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Recent SEC Releases
Saturday
Feb212015

SEC Halts "Triple Algorithm" Ponzi Scheme

The Securities and Exchange Commission has filed an emergency enforcement action against a Colorado-based Ponzi scheme that offered 700% returns through a "triple algorithm" and "3-D matrix."  Kristine L. Johnson, of Aurora, Colorado, and Troy Barnes, of Riverview, Michigan, were charged with multiple violations of federal securities laws in connection with the operation of Work With Troy Barnes Inc. ("WWTB"), which currently does business as "The Achieve Community" ("TAB").  Indeed, despite distributing a promotional video claiming that WWTB was "not a pyramid scheme," the Commission alleged that the venture was a "pure Ponzi and pyramid scheme."  The Commission is seeking disgorgement of ill-gotten gains, injunctive relief, civil monetary penalties, and pre-judgment interest.

WWTB was formed in March 2014, and was subsequently rebranded as TAC.  Beginning in April 2014, TAC solicited investors to purchase "positions" in TAC.  These "positions," which cost $50 each, promised a pay-out of $400 per position in a term of three-to-six months - a return of 700% and an annualized return exceeding 1000%.  In a short video on TAC's website, Johnson touted TAC as a "lifetime income plan," and explained:

How are we a lifetime income plan? It’s simple. Every $50 position you purchase, you make $400. With two positions, you make $800. With five positions, you make $2,000. Want to go bigger? With twenty positions, you make $8,000. With one hundred positions, you make $40,000. This is limitless.

Barnes made similar claims, narrating a different TAC video claiming that TAC “will teach you how to take $50 and turn it into thousands of dollars, and that’s a fact.”  Investors that questioned TAC's ability to pay such exorbitant returns were assured that TAC utilized a "triple algorithm" and "matrix" created by Johnson and Barnes.  Johnson attempted to explain the "3-D matrix" as follows:

I thought, what can I do, what can I make, what can I design, that has only what works and none of what doesn’t, and one day, honestly this is what happened, I just saw it. I just saw it in my head. This matrix is 3D, which is why we can’t put it on paper. It’s a triple algorithm. And I can’t for the life of me tell you why I could figure that out in my head. But I could.

Investors were encouraged to re-invest their returns, with Barnes assuring investors that such a strategy would make it "very easy to make six figures."  In total, TAC took in at least $3.8 million from investors.

However, despite its claims that it was "not a pyramid scheme," the Commission alleged that TAC was, in fact, a pure Ponzi and pyramid scheme.  For example, TAC's sole source of revenue is alleged to have originated from funds contributed from investors.  Nor were any profits derived from legitimate business activities; rather, TAC used funds contributed from new investors to make principal and interest payments to existing investors.  In addition to using investor funds for "Ponzi" payments, the Commission also accused Johnson and Barnes of misappropriating more than $200,000 for their own personal use - including $35,000 for a new car, making personal credit card payments, and more than $40,000 in Paypal transfers to Barnes.  

A copy of the Commission's complaint is below:

 

TAC Complaint

 

Saturday
Feb212015

Court: Madoff Victims Can't Get Interest Or Inflation On Losses 

A New York federal appeals court sided with the court-appointed bankruptcy trustee for Bernard Madoff's massive Ponzi scheme in ruling that Madoff's victims were not entitled to have their losses upwardly adjusted for interest or inflation.  The ruling by the Second Circuit Court of Appeals means that, regardless of the length of victims' investments with Madoff, each will be entitled to their pro rata share of funds recovered by the trustee, Irving Picard.  The decision, if not appealed, will ultimately clear the way for the distribution of more than $1 billion currently being held in reserve pending determination of the issue.  Victims have already recovered over 50% of their losses.

In the aftermath of a Ponzi scheme, a claims process is often instituted to return recovered assets to victims on a pro rata basis based on approved losses.  While a victim's claim is often decreased based on the amount of payments or distributions they received from the scheme during its existence, some of Madoff's victims took the position that they were entitled to an upward adjustment accounting for inflation during the period of their investment and/or interest to reflect the time-value of money.  Under this rationale, those victims who had invested with Madoff for a longer period of time would be entitled to an increase in their claim - logically, at the expense of other victims who had not invested with Madoff for such a duration.  As the Second Circuit characterized the victims' position, 

the claims of Madoff’s earlier investors are unfairly undervalued when compared to the claims of Madoff’s later investors.

Under the statutory framework of the Securities Investor Protection Act ("SIPA"), which governed the liquidation of Madoff's brokerage, the Second Circuit concluded that 

an inflation adjustment to net equity is not permissible under SIPA.  An inflation adjustment goes beyond the scope of SIPA’s intended protections and is inconsistent with SIPA’s statutory framework.

The Second Circuit gave weight to the absence of an inflation-based adjustment from SIPA's provisions, noting that such a provision would be "nonsensical" given SIPA's intended purpose to remedy broker-dealer insolvencies rather than the outright fraud committed by Madoff.  Rather, SIPA aims to restore investors to their position had a liquidation not occurred.

Picard has now survived an impressive assortment of challenges to his use of the "net equity" method as the proper determinant of victim loss calculations.  In addition to the now-unsuccessful attempts to tack on interest and inflation, efforts previously failed to force Picard to accept the amount showing on the last statement mailed by Madoff to victims - the "Last Statement Method" - an argument the Second Circuit previous rejected on the basis it 

“would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations.”

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231– 33 (2d Cir. 2011).  Like the interest and inflation arguments, the "Last Statement Method" would also have favored long-term Madoff investors who watched as their purported account balances consistently increased.  Importantly, each of the methods would have ultimately resulted in a lower payout to investors due to the inverse relationship between the total amount of allowed claims and funds available for victims.  Fortunately, the success of Picard and his professionals in recovering assets has resulted in a pot of over $10 billion earmarked for victims. 

Notably, the Securities and Exchange Commission supported the victims' position - and opposed the trustee - that SIPA permitted inflation-based adjustments.  The Second Circuit concluded that this position was not entitled to any deference typically afforded to administrative interpretations, and remarked that the Commission's interpretation was "novel, inconsistent with its positions in other cases, and ultimately unpersuasive."  Indeed, the Court observed that that, while favoring an inflation-based adjustment in this case, the Commission had recently opposed such an adjustment in a "different, long-lasting Ponzi scheme."  Given that both scenarios envisioned an outcome where recovered assets would ultimately be insufficient to fully satisfy investor claims, the Second Circuit rejected any basis to further exacerbate this shortfall.

The Second Circuit's Order is below:

Madoff Opinion by jmaglich1

Friday
Feb132015

Zeek Receiver Wins Approval To Pursue Class Action Clawbacks 

A North Carolina federal judge has given the go-ahead for a court-appointed receiver to treat nearly 10,000 "net winners" of the $700 million ZeekRewards Ponzi scheme as defendants in a class-action lawsuit - a mechanism that the overseeing judge deemed as "the only means to reasonably and efficiently resolve the Receiver’s claims against 9,400 net winners.”  Kenneth D. Bell, the Receiver for Rex Venture Group, LLC d/b/a ZeekRewards.com ("ZeekRewards"), is seeking the return of fictitious "profits" from approximately 9,400 participants in the ZeekRewards scheme that were fortunate enough to realize $1,000 or more in returns from their involvement.  Allowing the pursuit of these net winners, as they are known in receivership parlance, as a class will not only greatly reduce the complications and redundancy in bringing the same claims against thousands of individuals, but in doing so will also preserve assets for future distribution to those victims who were not as fortunate.  

ZeekRewards was an online penny auction website that attracted users at an exponential pace due to a lucrative investment program that promised annual returns exceeding 200% and provided recruitment-based incentives to participants..  The program, masterminded by Paul Burks, attracted over one million participants before the Securities and Exchange Commission filed an emergency enforcement action in August 2012 alleging the venture was a massive Ponzi and pyramid scheme.  Following Bell's appointment, his subsequent investigation revealed that over 700,000 participants suffered collective losses exceeding $700 million.

Bell's investigation also showed that tens of thousands of participants had not only recouped their initial investment but also varying amounts of "false profits" that, by virtue of Zeek's operation as a Ponzi scheme, were simply the redistribution of investments by other victims.  Bell has instituted separate actions against the largest net winners not only in the U.S., but other countries such as Canada, New Zealand, and Australia.  

While some of the top net winners received more than $1 million from ZeekRewards, the vast majority of profiteers received a much smaller amount of false profits.  Bell employed a strategy whereby he sued the top ten U.S. net winners, who each received false profits of over $900,000, and sought to designate those net winners as class representatives for a much larger class of approximately 9,400 profiteers who had earned more than $1,000 from the scheme.  Bell argued that those class representatives would likely retain experienced counsel and mount a vigorous defense due to the large sums sought, and that these representatives would "fairly and adequately protect the interests of the class."  Pursuant to Rule 23(a) of the Federal Rules of Civil Procedure, Bell argued that the requisite requirements of numerosity, commonality, typicality, and fair and adequate representation had been satisfied.  Not surprisingly, Bell's request was opposed by the proposed class representatives, who claimed that certification was improper on the basis that it would deprive those individuals of certain due process rights.

The Court's decision first analyzed the four factors set forth in Rule 23(a).  While Defendants did not contest the numerosity requirement, it analyzed objections to the commonality and typicality factors.  First, the Court rejected Defendants' commonality arguments, finding that any potential dissimilarities did not impair the ability to reach a common resolution to the core issues of law and fact.  Next, the Court found that the proposed class representatives satisfied the typicality requirement on the basis that each participated in the same event and course of conduct that gave rise to the Defendant class.  Finally, the Court found that the proposed representatives fairly and adequately represented the interests of the 9,400 class members, finding that their issues were aligned and that the representatives were not likely to abandon their or return the substantial sums sought by the Receiver without engagement of competent counsel and mounting a vigorous defense.

The certification of the class will not only result in an efficient mechanism to pursue thousands of clawback claims, but also avoided the nightmare scenario of potentially having inconsistent results if the Receiver were forced to pursue each of the clawback defendants individually.  Additionally, doing so would have resulted in exponential costs to the Receiver that would serve only as a dollar-for-dollar reduction in assets that could potentially be later returned to victims.  Finally, allowing the receiver to pursue clawback claims in a class action also increases the total potential recoveries by allowing the receiver to target net winners with a lower threshold of clawback claims that might not have been a realistic target in the context of a separate action.  

A copy of the Court's order is below:

Order Cert Class

Friday
Feb132015

Jury: Former Ambassador Must Return $700,000 To Stanford Receiver

A federal jury found that a former U.S. Ambassador to Ecuador must return more than $700,000 in compensation he received as an employee of Allen Stanford's massive $7 billion Ponzi scheme.  The case brought by a court-appointed receiver against Peter Romero, of St. Michaels, Maryland, was seen as a test case for more than a dozen similar trials scheduled for 2015 and 2016 against those who received transfers from Stanford's scheme either as an employee or investor.  Stanford is currently serving a 110-year prison sentence at a high-security Florida federal prison.

Romero worked at the State Department during the Clinton administration who, after leaving the State Department, subsequently signed on to work for Stanford as a consultant in the early 2000's.  According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford." Romero traveled all over the world, interacting with media outlets as well as current and potential clients.  In addition to working with Stanford's marketing operations, Romero's activities included radio interviews and appearances to give speeches.  

The Court-appointed receiver, Ralph Janvey. originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million.  Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with politicians by leveraging his reputation and government contacts.  Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communicate with Stanford in the days following the revelation of the scheme in 2009.  Romero's lawyers denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."

Following the close of testimony, the Receiver, Ralph Janvey, submitted a Motion for Judgment as Matter of Law ("Motion for Judgment") seeking a judgment of more than $1 million: $725,000 in compensation from a Stanford entity, nearly $377,000 in investment redemptions, and almost $34,000 in expense reimbursements.  While the jury decided that Romero was required to return his compensation, they did rule in his favor in deciding that he was not liable for the return of the approximately $377,000 in redeemed investments before the collapse of Stanford's scheme in 2009.

A copy of the Receiver's Motion for Judgment is below:

 

Romero Motion for Judgment

 

Thursday
Feb122015

Former Hockey Team Owner Gets 21 Years For $130 Million Ponzi Scheme

A Canadian man who once owned a hockey team in the Ontario Hockey League learned he will spend the next 262 months in federal prison for orchestrating a massive Ponzi scheme that took in at least $130 million from over 1,000 victims.  William Wise, 64, was sentenced by U.S. District Judge Edward Chen, who will decide in April how much restitution Wise should be ordered to pay to his victims.  Wise pleaded guilty last September to one count of conspiracy to commit mail and wire fraud, twelve counts of mail fraud, three counts of wire fraud, one count of money laundering, and one count of tax evasion.  With credit for good behavior, Wise will not be eligible for release until late 2033.

Beginning as early as 1999, Wise offered certificates of deposit (CDs) to potential investors that promised guaranteed annual rates of return of 16%. The CDs were offered by three entities: Millennium Bank, United Trust of Switzerland ("UTS"), and Sterling Bank and Trust ("SBT") (collectively, the "Millennium Entities").  Potential investors were told that the offered rates of return were made possible through overseas investments made by the Millennium Entities.  Wise opened offices in Napa, California and Raleigh, North Carolina, where he employed and oversaw salespeople who solicited investors.  Ultimately, nearly $130 million was raised from at least 1,200 investors.

However, Wise failed to disclose that he controlled the Millennium Entities, and that the promised rates of return were not from overseas investments but rather from the funds of other investors - a classic hallmark of a Ponzi scheme.  In addition to using investor funds to make interest and principal payments, Wise misappropriated a stunning $50 million to support a lavish lifestyle that included:

  • a $12,000 weekly allowance for his wife;
  • a $6,000 - $10,000 monthly allowance for each of his girlfriends;
  • $1 million on fine wine;
  • $800,000 to build a hangar in Atlanta for his corporate jet;
  • $450,000 for three boats;
  • and the purchase of a property in St. Vincent and the Grenadines.

After the Securities and Exchange Commission filed charges and obtained a $75 million judgment against Wise, he was subsequently indicted in February 2012.  Wise turned himself in on April 17, 2012, and pleaded guilty in September 2012.

A court-appointed receiver identified over 300 investors that were fortunate enough to profit from their investment with the Millennium Entities, and subsequently filed suit against 200 of those so-called "net winners."  Ultimately, the Receiver was able to recover over $2.5 million in "clawback" settlements and judgments.   

A copy of the plea agreement is below:

 

Wise Plea Agreement