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Recent SEC Releases
Wednesday
Sep172014

Authorities Charge Cay Clubs Principals With Fraud In Alleged $300 Million Ponzi Scheme

The principals of the now-defunct Cay Clubs Resorts and Marinas ("Cay Clubs") were indicted on multiple bank fraud and conspiracy counts in what authorities alleged was a massive $300 million Ponzi scheme.  Fred Davis Clark, Jr., a/k/a Dave Clark, 56, and Cristal R. Clark, a/k/a Cristal R. Coleman, face the charges after originally being arrested and charged earlier this summer with obstruction and fraud charges in connection with their operation of other businesses not directly related to Cay Clubs.  The new charges stem from their operation of Cay Clubs, which bilked investors out of hundreds of millions of dollars over the purported refurbishing of luxury condos.  The Clarks face charges of bank fraud and conspiracy to commit bank fraud, with the bank fraud charges carrying a maximum 30-year prison sentence.  

Background

Cay Clubs 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.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% TO 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay leaseback" payments to existing investors in what authorities alleged was a classic example of an ongoing Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 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.  

Criminal Investigation Continued

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and expulsion from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  The pair are currently being held without bond.

Even while the Commission's case foundered, it was apparent that criminal authorities continued to move forward with their investigation.  In April 2014, it was reported that immunity had been granted to two Florida attorneys who were previously involved in day-to-day Cay Clubs operations, including the concealment of the true nature of the company's operations from its lenders.  Attorneys Scott Callahan and Charles Phoenix reportedly testified that they helped conceal the existence of the "leaseback" payments from lenders to give the appearance that the sales to investors were that of real estate - and not securities. Indeed, Phoenix's immunity statement read, in part, that

"In Phoenix's view, there came a time during the course of the operation of Cay Clubs where it could fairly be described as a 'Ponzi scheme' due to its inability to pay existing leaseback obligations without new investor money..."

In a motion filed by one of Clark's attorneys in the Commission's case, it was alleged that Phoenix and Callahan gave the statements under the threat of criminal prosecution. 

Getting Around The Five-Year Statute of Limitations

While the Clarks were able to evade civil prosecution by the Commission by successfully contesting the Commission's adherence to the applicable statute of limitations, it appears that the government will not have the same problem in proceeding with the criminal charges.  Of note, the criminal charges emanate from the Clarks' interactions with their lenders, rather than investors.  The significance of this becomes apparent when reviewing the applicable criminal statutes and recent legislation.  For example, the criminal statute governing statutes of limitation provides:

Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.

18 U.S.C. 3282 (emphasis added).  Further, as part of the Fraud Enforcement and Recovery Act of 2009, Congress authorized the the government to prosecute cases against financial institutions, including mortgage lending businesses, using bank fraud, mail fraud, and wire fraud statutes, and extended the applicable statute of limitations from five years to ten years.  This exact scenario was recently outlined by Preet Bharara, the Assistant U.S. Attorney for the Southern District of New York:

“A lot of people thought the statute of limitations is five years in particular cases, but a bank fraud statute has a statute of limitations of 10 years.  If you’re talking about wire fraud and mail fraud, which is specifically five years, but if it affects a financial institution, it’s 10 years.”

By focusing on the Clarks' interactions with lenders, including their omission of certain information such as the "leaseback" arrangement with investors when obtaining lender financing, the government's plan to utilize the longer statute of limitations becomes very apparent.  However, it would not be surprising to see this position attacked by the Clarks.

Update 9/19: The superseding indictment is below:

Superseding Indictment

Tuesday
Sep162014

Regulator Fines Morgan Stanley For Ignoring $35 Million Ponzi Scheme's "Red Flags" 

A market regulator has fined Morgan Stanley Smith Barney ("MSSB") for ignoring multiple "red flags" involved in a customer's account who ultimately was imprisoned for masterminding a $35 million Ponzi scheme. The Commodity Futures Trading Commission ("CFTC") handed down a $280,000 fine to MSSB over what it classified as improper supervision and records violations tied to accounts opened and ultimately used by Benjamin Wilson to carry on his scheme in the United Kingdom.  Wilson is currently serving a seven-year prison sentence after pleading guilty to criminal charges.  

According to the CFTC, Wilson began opening multiple accounts for his company, SureInvestment, at MSSB in April 2010.  Neither Wilson nor his company had previously been a MSSB customer, and several SureInvestment entities were located in the British Virgin Islands - a country deemed a "high risk jurisdiction" under MSSB compliance procedures.  Based on these facts and Wilson's representation that he planned to initially fund the account with $100 million, MSSB required Wilson to provide several documents that included an audit of a SureInvestment entity located in BVI.  However, that audit contained several "suspicious irregularities," including numerous typos throughout the document.  The CFTC's Order also highlighted the fact that:

A simple internet search would have revealed that neither the Surelnvestment entity that was the subject of the audits nor the purported B.V.I. auditing firm and its principals actually existed. 

SureInvestment's reported trading history was also scrutinized by the CFTC, who noted that the company touted compounded returns of nearly 2,900% from 2003 to 2009, including a string of 45 consecutive profitable months.  

Despite the multiple red flags highlighted by the CFTC, MSSB allowed Wilson to open the requested accounts and ultimately more than $1 million flowed through the accounts.  However, despite the placement of a $250,000 trading limit on the accounts, Wilson and SureInvestment ultimately incurred net trading losses of approximately $600,000 and continued to surpass the trading limit until MSSB ultimately discovered the violation.    

In addition to the red flags and failure to enforce the trading limits on the SureInvestment accounts, the CFTC's Order also faulted MSSB for its level of cooperation in responding to a document request in the course of the investigation.  In September 2011, MSSB received a document request from the CFTC related to the SureInvestment accounts.  In response, a division of MSSB, Morgan Stanley & Co., LLC, provided a response stating that it did not have any responsive documents.  However, after the CFTC subsequently discovered several account numbers for the SureInvestment accounts held at MSSB, account records were produced for the first time.  Those records disclosed that MSSB failed to keep daily records of the trading limit applicable to the SureInvestment accounts.  

While neither admitting nor denying the CFTC's findings, MSSB agreed to resolve the investigation by disgorging the commissions related to the accounts, which amounted to aproximately $16,000, as well as the payment of a $280,000 civil monetary penalty.  MSSB also agreed to abstain from future violations of the relevant portions of the Commodity Exchange Act.  

A copy of the CFTC's Order is below:

Enf Morgan Order 091514

Monday
Sep152014

Guilty Plea In $30 Million Landscaping Ponzi Scheme

A New York man will plead guilty to federal charges that he orchestrated a landscaping Ponzi scheme that duped investors out of at least $30 million through promises of annual returns of up to 400%.  Eric Aronson, 46, pleaded guilty to a single count of securities fraud.  While the charges carries a maximum 20-year prison sentence, Aronson's plea agreement with authorities calls for him to serve 121 to 151 months in prison.  

According to authorities, Permapave was a conglomerate of companies controlled by Aronson that, beginning in 2006, solicited investors to fund the importation of PermaPave pavers from Australia for subsequent resale in the United States.  Through unregistered promissory notes and "use of funds" agreements, investors were promised monthly returns ranging from 7.8% to 33.3%, which equated to annual returns of up to 400%. Aronson and the other defendants told potential investors that there existed an enormous backlog of orders for the pavers, and that investors would be repaid out of profits from the guaranteed sales. 

When PermaPave began to fall behind on payments in late 2008, investors were mollified by an agreement to exchange the promissory notes for convertible debentures with a lower interest rate and a deferral of principal due.  In total, at least 140 investors entrusted $16 million with the company.  In 2009, investors were told that the company had been sold and were urged to convert their debentures into equity shares.  In reality, the company had not been sold nor had it ever been profitable.  Rather, the company was a massive Ponzi scheme that operated at substantial losses while using incoming investor funds to pay "returns" to existing investors. Of the tens of millions of dollars raised by PermaPave, Aronson and the defendants were accused of misappropriating millions of dollars for their own personal use.

Aronson's guilty plea is not his first fraud-related brush with the law.  In 2000, Aronson pled guilty to an unrelated offering scam and later served time in federal prison.  Ironically, Aronson was accused of using investor funds from his current scam to pay his court-mandated restitution payments to victims of his previous fraud.  

The plea comes nearly three years after he was first indicted for the Permapave scheme along with executives Vincent Buonauro Jr. and Robert Kondtratick.  The men were also the subject of an enforcement action by the Securities and Exchange Commission, which sought various remedies including disgorgement, civil penalties, and injunctive relief.  At one point, the Commission sought to hold the men in contempt after accusing them of failing to cooperate with discovery by producing duplicate documents and even a DVD containing damaged and corrupted audio files.

Friday
Sep122014

90-Year Prison Sentence For Florida Man Convicted Of $2.7 Million Ponzi Scheme

A Florida man received a 90-year prison sentence for running a $2.7 million Ponzi scheme - a sentence believed to be one of the longest in history in Ponzi scheme jurisprudence.  James Jackson Jr., 48, received three 30-year sentences, to be served consecutively, after a jury convicted him of 33 grand theft and forgery charges.  Each of Jackson's victims was over 50, and with 10 of the 33 victims being older than 65.  Jackson's sentence ranks as the third-longest Ponzi scheme prison sentence to be handed down, behind only infamous schemers Allen Stanford and Bernard Madoff.  While Jackson will be eligible for parole after serving 85% of his sentence due to his prosecution by the state, the sentence is almost certain to be a life sentence due to his age.

Beginning in January 2008, Jackson used his two companies, American Senior Advisory Group and Covenant Planning Group, to solicit elderly victims under the guise that their investment would be entrusted to a company called AFG to generate regular interest payments.  Jackson showed investors purported emails showing that their funds were delivered to a man named Matthew Turner at AFG, and also provided "deposit agreements" supposedly signed by local attorneys.  Some victims then began receiving regular interest payments from Jackson as evidence of the investment's legitimacy, and ultimately approximately 33 victims entrusted nearly $3 million with Jackson and his companies.

However, the "Matthew Turner" supposedly employed at AFG and overseeing investor funds did not exist, and Jackson was accused of operating a Ponzi scheme by using new investor funds to pay returns to existing investors.  In addition to the Ponzi payments, Jackson also misappropriated investor funds for his own personal use, including more than $500,000 in gambling losses at the Hard Rock Casino and transfers to family members, girlfriends, and an ex-wife.  Jackson was ultimately arrested in January 2012 and more charged were added as additional victims were located.  As of this past July, Jackson has returned approxiamtely $400,000 to victims while more than $1.8 million remains unpaid.

Should Jackson's sentence stand (if appealed), he will become the newest member of the Wall Street Journal's recent "Reordering of the Top 10 White Collar Crime Prison Sentences," where his sentence would place him in sole possession of 8th place and above the 50-year sentences handed down to noted Ponzi schemers Scott Rothstein and Thomas Petters.  The sentence would also be the longest sentence handed down to a Florida Ponzi schemer.  

Tuesday
Sep092014

Hedge Fund Managers Sentenced For $40 Million Ponzi Scheme

Three former hedge fund managers were sentenced to federal prison for their role in a $40 million Ponzi scheme that was previously characterized by a U.S. District Judge as the "the worst financial crime in this district in memory."  Jeffrey M. Toft, 51, of Sioux Fall, S.D., Chad A. Sloat, 36, of Kansas City, Mo., and Michael J. Murphy, 54, of Deep Haven, Minn., became the latest to be sentenced after authorities filed criminal charges relating to the "Black Diamond" Ponzi scheme that swindled victims out of tens of millions of dollars.  Toth, Sloat, and Murphy received sentences of 66 months, 70 months, and 48 months, respectively, and each was also ordered to pay millions of dollars in restitution to victims.  Toft had previously pleaded guilty to one count each of securities fraud conspiracy, wire fraud conspiracy, and money laundering conspiracy, while Sloat and Murphy each pleaded guilty to one count of securities fraud conspiracy.  

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.  Potential investors were promised 4% monthly returns and were assured that their investment was safe due to Simmons' promise that no more than 20% of invested funds would be at risk at any time.  Even quoting Bible verses and stressing his devout Christianity, Simmons succeeded in convincing approximately 240 investors to contribute at least $35 million to the scheme.  

Toft, Sloat, and Murphy operated hedge funds that solicited investors by representing that their funds would be invested in the Black Diamond venture, of which the trio had conducted extensive due diligence and were utilizing extensive safeguards.  However, these representations were not true, and soon the Black Diamond scheme began collapsing - as all Ponzi schemes eventually do.  But instead of disclosing this to their investors, the trio were accused of enlisting the assistance of a fourth individual, Jonathan Davey, to create their own Ponzi scheme and continue to divert investor funds for their own personal use.  

The mastermind, Simmons, was sentenced to a 50-year term back in May 2012 - one of the largest white collar prison terms in history.  Davey was convicted by a federal jury in February 2013 after 45 minutes of deliberations, and is still awaiting sentencing.  

The case was also significant in that the bank used by Simmons to perpetuate the scheme, CommunityONE Bank, N.A., was criminally charged over its lack of an effective anti-money laundering program.  The bank entered into a deferred prosecution agreement ("DPA") with the government, under which the bank, after paying $400,000 in restitution to the victims of Simmons' scheme, was able to have the criminal charges dismissed after two years.  

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