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Recent SEC Releases
Monday
Apr072014

Charles Ponzi's Former House Is For Sale

For the first time, ever, the public will have a chance to purchase the house that briefly belonged to the man whose last name came to epitomize the devastating financial weapon that has since become a household name.  The Lexington, Massachusetts house that once belonged to Charles Ponzi before his arrest on mail fraud charges is now publicly listed for sale to the public - at a price of $3.3 million.  Ironically, Ponzi's initial purchase of the property was conditioned on the requirement that the seller invest with Ponzi's Securities Exchange Company.  

Originally built in 1913, the House was styled as a colonial revival mansion, featuring 16 rooms, a carriage house, and even a sunlight-illuminated conservatory.  Its first owner, Richard Engstrom, was a prominent industrialist who spent an estimated $50,000 to build the house - an amount equal to nearly $1.2 million today when adjusted for inflation. 

The house soon went on the market, and Ponzi reportedly took a keen interest.  After originally offering $25,000 for the house, Ponzi ultimately agreed to pay $39,000, paying $9,000 in cash and supplying the remainder with a "postal reply coupon" that Ponzi assured the seller would soon be worth $30,000.  Ponzi's Securities Exchange Company had been wildly successful, taking in over $250,000 per day at its peak.

However, Ponzi's purchase of the House came at a time when suspicions were mounting by authorities and journalists.  Increasing skepticism ultimately culminated in a front-page expose by the Boston Post (a newspaper that had previously published a glowing review that prompted a mass of new investors) and Ponzi's surrender the following day to federal authorities on mail fraud charges.  Ultimately, Ponzi's investors lost nearly everything, ultimately recovering less than 30% of total losses, which amounted to $20 million in 1920 ($225 million today).

After Ponzi's company was placed into bankruptcy, the house was eventually sold.  

A photo gallery of the house is featured here.

Sunday
Apr062014

Rothstein Partner Pleads Guilty To Violating Federal Election Laws

The former law partner of convicted Ponzi schemer Scott Rothstein has agreed to plead guilty to charges he violated federal election laws by making hundreds of thousands of dollars in illegal campaign contributions to prominent politicians such as former Florida Governor Charlie Crist and Senator John McCain.  Russell Adler, a former name partner in the now-defunct law firm Rothstein Rosenfeldt Adler, could face up to a five-year prison term after pleading guilty to conspiring to defraud the federal government.  Because the plea agreement calls for cooperation with the government's ongoing investigation, Adler's ultimate sentence will depend on the extent of his cooperation.  

Adler was a prominent trial attorney in Fort Lauderdale, and was a name partner in Rothstein's firm until Rothstein's scheme collapsed in 2009.  According to authorities, Adler assisted Rothstein in making hundreds of thousands of dollars in campaign contributions to John McCain and Charlie Crist in 2009, a tactic used by Rothstein to increase his influence in South Florida politics that later led to his appointment to a prestigious judicial nominating commission.  In an effort to funnel the maximum amount to his selected candidates, Rothstein enlisted various RRA employees, including administrative staff, lawyers, and Adler, to contribute to the McCain and Crist campaigns by promising to provide reimbursement for the contributions.  In total, Rothstein reimbursed Adler nearly $300,000 - including at least $239,000 in contributions to Crist's failed 2010 Senate campaign that placed RRA as the second-largest contributor.  

According to Adler's attorney, Fred Haddad, the recent convictions of former Rothstein lawyers Christina Kitterman and Douglas Bates played a role in the decision to approach the government and negotiate a plea agreement.  Importantly, Haddad expects that the campaign finance conspiracy will resolve all of Adler's potential criminal liability - meaning that no charges are expected for any allegations that Adler knew of or assisted Rothstein's fraud.  While Adler is currently serving a 91-day suspension from practicing law, his subsequent guilty plea to a felony could result in his permanent disbarment.

Adler's agreement to cooperate may indicate that authorities are not through with their criminal investigation of those connected to Rothstein.  This includes other employees and attorneys in Rothstein's office that have not yet been charged, including former name partner Stuart Rosenfeldt.  

Thursday
Apr032014

Refusing Plea Agreement, Seattle Woman Pleads Guilty To All 110 Counts For $126 Million Payday Loan Ponzi Scheme

In a rare turn of events, a Seattle woman decided to accept responsibility for masterminding a $126 million payday loan Ponzi scheme on her own terms by rejecting a plea agreement offered by federal prosecutors and instead pleading guilty to each of the 110 criminal charges - a move that could effectively ensure she spends the rest of her life in prison.  Doris "Dee" Nelson was indicted in late 2011 and charged with 71 counts of wire fraud, 22 counts of mail fraud and 17 counts of international money laundering.  While the rejected plea agreement almost certainly called for Nelson to plead guilty to a significantly smaller number of charges, which would have likely resulted in a prison sentence that would likely allow Nelson to complete in her lifetime, the decision to plead guilty to all 110 counts will likely result in a significantly higher sentence, as well as the possibility Nelson could be deported to Canada.

Nelson was accused of using multiple different business entities to operate a payday/short-term lending business called the Little Loan Shoppe ("LLS").  Authorities alleged that the scheme began in or around May 2000, when Nelson began soliciting investors by promising high yields on investor funds which Nelson claimed would be paid from the profits of the short-term operations of LLS.  These purported returns ranged from forty to sixty percent annually, and were often paid to investors via post-dated interest checks mailed to the investor at the time of their investment.Originally centered in British Colombia, LLS moved its operations to Spokane in or around 2001.  Soon thereafter in 2003, LLS closed all physical operations and and began conducting the business solely over the internet.  When the operation began to encounter financial difficulties in October 2008, investors were offered reduced interest rate payments of ten percent.  However, the financial difficulties continued, and by March 2009, Nelson had ceased making any payments.

While Nelson represented to investors that LLS generated huge profits that were used to pay the exorbitant returns, in reality the entire operation was a massive Ponzi scheme, with nearly all investor funds being used to pay interest to existing investors and to sustain Nelson's lavish lifestyle.   Nelson alone received over $3 million in funds diverted from investor funds, which were used to purchase, among other things, a motor home, a Chevrolet Corvette, and a Mercedes Benz S550.  Additionally, Nelson used investor funds to gamble at Las Vegas casinos, losing nearly $500,000 between 2005 and 2008.  Nelson also paid commissions to several investors in return for directing further investment to Nelson's operation. 

Little Loan Shoppe filed for bankruptcy in 2009, and the trustee appointed to oversee the liquidation process has filed clawback lawsuits against LLS investors who received interest payments in excess of their original investment.  In addition to the criminal charges, Nelson was also charged by the Securities and Exchange Commission, and later faced charges by Canadian securities regulators.

While the decision to plead guilty to all 110 charges will likely result in a significantly higher recommended sentencing range under Federal Sentencing Guidelines, the court is not bound to hand down a sentence within the sentencing range as a result of the Supreme Court's decision in United States v. Booker.  Thus, Nelson's ultimate fate will rest in the hands of the district judge overseeing the case.

Nelson's sentencing is scheduled for July.

A copy of Nelson's indictment is below:

US v. Doris Nelson Indictment

Wednesday
Apr022014

Prominent Law Firm Pays $4.25 Million To Settle Ponzi Claims

A white-shoe law firm ranking second largest in the world by revenue has agreed to pay $4.25 million to settle claims relating to its relationship with a New York investment manager suspected of running a massive Ponzi scheme through his now-defunct hedge fund.  Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), one of the world's most prestigious law firms, entered into the settlement with the bankruptcy trustee for a hedge fund previously operated by Alphonse "Buddy" Fletcher relating to Skadden's previous representation of Fletcher and his funds.  Skadden has denied any liability, and stated that it entered into the settlement to "avoid the expense and uncertainty" of litigation.

After graduating from Harvard University and working for storied Wall Street firms Bear Stearns and Kidder Peabody (the latter who he later sued for racial discrimination), Fletcher formed an investment firm, Fletcher Asset Management.  There, he operated several hedge funds, including 'master' fund Fletcher International Ltd. ("Fletcher International").  Fletcher gained prominence on Wall Street by securing consistent and outsized gains - at one point, one Fletcher fund went 11 years without a losing month.  In offering documents provided to potential investors, Fletcher promised investors that their funds would be used for investments that were "immediately, quantifiably worth more to the buyer than the seller."  In total, hundreds of of millions of dollars were raised from investors.

However, Fletcher's main fund, Fletcher International, later filed for bankruptcy protection in June 2012. A bankruptcy trustee, Richard J. Davis, was appointed and later issued a nearly-300 page report in late 2013 concluding that Fletcher's funds were inflated through "fraud," shared "many of the characteristics of a Ponzi scheme," and had likely been insolvent as far back as December 2008.  In a response to the trustee's report, Fletcher vehemently denied the Ponzi allegations, even submitting an affidavit to the Court in which he stated under oath that "I am not the Black Madoff."

The trustee's investigation also identified third parties against which could potentially face liability for their relationship with Fletcher's funds.  One of these third parties included Skadden, which faced liability "premised on advice Skadden allegedly provided or failed to provide to the funds, and Skadden’s alleged failure to protect adequately the interests of the Funds and their investors.”  According to the trustee, Skadden served as primary counsel to Fletcher and his companies, and was identified as counsel in offering documents distributed to investors.  Additionally, Skadden represented Fletcher and his investment firm in connection with an investigation by the Securities and Exchange Commission - which ultimately resulted in legal bills of over $3 million.  While Skadden had denied that it had any liability for its role in Fletcher's fraud, it indicated that it had entered into the settlement to avoid the cost and uncertainty of litigation.  The settlement remains subject to the approval of the bankruptcy court.

The trustee's report is available here.

Wednesday
Apr022014

Rothstein Ponzi Victims Sue Bank of America For $385 Million, Punitive Damages

Victims of Scott Rothstein's massive $1.2 billion Ponzi scheme have sued banking juggernaut Bank of America (the "Bank"), claiming that, despite knowing of the fraud, the Bank and its executives shepherded investors to Rothstein's scheme with the hopes of landing Rothstein as a banking client.  In two lawsuits filed in Fort Lauderdale state court totaling more than 200 pages (the "Lawsuits"), nearly 100 investors that entrusted nearly $400 million with Rothstein asserted a variety of claims against the Bank and executives Frederick Perry, Mark R. Maller, Brian Mormile, and Douglas DiVirgillio, including aiding and abetting fraud, conspiracy, and violations of Florida's Securities and Investors Protection Act. In addition to seeking compensatory damages in the amount of their investments, the victims are also seeking punitive damages based on their claims that "the Bank....[has] concealed, covered up, and possibly destroyed documents for obvious reasons: to avoid massive liability and a public relations nightmare."

According to the lawsuits, the Bank first became aware of Rothstein's fraudulent investment scheme in 2007, when a client, Frank Preve, sought to have the Bank provide $6.5 million in credit financing collateralized on an Interest in Trust Account ("IOTA") account maintained by Rothstein's law firm that purportedly was used to hold settlements from secret sexual-harassment settlements.  After performing extensive due diligence on the credit request, including an analysis of the legal aspects of Rothstein's purported business and a spreadsheet showing Rothstein's account balances and alleged rates of return, the Bank allegedly concluded that Rothstein's investment scheme was likely fraudulent and certainly illegal.  The complaint contains numerous communications from and between Bank executives, in quotations from a sworn statement provided by a Bank employee, including that:

  • The Rothstein investments "seem too good to be true," Para. 154;
  • The Rothstein investments "couldn't get past the sniff test," Para. 155;
  • "[I]t was never believed to be 'if' but rather 'when' he would be caught doing something illegal," Para. 157;
  • Rothstein was "dirty," a "crook," a "bad guy," and his firm RRA was a "known bad entity," Para. 157; and
  • Rothstein's scheme offered returns that "were too good to be true," and colleagues were warned to "[s]tay away from these guys."

Following the denial of the credit request in 2007, the complaints allege that this information was logged in the Bank's internal "pipeline report" - thus becoming available to all relevant bank employees.  

The Bank again was faced with conducting due diligence on Rothstein's scheme in December 2008, when it was approached by another client for a personal loan to purchase a Gulfstream G550 jet.  The client proposed using as collateral his Banyon Fund investments, which were fully invested with Rothstein.  The Bank again conducted an exhaustive due diligence review, which included an email sent from a Bank Senior Vice President to a number of Bank executives, including Perry and Maller, asking if anyone was familiar with Rothstein's law firm.  In a reply that day, Frederick Perry responded to all executives with a one sentence reply: "Stay away from these guys".  Another executive, Maller, emailed Perry and another employee included on the email chain, asking them to "discuss face to face rather than via email on this," presumably to avoid creation of an email chain.  As a result of these conversations and the Bank's due diligence review, the request for the personal loan was ultimately denied.  

The Complaints allege that the Bank and its executives failed to ever voice their opinions concerning their suspicions of Rothstein to the Plaintiffs.  Indeed, instead of warning the Plaintiffs, the Bank and its executives are accused of leveraging their ability to induce the Plaintiffs to invest in Rothstein's scheme to convince Rothstein to keep some of his funds on deposit with the Bank.  When a large client sought to invest nearly $86 million with Rothstein, several Bank executives are accused of "going along" with the investment decision, despite their previous concerns about Rothstein's scheme.  Indeed, another employee later provided a sworn statement that he reminded one of the Defendants, Perry, about his fiduciary duty to apprise the client of the previous decision to decline a loan based on suspicions about Rothstein, and that that statement was "shrugged off."  Perry then stated that "We've [Perry and the Bank] done a full background on Scott and he's super clean, squeaky clean."  The employee was later pressured to quit in July 2009, while Perry is alleged to have later enlisted the investor that made the $86 million investment to inquire about "the potential for there being some business Scott & I could do together."  Rothstein later testified at his deposition that Perry's pursuit of his business was persistent, and that Perry "tried to shake me down right to the end."  Ultimately, Rothstein ended up opening depository accounts in late 2009 - days before the scheme collapsed.

According to the lawsuits, the Bank's failure to adequately warn clients resulted in an additional $565 million being invested with Rothstein between May 2009 and October 2009 - a significant portion of which was comprised of investments by the Plaintiffs.  

The Lawsuits are brought by William Scherer, a prominent South Florida lawyer who previously successfully represented a group of investors in obtaining significant settlements against two other banks that called Rothstein a client.  This included a $170 million settlement with TD Bank Group and a $10 million settlement against Gibraltar Private Bank & Trust 

A copy of each lawsuit is below:

Beverly Complaint - Bank of America

 

 

 

Von Allmen Complaint - Bank of America

 

 

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