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Recent SEC Releases

Judge Fines Texas Man $40 Million For Bitcoin Ponzi Scheme 

A federal judge has ordered a Texas man and his company to pay more than $40 million in disgorgement and civil penalties for operating a Ponzi scheme using the virtual currency Bitcoin.  U.S. Magistrate Judge Amos L. Mazzant handed down the order against Trendon T. Shavers and his company, Bitcoin Savings & Trust ("BST"), stemming from an unopposed motion for summary judgment filed earlier this year by the Securities and Exchange Commission, which brought the original charges against Shavers and BST back in July 2013.  

According to the Commission, Shavers, known as Pirateat40 on popular Bitcoin Forum, began soliciting investors to park their Bitcoins ("BTC") in 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.  

In July 2012, the scheme was estimated to have raised hundreds of thousands of BTC, which then had an average price of approximately $7 per BTC.  However, Shavers announced in a post that the interest rate would decrease to 3.9% weekly beginning August 1, 2012, and began making preferential payouts to friends and longtime investors.  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 the Commission, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  Shavers took in more than 700,000 BTC, returning approximately 500,000 BTC to investors through purported returns of interest or principal.  Of the remainder, Shavers transferred approximately 150,000 BTC - approximately $1 million based on the average price during that time period - to his personal account, which he used for a variety of unauthorized personal expenses including rent, car-related purchases, and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

Shavers contested the SEC's charges against him, and argued that he was not subject to the federal securities laws because bitcoin could not be classified as a "security."  That argument was rejected by Judge Mazzant 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).

The Commission's Motion for Summary Judgment sought to impose penalties and disgorgement of approximately $40 million based on the average price of Bitcoin from the scheme's collapse to the present. Judge Mazzant adopted this methodology, and ordered that BST and Shavers must disgorge $38.6 million in ill-gotten gains, as well as approximately $1.8 million in prejudgment interest.  In addition, both BST and Shavers were ordered to pay a civil monetary penalty of $150,000 each for their "egregious" conduct.  


Feds: Deceased Former AARP President Ran $4.6 Million Ponzi Scheme

The Securities and Exchange Commission filed an emergency action charging that a deceased Florida man who once served as President of the South Florida AARP had been running an offshore Ponzi scheme that took in at least $4.6 million from dozens of investors.  In a complaint filed last week, the Commission alleged that Joseph Laurer, a/k/a Dr. Josef V. Laurer, ran the scheme through a company he controlled in the Turks and Caicos until his death on May 15, 2014.  The Commission is seeking declaratory relief, disgorgement of ill-gotten gains, and the repatriation of assets currently being held outside the United States.

Laurer was a resident of Homestead, Florida, where he was a member of the City of Homestead's General Employee Pension Board and later served as President of the Dade County chapter of the AARP.  According to the Commission, Laurer founded Abatement Corp. Holding Company Limited ("Abatement Corp.") in 1994 in the Turks and Caicos Islands, a series of tropical islands in the southeast Bahamas island chain.  Beginning in 2004, Laurer is accused of soliciting investors, many of whom were family and friends, to invest in various entities and funds with names similar to Abatement Corp., including the International Balanced Bond Fund ("IBBF").  Through a website he established as well as documents provided to prospective investors, Laurer touted risk-free and tax-free investments in corporate and government bonds that promised annual returns ranging from 4% to 6%.  Investors were also told that the investments were guaranteed through the "F.D.I.C. or the S.I.P.C."  During the ten-year period from 2004 until Laurer's death in May 2014, approximately 50 people invested at least $4.6 million with Laurer and Abatement Corp.

However, the Commission alleged that Laurer's promises and representations relating to Abatement Corp. and the purported investments were false.  This included that neither the FDIC nor SIPC guaranteed the investments, that Abatement Corp. was not investing in bonds, and that by July 2007 Abatement had ceased purchasing new investments and relied entirely on investor funds to pay "returns" to existing investors.  Investor funds were also diverted to Laurer's wife, Brenda M. Davis, for her living expenses and the purchase of at least two homes.  Additionally, Laurer is accused of using investor funds to sustain his lavish lifestyle as well as for payment of premiums on a $500,000 life insurance policy.  After Laurer's death in May 2014, Davis received approximately $510,000 in life insurance proceeds.  

At the time of Laurer's death, approximately $900,000 remained in various Turks and Caicos bank accounts held in the name of or for the benefit of Abatement Corp.  

The Commission's Complaint is below:





Authorities Charge Cay Clubs Principals With Fraud In Alleged $300 Million Ponzi Scheme

The principals of the now-defunct Cay Clubs Resorts and Marinas ("Cay Clubs") were indicted on multiple bank fraud and conspiracy counts in what authorities alleged was a massive $300 million Ponzi scheme.  Fred Davis Clark, Jr., a/k/a Dave Clark, 56, and Cristal R. Clark, a/k/a Cristal R. Coleman, face the charges after originally being arrested and charged earlier this summer with obstruction and fraud charges in connection with their operation of other businesses not directly related to Cay Clubs.  The new charges stem from their operation of Cay Clubs, which bilked investors out of hundreds of millions of dollars over the purported refurbishing of luxury condos.  The Clarks face charges of bank fraud and conspiracy to commit bank fraud, with the bank fraud charges carrying a maximum 30-year prison sentence.  


Cay Clubs raised more than $300 million from over 1,000 investors through the sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% TO 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay leaseback" payments to existing investors in what authorities alleged was a classic example of an ongoing Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Criminal Investigation Continued

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and expulsion from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  The pair are currently being held without bond.

Even while the Commission's case foundered, it was apparent that criminal authorities continued to move forward with their investigation.  In April 2014, it was reported that immunity had been granted to two Florida attorneys who were previously involved in day-to-day Cay Clubs operations, including the concealment of the true nature of the company's operations from its lenders.  Attorneys Scott Callahan and Charles Phoenix reportedly testified that they helped conceal the existence of the "leaseback" payments from lenders to give the appearance that the sales to investors were that of real estate - and not securities. Indeed, Phoenix's immunity statement read, in part, that

"In Phoenix's view, there came a time during the course of the operation of Cay Clubs where it could fairly be described as a 'Ponzi scheme' due to its inability to pay existing leaseback obligations without new investor money..."

In a motion filed by one of Clark's attorneys in the Commission's case, it was alleged that Phoenix and Callahan gave the statements under the threat of criminal prosecution. 

Getting Around The Five-Year Statute of Limitations

While the Clarks were able to evade civil prosecution by the Commission by successfully contesting the Commission's adherence to the applicable statute of limitations, it appears that the government will not have the same problem in proceeding with the criminal charges.  Of note, the criminal charges emanate from the Clarks' interactions with their lenders, rather than investors.  The significance of this becomes apparent when reviewing the applicable criminal statutes and recent legislation.  For example, the criminal statute governing statutes of limitation provides:

Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.

18 U.S.C. 3282 (emphasis added).  Further, as part of the Fraud Enforcement and Recovery Act of 2009, Congress authorized the the government to prosecute cases against financial institutions, including mortgage lending businesses, using bank fraud, mail fraud, and wire fraud statutes, and extended the applicable statute of limitations from five years to ten years.  This exact scenario was recently outlined by Preet Bharara, the Assistant U.S. Attorney for the Southern District of New York:

“A lot of people thought the statute of limitations is five years in particular cases, but a bank fraud statute has a statute of limitations of 10 years.  If you’re talking about wire fraud and mail fraud, which is specifically five years, but if it affects a financial institution, it’s 10 years.”

By focusing on the Clarks' interactions with lenders, including their omission of certain information such as the "leaseback" arrangement with investors when obtaining lender financing, the government's plan to utilize the longer statute of limitations becomes very apparent.  However, it would not be surprising to see this position attacked by the Clarks.

Update 9/19: The superseding indictment is below:

Superseding Indictment


Regulator Fines Morgan Stanley For Ignoring $35 Million Ponzi Scheme's "Red Flags" 

A market regulator has fined Morgan Stanley Smith Barney ("MSSB") for ignoring multiple "red flags" involved in a customer's account who ultimately was imprisoned for masterminding a $35 million Ponzi scheme. The Commodity Futures Trading Commission ("CFTC") handed down a $280,000 fine to MSSB over what it classified as improper supervision and records violations tied to accounts opened and ultimately used by Benjamin Wilson to carry on his scheme in the United Kingdom.  Wilson is currently serving a seven-year prison sentence after pleading guilty to criminal charges.  

According to the CFTC, Wilson began opening multiple accounts for his company, SureInvestment, at MSSB in April 2010.  Neither Wilson nor his company had previously been a MSSB customer, and several SureInvestment entities were located in the British Virgin Islands - a country deemed a "high risk jurisdiction" under MSSB compliance procedures.  Based on these facts and Wilson's representation that he planned to initially fund the account with $100 million, MSSB required Wilson to provide several documents that included an audit of a SureInvestment entity located in BVI.  However, that audit contained several "suspicious irregularities," including numerous typos throughout the document.  The CFTC's Order also highlighted the fact that:

A simple internet search would have revealed that neither the Surelnvestment entity that was the subject of the audits nor the purported B.V.I. auditing firm and its principals actually existed. 

SureInvestment's reported trading history was also scrutinized by the CFTC, who noted that the company touted compounded returns of nearly 2,900% from 2003 to 2009, including a string of 45 consecutive profitable months.  

Despite the multiple red flags highlighted by the CFTC, MSSB allowed Wilson to open the requested accounts and ultimately more than $1 million flowed through the accounts.  However, despite the placement of a $250,000 trading limit on the accounts, Wilson and SureInvestment ultimately incurred net trading losses of approximately $600,000 and continued to surpass the trading limit until MSSB ultimately discovered the violation.    

In addition to the red flags and failure to enforce the trading limits on the SureInvestment accounts, the CFTC's Order also faulted MSSB for its level of cooperation in responding to a document request in the course of the investigation.  In September 2011, MSSB received a document request from the CFTC related to the SureInvestment accounts.  In response, a division of MSSB, Morgan Stanley & Co., LLC, provided a response stating that it did not have any responsive documents.  However, after the CFTC subsequently discovered several account numbers for the SureInvestment accounts held at MSSB, account records were produced for the first time.  Those records disclosed that MSSB failed to keep daily records of the trading limit applicable to the SureInvestment accounts.  

While neither admitting nor denying the CFTC's findings, MSSB agreed to resolve the investigation by disgorging the commissions related to the accounts, which amounted to aproximately $16,000, as well as the payment of a $280,000 civil monetary penalty.  MSSB also agreed to abstain from future violations of the relevant portions of the Commodity Exchange Act.  

A copy of the CFTC's Order is below:

Enf Morgan Order 091514


Guilty Plea In $30 Million Landscaping Ponzi Scheme

A New York man will plead guilty to federal charges that he orchestrated a landscaping Ponzi scheme that duped investors out of at least $30 million through promises of annual returns of up to 400%.  Eric Aronson, 46, pleaded guilty to a single count of securities fraud.  While the charges carries a maximum 20-year prison sentence, Aronson's plea agreement with authorities calls for him to serve 121 to 151 months in prison.  

According to authorities, Permapave was a conglomerate of companies controlled by Aronson that, beginning in 2006, solicited investors to fund the importation of PermaPave pavers from Australia for subsequent resale in the United States.  Through unregistered promissory notes and "use of funds" agreements, investors were promised monthly returns ranging from 7.8% to 33.3%, which equated to annual returns of up to 400%. Aronson and the other defendants told potential investors that there existed an enormous backlog of orders for the pavers, and that investors would be repaid out of profits from the guaranteed sales. 

When PermaPave began to fall behind on payments in late 2008, investors were mollified by an agreement to exchange the promissory notes for convertible debentures with a lower interest rate and a deferral of principal due.  In total, at least 140 investors entrusted $16 million with the company.  In 2009, investors were told that the company had been sold and were urged to convert their debentures into equity shares.  In reality, the company had not been sold nor had it ever been profitable.  Rather, the company was a massive Ponzi scheme that operated at substantial losses while using incoming investor funds to pay "returns" to existing investors. Of the tens of millions of dollars raised by PermaPave, Aronson and the defendants were accused of misappropriating millions of dollars for their own personal use.

Aronson's guilty plea is not his first fraud-related brush with the law.  In 2000, Aronson pled guilty to an unrelated offering scam and later served time in federal prison.  Ironically, Aronson was accused of using investor funds from his current scam to pay his court-mandated restitution payments to victims of his previous fraud.  

The plea comes nearly three years after he was first indicted for the Permapave scheme along with executives Vincent Buonauro Jr. and Robert Kondtratick.  The men were also the subject of an enforcement action by the Securities and Exchange Commission, which sought various remedies including disgorgement, civil penalties, and injunctive relief.  At one point, the Commission sought to hold the men in contempt after accusing them of failing to cooperate with discovery by producing duplicate documents and even a DVD containing damaged and corrupted audio files.

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