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Recent SEC Releases
Friday
Mar282014

Former Prosecutor Due For Release After Serving Four Years For $45 Million Ponzi Scheme

A former prosecutor and part-time magistrate judge who encouraged his investors to call him "judge" is scheduled to be released next week after serving over four years in federal prison for a massive Ponzi scheme that raised more than $45 million from nearly 10,000 victims.  Bryant E. "Bry" Behrmann, 67, is set to be released from a halfway house after being sentenced to a six-year term in September 2009.  

Behrmann, along with business partner Larry "Buck Hunter," operated Global Online Direct ("GID"), which held itself out to investors as a buyer of distressed inventory.  GID told investors that, through its "Secured Profit Inventory Program," it could promise the payment of daily interest rates of as much as 1.00% through the "Big Dawgs Club."  These returns translated into annual returns ranging from 65% to 1,800%, which were purportedly made possible through the purchase and subsequent resale of excess inventory at flea markets, retail storefronts, and online actions such as eBay and Yahoo.  Investors were recruited primarily through the internet, and were advised of Behrmann's previous background as a county prosecutor and later part-time magistrate judge as a sign of the scheme's legitimacy.  In total, approximately 9,400 investors entrusted nearly $46 million with the men.

However, investors were not told that Behrmann's law license was suspended in 1999 after the Idaho Supreme Court found that he had engaged in "conduct involving dishonesty, fraud, deceit or misrepresentation."  Civil and criminal authorities soon alleged that GID was nothing more than a Ponzi scheme that used incoming investor funds to pay returns to existing investors.  After several states issued cease and desist orders, Hunter and Behrmann were charged with securities fraud in 2007, and GID was subsequently placed in receivership.  Hunter and Behrmann later pleaded guilty to money laundering charges resulting from the purchase of personal homes for their family members using shceme funds, and in September 2009 were handed down six-year prison sentences.

According to the Idaho Stateman, Hunter is scheduled to be released from a halfway house in June.

Friday
Mar282014

SEC Alleges "Cloud Computing" Company Was $65 Million Pyramid, Ponzi Scheme

The Securities and Exchange Commission ("Commission") announced that it had initiated an emergency enforcement action and obtained an asset freeze against a California company that purportedly specialized in cloud computing but was, according to the Commission, a massive Pyramid and Ponzi scheme that targeted members of the Asian and Latino community.  Defendants World Capital Market Inc., WCM 777 Inc., WCM777 Ltd. d/b/a WCM777 Enterprises, Inc. (the 'WCM Entities"), and Phil Ming Xu were charged with multiple violations of federal securities laws in a complaint filed yesterday and unsealed today in a California district court.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties. In addition, the Commission is seeking appointment of a Receiver over the WCm Entities.

According to the Commission, Xu formed the WCM Entities in March 2012, identifying himself as the founder, chairman, and president in documents distributed to investors.  WCM was described as a "global merchant investment bank," and represented that it was in partnership with over 700 investment organizations including Siemens, Denny's, and Goldman Sachs.  WCM777 Inc. was a wholly-owned subsidiary of WCM, opening and maintaining bank accounts in the name of WCM777.  

Beginning in March 2013, the WCM Entities began soliciting investors to purchase purported service packages and membership units in various cloud-based computing services.  In addition to computing services, each "package" offered investors returns in the form of cash and "points."  Investors could earn cash and "points" through referring new members, and were then able to redeem the "points" by either exchanging the "points" for goods and services offered by the WCM Entities or by converting the "points" into equity for the upcoming initial public offering of various companies the WCM Entities planned to bring public, including WCM7.com.  

Investors purchasing cloud-based computing packages were given the choice of five different membership levels, which in turn allowed members to purchase even more "World Cloud Media Products."  Each of the five service packages promised investors returns of at least 100% in 100 days, with the fifth, or highest, level promising returns of 160% within 100 days.  The various levels carried descriptions ranging from "junior distributor" to "director."  In order to keep the scheme going and to control the possibility of massive cash withdrawals, investors were encouraged to accumulate point balances, with Defendant Xu allegedly posting on WCM777's online forum that those who took cash withdrawals were required to pay income tax in their respective countries.  

To reassure potential investors, the WCM Entities featured a section on their website that included the question whether "WCM777 is a Ponzi game," responding that "we are not a Ponzi game company.  We are creating a new business model."T

The WCM Entities have increasingly been the subject of state securities regulators for engaging in unregistered securities offerings, and have since consented to orders in California and Colorado relating to these offerings.  Additionally, according to the Commission, the WCM Entities had no source of revenues other than money received from new investors through the sale of service packages.  Thus, the success of the WCM Entities depended almost entirely on the recruitment of new investors to sustain operations - which inevitably will lead to the situation where incoming funds dry up and existing obligations will dwarf cash on hand.  According to the Commission,the WCM Entities operated a classic Pyramid scheme that had no source of revenue other than soliciting new investors. Additionally, the WCM Entities made Ponzi-style payments to investors by using investor funds as the source of over $4 million of payments of purported "returns" to investors.

Nor did the WCM Entities have the purported extensive connections with numerous multi-national companies.  For example, despite claiming to have a partnership with well known companies including Denny's, Goldman Sachs, and Siemens, the WCM Entities did not have any relationship with any of the entities, and in several cases were using the respective company's logo without permission.  

Defendants raised more than $65 million from investors worldwide, including nearly $30 million from investors in the United States.  However, rather than being used for cloud-based services, investor funds were used for a variety of unauthorized purposes, including (i) the purchase of nearly $14 million in real estate in the United States, including two golf courses; (ii) "playing" the stock market; (iii) various unrelated investments in an oil and gas company and a rough diamond merchant.  

According to Patrickpretty.com, a Twitter account belonging to Xu contained an entry on March 14, 2014, that an employee known as "Liu," or "Tiger," had taken more than $30 million in "ecash."  The veracity of that claim remains unknown.

A copy of the Commission's complaint is below:

 

comp-pr2014-60

 

Tuesday
Mar252014

If You Invested Less Than $925,000 With Bernard Madoff, You're Now Even.

 

In an announcement from the court-appointed trustee overseeing recovery for victims of Bernard Madoff's massive Ponzi scheme, a proposed fourth distribution of approximately $350 million will resolve all claims from victims with an allowed claim of $925,000 or less. The trustee, Irving Picard, sought court approval to make a total distribution of approximately $349 million, which will bring the total amount distributed to Madoff victims at nearly $6 billion to date. With an average payment of approximately $323,000, the proposed distribution will also fully satisfy nearly 52% of the 2,189 accounts for which a claim was submitted.

According to Picard, the bulk of the proposed distribution will be comprised of the recent $325 million settlement with JP Morgan over the bank's alleged role as Madoff's primary banker. The bank's settlement with Picard was part of a record $2.6 billion settlement paid to resolve a panoply of civil and criminal investigations. The distribution will include payments ranging from $496.00 to $77.3 million, and comes over one year after Picard announced a third distribution of approximately $500 million in February 2013.

The proposed distribution will mark the fourth year in a row that Picard has made a distribution to victims, bringing the total payout thus far to nearly $6 billion including the proposed distribution. With the fourth distribution, Picard announced that Madoff victims will now have received approximately 46% of their allowed loss. Combined with the fact that many victims also received a SIPC cash advance of up to $500,000 from an industry-funded reserve, this means that every allowed claim of $925,000 or less will now have been repaid in full.

More than five years after Madoff's fraud was unraveled, it is now becoming clear that many, if not all, of Madoff's victims will receive at least a significant reimbursement of their losses.  While the proposed distribution represents the smallest payment of the four distributions to date, there still remains several billion dollars locked up in the bankruptcy estate due to Picard's obligation to hold certain amounts in reserve pending the finality of various litigation, including a time-based damages dispute that was appealed in January. Additionally, nearly $3 billion is being held in reserve for 155 "deemed determined" claims that are still subject to litigation or further determination.  Finally, the Madoff Victim Funda separate fund of nearly $4 billion consisting of government forfeitures and recoveries, is also currently accepting claims from a larger subset of victims for an eventual distribution. Thus, theoretically, more than $8 billion potentially remains for distribution in the future - a figure that exceeds the total amount of distributions made thus far by Picard.

Previous Ponzitracker coverage of the Madoff scandal is here.

Monday
Mar242014

Jury Convicts Former Madoff Employees Of All Charges

In the first trial to take place since Bernard Madoff's massive Ponzi scheme shocked the world more than five years ago, five former employees at Madoff's investment firm were convicted by a New York federal jury for their participation in Madoff's scheme.  After nearly 3 days of deliberations, a federal jury found former staffers Daniel Bonventre, the firm's back-office director of operations, Annette Bongiorno, Madoff's administrative assistant, Joann Crupi, an account manager, and computer programmers Jerome O'Hara and George Perez, guilty of all charges.  Perhaps fittingly, the five-month trial now ranks as the longest white collar trial in decades.  

Following Madoff's arrest in December 2008, prosecutors began to increasingly doubt his claims that he was singularly responsible for the largest investment fraud in history.  Following Madoff's 150-year sentence in June 2009, prosecutors charged nat least fifteen former employees with complicity in Madoff's scheme.  Nine of those charged pleaded guilty rather than face trial.  

According to prosecutors, each of the five defendants played an active role for years in helping Madoff cover up the fraud.  This included the development of computer programs by O'Hara and Perez that contained fraudulent information designed to generate fictitious reports and evade suspicion from regulators. Bonventre allegedly falsified financial statements and other documents in order to obtain hundreds of millions of dollars in loans from financial institutions, as well as arranging for his son to obtain a "no-show" job by providing false information to the Department of Labor.  Bongirono and Crupi managed hundreds of accounts on the investment advisory side of the business, "executing" backdated trades in this accounts on paper only to achieve rates of return pre-determined by Madoff.  

One of the ex-employees that pleaded guilty was Frank DiPascali, who was widely regarded as Madoff's right-hand man during the decades-long fraud.  As part of his agreement with prosecutors, DiPascali has provided extensive cooperation to authorities, and served as the prosecution's star witness as he testified at trial and implicated each of the five defendants in Madoff's fraud.  This testimony apparently proved persuasive, as each defendant was convicted of all charges levied by prosecutors.

The trial featured many interesting twists and turns, including the unusual decisions by Bonventre and Crupi to testify in their own defense that they had no idea of the true nature of Madoff's business.  Additionally, one juror was eventually removed from deliberations after falling seriously ill - resulting in an 11-member jury left to deliberate the fate of the five defendants.  

The Court rejected prosecutors' request to immediately detain the five defendants, instead allowing them to remain free until sentencing.  Each of the five was convicted of at least eight criminal counts, and potentially face decades in federal prison.  

The convictions are the culmination of prosecutors' quest to hold those accountable who may have participated in or aided Madoff's fraud, with prosecutors now having obtained fourteen guilty pleas or convictions.  That leaves Madoff's ex-accountant, Paul Konisberg, as the only remaining defendant fighting criminal charges.  Konisberg was arrested and pleaded not guilty in September 2013 just before the five defendants were scheduled to begin trial.  The successful prosecution of the 'Madoff Five' will certainly raise serious questions as to Konisberg's choice of whether or not to proceed to trial.  Depending on Konisberg's decision, it may also finally result in DiPascali learning his sentencing after originally pleading guilty in August 2009.  

Wednesday
Mar192014

Agape World Broker Pleads Guilty To Role In $400 Million Ponzi Scheme, Faces Deportation

A former sales agent that received more than $9 million in commissions from pitching investments in Nicholas Cosmo's $400 million Ponzi scheme has entered into a plea agreement with prosecutors, and may face deportation as a result.  Hugo Arias, 44, pleaded guilty to an unspecified number of securities fraud charges before United States District Judge Kathleen Tomlinson, where he admitted that Cosmo's scheme "was a Ponzi scheme."  Securities fraud carries a maximum twenty-year sentence for each count, although federal sentencing guidelines will likely result in a reduced sentencing recommendation.  

Agape was a nationwide Ponzi scheme orchestrated by Cosmo, whose exploits earned him the nickname as the "New York Mini-Madoff".  After being indicted in April 2009, Cosmo pled guilty to one count of wire fraud and one count of mail fraud, and was sentenced to twenty-five years in federal prison in October 2011.  According to prosecutors, Agape solicited over 5,000 investors nationwide, offering exorbitant short-term returns that were the equivalent of eighty percent annually.  Cosmo told potential investors that these returns were achieved by making profitable short-term bridge loans.  As a result, Cosmo and Agape took in approximately $413 million from thousands of investors nationwide.  However, in reality only $30 million was used to make bridge loans, while approximately $80 million was lost as the result of unauthorized trading in commodities and futures positions. Approximately $232 million was paid to investors in the form of fictitious interest payments.

After Cosmo was sentenced to prison, authorities began investigating the scheme's use of commissioned agents to attract investors.  The Securities and Exchange Commission filed civil fraud charges against fourteen brokers, including Hugo Arias, in June 2012, alleging the agents used an assortment of false claims made to lure investors, including the safety of an investment, the intended use of investor funds, and the attractive rate of return. Authorities focused on alleged misrepresentations and omissions made by agents in 2008 despite learning that previous bridge loans made in 2007 were either in default or on extension.  Cosmo's sales agents were richly rewarded for their efforts; more than $60 million was paid out to agents in commissions during the scheme's existence.  

Additionally, in light of the short-term nature of the investments, the agents urged investors to "roll-over" their principal and accrued interest to continue to perpetuate the scheme and ignored numerous red flags of fraud, including Cosmo's prior criminal convictions for fraud, the promised exorbitant returns, and representation that only 1% of an investor's principal was at risk.  
Criminal authorities have charged eight people, including Cosmo and Arias, since the scheme collapsed in 2009.  This includes:
  • Richard Barry, who pleaded guilty in August 2010 and awaits sentencing;
  • Jason Keryc, Anthony Ciccone, Diane Kaylor, and Anthony Massaro, 41, who were arrested in April 2012; and
  • Bryan Arias, Hugo Arias's brother, and Shamika Luciano, who were arrested in December 2013.

According to LIBN.com, six former Agape brokers remain free on bail pending trial.  

After serving his sentence, Arias could be deported back to his native country, Colombia.  He remains free on $50,000 bond pending sentencing.  

Previous Ponzitracker coverage of the Agape World Ponzi scheme is here.

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