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Recent SEC Releases
Wednesday
Jul232014

TelexFree Founders Indicted On Fraud Charges

A Massachusetts grand jury indicted TelexFree co-founders James Merrill and Carlos Wanzeler on multiple fraud charges in what authorities have alleged was a massive Pyramid/Ponzi scheme that may have defrauded victims out of hundreds of millions of dollars.  Merrill and Wanzeler were charged with one count of conspiracy to commit wire fraud and eight counts of wire fraud.  Each wire fraud count carries a maximum twenty-year prison term as well as monetary penalties.  The indictment also seeks the forfeiture of tens of millions of dollars, real estate, and luxury vehicles and watercraft belonging to the two men.  Merrill is currently in custody after his arrest in early May, while Wanzeler remains a fugitive and is believed to be in Brazil.  

The indictment does not appear to contain any new revelations, alleging that Wanzeler and Merrill operated TelexFree as a Pyramid and Ponzi scheme that took in hundreds of millions of dollars from victims who were promised substantial returns through minimal efforts.  Authorities allege that TelexFree's compensation system incentivized the recruitment of new investors to the scheme, and that Merrill and Wanzeler made deceiving statements to induce new investors.  This included promotional and instructional videos that were distributed through social media and at conferences known as "evtravaganzas."  

Three TelexFree entities filed a late-night bankruptcy on April 13, 2014, two days before both the Massachusetts Securities Division and the Securities and Exchange Commission filed civil complaints accusing the company of operating as a massive fraud.  The Nevada bankruptcy court where the bankruptcy cases were initially filed later transferred the cases to Massachusetts on the motion of the government, thwarting TelexFree's hopes that it could use the bankruptcy as a way to fend off regulators and reorganize the company.  A court-appointed bankruptcy trustee recently stated in court filings that TelexFree "engaged in a Pyramid or Ponzi scheme."

The indictment contains a lengthy list of assets the government seeks to forfeit as proceeds of the crimes, including tens of millions of dollars in bank accounts and cashier's checks.  Additionally, the government seeks to forfeit several dozen parcels of real estate located in Massachusetts and Florida, as well as the following motor vehicles:

  • 2014 BMW X6;
  • 2013 BMW X5;
  • 2013 BMW Z4;
  • 2009 Ferrari 430;
  • 2013 Porsche Boxster;
  • 2013 Toyota Highlander; 
  • 2007 Sea Ray 40 Motor Yacht; and 
  • 2003 Maxum boat.

According to a report from Patrick Pretty, these assets appear to be the "small real estate empire" prosecutors allege Wanzeler purchased using investor funds.

The indictment is below (special thank you to ASD Updates):

 

70-main

 

Monday
Jul212014

Florida Cop Gets 5-Year Sentence For Rothstein Ties, Including Illegal Arrest

"Mr. Benjamin, while wearing the cloak of BSO authority, engineered the arrest and incarceration of an innocent citizen.  This was done purely for financial gain. This conduct is deplorable — it is unconscionable."

- U.S. District Judge James Cohn

A former Broward County Sheriff's Lieutenant received the maximum prison sentence after pleading guilty to serving as convicted Ponzi schemer Scott Rothstein's personal de facto enforcer, including the illegal arrest of one of the ex-wife of one of Rothstein's colleagues on trumped-up drug charges.  David Benjamin, once the third-most powerful official in the Broward County Sheriff's Office, received the sentence from U.S. District Judge James Cohn after previously pleading guilty to a charge of conspiracy to defraud through extortion and violation of civil rights.  In an indication of the high-charged emotional atmosphere of the sentencing, the woman ordered to be arrested on the drug charges was given the opportunity to confront Benjamin directly and later saw him taken into custody.

Benjamin, who once oversaw the police department's internal affairs division, received nearly $200,000 in cash and jewelry from Rothtein in return for carrying out a myriad of tasks.  This included ordering a local prostitute to leave Florida after Rothstein learned she might expose her relationship with Stuart Rosenfeldt, Rothstein's partner.   Benjamin also provided Rothstein with an armed escort in October 2009 as he made his to way with $500,000 in a duffel bag to a waiting plane on a Ft. Lauderdale tarmac that would take Rothstein to Morocco as his scheme was collapsing.

But the favor that has drawn the most attention was when Benjamin, at Rothstein's insistence, ordered a subordinate to arrest the ex-wife of Rothstein colleague Douglas Bates.  The ex-wife was cited for the possession of illegal prescription drugs, but the charges were later dropped when it was revealed that the "illegal drugs" were in reality her son's autism medication.  Citing her 18-hour tenure in jail, the woman has claimed that she now suffers post-traumatic stress syndrome.  

Benjamin was suspended in January 2013 as one of the first priorities of a newly-elected Sheriff Scott Israel.  Both he and Detective Jeff Poole - who made the arrest of Bates' ex-wife - were arrested in April 2014 and subsequently pleaded guilty one month later.  Judge James Cohn, who indicated that he would have handed down a longer sentence if possible, also ordered Benjamin to pay $22,071 in restitution to Bates' ex-wife.  

Friday
Jul182014

Appeals Court Rules Stanford Victims Ineligible For SIPC Coverage

A federal appeals court affirmed that victims of Allen Stanford's massive $7 billion Ponzi scheme - the second largest scheme in history behind only Bernard Madoff's scheme - are not "customers" of Stanford's American-based bank and thus not eligible to seek compensation from the industry-funded pool administered by the Securities Investor Protection Corp. ("SIPC").  Judge Sri Srinivasan of the U.S. Court of Appeals for the District of Colombia ruled that, despite professed sympathy for Stanford's victims, the fact that Stanford's investors purchased certificates of deposit from an Antiguan bank precluded any finding that investors were "customers" of Stanford Group Company ("SGC").  The ruling is a blow to the Securities and Exchange Commission, which brought the suit in December 2011 to force SIPC to commence a liquidation and compensate victims - the first time it had brought such a suit.

Background

Stanford, who is currently serving a 110-year prison term after being convicted by a federal jury, built a banking conglomerate that touted its certificates of deposit that promised above-market returns to investors.  However, prosecutors argued that Stanford actually used CD proceeds to prop up his empire of businesses and support a lavish lifestyle that included private jets, cricket teams, and a once-sterling reputation on the Caribbean island of Antigua.  Stanford was convicted on 13 of 14 fraud counts, and ordered to pay nearly $6 billion in restitution to victims.  Victims face a bleak prospect of recovery; the receiver appointed to recover assets for Stanford victims have to date has made one distribution to date representing 1% of victims losses.  The recovery process has been hampered by overseas liquidations and competing claims to hundreds of millions of dollars in overseas assets and bank accounts.

Applicable Issues

After initially deciding that Stanford victims were not entitled to SIPC protection, the SEC reversed course in June 2011 and concluded that a liquidation under the Securities Investor Protection Act (the "Act") was required to compensate investors who had purchased certificates of deposit at the heart of Stanford's scheme.  Following unsuccessful attempts by Congress to put pressure on SIPC, the SEC filed suit against SIPC contending that a SIPA liquidation was warranted by virtue of the Stanford Group Company's SIPC membership.  In response, SIPC countered that the fraudulent certificates of deposit sold to Stanford's victims originated not from SGC, but were instead issued by Stanford International Bank, an Antiguan entity that was not a SIPC member.

Thus, the issue presented, according to Judge Srinivasan, was whether SIPC could be ordered to proceed against SGC - rather than the Antiguan bank - to protect the CD investors' property.  The Commission claimed that victims were "customers" because they had purchased CDs from the Antiguan bank at the urging of SGC employees, and urged the court to disregard the corporate separateness of the two entities and rather treat the two entities as a combined entity. SIPC disagreed, arguing that the CD investors failed to qualify as "customers" because the investors never deposited the funds directly with SGC.  Judge Srinivasan agreed with SIPC, stating that:

Here, insofar as the analysis focuses on the entity that in fact held custody over the property of the SIBL CD investors, the investors fail to qualify as “customers” of SGC under the statutory definition. That is because SGC never “received, acquired, or held” the investors’ cash or securities. 15 U.S.C. § 78lll(2)(A); see 15 U.S.C. § 78lll(2)(B)(i). With regard to the investors’ cash, it is undisputed that investors at no time deposited funds with SGC to purchase the SIBL CDs. The funds instead went to SIBL....Because SGC had no custody over the investors’ cash or securities, the investors do not qualify as SGC “customers” under the ordinary operation of the statutory definition

According to Judge Srinivasas, even if it were to accept the Commission's substantive consolidation argument, the result would remain unchanged due to a provision of the Act excluding from “customer” status “any person, to the extent that . . . such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor.”  Because victims who purchased CDs were lenders by virtue of loaning money to - and not through - the Antiguan entity, the substantive consolidation of the two entities would result in investors assuming a creditor-debtor relationship with that entity - a result specifically excluded under the Act.

Financial Ramifications For SIPC Coverage

Shortly after the suit was filed, SIPC raised the potential of financial shortfalls associated with being forced to compensate victims, saying that an adverse decision

would vastly exceed SIPC's Fund, and would jeopardize the availability of the Fund for the legitimate purposes for which it was created."

SIPC's 2010 financial statements adds some veracity to such a claim.  The fund received $400 million in member assessments in 2010 and listed net assets of approximately $100 million (having listed $1.38 billion in assets and $1.28 billion in liabilities).  Not surprisingly, the majority of its listed liabilities were allocated to "estimated costs to complete customer protection proceedings in progress" - the largest of which, Bernard Madoff's Ponzi scheme, was and remains pending.  Those financial statements also indicated that the weight of the Madoff proceeding caused SIPC to operate at a loss in 2010 and reduced net assets from $344 million at the beginning of 2010 to $100 million at the end of the year.  The then-recent bankruptcy of MF Global, a SIPC member, threatened to further strain resources depending on the severity of investor losses.  

SIPC's finances have since rebounded, with the 2013 financial report listing $1.162 billion in net assets due in part to average member assessments of $400 million in the past few years.  While today's SIPC is in a much better financial position to respond to a massive fraud at one of its members, today's decision no doubt alleviates the potential of having to compensate Stanford victims. 

The appellate decision is below:

SIPC SEC Appeals Decision

 

Thursday
Jul172014

Florida Radio Host Charged In $3.1 Million Ponzi Scheme Targeting Haitians

Florida law enforcement officials raided the office of a Florida radio personality Thursday morning and later arrested the man on charges that he ran a $3.1 million Ponzi scheme that targeted Haitian-Americans.  Philippe Bourciquot faces charges of racketeering, securities fraud, grand theft, and money laundering in connection with the scheme.  As he was led away, Bourciquot was quoted as saying "it's not true I'm not stealing money."

According to law enforcement, Bourciquot appeared on several radio shows in south Florida where he solicited Haitian-Americans to invest with him, promising them monthly returns of 8% and promising them that their investments were "guaranteed."  These monthly returns equated to an approximate annual return of nearly 100%.  According to a local newspaper, Bourciquot raised over $3 million from his fellow Haitian-Americans.

However, after authorities received a tip about a suspicious advertisement in Creole, a subsequent investigation found that Bourciquot was not using investor funds as promised, and instead was using funds from new investors to pay previous investors - a classic hallmark of a Ponzi scheme.  Authorities believe that Bourciquot also diverted investor funds to support his lavish lifestyle, and Florida Department of Law Enforcement Commissioner Gerald Bailey stated his belief that "a large portion of the funds will be unrecoverable."

If you believe you were a victim of this scheme, you may file a complaint with the Florida Office of Financial Regulation online at flofr.com or by phone at 850-487-9687. Victims speaking Creole are asked to call 305-536-0308.

Wednesday
Jul162014

Pennsylvania Man Charged With $5 Million Ponzi Scheme

Federal authorities unveiled charges against a Pennsylvania man and accused him of orchestrating a $5 million Ponzi scheme..  Walter "Buddy" Lambert, 73, was charged with sixteen counts of mail fraud, five counts of wire fraud, and one count of interfering with the due administration of the Internal Revenue Service.  The criminal charges come over three years after the Federal Bureau of Investigation raided Lambert's offices, and nearly four years after almost a dozen lawsuits were filed against Lambert by victims.

Lambert was the chief executive officer of Blue Mountain Consumer Discount Company ("Blue Mountain"), a consumer loan company owned by the prominent Cinelli family.  The company solicited potential investors with the promise that their investment would be used to make high-interest loans to consumers at an annual rate ranging from 23% - 26%.  In return, investors were promised steady annual returns of 10% that were paid in cash and usually not disclosed to the Internal Revenue Service.  In total, more than twenty investors entrusted more than $5 million with Blue Mountain.

However, authorities alleged that Lambert failed to use investor funds as promised.  Instead of making high-interest consumer loans, Lambert diverted investor funds for his own personal use, including the payment of Blue Mountain overhead and expenses, the purchase of a life insurance policy on himself, buying personal items and collectibles for himself and family members, and making 6% loans to himself, his children, and other "preferred" consumers.  To hide his fraud, Lambert is also accused of doctoring Blue Mountain's books and filing falsified income tax returns with the IRS.  In addition to paying the majority of interest payments to investors in cash, Lambert also paid a 1% kickback to a local attorney, Nicholas R. Sabatine, III, in exchange for Sabatine's referral of clients to Blue Mountain.  Sabatine was charged in October 2013 with filing a false tax return in 2009.

Francis Cinelli and his family are currently named in multiple lawsuits seeking more than $5 million on claims that they failed to supervise Lambert.  Both Cinelli and Blue Mountain have filed bankruptcy, with Cinelli listing the majority of his creditors as Blue Mountain victims.  

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