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Recent SEC Releases
Thursday
Jun252015

Convicted Ponzi Promoter Arrested For Drowning Pet Rabbit

A Florida man who previously served prison time for soliciting investors for Lou Pearlman's massive $300 million Ponzi scheme has found himself again in trouble with the law after surveillance video showed him drowning a rabbit in a hotel pool.  Steven B. Rodd, 49, was arrested by Tampa police after he was observed tossing a rabbit into a hotel pool and watching it drown.  If convicted, Rodd could face up to five years in state prison as well as a fine of up to $10,000.

Rodd has a long history of being implicated in Florida Ponzi schemes.  During 1999, Rodd and others solicited investors for LinkTel Communications, Inc. ("LinkTel"), which promised investors annual returns ranging from 12% to 14% through a payphone leaseback venture.  The Securities and Exchange Commission later accused LinkTel of being a large Ponzi scheme that raised over $6 million from several hundred investors.  Rodd was later charged by the Commission with violating securities laws in connection with his role with LinkTel and agreed to be permanently barred from the securities industry.  According to the St. Petersburg times, Rodd was associated with at least six fraudulent schemes.

However, LinkTel paled in comparison to the massive $300 million Ponzi scheme run by former boy band mogul Lou Pearlman that unraveled in early 2007.  Rodd, along with others, solicited investors for the Employee Investment Savings Account (EISA), which was represented as an investment by Pearlman-owned Transcontinental Airlines.  An EISA investment promised annual returns exceeding 6% and targeted retirees and elderly investors by falsely claiming that the investment was FDIC-insured and that he did not receive sales commissions.   In total, Rodd sold over $32 million in EISA investments to hundreds of Florida investors.  The investments later turned out to be worthless when Pearlman's scheme collapsed, and a court-appointed bankruptcy trustee has returned just pennies on the dollar to scammed victims.

Rodd was indicted for his role in Pearlman's fraud in 2011 and was later sentenced to a 36-month prison term.  

Tuesday
Jun232015

NY Financial Advisor Gets 4.5 Years For $1.9 Million Ponzi Scheme

A Long Island financial advisor was sentenced to serve the next 55 months in federal prison after previously pleading guilty to operating a Ponzi scheme that caused nearly $2 million in losses to clients and friends.  Paul Sullivan, 50, received the sentence from U.S. District Judge Leonard D. Wexler after pleading guilty to wire fraud.  In addition to the prison sentence, Judge Wexler ordered Sullivan to pay $1.9 million in restitution and serve three years of supervised release after completion of his sentence.

Sullivan, a previously-licensed financial advisor, used funds entrusted to him by his clients for various unauthorized investments that later resulted in significant losses.  When confronted by those clients, Sullivan attempted to avoid any potential ramifications by promising those investors that he would completely reimburse their losses.  Instead, Sullivan pitched a different group of clients to invest in what he characterized as "private investment opportunities" that, in reality, were simply the transfer of those client funds to the previously defrauded investors. 

During a subsequent client meeting that was recorded by a hidden camera, Sullivan admitted to using client funds to repay other client investment losses and stated that "what I did was completely illegal, completely wrong...everything I've done was wrong, was illegal, I have nothing to say."

Sullivan was arrested in July 2012 and subsequently pleaded guilty in July 2013. 

Tuesday
Jun232015

Colorado Woman Charged With $7 Million "Triple Algorithm" Ponzi Scheme 

North Carolina authorities have filed criminal charges against a Colorado woman on allegations that she operated a massive Ponzi scheme that duped over 10,000 victims out of at least $7 million under the guise that a "lifetime income plan" could deliver annual gains exceeding 700%.  Kristine L. Johnson, of Aurora, Colorado, was charged with one count of wire fraud conspiracy in an information filed in the Western District of North Carolina.  Johnson has agreed to plead guilty to the charge, and could face up to twenty years in prison.

Johnson and Troy Barnes, of Riverview, Michigan, operated Work With Troy Barnes Inc. ("WWTB"), which was subsequently rebranded as "The Achieve Community" ("Achieve") in April 2014.  Johnson served as CFO of WWTB and Achieve and was responsible for day-to-day activities.  Achieve solicited investors to purchase "positions" costing $50 each that in turn promised a pay-out of $400 per position in the subsequent three-to-six month period - a return of 700% and an annualized return exceeding 1000%. In a short video on Achieve's website, Johnson touted Achieve 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 Achieve video claiming that Achieve “will teach you how to take $50 and turn it into thousands of dollars, and that’s a fact.”  Investors that questioned Achieve's ability to pay such exorbitant returns were assured that Achieve 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, Achieve took in at least $6.8 million from investors.

However, despite its claims that it was "not a pyramid scheme," both civil and criminal authorities alleged that Achieve was a pure Ponzi and pyramid scheme.  For example, Achieve's sole source of revenue allegedly originated from investor contributions.  Nor were any profits derived from legitimate business activities; rather, Achieve used funds contributed from new investors to make principal and interest payments to existing investors.  Johnson admitted to taking more than $200,000 in investor funds for her own personal use.  

Despite Barnes' prominent role in the suit filed by the Securities and Exchange Commission, he is named in the criminal information only as an unindicted co-conspirator, suggesting that he may have cooperated with authorities.  

The criminal charging document filed against Johnson is below.  Special thanks to Don at ASDUpdates.

Doc 1 (6) by jmaglich1

Monday
Jun222015

Supreme Court Deals $4 Billion Blow To Madoff Recovery Efforts

The Supreme Court refused to consider an appeal brought by the court-appointed bankruptcy responsible for recovering assets for Bernard Madoff's massive Ponzi scheme, instead leaving intact an appellate decision that prevents the recovery of "false profits" by Madoff profiteers beyond the two-year period preceding the collapse of Madoff's scheme.  Irving Picard, the court-appointed trustee, had estimated that an adverse ruling could result in the inability to recover an additional $4 billion for the benefit of the thousands ensnared by Madoff's historic fraud.  Picard's efforts have already resulted in the recovery of nearly $11 billion for victims, with an additional $4 billion recovered through government settlements set to be distributed through a more expansive claims process.  The decision will have no effect on the funds recovered to date.

One of the principal sources of recoveries in the aftermath of a collapsed Ponzi scheme is those investors who were fortunate enough not only to realize a recovery of their invested principal but also some form of profits.  While characterized as interest or returns, the operation of a Ponzi scheme meant that those profits were nothing more than the redistribution of funds raised from other newer investors.  A bankruptcy trustee is able to utilize avoidance powers under the U.S. Bankruptcy Code as well as fraudulent transfer claims under state law, often with the ability to recover prejudgment interest from the time of the transfer.  Picard has brought hundreds of such suits, known as clawback suits, since his appointment with significant success - including a $7 billion settlement with the estate of Jeffry Picower, a close friend of Madoff's and early investor. Picard's success prompted many to settle with Picard for all or a majority of the illicit funds they received from the scheme.

However, a federal bankruptcy judge ruled in 2011 that several executives with the New York Mets baseball team could only be held liable for transfers they received in the two years preceding the collapse of Madoff's scheme, citing the "safe harbor" provision codified in section 546(e) of the Bankruptcy Code.  In relevant part, that section provides:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b)…, the trustee may not avoid a transfer that is a … settlement payment … made by or to (or for the benefit of) a … stockbroker … or that is a transfer made by or to (or for the benefit of) a … stockbroker … in connection with a securities contract…, except under section 548(a)(1)(A). 

Both U.S. District Judge Jed S. Rakoff, as well as the U.S. Court of Appeals for the Second Circuit, concluded that Section 546(e) applied to the situation present in the Madoff suits: the Madoff account documents qualified as a securities contract, customer distributions were made in connection with that "securities contract," and those distributions also qualified as settlement payments.   As Judge Rakoff concluded, Section 546(e) covers an extremely broad definition of "settlement payments", and "clearly includes all payments made by Madoff Securities to its customers."  Thus, by its "literal language," the Bankruptcy Code prohibits Picard from bringing any clawback action against Madoff customers except those paid in the case of actual fraud.  The Second Circuit affirmed Judge Rakoff's ruling in December 2014.

Picard's legal team has estimated that upholding the Second Circuit's decision could prevent the recovery of more than $4 billion - consisting of approximately $2 billion in direct recoveries and complicating efforts to seek an additional $2 billion.  

Tuesday
Jun162015

Key Player In $150 Million Ponzi Scheme Gets 1-Day Sentence

A California man accused of being a key player in a $150 million Ponzi scheme - allegedly the largest scheme ever uncovered in Orange County, California - will spend one day in jail for his role despite once facing over thirty felony charges.  Adam Jay Boskovich, 45, received the sentence after a California judge agreed to reduce his felony conviction to a misdemeanor following the payment of restitution to defrauded investors.  Prosecutors cited "serious statute of limitations issues" as well as victims' refusal to cooperate in justifying the decision.  Boskovich could have faced up to 45 years in prison had he been convicted of the original charges.

According to authorities, Gerald Frank Cellette masterminded a massive Ponzi scheme while living in Minnesota.  Cellette used his company, Minnesota Print Services ("MPI") to solicit potential investors by promising annual returns ranging from 10% to 15% purportedly derived from lucrative printing contracts between MPI and major companies.  Investors were provided with various documentation allegedly proving the scheme's legitimacy, such as "deal sheets" evidencing the contracts between MPI and its clients.  After Cellette sold an investment in MPI to an Orange County man in 2005, that individual informed others, including Boskovich, of the investment opportunity.   

Boskovich later formed a company called Center-Point Capital ("CPC") to solicit potential investors.  Authorities alleged that Boskovich also went one step further by essentially conducting his own scheme by making misrepresentations or omissions to investors to solicit larger investments, including that he had personally examined Cellette's operations, contracts, and insurance policies in an effort to soothe any concerns over the scheme's legitimacy.   Cellette's scheme ultimately took in more than $200 million nationwide - including $150 million from Orange County residents.  While Orange County residents ultimately incurred losses of approximately $21 million, the investors recruited by Boskovich comprised over $17 million of that amount.

Boskovich was charged in October 2013 with 32 felony counts and accused of being a key player in Cellette's scheme.  Last month, Boskovich agreed to plead guilty to one felony count of making false statements in the sale or purchase of securities, with a top Orange County prosecutor explaining that the decision to agree to such a plea deal was made in the face of "serious" statute of limitations issues and testimony by potential victims during preliminary hearings that they would not cooperate with authorities out of a fear of jeopardizing potential restitution.  Those investors had reached a confidential settlement with Boskovich in a civil lawsuit, the terms of which allowed Boskovich to reduce his conviction from a felony to a misdemeanor in the event he fully repaid investors by May 19.  Boskovich's sentence reduction followed after he was able to satisfy the terms of the civil settlement.  

Cellette is currently awaiting trial on 116 felony counts, including 46 counts of selling unregistered securities, 43 counts of money laundering, and 27 counts of using a false statement in the purchase and sale of a security.  If convicted of all charges, Cellette could be sentenced to up to 104 years in prison.