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Recent SEC Releases
Monday
Aug172015

Trial Of Accused $300 Million Ponzi Scheme Masterminds Ends In Acquittal, Mistrial

In a rare loss for the government in a Ponzi scheme trial, the trial of a husband-and-wife duo accused of defrauding thousands of investors out of hundreds of millions of dollars in an alleged timeshare Ponzi scheme ended with a full acquittal for the wife and a mistrial declared for her husband.  After a federal jury acquitted Cristal Clark of all fraud charges, U.S. District Judge Jose E. Martinez declared a mistrial after a federal jury deadlocked for the fourth day of negotiations on the fate of Fred "Dave" Clark.  The government has indicated that it intends to retry Fred Clark, who faces up to thirty years in federal prison for each bank fraud charge.  

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.  

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.  

In the wake of the charges against the Clarks related to their operation of Cay Clubs, authorities targeted former sales directors Barry Graham and Ricky Lynn Stokes and charged the pair with conspiracy to commit bank fraud.  The charges resulted in guilty pleas and identical five-year sentences, and each of the men reportedly testified at the Clarks' trial.  

A forensic analysis conducted by the government alleges 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.

Thursday
Aug132015

Ponzi Schemer Gets Extra Two Years For Violating Asset Freeze

It is to say to other people who are brought in to court by the SEC, 'This is what could happen to you if you violate the interim orders that judges frequently impose in cases brought by the SEC or similar agencies.  It is not going to be folded up into a ball of wax and everything is going to be treated as congealed.  It is a separate and distinct crime, and you will pay for it, and you will pay for it by additional time in prison.'

U.S. District Judge Douglas P. Woodlock

In a rare occurrence, a Boston man currently serving a prison sentence for perpetrating a $10 million Ponzi scheme received an additional two-year sentence for violating an asset freeze imposed during a civil enforcement action brought by the Securities and Exchange Commission.  Steven Palladino, 58, received the sentence from U.S. District Judge Douglas P. Woodlock, who sought to send a message as to the seriousness of the court-imposed asset freeze often imposed at the request of regulatory agencies bringing emergency enforcement actions to stop financial frauds such as Ponzi schemes.  Palladino previously pleaded guilty in May 2015 to twenty-five counts of criminal contempt.

The Scheme

Palladino and his wife, Lori, and son, Gregory, were the sole principals of Viking Financial Group ("Viking"), which advertised itself to investors as a high-yield, low-risk investment strategy carrying above-average returns by making secured loans to borrowers at high interest rates.  While Viking took in more than $10 million from investors based on these representations, in reality Viking made very few loans and many of those loans were made in violation of a state statute prohibiting loan interest rates exceeding 20%.  The majority of investor funds served only to support a lavish lifestyle for the Palladinos that included Bahamas trips, rent for Steven Palladino's mistress, and hundreds of thousands of dollars in gambling losses.  The Palladinos were indicted in September 2013 and sentenced to prison in January 2014.

The Asset Freeze

On April 30, 2013, the Commission filed an emergency enforcement action accusing the Palladinos of perpetrating the Ponzi scheme through Viking.  The Commission requested, and the court granted, an injunction that contained an asset freeze prohibiting the Palladinos and any of their associates from dissipating or transferring any funds in their control or possession.  Such orders are standard in cases involving financial fraud, where investor funds are often at risk of being dissipated beyond the reach of regulators or a court-appointed receiver or trustee.  The District Court later modified that asset freeze to require that all funds received by Viking were to be deposited into a court escrow account.  

However, on at least four different occasions, Palladino was accused of violating the asset freeze.  This included when Palladino (1) opened multiple credit card accounts after the asset freeze was entered; (2) sold a Ford F350 Truck for $9,500 and failed to deposit the proceeds in the court escrow account; (3) transferred three luxury vehicles to car dealerships, which subsequently transferred the vehicles to Palladino's wife who then obtained loans using each of the vehicles as collateral; and (4) represented that the loans obtained on the vehicles were paid off when, in reality, the checks used to pay off the loans bounced and the loans remained.  

Palladino was charged with twenty-five counts of criminal contempt in a criminal information that was filed in May 2014.  The charges should be a deterrent in the future to similar defendants facing the temptation of defying a court-ordered asset freeze and dissipating investor funds for their own benefit.

A copy of the charging document is below:

 

Monday
Aug102015

Schemer's Unauthorized Real Estate Investment May Pay Off For Victims

Victims of one of the largest Ponzi schemes uncovered in Long Island may soon recoup a significant chunk of their losses from the sale of a luxury Montauk resort that the scheme perpetrator purchased using misappropriated investor funds.  Brian Callahan and Adam Manson, who each currently await sentencing after pleading guilty for their role in duping investors out of close to $100 million, used tens of millions of dollars in investor funds to purchase the Panoramic View in Montauk, New York, early in the scheme.  While the scheme collapsed in 2013, the property has appreciated considerably in value as as beneficiary of the rise in real estate values over the past half-decade.  While the property remains on the market, it appears that a sale could result in the payment of close to 50% of approved investors losses - a welcome development and well above the pennies on the dollar that most victims typically receive in the aftermath of such schemes.  

Authorities indicted Callahan and his brother-in-law, Manson, in August 2013.  According to the indictment, Callahan managed multiple offshore investment funds organized in Nevis and the British Virgin Islands, told most investors that their funds would be invested in various New York hedge funds, and required a $5 million minimum investment.  Other investors were told they would receive above-average returns by investing in a fund that traded high-dividend stocks, bonds, and certificates of deposit.  Investors were provided with regular account statements purportedly showing consistent account growth.  In total, the funds raised nearly $120 million from at least 40 investors, including the Montauk, N.Y. volunteer fire department and a Maryland investor that alone lost $11 million.  

However, rather than using investor funds as promised, the men ran a classic Ponzi scheme where they used new investor funds to pay purported returns to existing investors.  In addition, the men diverted tens of millions of dollars in investor funds for other unauthorized purposes, including credit card bills, golfing club dues, down payments on multiple houses, and payments for luxury automobiles including a Range Rover and BMW.  

Through their company, Distinctive Ventures, Callahan and Manson also diverted at least $30 million of investor funds to acquire Panoramic View in 2007.  The resort, a stunning ten-acre parcel of property in Montauk consisting of private residences and a hotel, was refurbished with the goal of selling the residences and focusing on operating the hotel.  However, the purchase came on the eve of the well-known collapse in the real estate market, and the market for such an exclusive property soon dried up.  

After the Securities and Exchange Commission brought an action against the men in 2012, the federal government filed a criminal forfeiture action that same year and has been responsible for the property ever since.  Notably, a New York federal judge denied the government's attempt to sell the property for $54 million in 2013, finding that the sale was not commercially reasonable given that a valuation had priced the property as high as $88 million and that the amount would only leave approximately $36 million for investors after paying off higher-priority outstanding liens.  The government has been accepting new bids for the sale, with all interested parties having until Wednesday, August 12, 2015 to submit any indication of interest to USANYE-Panoramic@usdoj.gov.   

For investors, the proceeds from the sale of the Property likely represent their only hope to recoup more than pennies on the dollar of their losses - losses that the court-appointed receiver collectively pegs as nearly $100 million.  The receiver has amassed nearly $7 million for distribution to investors to date, meaning that investors could realistically expect to recoup close to half of their losses should the Property sell for an amount above $60 million.  

The Court's previous order denying the motion to sell the Property is below:

 

Order

 

Thursday
Aug062015

Final Madoff Defendant Sentenced To Prison

Nearly 8 years after Bernard Madoff confessed to an FBI agent in his Manhattan apartment that he was running a giant Ponzi scheme, a New York federal judge sentenced the 15th and last remaining defendant to be charged for their role in Madoff's scheme to six months in prison.  Irwin Lipkin, the first non-Madoff family member hired at Madoff's Bernard L. Madoff Investment Securities LLC ("BLMIS") in 1964, received a 6-month prison sentence - over the objection of his defense attorneys - for what prosecutors called conduct that was "central" to Madoff's fraud.  Lipkin had previously pleaded guilty in 2012 to conspiracy to commit securities fraud and falsify documents and the falsification of documents required by ERISA.

Lipkin was the third employee hired at BLMIS more than 50 years ago in 1964.  During his 34-year tenure at BLMIS, Lipkin served as Controller and was responsible for maintaining the internal books and records.  In this capacity, Lipkin assisted Madoff with performing internal audits of the securities positions that Madoff purportedly held on behalf of customers.  At the direction of Madoff, Lipkin was accused of creating false books and records that were designed to manipulate BLMIS's profit numbers.  Lipkin kept these changes in a journal he kept, and when he left BLMIS in 1998, he instructed his successor on how to accomplish these falsifications.  Additionally, Lipkin orchestrated sham trades in his person BLMIS trading account to create the appearance of capital losses that allowed Lipkin to retain significant capital gains.  Finally, Lipkin arranged for his wife to remain on BLMIS's payroll from 1978 to 2001 despite her failure to perform any services for BLMIS.

Mr. Lipkin is the last defendant to be sentenced in an extraordinary prosecutorial effort to bring to justice all who played a role in Madoff's fraud.  This ranged from Madoff's family members to Madoff's secretary to his accountant.  Notably, according to a graphic compiled by Reuters, 9 of the 15 defendants were sentenced to a prison term of 2.5 years or less - including six defendants who did not serve any prison time.  This extraordinary criminal prosecution has proceeded on a parallel track to an equally-extraordinary effort by the court-appointed trustee for BLMIS, Irving Picard, whose legal team has recovered over $10 billion to compensate a class of Madoff victims who collectively lost an estimated $17 billion.  This $10 billion amount does not include an additional $4 billion separately recovered and administered by the government.  

A copy of Irwin Lipkin's criminal charging document is below:

Lipkin, Irwin S9 Information

Wednesday
Aug052015

Judge Won't Dismiss Receiver's Suit Against Associated Bank

Months after an appeals court revived a lawsuit against Associated Bank for its alleged role in Trevor Cook's massive Ponzi scheme, a federal district denied the bank's subsequent attempt to dismiss the suit on in pari delicto and res judicata grounds.  On Tuesday, U.S. District Judge David S. Doty issued an order denying Associated Bank's (the "Bank") motion to dismiss the complaint brought by R.J. Zayed in his capacity as receiver over several entities used by Trevor Cook to perpetrate a $194 million Ponzi scheme.  The suit was originally filed in April 2013, dismissed by Judge Doty in September 2013 for failure to state a claim, and subsequently revived by the Eighth Circuit Court of Appeals in March 2015 on the basis that Zayed had, in fact, adequately stated claims against the Bank.  

The Scheme

Cook's scheme, the second-largest in Minnesota history to only Thomas Petters' $3.65 billion Ponzi scheme, promised investors above-average returns through trading in commodities and futures.  Partnering with two firms, Crown Forex SA and JDFX Technologies, Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out.  Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million of that amount was used to trade currency, of which $68 million was lost.  The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.

The Bank Lawsuit

The Receiver sued the Bank back in early 2013, asserting claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions.  According to the Receiver, the Bank's substantial assistance allowed Cook's scheme to take in over $79 million.  The Complaint alleged, among other things, that Cook contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds. Following this, the Complaint described a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme.  This included:

  • Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
  • Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
  • Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
  • Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.

The Complaint also disclosed that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.

While Judge Doty dismissed the suit on the basis that Zayed had failed to adequately plead both that the Bank had actual knowledge of Cook's fraud and that the Bank rendered substantial assistance to the scheme, the Eighth Circuit disagreed and remarked that "it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it."

The Motion to Dismiss

Following the Eighth Circuit's decision, Associated Bank again moved to dismiss the suit on the grounds that it was barred by the doctrine of both in pari delicto and res judicata.  Each is discussed below.

In pari delicto

The doctrine of in pari delicto is an equitable defense standing for the principle that a plaintiff who has participated in wrongdoing is prohibited from later attempting to recover damages for that wrongdoing.  While tracing its roots to judicial reluctance to become intertwined in disputes between wrongdoing parties, Judge Doty noted that judicial intervention might be warranted if a "paramount public interest supports the enforcement of a public policy which overrides considerations of a benefit inuring to the wrongdoer.” Associated Bank argued that, because the Receiver stands in the shoes of the receivership entities, both it and the receiver were at least equally culpable for any alleged losses and thus the suit was prohibited by the in pari delicto doctrine.  

In rejecting this argument, Judge Doty first observed that the appointment of an equity receiver over a corporation removes the wrongdoer and thus negates any in pari delicto argument.  Kelley v. College of St. Benedict, 901 F. Supp. 2d 1123, 1129 (D. Minn. 2012).  Further noting that the receiver was granted authority to bring all claims on behalf of the receivership entities pursuant to the order appointing receiver, Judge Doty held that it would

defeat one of the purposes for which the Receiver was appointed to bar this action based on in pari delicto.

While Associated Bank pointed to caselaw purportedly absolving similar participating entities from blame that had not benefited from the scheme, Judge Doty held that the preliminary stage of proceedings prevented the court from "determining the extent to which Associated Bank participated in and benefited from the Ponzi scheme."  

Res judicata

Next, Associated Bank argued that the doctrine of res judicata operated to bar the suit based on a Wisconsin court's 2010 dismissal of an action brought against the Bank by several Cook victims.  That doctrine prevents relitigation of claims and issues previously decided in a prior case.  The Bank argued that the investors' suit, brought in 2009 and alleging similar claims based on the Bank's alleged failure to detect Cook's scheme, precluded Zayed's suit.

Judge Doty switftly dealt with this argument, noting that the first requirement in a res judicata analysis that there exist "an identity between the parties or their privies in the prior and present suits."  While the Bank argued that the receiver and the investors were in privity, Judge Doty explained that the receiver and the investors had different interests: the investors were seeking recovery on their own behalf, while the receiver was pursuing the action on behalf of the receivership entities even though the ultimate result might benefit the investors.  This difference alone precluded a finding of privity.

Judge Doty's Order is below:

Associated Bank Order (1)