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Recent SEC Releases
Sunday
Jan242016

Appeals Court Revives Charges Against Accused $100 Million Ponzi Schemer

A federal appellate court reversed the dismissal of criminal charges against a Utah man accused of masterminding a $100 million Ponzi scheme, ruling that the trial judge abused his discretion by dismissing the case with prejudice - meaning the charges could not be refiled - after concluding that prosecutors had failed to timely pursue the case.  The Tenth Circuit Court of Appeals issued an opinion last week concluding that U.S. District Judge Clark Waddoup's decision to toss all eighteen charges against Claud "Rick" Koerber with prejudice over violations of the Speedy Trial Act did not adequately address several factors, including Koerber's own actions that contributed to the delay.  Koerber, who touted himself as a "Latter day capitalist" during the mid-2000's, was indicted in 2009 but had the charges dismissed nearly 18 months ago in August 2014.

Background

Koerber, who called himself a "Latter day capitalist," garnered a growing following for his purported real estate investing prowess and was well known in the community not only for his membership in the Latter Day Saints Church but also for hosting a radio show and frequent real estate seminars.  Through his companies, Founders Capital and Franklin Squires, Koerber touted his "equity milling" program that promised lucrative returns through buying and selling residential real estate.  Investors came in droves, entrusting tens of millions to Koerber's operations.  Even Koerber's radio show changed its opening theme song to, "Money, Money, Money" by Abba.  Koerber also appealed to listeners' religious beliefs, even remarking to one listener who questioned his motives that "God is a capitalist."  In total, Koerber raised approximately $100 million from investors.  

However, the collapse of the real estate bubble in 2007 was catastrophic to Koerber's operations, as the majority of Franklin Squires's assets were in the form of real estate that quickly erased any equity as housing prices declined.  He was indicted in May 2009, and a superseding indictment handed down six months later included twenty-two charges including wire fraud, money laundering, and tax fraud.  

Koerber Obtains Dismissal With Prejudice

In April 2014, nearly five years after the first indictment was handed down, Koerber filed a Motion to Dismiss for Impermissible Delay citing multiple grounds, including the violation of Koerber's right to a speedy trial.  The Speedy Trial Act (the "Act"), codified at 18 U.S.C. § 3161, requires that the trial of a defendant entering a plea of not guilty was to start within 70 days of the later of the filing of the indictment or appearance by the defendant in front of a judicial officer.  While the Act also allows for certain extensions, Koerber's motion argued that at least 125 non-exempt days had passed without a trial or other resolution.  

At a hearing, the Government conceded that while a "technical" violation of the Act had occurred, the Court should "cure" the violation by entering an Order pursuant to the Act essentially making a finding that the "ends of justice" warranted a retroactive continuance and outweighed the best interests of the public and Koerber.  However, the Court cited precedent standing for the proposition that such a retroactive mechanism was prohibited and that a violation of the Act would have occurred even of such actions were taken.  

In deciding whether or not to grant dismissal with prejudice, which would prevent prosecutors from re-filing the charges, the Court referenced the seriousness of the offenses and also the "Government's problematic conduct in prosecuting this case," including a "pattern of neglect," tactical delays, an inappropriate use of attorney-client privileged information, and ex parte interviews with Koerber that violated his due process rights.  Noting that prejudice to Koerber was presumed, the Court opined that re-prosecuting Koerber would be impossible and ordered that the case be dismissed with prejudice.

The Appeal

The Tenth Circuit's opinion painstakingly recites the procedural history of the case beginning with the government's 2007 investigation, noting various missteps along the way including the government's failure to provide timely and sufficient proposed orders extending the time under the Act.  These and other missteps eventually prompted Koerber to move to dismiss the case for violations under the Act, which the Tenth Circuit noted subsequently resulted in the government's decision to turn over nearly 1,500 pages of additional discovery.  The district court's analysis resulted in a dismissal with prejudice.

The Tenth Circuit faulted the district court's analysis in dismissing the charges on two grounds.  First, while the district court correctly embarked on an analysis of the seriousness of the offenses pursuant to 18 U.S.C. § 3162(a)(2), the Tenth Circuit found that this analysis had included several unrelated factors - the presumption of innocence, issues with the "indefiniteness of the information contained in the indictments," and the government's alleged misconduct.  Rather than stopping its analysis at the seriousness of the allegations, the Tenth Circuit found the district court had abused its discretion by considering:

the indictment’s allegations, which are beyond what this factor measures: the seriousness of the charged offenses

...

The strength of the allegations and of the evidence against a defendant is irrelevant to [the seriousness of the offense] factor.

...

The district court strayed off-course by weighing the strength of the government’s allegations instead of the seriousness of the charged offenses themselves.

The Tenth Circuit concluded that the district court abused its discretion in both weighing the seriousness of the offense and applying that finding to whether or not dismissal with prejudice was warranted.

Next, the Tenth Circuit agreed with the government's argument that the district court had failed to "fully consider Koerber's responsibility in the [Act] delay," noting that the "district court was not free to ignore Koerber’s other acts that may have partially contributed to the STA violation."  The government pointed to instances where Koerber "disregarded his STA rights by waiting passively and acquiescing to the postponement of his case," including his waiting months or even years to file motions directed at certain specific events or dates.  The Tenth Circuit agreed, noting that:

One such motion is Koerber’s April 2012 motion to suppress statements from the February 2009 interviews. The district court held a hearing in November 2012 and additional argument in April 2013. Not until August 15, 2013, did the district court grant Koerber’s motion.

The Tenth Circuit ordered the district court to review whether Koerber's actions contributed to delays under the Act, and whether those delays would change the district court's review of the second factor of its analysis given the government's conduct.  

While the Tenth Circuit's ruling is, on paper, a win for the government, the tone of the opinion suggests that this triumph may be more of a pyrrhic victory.  The opinion concludes with an ominous condemnation of the government's handling of the case, including its disagreement with the government's contention that its "role in the admitted STA violation was unintentional."  The opinion cites several instances, including the government's inexplicable loss of 27 discs of information, the delayed production of thousands of pages of documents, and the protracted nature of the case involving the passage of five years of time and a "dozen Assistant United States Attorneys," in concluding that this conduct could justify "the more serious sanction of dismissal with prejudice."

Next steps

The case will now be remanded back to the district court, where Judge Waddoups will be required to address the deficiencies noted in the opinion.  

A copy of the Tenth Circuit's opinion is below.

14-4107

Friday
Jan222016

SEC Accuses Utah Company Of Running $28 Million Ponzi Scheme

The Securities and Exchange Commission announced it had obtained an asset freeze and halted an alleged $28 million Utah-based Ponzi scheme that may have duped over 250 investors nationwide.  Marquis Properties, LLC, its President/CEO Chad R. Deucher, and Vice President Richard Clatfelter, were named in a January 19, 2016 complaint alleging multiple violations of federal securities laws.  The Commission is seeking injunctive relief, imposition of civil monetary penalties, prejudgment interest, and disgorgement of ill-gotten gains.

According to the Commission's complaint, Marquis held itself out as an experienced property-management company that specialized in acquiring and managing high-quality cash-flowing properties.   The company solicited potential investors by representing that it would manage various properties located in Indiana, Missouri, and Ohio, collect monthly rental income, and distribute a return ranging from 8% to 12% annually as passive investment income.  Potential investors were told that the various investments offered by Marquis were safe and risk-free because investment returns would be secured by a first deed of trust on property and that investments would be "over-capitalized."  From April 2010 to June 2015, Marquis raised at least $28.2 million from hundreds of investors.

However, the Commission alleged that Marquis operated a classic Ponzi scheme by using new investor funds to pay purported returns to existing investors.  Rather than purchase real estate with investor funds, as had been represented to investors, the Commission charged that Marquis had diverted investor funds to pay returns to existing investors and to pay personal expenses including the transfer of nearly $400,000 to Mr. Deucher's wife.  While Marquis stopped paying returns to investors in June 2015, the Commission's complaint alleges that Mr. Deucher had recently represented to an investor that repayment would begin shortly.  

A copy of the Complaint is below:

Comp 23451

Friday
Jan222016

After Allegedly Forging Character Letters, Former NBA Star Gets 9-Year Sentence For $2 Million Ponzi Scheme

A former professional basketball player will spend the next nine years in federal prison after being convicted of operating a Ponzi scheme that duped victims - including other professional athletes - out of more than $2 million.  Tate George, 47, was a former first round draft pick in the NBA whose long fall from grace culminated in his 2011 arrest on fraud charges.  In a stunning development at the culmination of a six-day sentencing hearing, federal prosecutors disclosed that George had apparently forged several character reference letters which were sent to U.S. District Judge following George's 2013 conviction on four wire fraud charges.  In addition to the sentence, George was also ordered to pay $2.55 million in restitution as well as $2.5 million in forfeiture.  George had faced a maximum sentence of 20 years.

Beginning in 2005, George owned and operated The George Group ("TGG"), which solicited potential investors based on promises it was a successful real estate development company that had a portfolio exceeding $500 million.  The company was said to specialize in commercial and residential development financing, and represented that investor funds would be safeguarded in an attorney escrow account.  In return for their investment, investors received promissory notes with varying terms reflecting their investment amount and length.  In total, George raised more than $7 million from investors - including some former professional athletes.

However, contrary to George's representations, TGG did not have $500 million under management and investor funds were not used to fund real estate development projects.  Rather, TGG had virtually no income-generating operations, and George used TGG to run a classic Ponzi scheme by using investor funds for a variety of unauthorized purposes that included the payment of principal and interest to existing investors.  George also used investor funds to sustain a lavish lifestyle that included throwing a Sweet 16 party for his daughter, the mortgage and extensive renovations on his New Jersey home (that has since been foreclosed), taxes to the IRS, and traffic tickets. George also spent $2,905 for a reality video about himself (a “sizzle reel” for “The Tate Show,” is available on YouTube).

After his conviction in October 2013, Tate lodged a series of unsuccessful post-trial motions arguing for his acquittal on various grounds and later gained court approval to represent himself.  Allegations also surfaced that Tate had sent correspondence while behind bars to some of his victims soliciting them to invest with him again. 

George maintained his innocence throughout his prosecution, claiming that investor losses were due to "delays" in his projects while also blaming prosecutors for withholding crucial exculpatory evidence.  In closing arguments to Judge Cooper on the final day of George's sentencing hearing, a federal prosecutor invoked another basketball great, Michael Jordan, in urging the maximum sentence for George:

“There was a saying about Michael Jordan that you couldn’t stop him — you could only contain him...I submit your honor that is exactly Tate George. ... You know that he will commit more crimes.”

While George spent four years in the NBA, his most memorable playing moment arguably came on a buzzer-beater in the third round of the 1990 NCAA tournament:

Thursday
Jan072016

Authorities: Montana Man's Clint Eastwood Documentary Was Ponzi Scheme

A Montana man faces criminal charges and is barred from soliciting investors in Montana over allegations that efforts to solicit investors for a film project purportedly featuring Clint Eastwood were a Ponzi scheme.  Matthew McClintock, who also went by Michael Willis, currently faces fraud and theft charges stemming from allegations that he duped nearly $25,000 from investors who thought they were investing in a cowboy documentary that would be narrated by actor Clint Eastwood.  Ironically, a portion of investor funds were allegedly used for a $575 cowboy hat that was worn at a recent court hearing.  McClintock has since been barred from soliciting investments in Montana, and faces a possible 10-year sentence on each of six criminal charges he is currently facing.  

According to the Montana Securities Commission, McClintock solicited individuals and businesses under the premise that he was producing a western documentary that would involve a prominent historian and feature narration by actor Clint Eastwood.  McClintock told potential investors that the documentary would be aired on PBS and that a portion of the proceeds would go to the "Western Montana Breast Cancer Fund."  Ultimately, McClintock raised nearly $25,000 in the form of "advertising fees" and "sponsorship fees" from at least 70 individual investors and nine businesses, at least some of whom were promised a portion of film royalties and would have their names included in the film credits.  

However, authorities allege that McClintock's numerous promises were simply untrue.  Clint Eastwood had no involvement with the project, no prominent historian had been retained, and the "Western Montana Breast Cancer Fund" did not exist.  Nor had PBS signed on to air the documentary.  Instead, McClintock is accused of using investor monies to pay make interest payments to existing investors as well as to fund a spending spree that included living expenses, fine dining, and personal expenses that included the purchase of a $575 cowboy hat.  According to a Montana deputy securities commissioner, that same hat was worn by McClintock to a recent hearing.  

This is not McClintock's first run-in with the law.  He was previously convicted of fraud and obtaining money by false pretenses in Oklahoma, and later pleaded guilty to a fraudulent scam in 2010 for which he was still on probation.  

Wednesday
Jan062016

PwC Pays $55 Million To Settle Madoff Lawsuit Over Auditing Failures

Accounting behemoth PricewaterhouseCoopers ("PwC") has agreed to pay $55 million to settle a lawsuit that accused it of failing to properly audit a "feeder fund" that invested with convicted Ponzi schemer Bernard Madoff.  In a filing in a Manhattan federal court, PwC agreed to an all-cash settlement of $55 million to settle a lawsuit brought by investors in Fairfield Greenwich Group ("Fairfield"), which was the largest of the numerous "feeder funds" that funneled billions of dollars into Madoff's massive fraud.  PwC did not admit wrongdoing in agreeing to the settlement, which still must be approved by the presiding federal judge.  The settlement comes nearly two months after a Washington state jury tagged another well-known accounting firm, Ernst & Young, for at least $10 million over similar alleged auditing failures at a Madoff feeder fund.

Less than one month after Bernard Madoff was arrested on suspicion of operating the largest Ponzi scheme in history, a lawsuit was filed on behalf of Fairfield investors against various Fairfield funds, Fairfield principals, fund administrator Citco Group, and the Canadian and Dutch offices of PwC.  Fairfield, which was a "fund of funds" hedge fund that purported to pool investor funds and invest those funds with various hand-picked hedge funds, had in reality entrusted a significant amount of investor funds with a single fund - Bernard L. Madoff Investment Securities LLC.  The lawsuit has been both complex and drawn out, including years of disputes over the issue of class certification, which saw a federal appellate court reverse a district court class certification only to have the district court re-certify the class in 2015. 

According to a 202-page complaint filed in September 2009, PwC's Canadian and Dutch subsidiaries audited various Fairfield funds during the period from 2002 to 2007.  The complaint alleged that, while PwC claimed that it would conduct tests of physical ownership of selected assets, tests of selected recorded transactions, and directly confirm with selected third parties (i.e. banks and customers) of amounts due to them, PwC misrepresented that the tests had actually taken place when they did not.  The complaint also referenced internal PwC documents memorializing conversations with Madoff that PwC alleged "blindly accepted" without any attempts to confirm their veracity.  For example, while Madoff claimed that 99% of his trades were electronic and that records were updated daily, Fairfield received delayed paper - not electronic -  confirmations.

The PwC settlement is the last of a series of high-dollar settlements in this class action that brings the total recovery to over $270 million.  Fairfield agreed to pay $80.25 million in November 2012, while GlobeOp Financial Services agreed to pay $10 million in February 2013.  After the New York federal court re-certified the class action, Citco agreed to pay $125 million in March 2015 - leaving only the PwC defendants remaining.  While the instant settlement will mark the end of the litigation, the next steps will include a claims process for class members to share in the PwC settlement.  Of the $55 million, counsel for the class action members has indicated it intends to seek approximately $19 million in legal fees and expenses.  

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