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Recent SEC Releases

Florida Men Plead Guilty To $19 Million Ponzi Scheme

Two Florida men have entered guilty pleas to charges that they operated a Ponzi scheme that raised nearly $19 million by peddling "guaranteed" certificates of deposit to mostly elderly investors.  Donald Ray Babb, 58, of Merritt Island, Florida, and Ralph Ruth, of Melbourne, Florida, each pleaded guilty to a single charge of conspiracy to commit wire fraud.  Each man faces up to twenty years in federal prison at a sentencing likely to take place in early 2015.

Babb and Ruth operated several businesses, including Southeast Mutual Insurance and Investment LLC, Capstar Industries LLC, and First Merchant Capital LLC (the "Companies").  The men met while working in the automobile dealership industry, and beginning in 2006, began soliciting potential investors through word of mouth and newspaper advertisements on claims that the Companies were licensed financial institutions offering risk-free certificates of deposit with high rates of return.  The Companies would ultimately raise nearly $19 million from at least 150 investors, many of whom were elderly and who invested a significant portion (or all) of their life savings.

However, there were no certificates of deposit offering high rates of return; instead, Babb and Ruth used the Companies to orchestrate a classic Ponzi scheme whereby funds from new investors were used to pay interest and principal redemptions to existing investors.  The men used investor funds to live a life of luxury that included the purchase of high-end watercraft, three airplanes, and real estate in Florida and North Carolina.  The scheme collapsed in late 2013, and the pair were later arrested.  An investigation found that, of the approximately $18.5 million raised by the Companies, approximately $7.8 million was repaid to investors in the form of interest payments and return of principal.

In addition to criminal charges, the Florida Office of Financial Regulation brought civil fraud charges against the men and the Companies.  A court-appointed receiver has recovered approximately $1 million


Former Tennis Team Owner Gets 20 Years For $150 Million Latex Glove Ponzi Scheme

A California man who once owned a professional tennis team has been sentenced to a twenty-year prison term for orchestrating a massive Ponzi scheme that duped victims out of over $100 million.  Deepal Wannakuwatte, 63, received the sentence from U.S. District Judge Troy Nunley who, after hearing testimony from various victims defrauded by the scheme, branded Wannakuwatte a "liar" and "evil person" and delivered the maximum sentence under the law.  Wannakuwatte had previously agreed to plead guilty to a single count of wire fraud after facing charges that could have resulted in up to a 90-year sentence. 

Wannakuwatte operated International Manufacturing Group ("IMG") and RelyAid Global Healthcare Inc. ("RelyAid") (collectively, the "Companies"), telling potential investors that the Companies had lucrative contracts providing surgical gloves to various government agencies.  Investors were told that the Companies had annual sales exceeding $100 million, including more than $125 million in contracts from the U.S. Department of Veteran Affairs ("VA") alone.  Based on these representations, Wannakuwatte and the Companies took in more than $200 million from at least 100 victims.  

However, authorities allege that Wannakuwatte grossly overstated the extent of the Companies' dealings with the VA - indeed, rather than $100 million in sales from the supply of medical gloves, authorities claim that the actual amount of the contracts were $25,000, and the Companies; total 2013 sales were just $5 million.   The scheme began unraveling late last year when Wannakuwatte, his wife, and the Companies were sued by a creditor, General Electric Capital Corp. ("GE Capital"), who claimed that RelyAid had defaulted on a loan it had taken out to purportedly build a latex glove factory.  Wannakuwatte was ordered to turn over a $3 million King Air private plane that had been pledged as collateral on the loan, and multiple government agencies began investigating Wannakuwatte and the Companies shortly thereafter.

After being arrested in February on mail fraud, wire fraud, and bank fraud charges, Wannakuwatte pleaded guilty several months later to a single count of wire fraud.  As part of that plea agreement, prosecutors agreed to seek a 20-year sentence - the maximum allowed under a wire fraud charge.  After accounting for distributions received by victims, total losses were estimated at approximately $109 million.

However, Wannakuwatte's previous sentencing in August 2014 was delayed when, at the sentencing hearing, Wannakuwatte's lawyer presented Judge Nunley with a note claiming that his current lawyer, Donald Heller, had been "intimidating" towards him and that he had retained another attorney.  Heller, a well-regarded criminal defense attorney and former federal prosecutor, later denied the accusations to a reporter and stated that it was in Wannakuwatte's best interests to plead guilty given the "overwhelming" case against him.  Wannakuwatte's new counsel, Philip Cozens, appears to have convinced his client that he was facing a significant uphill battle in trying to revoke his plea agreement.

A hearing is scheduled in January 2015 to determine the exact amount of losses, as the figures advanced by the government and Wannakuwatte's defense differ by tens of millions of dollars.


Judge Denies Charging Lien On Ponzi Victim Distributions 

A federal judge has issued an order denying an attempt by lawyers for certain victims of the $600 million ZeekRewards Ponzi scheme to place a "charging lien" against hundreds of thousands of dollars in interim distributions due to those victims.  U.S. District Judge Graham C. Mullen issued the order nearly two months after Marc Michaud, a New Orleans lawyer with the firm of Patrick Miller LLC, filed a Notice of Attorney's Charging Liens asserting "attorney’s charging liens and other privileges for legal services performed and costs incurred by Attorney in connection with the representation of" approximately 400 claimants.  In the order, Michaud was also ordered to "immediately and without further delay" provide the contact information for his clients to allow the Receiver to make the first interim distribution directly to those clients.  

Michaud filed the Notice of Attorney's Charging Liens in late September, seeking to create a security interest entitling Michaud and his firm to a portion of distributions made by court-appointed Receiver Kenneth Bell to Michaud's clients.  The exhibit attached to the original Notice listed approximately 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with Michaud's law firm agreeing to turn over a portion of any funds recovered from the scheme.  However, it appears that the only assistance provided by Michaud's firm was the filling out of proof of claim forms for those victims as part of the court-approved claims process; indeed, each of the proof of claim forms filled out for those victims listed Michaud's law firm as the address to which distributions should be sent.

Kenneth D. Bell, the court-appointed receiver, opposed sending victim distributions to any third party, and filed a motion in December 2013 seeking court approval for distribution procedures that included a provision that payments would be made directly to victims.  Michaud's firm filed a pointed objection, claiming that the payments should be sent directly to their firm and characterizing the Receiver's decision as a refusal to consider their clients' claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Law Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form.  The Receiver also noted that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

Judge Mullen subsequently approved the Receiver's Motion in all aspects.

Following the filing of the Notice of Attorney's Charging Liens, the Receiver filed a sharply-worded objection contending that the Notice "appears to be an attempt by Mr. Michaud to circumvent the Court’s prior orders regarding this issue and insert himself as the recipient of money that belongs to victims."  The Receiver also noted that nearly all of Michaud's clients were included in the group of victims that had not yet received the first interim distribution made in late September 2014 due to the fact that Michaud's firm had failed to follow an earlier court order requiring the amendment of certain claimants' mailing information to reflect their actual address rather than that of the Law Firm.  The Receiver also insinuated that, in failing to comply with the order, the Law Firm may also have violated rules governing attorney conduct in both Louisiana and North Carolina by placing the financial interest of the Law Firm over that of their clients.  

The Receiver raised multiple issues with the entitlement to a charging lien for representation of Ponzi scheme victims, and concluded that 

Here, a charging lien is inappropriate given that Mr. Michaud continues to represent these victims in a matter which has not yet been resolved; there is no evidence of either an avoidance of payment or a dispute as to the amount of fees; and there is no indication that these victims have received notice that Mr. Michaud seeks to claim 25% of this first distribution. 

Under the terms of Judge Mullen's Order, Michaud's firm is directed to "immediately and without further delay" provide the direct contact information for his clients to the Receiver so that those victims may receive the first interim distribution.  While Michaud had apparently sought the use of a charging lien to prevent the scenario where he was forced to collect the contingency fee directly from his clients, it appears that he will have no other choice with the Court's ruling.  

A copy of Judge Mullen's Order is below (as always, thanks to ASD Updates)

Zeek Doc 283


Pastor Gets 10-Year Sentence For $7 Million Ponzi Scheme

A California pastor was sentenced to serve more than ten years in prison for duping more than 80 victims - many of them low-income families - in a $7 million Ponzi scheme.  Luis Serna, 62, was sentenced to 121 months in federal prison by U.S. District Judge Beverly Reid O'Connell, who also ordered Serna to pay $4.6 million in restitution to his victims.  Serna previously pleaded guilty to wire fraud charges.

Serna was a pastor at Zion Living Word Christian center in San Fernando.  When he was not directing his congregation, Serna was the owner and operator of Architects of the Future Investments ("AFI"), which solicited potential victims by promising annual returns of up to 20% from his prowess as a foreign currency trader. In total, investors entrusted more than $7 million with Serna - of which authorities estimated that $4.6 million was ultimately lost.  

However, according to authorities, Serna used very little of the funds raised from investors to trade foreign currency.  Rather, Serna admitted to operating a Ponzi scheme by using new investor funds to pay fictitious returns to existing investors.  The scheme collapsed when Serna was unable to satisfy monthly obligations to investors, many of whom came from low-income backgrounds.  In a statement to the sentencing judge, prosecutors indicated that:

This case involves an egregious fraud that targeted non-wealthy victims who believed in the defendant because he was a pastor.  The effects of this crime on the victims are truly devastating in every way.  In short (Serna) has caused not only financial loss, but the loss of homes, the loss of ability to pay for education for children, the need to declare bankruptcy, psychological damage, physical damage and endless suffering.

Serna's attorney claimed that Serna had accepted responsibility for his crimes, but sought leniency based on Serna's immigration from Mexico when he was 16 and a difficult upbringing.  


New York Woman Receives 3-Year Sentence For $6.9 Million Ponzi Scheme

A Long Island woman will spend the next three years in federal prison for orchestrating a Ponzi scheme that duped victims out of nearly $7 million.  Laurie Schneider, 39, received the sentence from U.S. District Judge Denis Hurley after previously pleading guilty to a single count of wire fraud earlier this spring.  In addition to the prison sentence, Schneider's plea agreement calls for her to forfeit $1 million to the government.  

Beginning in September 2006, Schneider began soliciting investors for Janitorial Close-Out City Corporation.  ("Janitorial Close-Out").  Investors were told that Janitorial Close-Out invested in industrial equipment and machinery produced by Chinese companies, and that the company was able to purchase and re-sell janitorial equipment and machinery at a profit margin of 15% to 60% over a short-time period.  It was these high profits margins, according to Schneider, that allowed her to pay annual interest payments to investors of up to 60%.  In total, authorities estimate that Schneider solicited investments in Janitorial Close-Out of over $4 million from over 25 individuals.  

In another venture, Schneider operated Eager Beaver Realty LLC ("Eager Beaver"), which purported to buy and re-sell real estate on Long Island at a discount or that were on the verge of foreclosure.  Potential investors were promised annual returns of up to 20%, and received written paperwork indicating that all of their investment would be used to buy and sell real estate.  Investors entrusted nearly $5 million to Schneider and Eager Beaver.

In reality, the healthy returns promised by Schneider were made possible through the operation of a classic Ponzi scheme in which incoming investor funds were used to pay returns to existing investors.  Schneider also formed the Eager Beaver scheme to establish a new source of funds to pay returns to investors in Janitorial Close-Out.  Investor funds were also diverted for Schneider's personal expenses, which included luxury car purchases and country club dues.

Schneider was indicted on three counts of wire fraud in February 2012.