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Recent SEC Releases
Saturday
Nov222014

Ponzi Victims Successfully Recover $1.4 Million From Net Winner In $100 Million Ponzi Scheme

Victims of the largest Ponzi scheme in Ohio history will now recover at least a small portion of their losses after reaching a settlement to recover $1.4 million in "false profits" received by a more fortunate investor.  Glen Galemmo, a former money manager currently serving a 15-year prison sentence, took in more than $100 million from hundreds of investors who trusted the Ohio man's promises of above-average returns through investments in undervalued stocks.  While authorities have not sought the appointment of a receiver to collect assets for victims, a pair of Cincinnati attorneys have spearheaded efforts to recover funds that might be used to temper losses.

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 has 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.

Investors Take Matters Into Their Own Hands

Earlier this fall, the Commodity Futures Trading Commission ("CFTC") filed a civil enforcement action against Galemmo and Queen City.  While government agencies such as the CFTC and the Securities and Exchange Commission that initiate civil enforcement actions typically request the appointment of a receiver when there appear to exist substantial assets that could be recovered and later distributed to victims, here the CFTC did not request the appointment of a receiver.

One of the largest sources of recovery for victims of Ponzi schemes typically comes from lawsuits against scheme investors fortunate enough to ultimately profit from their investments.  Aptly known as "clawback" suits in Ponzi jurisprudence, the suits seek recovery of "false 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."  

One of the "net winners," as they are known, in Galemmo's scheme was Michael Willner.  Willner was one of Galemmo's original investors, whose initial investment of several million dollars allegedly multiplied several times according to fictitious account statements provided by Galemmo.  Willner also allegedly served as a recruiter for new Galemmo investors, and the lawsuit alleged that Galemmo paid commissions to Willner for referred investors.  Willner allegedly withdrew "millions" of dollars in excess of his original investment.

Willner sent out an incriminating email to fellow investors in the days after Galemmo's announcement that the funds would be shutting down, stating: 

“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.

While Willner allegedly received "millions" in excess of his original investment, the settlement takes into account his financial condition, and also discloses that a majority of the settlement amount will come from a federal tax refund due to Willner.  The remainder will come from the sale of Willner's interest in a private company that was purportedly purchased with funds traceable to Galemmo's scheme.

The settlement seeks to create a class composed of all victims that invested with Galemmo from 2002 until the scheme's collapse in 2013.  While the motion to approve the settlement does not provide details on the disbursement of settlement funds, it is likely that some kind of claims process will have to occur and be approved by the overseeing Ohio judge.  The eventual distribution to each investor will be known only after a determination of each investor's approved loss and the total amount of losses.  

The law firm behind the lawsuit, Santen & Hughes, was the same law firm that filed the initial lawsuit accusing Galemmo of running a fraud in the wake of the scheme's collapse.  The firm has also filed other lawsuits against third parties seeking recovery for Galemmo victims, including a suit against several prominent financial institutions related to their dealings with Galemmo.  The firm was able to interview Galemmo before he reported to federal prison, and it is possible that other net winners could be pursued.  

The motion seeking approval of the settlement is below:

Galemmo - Joint Motion for Order Preliminarily Approving Class Action Se... (2)

 

Thursday
Nov202014

After Robbing Bank With Fake Bomb, Man Pleads Guilty To $20 Million Ponzi Scheme

A New Jersey man, who after his arrest for a $20 million Ponzi scheme subsequently robbed a Florida bank by brandishing a fake bomb, has pleaded guilty to a wire fraud charge in connection with the scheme.  Louis Spina, 57, entered his guilty plea today before U.S. District Judge Anne E. Thompson.  Spina could face a maximum of twenty years in federal prison when he is sentenced, as well as criminal fines and restitution. 

credit - Sacramento CBS LocalSpina's story reads like a gripping Hollywood thriller.  With only a high school diploma, Spina started working for the New York Stock Exchange at the age of 19.  Spina apparently had a penchant for Wall Street, becoming an NYSE member at age 27 and taking home at least $800,000 in annual pay during an 18-year period beginning in 1983.  Spina, who apparently had a knack for being captured by media outlets on the trading floor (see here, here, and here), ultimately spent over 25 years on Wall Street.

In 2010, Spina left Wall Street and formed LJS Trading, LLC ("LJS").  Potential investors were told that Spina could deliver annual returns ranging from 9% to 14% through trading in various stocks and equities, wit the understanding that Spina would be entitled to keep any surplus profits.  Spina would ultimately raise approximately $20 million from dozens of investors.

However, Spina ultimately used less than 50% of investor funds for their stated purpose, and indeed lost the entirety of the $9.5 million he invested.  He spent the remainder of investor funds to sustain a lavish lifestyle that included expensive cars, luxury real estate, and even a $400,000 donation to a private university.

When investors began questioning Spina about the safety of their funds, Spina provided them with "screenshots" of his trading account displaying a large balance.  According to the FBI, this balance was not the accurate balance, but simply a display of the 100-to-1 margin purchasing power used by Spina.  In late 2013, Spina told investors that he was in talks to sell the company to an unnamed wealthy individual that could offer even higher annual returns of 14% to 30% - and succeeded in raising an additional nearly $2 million.  

"Rock bottom"

However, there was no wealthy benefactor waiting in the wings, and Spina was arrested in November 2013 on federal charges that he was operating a Ponzi scheme.  Several months after his arrest, Spina entered a Wells Fargo branch in Coral Gables, Florida, wearing a black ski mask over his head and carrying a bag which he claimed contained a live bomb.  Spina made off with approximately $16,000 from the heist, but a witness observed his getaway and reported his plates to authorities.  Spina was arrested without incident the following day, where he confessed to authorities that he had robbed the bank, used a key fob to simulate a detonator, and used most of the robbery proceeds to pay bills.  Spina was recently sentenced to a 41-month prison sentence for the robbery.

Spina now faces an additional prison term of up to twenty years for the wire fraud charge.   Sentencing is currently scheduled for February 26, 2015.

Thursday
Nov202014

Zeek Founder Set For Trial In January 2015  

A North Carolina man will face trial in January 2015 over charges that he masterminded the ZeekRewards Ponzi scheme that allegedly swindled hundreds of millions of dollars from hundreds of thousands of victims.  Paul Burks, 67, will have until January 20, 2015 to prepare his defense to multiple wire fraud, mail fraud, conspiracy, and tax fraud conspiracy charges brought by the United States.  Burks has pleaded not guilty to the charges.

Burks operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place bids on merchandise in one-cent increments.  Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions.  Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler.  Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix."  None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com.  According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits.  The daily "award" was usually 1.5% of the individual's 'investment'.  Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points numbered nearly $3 billion in August 2012 when the Securities and Exchange Commission filed an emergency action to halt the ongoing fraud.  Assuming a 1.5% daily "award", the outstanding Profit Points would have required daily cash outflows of $45 million should all investors seek to receive their "award" in cash.  

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix".  The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.  

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of a Ponzi scheme.  Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadilty increased, reaching approximately $2.8 billion in August 2012 despite available cash reserves of less than 4300 million.  Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.

Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.  

Timing of Charges

Burks was the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing.  The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment.  The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty or is convicted of the fraud, which would allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.  

Tax Fraud Conspiracy

While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, Burks also faces a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme.  While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.

More Ponzitracker coverage of ZeekRewards is here.

Thursday
Nov202014

North Carolina Woman Gets 10-Year Sentence For $1.6 Million Ponzi Scheme

A North Carolina woman will serve at least ten years in state prison after pleading guilty to operating a Ponzi scheme that duped fellow churchgoers and art class acquaintances of at least $1.6 million.  Angela Dawn Campbell, 42, was sentenced by Special Superior Court Judge Richard Stone to two consecutive 60-to-81-month sentences, which translates into a minimum of ten years and a maximum term of 14.5 years.  Campbell currently owes more than $350,000 in restitution to her defrauded victims.

From 2009 to 2011, Campell befriended fellow churchgoers and members of art classes she attended, telling them she was operating an online brokerage and investment business.  Victims that Campbell approached at church later told investigators that Campbell asked them to keep their investment quiet because she "didn't want to get over her head and have too many people coming to her."  Investors were told that they could double or triple their investment, and Campbell also promised investors that they could request a withdrawal of their funds at any time.  

However, in reality Campbell did not use investor funds to open online trading accounts; rather, she used investor funds for a variety of unauthorized purposes, including the payment of fictitious returns to existing investors and the withdrawal of funds at Atlantic City casinos.  Campbell was arrested in February 2012 on twenty-two counts of obtaining property through false pretenses.  As part of her plea agreement, prosecutors agreed to drop twenty of the charges in exchange for Campbell's guilty plea to two charges.  As part of North Carolina's Structured Sentencing Act, parole was eliminated for crimes committed after October 1, 1984, and an offender must serve 100% of the minimum sentence and 85% of the maximum sentence. 

Tuesday
Nov182014

California Man Gets 14-Year Prison Sentence For $2.7 Million Ponzi Scheme

A federal judge sentenced a California man to a fourteen-year prison term for operating a real estate Ponzi scheme that duped family and friends of nearly $3 million.  James Berghuis, 42, received the sentence from U.S. District Judge William B. Shubb, who factored in Berghuis' lack of "conscience" in fashioning his sentence. Berghuis chose to stand trial on the charges last year, which resulted in a federal jury convicting him on four counts of mail fraud, four counts of wire fraud and one count of laundering money.  Berghuis could have potentially faced decades in prison.

From 2005 to 2007, Berghuis used his company, Berghuis National Lending Inc. ("BNLI") to solicit potential investors to take out home equity loans in order to invest in hard-money loans, real estate parcels, or the purchase of real estate franchises.  Investors were assured that the investment was safe, and some were offered a deed of trust purportedly giving them a second position on the asset underlying their particular investment.  In total, Berghuis raised millions of dollars from family members, friends, and acquaintances.

However, Berghuis did not use investor funds as promised; instead, he diverted funds for his own personal use and paid out fictitious returns to existing investors.  In one situation, Berghuis signed over a $200,000 check he had received from a new investor to a car dealership to take possession of a top-of-the-line Mercedes sports car.  Meanwhile, when funds began to run out, investors received various excuses as to why Berghuis could not make the promised payments; many investors ultimately lost their houses or were saddled with significant mortgages as a result of Berghuis' encouragement to use home equity money for the investment.