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Recent SEC Releases
Monday
Jun152015

Texas Man Charged With $4.5 Million Oil-And-Gas Ponzi Scheme

A Texas man is facing criminal charges on allegations that he ran a $4.5 million Ponzi scheme through the sale of purported interests in oil and gas wells.  William Allen Risinger was charged with three counts of wire fraud and one count of money laundering in an indictment that was filed in May 2015 but only recently unsealed following Risinger's arrest.  The wire fraud charges carry a maximum 20-year term per count while the money laundering charge carries a maximum 10-year prison term.  Risinger is currently free on a $50,000 bond. 

According to the indictment, Risinger formed RHM Exploration in November 2010.  Risinger solicited potential investors through the sale of interests in various oil and/or gas wells.  For example, investors were given the opportunity to purchase units in the RHM-Sinton Joint Venture (the "SJ Venture") from December 2010 to August 2012.  Investors were told that the SJ Venture would sell ten units for $60,000 each, with RHM purchasing one unit and the remaining nine units available for purchase by investors.  Investors were further promised that funds would be kept in an account at JP Morgan, that they would be used as described in offering documents, and that none of the funds would be used to pay sales commissions. 

However, RHM never purchased an investment unit in the SJ Venture.  Instead, RHM sold over 20 investment units to investors, resulting in the receipt of over $1.2 million and thus diluting the membership interest promised to potential investors.  RHM also allegedly used funds for unauthorized purposes, including making Ponzi-style payments to existing investors and the payment of sales commissions.  As the funds were not used as promised, a lien was ultimately filed - but not disclosed to RHM investors - against the mineral lease purportedly at the center of the investment. The Indictment alleged that similar misrepresentations and omissions were made in connection with several other mineral lease offerings.  Risinger ultimately raised over $4 million from several dozen investors. 

The government indicated in the indictment that it is seeking the forfeiture of a residence in Round Rock, Texas, multiple bank and brokerage accounts, and even a 4-seat Cessna airplane.  A copy of the indictment is below:

Risinger Indict

Saturday
Jun132015

MLM Law Firm Pays $1.175 Million To Settle Zeek Receiver's Lawsuit

A law firm that touts itself as the "premier law firm servicing the direct sales industry" has agreed to pay over $1 million to settle charges that it played an "indispensable role" in the massive ZeekRewards Ponzi scheme that defrauded thousands of investors out of hundreds of millions of dollars.  The court-appointed receiver tasked with recovering assets for defrauded victims, Kenneth Bell, has sought court approval of a $1.175 million settlement reached with Kevin D. Grimes and his law firm, Grimes & Reese P.L.L.C. ("G&R").  If approved, the settlement will be added to the over-$300 million recovered by Bell that will ultimately be distributed to victims. 

ZeekRewards was an online penny auction website that attracted users at an exponential pace due to a lucrative investment program that promised annual returns exceeding 200% and provided recruitment-based incentives to participants..  The program, masterminded by Paul Burks, attracted over one million participants before the Securities and Exchange Commission filed an emergency enforcement action in August 2012 alleging the venture was a massive Ponzi and pyramid scheme.  Following Bell's appointment, his subsequent investigation revealed that over 700,000 participants suffered collective losses exceeding $700 million.

Grimes is a well-known attorney in the multi-level-marketing arena, operating www.mlmlaw.com and touting his firm as the "premier law firm servicing the direct sales industry."  According to Bell, Grimes served as counsel to Zeek beginning no later than January 2012 up to August 2012 when the Commission's enforcement action was filed.  According to the complaint filed by Bell, Grimes was allegedly aware that Zeek was a Pyramid/Ponzi scheme and that investors were being rewarded solely for the recruitment of new investors without any regard to any efforts to sell any products.  Despite this alleged knowledge, Grimes was accused of creating a "compliance course" specifically designed to encourage investors and potential investors that completion of such a course somehow bestowed an air of legitimacy to the scheme.  Bell alleged that Zeek required completion of this course, for which it charged each affiliate $30 - of which $5 was paid to Grimes.   

Bell also alleged that Grimes, a well-known figure in the multi-level marketing world, knowingly allowed Zeek to use his association with the company as an implicit endorsement of the company's legitimacy in order to attract more investors.  This not only included Grimes' participation in Zeek conference calls with investors, but the use of his name in marketing and promotional materials disseminated to prospective investors.  

Bell sued Grimes and G&R last year and sought over $100 million in damages.  The parties participated in a mediation earlier this year, which resulted in subsequent settlement discussions that ultimately resulted in the $1.175 million settlement.  In the motion seeking approval of the settlement, the Receiver cited the complexity of the litigation and the potential difficulty of settlement as reasons weighing in favor of approval of the settlement.  The Court approved the settlement earlier this week.

The Motion for Approval of Settlement is below.  Thanks to ASDUpdates for their coverage of the scheme.  

 

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Saturday
Jun132015

Florida Man Gets 10-Year Sentence For $3 Million Ponzi Scheme Targeting Teachers

A Jacksonville man will spend the next ten years in federal prison for carrying out a Ponzi scheme that targeted public employees, many of whom were teachers, and ultimately caused more than $3 million in losses.  Scott Anderson Hall, 50, received the sentence from U.S. District Judge Timothy Corrigan after previously pleading guilty to fraud and money-laundering charges.   The sentence was in line with that requested by prosecutors, and Judge Corrigan openly questioned the sincerity of Hall's remorse and whether victims would ever see any of their money again.  

Hall formed Abaco Securities International, a shell company in the Turks and Caicos islands, in 1999.  Using his affiliation with various financial services companies, including AXA Advisors, Hall solicited clients to invest their retirement savings in an investment product known as ASI.  Many of Hall's victims were employees of the Duval County School Board, including teachers and at least one principal.  Hall promised annual returns ranging from 6% to 18%.  In one particular example noted by prosecutors, Hall showed up at a the funeral of a North Carolina woman, although he did not know the woman or her husband, and followed the family to the funeral reception where he convinced the deceased woman's husband to invest the proceeds of a life insurance policy with him.  In total, Hall took in more than $4 million from at least 50 investors.

According to authorities, however, Hall did not use investor funds as promised.  Instead, Hall lived a luxurious lifestyle that included the purchase of commercial property and high-end automobiles.  Hall also used investor funds to pay fictitious returns - a classic example of a Ponzi scheme.  Hall's scheme lasted over a decade until it collapsed in 2011.  He was indicted in January 2013 and pleaded guilty later that year.

Friday
Jun122015

Criminal Charges Filed In Alleged $32 Million Pro Athlete Loan Ponzi Scheme

A former National Football League player and his business partner were arrested this morning on charges they masterminded a $32 million Ponzi scheme that promised generous returns purportedly generated from loans to high-profile athletes.  Will Allen, 36, and Susan Daub, 55, were arrested in south Florida on one count each of securities fraud.  The pair, who already face civil fraud charges filed by the Securities and Exchange Commission, were charged on a criminal complaint filed by authorities in Boston.  The securities fraud charge carries a maximum prison sentence of up to twenty years as well as a fine of up to $5 million. Each of the defendants is free on a $200,000 bond.  

According to authorities, Daub and Allen operated Capital Financial Partners, LLC, Capital Financial Holdings, LLC, and Capital Financial Partners Enterprises, LLC (collectively, "Capital Financial").  Allen had a length career in the NFL that spanned over ten years and included stints with the New York Giants, the Miami Dolphins, and the New England Patriots.  Beginning in 2012, the pair began soliciting investors to contribute some or all of a short-term loan to a professional athlete who might not have access to guaranteed salary money during that particular athlete's "off-season."  As Capital Financial's website explained,

In many cases, athletes' contracts do not allow them to access their guaranteed money during the off season or early in the season when they may need a significant sum to purchase a house or car, pay the bills, or meet a financial demand. By pooling the resources of a network of investors, CFP gives athletes access to money when they need it while providing investors with solid, short-term returns on investment.

Potential investors were told that Capital Financial required a minimum $75,000 investment, of which a 3% origination fee would be subtracted, and that a typical athlete loan was for $600,000.  Before making an investment, a potential investor was often provided with information about a particular athlete, including that athlete's sports contract and what amounts of that contract were guaranteed.  According to authorities, at least some potential investors were led to believe that their investment was backed by that particular athlete's contract and that Capital Financial had the ability to receive payments from that athlete's team if needed.  In return, an investor was promised monthly interest rates ranging from 9% to over 18% depending on the duration of the loan.  In total, Capital Financial raised at least $31.7 million from over 40 investors from July 2012 to February 2015.

However, authorities charge that nearly half of the money raised from investors never made it into the pockets of a particular professional athlete.  For example, over two dozen investors contributed more than $4 million in mid-2014 with the understanding that they were participating in a $5.65 million loan to an unnamed National Hockey League player.  The SEC previously alleged that the $5.65 million promissory note was never signed, and the particular NHL player subsequently filed for bankruptcy in October 2014.  While Capital Financial filed a proof of claim in the player's bankruptcy case claiming a $3.4 million debt, none of the investors were informed of the bankruptcy and continued to receive monthly payments amidst assurances that the loan was "performing as expected".  The pair is accused of similar misrepresentations with respect to purported loans made to MLB and NFL players.

From July 2012 to February 2015, Capital Financial allegedly received approximately $13 million in loan repayments from athletes, yet paid out approximately $20 million to investors - a scenario in which the additional $7 million paid out to investors was possible only by using new investor funds in a classic Ponzi scheme.  Allen and Daub are also accused of withdrawing more than $7 million for various personal and unrelated business expenses, including casino and travel expenses as well as loans to various insurance companies.

While it is unknown when Capital Financial appeared on the radar of authorities, it appears that the unnamed NHL player in the SECcomplaint filed by the SEC in April was veteran NHL player Jack Johnson, whose high-profile October 2014 bankruptcy filing disclosed at least $15 million in undisclosed loans taken out by his parents - loans that the Columbus Dispatch characterized as "nonconventional" high-interest loans.  Given the significant media coverage of Johnson's bankruptcy and allegations that some of the loans were fraudulently obtained by his parents, it is certainly plausible that authorities may have discovered the fraud after closely scrutinizing Capital Financial's creditor status.

According to criminal prosecutors, investor funds were also spent at Florida and Las Vegas casinos, where Allen had accounts.  Allen is alleged to have profited by more than $4 million from the scheme, while Daub and her son allegely received nearly $300,000.  At a bond hearing earlier today, the Court rejected a Boston prosecutor's request for a $500,000 bond apparently based on claims by Allen's lawyer that most of his money had been frozen by the SEC and that former Miami Dolphin teammate Vernon Carey would be paying the bond.  

A copy of the Complaint filed by the SEC is below:

Wednesday
Jun102015

TelexFree Trustee Provides Update On Claims, Losses, And Clawbacks

The bankruptcy trustee tasked with recovering funds to compensate hundreds of thouands investors worldwide who were duped in the massive TelexFree fraud appeared at a Bankruptcy court hearing today where he provided an update on the complexity of the scheme, the estimated losses, and the next steps moving forward.  Stephen B. Darr, the court-appointed trustee, was in court today for a hearing on the approval of nearly $3 million in fees incurred by his financial and legal professionals.  While the fees were ultimately approved, Darr also provided an update on the progress of the monumental task he has undertaken in attempting to understand and reconstruct the inner workings of what may be the largest and most complex financial fraud in history.

Background

TelexFree raised billions of dollars from hundreds of thousands of investors through the sale of a voice over internet protocol (“VoIP”) program and a separate passive income program.  The latter was TelexFree's primary business, offering annual returns exceeding 200% through the purchase of "advertisement kits" and "VoIP programs" for various investment amounts.  Not surprisingly, these large returns attracted hundreds of thousands of investors worldwide, and participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses.  Ultimately, while the sale of the VoIP program brought in negligible revenue, TelexFree's obligations to its "promoters" quickly skyrocketed to over $1 billion.

In April 2014, after multiple attempts to modify the passive income program both to rectify regulatory deficiencies and to curb increasing obligations, TelexFree quietly filed for bankruptcy in a Nevada bankruptcy court.  While it appeared that TelexFree had hoped to use the bankruptcy proceeding to eliminate its obligations to its "promoters" and extinguish any ensuing liabilities, the filing immediately attracted scrutiny and was followed shortly by enforcement actions filed by the Securities and Exchange Commission (the "Commission") and Massachusetts regulators.  The Commission then moved to transfer the bankruptcy proceeding to Massachusetts, where the company was headquartered and where the Commission had filed its enforcement proceeding.  Despite vehement objections by TelexFree, that effort was ultimately successful, and the appointment of an independent trustee, Mr. Darr, shortly followed.

TelexFree's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges, with Wanzeler currently a fugitive and believed to be in Brazil.  

Update

In the bankruptcy hearing, Darr disclosed that he had identified over 900,000 unique email accounts that were registered with TelexFree's program - of which over 90% were determined to have suffered an average loss of nearly $2,000.  The remaining approximately-68,000 email accounts were fortunate enough to profit from the scheme, although those profits were simply the redistribution of new investor funds as the VoIP business made little actual money.  Those "net winners," as they are commonly known in Ponzi parlance, made an average profit of over $20,000 - meaning that there is the possibility of over $1 billion in potential future clawback/avoidance actions. To put that figure in context, the number of Ponzi schemes in which losses surpassed $1 billion can likely be counted on one hand.  

Going forward, Darr indicated that he planned to schedule a meeting in the next few months to update TelexFree investors.  A creditors meeting, known as a 341 Meeting in bankruptcy parlance in reference to the specific section of the U.S. Bankruptcy code, is mandatory in bankruptcies and allows creditors to obtain testimony from a debtor under oath.  

To date, Darr disclosed that he had recovered approximately $16 million that would ultimately be returned to creditors.  One of the largest sources of recoveries in similar fraud cases is often through the institution of "clawback" or "avoidance" actions filed to recover funds from net winners or those who received transfers on the eve of an entity's collapse.  In this scenario, it is very likely that Darr will pursue those TelexFree net winners who profited most from the scheme, as well as the third-party entities that provided services to TelexFree or who may have facilitated or exacerbated the fraud.  It is expected that further details will emerge in the coming months.

Further Ponzitracker coverage of TelexFree is here.

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