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Recent SEC Releases
Wednesday
Apr062016

Recovery On Horizon For Victims Of $68 Million Florida Ponzi Scheme 

Over seven years after the Securities and Exchange Commission shut down a massive Ponzi scheme targeting the south Florida Haitian community, victims are finally on the verge of recouping some of their losses through a court-administered claims process.  Jonathan Perlman, the court-appointed receiver over two companies operated by convicted schemer George Theodule, has announced that victims may submit a claim to share in assets recovered by the receiver.  Perlman estimates that approximately $5 million will be available for distribution to victims, which equates to an expected recovery of approximately 10% of the estimated $41 million in losses suffered by Theodule's victims.  Victims are required to submit a proof of claim on or before August 16, 2016.

Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC").  Using these companies, and a variety of other entities and investment clubs he formed, Theodule held himself out as a financial expert to the Haitian community, touting his 17+ years of experience trading stocks and options.  Theodule promised astronomical returns, guaranteeing potential investors 100% returns on their investment in just 90 days. As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone.  Based on these representations, Theodule is said to have raised more than $30 million from as many as 2,500 investors from July 2007 to December 2008.

However, authorities alleged that Theodule's claims of trading success were completely false, and that in reality, Theodule was operating a massive Ponzi scheme.  Theodule's trading records showed trading losses of at least $18 million, and the remainder of investor funds were diverted to support Theodule's lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas.  The scheme collapsed when the Securities and Exchange Commission filed an emergency enforcement action in December 2008.  Perlman's subsequent investigation revealed that Theodule had spent nearly 100% of the money he took in, meaning little remained for victims.

Perlman filed a series of lawsuits against entities he accused of being complicit or ignorant of Theodule's scheme, including Wells Fargo, Bank of America, TD Ameritrade, and OptionsXpress.  While Bank of America and TD Ameritrade settled for $2.75 million and $1.25 million, respectively, the lawsuit against Wells Fargo took several years.  Perlman alleged that Wachovia ignored obvious red flags about Theodule's banking relationship, failed to conduct the requisite due diligence, and even made special accommodations for Theodule's benefit including the delivery of large amounts of cash through the drive-through window.  Perlman also alleged that internal bank documents showed the bank's knowledge of suspicious activity, including a decision to freeze one of the accounts that essentially acted as a funnel for investor deposits to Theodule's main account.  This freeze was subsequently removed four days later after a Creative Capital employee faxed the bank a business plan.

While the Wells Fargo suit was initially dismissed by the trial court, Perlman was successful in petitioning the Eleventh Circuit Court of Appeals to overturn the dismissal.  After a two-week trial in April 2015, the parties reached a $3.175 million settlement on the eve of jury deliberations.  The settlement was noteworthy as it marked one of the largest recoveries from banks in Ponzi litigation. 

In order for a victim to share in this and potential future distributions, a proof of claim form from the receivership website must be submitted by August 16, 2016.  A link to the receivership website is here.

Friday
Mar112016

SEC Alleges Oregon Company Ran $350 Million "Ponzi-Like" Scheme

An Oregon company is facing allegations by the Securities and Exchange Commission that it operated a "Ponzi-like" scheme that raised hundreds of millions of dollars from over 1,000 investors around the country.  Aequitas Management LLC ("Aequitas") was named in a civil enforcement action filed yesterday by the Securities and Exchange Commission alleging that the company, which last year orchestrated an orderly liquidation and winding down of its business, violated federal securities laws in raising hundreds of millions of dollars from investors.  The Commission filed its action against Aequitas and its senior management team, including founder Robert J. Jesenik, fundraiser Brian A. Oliver, and former Chief Financial Officer N. Scott Gillis, and is seeking injunctive relief, disgorgement of ill-gotten gains, imposition of civil monetary penalties, officer and director bars, and appointment of a receiver.

Aequitas and a related group of companies was founded by Jesenik in the early 1990s.  Aequitas, which is majority owned by Jesenik, Oliver, and Gillis, sits at the top of a complicated organizational structure that includes over 75 active entities.  One of the related entities, Aequitas Commercial Finance, LLC ("ACF"), began raising money from investors in 2003 through the issuance of high-interest promissory notes to more than 1,500 investors.  The notes, sold directly and through registered investment advisors, carried terms ranging from one to four years and promised investors annual returns ranging from 5% to 15%.  Through offering documents, investors were told that their funds would be used for several purposes including the funding of receivables in the student loan, healthcare, and other industries.  Investors were assured that the notes issued to them were secured by the personal property of ACF.

While ACF disclosed that the purchase of student loan receivables were one of the uses of investor funds, investors were not told that their funds were heavily concentrated in receivable purchased from troubled for-profit education provider Corinthian Colleges ("Corinthian").  Those receivables were subject to a resource agreements that required Corinthian to buy back any receivables that became delinquent by more than 90 days, which included monthly payments from $4 to $7 million in early-to-mid 2014.  However, Corinthian began encountering financial difficulties in 2014 and stopped making monthly payments altogether to Aequitas in June 2014.  Corinthian subsequently filed for Chapter 11 bankruptcy protection in May 2015.  

However, rather than disclose the true nature of Aequitas's exposure to Corinthian, the Commission alleges that Aequitas and its executives ramped up efforts to sell short-term notes to investors.  Indeed, during the latter half of 2014 ACF raised nearly $25 million from the issuance of 6-month notes carrying annual interest rates ranging from 11% to 12%.  Later that same year, ACF also began offering one-year notes touting 15% annual interest rates.  As those short-term notes began coming due, the company disclosed that it would be unable to meet its obligations. 

According to the Commission, the offering documents distributed by ACF representing that the primary use of investor funds was to purchase trade receivables was false.  In 2014, the Commission alleged that only about 25% of investor funds were used to purchase trade receivables, while that figure dropped to 8% in 2015.  Indeed, the Commission alleged that the operation had likely morphed into a Ponzi scheme by mid-2014 when 

the vast majority of investor money to cover redemptions and interest payments to prior investors and to pay the operating expenses of the entire Aequitas enterprise...In reality, at least by July 2014, ACF was generally paying the principal and interest due on prior ACF notes from the proceeds of investments, in a Ponzi-like fashion

Aequitas has consented to the imposition of an injunction enjoining it from raising additional funds from investors and also agreeing to the appointment of a receiver to marshal and secure assets for the benefit of defrauded investors.  

A copy of the Commission's Complaint is below:

 

Aequitas Complaint

 

Wednesday
Feb242016

Salesman Gets 7-Year Prison Sentence For Role In $370 Million Ponzi Scheme

A New York man who took in nearly $9 million in commissions for soliciting investors for a $370 million Ponzi scheme has been sentenced to a nine-year prison term for his role in the fraud.  Jason Keryc, of Wantaugh, New York, received the sentence from U.S. District Judge Denis R. Hurley after a federal jury convicted Keryc on charges of securities fraud, conspiracy, mail fraud, and wire fraud for his role in pitching investments for Agape World, Inc. ("Agape").  Keryc is one of five former Agape sales agents charged for his role in the massive Ponzi scheme masterminded by Agape founder Nicholas Cosmo.  In addition to his prison sentence, Keryc was also ordered to pay $179 million in restitution.

Authorities arrested Cosmo in January 2009, charging him with operating a $415 million Ponzi scheme. According to authorities, Cosmo used his companies, Agape and Agape Merchant Advance LLC (collectively, Agape), to solicit investors by promising high returns purportedly derived from making private bridge loans to commercial real estate companies and builders.  The scheme used a network of agents that received lucrative commissions in exchange for soliciting investors.  After pleading guilty in October 2010, Cosmo received a 25-year sentence in October 2011.  

After Cosmo was sentenced to prison, authorities began investigating the scheme's use of commissioned agents to attract investors.  This included an assortment of false claims made to lure investors, including the safety of an investment, the intended use of investor funds, and the attractive rate of return. Authorities soon zeroed in on alleged misrepresentations and omissions made by agents in 2008 despite learning that previous bridge loans made in 2007 were either in default or on extension.  Investors were also not told that approximately $100 million of investor funds were transferred to commodity trading accounts - of which $80 million was subsequently lost in commodities trading.  Cosmo's sales agents were richly rewarded for their efforts; Cosmo paid more than $50 million in commissions during the scheme's existence.  

Keryc was an account representative for Agape from November 2003 and January 2009.  Authorities charged that, of the approximately 5,000 investors that were duped by Agape, 1,600 of those investors were solicited at the behest of Keryc or sub-brokers working at his direction.  Keryc ultimately raised approximately $700 million from investors that was earmarked for specific bridge loans when, in reality, roughly $25 million was loaned to Agape's bridge loan clients from 2003 to 2009.  

Previous Ponzitracker coverage of the Agape Ponzi scheme is here.

A copy of the indictment charging Keryc is below:

Keryc Indictment

Monday
Feb222016

Cay Clubs Founder Gets 40 Years In Prison For $300 Million Ponzi Scheme

Over seven years after the collapse of a Florida real estate investment company that took in more than $300 million from thousands of investors, a federal judge sentenced the company's founder to a 40-year prison term.  Fred Davis Clark, aka Dave Clark, received the sentence from U.S. District Judge Jose E. Martinez two months after a federal jury convicted Clark on multiple charges stemming from his tenure over Cay Clubs Resorts and Marinas, including three counts of bank fraud, three counts of making false statements to a financial institution, and obstruction of an official investigation.  Clark was convicted of the charges during a December 2015 trial after a previous trial resulted in a mistrial for clark and an acquittal for his wife, Cristal Coleman.  In addition to the sentence, Judge Martinez also ordered Clark to forfeit over $300 million.

The Scheme

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxury resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company was alleged to have lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs allegedly used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Original Trial

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and extradition from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

A forensic analysis conducted by the government alleged that Cay Clubs evolved into a Ponzi scheme as early as April 2005, with $2 out of every $3 paid to investors allegedly coming from existing investors.  The forensic analysis also showed that the Clarks lived lavishly, including nearly $20 million in boat purchases and expenses, $5 million in aircraft expenses, and $3 million in personal credit card bills.  Fred Clark also allegedly spent over $3 million at a Bradenton golf and country club.

After a five-week trial earlier this summer, a federal jury deliberated for four days before acquitting Cristal Clark of all charges and deadlocking on the charges against Dave Clark. 

Superseding Indictment

Shortly after the mistrial, authorities handed down a superseding indictment that signaled a slight change in strategy.  While the previous indictment focused onthe Clarks' alleged operation of a Ponzi scheme through Cay Clubs, the superseding indictment honed in on the insider transactions that were used to artificially inflate the unit prices and allegedly defraud the lending institutions.  The new indictment alleged that Clark would identify certain family members to act as "straw borrowers for loans that were used to purchase Cay Clubs units." These straw borrowers would prepare fraudulent loan applications, which included representations about the borrower's employment and income, designed to induce lenders to approve the extension of credit.  Clark and others also allegedly prepared fraudulent HUD-1 Statements in which they certified that the borrowers had made the required down payment and cash-to-close payments when, in reality, those payments were made by a Cay Clubs entity controlled by Dave Clark.  

The retrial began November 9th and lasted four weeks.

Post Trial Efforts

Clark made several post-trial attempts to overturn his conviction or secure a new trial, arguing among other things that prosecutors failed to prove their case, that the jury ruled on insufficient evidence, and his conviction was based on presumptions.  Clark's motion for a new trial was denied earlier this month without accompanying explanation.  Clark also sought to have Judge Martinez recused for exhibiting bias during the trial, as purportedly evidenced by excerpts from the trial transcript.  The US opposed Clark's motion for recusal, observing that:

Defendant was extremely manipulative, non-responsive, and obstructive during his trial testimony. During his direct examination he refused to answer the questions of his own lawyer and instead continuously provided long, narrative and rambling statements...The court had to direct him on multiple occasions to answer the questions asked.

Judge Martinez denied the recusal motion on February 10th.

Tuesday
Feb162016

Rothstein's Bank - Not Victims - Will Get Proceeds Of Auctioned Luxury Items

An upcoming auction of luxury items seized from convicted Ponzi schemer Scott Rothstein, including a 12-carat diamond ring, the most expensive women's Rolex ever made, and a $550,000 watch, will likely bring in millions of proceeds payable to an unlikely beneficiary: the Canada-based bank which has paid hundreds of millions of dollars in settlements for its role in Rothstein's scheme.  A Florida jeweler is tasked with auctioning off the remaining part of Scott Rothstein's extensive jewelry collection - an assortment built with no limits using stolen funds from hundreds of duped investors.  However, while the proceeds would typically go to pay back Rothstein's victims, that is not the case as those victims have already been made 100% whole through an unprecedented recovery effort by bankruptcy trustee Herbert Stettin.  As such, in a final twist of irony, the bank which has paid dearly for its role in the fraud will start to recoup its $132.5 million claim recognized by the trustee.

The Scheme

Rothstein touted lucrative returns to investors through the purchase of highly confidential legal settlements purportedly stemming from claims of sexual harassment, whistle-blower, and qui tam actions against large corporations.   According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to receive that settlement at a discount.  With the investor sworn to secrecy and enamored by the prospect of an lucrative return, there was a built-in incentive for all parties to remain tight-lipped. Potential investors were assured that their funds would remain safe in a firm trust account held at TD Bank, with some provided "lock letters" authored by bank officials purportedly assuring them that their funds were impervious to ill will or influence.  

As would later emerge in spectacular fashion, Rothstein's alleged secretive settlements were bogus and nothing more than what would later be revealed as the largest Ponzi scheme in Florida history.  Indeed, as he would later confide in authorities as part of one of the most memorable (and effective) post-conviction cooperation campaigns, Rothstein pointed the finger at numerous individuals who he claimed shared blame for the scheme, including Frank Spinosa - the then-regional Vice President of the TD Bank branch in Ft. Lauderdale.  As alleged by Rothstein (and later by both civil and criminal authorities), Spinosa played an integral role in the scheme through a series of actions that included making false representations to investors and authoring bogus "lock letters."  Spinosa later pleaded guilty to wire fraud conspiracy and is scheduled to begin a 30-month prison sentence this Thursday.

Unprecedented Recovery

The court-appointed bankruptcy trustee, who assumed his position in late 2009 with Rothstein's once-prominent law firm shuttered and Rothstein having fled with $15 million, announced a liquidation plan in February 2013 that sought to return 100% of victim losses - a remarkable outcome that was possible only due to TD Bank's culpability in Rothstein's scheme.  At the time of the proposed distribution plan, TD Bank was the subject of numerous lawsuits brought by Rothstein victims and had already been on the losing end of several suits to the tune of at least $132.5 million in damages.  Stettin sought and received approval to largely exclude those victims who had already recovered from TD Bank from participating in the liquidation plan. 

The funds available for the proposed liquidation plan also included a $72.45 million payment from TD Bank to resolve all claims Stettin could have brought against the bank.  The payment essentially acted to stop the increasing spigot of lawsuits brought by Rothstein victims as it was conditioned upon the Court's entry of a "bar order" which would forever enjoin any current or future lawsuits against the bank.  The settlement essentially ensured that Stettin would have available funds to make good on his intention to make Rothstein's victims 100% whole.

The liquidation plan was approved by the Court in July 2013, albeit as a result of a marathon negotiating session that naturally resulted in the extraction of additional settlements from TD Bank.  At the time the plan was approved, TD Bank's total toll from Rothstein's fraud stood in the hundreds of millions of dollars - including $257 million in settlements for lawsuits brought by one attorney alone. 

TD Bank's Subordinated Claim

The liquidation plan provided that TD Bank was permitted a $132.45 million subordinated claim, an amount which represented the current total of settlements and jury verdicts rendered against the bank at the time the liquidation plan was proposed.  TD Bank's claim was subordinated to the lowest possible priority, meaning that it would not be entitled to receive any distribution on its claim until all other claims had been paid. 

The Auction

With the Rothstein saga in its seventh year, the bankruptcy estate is seeking to wind down and close the estate.  That means that Michael Goldberg, a court-appointed liquidating trustee, is entrusted with auctioning off the remainder of a collection of luxury assets that once symbolized the rock-star lifestyle enjoyed by Rothstein with investor funds.  The auction, which will take place in early April, includes a 30-piece jewelry collection fit for a king, including:

  • Wife Kim Rothstein's 11.8 carat diamond engagement ring;
  • A Zenith Zero-G Tourbillion watch that cost $550,000 to make;
  • a Harry Winston watch;
  • a 12.08 carat yellow canary diamond ring;
  • a women's Rolex watch estimated to be the most expensive ever made; and
  • A bracelet with at least 1,350 diamonds.

The jewelry collection is appraised at roughly $10 million, although it is estimated the auction will bring in roughly 20%-40% of that amount.  Participants can also bid on a nearly-10,000 square foot unfinished mansion in Boca Raton that was custom built by a Rothstein victim and later purchased by Rothstein.  The mansion, which has an elevator, atrium, pool, spa, and waterfall, has several rooms that are still unfinished.  The price for the mansion will be set at $2.5 million.

The conclusion of the auction will mark a closing chapter in a saga that has gripped the south Florida scene for the better part of a decade.  The resulting efforts by the court-appointed trustee have resulted in significant accolades, including the largest Ponzi scheme to see its victims receive 100% compensation.  It is then perhaps fitting that TD Bank, which has paid dearly for its involvement with Scott Rothstein, will perhaps receive the last token payment. 

More Ponzitracker coverage of the Rothstein scheme is here.