Search
Most Recent
AdSurfDaily Agape agent American Integrity Aronson asset sales Attorney av bar reg baker bank bank of america Bankruptcy baumann bermudez black diamond blackwell bridge loan bull cattle CD celebrity cftc charity china China Voice church cityfund claims claims process clawback commission commodities commodity pool computer program congress Crown Forex currency death sentence denver diamond bar disgorgement Distribution Dodd-Frank donnan Dreier dunhill e-bullion elderly E-M Management SEC england Fairfield family FBI FDIC Fees female ponzi scheme financial advisor fine FINRA football forex fraud fufta fugitive Full Tilt gift card guilty plea GunnAllen hawaii Heckscher HSBC india invers forex janvey John Morgan JP Morgan kansas ken bell kenzie las vegas lawsuit lawyer libya Lifland machado Madoff Marian Morgan metro dream homes mets milberg millers a game Morgan European Holdings mortgage multiple schemes NCAA Net Winner new jersey notes objection Oxford Patrick Kiley paul burks PermaPave Pettengill Petters Picard poker Ponzi ponzi scheme ponzi scheme database ponzi scheme list Prime Rate profitable sunrise prosun pta puerto rico Rakoff real estate receiver receivership regulation relief defendants religion remission repeat offender restitution Rothstein RRA sec sentencing simmons sipa sipc snelling standing stanford stettin subpoena td bank telexfree treasury bonds treasury strip Tremont Trevor Cook UBS UFTA uga utah venture advisors Wachovia wilpon wire fraud woman zeek zeek rewards zeekler zeekrewards
Social
Recent SEC Releases
Thursday
Apr302015

100% Recovery Possible For Victims Of $220 Million Ponzi Scheme

Hundreds of victims of a massive $220 million Utah Ponzi scheme may soon become part of an extremely rare group of Ponzi victims who were able to recover 100% of their principal losses.  Gil Miller, the court-appointed receiver over Management Solutions, recently obtained court approval for a proposed distribution plan that contemplates a "reasonable possibility" that all investors will realize a 100% recovery of their experienced losses.  Perhaps ironically, the occurrence - sometimes called the 'holy grail' of Ponzi scheme jurisprudence - will be possible only because the alleged masterminds of the scheme agreed to forfeit their 51% interest in Management Solutions as a condition of settlement.  

Background

The Commission brought charges against Management Solutions and its operators, Wendell Jacobson and his son Allen Jacobson, in December 2011, alleging that the company had been operating a Ponzi scheme since at least 2008 through the purported offering of 5% to 8% annual returns through the renovation and resale of apartment complexes throughout the country.  Potential investors were told that the company purchased apartment complexes with low occupancy rates at a deep discount, that their underlying principal investment was safe, and that they could expect to receive monthly interest payments.  Co-owner Wendell Jacobson represented to investors that Management Solutions had achieved historic returns of 12% to 15%, and that only one apartment investment had failed to return a profit - in which case Jacobson covered the loss personally so that investor returns would remain unchanged.  Additionally, Management Solutions represented that, even during its worst performing years, investors had still enjoyed annual returns of approximately 13%.  Based on these misrepresentations, the company raised over $200 million from 225 investors.  

The Jacobsons were members of the Church of Jesus Christ of Latter Day Saints, which the SEC alleges they exploited to solicit additional investors.  However, rather than use investor funds for their stated purpose, investments were almost immediately diverted to one of several collecting accounts, where funds were commingled with other investor funds.  Investor returns were paid from new investor funds - a classic hallmark of a Ponzi scheme.  According to the SEC's complaint, as of December 31, 2010, one of the collecting accounts had outstanding debts to investors and other LLC's of approximately $103 million.  However, the current balance of that account was under $200,000.  

Proposed Distribution Plan

The largest asset class held by Management Solutions was its significant real estate holdings, which largely consisted of apartment complexes.  The real estate was heavily encumbered by mortgages and its value suffered greatly during the economic slowdown, which was likely a significant factor contributing to the mounting losses.  However, a resurgent real estate market has boosted property values accordingly.  Last year, the receivership court approved the sale of several dozen apartment complexes owned by Management Solutions for nearly $340 million.  

The Receiver hopes to make an initial distribution of roughly $100 million to defrauded victims, while an additional $31 million will be available at a later date.  The outcome is possible by (1) accounting for payments received by investors in the form of interest or other distributions, and (2) the use of a rising tide investment method, which seeks to ensure that investors that received little or no distributions are paid before those who were fortunate enough to receive more significant distributions.  The rising tide method will be followed until all investors recoup 100% of their approved losses.

Twists and Turns

The case has not been without its share of twists and turns along the way.  Miller took over as receiver approximately one year ago from previous receiver John Beckstead, who resigned to serve a mission for the Mormon Church.  Beckstead had faced mounting pushback from Management Solutions investors, including strong opposition to a previous liquidation plan that would have ultimately resulted in a recovery of approximately 50% to investors.  That plan was ultimately shelved by Beckstead, and Miller took over as receiver shortly thereafter.  

An Elite Class

Management Solutions joins just two other schemes in recent memory to accomplish the feat of fully repaying defrauded Ponzi victims: Scott Rothstein's $1.2 billion Ponzi scheme and David Dadante's $58 million scheme.  Such an outcome is extremely rare, as it is estimated that the average investor recovery from a Ponzi scheme is less than 10%.  

As illustrated by the dearth of schemes that have achieved such a result, a valuable asset or recovery source has been the driving force for the recovery in each scheme.  In Rothstein's scheme, the Trustee was able to bridge the shortfall between recoveries and losses through a contribution from TD Bank, which was ultimately tagged for hundreds of millions of dollars in verdicts and settlements for the alleged involvement of its regional vice president with Rothstein.  In the aftermath of Dadante's scheme, the receiver was able to strategically manage and later sell a large chunk of stock that resulted in a windfall to the victims and ultimately resulted in a "bonus" payment to the receiver for his success.  And in Management Solutions, the decision to hold onto the real estate assets at the center of the scheme, as well as the Jacobson's agreement to surrender their 51% interest, ultimately allowed the receiver to recoup enough funds to fully repay investors.

Ponzitracker's list of top Ponzi scheme recoveries is here.

A copy of the Amended Motion for Approval of Plan Distribution is below:

 

2015 03 27 Amended Motion for Approval of Plan of Distribution

 

Wednesday
Apr292015

'Appalled' Judge Rejects Plea Deal In Erectile Dynfunction Ponzi Scheme

In an unexpected move, a California state judge refused to accept a plea deal that would send a California man to prison for seven years for defrauding dozens of victims in a $1 million Ponzi scheme, and instead indicated that the accused could agree to a 12-year prison sentence or choose to stand trial.  Dennis Long, who was accused of operating a Ponzi scheme that targeted some victims at Bible studies and children's sporting events, had entered into an agreement with prosecutors that called for him to receive a sentence not exceeding seven years.  However, Superior Court Judge Michael Popkins was swayed by the stories of dozens of victims who testified at Long's sentencing hearing, calling Long's conduct "appalling" and likening him to a wolf in sheep's clothing.  Judge Popkins indicated that Long had the choice of accepting a 12-year sentence - of which Long would serve approximately half - or to proceed to trial on the charges.

Long, a former store clerk at an Encinitas Target, told dozens of investors that he could deliver handsome returns though investments in his erectile-dysfunction business that was on the verge of being purchased by a larger company for $4 million.  Long touted his company, CDCDA, to potential investors he encountered at a church Bible study, at his daughter's school and volleyball clubs, and to mutual friends.  Investors were shown a letter on an attorney's letterhead to assure them of the scheme's legitimacy, and were required to sign confidentiality agreements to prevent them from discussing the investment with others.  In total, Long raised over $1 million from several dozen investors over almost a decade.

However, there was no impending sale of CDCDA nor was there an attorney vouching for the company's legitimacy.  CDCDA's license had been permanently revoked, and the attorney whose letterhead was used to legitimize the company has claimed that his signature was forged.  Authorities alleged that Long used investor funds for a variety of unauthorized personal expenses, including private school, car payments, travel, and extensive shopping trips.  Long was arrested in April 2014 on 69 counts of grand theft, burglary, fraud, and other charges.  

The burglary charge appears to be favored by prosecutors due to the California Penal Code's definition of burglary as the entry into a structure with the intent to commit a felony - in this case, grand theft. While the theory is certainly a novel one, surprisingly it has been used several times in California.  A California man faced burglary charges in March 2014 for operating an alleged ATM Ponzi scheme, while another California man faced 37 counts of residential burglary in 2009 in connection with what prosecutors alleged was a $200 million Ponzi scheme. The choice by California authorities to levy burglary charges in white collar crimes may also be partially due to its categorization as a serious "strike" crime under California's Three Strikes Law, which may allow for a stricter sentence.

A hearing has been scheduled for May 12 to allow Long to consult with his attorneys about the proposed plea deal.  

Tuesday
Apr282015

SEC Halts $15 Million Farm Loan Ponzi Scheme

The Securities and Exchange Commission filed civil fraud charges against an Indianapolis securities firm and accused it of operating a Ponzi scheme that raised more than $15 million under the guise of making short-term operating loans to farmers.  Veros Partners, along with its President, Matthew D. Haab, associates Jeffrey B. Risinger and Tobin J. Senefeld, and several related companies, were charged with violations of federal securities laws in an emergency action filed in the Southern District of Indiana.  The Commission has obtained an asset freeze and temporary restraining order, and is seeking disgorgement of ill-gotten gains, civil monetary penalties, and injunctive relief.  

Haab managed Veros's investment advisory business, in which he personally managed the accounts of nearly 200 Veros clients.  Following the financial crisis, Haab began looking for private investment opportunities for client investments, and was approached by Defendant Senenfeld in 2009 regarding a farm loan offering.  Over the next few years, and with the help of Risinger, Haab created a number of these investment opportunities to offer to Veros clients.  Potential investors were told that their funds would be used to make short-term operating loans to farmers to be used for the upcoming growing seasons, and that the farmers would repay the loans over the following year as they sold their crops or collected crop insurance payments.  The promised rates of return ranged from 12% to 13.5%.

After several 2012 offerings failed to return the amount required to pay back investors, Haab used several million dollars raised during a 2013 offering to repay investors from the 2012 offerings.  Further, while Haab raised nearly $10 million from investors during the 2013 offerings, he is accused of misstating the true amount of funds loaned to various farms during the 2013 crop season.  The Commission also accused him of failing to disclose the true nature and amount of fees paid to Risinger and Senefeld for their roles in facilitating the loans.  Haab is accused of encouraging investors to roll-over their balances upon maturity into new loans due to the fact that Haab lacked sufficient funds to repay investors.  

In early 2014, Haab raised nearly $4 million from clients for a new 2014 offering.  Combined with the millions of dollars in investments that were rolled over from earlier offerings, clients of the 2014 offering are collectively owed roughly $9 million when the offering comes due on April 30, 2015.  The Commission alleges that insufficient funds exist to fully repay investors in the 2014 offerings, and further alleges that funds raised in the 2014 offering were used to pay existing investors in the 2013 offerings in Ponzi-like fashion.  According to the Commission, Haab is currently facing a shortfall of approximately $7 million, and has acknowledged that investors in the 2014 offering are unlikely to be made whole upon maturity of the offering.  

The Commission's complaint is below:

 

Comp 23246

 

Thursday
Apr232015

Court: Trustee Can Recover Ponzi Investor's Principal And Profits

In a rare move, a Connecticut Bankruptcy court has approved a court-appointed bankruptcy trustee's efforts to recover not only the false profits from a group of Ponzi investors, but also those investors' invested principal due to their lack of good faith in making those investments.  The decision by U.S. Bankruptcy Judge Albert S. Dabrowski is notable in that it marks a rare occasion that a Ponzi investor was ordered to surrender his profits and invested principal based on a finding that the investor lacked the requisite good faith to allow retention of the initial investment.  The decision is a welcomed development for the defrauded investors in Michael S. Goldberg, LLC ("MSG"), which raised more than $100 million from hundreds of investors who were promised a 20% - 25% profit every 60 to 90 days but which turned out to be a massive Ponzi scheme that resulted in tens of millions of dollars in losses.

Background

MSG was operated by Michael S. Goldberg, a Connecticut man who promised extraordinary returns to potential investors purportedly derived through the resale of diamonds and distressed assets from JP Morgan Chase.  Goldberg told potential investors that their investment was risk-free, as Chase had promised to refund the purchase price of any asset that could not be resold.  In addition, Goldberg told some investors that he would pay any tax obligations arising from the investment.  Investors were drawn to the scheme not only through word-of-mouth, but also through other investors who were paid a "finder's fee" for recruiting new investors.  In total, more than 350 investors entrusted over $100 million to Goldberg.  After the scheme collapsed and was revealed to be a Ponzi scheme, Goldberg filed bankruptcy and was later sentenced to a 10-year prison term.  Authorities estimated total losses to investors of at least $30 million.

Clawback Action

After MSG's bankruptcy filing, James Berman was appointed as Chapter 7 trustee over MSG and tasked with recovering assets for victims.  In that context, Berman filed multiple actions against parties that he contended wrongly received distributions from MSG, including early investors Edward Malley ("Malley") and his wife Tracey Malley ("T. Malley") (Malley and T. Malley are collectively referred to as the "Malleys"), Scott LaBonte, Deborah Bianca, and several entities controlled by LaBonte and/or Malley (collectively, the "Defendants").  Edward Malley was an investor investor in MHG, having met Goldberg in 2004 and subsequently investing roughly $1.3 million of his own money as well as money pooled from dozens of other investors during the time period of July 2005 to September 2008.  After Malley began acting as a "feeder" for other investors, he stopped investing his own funds and withdrew nearly $1.9 million from payments he received from MHG as a return on his investment.  Through an account managed by a colleague's law firm, Malley caused nearly $4 million in investments to be made with MHG.

Between July 2008 and November 2009, more than $12 million was transferred from MHG to the law firm account designated by Malley which represented returns on the investments made by the Malleys and other third parties that had invested through the Malleys.   These distributions represented exorbitant returns for the Malleys and their investors; for example, T. Malley's initial $50,000 investment resulted in over $1 million of subsequent profits.  LaBonte also made significant investments with Goldberg through Malley on behalf of himself and other third parties, and ultimately received more than $7 million in distributions on account of those investments.

Berman brought claims against the Defendants under certain provisions of the Bankruptcy Code and Connecticut law providing for the recovery of fraudulent transfers made by MHG.  Both allow the trustee to recover transfers made by the debtor with the actual or constructive intent to hinder, delay, or defraud the debtor's creditors.  A creditor may then attempt to avoid rescission of a transfer by demonstrating both that the transfer was received in good faith and that the creditor provided value to the debtor.  The Court set forth a two-part inquiry that a transferee must satisfy to demonstrate good faith: first, using an objective reasonable man standard, whether or not the transferee had information putting it on inquiry notice of the debtor's insolvency or fraudulent purpose; and second, once on inquiry notice, whether the transferee conducted a diligent investigation.  With respect to value, courts typically find that a transferee can give value in the form of a preexisting claim against a transferor up to the amount of their invested principal; accordingly, a transferee cannot give value for transfers in excess of their investment.  

Analysis

The Court began its analysis by evaluating whether the trustee had adequately demonstrated MHG's actual or constructive intent to hinder, delay, or defraud its creditors in making the transfers to Defendants. The Court found this analysis unnecessary, as the parties' stipulation that MHG had been a "pure" Ponzi scheme allowed it to assume the existence of an actual fraudulent intent based on the invocation of the Ponzi scheme presumption.  Under the Ponzi scheme presumption, which has been applied nearly universally by courts around the country, the existence of a Ponzi scheme - which is itself premised on the fraudulent operation of a scheme that cannot last forever and is indeed destined to fail - conclusively demonstrates the fraudulent intent of a transferor.  Thus, the Court found that the trustee had carried his burden, and the burden then shifted to the Defendants to demonstrate the existence of good faith and value.

1. Were Defendants On Notice Of MHG's Insolvency Or Fraudulent Purpose?

The trustee alleged that numerous red flags were on notice to the Defendants that precluded any finding of good faith in the receipt of transfers from MHG.  In evaluating this, the Court used an August 2014 investor bulletin published by the SEC identifying ten potential investment red flags as a benchmark.  These red flags consisted of:

(1) promises of high returns with little or no risk; (2) unregistered or unlicensed investment professionals; (3) aggressive sales tactics; (4) problems with sales documents (sloppy documents containing typographical, spelling or other errors); (5) no net worth or income requirements for investors; (6), no one other than the salesman appearing to be involved in the deal; (7) sham or virtual offices; (8) the company not being in good standing in the state where it is incorporated or formed; (9) unsolicited investment offers, often coming from a trusted friend, co-worker or family member and (10), suspicious or unverifiable biographies of managers or promoters.

As the Court observed, "courts have often used these and other 'red flags' to identify those situations where a reasonably prudent investor in a Ponzi scheme would have been put on inquiry notice."

In applying the ten 'red flags' to the present situation, the Court listed numerous factual circumstances that led it to conclude that:

all of the “Red Flags” were in evidence to varying degrees in the manner by which the Debtors conducted their business operations.

This included the "extraordinarily" high returns, assurances of little or no risk, the promises to pay the transferees' tax obligations (despite never asking for those transferees' social security numbers), and the lack of registration of Goldberg's company, grammatical errors in offering documents.  The Court also highlighted the fact that, despite the Malleys' self-professed investment experience, they never met with any attorneys or accountants representing Goldberg or MHG nor did they request or receive any financial or tax documents.  As the Court concluded, "It is apparent here that the Malleys’ chose to remain willfully ignorant of the facts which would have alerted them to the Debtors fraudulent purpose."  Also noteworthy as to the Malleys was their transfer of over $250,000 to their personal accounts after they learned of Goldberg's arrest for operating a Ponzi scheme.  As to LaBonte, the Court referenced a previous order sanctioning LaBonte for the destruction of evidence, and also noted that LaBonte was privy to the same information which supported a lack of good faith on behalf of the Malleys.  As the Court poignantly observed,

Thus, LaBonte, as with Malley, was not just an investor but became a participant in the fraud itself. By adding to the pot in placing other peoples’ money with the Debtors, he and Malley were both extending the ability of the Debtors to keep the Ponzi scheme going and at the same time increasing the likelihood that their own investments would be repaid.

The Court also imputed LaBonte's lack of good faith to entities for which he served as the managing member "because they are charged with the same knowledge as that possessed by LaBonte."

2. Did Defendants Conduct A Diligent Investigation After Being On Notice Of MHG's Insolvency Or Fraudulent Purpose?

Having demonstrated that Defendants were clearly on notice of information which should have prompted them to conduct a diligent investigation, the Court next turned to whether such a diligent investigation had, in fact, been made.  The Court answered this question with a resounding "no."  First, the Court observed that the Defendants stood to make "staggering" returns that could be jeopardized if they were to investigate the propriety of MHG.  Additionally, despite meeting with Goldberg on numerous occasions, neither Malley nor LaBonte ever requested to speak with MHG's accountants or attorneys nor did they raise the issue with their own professionals.  While T. Malley sought to excuse her failure to act on the basis that she was relying on her husband, the Court noted that 

“Given that good faith is determined using an objective standard and that no reasonable person would have proceeded in a manner similar to the defendants without completing the requisite due diligence, “[the investor’s] excuse that ‘he didn't know better’ merely establishes ignorance, not good faith.” 

 

Concluding that Defendants had failed to establish either of the two elements of a good faith defense, the Court found that it was not necessary to examine whether Defendants had provided value in exchange for the transfers.  

Each of the Defendants was found liable for the total amount they received from the scheme, as well as pre- and post-judgment interest.  

The Order is below:

 

Ct Proposed Findings (1)

 

 

 

 

 

Tuesday
Apr212015

Former NBA Assistant Charged With $4 Million Ponzi Scheme

A former special assistant for the Seattle Supersonics is facing a wire fraud charge for what prosecutors are describing as a Ponzi scheme that falsely claimed a relationship with Los Angeles Clippers owner Steve Ballmer and took in $4 million from investors.  Steve Gordon was charged with a single count of wire fraud in a charging document known as an "information" that typically suggests a plea agreement has been reached.  If convicted, Gordon could face up to twenty years in federal prison.

Gordon, who was a former longtime assistant for the Supersonics, originally met Ballmer back in 1990 when Gordon agreed to provide private basketball lessons to Ballmer and his friends.  Ballmer, who eventually rose to become the top executive at Microsoft Corp. and subsequently purchased the Los Angeles Clippers, later agreed to provide Gordon with a monthly $9,900 stipend to help Gordon with purported financial difficulties.  According to authorities, Gordon used the bank account documents showing the relationship with Ballmer to solicit potential investors, including former athletes, who believed that Ballmer and Gordon were business partners.  

Potential investors were told several different stories, including that (i) Ballmer was preparing to invest in a major basketball promotional venture overseas in Australia and China, (ii) that Ballmer was preparing to establish a substantial investment fund to be run by Gordon, and (iii) he had deals with a billing management company and a Section 8 housing project.  In at least one instance, an investor participated in nearly one dozen phone calls from 2011 to 2013 with who he believed to be Steve Ballmer; according to authorities, those calls were from an individual recruited by Gordon to impersonate Ballmer.  In total, Gordon is alleged to have raised over $4 million from at least 30 people.

According to the Seattle Times, Gordon is scheduled to appear in a Seattle federal court on Wednesday morning.  

Gordon becomes the third individual to face Ponzi scheme charges in as many weeks with a connection to professional sports.  Earlier this month, former Minnesota Viking Stu Voigt was charged with a multi-million dollar real estate Ponzi scheme, which came on the heels of charges filed by the Securities and Exchange Commission against former Miami Dolphins player Will Allen.