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Recent SEC Releases
Monday
Jan262015

Ohio CPA Gets 21 Years For Role In $40 Million Ponzi Scheme

An Ohio man was sentenced to serve twenty-one years in federal prison for his role in funnelling investors to the massive "Black Diamond" Ponzi scheme that ultimately duped over 400 investors out of at least $40 million.  Jonathan Davey, 50, of Newark, Ohio, received the sentence from U.S. District Judge Robert J. Conrad, Jr., who remarked that Davey's conduct "was driven by greed that the Court rarely sees."  In addition to the prison sentence, Davey was ordered to pay nearly $22 million in restitution to defrauded victims.  

Black Diamond was a foreign currency ("forex") trading operation masterminded by Keith Simmons.  Beginning in 2007, and using a network of co-conspirators and feeder funds, Simmons solicited investors under the guise that their funds would be used in the purportedly highly successful Black Diamond trading platform.  Simmons quoted Bible verses in pitching potential investors while also promising 4% monthly returns that were never at risk because no more than 20% of invested funds would be at risk at any time. 

Davey served as administrator for several of the hedge funds involved in the Black Diamond Ponzi scheme, and raised over $10 million from investors though his own hedge fund, "Divine Circulation Services'.  Davey told investors that he was operating a legitimate hedge fund, and that he had conducted due diligence on Black Diamond.  However, neither was true.  Additionally, when the Black Diamond scheme began to collapse, Davey orchestrated a separate Ponzi scheme in which he raised over $5 million to use to pay fictitious 'returns' to old investors.  While investors were told that Davey managed a total of over $120 million, in reality the amount on hand was less than $1 million.  

In addition to making Ponzi-style payments to investors of nearly $20 million that purportedly represented investing returns, Davey and others diverted investor funds for a variety of unauthorized personal expenses.  In one example, Davey used an offshore shell company in Belize to fund the construction of an Ohio mansion.  Additionally, Simmons was said to have paid women for sex and furnished "lavish love condominiums" with investor funds.  Simmons was recently sentenced to a fifty-year term.  

Monday
Jan262015

California Men Plead Guilty To $100 Million ATM Ponzi Scheme

Two California men have entered guilty pleas to operating a massive Ponzi scheme that allegedly caused losses of over $100 million to victims who thought they were investing in a profitable ATM leasing operation.  Joel Barry Gillis, 74, and Edward Wishner, 76, each entered a guilty plea to one count of conspiracy, two counts of mail fraud, and one count of wire fraud before U.S. District Judge S. James Otero.  Both men are scheduled to be sentenced by Judge Otero on March 30, and could potentially face decades in prison.  

Gillis and Wishner operated Nationwide Automated Solutions ("NAS").  According to authorities, NAS solicited investors since 1999 by promising that their funds would be used to place, operate, and maintain automated teller machines ("ATMs") throughout the country.  Investors were told that they could purchase ATMs for a price ranging from $12,000 to $19,800 from NAS, and could then lease those same ATMs back to NAS for a 10-year term in exchange for a "rent" of $.50 per ATM transaction.  A contract memorializing the investment purportedly contained the serial number and the location of the ATM, and investors were guaranteed an investment return of at least 20% annually.  Notably, each contract also included a "non-interference" clause prohibiting the investor from interfering with the operation of the ATM by contacting the locations where the ATM was installed or any ATM service provider.  An analysis of NAS' bank accounts from 2013 forward showed that more than $123 million was raised from investors in just that short period.

While the company's records showed that it had sold and was leasing back more than 31,000 ATMs to investors as of June 2014, third-party settlement reports provided by NAS's ATM servicers show that only 253 ATMs were serviced.  As the SEC previously alleged,  

Defendants have “sold” and “leased back” tens of thousands of ATMs to NASI investors that they never owned, that they never operated, and that may have never existed. 

For example, while NAS's internal records claimed ownership or operation of nearly 700 ATMs located at "Casey's Convenience Mart" locations in the Midwest, the Commission's investigation showed that neither NAS nor any of its investors owned or serviced any of those ATMs.  Rather, those ATMs were owned by an unrelated company with no affiliation with NAS.  The Commission also alleged that NAS often sold and leased back the same ATM to more than one investor.  Of the ATMs that NAS did service, those revenues were minimal and were dwarfed by the significant amount of new investor funds.  Those investor funds were used to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

Authorities alleged that NAS bounced over $3 million in checks to investors in August 2014, with investors told that a "glitch" in connection with retention of a new outside firm handling investor payments was to blame.

Authorities began investigating NAS shortly after the bounced checks, with court records in the SEC's case demonstrating that an application for a temporary injunction and other relief was filed on September 17, 2014.  Criminal charges were filed several months later.  

A receiver, William Hoffman, was appointed at the request of the SEC, and a website has been established at http://www.nasi-nationwideatm.com/ for interested parties.  

Oddly enough, multiple Ponzi schemes centered around promised riches from ATM leasing or rentals have popped up in the past few years, including herehere, and here.

Saturday
Jan242015

In Depth: High Stakes As Stanford Clawback Suits Set To Begin In February

For the more than 20,000 investors who have thus far received little or nothing from their investment in Stanford CDs, money recovered from wherever it resides today is likely the largest portion of the money they will ever receive in restitution. CD Proceeds — comprising purported CD principal and interest payments to the Stanford Investors — are little more than stolen money and do not belong to the Stanford Investors who received such funds but belong, instead, to the Receivership Estate.

- Clawback complaint

Nearly six years after Allen Stanford was arrested and charged with masterminding the second largest Ponzi scheme in U.S. history, which caused billions of dollars in losses to thousands of victims worldwide, a court-appointed receiver is preparing to proceed with the first of dozens of trials seeking to "clawback" hundreds of millions of dollars from those lucky enough to profit from their investment with Stanford.  Ralph Janvey, the court-appointed receiver, filed so-called "clawback suits" against hundreds (if not thousands) of Stanford investors that received purported returns in excess of their original investment in Stanford's bogus certificates of deposit.  With victims having received approximately 4% of their losses to date, stakes are high in the suits - which Janvey has previously acknowledged as "the single largest potential source of funds which may be recovered for the benefit of Stanford’s victims."

Stanford's fraud involved the offering of CDs carrying guaranteed rates of return and likened to the safety and security of similar CDs issued by commercial banks.  The increased return, along with the promised safety of the investments, made the CDs enticing - a typical Stanford CD offered returns at least two to three percentage points higher than a bank-issued CD.  At least 18,000 victims in the U.S. alone suffered collective losses of billions of dollars when Stanford's empire finally collapsed in early 2009.

Clawback Suits

"Everybody who got money from Stanford has two things in common: One, they don't want to give it back. Two, they claim they're completely innocent and had no idea anything untoward was going on,"

- Janvey attorney Kevin M. Sadler

Following his appointment, Janvey filed numerous clawback lawsuits against victims and other third parties that he contended wrongfully received illicit scheme proceeds.  The suits, brought under the version of the Uniform Fraudulent Transfer Act adopted by Texas ("TUFTA"), claim that the transfers to the investors were made with the actual or constructive intent to hinder, delay, or defraud, and that equity requires that those profits be returned to the receivership where they may be distributed in a pro rata fashion to those less-fortunate investors. Proceeding under a theory of actual intent to hinder, delay, or defraud, which can be satisfied through the finding that the perpetrator operated a Ponzi scheme, shifts the burden to the clawback defendant to demonstrate both that they showed good faith and took the transfers for reasoanbly equivalent value.

In analyzing reasonably equivalent value, courts have been quite clear that, while returns to an investor up to the amount of that investor's invested principal can be made for reasonably equivalent value under the theory that such return extinguishes that victim's claim for return of their principal, returns exceeding an investor's invested principal can never be made for reasonably equivalent value.  Similar suits brought by court-appointed receivers and/or bankruptcy trustees have enjoyed a significant success rate.

However, Janvey has faced several significant obstacles in bringing clawback claims that have correspondingly delayed prosecution of the suits.  For example, Janvey initially sought to recover not only the profits realized by clawback defendants but also the underlying returned principal.  For example, an investor that realized $40,000 in profits on an investment of $100,000 would be targeted for the return of $140,000.  While Janvey took the position that such course was necessary to enlarge the size of potential returns to less-fortunate investors, the Securities and Exchange Commission took the rare step of opposing the strategy.  While the Commission has approved a receiver's ability to seek the return of principal from certain investors in other situations upon a demonstrated lack of good faith or other circumstances, it opposed a one-size-fits-all approach in seeking interest and principal from undisputed innocent investors.  This resulted in a 2009 court ruling holding that Janvey was limited to only seeking the return of interest from clawback defendants.  

Janvey has also been locked in a battle with hundreds of former sales brokers employed by Stanford who peddled the CDs to investors.  Janvey has sued the brokers for the return of hundreds of millions of dollars in commissions and other recruitment bonuses they were paid for selling the CDs; the brokers have refused to repay the monies and sought instead to force Janvey to abide by the arbitration clauses contained in their employment agreements with Stanford's entities - meaning that, if successful, Janvey could be forced to incur exponentially higher costs in individually arbitrating  each of the over-300 claims.

Dozen Trials Scheduled in 2015 and 2016

The clawback of hundreds of millions of dollars in false profits from Stanford investors likely represents the largest source of potential remuneration for thousands of Stanford's victims.  At least a dozen clawback trials are scheduled to occur in 2015 and 2016, with the receiver's case against Peter Romero scheduled to proceed first in February 2015.  

Romero is a former State Department official during the Clinton administration who subsequently signed on to work for Stanford as a consultant in the early 2000's.  According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford."  Janvey originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million.  Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with polticians by leveraging his reputation and government contacts.  Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communciate with Stanford in the days following the revelation of the scheme in 2009.  

Janvey's attorneys have recognized the significance of the Romero case as a "bellwether" for the significant number of clawback claims they have brought.  Indeed, the outcome - whether a victory or defeat for Janvey - will likely influence the potential for settlement in the cases set to go to trial later this year and next, as the victorious side will be able to further bolster their position.  

Romero's lawyers have denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."

In closing, the stakes are high for Janvey on the eve of commencement of these clawback suits, which present victims' best (and likely last remaining) chance to realize any significant remuneration for their losses.  While Janvey himself acknowledged to CNBC that victims would ultimately not realize more than "pennies on the dollar," every penny surely counts to thousands of victims whose hopes rest squarely on Janvey's efforts.

Wednesday
Jan212015

SEC Accuses South Florida Fund Manager Of Running $17 Million Ponzi Scheme

A South Florida man has been accused by the Securities and Exchange Commission of operating a $17 million Ponzi scheme through his investment advisory firm.  Frederic Elm, along with his advisory firm Elm Tree Investment Advisors LLC ("ETIA"), was named in a complaint filed by the Commission last Friday that alleged violations of federal securities laws.  Elm's wife, Amanda Elm f/k/a Amanda Elmaleh, was also named as a Relief Defendant based on the Commission's belief that she wrongfully received investor funds.  The Commission obtained an asset freeze from a Florida federal court, and is seeking injunctive relief, disgorgement of ill-gotten gains, civil monetary penalties, and prejudgment interest.  Additionally, the Court appointed Grisel Alonso as Receiver over ETIA and the funds purportedly managed by ETIA.

Elm, 45, resides in Fort Lauderdale, where he operated ETIA.  ETAI purportedly acted as fund manager for three funds: the Investment Fund, The 'e'Conomy Fund, and The Motion Opportunity Fund (collectively, the "Funds").  Beginning no later than November 2013, Elm and ETIA solicited investors both through phone and email based on promises that their funds would be invested based on various equity and options trading strategies and that they could expect guaranteed annual returns ranging from 2% to 11%.  Most investors purchased interests in limited partnerships through subscription agreements, while some investors received promissory notes evidencing their investment.  In just over one year, Elm and ETIA raised at least $17 million from over 50 investors.

Elm used roughly $7 million of investor funds for trading.  However, he did not achieve the returns he promised to investors; rather, his trading account suffered losses of nearly $4 million from January 2014 to November 2014.  Of the remaining funds, Elm used over $5 million to make Ponzi-like payments to investors purportedly representing interest and returns of principal.  Elm also used investor funds to support a lavish lifestyle that included the purchase of a $1.75 million home, nearly $300,000 in luxury cars, over $130,000 in jewelry, and even nearly $20,000 to pay his wife's student loans.

Grisel Alonso has been appointed as Receiver over ETAI and the Funds, and has established a website at www.elmtreereceivership.com.  A court hearing has been scheduled for January 29, 2015 at 1:15 PM in Courtroom 205B of the Federal Courthouse in Ft. Lauderdale, FL. A copy of the Commission's Complaint is below:

Elm Complaint

Sunday
Jan182015

Ponzi Schemes Continued To Proliferate In 2014

Despite a burgeoning economy, increased regulation, and heightening scrutiny on financial crime, data compiled by Ponzitracker shows that Ponzi schemes continued to be uncovered at a steady pace in 2014 and result in numerous and lengthy prison sentences for the perpetrators.  In 2014, at least 70 Ponzi schemes involving more than $1.5 billion in investor funds were uncovered - equating to the discovery of a new scheme every five days.  Additionally, nearly 1,500 years in prison sentences were handed down in 2014 to at least 136 individuals for their involvement in Ponzi schemes.  Analysis of this data, illustrated in the below database and assembled with the assistance of Alison Jimenez at Dynamic Securities Analytics, suggests that the era of the Ponzi scheme is unfortunately here to stay for at least the near future.

The Madoff Era: Unprecedented And Devastating

The collapse of Bernard Madoff's massive Ponzi scheme in late December 2008 heralded the start of a likely-unprecedented period of time during which over 500 schemes have since been discovered.  This onslaught was not gradual but rather sudden and violent; in the 14-month period from October 2008 to December 2009, the three largest Ponzi schemes in history collapsed in stunning fashion (with losses from the largest, Madoff's fraud, more than doubling those of the second-largest scheme)  Yet, while the number of schemes discovered annually has decreased since peaking at 113 in 2009, the proposition that increased regulation and heightened public awareness might significantly curb the number and severity of schemes going forward has not been borne out by the data.  Rather, the ensuing years showed an alarming consistency in both the number and magnitude of schemes uncovered. As the graphic (right) illustrates, the number of schemes uncovered from 2010 to 2014 has ranged from a low of 67 in 2013 to a high of 100 in 2012.  

The increased prosecution of these schemes has resulted in a corresponding increase in prison sentences handed down to Ponzi scheme perpetrators and their accomplices, with more than 5,000 years in prison sentences handed down to more than 400 individuals in the past six years.

2014 Data Shows Positive, Alarming Trends
  

An analysis of Ponzi scheme discoveries and prison sentences in 2014 points to both positive and alarming trends.  On the one hand, the average Ponzi scheme discovered in 2014 was approximately $21.8 million - an approximately 50% decrease from an average size of nearly $43 million in 2013 and the lowest average size since 2011.   Coupled with a modest increase in the median Ponzi scheme size, the data suggests that the number of large schemes that had previously boosted the average scheme size appears to be on the decline.  However, any comfort from that statistic is negated by the fact that both the number of schemes uncovered and accompanying prison sentences increased in 2014 (albeit modestly) compared to 2013. 

There was also a notable increase in the role of women in Ponzi schemes discovered in 2014. During the 2008 to 2013 time period, males comprised 90% of the individuals arrested and sentenced for Ponzi schemes.  While that percentage remained constant for Ponzi scheme sentencing in 2014, women made up over 16% of individuals implicated in Ponzi schemes discoveries in 2014 - a 240% increase from the same time period in 2013 and a 181% increase from the 2008 - 2013 average.  While the sample size is much too small to draw any substantial or permanent conclusions, the sudden increase in schemes involving females may be a trend worth further scrutiny.  

Finally, the data shows that California significantly outpaced the rest of the United States in terms of discovered Ponzi schemes.  Of the 70 Ponzi schemes uncovered in 2014, an astounding 13 - or nearly  20% - were based in or had ties to California and had a collective total of nearly $370 million of investor funds at stake.  Florida was a distant second with seven schemes discovered.   

In closing, any hopes that 2014 might finally signal the final curtain on the "Madoff Era" are belied by the data.  While authorities have done an admirable job in rooting out Ponzi schemes over the better half of the past decade, it simply appears that new fraudsters have been more than willing to take the place of their fallen brethren.  The result has been a continued evaporation of investor wealth, which serves not only to decrease legitimate investments but continues to breed mistrust in the financial markets for those slighted victims.  While significant strides have been made in increasing regulation and educating the investing public, more must be done.

For a comprehensive database of Ponzi schemes spanning the last six years, visit the Ponzi Database.

 

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