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Recent SEC Releases
Tuesday
Jun212011

$500k Ponzi Scheme exposed in Pittsburgh

An information filed today in a Pittsburgh federal court alleged that a Pittsburgh-area man orchestrated a Ponzi scheme that stole nearly $500,000 from investors.  Daniel Bull operated Venture Advisors, a company that purported to assist companies backed by venture-capitalists save on insurance and retirement plans. 

Bull told investors that he had made millions after selling three businesses, and convinced investors to entrust nearly $800,000 to him.  Bull then paid returns on their investments, totaling $281,000, to lend the scheme credibility.  Authorities allege that fifteen investors were involved in the scheme.  

Tuesday
Jun212011

Another Guilty Plea in $200 Million Minnesota Ponzi Scheme

Another of the principals in a failed $200 million currency arbitrage Ponzi Scheme pled guilty Tuesday in a Minneapolis federal court.  Christopher Pettengill, 54, pled guilty to charges of securities fraud, wire fraud, and money laundering as part of his role in the failed scheme.  The alleged mastermind of the scheme, Trevor Cook, was sentenced in August to 25 years in prison and ordered to pay restitution of $155 million to the identified victims.

While Pettengill faces a maximum of twenty years under the charges, prosecutors are asking for a sentence of 15 - 19 years based on federal sentencing guidelines.  Pettengill's lawyers argue that the appropriate range is 12-15 years; sentencing has not yet been scheduled.  The ultimate length of the sentence may be reduced, as authorities have indicated that Pettengill has been cooperating since January.  Other associates of the firm have denied wrongdoing.

Beginning in 2006, Pettengill and his associates pitched a currency arbitrage strategy in which investors were promised steady annual returns ranging from 10.5 to 12 percent with virtually no risk.  Originally called Universal Brokerage Services, the entities involved were renamed to various funds with the word "Oxford" in their names after a trademark infringement lawsuit from UBS Bank.  In his plea agreement,Pettengill admitted that investors were provided with fictitious account statements that bore no relation to the actual fund performance.  

Unbeknownst to investors, Pettengill and associates had invested some portion of the asset pool with Crown Forex SA in Switzerland.  Yet, when Crown Forex began having financial problems, Pettengill and associates worked to keep the news quiet.  The Oxford entities eventually collapsed during the height of the financial crisis in late 2009.  Cook and radio host Patrick Kiley were charged in November 2009.

 

See the SEC Litigation Release here and the SEC Complaint here.


Tuesday
Jun212011

More Arrests Expected in Rothstein Scheme

The investigation of the $1.2 billion Ponzi Scheme run by Scott Rothstein, a former Florida lawyer who pled guilty in January 2010, continues to move forward, with prosecutors disclosing in a filing late last week that a fresh round of indictments is expected in the coming months.

Rothstein, who admitted using the pretense of selling nonexistent legal settlements to investors to rake in over $1 billion, has been cooperating extensively with investigators since his arrest and guilty plea.  He was sentenced to 50 years in prison for his role, although prosecutors are expected to ask for a reduction based on the fruits of Rothstein's efforts in cooperating.

The latest disclosure comes as the trustee marshalling assets for the benefit of defrauded investors seeks to depose Rothstein, after receiving approval from United States Bankruptcy Judge Raymond Ray.  The decision will ultimately be up to District Judge James Cohn, who will take up the matter at a hearing on July 1st.   Prosecutors said in a filing opposing the deposition that

"It is anticipated that a deposition of Rothstein would disclose the evidence which forms the basis of the government’s proposed case to putative defendants and other targets of the criminal investigation, some of whom are parties to this action. It is further feared that such a disclosure of information, at the present time, would enable coconspirators to obstruct the grand jury’s investigation and to corruptly tailor their statements and statements of other witnesses to falsely exculpate themselves."

In lieu of deposing Rothstein, prosecutors have offered to provide the trustee, Herbert Stettin, with information he may need to go forward with pursuing clawback lawsuits, in light of the two-year statute of limitations applicable in bankruptcy proceedings.

Already, five Rothstein associates have been charged, including the chief operating officer of the now-defunct firm.  According to the recent filing, prosecutors expect to file indictments for a broad array of crimes, including mail and wire fraud, campaign finance fraud, tax fraud, extortion, payments of unlawful gratuities, bank fraud, and money laundering.


Monday
Jun202011

'Brooklyn Madoff' Ponzi Schemer Sentenced to 20 Years

A New York man convicted of running a $45 million Ponzi Scheme over three decades was sentenced to twenty years in federal prison on Friday, June 17th, 2011.  Philip Barry faced up to 34 years under federal sentencing guidelines.  According to prosecutors, the scheme is believed to be the longest in history. 

Philip Barry began soliciting investors in 1978 to invest in the Leverage Group, which he claimed focused on stock options.  Over the course of the next thirty years, more than 800 investors entrusted $45 million to Barry.  The scheme functioned by 'promising' a guaranteed rate of return to investors each December ranging from 12.55 to 16 percent.  At least some of the money was diverted to purchasing property that Barry planned to develop but could not later obtain permits.  Barry used funds from new investors to pay distributions to older investors, the classic hallmark of a Ponzi Scheme.

It was Barry himself who voluntarily approached authorities in 2008 to inform them he owed investors $50 million.  He would later that year declare bankruptcy, and would be formally charged in late 2009.  Barry settled a related SEC proceeding by agreeing to pay disgorgement of ill-gotten gains, a penalty, and pre-judgment interest.  

Barry's sentence is more severe than those Ponzi Schemers sentenced in similar situations, which may be the result of several factors.  First, Barry elected to go to trial rather than seek a plea deal, and was subsequently convicted of thirty-four federal charges.  Second, Barry's scheme spanned over three decades, making it the longest known Ponzi Scheme - including Madoff.  As part of his sentence, Barry is barred from seeking employment in the financial sector when he is released.

 

Sunday
Jun192011

Ponzi Scheme Uncovered in China; Sign of Things to Come?

As reported by Xinhua News Agency, fourteen people have been arrested in China's Zheijang Province for "unscrupulous speculative practices" and later charged with illegally absorbing public deposits in association with investment in a supposed tea company.

According to prosecutors, from June 2007 to May 2011, the suspects solicited what investors thought were initial offerings of a listed company in the hopes of realizing substantial returns, eventually raising almost twenty million dollars.  Prosecutors say that nearly 1,000 investors were duped into investing with the suspects, who used several companies including the Hongru Tea Industry Co. Ltd. and the Hongru Cultural Development Holding Group to raise the money.

 While this scheme pales in comparison to the much larger Ponzi Schemes uncovered lately in the United States, it raises an important question: will a slowdown in the Chinese economy result in the unmasking of Ponzi Schemes as happened in the United States?  As a result of the slowing of the US economy from 2007 to 2009, a large number of Ponzi Schemes imploded due to the drying up of new investors needed to sustain the distributions.  Yet, while the US economy sustained negative GDP growth during this period, Chinese GDP growth remained positive, dipping to a low of 6% GDP growth in early 2009.  As the global economy has recovered, the Chinese economy has rocketed back to double-digit GDP growth.

While economic growth has remained constant in China, a deflating bubble in real estate prices that have increased substantially in the past two decades presents serious implications for future growth.  In the United States, the uncovering of numerous Ponzi Schemes began occurring towards the last half of the Great Recession, presumably when new investor funds began drying up and preventing investors from receiving regularly scheduled distributions.  Common sense dictates that such a situation could certainly occur in China should a similar economic slowdown occur, especially in light of the incredible growth in the Chinese economy over the past decade.