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Recent SEC Releases
Monday
Jun302014

Pennsylvania Woman Charged With "Massive" Ponzi Scheme

Federal authorities have indicted a Pennsylvania financial advisor on charges that she orchestrated a "massive Ponzi scheme" that may have duped hundreds of victims out of millions of dollars.  Patricia S. Miller, 67, was charged with five counts of wire fraud by the U.S. Attorney for Massachusetts.  If convicted of the charges, Miller could face up to twenty years in federal prison for each count as well as up to a $250,000 fine.

Miller served as a financial advisor with several brokerage firms, most recently with Investors Capital Corp in McMurray, Pennsylvania.  Using her position as a financial advisor, Miller solicited potential investors for "investment clubs," such as "KS Invsestments" and "Buckharbor," that offered high rates of return through purported investments in fixed-income notes and other investments.  According to the indictment, investors entrusted millions of dollars towards these "investment clubs." 

However, authorities alleged that Miller did not use investor funds as promised, but rather misappropriated funds for her own use as part of a massive Ponzi scheme that may have dated back as far as the early 1990's.  According to Miller's FINRA Broker Check, she was terminated in May on grounds that she misappropriated customer funds, borrowed money from customers, and engaged in fraudulent investment activity.   The Report also disclosed that Miller was the subject of at least six pending customer complaints related to the alleged scheme.

Miller's Broker Check is below:

Broker Check

Monday
Jun302014

TelexFree Proof of Claim Deadline No Longer Valid, New Deadline Expected Soon

Ponzitracker has confirmed that victims of the alleged $1 billion TelexFree Ponzi/pyramid scheme no longer face an August 13, 2014 deadline to submit any claim for alleged losses, and that a new deadline will likely be set for late 2014.  TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree"), which initially filed bankruptcy in a Nevada Bankruptcy court, currently face allegations from state and federal securities regulators that their voice-over-internet-protocol ("VOIP") business was a massive Ponzi and pyramid scheme that took in hundreds of millions of dollars from U.S. investors alone.  The proceedings were subsequently transferred to a Massachusetts Bankruptcy court where civil and criminal proceedings are also pending, and an independent trustee was recently appointed.

An attorney for the independently-appointed trustee, Stephen Darr, has confirmed to Ponzitracker that the August 13, 2014 deadline established by the Nevada Bankruptcy court to file a Proof of Claim is no longer valid as a result of the transfer of the proceedings to Massachusetts.  Rule 3002 of the Federal Rules of Bankruptcy Procedure provides that a proof of claim is timely filed when done so within 90 days after the first date of the meeting of creditors known in Bankruptcy parlance as the "341 Meeting."  Shortly after TelexFree's April bankruptcy filing, a notice appeared on the court docket setting the 341 Meeting for May 15, 2014 and providing that the Proof of Claim filing deadline was 90 days after that date - resulting in a claim deadline of August 13, 2014.  

However, the originally-scheduled 341 Meeting was never held, as a Court ordered the transfer of the proceedings to a Massachusetts Bankruptcy court on May 6, 2014.  Recently, Ponzitracker spoke with an attorney for Trustee Stephen Darr, who confirmed that:

You can disregard the bar date set by the Bankruptcy Court in Nevada.

Thus, until the Court reschedules the 341 Meeting, the Proof of Claim deadline will not take effect.  

This change was also recently reflected on the official website maintained for TelexFree interested parties, with the Proof of Claim Form section modified to state that:

Claim Form (Modified Version Available Shortly)

Please note that a modified Proof of Claim Form specific to the TelexFree cases will be available in the near future. A Bar Date has not been set.

Thus, while the August 13, 2014 claim deadline is no longer valid, victims should still continue to gather appropriate documents that will allow them to submit an accurate claim, including bank documents showing their investment, documents from TelexFree or any promoter confirming their investment, and documents showing any funds received from TelexFree after their investment.  With the number of estimated victims likely to be in the tens of even hundreds of thousands, any discrepancy in a submitted Proof of Claim could potentially delay any eventual recovery.

Ponzitracker will report on when a new bar date is made public, and will provide a detailed instruction guide for understanding and completing the Proof of Claim form at an appropriate time.

Previous Ponzitracker coverage of TelexFree is here.

Wednesday
Jun252014

Convicted Ponzi Schemer Threatens To "Fry This Court" After Receiving 20-Year Sentence

Shortly after learning of his twenty-year prison sentence for operating a Ponzi scheme that duped more than 140 investors out of over $4.3 million, a Montana man stated that he "will fry this court" and threatened that the prosecuting county attorney "will pay."  Richard Reynolds received a 60-year sentence from District Judge Holly Brown, with 40 years of the sentence suspended, following his conviction on six felony charges in December 2013.  Reynolds' outbursts were reportedly followed by his daughter threatening the two co-prosecutors that "this is the beginning, not the end."  Authorities plan to report the threats to police.

Reynolds was arrested in July 2012 after being on the run for several months.  He had been charged with twenty felonies in Gallatin County District Court after a former employee alerted authorities over concerns over the legitimacy of his operation.  According to authorities, Reynolds and his wife, Lori, operated and managed eight corporations from 2008 to 2011 under the several companies, including United Consultant Investment Corporation ("UCIC"), Buffalo Exchange, and Buffalo Extension.  The two solicited investors for a purported foreign currency trading platform through Buffalo Extension and Buffalo Exchange, and in a gold investment opportunity through Buffalo Investment.  Importantly, none of these investments were approved or registered with any state securities regulator or the Securities and Exchange Commission ("SEC").  

Investors were provided with marketing materials and promised quarterly returns of 100 percent.  In one instance, Reynolds communicated with a promoter for a mining entity who provided him with offering documents after Reynolds offered to help raise money for the operation.  However, even after the promoter discovered that Reynolds had securities problems with Missouri and Montana authorities and ceased communication with Reynolds, it was later discovered that Reynolds still solicited several individuals to invest in the mining operation.  

Additionally, Reynolds also used his close relationship with area pastors to identify and solicit investors.  At least eight pastors introduced investors to Reynolds, and in return became employees of Reynolds and received 10% of all investor funds directed to Reynolds' operations  While the pastors thought that Reynolds was truly investing in the foreign currency and gold opportunities being promoted, they later became suspicious when Reynolds failed to meet investor principal redemptions and made promises he could not keep.  In total, Reynolds and his umbrella of entities raised approximately $5.4 million from over 140 investors in 21 states and six countries.

After the Montana Committee of Securities and Insurance was contacted by several former employees who had become suspicious of Reynolds, an investigation revealed that Reynolds and his wife did not make the gold and foreign currency investments they purported to make.  Instead, the two maintained thirty-one separate bank accounts at Bank of America and Wells Fargo, where they used at least $4.4 million of the $5.4 million they raised to live a lavish lifestyle and make Ponzi-style interest payments and principal redemptions.  Additionally, through investigative subpoenas served to E*Trade, the CSI learned that of a total of $725,000 of investor funds transferred in, approximately $314,015 was lost in speculative penny stock trading.  The CSI also learned that the Reynolds were a 49% owner in a pre-production movie being produced about an Indian heroine.  

After standing trial, Reynolds was convicted by a Montana jury of six felony charges, including two counts of fraudulent practices and single counts of theft, operating a Ponzi scheme, failure to register as a security salesperson and failure to register a security.  While Reynolds will be given credit for the approximately two years he has spent in custody, Montana law requires that he serve at least 25% of his sentence before he can be eligible for parole - meaning he will be in prison until at least mid-2017.  Such a timetable does not include any additional sentence based on the alleged threats.

Wednesday
Jun252014

Zeek Receiver Sues Former Attorneys For $100+ Million

The court-appointed receiver for the $600 million Zeek Rewards Ponzi scheme has filed suit against two well-known multi-level-marketing attorneys that provided legal services to the company, alleging the attorneys knew or should have known that the company "was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme.  Kenneth D. Bell, the Receiver, named Howard N. Kaplan in one lawsuit and Kevin D. Grimes and Grimes' law firm, Grimes & Reese, P.L.L.C., in a second lawsuit.  Each suit contains legal a legal malpractice/negligence/breach of fiduciary duty claim, an aiding and abetting breach of fiduciary duty claim, and a claim for constructive trust, while the suit against Grimes also includes an unjust enrichment claim.  

The Securities and Exchange Commission filed civil fraud charges against RVG Venture Group, LLC d/b/a ZeekRewards ("Zeek") in August 2012, alleging that the company was operating a $600 million Pyramid and Ponzi scheme that was on the verge of collapse.  After Bell's appointment as Receiver, his subsequent investigation confirmed that Zeek's more-than 800,000 victims had likely lost between $500 million and $600 million.  Including money that authorities were able to seize following the charges and Bell's recovery efforts, more than $300 million has been recovered for the benefit of investors, and Bell has sought to make an interim distribution at the end of September.

As part of Bell's recovery efforts, he commenced "clawback" lawsuits against net winners that were fortunate enough to realize a profit off of their investment - a profit that was, in reality, simply the redistribution of funds belonging to other investors.  Additionally, Bell indicated throughout his quarterly status reports that he and his team continued to investigate:

claims against RVG's third-party advisors, vendors, and other service providers that knew or should have known of the inappropriate nature of RVG's activities and yet facilitated those activities for their own gain.

While Bell has explicitly said that these third parties included financial institutions, this is the first confirmation that Zeek's former legal advisors have also been under Bell's scrutiny.

The Lawsuits

The lawsuits allege that Kaplan and Grimes "played an indispensable role in the scheme."  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."  Kaplan is a tax attorney whose website states that "taxes are a necessary evil, [and] [p]aying too much in taxes is avoidable with good counsel." Both of the men are alleged to have served as counsel to Zeek beginning no later than January 2012 up to August 2012 when the Commission's enforcement action was filed.

Grimes, according to the complaint, despite allegedly knowing that Zeek was a Pyramid/Ponzi scheme that was selling unregistered securities, created a "compliance course" specifically designed to encourage investors and potential investors that completion of the course somehow bestowed an air of legitimacy to the scheme.  According to Bell, Zeek charged each affiliate $30 for the course - of which $5 was paid to Grimes.  Bell expands on his claim that Grimes knew Zeek was selling unregistered securities by pointing to an email purportedly authored by Grimes that stated, in part, 

I am still in the process of getting my arms around the program, but I have some SERIOUS concerns that it very likely meets the definition of an "investment contract."

If Zeek was, in fact, an investment contract (as tbe Commission alleged), it would constitute a security that was subject to federal and state securities laws, including registration requirements and exemptions.  According to Bell, Grimes discarded these concerns to profit from the creation and marketing of the compliance course.   

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.  

While the allegations against Kaplan are not as thorough, Bell similarly alleged that Kaplan ignored that Zeek's compensation plan could only be classified as an investment.  As Zeek's "tax advisor," Kaplan appeared on multiple conference calls with investors to provide tax advice related to classification of their gains.  The suit also alleges that Kaplan allowed Zeek to use his association as an implicit endorsement of the legitimacy of the scheme, and that this served to prolong the scheme and the resulting financial losses.

The lawsuits assert multiple causes of action against Kaplan and Grime, seeking not only more than $100 million from each but also the award of punitive damages for their conduct.  

Previous Ponzitracker coverage of ZeekRewards is here.

The lawsuits are included below (special thanks to ASDUpdates):

 

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Saturday
Jun212014

Cay Clubs Executives Arrested In Central America To Face U.S. Obstruction And Fraud Charges

Just weeks after a Florida federal judge dismissed the Securities and Exchange Commission's civil enforcement action accusing five executives of a failed real estate company of operating a $300 million Ponzi scheme, the Department of. Justice announced that two of the executives had been arrested in Central America and returned to the United States to face conspiracy and obstruction charges.  Fred Davis Clark, Jr., 56, and his wife, Cristal R. Clark a/k/a Cristal Coleman, 41, face a newly-unsealed indictment charging them with one count of conspiracy to commit mail and wire fraud, three counts of mail fraud, and one count of obstructing an official proceeding.  Each of the charges carries a maximum twenty-year prison sentence.

Cay Clubs was a Florida company that raised more than $300 million from over 1,000 investors through the sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  The two also had ownership interests or exercised control over several other entities, including Cayman Islands-based CMZ Group, LTD ("CMZ"), Cristal Clear Charters, LLC ("CCC"), and DC6, LLC ("DC6").  Cay Clubs touted investments in interests in residential real estate, promising guaranteed annual returns of 15% purportedly derived from the purchase of decaying or abandoned properties properties that would be refurbished and upgraded into five-star resorts nationwide.  From 2004 to 2008, the company was able to raise over $300 million from investors.

After an investigation that spanned several years, the Commission initiated a civil enforcement action against Cay Clubs and five of its executives in January 2013, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end recently when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

The criminal action alleges that the Clarks not only provided false and misleading testimony during the Commission's investigation, but also took steps to conceal the status and whereabouts of their assets to further thwart the investigation.  The conspiracy charge relates to the Clarks' operation of CMZ, which operated pawn shops throughout the Caribbean.  According to the Indictment, the Clarks used CMZ to transport raw materials, including gold and precious metals, from the pawn shops to a third-party Illinois smelting plant, where the resulting proceeds were diverted to the CCC and DC6 bank accounts for their own personal use.  The mail fraud charges related to the delivery of bank statements for CCC's Bank of America account on several occasions from November 2010 to May 2011, while the obstruction charge related to Fred Clark's allegedly false and misleading testimony given to the Commission that included engaging in certain financial transactions to conceal his assets.  The Indictment also seeks the forfeiture of the funds involved in the allegations, which totals over $5 million.

While many may question the timing of the Clarks' arrest given the recent dismissal of the Commission's civil enforcement action, a review of the underlying criminal court docket reveals that the case has been pending under seal since November 2013, with the Indictment handed down on November 26, 2013. Shortly after the Indictment, the court docket reveals that authorities sought a partial lifting of the seal order to provide the indictment and arrest warrants to Interpol and foreign governments in an effort to bring the Clarks into custody and possibly cancel their passports.  These efforts culminated in the Clarks' arrest on June 20, 2014, with the Department of Justice announcing that Fred Clark had been apprehended as he was traveling from Honduras to Panama, while Cristal Clark was apprehended in Honduras.  The two made their first appearances before Key West Magistrate Judge Lurana S. Snow, and a detention hearing has been scheduled for Friday June 27, 2014 at 2:00 P.M.  Court files indicate that noted criminal defense lawyer Todd Foster has entered an appearance for Fred and Cristal Clark.

The Indictment is below:

Indictment

 

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