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Recent SEC Releases

Authorities Charge "Bernie Madoff of Orange County" With $11 Million Ponzi Scheme

A California man dubbed as the "Bernie Madoff of Orange County" by the California Department of Insurance, along with his female co-worker, have been arrested and charged with dozens of felonies for what authorities allege was a $11 million Ponzi scheme.  Joseph Francis Bartholomew, 75, was charged with one felony count of the use of a device or scheme to defraud and 28 felony counts of using an untrue statement in the purchase or sale of a security with sentencing enhancements for aggravated white collar crime over $500,000 and loss greater than $3.2 million.  Wendy King-Jackson, 54, was charged with one felony count of the use of a device or scheme to defraud and two felony counts of the use of an untrue statement or omission in connection with the purchase or sale of a security with sentencing enhancements for aggravated white collar crime over $500,000 and loss greater than $3.2 million.  The California Department of Insurance has characterized the alleged scheme as one of the largest Ponzi schemes they have ever investigated.  The two were arraigned on the charges earlier today.

Bartholomew owned and operated MBP Insurance Services ("MBP"), where Jackson worked as an insurance agent.  Beginning in July 2005, MBP pitched potential investors on the ability to purchase products based on fraudulent insurance policies that offered above-average rates of return that often ranged from 15% to 40%.  Investors were led to believe that the investments were legal and legitimate, and were not informed that MBP had not been authorized by the California Department of Corporations.  In total, at least 27 investors entrusted over $11 million to MBP and Bartholomew, including a former Major League Baseball player.

However, Bartholomew is accused of running a Ponzi scheme by using incoming investor funds to pay promised returns to existing investors.  Beginning in September 2011, certain investors failed to receive their promised regular interest payments from MBP and, by September 2013, MBP was no longer making any monthly investor payments.

Bartholomew, who faces up to 42 years in prison if convicted of all charges, is currently being held on $11.3 million bail.  In order to be released on bond, Bartholomew must demonstrate that the posted bond must not be traceable to criminal activity.King-Jackson faces a maximum 16-year sentence.


Ponzitracker Selected As Top 100 "Blawg" By ABA Journal

The ABA Journal has announced the inclusion of Ponzitracker in its annual compilation of the top 100 legal blogs on the internet.  The 8th Annual ABA Journal Blawg 100, compiled by staff and reader submissisions, was selected from more than 4,000 "blawgs" maintained in the site's "blawg directory."  This is the second year that Ponzitracker has been included in the Blawg 100.  In addition to being featured in ABA Journal's current magazine issue, readers are also invited to submit their votes for the top "blawg" here until December 15, 2014.

Ponzitracker is honored to be included in the Blawg 100.  The blog was originally started with the simple goal of serving as an eduational and informational resource for those interested in Ponzi schemes, both nationally and internationally.  While focusing solely on news articles at its inception in 2011, the blog has since expanded to include maps of current and previous Ponzi schemes, rankings of top schemes, and a comprehensive (and free!) database of legal pleadings plucked from dozens of Ponzi receiverships and bankruptcy proceedings.  

Additionally, in 2014, Ponzitracker announced several new features, including top investor recoveries in Ponzi schemes and the Ponzi Database - an extensive and exhaustive compilation of all Ponzi schemes reported during the last six years.  The resource, which is free, not only includes relevant information about each scheme but has also enabled the analysis of various underlying trends which provide a previously-unavailable insight into the proliferation and scale of these financial frauds.  

In short, thank you to those who have made Ponzitracker a regular on your blog list.  Please consider casting your vote for the top "blawg" here.  Remember voting ends December 15, 2014.


Ponzi Victims Successfully Recover $1.4 Million From Net Winner In $100 Million Ponzi Scheme

Victims of the largest Ponzi scheme in Ohio history will now recover at least a small portion of their losses after reaching a settlement to recover $1.4 million in "false profits" received by a more fortunate investor.  Glen Galemmo, a former money manager currently serving a 15-year prison sentence, took in more than $100 million from hundreds of investors who trusted the Ohio man's promises of above-average returns through investments in undervalued stocks.  While authorities have not sought the appointment of a receiver to collect assets for victims, a pair of Cincinnati attorneys have spearheaded efforts to recover funds that might be used to temper losses.

The Scheme

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities. Touting himself as an experienced trader, Galemmo promised outsized returns through investments in stocks, bonds, futures, and commodities.  Investors were told Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Galemmo assured investors that Queen City was audited annually, and provided monthly statements showing steady returns.  Galemmo raised more than $100 million from individuals, trusts, and even charities.

However, Galemmo's touted trading prowess was pure fiction.  Instead, Galemmo used new investor funds to pay his promised returns - a classic hallmark of a Ponzi scheme.  Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003.  Investors received fictitious account statements, and Galemmo paid himself tens of millions of dollars in fictitious management fees, which he used to purchase real estate, pay fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes. 

The scheme collapsed in July 2013 when investors received an email from Galemmo stating that the funds were shutting down and directing all further inquiries to an IRS agent.  Victims filed a lawsuit later that month, and Galemmo was later arrested.  He agreed to plead guilty shortly thereafter, and recently received a 15-year sentence.  

The prospect of recovery for victims appeared bleak, with one source reporting that the Department of Justice has estimated that victims could recoup 10% to 20% of their investment.  Authorities were able to quickly seize what remained of Galemmo's assets, which included over $500,000 in cash, various real estate including a condo in Florida and Galemmo's former office building, and over $100,000 in automobiles.

Investors Take Matters Into Their Own Hands

Earlier this fall, the Commodity Futures Trading Commission ("CFTC") filed a civil enforcement action against Galemmo and Queen City.  While government agencies such as the CFTC and the Securities and Exchange Commission that initiate civil enforcement actions typically request the appointment of a receiver when there appear to exist substantial assets that could be recovered and later distributed to victims, here the CFTC did not request the appointment of a receiver.

One of the largest sources of recovery for victims of Ponzi schemes typically comes from lawsuits against scheme investors fortunate enough to ultimately profit from their investments.  Aptly known as "clawback" suits in Ponzi jurisprudence, the suits seek recovery of "false profits" consisting of amounts in excess of that investor's net investment in the scheme.  Because the scheme operator does not generate the promised returns from legitimate activities, these transfers are nothing more than the redistribution of new investor funds.  While extensive caselaw generally recognizes that clawback targets can keep the amount of transfers adding up to their total investment in the scheme (absent signs that the investor did not act in good faith in receiving the transfers), the law is clear that any receipt of funds over an investor's net investment can be recovered as "false profits."  

One of the "net winners," as they are known, in Galemmo's scheme was Michael Willner.  Willner was one of Galemmo's original investors, whose initial investment of several million dollars allegedly multiplied several times according to fictitious account statements provided by Galemmo.  Willner also allegedly served as a recruiter for new Galemmo investors, and the lawsuit alleged that Galemmo paid commissions to Willner for referred investors.  Willner allegedly withdrew "millions" of dollars in excess of his original investment.

Willner sent out an incriminating email to fellow investors in the days after Galemmo's announcement that the funds would be shutting down, stating: 

“To those of you that I brought into the fund you have my deepest and most sincere apologies...I am embarrassed and shamed by my actions. Like most of us I ignored the poor statements and lack of transparency in favor of the high returns. In hindsight, these warning signs should have alerted me to probe deeper and ask appropriate questions.

While Willner allegedly received "millions" in excess of his original investment, the settlement takes into account his financial condition, and also discloses that a majority of the settlement amount will come from a federal tax refund due to Willner.  The remainder will come from the sale of Willner's interest in a private company that was purportedly purchased with funds traceable to Galemmo's scheme.

The settlement seeks to create a class composed of all victims that invested with Galemmo from 2002 until the scheme's collapse in 2013.  While the motion to approve the settlement does not provide details on the disbursement of settlement funds, it is likely that some kind of claims process will have to occur and be approved by the overseeing Ohio judge.  The eventual distribution to each investor will be known only after a determination of each investor's approved loss and the total amount of losses.  

The law firm behind the lawsuit, Santen & Hughes, was the same law firm that filed the initial lawsuit accusing Galemmo of running a fraud in the wake of the scheme's collapse.  The firm has also filed other lawsuits against third parties seeking recovery for Galemmo victims, including a suit against several prominent financial institutions related to their dealings with Galemmo.  The firm was able to interview Galemmo before he reported to federal prison, and it is possible that other net winners could be pursued.  

The motion seeking approval of the settlement is below:

Galemmo - Joint Motion for Order Preliminarily Approving Class Action Se... (2)



After Robbing Bank With Fake Bomb, Man Pleads Guilty To $20 Million Ponzi Scheme

A New Jersey man, who after his arrest for a $20 million Ponzi scheme subsequently robbed a Florida bank by brandishing a fake bomb, has pleaded guilty to a wire fraud charge in connection with the scheme.  Louis Spina, 57, entered his guilty plea today before U.S. District Judge Anne E. Thompson.  Spina could face a maximum of twenty years in federal prison when he is sentenced, as well as criminal fines and restitution. 

credit - Sacramento CBS LocalSpina's story reads like a gripping Hollywood thriller.  With only a high school diploma, Spina started working for the New York Stock Exchange at the age of 19.  Spina apparently had a penchant for Wall Street, becoming an NYSE member at age 27 and taking home at least $800,000 in annual pay during an 18-year period beginning in 1983.  Spina, who apparently had a knack for being captured by media outlets on the trading floor (see here, here, and here), ultimately spent over 25 years on Wall Street.

In 2010, Spina left Wall Street and formed LJS Trading, LLC ("LJS").  Potential investors were told that Spina could deliver annual returns ranging from 9% to 14% through trading in various stocks and equities, wit the understanding that Spina would be entitled to keep any surplus profits.  Spina would ultimately raise approximately $20 million from dozens of investors.

However, Spina ultimately used less than 50% of investor funds for their stated purpose, and indeed lost the entirety of the $9.5 million he invested.  He spent the remainder of investor funds to sustain a lavish lifestyle that included expensive cars, luxury real estate, and even a $400,000 donation to a private university.

When investors began questioning Spina about the safety of their funds, Spina provided them with "screenshots" of his trading account displaying a large balance.  According to the FBI, this balance was not the accurate balance, but simply a display of the 100-to-1 margin purchasing power used by Spina.  In late 2013, Spina told investors that he was in talks to sell the company to an unnamed wealthy individual that could offer even higher annual returns of 14% to 30% - and succeeded in raising an additional nearly $2 million.  

"Rock bottom"

However, there was no wealthy benefactor waiting in the wings, and Spina was arrested in November 2013 on federal charges that he was operating a Ponzi scheme.  Several months after his arrest, Spina entered a Wells Fargo branch in Coral Gables, Florida, wearing a black ski mask over his head and carrying a bag which he claimed contained a live bomb.  Spina made off with approximately $16,000 from the heist, but a witness observed his getaway and reported his plates to authorities.  Spina was arrested without incident the following day, where he confessed to authorities that he had robbed the bank, used a key fob to simulate a detonator, and used most of the robbery proceeds to pay bills.  Spina was recently sentenced to a 41-month prison sentence for the robbery.

Spina now faces an additional prison term of up to twenty years for the wire fraud charge.   Sentencing is currently scheduled for February 26, 2015.


Zeek Founder Set For Trial In January 2015  

A North Carolina man will face trial in January 2015 over charges that he masterminded the ZeekRewards Ponzi scheme that allegedly swindled hundreds of millions of dollars from hundreds of thousands of victims.  Paul Burks, 67, will have until January 20, 2015 to prepare his defense to multiple wire fraud, mail fraud, conspiracy, and tax fraud conspiracy charges brought by the United States.  Burks has pleaded not guilty to the charges.

Burks operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed, which operated as a penny auction website offering participants the ability to place 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 "bids", and placing one free ad daily for  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 numbered nearly $3 billion in August 2012 when the Securities and Exchange Commission filed an emergency action to halt the ongoing fraud.  Assuming a 1.5% daily "award", the outstanding Profit Points would have required 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 a Ponzi scheme.  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 available 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 was 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 or is convicted of the fraud, which would 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, Burks also faces 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.

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