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Recent SEC Releases
Sunday
Jul062014

Attorney and Daughter Charged With $23 Million Ponzi Scheme

"Ninety-nine percent of cases we see are caused by unregistered investments or investment advisors.  The best thing investors can do is check with our website or call our office to make sure the investment is registered and the person they are dealing with is registered."

- Indiana Secretary of State

An Indiana attorney and his daughter have been arrested and charged with masterminding a $23 million Ponzi scheme that allegedly targeted senior citizens.  Charles Blackwelder, 69, and his daughter, Cara Grumme, 41, were charged by Indiana authorities with twenty felonies, including nine counts of fraudulent sale of securities and four counts of securities fraud on a victim over 60.  Each of the felonies carry at least a four-year minimum sentence.  Blackwelder remains in an Indiana jail where he is being held on a $500,000 bond.  

According to the Indiana Secretary of State, Blackwelder operated CFS LLC ("CFS") in Carmel, Indiana, as an unregistered company that offered investors an opportunity to purchase "real estate investment opportunities" that would allegedly operate as a legal shield of those assets from consideration for qualification for Medicaid.  In total, the company took in over $23 million for over a decade from several hundred Indiana investors - many of them senior citizens.

However, Indiana authorities allege that CFS was nothing more than a Ponzi scheme, using new investor funds to pay returns to existing investors.  While investors were told that they were purchasing undivided interests in properties, authorities allege that in, in reality, the subject real estate was either previously sold or had already entered foreclosure.  In addition, Blackwelder and Grumme were accused of using several of the properties for their own use.

The Indiana Secretary of State Securities Division filed an enforcement action last year against Blackwelder, his son Chad, and Grumme related to their ownership of CFS Inc.  While A receiver was appointed, with over $23 million in claims filed by investors and debtors.  According to the receiver, CFS Inc. may have oversold interests in its properties by as much as 48%.  

Wednesday
Jul022014

Clawback Defendants File Counterclaims Against Receiver, Seek Treble Damages And Fees 

In a novel strategy, several "net winners" facing claims that they received millions of dollars in false profits from the $600 million ZeekRewards Ponzi scheme have responded to the court-appointed Receiver's complaint by asserting various counterclaims against the Receiver - a strategy that may have actually exposed some of those individuals to further liability.  Defendants Durant Brockett, Rhonda Gates, Trudy Gilmond, Jerry Napier, Darren Miller, Aaron Andrews, and Sharon Andrews (the "Defendants") were sued by Receiver Kenneth Bell on claims that they had each received over $1 million in "false profits" exceeding their investment in ZeekRewards.  Each has filed an Answer and Counterclaim against the Receiver, with Brockett also seeking to dismiss the claims.

Clawback Actions

The Defendants were sued after being identified by the Receiver as the largest recipients of purported profits from their affiliation with ZeekRewards, which the Securities and Exchange Commission shut down in August 2012 on claims that it was operating a massive Pyramid and Ponzi scheme.  Following Bell's appointment, his investigation showed that nearly $300 million had been distributed to so-called "net winners."  Bell sought and received court approval to file two lawsuits - one against the largest net winners, and another in the form of a class action lawsuit against approximately 9,000 investors that received at least $1,000 in net profits.  The Defendants comprised a portion of the individuals and entities named in the first lawsuit.

In their pleadings, the Defendants largely denied or claimed lack of knowledge surrounding the Receiver's allegations concerning Zeek's operation as a massive Ponzi scheme.  In addition, each of the Defendants also chose to assert counterclaims against the Receiver - the first time in recent memory such a tactic has been attempted.  The claims asserted by each Defendant are:

  • Durant Brockett - Breach of Contract, Tortious Interference, Money Had and Received, 42 U.S.C. 1983 (Deprivation of Constitutional Rights) or in the alternative common law 4th amendment claims, and North Carolina's Unfair and Deceptive Trade Practices Act.
  • Sharon and Aaron Andrews - Breach of Contract, Tortious Interference, Money Had and Received, 42 U.S.C. 1983 (Deprivation of Constitutional Rights) or in the alternative common law 4th amendment claims, and North Carolina's Unfair and Deceptive Trade Practices Act.
  • Trudy Gilmond - Breach of Contract
  • Jerry Napier - Breach of Contract
  • Darren Miller - Breach of Contract
  • Rhonda Gates - Breach of Contract 

Breach of Contract Claims

The crux of the breach of contract claims is that each of the Defendants was owed compensation for their "work" for ZeekRewards parent entity Rex Venture Group ("RVG"), and that the Commission's actions shutting down ZeekRewards prevented each Defendant from receiving the compensation owed to them.  Each Defendant also alleges that the Commission "unnecessarily delayed its prosecution of claims" against RVG to their detriment.  While the existence of a contract is alleged, there is little detail provided as to the substance of that contract or the terms of compensation.

The breach of contract claims likely face an uphill battle.  As an initial matter, Receivers enjoy broad and nearly unlimited immunity from suit for performance of their duties.  Additionally, the Order Appointing Receiver typically prohibits the filing of actions against Receivership Entities by any person without judicial leave.  Finally, the court-ordered claims process was designed to be the exclusive forum for those who held potential claims against RVG or ZeekRewards.

Additional Claims Could Result In Additional Liability To Defendants

In addition to the breach of contract claims, Defendants Durant Brockett and Sharon and Aaron Andrews also asserted additional claims that included a claim for violations of North Carolina's Unfair and Deceptive Trade Practices Act (the "Act"), alleging that the Receiver and RVG's conduct was illegal and immoral, offends public policy, and constituted unfair methods of competition, unfair trade practices, and deceptive trade practices.  As a result, Brockett and the Andrews allege that they are entitled to an award of treble damages and their attorney's fees and costs, as provided in the Act.  

However, a review of the relevant provision of the Act governing an award of attorney's fees provides that:

In any suit instituted by a person who alleges that the defendant violated G.S. 75-1.1, the presiding judge may, in his discretion, allow a reasonable attorney fee to the duly licensed attorney representing the prevailing party, such attorney fee to be taxed as a part of the court costs and payable by the losing party, upon a finding by the presiding judge that:

......

(2)        The party instituting the action knew, or should have known, the action was frivolous and malicious. 

Thus, a party prevailing in defending claims under the Act can collect his/her reasonable attorney's fees where the party instituting the action knew or should have known that the action was frivolous and malicious.  Perhaps ironically, the recovery of the Receiver's attorney's fees is not available pursuant to the claims asserted in the original complaint; rather, Defendants Brockett and the Andrews may have exposed themselves to the potential for an adverse attorney's fees award by bringing claims under the Act that are likely to be challenged as frivolous by the Receiver.  Such an award is in the judge's discretion, but the fact that funds that could potentially be returned to victims will instead be paid to the Receiver to defend these claims could certainly be a consideration.

Several of the Pleadings are below.  A special thanks to ASDUpdates for providing the pleadings.

Brockett

 

 

Gil Mond

 

Wednesday
Jul022014

TelexFree Trustee Seeks To Vacate Claim Deadline

As Ponzitracker reported yesterday, the court-appointed bankruptcy overseeing the TelexFree bankruptcy has filed a motion to invalidate the current Proof of Claim deadline of August 20, 2014, arguing that a variety of reasons render the establishment of a deadline as premature.  Stephen Darr, the court-appointed trustee for TelexFree, LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree"), filed a motion (the "Motion to Vacate") through his attorneys today seeking to vacate the docket entries establishing the current deadline and stating that a Proof of Claim deadline was appropriate only after addressing various deficiencies in TelexFree's bankruptcy filing and the determination of a proper procedure to administer any claims process.  

Rule 3002 of the Federal Rules of Bankruptcy Procedure provides that a proof of claim is timely filed when done so within 90 days after the first date of the meeting of creditors known in Bankruptcy parlance as the "341 Meeting."  Shortly after TelexFree's April bankruptcy filing, a notice appeared on the court docket setting the 341 Meeting for May 15, 2014 and providing that the Proof of Claim filing deadline was 90 days after that date - resulting in a claim deadline of August 13, 2014.  A subsequent notice on April 24, 2014, rescheduled the 341 Meeting for May 22, 2014 - thus resulting in a rescheduled Proof of Claim deadline of August 20, 2014.  

However, the rescheduled 341 Meeting was never held, as a Court ordered the transfer of the proceedings to a Massachusetts Bankruptcy court on May 6, 2014.  Prior to the filing of the Motion to Vacate, Ponzitracker spoke with an attorney for the Trustee, who confirmed that the current bar date could be disregarded.

In the Motion to Vacate, the Trustee identified several bases for his request.  First, he argued that TelexFree had not yet filed its financial schedules or statements, nor had it submitted a complete matrix of creditors.  After he is able to determine the pool of potential claimants, the Trustee indicated that he intended to develop a protocol for the filing and administration of claims.  Hinting that the number of parties that could potentially assert claims against TelexFree could exceed 1,000,000, the Trustee indicated that administration of the claims process was likely to be a "significant undertaking" and that he was currently accepting proposals for a claims and noticing agent to assist.  Finally, the Trustee cited due process concerns, noting that there was no way to determine whether all of the potential affected parties had received notice of the impending deadline.

Ponzitracker will report on when a new bar date is made public, and will provide a detailed instruction guide for understanding and completing the Proof of Claim form at an appropriate time.

Previous Ponzitracker coverage of TelexFree is here.

The Motion to Vacate is below:

Motion to Vacate

Monday
Jun302014

Former NASCAR Driver And Son Of Convicted Swindler Indicted In $15 Million Ponzi Scheme

A Tennessee man whose father once served prison time for an oil-and-gas fraud has been indicted on allegations that he orchestrated a coal-mining Ponzi scheme that may have duped investors out of over $15 million.  Brian Rose, a/k/a John Haskins, was indicted on federal fraud charges along with eight other individuals, with authorities alleging that Rose was the ringleader of a coal mining venture that in reality was a devastating Ponzi scheme.  In addition to Rose, authorities also charged Robert McGregor a/k/a Jim Robinson III, Dallas McRae, Hugh Sackett, James Robinson, Brett Loveall, Jason Smith, Ray Spears a/k/a Brock Hamilton, and Jennifer Key.  Each of the nine face charges of conspiracy to commit wire fraud and mail fraud. 

According to the indictment, Rose operated numerous mining and coal companies including New Century Coal ("New Century").  New Century was marketed as an issuer/sponsor of various partnerships that were each assigned to the performance of a specific coal mine, distributing marketing materials to potential investors that touted "turnkey" mining operations set to commence after raising sufficient capital.  Investors were promised 6% quarterly returns while capital was being raised for operations, and 100% annual returns during the first year that mining operations commenced.  New Century is alleged to have employed "fronters" who identified potential investors from broker lists, publicly available information, and even victim lists of prior financial schemes.  After the fronters initially reached out, "closers" would then contact the potential investors with additional information and provide subscription documents. 

According to authorities, the New Century venture was nothing more than an intricate Ponzi scheme.  The indictment alleges that the documents provided to potential investors were fabricated, and that the defendants created "ghost" vendor companies to give the impression that New Century actually explored, developed, and mined coal.  Additionally, investors received fabricated financial statements, mining expenses, proof of existence of coal mines, and documentation of the existence of the coal.  Investors were not told that 20% of their investment was immediately paid to the applicable "closer," and that a significant portion of the remainder was diverted to sustain Rose's lavish lifestyle that included gambling trips to Las Vegas, horse racing, and to support Rose's NASCAR racing team.  

A simple Google search shows that the Rose family has had an extensive history with civil and criminal authorities related to the sale of securities. Rose's father, David G. Rose, was indicted in 2008 on multiple fraud charges related to two oil-and-gas projects that were alleged to be fraudulent.  The elder Rose subsequently pleaded guilty and was sentenced to a four-year term.  In August 2007, Brian Rose and his brother, Jason Rose, were the subject of a permanent restraining order obtained by the Kentucky Office of Financial Institutions that prohibited the company

from selling securities in Kentucky unless they disclosed in writing the negative legal history associated with any businesses run by members of the Rose family.

Several of the defendants are accused of providing false sworn testimony after the Securities and Exchange Commission opened an investigation in 2013.  Additionally, `Rose, McGregor, and Spears are accused of using false identities to evade detection by law enforcement, including Spears' and McGregor's legal changing of their names.  

The Indictment is below:

 

Brian Rose Indictment (1)

 

 

Monday
Jun302014

Pennsylvania Woman Charged With "Massive" Ponzi Scheme

Federal authorities have indicted a Pennsylvania financial advisor on charges that she orchestrated a "massive Ponzi scheme" that may have duped hundreds of victims out of millions of dollars.  Patricia S. Miller, 67, was charged with five counts of wire fraud by the U.S. Attorney for Massachusetts.  If convicted of the charges, Miller could face up to twenty years in federal prison for each count as well as up to a $250,000 fine.

Miller served as a financial advisor with several brokerage firms, most recently with Investors Capital Corp in McMurray, Pennsylvania.  Using her position as a financial advisor, Miller solicited potential investors for "investment clubs," such as "KS Invsestments" and "Buckharbor," that offered high rates of return through purported investments in fixed-income notes and other investments.  According to the indictment, investors entrusted millions of dollars towards these "investment clubs." 

However, authorities alleged that Miller did not use investor funds as promised, but rather misappropriated funds for her own use as part of a massive Ponzi scheme that may have dated back as far as the early 1990's.  According to Miller's FINRA Broker Check, she was terminated in May on grounds that she misappropriated customer funds, borrowed money from customers, and engaged in fraudulent investment activity.   The Report also disclosed that Miller was the subject of at least six pending customer complaints related to the alleged scheme.

Miller's Broker Check is below:

Broker Check