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Saturday
Oct252014

On Fifth Anniversary Of Rothstein's $1.2 Billion Ponzi Scheme, Questions Remain

This article originally appeared on Forbes.com on 10/31/2014.

It was ego fueled. We were rolling, you know, we were -- we were all, me, Stu, Lippman, Adler, Boden, we were living like rock stars; private jets, massive amounts of money. There were lots of things that kept fueling that. As I'm sure you realize from looking at everything, there came a point in time when the only portion about it, which was money, was keeping the Ponzi going. We had more than enough money to fuel our lifestyles. It was the power that got ahold of us and kept pulling this forward; the more power, the more money, the more money the more power, it kept going back and forth until in exploded.

Scott Rothstein 2011 deposition testimony

Five years ago on a late October night, prominent lawyer Scott Rothstein hurried down an empty tarmac towards a waiting Gulfstream plane bound for Morocco – a country that lacked an extradition agreement with the United States.  Rothstein’s once-extravagant lifestyle was collapsing before his eyes, with hundreds of investors soon to learn that Rothstein had masterminded a massive $1.2 billion Ponzi scheme.  Carrying a duffel bag stuffed with over $500,000 and with $16 million sitting in a Moroccan bank account, Rothstein had little intention of returning to the U.S. to face the music.

But Rothstein’s conscience somehow got the best of him and, with the cajoling of friends and family, he returned several weeks later and immediately began cooperating with federal authorities.  With the exception of testifying at depositions and appearing in court, his whereabouts are unknown and authorities have confirmed he is a participant in the federal witness protection program.  With credit for good behavior, he is scheduled to be released sometime in late 2052.

Like the larger-than-life persona embraced by Rothstein during the pendency of the scheme, the five years following Rothstein's arrest have also yielded eye-popping figures.  While Rothstein's victims initially learned that that little money remained to satisfy their losses, the work of a court-appointed trustee (and arguably Rothstein's assistance) have yielded the incredible conclusion that victims will recoup 100% of their losses.  Amazingly, some victims even managed to turn a profit on their role in Rothstein's fraud through savvy lawyering.  Rothstein's cooperation with federal authorities has also been extensive; more than two dozen of Rothstein's former acquaintances, co-workers, and family members (including his wife) previously served or are currently serving time in federal prison for their role in Scott's crimes.

Unsurprisingly, Rothstein’s seemingly-limitless cooperation has not been entirely out of remorse; rather, he has been quite clear of his hope that those efforts might one day result in a reduction of his 50-year prison sentence that, if left unchanged, is likely a death sentence.  That Rothstein might one day walk out of a federal prison on his own free will, rather than horizontally surrounded by empaneled wood, could become a reality if U.S. District Judge James Cohn rewards the convicted Ponzi schemer’s campaign of cooperation.  Questions remain not only as to whether Rothstein’s cooperation might lead to further arrests, but if Rothstein might be able to pull one final con: successfully reducing his 50-year sentence.

Florida’s Largest Ponzi Scheme

Beginning as early as 2005, Rothstein touted lucrative returns to investors through the purchases of highly confidential legal settlements purportedly stemming from claims of sexual harassment, whistle-blower, and qui tam actions against large corporations.   According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to payment of that settlement at a discount.  With the investor sworn to secrecy and enamored by the prospect of an lucrative return, there was a built-in incentive for all parties to remain tight-lipped. Describing himself at times as a “Prince of Darkness,” Rothstein took great lengths to keep the scheme afloat, including forging documents with the signatures of state and federal court judges, convincing others to impersonate judges and Florida bar officials, and utilizing corrupt law enforcement officers at his disposal.

Q We see throughout this that you sometimes say T.P.O.F.D. We have a bet in my office about what that means. 

A: I need money in my commissary, you want to put me in?

Q No. I'm going to have a hard enough time. Prince of Darkness. 

A: You left out the F word, but yes. It was actually a name given to me when I was at Gunther and Whitaker. It stuck. 

Scott Rothstein 2011 deposition testimony

Rothstein quickly settled into a flashy life of opulence and excess as his scheme thrived, purchasing millions of dollars in luxury homes and amassing a multi-million dollar collection of cars and timepieces.  A regular on the charity circuit, Rothstein also made significant political contributions to well-known Republican candidates including John McCain and ex.Governor Charlie Crist. This regular benevolence had a twofold benefit: it not only greatly increased Rothstein’s reputation and influence around town, but in doing so impliedly lent an air of legitimacy to Rothstein’s scheme.  Coupled with the fact that Rothstein was a lawyer at one of Fort Lauderdale’s most prestigious firms, indeed few doubted that Rothstein would have the audacity to live such a lie.

 Q: How much do you think you devoted to your lifestyle and your partners and people in your firm's avenue as opposed to passed along to Ponzi investors, the old investors with the new investors' money; do you have any...

A: It would have to be hundreds and hundreds of millions of dollars. I know that I probably personally spent that myself over 200 million dollars, something close to it. You know, we were -- between the money we were actually pulling out and the money we were spending for lavish parties, trips, dinners, presents, gifts for wives, gifts for mistresses, our mistresses, the numbers are astronomical.

Scott Rothstein 2011 deposition testimony

But no one was immune to the downturn in the economy, and Rothstein began running out of funds to pay investors in early 2009.  Rothstein initially staved off scrutiny by claiming that he was experiencing temporary issues with the Florida Bar, and somehow even convinced acquaintances to raise an additional $100 million.  However, as Rothstein put it, the Ponzi scheme had "taken a life of its own," and the decrease in new investors was fatal to the ability to pay returns to the existing investors - the lifeblood of a Ponzi scheme.  After Rothstein fled to Morocco, his lawfirm was placed into involuntary bankruptcy, and life as Scott A. Rothstein once knew it was over.

"At some point in time, all these crimes were going to be exposed. I made a conscious decision to find a nonextradition country and flee to it."

- Scott Rothstein 2011 deposition testimony

After several days in Morocco, Rothstein returned to Fort Lauderdale in early November 2009 and immediately began cooperating with federal authorities.  He was formally arrested on December 1, 2009 and charged with five counts of racketeering, fraud, and money laundering.  He pleaded guilty in January 2010, and was sentenced to a 50-year prison term later that year.  Rothstein entered the federal witness protection at some point following his surrender, and has not been seen in public with the exception of several court appearances and court-ordered depositions in 2011.

Rothstein's Extraordinary Cooperation

One thing I have learned over the course of this crime, and since coming back, is that I had the unfortunate experience of dealing with a lot of extremely, extremely bright people who did some very, very stupid things during the commission of a lot of very bad crimes.

Scott Rothstein 2011 deposition testimony

Rothstein himself has acknowledged that his decision to return back to Florida from Morocco, which did not have a formal extradition treaty with the U.S., was not one he reached lightly given the strong possibility that he would likely face a significant prison sentence.  Indeed, Rothstein faced a potential 100-year term for the five federal charges he pleaded guilty to in January 2010. Rothstein’s lawyers had requested that his crimes warranted a 30-year term, while prosecutors sought a 40-year term with the acknowledgement that Rothstein’s decision to return and cooperation merited a downward departure:

"The government concedes that a variance in this case is supported by several salient factors. While the defendant's criminal activity in this case can only be described as reprehensible, it is beyond dispute that his post-offense conduct has been extraordinary,"

However U.S. District Judge James Cohn rejected any notion of leniency and handed down a 50-year sentence.  In crafting the sentence, Judge Cohn referenced not only the extravagant lifestyle led by Rothstein but also the depths to which he carried on his fraud, which even included forging the signatures of federal and state judges.  Observed Judge Cohn, “there can be no conduct more reviled.”

Following his sentencing, Rothstein disappeared for apprximately 18 months.  He made his first public appearance in December 2011 when he sat for 12 days of court-ordered depositions conducted by a consortium of lawyers representing various clients that had filed suit against Rothstein.  Sporting polo shirts and jeans purchased by his lawyer from Target, Rothstein’s transformation from high-flying socialite to federal inmate had come full circle.  And, true to his word, Rothstein sang like a canary.  In those depositions, Rothstein dished out juicy details on dozens of former attorneys, acquaintances, and accomplices, interrupted only by an observing federal prosecutor in certain sensitive areas that often included reference to public and political corruption.

The extent of Rothstein’s cooperation is likely unsurpassed.   According to his lawyer, Marc Nurik, who was formerly with Rothstein’s law firm before quitting to represent Rothstein,”nobody to my knowledge has provided as much cooperation” in a similar investment fraud.  And the results speak for themselves; Rothstein’s cooperation has resulted in over 60 years of prison sentences for his former acquaintances.   Below is a list of the nearly 30 individuals that have been arrested or convicted based on their connection to Rothstein:

Name

Sentencing Date

Sentence

Link

Involvement

Scott Rothstein

6/9/10

50 years

http://articles.sun-sentinel.com/2010-06-09/news/fl-rothstein-sentence-20100608_1_scott-rothstein-rothstein-s-parents-ponzi-scheme

$1.2 billion Ponzi Scheme

Frank Preve

10/12/2014

 

http://criminaldefenselawventura.com/man-arrested-connection-rothstein-ponzi-scam/

Allegedly was Rothstein’s right-hand man

Christina Kitterman

8/30/13

5 years

http://articles.sun-sentinel.com/2013-08-30/news/fl-scott-rothstein-lawyer-arrests-20130830_1_scott-rothstein-rothstein-rosenfeldt-adler-christina-kitterman

Impersonated Florida Bar officials

Doug Bates

8/30/13

5 years 

http://articles.sun-sentinel.com/2013-08-30/news/fl-scott-rothstein-lawyer-arrests-20130830_1_scott-rothstein-rothstein-rosenfeldt-adler-christina-kitterman

Signed fake letters

Roberto Settineri

2009?

4 years

http://www.fbi.gov/miami/press-releases/2010/mm110310.htm

Helping Rothstein to allegedly launder Ponzi proceeds

David Benjamin

4/25/14

5 years

http://www.bizjournals.com/southflorida/blog/picking_up_the_pieces/2014/04/two-broward-sheriff-s-deputies-charged-in.html?page=all

Sheriff that served as Rothstein’s personal bodyguard

Jeff Poole

4/25/14

1 year 

http://www.bizjournals.com/southflorida/blog/picking_up_the_pieces/2014/04/two-broward-sheriff-s-deputies-charged-in.html?page=all

Detective that carried out illegal arrest at Rothstein’s behest

Stuart Rosenfeldt

5/23/14

33 months

http://www.whdh.com/story/25600062/ex-partner-of-fla-ponzi-schemer-rothstein-charged

Rothstein’s former partner

Steven Lippman

4/10/12

3 years

http://www.huffingtonpost.com/2012/04/10/steven-lippman-rothstein_n_1414510.html

illegal campaign contributions

David Boden

9/19/14

 

http://www.justice.gov/usao/fls/PressReleases/140919-02.html

Worked with broker on Rothstein phony settlements

Richard Pearson

9/19/14

 

http://www.justice.gov/usao/fls/PressReleases/140919-02.html

Acted as broker in some phony investments

Debra Villegas

2010

10 years

http://www.justice.gov/usao/fls/PressReleases/2010/101008-01.html

Known as Rothstein’s right-hand woman

William Boockvor

12/1/2010

4 years

http://www.justice.gov/usao/fls/PressReleases/2011/111201-01.html

Rothstein's uncle, played part in duping investors

Marybeth Feiss

12/1/2010

6 months

http://www.justice.gov/usao/fls/PressReleases/2011/111201-01.html

Illegal campaign conributions

Russell Adler

3/7/14

2.5 years

http://articles.sun-sentinel.com/2014-03-07/news/fl-russell-adler-charged-20140307_1_scott-rothstein-christina-kitterman-russell-adler

Illegal campaign contributions

Kim Rothstein

9/6/12

18 months

http://www.huffingtonpost.com/2012/09/06/kim-rothstein-scott-arrested-jewelry_n_1862079.html

Concealed ownership of jewelry ultimately sold

Frank Spinosa

10/10/14

 

http://www.miamiherald.com/news/local/crime/article2653221.html

Accused of assisting as bank employee

Curtis Renee

9/28/2011

37 months

http://articles.sun-sentinel.com/2011-09-28/news/fl-rothstein-employee-sentencings-20110928_1_william-j-corte-stephen-caputi-rothstein-s-ponzi

Created fake bank websites

William J. Corte

9/28/2011

37 months

http://articles.sun-sentinel.com/2011-09-28/news/fl-rothstein-employee-sentencings-20110928_1_william-j-corte-stephen-caputi-rothstein-s-ponzi

Created fake bank webstes

Howard Kusnick

9/2/11

24 months

http://www.bizjournals.com/southflorida/blog/picking_up_the_pieces/2011/09/attorney-kusnick-gets-2-years-for.html

Authoring fake settlement letters

Stephen Caputi

8/24/2011

5 years

http://www.bizjournals.com/southflorida/blog/picking_up_the_pieces/2011/08/scott-rothstein-pal-stephen-caputi.html

Posed as banker during investor meetings

Eddy Marin

3/21/14

10 months

http://www.bizjournals.com/southflorida/news/2014/03/21/miami-businessman-sentenced-in-rothstein.html

Helping Kim Rothstein sell concealed jewelry

Patrick Daoud

4/11/14

10 months of house arrest

http://articles.sun-sentinel.com/2014-04-11/news/fl-patrick-daoud-sentenced-20140411_1_patrick-daoud-stacie-weisman-kim-rothstein

Helping Kim Rothstein sell concealed jewelry

Irene Stay

8/29/14

5 years

http://articles.sun-sentinel.com/2014-08-29/news/fl-rothstein-irene-stay-shannon-20140827_1_scott-rothstein-law-firm-fraud-scheme

Moving money around for Rothstein’s scheme

Scott Saidel

10/7/13

3 years

http://articles.sun-sentinel.com/2013-10-07/news/fl-kim-rothstein-attorney-sentencing-20131007_1_kim-rothstein-eddy-marin-patrick-daoud

Helping Kim Rothstein conceal jewelry

Stacie Weisman

11/12/13

3 months

http://www.fbi.gov/miami/press-releases/2013/two-individuals-sentenced-in-plot-to-conceal-and-dispose-of-assets-in-connection-with-rothstein-case

Helping Kim Rothstein conceal jewelry

With some legal statutes of limitation expiring and prosecutors running out of individuals to charge, Rothstein’s role as government witness is likely nearing its twilight.  Rothstein has remained unapologetic for his cooperation; indeed, he has been quite vocal that it is his only chance to one day walk out of prison on his own free will:

I have been sentenced to 50 years in prison. The only chance that I have to be released early, the only chance is I must tell the truth about everything that I know.

Scott Rothstein 2011 Deposition testimony

And he has a point.  With Rothstein’s help, prosecutors have imprisoned dozens of individuals who played varying roles in Rothstein’s fraud.  Perhaps more importantly, it was Rothstein’s testimony that colorfully illustrated the extraordinary role that TD Bank played in Rothstein’s scheme.  The bank has since paid dearly; it has paid out hundreds of millions of dollars to investors that sued the bank, and its large settlement with the court-appointed bankruptcy trustee was a significant factor in fully compensating Rothstein’s victims - a feat accomplished only one other time in recent memory.  Indeed, some investors were able to profit from Rothstein’s scheme due to savvy lawyering.  Odds are, Rothstein would likely claim at least a share of the extraordinary success Trustee Herbert Stettin and his team have been able to accomplish.

Expiring Statute of Limitations....Or Not?

There are a lot of armchair lawyers and armchair prosecutors who think that they know what the legal theories are that we can pursue and what statute of limitations issues are and often they are quite wrong. 

-  Preet Bharara, U.S. Attorney for Southern District of New York

Many have theorized that the expiring five-year statute of limitations accompanying most crimes committed by Rothstein co-conspirators, such as mail fraud, wire fraud, and securities fraud, will be the main reason for the halt in any remaining prosecutions attributable to Rothstein’s fraud.  Not so, warn authorities.  The Dodd-Frank Act, passed in 2010, contained provisions that extended the statute of limitations for such crimes.  This includes the ability to bring securities fraud charges up to six years later, as well as extending the statute of limitations for mail fraud and wire fraud up to ten years if the crime affected a financial institution.

While not addressing any specific individuals or offenses, the U.S. Attorney’s Office for the Southern District of Florida issued a statement that “Given that the crimes affected a financial institution, the 10-year statute of limitations arguably would apply,” said Marlene A. Fernandez-Karavetsos, spokeswoman for the U.S. attorney’s office.”  While the touchstone of such an analysis will depend on how loosely any crime “affected” a financial institution (in this case TD Bank), it certainly cannot be ruled out that prosecutors view the five-year anniversary of Rothstein’s arrest as little more than a date on a calendar.

But Does Cooperation Translate To A Reduced Sentence?

Q: Good answer. So, you hope that that's what is going to happen, but other than that no promises by the government or anybody?

A:  I'm hopeful at the end of all this, the government will see fit to ask Judge Cohn to reduce my sentence. There's no promise made to me.

Scott Rothstein 2011 deposition testimony

Rule 35 of the Federal Rules of Criminal Procedure governs the correction and reduction of a federal criminal sentence.  Subsection (b) provides that,

(1) In General. Upon the government's motion made within one year of sentencing, the court may reduce a sentence if the defendant, after sentencing, provided substantial assistance in investigating or prosecuting another person.

Unsurprisingly, one day before the first anniversary of Rothstein's sentence, prosecutors filed a Motion for Reduction of Sentence and Stay of Ruling.  The Motion stated that Rothstein's cooperation, which had begun before he entered his guilty plea, was ongoing and would not be complete until a future time.  Upon the completion of Rothstein's cooperation, the Motion indicated that a subsequent motion would be filed requesting a hearing at which Rothstein's nature, extent, and value of such cooperation would be detailed.

In the overall scheme of things, he’s already received a significant reduction.

Chuck Malkus, Author of The Ultimate Ponzi: The Scott Rothstein Story

While the prosecution will be able to tout an expanding list of the fruits of Rothstein’s cooperation, not all in the south Florida community share this sentiment.  Chuck Malkus, who penned ”The Ultimate Ponzi: The Scott Rothstein Story,” believes that Rothstein’s expected cooperation may have already been considered at his original sentencing given that Rothstein could have faced a 100-year prison sentence.  Further, Malkus noted Rothstein’s attempt to conceal jewelry he had given to his wife:

Rothstein’s cooperation, however, is tainted due to the fact that he was not completely honest with the feds about his wife Kim her million dollars of hidden jewelry, obtained with stolen money.  Because Scott Rothstein was not truthful with investigators, it probably will cost him receiving any sentence reduction.

Rothstein himself acknowledged that his failure to come clean about the hidden jewelry that ultimately resulted in his wife's incarceration may ultimately doom his quest for a sentence reduction.  Called as a witness at the trial of his former colleague Christina Kitterman, Rothstein stated on the witness stand that:

“I understand that there's been an issue concerning my failure to disclose what I did with my wife and the jewelry.  My hope is that at the end of the day that the government, they will see that I did a lot more good than bad.”

- Scott Rothstein 2011 deposition testimony

David Mandel is a well-known Miami attorney who obtained a $67 million verdict against TD Bank – including $35 million in punitive damages – on behalf of a group of defrauded Rothstein investors.  When asked about the possibility of a sentence reduction, Mr. Mandel expressed faith in Judge Cohn, who is a seasoned federal judge, and noted that a reduction was certainly not a given considering “Rothstein’s transgressions…[which] involved forging the signature of a federal judge on a court order!”  Mr. Mandel also questioned “what benefit Rothstein’s so-called cooperation was to us or the other victims.”

Q: What do you hope your sentence is?

A: Whatever is fair. I mean, I would love to get out as soon as possible. Prison is a very bad place. Okay. I know there's a lot of talk about where I am and stuff, and I can't talk about that; but make no mistake about it, I'm in prison, okay. It's a very bad place, and I can tell you with 100 percent certainty there is nobody in there that does not want to go home today. I would like to go home today. That is wholly unrealistic. Okay. I would like to go home today.

How Does Rothstein's Sentence Fit In Ponzi Scheme Jurisprudence?

Finally, while not necessarily significant, it should also be examined whether Rothstein’s sentence warrants reduction based on the implicit sentencing rubric utilized in sentencing Ponzi schemers in recent years.  For example, Bernard Madoff’s Ponzi scheme stands as the longest Ponzi scheme in history, and deservedly earned him a 150-year prison term that ranks as the longest sentence handed down in Ponzi scheme jurisprudence.  Allen Stanford’s $6 billion Ponzi scheme ranks next on the list, and resulted in a 110-year prison sentence.  In third place, Rothstein’s 50-year sentence is tied with Thomas Petters’s $3.2 billion scheme, which is the third-largest Ponzi scheme in history.  However, a closer look shows that the estimated initial losses from Rothstein’s scheme, ranging from $400 million and $500 million, paled in comparison toestimates that “the total lost in the Petters fraud is $1.94 billion.”

Thus, Rothstein’s victims not only suffered losses of approximately 75% less than those similarly situated Petters victims, but more importantly will emerge in a much better position than Petters investors, who are expected to ultimately recoup no more than pennies on the dollar of their losses. As noted above, Rothstein investors will join an infamous group that recovered 100% of their losses.

Whatever the decision on Rothstein’s sentence reduction may be, it will be clear in the near future that each side will have ample arguments supporting their position.

In Closing

Rothstein is the quintessential greedy, deceitful, self-promoting bully.  A poster boy for corruption.   Lawyers are going to be spending quite a while digging out from the dirt Rothstein buried us with, simply by being a former member of our profession.

- David Mandel

The name Scott Rothstein is one that will not only live in infamy, but which has already secured a place in the history books regardless of his ultimate fate.  Rothstein is not only the sole Ponzi schemer in recent memory to join the Witness Protection Program, but also one of only two Ponzi schemers whose victims were ultimately fully compensated for their losses.  And it is Rothstein who can boast that his post-arrest cooperation ultimately resulted in the convictions of over two dozen of his former friends.  The man who once owned over 100 high-end watches and multiple Lamborghinis will soon have his counsel appear in Court (pro bono, of coursewith the hopes that Rothstein might one day be able to emerge from prison as a penniless, yet free, man.  Will Scott Rothstein be able to pull off one final con?  You’d be wise not to bet against him.

Jordan Maglich is a securities law attorney at the Tampa, Florida law firm of Wiand Guerra King, and also writes frequently at Ponzitracker.com.  You can follow him on Twitter here.

Friday
Oct242014

ZeekRewards Founder Indicted For $850 Million Ponzi Scheme

Over two years after the Securities and Exchange Commission accused ZeekRewards of being a massive Ponzi and pyramid scheme, a grand jury indicted the company's founder on a multiple fraud charges.  Paul Burks, 67, was charged with mail fraud, wire fraud, mail and wire fraud conspiracy, and tax fraud conspiracy.  Burks is expected to appear in federal court in the coming days to make his initial appearance.  If convicted and sentenced to the maximum term, Burks could face decades in federal prison.

Background

Burks has operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place incremental bids on merchandise in one-cent increments.  Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions.  Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler.  Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix."  None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com.  According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits.  The daily "award" was usually 1.5% of the individual's 'investment'.  Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points now numbers nearly $3 billion.  Assuming a 1.5% daily "award", this would require daily cash outflows of $45 million should all investors seek to receive their "award" in cash.  

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix".  The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.  

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of Ponzi schemes.  Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadilty increased, reaching approximately $2.8 billion in August 2012 despite availabie cash reserves of less than 4300 million.  Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.

Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.  

Timing of Charges

Burks becomes the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing.  The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment.  The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty to the fraud, since the guilty plea or conviction of a Ponzi schemer allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.  

Tax Fraud Conspiracy

While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, the Burks indictment also includes a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme.  While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.

More Ponzitracker coverage of ZeekRewards is here.

The indictment is below (h/t to ASDUpdates):

 

File.stamped.burks.indictment

 

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

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