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Recent SEC Releases
Monday
Feb152016

Former Soccer Club President Gets Prison For $5 Million Ponzi Scheme

A former soccer club president will spend the next 51 months in federal prison after pleading guilty to operating a Ponzi scheme that took in at least $5 million from investors, including fellow members of the soccer club.  Robert Rocco, 48, received the maximum sentence after previously pleading guilty to a single count of wire fraud.  Rocco was previously indicted on five counts of wire fraud and nine counts of mail fraud. In addition, the government is also seeking forfeiture of all proceeds traceable to the fraud, including Rocco's New York house.

According to the indictment, Rocco was the president of the Dix Hills Soccer Club ("DHSC"), which allowed him exclusive control of the club's bank accounts.  Rocco was also the founder and owner of Limestone Capital Services ("Limestone"), which purported to provide wholesale financing of cigarette purchases for a tobacco shop located on the Shinnecock Native American Reservation (the "Reservation").  Limestone also allegedly provided credit card services to retail users seeking to purchase cigarettes from the Reservation.

Beginning in 2006, Rocco solicited friends and family members of the DHSC to invest in Limestone, representing that investor funds would be used to finance the wholesale purchase of cigarettes on the Reservation.  Investors were provided with promissory notes that stated annual rates of return ranging from 15% to 18%.  Rocco also solicited the assistance of an unnamed acquaintance to recruit additional investors.  In total, over two dozen investors entrusted amounts ranging from $25,000 to $1.2 million with Limestone for a collective investment of over $5 million.  

While investors received regular checks purporting to be interest payments, Rocco revealed in February 2009 that a rival Indian tribe had stolen approximately $4 million - $5 million of uninsured cigarette inventory from the Reservation, resulting in a massive loss.  Rocco then formed Advent Equity Partners ("AEP"), which purported to deal in credit card processing services, and solicited a total of $1.3 million from an unnamed victim.

According to authorities, Rocco was not able to pay his advertised returns through legitimate businesses such as Limestone or AEP, but rather used incoming investor funds to pay returns to existing investors in classic Ponzi scheme fashion.  In addition, Rocco is accused of diverting nearly $67,000 from DHSC bank accounts to cover redemption obligations to investors.  This had the effect of depleting club coffers, with DHSC managing to stay afloat only by soliciting donations from benefactors.

Rocco's indictment is below:

Rocco Indictment by jmaglich1

Wednesday
Feb102016

Did A $70 Million Wine Ponzi Scheme Just Collapse?

A now-bankrupt California wine retailer that specialized in "future delivery" of expensive wines to customers is now reportedly under investigation by the FBI over claims that it operated a massive Ponzi scheme that duped thousands of consumers.  Wine Spectator Magazine is reporting that Premier Cru, based out of Berkeley, California, is the subject of an FBI investigation looking into "claims of a Ponzi scheme involving the [company]."  Premier Cru filed for bankruptcy protection early last month, which was followed by the personal bankruptcy filing this week by the company's president John Fox.  Already, the collapse has been estimated to be the "biggest wine retail-related default to have ever occurred in America."

Premier Cru, which operated as Fox Ortega Enterprises, sought out purveyors of fine wines by offering attractive prices on rare bottles that often handily beat competitors. The company also specialized in selling "pre-arrival" or "futures" wine, offering tantalizingly low prices on rare wine vintages that were currently bottling and had not yet been bottled.  The waiting period for such wines could range for months or even years, with some customers waiting up to five years to receive their purchased wine.  

The company came under fire last year when nearly a dozen customers filed lawsuits accusing the company of fraud and of operating a pyramid scheme.  Those customers alleged that Premier Cru had failed to deliver millions of dollars in pre-arrival wine and instead offered only excuses and empty refund promises.  Shortly after those lawsuits were filed, the company shut its doors and purportedly transitioned to an online-only sales platform.

In early January, Premier Cru sought bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code.  In its petition, the company listed assets of $1million to $10 million but liabilities of $50 million to $100 million.  The petition listed the near-entirety of the company's assets as $6.5 million in wine inventory but also disclosed nearly $70 million in unsecured creditors who are suspected of purchasing - but never receiving - rare wines.  A 1,401-page bankruptcy petition lists over 3,950 creditors with debts ranging from $50 to over $100,000.  The list of creditors contains several well-known wine collectors, including Accel Partners' Arthur Patterson who is reportedly owed more than $830,000.  Fox's petition was filed earlier this week, listing assets of $0 to $50,000 compared to liabilities of $50 million to $100 million.  

The court-appointed bankruptcy trustee in the Premier Cru bankruptcy has disclosed that approximately 35,000 bottles of wine remain in the company's inventory, with a small percentage of those bottles segregated for approximately 120 "paid-up" customers.  While the trustee has indicated that he intends to sell off all of the wine - including the pre-sold wine - for the benefit of creditors, he does anticipate that those "paid-up" buyers may attempt to assert their interests.  The judge overseeing the bankruptcy case has cautioned the trustee against racing to liquidate the wine while potential creditors' claims may be asserted.  

The trustee will conduct a so-called "341 Meeting" on February 24th in which creditors will have the opportunity to question Premier Cru principals - including John Fox - under oath about the company's position.  The FBI has asked that interested individuals send complaints and tips to premiercru.complaints@fbi.gov.

Thursday
Feb042016

China's Madoff Moment: The Latest About The Alleged $7.6 Billion Ponzi Scheme

Last week authorities arrested nearly two dozen employees of a shuttered Chinese peer-to-peer lender on accusations that the company was a massive Ponzi scheme that had taken in billions from countless investors.  These mind-blowing figures were soon followed by revelations of lavish purchases by key insiders - including a $12 million diamond ring - as well as some slick policing that uncovered (literally) nearly 100 bags of evidence buried 20 feet underground.  As the rest of the world struggles to get their head around the sheer size of this scheme, which would be the second largest Ponzi scheme in history, more details have started to trickle out which shed further light on the allegations. 

Ezubao (also referred to as Ezubo by several publications) shot to prominence in the past two years as one of many Chinese peer-to-peer lenders operating in China’s “shadow banking” industry.  Ezubao and others catered to smaller or underserved business segments which might not qualify or meet the standards for the extension of credit from established financial institutions.  As a subsidiary of Yucheng International Holdings Group, Ezubao purported to finance equipment purchases for small to medium-sized businesses, who in turn paid rental payments to Ezubao for the use of that equipment.  Ezubao pointed to these profitable lending relationships in soliciting investors with promises of annual returns ranging from 9% to 14%.  These above-average returns, which were up to ten times higher than the official rate offered by Chinese banks on deposits, caused investors to flock to Ezubao.  In total, at least 900,000 investors handed over at least $7.6 billion. 

One of the reasons for Ezubao’s explosive growth may lie in its extensive use of marketing to cultivate a favorable reputation and public image.  Last year, the company reached millions by sponsoring online broadcasts of the National People’s Congress and even having its logo hung in the Great Hall of the People in Beijing.  The broadcasts were carried by a subsidiary of Xinhua, which is a Chinese state-owned news agency.  The company also ran prime-time television advertisements on state-owned television channels and had its logos covering seats on the Shanghai-Beijing high-speed train. In a particular stroke of irony, the company was even the recipient of an award given to the most responsible internet finance companies from state-run news company China Newsweek.  In addition to creating the impression that it was blessed by the Chinese government, Ezubao also used its own employees to project an appearance of success by implementing a formal dress code.  Indeed, more than $100 million was distributed to employees this past November, with a portion of the funds earmarked for the purchase of luxurious clothing and jewelry.  The company also sponsored industry conferences, including one just months ago that featured government officials and other industry leaders extolling Ezubao’s business plan and prospects.  

But authorities now allege that Ezubao’s business was a massive fraud built on lies.  China’s news agency is now reporting that approximately 95% of the investment projects listed on Ezubao’s website were simply made up.  Similarly, of the 207 companies Ezubao claimed to call business partners, only one of those partners had apparently ever done business with Ezubao.  Authorities discovered that the company had shelled out as much as 800 million yuan to buy business plans from corporate brokers and use those details to fabricate investment projects used to solicit potential investors.  In a confession being broadcast by Chinese state-run media, Ezubao founder Ding Ning admits that he embezzled close to 1.5 billion yuan from the company and lavished Yucheng president (and girlfriend) Zhang Min with hundreds of millions of yuan in cash payments and the purchase of luxury items such as a 12-million yuan diamond ring.  

As the scheme began to collapse in December 2015, Ning and Min claimed in their confessions that they began making plans to run away and hide evidence.  Authorities somehow caught wind of the scheme and were able to learn that employees had hidden dozens of bags of documents underground in the outskirts of a Chinese province.  Two excavators and twenty hours of digging later, authorities uncovered the hidden documents.  

It remains unknown as to what charges Ning, Min, and the other Ezubao employees will face, but China differs from the United States in that it allows the imposition of the death penalty for nearly sixty offenses, including fraud and economic crimes.  One Chinese businessman labeled as China's "Madoff" was secretly executed back in 2013 after being convicted of running a $460 million Ponzi scheme.  

Tuesday
Feb022016

Ponzi Scheme Discoveries and Sentences Dropped Sharply In 2015

In exclusive data compiled by Ponzitracker.com, both the number of uncovered Ponzi schemes as well as the number of sentences handed out to individuals for their role in Ponzi schemes appear to have decreased sharply in 2015.  The statistics, which come over seven years after the discovery of Bernard Madoff's massive Ponzi scheme, show a significant drop in the number and severity of Ponzi schemes in 2015 - a welcomed trend that will no doubt be trumpeted as a product of increased enforcement efforts.  However, while certainly encouraging, it remains to be seen whether this reversal is simply an anomaly.  

In 2015, at least 61 Ponzi schemes were uncovered with a collective total of more than $800 million in potential losses.  The number of uncovered schemes was down approximately 10% from the number discovered in 2013 and 2014.  Further, the $800 million of estimated losses in 2015 was 50% less than the estimated losses in 2014 and nearly 75% less than the estimated losses in 2013.  Similarly, the average Ponzi scheme size in 2015 of approximately $13.2 million was 40% less than 2014 and 70% less than 2013.  The median Ponzi scheme size also significantly decreased from $6.8 million in 2014 to $4.5 million in 2015 - a 33% decrease.  With 61 schemes discovered, this correlated to a new Ponzi scheme uncovered roughly every six days in 2015.  The average scheme losses also declined compared to previous years, with only one scheme in 2015 having estimated losses of $100,000,000 or more.  At least six uncovered schemes in 2013 had losses of $100 million or more, while 2014 saw at least five schemes with at least that amount of losses.

Similarly, the number and severity of sentences handed down to those convicted for their role in a Ponzi scheme in 2015 also sharply decreased.  In 2015, 79 individuals were sentenced to nearly 700 years in cumulative sentences.  Both the number of individuals sentenced and the cumulative sentences handed down were approximately 50% less than sentences handed down in 2013 and 2014.  Additionally, the average sentence decreased approximately 20% from 2014 to 2015.  Curiously, the percentage of female defendants receiving these sentences declined by more than 50% from 2014 to 2015.  The sentences handed down ranged from mere months to decades in prison, with Joyce Allen's 30-year sentence for a $20 million Ponzi scheme ranking as the highest Ponzi sentence handed down in 2015.  

While the 2015 statistics constitute notable drops compared to 2013 and 2014, the discrepancies are even more apparent when looking back to the 2009, 2010, and 2011 time periods that marked the high-water marks in Ponzi scheme discoveries.  Then, fresh on the heels of the discovery of Madoff's massive scheme and during the middle of an financial crisis that caused the implosion of countless schemes, the number of Ponzi schemes discovered annually averaged over 100 and included the discovery of Madoff's $17 billion scheme in 2008 and Stanford's $7 billion scheme in 2009. 

A chart showing the last four years of statistics shows just how significant this decrease was in 2015:

A search for answers in the data itself does yield some interesting insights.  The immediate takeaway is that Ponzi schemes are declining in all measurable areas - number discovered, average size, and total losses.  Ponzi scheme sentences are also dwindling correspondingly as a result of the declining number of schemes.  At least part of this decrease can feasibly be attributed to a burgeoning economy.  Some can also be attributed to increased and more sophisticated enforcement efforts, with the decreasing average scheme size suggesting that regulators are becoming more adept at shutting down schemes before they can grow exponentially.  Similarly, a decline in both the number of sentences and the cumulative time handed down may well be blamed on the growing gap between present-day and the days where massive mind-blowing schemes were being discovered nearly daily and brewing public outrage.  

The data is presented below.  Analyses of the 2013 and 2014 data are available here and here, respectively.

(As a disclaimer, this database is meant for educational purposes only, and was compiled through articles published on Ponzitracker as well as through reporting available on the internet through various sources, including Kathy Phelps' monthly Ponzi roundups at ThePonziSchemeBlog.com. A special thanks to Alison Jimenezwith Dynamic Securities Analytics for her assistance in visualizing the data.  Individuals accused of Ponzi schemes are presumed innocent until proven guilty. The database generally only included Ponzi schemes of $1 million or more.  Please feel free to direct any comments or inquiries toinquiries@ponzitracker.com.)

 

 

Monday
Feb012016

Did China Just Bust A $7.6 Billion Ponzi Scheme?

In what would be the second-largest Ponzi scheme in history and second only to Bernard Madoff's massive scheme, Chinese authorities have arrested nearly two dozen people on accusations that a person-to-person (P2P) lender they operated was nothing more than an elaborate fraud that duped nearly 1 million investors. At least 21 people were arrested for their role in Ezubao, a P2P site that offered the ability to profit from purported online financing opportunities.  At least one Chinese state-run news site is reporting that several suspects have already confessed to the fraud.  If true, the accusations would place Ezubao in notorious company alongside Bernard Madoff's $65 billion scheme and R. Allen Stanford's $7 billion scheme.  

Ezubao (also called Ezubo by several publications) is a subsidiary of Yucheng Group, a Chinese entity that mainly dabbled in finance leasing.  In exchange for providing businesses with equipment, the business agreed to pay Yucheng a series of rental payments.  This form of banking is highly unregulated and appeals to businesses that might be turned down for a conventional loan due to substandard credit.  Armed with this stream of rental payments, Ezubo then solicited investors with the promise of safe and steady annual returns ranging from 9% to 14.6%.  

However, police now believe that the vast majority of purported financing projects presented to potential investors were simply fabricated to induce new investments.  Rather than using new investor funds to finance equipment purchased by businesses, authorities claim that Ezubao used those funds to pay returns to new investors - a classic hallmark of a Ponzi scheme.  In addition to making Ponzi payments, a chairman of Ezubao's parent company is believed to have spent nearly two billion on gifts, including a $20 million diamond ring and over $1 billion in cash payments.   

Police began investigating Ezubao in December, seizing records and freezing assets as part of their probe.  According to the Wall Street Journal, the company sought to hide certain records from authorities by burying over 1,000 accounting books in 80 plastic bags nearly twenty feet underground on the outskirts of town.    

While both the frequency and severity of Ponzi schemes have generally declined in recent years, there have been several recent schemes that parlayed social media into massive growth which ultimately ensnared hundreds of thousands - or even millions - of victims.  One of these examples is TelexFree, a Massachusetts company which attracted more than one million investors through the promise of outsized returns through investments in VOIP software.  That scheme, which incentivized the recruitment of new members though social media and the payment of commissions to existing investors, ultimately took in more than $3 billion from investors.