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Recent SEC Releases
Wednesday
Jan062016

PwC Pays $55 Million To Settle Madoff Lawsuit Over Auditing Failures

Accounting behemoth PricewaterhouseCoopers ("PwC") has agreed to pay $55 million to settle a lawsuit that accused it of failing to properly audit a "feeder fund" that invested with convicted Ponzi schemer Bernard Madoff.  In a filing in a Manhattan federal court, PwC agreed to an all-cash settlement of $55 million to settle a lawsuit brought by investors in Fairfield Greenwich Group ("Fairfield"), which was the largest of the numerous "feeder funds" that funneled billions of dollars into Madoff's massive fraud.  PwC did not admit wrongdoing in agreeing to the settlement, which still must be approved by the presiding federal judge.  The settlement comes nearly two months after a Washington state jury tagged another well-known accounting firm, Ernst & Young, for at least $10 million over similar alleged auditing failures at a Madoff feeder fund.

Less than one month after Bernard Madoff was arrested on suspicion of operating the largest Ponzi scheme in history, a lawsuit was filed on behalf of Fairfield investors against various Fairfield funds, Fairfield principals, fund administrator Citco Group, and the Canadian and Dutch offices of PwC.  Fairfield, which was a "fund of funds" hedge fund that purported to pool investor funds and invest those funds with various hand-picked hedge funds, had in reality entrusted a significant amount of investor funds with a single fund - Bernard L. Madoff Investment Securities LLC.  The lawsuit has been both complex and drawn out, including years of disputes over the issue of class certification, which saw a federal appellate court reverse a district court class certification only to have the district court re-certify the class in 2015. 

According to a 202-page complaint filed in September 2009, PwC's Canadian and Dutch subsidiaries audited various Fairfield funds during the period from 2002 to 2007.  The complaint alleged that, while PwC claimed that it would conduct tests of physical ownership of selected assets, tests of selected recorded transactions, and directly confirm with selected third parties (i.e. banks and customers) of amounts due to them, PwC misrepresented that the tests had actually taken place when they did not.  The complaint also referenced internal PwC documents memorializing conversations with Madoff that PwC alleged "blindly accepted" without any attempts to confirm their veracity.  For example, while Madoff claimed that 99% of his trades were electronic and that records were updated daily, Fairfield received delayed paper - not electronic -  confirmations.

The PwC settlement is the last of a series of high-dollar settlements in this class action that brings the total recovery to over $270 million.  Fairfield agreed to pay $80.25 million in November 2012, while GlobeOp Financial Services agreed to pay $10 million in February 2013.  After the New York federal court re-certified the class action, Citco agreed to pay $125 million in March 2015 - leaving only the PwC defendants remaining.  While the instant settlement will mark the end of the litigation, the next steps will include a claims process for class members to share in the PwC settlement.  Of the $55 million, counsel for the class action members has indicated it intends to seek approximately $19 million in legal fees and expenses.  

Tuesday
Dec222015

'God's Sports Company' Accused Of $3 Million Ponzi Scheme

A California couple has been arrested and charged with operating a $3 million Ponzi scheme through their company, God's Sports Company ("GSC"), which offered a prototype baseball bat that offered "leading performance and durability."  Steven McKinlay, 58, and his wife, Kristi McKinlay, 56, were charged by California authorities with twelve felonies, including ten counts of using untrue statements in the purchase or sale of a security, one count of grand theft, and one count for the use of a device in a scheme to defraud.  If convicted, the couple faces up to nearly 24 years in prison.  Each is currently being held on $3 million bail.

According to authorities, GSC solicited investors for a prototype baseball bat it described as a "one piece [composite] bat that offers leading performance and durability."  The company's (now unavailable) website, which included a tagline of "made with integrity for players with integrity," touted Steve McKinlay's "consistent power hitting" and his reputation in the "competitive softball world" and also referenced Kristi McKinlay's financial background.  Authorities allege that the couple ultimately raised more than $3 million from investors which included a former Major League Baseball player and a cancer patient.

However, authorities allege that potential investors were not advised of Steve McKinlay's prior bankruptcy filings nor that their funds would be used to make Ponzi-like payments to existing investors.  Additionally, the pair is accused of misappropriating investor funds to donate at least $50,000 to their church as well as support a lavish lifestyle that included monthly $10,000 rental payments, payment of their daughter's wedding expenses, and even a luxury suite at the Los Angeles Angels stadium.  

Saturday
Dec192015

Feds: Company Touting 5% Weekly Returns Was Multi-Million Dollar Ponzi Scheme

A convicted forger was hit with civil fraud charges by the Securities and Exchange Commission on allegations that his multi-level marketing program and commodities trading outfit was nothing more than a $3 million Ponzi scheme.  Vu H. Lee and his company, TeamVinh.com, were accused of violating federal securities laws by soliciting nearly 6,000 investors with the promise of guaranteed 5% weekly returns.  The Commission is seeking disgorgement of ill-gotten gains, prejudgment interest, injunctive relief, and imposition of civil monetary penalties. 

According to the complaint, Le formed TeamVinh.com LLC in 2009.  Le appealed to the multi-level marketing community in claiming to have devised a solution to facilitate the creation of a "downline" for individuals through the creation of a "matrix" composed of other individuals signed up for TeamVinh.com.  Participants were also offered the chance to invest in TeamVinh through either a membership or equity investment, with returns based on TeamVinh's profits.  Le also later solicited investors for a "hidden" platform used by large companies to effectuate commodities transactions.  In total, Le raised more than $3 million from at least 5,600 investors.

Many investors were solicited through various publicly available websites maintained by Vinh, including TeamVinh.com which is still operational as of the date of this article.  The website contained various promises, including that:

My experience as a Business Advisor shows that the greatest opportunities emerge when economic times are at its worst.

TeamVinh has a light at the end of the tunnel. We can provide you with a powerful business solution to help you and your family be much more secured for the future.

Your Dreams will be supported by a Fortune 500-Caliber-Company and Civic Concept.

Earn Money. Earn a lot of Money. And then give a lot of it away.

Ironically, it was the final sentence of this last promise that authorities allege Le actually did keep, albeit likely not the way most investors would have expected.  The Commission alleges that Le used very little of the $3 million raised from investors on MLM-related activities.  Instead, Le is alleged to have gambled away more than $2 million of investor funds at a single Las Vegas casino.  In classic Ponzi scheme fashion, Le is also accused of using investor funds to make Ponzi-style payments to existing investors. 

Le is also accused of failing to disclose to potential investors that he had been previously convicted on charges of forgery and passing bad checks by the state of Wisconsin in 1995 and later served a two-year prison sentence.  Additionally, the states of Wisconsin and Minnesota barred Le from offering or selling securities in 2007 stemming from Le's apparent involvement in an unrelated real estate fraud. 

A copy of the Commission's complaint is below:

Comp 23432

Saturday
Dec192015

Former Lawmaker's Son-in-Law Gets Two Years For $6 Million Ponzi Scheme

The son-in-law of former New York politician Sheldon Silver will serve two years in federal prison for orchestrating a Ponzi scheme that duped several investors out of $6 million.  Marcello Trebitsch, 37, received the sentence after he pled guilty earlier this year to a single count of securities fraud.  In handing down the sentence, U.S. District Judge Vernon S. Broderick indicated that he departed from his original intent to sentence Trebitsch to a four-year term based on letters from friends and relatives extolling his contributions to society.  Trebitsch's sentence comes nearly one month after his father-in-law was convicted on federal corruption charges.

According to authorities, Trebitsch began soliciting investors in or around 2009 for Allese Capital, LLC ("Allese"), which Trebitsch touted as a successful investment fund that he operated with his wife.  Trebitsch, whose wife Michelle is a certified public accountant and is the daughter of Sheldon Silver, told potential investors that Allese employed a successful trading strategy through the day-trading of large cap stocks that resulted in annual returns ranging from 14% to 16%.  Trebitsch assured investors that little to none of their funds would remain invested in the market overnight, and also claimed that he cleared his trades through a major Wall Street investment bank that also had agreed to invest $50 million in Allese.  In total, Trebitsch raised at least $7 million - a majority of which was raised from a single victim.

After Trebitsch's largest investor requested a partial redemption of his investment in June 2014, Trebitsch ultimately disclosed through his attorney that he had experienced significant trading losses and that, after accounting for Trebitsch's $400,000 "fee," no money remained.  

The Complaint alleged that a forensic review of Trebitsch's bank accounts demonstrated that only a small portion of investor funds were used to engage in trading, and that Trebitsch suffered net trading losses.  A subsequent search warrant executed at Trebitsch's house apparently turned up a handwritten note that appeared to be authored by Trebitsch and stating that he "reckognize [sic] the tremendous pain along with financial," followed by the crossed-out word, "pain." 

Saturday
Dec192015

Former Bank VP Gets 2.5 Years For Role In Rothstein Ponzi Scheme

A former TD Bank vice president was sentenced to serve thirty months in federal prison for his role in Scott Rothstein's $1.2 billion Ponzi scheme.  Frank Spinosa, 54, faced up to five years after previously pleading guilty to a single count of wire fraud conspiracy.  While prosecutors sought a 37-month sentence, U.S. District Judge Beth Bloom cited Spinosa's rough upbringing and the death of his first child as factors warranting a slight downward departure from that recommendation.  With the sentence, Spinosa becomes the 29th person sent to prison for their role in Rothstein's massive fraud.  Rothstein is currently serving a 50-year sentence at an undisclosed location due to his inclusion in the witness protection program.

Spinosa became involved with Rothstein when the former attorney opened over 20 attorney trust accounts and law firm operating accounts in late 2007 at TD Bank and another bank TD Bank later acquired.  Spinosa was Rothstein's point of contact beginning in 2008, and communicated often with Rothstein regarding the accounts and various documents that were provided to investors.  As Spinosa's compensation was tied to the size and volume of accounts he managed, the fact that Rothstein's accounts were among TD Bank's largest accounts in South Florida meant increased compensation and bonuses for Spinosa.  

Spinosa was implicated in the massive scheme by Rothstein himself, who claimed during a 2011 deposition that he had recruited Spinosa to assist in the preparation of false "lock letters" used to show investors that their investments were safe and that Rothstein could not remove funds from the account holdings the funds. According to the Securities and Exchange Commission, which filed civil fraud charges against Spinosa last year, Spinosa also made oral assurances to at least two investors that certain trust accounts at TD Bank holding investor funds contained hundreds of millions of dollars when in reality the "locked" accounts typically held less than $100.  In one instance during August 2009, months before the scheme eventually collapsed, Spinosa participated in a conference call with Rothstein and an investor in which he told the investor that an account had a balance of $22 million when, in reality, the account had a balance of less than $100.  The investor subsequently made four more investments with Rothstein in the ensuing months.

Spinosa was ordered to report to federal prison no later than February 18, 2016.   

Other Ponzitracker coverage of the Rothstein scandal is here.