard Madoff has reportedly died after a battle with cancer.  Andrew Madoff, who had long maintained his innocence of any wrongdoing associated with his father's massive fraud, passed away after losing a long fight against mantle cell lymphoma.  His brother Mark Madoff committed suicide in December 2010 - nearly two years to the date after his father's arrest for the largest Ponzi scheme in history.  With Andrew Madoff's death, both of Bernard Madoff's children have now preceded him in death following their father's imprisonment.

Both Andrew and Mark Madoff were the targets of litigation filed by the court-appointed bankruptcy trustee for Madoff's failed brokerage firm seeking the return of more than $200 million withdrawn from Madoff' scheme.  The litigation, which also named Madoff's brother and niece, was amended in November 2013 seeking to highlight certain facts that demonstrated the Madoffs' knowledge of their father's scheme, including revelations that each of the Madoff kin received tens of millions of dollars in transfers from Madoff, and also maintained investment accounts in which they withdrew amounts far in excess of their invested principal, making them "net winners" under applicable terminology.  Indeed, Madoff's brother, Peter, managed to withdraw more than $16 million from his investment account despite investing only $32,146 - including only $14 after December 1995.

Peter Madoff is currently serving a ten-year prison sentence after pleading guilty to several fraud charges relating to his role as the former chief compliance officer at Madoff's firm - a role that prosecutors alleged served merely as a blank check for Bernard Madoff to conduct his scheme with impunity.  

Ironically, Mark and Andrew Madoff were responsible for turning their father in to criminal authorities after he confessed that he was operating a Ponzi scheme with liabilities of $50 billion.  Neither have ever been accused of criminal wrongdoing.  


Government Seeks To Stay Discovery In TelexFree SEC Case Pending Criminal Resolution

The U.S. Department of Justice ("DOJ") has sought to intervene in the civil enforcement action brought against TelexFree by the Securities and Exchange Commission on the basis that a stay of civil discovery is appropriate pending resolution of parallel criminal proceedings against certain former TelexFree principals. In an 18-page motion filed today, the DOJ argued that the existence of parallel criminal proceedings based on the same alleged misconduct warranted the stay of civil discovery for several reasons, including that defendants James Merrill and Carlos Wanzeler might use the civil discovery process "in a manner that impairs proper administration of the criminal case." Of the nine civil defendants, at least seven - including Wanzeler - assent to a stay of discovery.

In the Motion, the DOJ elaborates on the history of the case, indicating that the criminal investigation began in June 2013 after a tip from the Department of Homeland Security. The Commission allegedly began its investigation six months later in January 2014, also on the suspicion that TelexFree was an illegal Pyramid scheme. The DOJ suggests that TelexFree was somehow aware of its "covert" investigation due to TelexFree's surprise decision to declare bankruptcy in April 2013 - a decision that immediately prompted authorities to execute search warrants on TelexFree headquarters based on fears that evidence would be destroyed. That same day, the Commission filed its emergency enforcement action and Wanzeler, a TelexFree principal, fled the country to Canada to catch a flight to Brazil.

The focal point of the DOJ's Motion turns on the fear that Merrill and/or Wanzeler could use the more expansive discovery permitted in a civil case to circumvent the more limited scope of discovery available in a criminal case. For example, in criminal cases there are typically no automatic disclosure requirements by the government except that any exculpatory evidence must be turned over. In contrast, Rule 26 of the Federal Rules of Civil Procedure requires the parties in a civil proceeding to exchange basic information and discovery at an early stage of the case. Additionally, whereas in criminal proceedings the Jencks act prohibits the turnover of any witness statements until that witness has testified and the defense has requested those statements, a defendant in a civil case is usually free to use depositions and other discovery techniques to gather information about a potential witness.

In considering requests to stay civil proceedings, courts evaluate several factors including (a) the extent to which the civil and criminal cases overlap; (b) the public interest; (c) any potential prejudice to the civil parties if that matter is stayed; (d) the court’s interest in managing dockets and resources; and (e) the current status of the criminal case. The DOJ argues that the two cases will rely on identical witnesses and evidence, that the public interest favors preventing a criminal defendant from evading discovery rules, that the civil defendants will not be prejudiced by the stay and will in fact save money, and that a stay would promote judicial efficiency.

According to the DOJ, Merrill is currently considering the DOJ's request to stay civil discovery and has reserved his right to oppose such a stay. As highlighted by the DOJ, Merrill has raised issues with the estimated cost of defending the criminal cases and has claimed he has no funds available for his defense.

A copy of the Motion is below (thanks to ASDUpdates):

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