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Recent SEC Releases
Monday
Aug112014

California Man Fires Lawyer; Claims He Was Forced To Plead Guilty To $125 Million Latex Glove Ponzi Scheme

Due to be sentenced for masterminding a $125 million Ponzi scheme, a California man instead told a federal judge that he wanted to fire his lawyer, claiming he had been "intimidating" him and had coerced his guilty plea.  Deepal Wannakuwatte, 63, had previously pleaded guilty to a single count of wire fraud and was set to receive a prison sentence no longer than the statutory maximum of 20 years.  In a handwritten note provided to U.S. District Judge Troy Nunley, Wannakuwatte indicated that he had hired a different attorney and wished to fire his current lawyer.  Judge Nunley postponed sentencing indefinitely, and a status hearing is scheduled for this Thursday.

Wannakuwatte operated International Manufacturing Group ("IMG") and RelyAid Global Healthcare Inc. ("RelyAid") (collectively, the "Companies"), telling potential investors that the Companies had lucrative contracts providing surgical gloves to various government agencies.  Investors were told that the Companies had annual sales exceeding $100 million, including more than $125 million in contracts from the U.S. Department of Veteran Affairs ("VA") alone.  Based on these representations, Wannakuwatte and the Companies took in more than $200 million from at least 100 victims.  

However, authorities allege that Wannakuwatte grossly overstated the extent of the Companies' dealings with the VA - indeed, rather than $100 million in sales from the supply of medical gloves, authorities claim that the actual amount of the contracts were $25,000, and the Companies; total 2013 sales were just $5 million.   The scheme began unraveling late last year when Wannakuwatte, his wife, and the Companies were sued by a creditor, General Electric Capital Corp. ("GE Capital"), who claimed that RelyAid had defaulted on a loan it had taken out to purportedly build a latex glove factory.  Wannakuwatte was ordered to turn over a $3 million King Air private plane that had been pledged as collateral on the loan, and multiple government agencies began investigating Wannakuwatte and the Companies shortly thereafter.

After being arrested in February on mail fraud, wire fraud, and bank fraud charges, Wannakuwatte pleaded guilty several months later to a single count of wire fraud.  As part of that plea agreement, prosecutors agreed to seek a 20-year sentence - the maximum allowed under a wire fraud charge.  After accounting for distributions received by victims, total losses are estimated at approximately $108 million.

However, at the sentencing hearing, Wannakuwatte's lawyer presented Judge Nunley with a note claiming that his current lawyer, Donald Heller, had been "intimidating" towards him and that he had retained another attorney.  Heller, a well-regarded criminal defense attorney and former federal prosecutor, later denied the accusations to a reporter and stated that it was in Wannakuwatte's best interests to plead guilty given the "overwhelming" case against him.  

Wannakuwatte faces an uphill battle in his quest to undo his guilty plea.  Prosecutors will focus on his appearance before Judge Nunley to enter his guilty plea, known as his plea colloquy, which would have consisted of a lengthy and detailed exchange between Judge Nunley and Wannakuwatte as to the charge in the plea agreement.  Wannakuwatte would have testified under oath that he was pleading guilty voluntarily and because he was, in fact, guilty.  Further, Wannakuwatte's plea agreement would have included an affirmation that he was pleading guilty on his own accord and that he was not being forced or coerced.  

A Washington woman recently had a similar request denied after she entered a guilty plea to all 110 charges she was facing for an alleged $128 million Ponzi scheme.  Doris Nelson had asked a Washington federal judge to grant her request to withdraw her guilty plea on several grounds, including her discovery that she could retain private counsel and the discovery of new evidence.  In denying her request, the court noted her acknowledgement of her guilt in her plea colloquy and observed that her claims were simply not believable.  

Sunday
Aug102014

Criminal Charges Dismissed Against Alzheimers-Stricken Attorney Accused Of $6 Million Ponzi Scheme

A federal judge has granted a request by federal prosecutors to dismiss criminal charges against a Pennsylvania attorney accused of operating a $6 million Ponzi scheme and recently deemed unfit to stand trial after being diagnosed with Alzheimers disease.  U.S. District Judge Robert Mariani granted a request by prosecutors to drop an indictment against Anthony Lupas, 80, and ordered that Lupas be released from a federal medical prison once private transportation was secured.  Lupas's condition also means that his victims cannot pursue an ongoing civil lawsuit.  

Lupas was a once-prominent local attorney who once served as counsel to a local school board and whose son was a local judge.  According to authorities, Lupas solicited clients to invest with him, promising steady 5% returns through an investment in tax-free trusts.  This continued for years, until Lupas suffered injuries in a 2011 fall that allegedly diminished his mental faculties.  Lupas's injuries resulted in his inability to keep up with investor payouts, and his son, Judge David Lupas, later contacted authorities after discovering certin suspicious circumstances surrounding his father's investment operations.  After an investigation, the elder Lupas was arrested and charged with 29 counts of mail fraud, one count of conspiracy to commit mail fraud and one count of conspiracy to commit money laundering.

Last November, Judge Mariani held a competency hearing after Lupas's attorneys sought to have their client declared unfit to stand trial.  After hearing testimony, Judge Mariani sided with Lupas's attorneys and found that Lupas had "lost his perception of reality."  While Judge Mariani's order ordered that Lupas be reevaluated in several months, the move by prosecutors to dismiss the charges demonstrates that Lupas's condition certainly has not improved.

While Lupas's victims may not have the ability to see Lupas face the allegations in court, they have had the benefit of recouping a significant amount of their losses due to Lupas's status as an attorney.  Last November, it was announced that victims would share in a $3.25 million payout from a Pennsylvania state fund supported through annual attorney registration fees.  Additionally, prosecutors have signaled that they may seek to distribute funds seized from Lupas during the investigation to victims.  Further updates are expected in the coming days.  

Friday
Aug082014

Court: Seattle Woman Can't Withdraw Guilty Plea To 110 Charges In $128 Million Ponzi Scheme

Earlier this year, a Seattle woman accused of defrauding investors out of nearly $100 million in a massive Ponzi scheme made headlines when she rejected a plea agreement and instead decided to plead guilty to all 110 criminal charges she was facing - a decision that essentially guaranteed a severe sentence.  However, weeks before her sentencing, Doris Nelson asked the court to allow her to withdraw her guilty plea on several grounds, including her discovery that she could retain private counsel and her newfound access to a certain computer hard drive.  U.S. District Judge Robert H. Whatley recently issued an order denying Nelson's request, questioning her credibility and finding that her proferred reasons were less than persuasive.  Nelson is now scheduled to learn her fate on November 3, 2014.

Background

Nelson was indicted in late 2011 and charged with 71 counts of wire fraud, 22 counts of mail fraud and 17 counts of international money laundering.  Nelson was accused of operating a payday/short-term lending business called the Little Loan Shoppe ("LLS") in which she began soliciting investors in mid-2000 with the promise of large profits on short-term investments.  These purported returns ranged from 40% to 60% annually, and were often paid via post-dated interest checks provided at the time of investment.  LLS moved its operations from British Colombia to Spokane, Washington in or around 2001, and shortly thereafter ceased retail operations and conducted business solely over the internet.  When the operation began faltering in late 2008, Nelson tried to offer reduced interest rates to investors but the scheme later collapsed.

According to authorities, LLC was a massive Ponzi scheme that used investor funds to pay fictitious returns and sustain Nelson's lavish lifestyle.   Nelson alone received over $3 million in funds diverted from investor funds, which were used to purchase, among other things, a motor home, a Chevrolet Corvette, and a Mercedes Benz S550.  Additionally, Nelson used investor funds to gamble at Las Vegas casinos, losing nearly $500,000 between 2005 and 2008.  Nelson also paid commissions to several investors in return for directing further investment to Nelson's operation. 

Little Loan Shoppe filed for bankruptcy in 2009, and the trustee appointed to oversee the liquidation process has filed clawback lawsuits against LLS investors who received interest payments in excess of their original investment.  In addition to the criminal charges, Nelson was also charged by the Securities and Exchange Commission, and later faced charges by Canadian securities regulators.

The Guilty Plea and Withdrawal Attempt

In April, Nelson appeared before Judge Whatley to reject a proposed plea agreement and instead plead guilty to each of the 110 charges she faced.  Several months later, and on the eve of her sentencing, Nelson filed her Motion to Withdraw Plea of Guilty (the "Motion"), claiming that her guilty plea warranted withdrawal on (1) her ability to retain counsel, (2) assistance from her former counsel, and (3) access to a computer hard drive.  

After determining that Nelson's plea colloquy was adequate and clearly contained an acknowledgement by Nelson of her guilt, Judge Whatley addressed each of Nelson's bases for withdrawal.  First, Judge Whatley deemed Nelson's discovery that she could retain private counsel - rather than utilize her court-appointed lawyer - "ingenuous," noting that Nelson had previously retained private counsel.  Next, Nelson's claim that she had access to a former attorney that specialized in securities law after her plea was also dismissed by the Court, noting the lack of evidence that Nelson did not have access to that attorney prior to her plea.  Finally, Judge Whatley noted that Nelson had access to the computer hard drive prior to her sentencing, and her insinuation that she discovered new evidence that was previously inaccessible was not believable.

The government recently filed papers indicating it seeks to forfeit a myriad of real and personal property previously seized from Nelson, including real estate, cash, cars, boats, and an extensive jewelry collection.  Nelson was advised by Judge Whatley to be prepared to enter custody at her November sentencing.

Nelson's Motion and the Court's Order is below:

 

Motion to Withdraw Plea

 

 

 

Order Denying W-d of Plea

 

Thursday
Aug072014

John Elway Among Victims To Receive Distributions In $147 Million Ponzi Scheme

The court-appointed receiver tasked with recovering assets for victims of a $150 million Ponzi scheme has announced that victims, including former NFL star John Elway, may soon share in a $10 million distribution from recovery efforts.  Receiver C. Randel Lewis has filed a distribution plan in a Colorado court that, if approved, will return approximately 16% of each allowed claim.  The mastermind of the scheme, Sean Mueller, is currently serving a 40-year prison sentence after pleading guilty to racketeering, fraud, and theft charges.  

Mueller was the owner of Mueller Capital Management ("MCM"), which operated the Mueller Over Under Fund (the "Fund").  After forming the Fund in 2000, Mueller began soliciting investors to purchase interests in the Fund under the guise that Mueller's day trading strategy could generate risk-free annual returns of 12% to 25%.  In offering documents distributed to investors, Mueller represented that he would hold dozens of positions long and short, and would also use options trading to increase his returns.  Mueller also bragged that he had never suffered a monthly loss since he began trading.  Mueller sought to give off an aura of exclusivity by telling potential investors that he was very selective with accepting clients while simultaneously recruiting members of a top Denver-area country club.  From 2000 to 2010, at least 145 investors entrusted over $147 million with Mueller.

In early 2010, Mueller's operation began unraveling.  In mid-April, investors received several ominous emails from Mueller in which he confessed the fraud, claimed that only he was responsible, and that he felt "like there are no good options left."  Shortly after the first email was sent, police responded to calls that Mueller was threatening to commit suicide by jumping off a parking garage.  A second email was sent automatically using a time delay function. After police talked him out of suicide, Mueller was subsequently arrested.  

An investigation by authorities found that, despite his claims of never suffering a monthly loss, Mueller suffered heavy trading losses in 2008 and 2009. However, rather than disclose these losses to investors, Mueller allegely lived a life of luxury that included the purchase of multiple homes, expensive cars, personal living expenses, and memberships in exclusive country clubs.  By April 2010, Mueller's cash on hand was tens of millions of dollars less than customer liabilities.  

Following Mueller's arrest, it was disclosed that the scheme's investors included several high-profile figures, including John Elway and Blaine Rollins, a former money manager at Janus Capital Group Inc.  Elway was revealed to be the scheme's largest investor, having invested a total of $15 million on behalf of himself and his business partner with Mueller and later having a net claim of $9 million after accounting for withdrawals.  With the distribution, Elway stands to receive approximately $1.44 million, while Rollins stands to receive approximately $561,000 on a $3.5 million claim.

A copy of Mueller's arrest warrant is below:

 

MuellerAAWandC&IWeb

 

 

Tuesday
Aug052014

Appeals Court OK's $67 Million Verdict Against TD Bank For Rothstein Ties

An appellate court has affirmed a $67 million verdict obtained by victims of Scott Rothstein's $1.2 billion Ponzi scheme against banking giant TD Bank, upholding what is likely the only decision to impose liability on a banking institution for aiding and abetting a Ponzi scheme.  The U.S Court of Appeals for the Eleventh Circuit entered an order denying not only TD Bank's post-trial motions but also the imposition of sanctions against the bank for discovery violations deemed "simply incredible" by the trial judge.  While the 11th Circuit affirmed the verdict on all grounds, it did acknowledge that the unprecedented recovery by the court-appointed bankruptcy trustee presented a possibility of a "double recovery" that could be addressed by the trial court.

TD Bank had extensive ties with Rothstein, who promised investors the possibility of significant short-term returns through purported confidential settlements with whistleblowers and sexual harassment victims. To convince investors of the legitimacy of his operation, Rothstein claimed that the amount of the alleged settlements had already been deposited into TD Bank trust accounts administered by Rothstein's law firm and which were subject to strict transfer restrictions.  Investors were provided with "lock letters" by TD Bank vice president Frank Spinosa attesting to the fact that the transfer restrictions were, in fact, in place and that the claimed balance was correct.  However, there were no such transfer restrictions, and Rothstein was able to transfer funds freely.  Additionally, rather than containing the significant balance represented in the "lock letter," many accounts contained nominal $100 balances.  

Coquina, which is a Texas investment partnership, invested nearly $38 million with Rothstein based on these representations.  The partnership made several withdrawals during the course of its relationship with Rothstein, and ultimately lost nearly $7 million when the scheme collapsed.  However, despite its losses, Coquina was informed by the court-appointed trustee that it faced claims for the "clawback" of certain withdrawals made before the scheme's collapse.  Coquina ultimately settled with the trustee, paying $12.5 million and agreeing that the trustee could recoup up to $18.6 million if Coquina prevailed in its suit against TD Bank.

At trial, a federal jury found in favor of Coquina on its aiding and abetting and fraudulent misrepresentation claims, and awarded $32 million in compensatory damages and $35 million in punitive damages for a total award of $67 million.  Following the verdict, the trial judge also imposed sanctions against TD Bank and its counsel for the failure to produce relevant evidence that reflected unfavorably on the bank.  

On appeal, TD Bank raised several issues, including the propriety of drawing an adverse inference against Spinosa's invocation of his Fifth Amendment rights during testimony, whether the settlement agreement between Coquina and the trustee was properly admitted into evidence, and whether Coquina's damages claim was proper.  The Court addressed each contention, and ultimately found each unpersuasive.  Finally, the Court agreed that the trial court's imposition of sanctions, including accepting as true that TD Bank has actual knowledge of the fraud and that its account-monitoring systems were unreasonable, were consistent with the facts in the record.

While the ruling is clearly a win for Coquina, the Court did address the issue of a potential "double recovery" that has been the subject of a TD Bank post-trial motion seeking a reduction in the verdict.  The issue arises from the fact that Coquina could potentially receive $25 million not only from TD Bank pursuant to the verdict, but also by virtue of the trustee's allowance of Coquina's $25 million claim in the bankruptcy estate.  Due to the trustee's announced liquidation plan providing for the unprecedented 100% recovery by victims, this could potentially present a situation where Coquina could achieve a double recovery.  While the Court observed that a Rule 60(b) motion was pending in the trial court and could be addressed at the appropriate time, it did suggest that

 If the district court determines that a reduction in compensatory damages is appropriate, the court should also consider whether a proportionate reduction of punitive damages is required. 

A copy of the Order is below:

 

12-11161_Documents (1)

 

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