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Recent SEC Releases
Sunday
Nov092014

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.

Friday
Nov072014

Government To Appeal Dismissal Of Charges In Alleged $100 Million Ponzi Scheme

The Salt Lake Tribune is reporting that federal authorities intend to appeal a federal judge's permanent dismissal of charges against a Utah man accused of masterminding an alleged $100 million Ponzi scheme on the basis that government prosecutors failed to timely pursue the case.  Rick Koerber, a former real estate businessman who was indicted in 2009 on charges that he operated a massive Ponzi scheme, successfully argued to a California federal court earlier this year that government prosecutors failed to abide by the Speedy Trial Act in prosecuting him.  While the government conceded it may have technically violated the Speedy Trial Act, it has maintained that a dismissal with prejudice, which permanently foreclosed the re-filing of charges against Koerber, was improper.  Government prosecutors indicated that they intend to file their opening brief on or before December 5th.

Background

Koerber, who called himself a "Latter day capitalist," garnered a growing following for his purported real estate investing prowess and was well known in the community not only for his membership in the Latter Day Saints Church but also his hosting of a radio show and frequent real estate seminars.  Through his companies, Founders Capital and Franklin Squires, Koerber touted his "equity milling" program that promised lucrative returns through buying and selling residential real estate.  Investors came in droves, entrusting tens of millions to Koerber's operations.  Even Koerber's radio show changed its opening theme song to, "Money, Money, Money" by Abba.  Koerber also appealed to listeners' religious beliefs, even remarking to one listener who questioned his motives that "God is a capitalist."  In total, Koerber raised approximately $100 million from investors.  

However, the collapse of the real estate bubble in 2007 was catastrophic to Koerber's operations, as the majority of Franklin Squires's assets were in the form of real estate that quickly erased any equity as housing prices declined.  He was indicted in May 2009, and a superseding indictment handed down six months later included twenty-two charges including wire fraud, money laundering, and tax fraud.  

Koerber Obtains Dismissal With Prejudice

In April 2014, nearly five years after the first indictment was handed down, Koerber filed a Motion to Dismiss for Impermissible Delay citing multiple grounds, including the violation of Koerber's right to a speedy trial.  The Speedy Trial Act (the "Act"), codified at 18 U.S.C. § 3161, requires that the trial of a defendant entering a plea of not guilty was to start within 70 days of the later of the filing of the indictment or appearance by the defendant in front of a judicial officer.  While the Act also allows for certain exemptions, Koerber's motion argued that at least 125 non-exempt days had passed without a trial or other resolution.  

At a hearing, the Government conceded that while a "technical" violation of the Act had occurred, the Court should "cure" the violation by entering an Order pursuant to the Act essentially making a finding that the "ends of justice" warranted a retroactive continuance and outweighed the best interests of the public and Koerber.  However, the Court cited precedent standing for the proposition that such a retroactive mechanism was prohibited and that a violation of the Act would have occurred even of such actions were taken.  

In deciding whether or not to grant dismissal with prejudice, which would prevent prosecutors from re-filing the charges, the Court referenced the seriousness of the offenses and also the "Government's problematic conduct in prosecuting this case," including a "pattern of neglect," tactical delays, an inappropriate use of attorney-client privileged information, and ex parte interviews with Koerber that violated his due process rights.  Noting that prejudice to Koerber was presumed, the Court opined that re-prosecuting Koerber would be impossible and ordered that the case be dismissed with prejudice.

Koerber's Associates Have Also Managed To Escape Criminal Liability

The government's prosecution of Koerber and his associates has been unsuccessful by all accounts.  Charges against Gabriel Joseph, a former officer of several of Koerber's companies, were recently dismissed on the same violations of the Speedy Trial Act.  However, those charges were dismissed without prejudice, meaning that federal prosecutors have the ability to refile an indictment.  Another Koerber associate, Jason Vaughn, was cleared earlier this year of fraud charges after he took the stand and testified that he had completely relied on Koerber's assurances that the scheme was legitimate.  

In a statement, Koerber's attorney stated:

We welcome the chance to have the 10th Circuit review what Judge Waddoups described as the ‘sordid history’ of the government’s misconduct in this case. Hopefully, this appeal will finally put an end to the government’s overreach in pursuit of an unjust prosecution of Mr. Koerber.

The Order dismissing the charges is below:

Thursday
Nov062014

California Man Pleads Guilty To $110 Million Ponzi Scheme

A California man will plead guilty to mail fraud charges in what prosecutors alleged was a massive $110 million Ponzi scheme that duped unsuspecting investors who thought their funds would be used to flip real estate.  John Packard, 64, pleaded guilty today to a single count of mail fraud before a California federal judge.  Packard faces up to twenty years in federal prison at a May 18, 2015 sentencing, although his ultimate sentence will likely be lower based on federal sentencing guidelines.

Packard and Michael J. Stewart owned and operated Pacific Property Assets ("PPA"), a company they formed in 1999.  The two used PPA to purchase, refurbish, and eventually resell apartment complexes in Southern California and Arizona, financing the acquisitions through mortgages and raising money from potential investors to fund property renovations.  While the operation generally was not profitable, PPA was able to benefit from a booming real estate market and skyrocketing property values to raise cash by constantly refinancing the properties.  From 1999 to 2009, PPA acquired more than 100 properties and raised tens of millions of dollars from investors. 

However, as property values began to stagnate in 2007 in what would eventually lead to the economic meltdown, PPA was facing large debt payments to its mortgage lenders and private investors.  The men allegedly misrepresented PPA's financial condition, and continued to raise tens of millions of dollars from investors that were used to make payments to lenders and investors, and even Steward and Packard themselves.  Eventually, PPA and several other related companies filed bankruptcy in June 2009, with court records showing that the companies owed approximately $90 million to hundreds of investors and approximately $100 million to various banks.  After going through the bankruptcy process, private investors received nothing, while banks lost at least $24 million.  

The men were arrested earlier this year after a grand jury indicted them on 11 counts of mail fraud, three counts of bank fraud, and two counts of bankruptcy fraud.  The bankruptcy charges stemmed from the pair's alleged transfer of hundreds of thousands of dollars in PPA funds to personal bank accounts for their use and to pay their personal attorneys, and thus out of the reach of their creditors.

While Packard has pleaded guilty, Stewart has pleaded not guilty and remains on schedule for an April 2015 trial date.

The indictment is below (h/t to Compliancebuilding.com)

Indictment of Stewart and Packard

Thursday
Nov062014

Texas Man Arrested For $4.5 Million Bitcoin Ponzi Scheme

A Texas man has been arrested on wire fraud and securities fraud charges for his operation of what authorities allege was a Bitcoin-related Ponzi scheme that raised millions of dollars through a purported online digital hedge fund.  Trendon Shavers, known in Bitcoin forums as "Pirateat40," was arrested this morning on one count of securities fraud and one count of wire fraud.  Each charge carries a maximum sentence of 20 years in prison, as well as criminal fines.  The Securities and Exchange Commission filed civil fraud charges against Shavers in July 2013, which recently culminated in a federal judge ordering Shavers to pay $40 million in fines.

Bitcoin is a peer-to-peer payment system created in 2009 that is popular among certain groups due to its promises of security and anonymity. Shavers, known as Pirateat40 on popular Bitcoin Forum Bitcointalk.org, began soliciting investors to park their Bitcoins ("BTC") in Bitcoin Savings and Trust ("BST"), a digital hedge fund that promised weekly returns of up to 7%.  When asked how he was able to achieve such lucrative returns, Shavers told investors that he was involved in bitcoin arbitrage activity that included acting as a middleman for individuals who wished to purchase large quantities of BTC "off the radar."  Shavers later expanded on this explanation, saying

“If my business is illegal then anyone trading coins for cash and back to coins is doing something illegal. :)”  

When further asked about his profit margins, Shavers indicated that he achieved gross returns of nearly 11% per week.  As the operation progressed, the minimum investment amount was raised to 100 BTC, and investors were permitted to re-invest their profits.  

The scheme began to crumble when Shavers announced that the weekly interest rate would decrease to 3.9% beginning August 1, 2012, and he allegedly began making preferential payouts to friends and longtime investors with his remaining funds.  Later that month, Shavers declared default:

As much as I've tried to meet the deadlines within the community, there're conditions beyond my control which have escalated the process to the point it is today.  Bitcoin Savings & Trust has hereby given notice of default to its account holders.

The decision was based on the general size and overall time required to manage the transactions. As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system. On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits. In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.

However, according to authorities, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  In total, Shavers took in more than 700,000 BTC - which at one point constituted approximately seven percent of all Bitcoin then in public circulation.  Through payments of purported interest, Shavers returned approximately 500,000 BTC to investors, and transferred the remainder - approximately 150,000 BTC then worth $1 million - to his personal account, which he used for a variety of unauthorized personal expenses, including rent and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

According to authorities, at least 48 of approximately 100 investors lost part or all of their investment with Shavers.  

Shavers unsuccessfully contested the SEC's charges against him, arguing that he was not subject to the federal securities laws because Bitcoin could not be classified as a "security."  That argument was rejected and later affirmed by the District Court, which both found that Bitcoin investments satisfied the test espoused by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293 (1946).

Notably, the charges represent the first federal criminal securities fraud charges involving a Bitcoin-related scheme. 

The criminal complaint is below:

 

Shavers

 

Monday
Nov032014

FBI Investigating $50 Million Ohio Ponzi Scheme

Several Ohio citizens are reportedly under investigation by the Federal Bureau of Investigation for operating a massive Ponzi and pyramid scheme that is believed to have duped at least 213 victims out of tens of millions of dollars.  According to an affidavit submitted by an FBI agent in a federal forfeiture proceeding, authorities believe probably cause exists to suspect that William M. Apostelos, his wife Connie M. Apostelos a/k/a Connie Coleman, Scott Doak, and Rebekah Fairchild were "involved in a scheme to defraud investors and have committed wire fraud and/or money laundering."  One Ohio newspaper has since pegged potential losses at north of $50 million.

Allegations Surface In Involuntary Bankruptcy Filed By Spurned Investors

The allegations first surfaced after several doctors submitted an involuntary bankruptcy petition against William Apostelos.  According to declarations submitted by the doctors, each was solicited to invest with Apostelos as far back as 2011 with the promise of high returns in a short period of time.  While one investor was told that Apostelos could offer such lucrative rates of return through short-term loans and success in daytrading stocks, Apostelos also held himself out as a successful real estate investor and securities investor.  Investors were solicited through several companies operated by Apostelos, including:

  • Apostelos Enterprises, Inc.;
  • Coleman Capital, Inc.;
  • Midwest Green Resources, LLC;
  • WMA Enterprises, LLC;
  • Silver Bridle Racing, LLC; and 
  • OVO Wealth Management, LLC. 

According to the doctors that filed the involuntary bankruptcy petition, Apostelos would execute a promissory note in their favor that memorialized their investment.  These promissory notes carried varying rates of return, with one doctor submitting a declaration indicating that they held five promissory notes totaling nearly $1.5 million with annual rates of return ranging from 7% to 50%.  In total, the three doctors alone stated that they had invested more than $5 million with Apostelos.

Federal Forfeiture Action and FBI Allegation Make Similar Allegations

Several weeks after the involuntary bankruptcy was filed against William Apostelos, the United States filed an action seeking civil forfeiture of two Ohio properties on the basis that they are traceable to money laundering and wire fraud offenses.  One of the properties is owned by Coleman Capital, while the other is titled in the name of Steven C. Scudder, Trustee of the WMA Trust - a trust believed to be owned by William Apostelos.  

In support of the United States's forfeiture allegations, the affidavit of FBI Special Agent Michael Bush (the "Bush Affidavit") was submitted.  Concluding that the accused individuals and their business operations have been involved in operating a pyramid scheme over the past few years, the Bush Affidavit makes a detailed set of findings.

The Bush Affidavit states that Apostelos's entities have "reported very little income and more often significant losses" since 2010, and also that Apostelos and his wife have "had no legitimate source of income since 2010." Rather, the "sole source of income has been stolen from the funds investor unknowingly placed into the pyramid scheme."  Apostelos and his wife allegedly diverted investor funds to support a lavish lifestyle that included the purchase of luxury automobiles and spending of as much as $35,000 per month towards a horse racing hobby.  According to Bush's forensic analysis, more than $32 million was deposited into accounts controlled by Apostelos from November 2012 to May 2014, while an estimated $28 million was paid as returns to earlier investors.

The Bush Affidavit also detailed the pitches that were made to various investors.  For example, one investor was told that his $395,000 investment would be used to purchase an Ohio farm that would be quickly resold at a tidy profit.  While the investment came due in late 2013, the victim did not receive his investment back and instead received various excuses including that the bank made errors negotiating the funds.  In another example, a victim was told that his $100,000 investment would be used to invest in stocks through a TD Ameritrade account.  The victim was told that his account had incurred more than $150,000 in gains through timely investments in several stocks, and was provided a TD Ameritrade website where he could track his investment under the name "Mountaineer."  However, the Bush Affidavit indicated that the TD Ameritrade website provided to the victim was not a real trading account, but instead a training account program that did not trade real money.

Scheme Was On Verge Of Collapse

Both the bankruptcy and the Bush Affidavit reference multiple legal judgments that had been recently obtained against Apostelos and his entities for default on millions of dollars in various promissory notes.  Additionally, despite the filing of the involuntary bankruptcy in mid-October, the Bush Affidavit also details that Apostelos may have been continuing to solicit new investors.  For example, a majority of approximately $2.1 million in funds transferred into a Key Bank account in the past month "appears to be from investors."  An additional large wire transfer of nearly $900,000 was received in that account on October 23, 2014; its origin is unknown.

On October 29, 2014, agents from multiple federal and state agencies executed federal search warrants at multiple locations tied to Apostelos and his entities.  Authorities seized a number of bank accounts, cash, jewelry, and vehicles that included a 2008 BMW M3 Convertible, a 2012 Lincoln Navigator, a 2012 Ford F350 Pickup, and a 2012 Lexus LS 460.  Additionally, officers seized a six foot race horse named Baryshnikov owned by William and Connie Apostelos.  

The Bush Affidavit included this observation as well:

During the search, officers located many promissory notes executed between victims and APOSTELOS and/or the companies he controls. It appears that APOSTELOS would get money from victims, often out of their retirement account, and quickly after investing that money, or sometimes failing to invest that money, APOSTELOS would transfer the money to earlier investors as a return on their investments. During the investigation and search, it appears that APOSTELOS used most of the investors’ money to pay off earlier investments, or to fund his glamourous [sic] lifestyle.

Any victims are urged to contact the Ohio Department of Commerce Division of Securities at (800) 788-1194 or online at www.com.ohio.gov/secu

The Bush Affidavit is below:

 

Bush Affidavit