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Recent SEC Releases
Thursday
Oct232014

“Bamboo Cyclist” Gets 4-Year Sentence For $2.5 Million Ponzi Scheme

A Utah man once known as the “Bamboo Cyclist” was sentenced to serve a four-year prison term for masterminding a Ponzi scheme that duped victims out of nearly $3 million.  James Ronald Donahoo, II, of Pleasant Grove, Utah, received the sentence after pleading guilty this past summer to wire fraud, money laundering, and failure to file a tax return.  The sentence reflects the term agreed to in the plea agreement between Donahoo and prosecutors, and Donahoo will also serve a three-year period of supervise release following his release from prison.  Additionally, Donahoo was ordered to pay approximately $2.7 million to his defrauded victims.

Donahoo operated Paradigm, Inc. ("Paradigm"), a Utah corporation that Donahoo represented was in the business of making bridge loans or "hard money loans" to small businesses. Donahoo told potential investors that they could earn monthly returns ranging from 1% to 3% through investments in “hard money” loans or bridge loans. Investors were assured that their investment was safe, with Donahoo representing that each dollar invested was secured by a corresponding amount in the bank.  Investors were also shown monthly bank statements for Paradigm that purportedly reflected their investment growth.  In total, Donahoo raised at least $2.5 million.

However, Donahoo did not invest in “hard money” or bridge loans; rather, $1.5 million of investor funds were used to invest in various businesses overseen by Donahoo’s friends and family.  while Paradigm did invest approximately $1.5 million in various businesses, none of investors' funds were used as represented.  Approximately $267,000 was used to make Ponzi-style payments to existing investors, while Donahoo also misappropriated funds to sustain a lavish lifestyle that included the purchase of more than $11,000 in fur coats, trips to Hawaii, jewelry, and a Mercedez Benz.

After several investors obtained judgments against Donahoo following the scheme's collapse, he reportedly began traveling the country by bicycle billing himself as the "Bamboo Cyclist" as he promoted various philanthropic causes.  Donahoo promoted his cause through various social media sites, including YouTube.  One website apparently formed by one of Donahoo's victims suggested that these efforts, including Donahoo's claim that he was soliciting "micro loans" for 3rd world countries, were simply a continuation of Donahoo's deceit.  One of the YouTube videos is embedded below:

 

Tuesday
Oct142014

Zeek Receiver Blasts Victim Lawyers' Attempt To File Lien On Distributions

With thousands of allowed claims in this matter, it is impractical to allow third parties to interfere with the distribution process. The Receiver is simply not equipped to assess the validity of every interest asserted by a third party in the distribution proceeds of every victim. To allow otherwise would inundate this matter with third-party claims. Further, the Receiver is ill- equipped to address the validity of such claims given that each claim, in effect, becomes another case in and of itself. 

- Kenneth Bell, court-appointed receiver

The court-appointed receiver overseeing recovery efforts for victims of the $600 million Zeek Rewards Ponzi scheme had strong words for a Louisiana law firm that recently filed papers asserting attorney charging liens of over $130,000 against an interim distribution made to victims.  Kenneth D. Bell, the receiver, filed his objection to the Notice of Attorney's Charging Liens (the "Notice") filed by Patrick Miller LLC (the "Law Firm"), arguing that the Notice should be stricken or, in the alternative, the Court should decline to rule on the Notice and instead confirm that the Receiver is free to make distributions to affected victims.  

Background

The filing is the latest in the back-and-forth between the Law Firm and Bell, and comes after the filing of the Notice on September 29, 2014. In December 2013, Bell sought court approval for distribution procedures, which included, among other things, a provision that payments would be made directly to victims.  The Law Firm filed a sharply-worded objection, claiming that the payments should be sent directly to their firm and characterizing the Receiver's decision as a refusal to consider their clients' claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Law Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form.  The Receiver also noted that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

On April 1, 2014, the Court approved the Receiver's Motion in all aspects.  Several days later, the Law Firm filed a Motion for Clarification and/or Reconsideration, which, in the Receiver's words, "again challeng[es] the Court’s decision by seeking to change the approved distribution process to require the Receiver to aid the Movants’ attorneys in collecting their attorneys’ fees from the Movants."  Characterizing the reason for the motion as the Law Firm's inability "to let go of their pecuniary interests," the Receiver explained that he sought to make payments directly to victims to prevent duplicative payments, to ensure aggregate net winners do not receive distributions by using multiple addresses, and even ensuring that the Receiver does not unwittingly violate the Department of Treasury’s Office of Foreign Assets Control’s (OFAC) regulations.  While observing that his plan "may not assist Movants’ attorneys’ efforts to collect their fees," he argued that no clarification of the Order was necessary.  

An attorney's charging lien is used to create a security interest in favor of an attorney with a contract entitling him to a portion of the proceeds.  When the Notice was filed, it was unclear how the Law Firm intended to collect their claimed entitlement to each affected victim's distribution, or if there has been resistance from victims for complying with the demands for payment.  The exhibit attached to the Notice listed over 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with the Law Firm.

The Objection

In the Objection, the Receiver stated that the Notice "appears to be an attempt by Mr. Michaud to circumvent the Court’s prior orders regarding this issue and insert himself as the recipient of money that belongs to victims."  Of note, it appears that all but eight of the hundreds of affected victims were not recipients of the first interim distribution made earlier this month, as the Receiver claimed that the Law Firm had failed to follow an earlier court order requiring the amendment of certain claimants' mailing information to reflect their actual address rather than that of the Law Firm.  The Receiver also insinuated that, in failing to comply with the order, the Law Firm may also have violated rules governing attorney conduct in both Louisiana and North Carolina by placing the financial interest of the Law Firm over that of their clients.  

The Objection also observes that, while the Receiver did not address the merits of whether the Law Firm was entitled to compensation for whatever assistance it provided to victims during the claims process, neither he nor the Court should be forced to act as the Law Firm's enforcer where "the agreements’ enforceability and unconscionability plainly may be at issue."  Rather, the contingency fee contract explicitly provides for mandatory arbitration to resolve disputes.  Further, the Objection cites a North Carolina case for the proposition that a charging lien can only attach to a judgment, rather than a non-legal administrative proceeding such as the claims process.  The Receiver also notes that charging liens are not particularly favored in North Carolina:

Here, a charging lien is inappropriate given that Mr. Michaud continues to represent these victims in a matter which has not yet been resolved; there is no evidence of either an avoidance of payment or a dispute as to the amount of fees; and there is no indication that these victims have received notice that Mr. Michaud seeks to claim 25% of this first distribution. 

In closing, the Receiver requested an Order directing the Law Firm to timely update the contact information for its clients to reflect their actual address so as to allow the Receiver to make their interim distributions.  

The Objection is below:

Zeek Doc 260

Tuesday
Oct142014

Music Producer Convicted Of $2.5 Million Gold and Diamond Ponzi Scheme

A music producer who once worked with superstars Kenny G and Whitney Houston was convicted by a federal jury of operating a Ponzi scheme that promised lucrative returns through trading in precious metals including gold and diamonds.  Charles Huggins, 68, was convicted on one count of wire fraud and one count of conspiracy to commit wire fraud.  Huggins faces up to twenty years in federal prison on each count, as well as criminal fines of $250,000 or twice the gross gain or loss caused from the offense.  U.S. District Judge Sidney Stein ordered Huggins to be jailed until his January sentencing based on his heightened flight risk and connections to African officials. 

Huggins operated several companies including JYork Industries Inc. (“JYork”) and Urogo Inc. (“Urogo”).  Beginning in 2008, Huggins solicited potential investors by promising that their funds would be used for the mining of gold and diamonds from the African countries of Sierra Leone and Liberia, and that the extracted stones would then be sold in the United States at a significant profit.  In total, Huggins and his companies raised more than $4 million from several dozen investors.

However, Huggins used very little of investor funds for mining precious metals in Africa.  Rather, investor funds were used by Huggins for a variety of undisclosed personal purposes, including monthly rent for a $7,200 Manhattan apartment, Mercedes car payments, and doting on an aspiring young actress who called Huggins "daddy."  Additionally, money was also diverted to companies owned by Huggins' co-conspirators, Christopher Butchko and Anne Thomas.  The three were arrested on fraud charges in February 2013, and FBI agents later located $35,000 in cash-stuffed envelopes and approximately $1,000 smaller diamonds in a safe-deposit box.  

A copy of the criminal complaint is below:

Huggins, Butchko, Thomas Complaint

Friday
Oct102014

Former TD Bank Official Arrested For Role In Rothstein's $1.2 Billion Ponzi Scheme

As some have predicted, federal authorities have unveiled criminal charges against a former TD Bank official implicated in the massive $1.2 billion Ponzi scheme masterminded by Scott Rothstein.  Frank Spinosa, 53, was arrested today on five counts of wire fraud and one count of conspiracy to commit wire fraud and was later released on a $250,000 bond.  Spinosa's lawyer, who called the arrest "unnecessary" and "one of those typical Rothstein case flourishes," has maintained his client's innocence and indicated he intends to stand trial on the charges.

Rothstein's relationship with Spinosa began after he opened over 20 attorney trust accounts and law firm operating accounts in late 2007 at TD Bank and another bank TD Bank later acquired.  Spinosa was Rothstein's point of contact beginning in 2008, and communicated often with Rothstein regarding the accounts and various documents that were provided to investors.  As Spinosa's compensation was tied to the size and volume of accounts he managed, the fact that Rothstein's accounts were among TD Bank's largest accounts in South Florida meant increased compensation and bonuses for Spinosa.  

Spinosa was implicated in the massive scheme by Rothstein himself, who claimed during a 2011 deposition that he had recruited Spinosa to assist in the preparation of false "lock letters" used to show investors that their investments were safe and that Rothstein could not remove funds from the account holdings the funds. According to the Securities and Exchange Commission, which filed civil fraud charges against Spinosa last year, Spinosa also made oral assurances to at least two investors that certain trust accounts at TD Bank holding investor funds contained hundreds of millions of dollars when in reality the "locked" accounts typically held less than $100.  In one instance during August 2009, months before the scheme eventually collapsed, Spinosa participated in a conference call with Rothstein and an investor in which he told the investor that an account had a balance of $22 million when, in reality, the account had a balance of less than $100.  The investor subsequently made four more investments with Rothstein in the ensuing months.

Over two dozen other individuals have been charged for their role in Rothstein's scheme and sentenced to prison.  Spinosa could face decades in federal prison if convicted of all charges and sentenced to the statutory maximum.  

Other Ponzitracker coverage of the Rothstein scandal is here.

A copy of the indictment is here (thanks to Chuck Malkus, authorof The Ultimate Ponzi)

Spinosa Indictment by jmaglich1

Wednesday
Oct082014

SEC Halts $123 Million ATM Ponzi Scheme

The Securities and Exchange Commission announced it had obtained an emergency asset freeze and filed civil fraud charges accusing a California company and its principals of operating a $123 million Ponzi scheme.  Nationwide Automated Systems ("NAS"), and its principals Joel Gillis and Edward Wishner, were named in a civil complaint filed in a Los Angeles federal court.  In addition to the asset freeze, the court approved the appointment of a temporary receiver over NAS's assets and also froze the assets of principals Gillis and Wishner.  NAS, Gillis, and Wishner are accused of multiple violations of federal securities laws, and the Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.

According to the Commission, NAS  has 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.  While NAS has been engaged in the offering and sale of these ATM leaseback agreements since 1999, the Commission was only able to obtain bank records from 2013 forward during its investigation that showed more than $123 million raised in just that 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 Commission remarked, 

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.  

The Commission's complaint details that NAS bounced over $3 million in checks to investors in August 2014, and investors were told that a "glitch" in connection with retention of a new outside firm handling investor payments was to blame.  

Recently unsealed documents demonstrate that the Commission moved swiftly after presumably receiving a tip about NAS's difficulties making investor payments, with court records showing the Commission filed its application for a temporary injunction and other relief on September 17, 2014.  It appears that the Court granted those requests on September 30, 2014.  The Court also authorized the appointment of William Hoffman as a temporary receiver. It appears that a website has been established at http://www.nasi-nationwideatm.com/ for interested parties.

Several Ponzi schemes purportedly offering lucrative returns from investments in ATMs have been uncovered in recent years, including here, here, and here.

A copy of the Complaint is below:

Comp 23106

 

 

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