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Recent SEC Releases
Friday
Sep262014

SEC Alleges California Marketing Company, eAdGear, Is $129 Million Ponzi And Pyramid Scheme

The Securities and Exchange Commission has filed an emergency action accusing a California marketing company of operating a massive Ponzi and Pyramid scheme that took in at least $129 million from investors.  eAdGear, Inc., along with principals Charles S. Wang and Qian Cathy Zhang, of Warren, New Jersey, and Francis Y. Yuen, of Dublin, California, were charged with multiple violations of federal securities laws in a complaint filed in San Francisco federal court.  The Court granted the Commission's request for an emergency asset freeze and temporary injunctive relief, and the Commission is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil monetary penalties

According to the Commission's complaint, eAdGear was formed in December 2011 with Wang and Yuen serving as the company's sole officers and owners.  The company claimed to use search engine optimization to help paying "clients" increase their the page rankings of their website on various popular search engines, and claimed to share 70% of the daily revenue generated with investors.  Investors would pay between $300 and $6,000 to purchase a "business package" from eAdGear, and many investors purchased multiple membership accounts to increase their returns.  Investors were also incentivized to recruit new investors through the payment of commissions valued at approximately 5% - 15% of the new investor's membership package.  The original investor could also receive commissions based on the new investor's recruitment of investors.

To convince investors of the scheme's legitimacy, eAdGear also distributed marketing materials purportedly showing members that had generated astronomical returns; for example, an investor named "Cathy" was depicted as turning a $6,000 investment into a regular $180,000 per month return that translated into an annual return of $3.6 million.  Based on these representations, eAdGear and the defendants raised more than $129 million from tens of thousands of investors.  A 2012 PowerPoint Presentation distributed to potential investors demonstates some of these claims as well as the company's business model:

However, through December 31, 2013, eAdGear had generated approximately $212,000 in sales to non-investors - a figure the Commission also characterizes as false given that the primary "customer" believed that the recorded purchase was actually an investment.  Nor was eAdGear's product or service designed to increase an advertiser's page rankings; rather, eAdGear is accused of being in the primary business of raising money from investors.  The Commission also accuses the defendants of misappropriating investor funds for their personal use, including the diversion of millions of dollars for real estate purchases and loans.  Investor funds were also used to make Ponzi-like payments to existing investors.  According to the Commission's complaint, eAdGear was notified via multiple third parties that their business model was not legal, including notification that PayPal was suspending eAdGear's account in 2011 as well as legal advice from an unnamed multi-level marketing attorney who advised that the company's business model was not legal in the United States.

A copy of the Complaint is below:

 

Ead Gear

 

Tuesday
Sep232014

Cincinnati Money Manager Pleads Guilty To $8.7 Million Forex Ponzi Scheme

A Cincinnati man has pleaded guilty to charges that he masterminded a forex-based Ponzi scheme that raised at least $8.7 million from friends, acquaintances, and even members of a church group.  John R. Bullar, 52, pleaded guilty today in an Ohio federal court to one count of wire fraud and one count of money laundering.  Each of tne charges carries a maximum 20-year prison term as well as criminal monetary penalties.  In a parallel action filed by the U.S. Commodity Futures Trading Commission, Bullar and his company were also charged with violations of federal commodities laws.

Bullar owned and operated Executive Management Advisors ("EMA"), which he represented to potential investors as a successful commodities-trading firm.  Bullar told investors that their funds would be used to trade commodity futures and commodities options, touting himself as an experienced futures trader with significant experience with trading floors at the Chicago Board of Trade and the Chicago Mercantile Exchange.  Investors received regular account statements showing purported profits that they understood were derived from trading profits.  In total, nearly $9 million was raised from investors that included Bullar's friends and members of a church group.

However, of the millions of dollars raised by Bullar, only a fraction was used to trade commodities futures and options as promised.  Indeed, of the approximately $786,000 deposited in his trading account, Bullar lost more than $230,000 in the form of trading losses and fees.  Of the remaining millions of dollars in investor funds, Bullar misappropriated or embezzled approximately $6 million for his own use, including the payment of personal expenses, cash withdrawals, the purchase of property and vehicles, and for landscaping and other home improvements.  Additionally, Bullar used investor funds to pay "returns" to existing investors - a classic hallmark of a Ponzi scheme.  

The scheme ultimately collapsed in 2013 after Bullar was unable to satisfy investor redemptions.  While one investor had requested the redemption of their $1.5 million investment to close on a real estate transaction, Bullar admitted to that investor that he was unable to satisfy that request due to his operation of a fraudulent investment scheme.  Bullar later admitted the same to another investor, and indicated he knew he would be going to prison for the fraud.  

The CFTC complaint against Bullar is below:

Enf Bull Ar Complaint 092314

Tuesday
Sep232014

Appellate Court: Ponzi Schemer's Loss Calculation Must Account For Payments To Victims

In a decision that could have far-reaching implications, a federal appeals court has vacated a convicted Ponzi schemer's 11-year prison sentence after finding that the loss amount used in calculating the relevant sentencing guidelines improperly failed to account for money returned to victims in the form of fictitious "interest" payments. Jason Snelling, of Cincinnati, Ohio, was originally sentenced in October 2012 to a 131-month term after previously pleading guilty to three counts of conspiracy, obstruction, and tax evasion. While the resentencing will likely reduce Snelling's 131-month sentence, he must also deal with two other prison sentences related to the scheme, including a 40-year prison sentence being served consecutively to Snelling's other sentences.

History

Snelling and others operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they held themselves out as successful day-traders and solicited investors by promising guaranteed annual rates of return ranging from 10% to 15%. Ultimately, dozens of investors entrusted millions of dollars to Snelling and his companies. However, rather than utilize investor funds as promised, Snelling and his partner ran a Ponzi scheme whereby they used incoming investor funds to pay returns to existing investors, as well as to support lavish lifestyles that included purchases of a boat, furniture, and even plastic surgery.

After a tip by an investor whose accountant questioned the legality of the operation, authorities filed civil and criminal charges against Snelling and his partner, including state and federal charges against Snelling. In connection with the federal charges, Snelling ultimately pleaded guilty to one count each of three counts of conspiracy, obstruction, and tax evasion.

District Court Sentencing

While the plea agreement included Snelling's admission of guilt to the charges, it also referenced the disagreement between the government and Snelling regarding the offense-level calculations to be used by the U.S. Probation Office to calculate the sentencing-guidelines range included in a Presentence Investigation Report ("PSR"). Snelling argued that, under the U.S. Sentencing Guidelines, any funds returned to investors during the course of the fraud in the form of "profits" or "interest" should be used to offset the initial loss attributable to his fraud. Indeed, the commentary to U.S.S.G. § 2B1.1 provided that a loss would be reduced by, among other things:

(i) The money returned, and the fair market value of the property returned and the services rendered, by the defendant or other persons acting jointly with the defendant, to the victim before the offense was detected. The time of detection of the offense is the earlier of (I) the time the offense was discovered by a victim or government agency; or (II) the time the defendant knew or reasonably should have known that the offense was detected or about to be detected by a victim or government agency.

The government opposed Snelling's position, taking the position that Snelling “should not get credit for payments to perpetuate the scheme made with other victims’ money.” In other words, the Government maintained that Snelling's payment of fictitious returns to victims served simply to further the fraud and create the impression that the venture was legitimate. At sentencing, despite Snelling's protests, the Government adopted the Government's position and held that:

the loss should not be reduced, particularly because the monies did not represent profits . . . any return of money was to induce further investment . . . .

Based on the Government's methodology, the Court held that the intended loss for purposes of federal sentencing guidelines was $8,924,451.46. Using the highest calculated offense level of 35 for mail and wire fraud and after applying a three-level reduction based on Snelling's acceptance of responsibility, the Court applied U.S.S.G. § 2B1.1(b)(1)(K) to arrive at a sentencing range of 121 to 151 months. Based on that calculation, Snelling was ultimately sentenced to a 131-month term.

The Appeal

Snelling timely appealed, claiming that the district court committed error by using a loss figure of $8,924,451.46, representing the total amount of money taken in from investors, instead of of $5,336,187.78, which represented the total losses after accounting for the total amount returned to investors over the life of the scheme. This difference was crucial, as different sub-sections of U.S.S.G. § 2B1.1(b)(1) applied based on whether or not the loss figure was greater than or less than $7 million. As a result, while the calculation used by the district court resulted in a range of 121 to 151 months, a calculation using the loss figure urged by Snelling would have resulted in a maximum range of 97 - 121 months.

The Sixth Circuit agreed with Snelling's position, specifically noting that:

Snelling’s argument, based on the text of the Guidelines alone, is persuasive. His reading of the Guidelines is further bolstered by U.S.S.G. § 2B1.1 Application Note 3(F)(iv), which specifically addresses Ponzi-scheme loss calculations. Application Note 3(F)(iv) states that, when calculating the loss figure in a Ponzi scheme, the “loss shall not be reduced by the money or the value of the property transferred to any individual investor in the scheme in excess of that investor’s principal investment.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Snelling argues that the language of this note implies that courts are expected to reduce loss figures by the sums returned to investor victims, and that the note seeks to limit such reduction to no more than the principal invested. Thus, the Sentencing Commission, while contemplating that loss figures should be reduced according to the amount of money returned, does not want a single investor’s returns to be deducted beyond the amount originally invested: “[T]he gain to an individual investor in the scheme shall not be used to offset the loss to another.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Again, Snelling’s argument is persuasive. The fact that the Application Notes limit deductions from loss figures to no more than the sums originally invested implies, quite strongly, that the loss figures are to be reduced in the first place.

(emphasis added). The Court also looked to previous editions of the sentencing guidelines, pointing to language in the pre-2001 editions that entirely omitted any language calling for a reduction based on the sums returned to victims.

Addressing the government's position, the Sixth Circuit conceded that while there certainly was appeal to prohibiting a Ponzi schemer from benefiting from making payments to carry out the fraud, the relevant concern was whether the district court properly applied the sentencing guidelines. Based on the finding that the district court did commit error by failing to account for the payments made by Snelling to his victims, the Sixth Circuit vacated Snelling's sentence and remanded the case back to the district court for resentencing.

Implications

The Sixth Circuit candidly admitted that adopting Snelling's position would, in essence, ultimately mitigate the sentence a Ponzi schemer would ultimately face. Indeed, it is well-acknowledged that a Ponzi schemer's ability to consistently deliver the returns promised to investors serves to create an aura of legitimacy around the scheme and ultimately entice new investors. However, the Sixth Circuit noted that it was restricted to the question of whether the sentencing court adhered to the sentencing guidelines as written, and vacated the sentence based upon its finding of error.

The theoretical implications of such a position are significant.  Historically, the government's calculated loss figures were typically rarely disturbed; indeed, the Sentencing Guidelines state that courts "need only make a reasonable estimate of loss … based on available information.” Moreover, and especially in the common scenario where the Ponzi schemer pleads guilty, the post-collapse investigation into the scheme is only in the infant stages and rarely is enough information available to calculate the amount of funds ultimately disbursed to victims.

The biggest takeaway of the Sixth Circuit's decision, assuming it is adopted by other courts in loss calculations, are that scheme perpetrators will essentially be actively mitigating their future prison sentence by continuing their scheme.  Indeed, in the situation of two Ponzi schemes that raise an identical amount of funds from victims, the scheme that makes a higher payout to victims theoretically would result in a lower prison sentence for that perpetrator based on the net loss calculation.  Arguably, such a scenario technically incentivizes a Ponzi schemer to return as much as possible to investors with the knowledge that the returns will not only attract new investors but also serve to ultimately reduce any prison sentence.

The Sixth Circuit's opinion is below:

 

14a0244p-06

 

Friday
Sep192014

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 Bitcointalk.org, 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.  

Thursday
Sep182014

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:

 

comp-pr2014-198

 

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