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Recent SEC Releases
Tuesday
Mar312015

Cay Clubs Sales Directors Get 5-Year Sentences In $300 Million Ponzi Scheme

The former sales directors of what authorities have alleged was a massive $300 million Ponzi scheme will each spend the next five years in federal prison for their role in the scheme.  Barry J. Graham, 59, and Ricky Lynn Stokes were sentenced by U.S. District Judge Jose E. Martinez after previously pleading guilty to conspiracy to commit bank fraud in December 2014.  Judge Martinez also ordered that the men serve a three-year term of supervised release following completion of the prison sentence.  A hearing has been scheduled for May 22, 2015 to determine the amount of restitution each will owe to the defrauded victims. Graham and Stokes could have faced up to twenty years in prison.

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Graham was the director of sales for Cay Clubs from 2004 through late 2007, while Stokes was initially a sales agent and the director of investor relations before he took over the director of sales position upon Graham's departure in late 2007.  According to authorities, Graham and others participated in sales transactions with Cay Clubs at artificially inflated prices that were then used to convince investors of the purported profits their investment could yield.  Marketing materials distributed to investors touted the rapidly increasing sales price of the units without disclosing that the transactions were not typical arms-length sales. 

Fred and Cristal Clark are currently being held in a Key West detention facility after a judge determined that no bail conditions existed that could ensure the two would not flee before their June 2015 trial.  The two were initially arrested earlier this summer in Central America on fraud charges stemming from their operation of an unrelated company.  A subsequent indictment added fraud charges from the Clarks' operation of Cay Clubs.  Stokes and Graham are expected to testify against the Clarks as a condition of their guilty pleas, while former Cay Clubs attorneys Scott Callahan and Charles Phoenix have been granted immunity by the government in exchange for their testimony.  

Previous Ponzitracker coverage of the Cay Clubs Ponzi scheme is here.

Tuesday
Mar312015

Alleged ZeekRewards Ponzi Mastermind Wins Trial Delay Over "Unprecedented" Discovery

Citing the "unprecedented" document discovery that has included millions of documents and multiple terabytes of electronic data, attorneys for a North Carolina man accused of masterminding the massive ZeekRewards Ponzi scheme recently successfully obtained yet another delay in the ongoing criminal trial schedule.  Paul Burks, who is currently facing charges of wire fraud, mail fraud, conspiracy, and tax fraud conspiracy relating to his role in ZeekRewards, asked the court in a recent unopposed motion to again delay the trial schedule  so that Burks' team could continue poring through the approximately 8 million documents produced to date by the government. Burks' team indicated in the motion that they hope to file a joint motion in mid-April 2015 seeking a "peremptory" trial date.  Burks has maintained his innocence.

Burks 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 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 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 steadily 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.

A copy of the Motion to Continue is below.  Thanks to ASDUpdates.

26

Monday
Mar302015

"Social Capitalist" Gets 19.5 Years For $16 Million Ponzi Scheme Targeting Churches

Credit: CNBCAn Atlanta man who ran a $16 million Ponzi scheme that targeted churchgoers through promises of annual returns of up to 300% was sentenced to serve nearly 20 years in federal prison.  Ephren Taylor, who once described himself as the "youngest African-American CEO of any publicly traded company ever," received the sentence after previously pleading guilty to conspiracy to commit mail and wire fraud.  In addition to the sentence, Taylor was also ordered to pay $15.5 million in restitution and serve three years of supervised release following completion of his sentence.

According to authorities, Taylor was the chief operating office of City Capital Corporation ("City Capital").  Touting himself as "the Social Capitalist" and that he was the youngest black CEO of a public company, Taylor sought to portray himself as a wildly successful entrepreneur in internet and radio advertisements.  At "wealth management seminars" he conducted at various churches, including mega churches run by well-known pastors Eddie Long and Joel Osteen, Taylor pitched church congregants on two investments through City Capital that promised enormous returns.  The first investment was the purchase of promissory notes that purportedly funded small businesses and offered annual returns ranging from 12% to 20%, while the second investment involved the purchase of interests in "sweepstakes machines" that could generate annual returns of up to 300%.  As many of the potential investors were elderly and saving for retirement, Taylor offered the ability to roll over retirement portfolio into self-directed IRA custodial accounts that could then be used to invest with City Capital.  In total, Taylor and City Capital raised approximately $16 million from investors.

However, the majority of funds raised from investors were not used as promised.  Rather, Taylor used investor funds to support his extravagant lifestyle and self-promotion, including expenses for Taylor's book promotion, consultants for Taylor's speaking engagements and public relations, his wife's music recording career, and rent for Taylor's New York apartment. Additionally, the funds that were used as promised did not generate the returns promised by Taylor.  Rather, the ability to pay returns to existing investors was possible only through the continuous flow of new investor funds - the hallmark of a Ponzi scheme.

Taylor was previously charged by the Securities and Exchange Commission with violating federal securities laws in April 2012.  Taylor did not contest the charges, and a judgment of nearly $15 million was later entered against him.  The scheme also spawned at least one lawsuit against a church pastor that had endorsed Taylor, leading to a recent undisclosed settlement.

Taylor previously made an appearance on CNBC back in 2007:

 

Friday
Mar202015

The 'Ponzi Scheme Presumption' Is Dead. Long Live The 'Ponzi Scheme Presumption' 

By now, many who follow this site are likely aware of the Minnesota Supreme Court's recent ruling that denied a receiver's efforts to recover assets paid out to an investor on the basis that Minnesota's Uniform Fraudulent Transfer Act ("MUFTA") "does not contain a Ponzi-scheme presumption."  The ruling, which stands alone in contrast to significant state and federal jurisprudence explicitly recognizing a Ponzi scheme presumption, has spawned a growing chorus touting a new "balance of power" in clawback litigation.  However, a closer examination of the case at the middle of this controversy, as well as a primer on the application of fraudulent transfer precedent, demonstrates that this purported seismic shift in the fraudulent transfer landscape is likely nothing more than an isolated blip that will have little effect on a receiver's ability to claw back profits in a Ponzi scheme.

Background

The case at issue involved a clawback lawsuit brought by the court-appointed receiver of First United Funding, LLC ("First United"), which sold "participation interests" in loans it had made to third parties who were to receive a sizeable profit in the form of interest repaid on the loan.  Corey Johnston, who owned and operated First United, is currently serving a six-year prison sentence after pleading guilty to bank fraud and filing a false income tax return.  While some of First United's loans were legitimate in that no more than 100% of the loan was sold via a participation interest to one or more financial institutions, First United caused multiple loans to be oversold to multiple parties - meaning that those investors would not receive legitimate proceeds but rather the redistribution of money provided by other investors - a classic hallmark of a Ponzi scheme. 

In this instance, the receiver sought to recover several million dollars paid to several financial institutions as principal and interest on a $3.18 million loan made to an Arizona businessman.  While the lower court dismissed claims against several of the banks based on the statute of limitations, it entered judgment in favor of the receiver and against Alliance Bank in the amount of $1,235,388 - an amount which appears to be the profits received by Alliance Bank on its "participation interest."  In rendering judgment in favor of the receiver, the lower court referenced the 'Ponzi scheme presumption," which that court characterized as a rule holding that “the profits that good-faith investors enjoy in connection with a Ponzi scheme are recoverable as fraudulent transfers.”

In analyzing the relevant loan in which Alliance Bank and others purchased "participation interests," the Minnesota Supreme Court focused on the statutory interpretation of MUFTA in concluding that

MUFTA does not contain a provision allowing a court to presume anything based on the mere existence of a Ponzi scheme. 

Instead, the Court observed that "MUFTA requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer, rather than relying on a presumption related to the form or structure of the entity making the transfer."  Concluding that it was required to examine the transfer on a case-by-case basis, the Court found that the subject loan was not subject to the presumption nor had the receiver satisfied MUFTA's provisions as the loan was real, was not oversold, and was attacked solely on the basis that it was part of a greater Ponzi scheme. 

The Ponzi Scheme Presumption

The Uniform Fraudulent Transfer Act, which has been adopted by a majority of states including Minnesota, allows a creditor to recover a fraudulent transfer made by the debtor upon the demonstration of an actual or constructive intent to hinder, delay, or defraud the debtor's creditors.  A significant number of courts have found that the showing of the existence of a Ponzi scheme allows the court to presume that, due to the inherently fraudulent nature of a Ponzi scheme, all transactions were made with the intent to hinder, delay, or defraud a debtor's creditors.  See, generally, Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011); Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008).  A basic prerequisite for applying this 'Ponzi scheme presumption' involves a showing that the contested transfer was effected 'in furtherance' of the Ponzi scheme. Bear, Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 13 (S.D.N.Y. 2007).

In a nod to the difficulty of establishing a debtor's actual intent to hinder, delay, or defraud, state fraudulent transfer laws also allow the use of circumstantial evidence to demonstrate actual fraudulent intent through a non-exclusive list of eleven "badges of fraud."  These factors include, but are not limited to, that the transfer was concealed, the debtor removed or concealed assets, or that the transfer occurred shortly before or after a substantial debt was incurred.  Courts routinely recognize that a showing of multiple badges of fraud results in a presumption of fraudulent intent and a burden shift to the transferee to demonstrate a legitimate purpose for the transfers.

An Analysis Of Alliance Bank

A closer look into the Alliance Bank decision shows that the case involved a relatively unique factual situation that is likely to bear little precedential value going forward.  There, the court found (and the receiver did not argue) that the loan at issue was in fact real, not oversold, and was being attacked simply because it was part of a larger Ponzi scheme.  As referenced above, many courts refuse to invoke the Ponzi scheme presumption where the subject transfer was not made "in furtherance" of a Ponzi scheme.  While other relevant details remain unknown, such as the flow of the payments and whether funds used to pay Alliance Bank were commingled with other investor funds, the court concluded that the facts and circumstances known to it could not justify a showing of fraudulent intent. 

The factual backdrop of the First United Ponzi scheme is also illustrative of its uniqueness.  Unlike a majority of other Ponzi schemes, which solicit investors based on a promise that their collective funds will somehow be used to generate massive returns that they will later share, the First United Ponzi scheme essentially allocated participation in the scheme through the sale of "participation interests" in specific loans.  While some of those loans were fraudulent and used to further the Ponzi scheme, some were apparently legitimate.  In the Alliance Bank case, the financial institutions collectively purchased a 100% interest in the subject loan that entitled them to share in and resulting profits based on the loan's performance.  Thus, rather than a dollar-based investment in the schemer's hedge fund, company, or venture, an investment in First United was specifically tied to a distinguishable and distinct loan. As the court found, the loan's legitimacy and the fact that the proceeds from the loan were used to pay the returns were a critical factor in the court's ruling.

Decision's Precedential Effect Is Unlikely

While many are quick to hail the Alliance Bankdecision as a seismic shift in Ponzi scheme litigation, the reality is that the decision is likely to have little or no effect on future cases.  Indeed, while the Ponzi scheme presumption is often used to demonstrate actual intent as required to support a fraudulent transfer claim, it is not the sole avenue afforded to creditors.  Rather, state fraudulent transfer laws also allow a creditor to show actual intent by establishing the existence of badges of fraud.  It is likely that cases involving Ponzi schemes will likely feature a plethora of badges of fraud that can easily satisfy actual intent in the absence of a 'Ponzi scheme presumption.' 

This conviction is shared by Douglas Kelley, the court-appointed bankruptcy trustee tasked with recovering assets for victims of Thomas Petters' $3.65 billion Ponzi scheme, who dismissed the effect of the Alliance Bank decision in a recent interview with the Minneapolis Star Tribune, remarking:

Whether I prove the Ponzi presumtion or use badges of fraud, I can easily prove fraudulent intent.  We have no dearth of direct evidence of fraud in this case.

It is also worth noting that, even assuming the inability to invoke a 'Ponzi scheme presumption,' what further showing of fraud is necessary for an inherently deceptive scheme that by its nature depends on sustained and continuing fraud to perpetuate the scheme?  Whereas various factors can be used to establish "badges" of fraud, the showing that a debtor is operating a Ponzi scheme is itself indicative of fraud.  In other words, while the Minnesota Supreme Court recognized that the operation of a Ponzi scheme was not itself a badge of fraud, the showing that a debtor masterminded a Ponzi scheme is due to be afforded significant weight in determining the existence of the actual intent to hinder, delay, or defraud.

A copy of the Minnesota Supreme Court's decision is below: 

AppellateOpinion (1)

  

 

Friday
Mar132015

"Virtual Concierge" Ponzi Defendant Convicted By Jury

A south Florida man was convicted by a federal jury for his role in a "virtual concierge" Ponzi scheme that duped hundreds of investors out of tens of millions of dollars.  A federal jury deliberated for three hours before convicting Craig Hipp, 54, of wire fraud, mail fraud, and conspiracy to commit mail and wire fraud. The trial of Hipp - who was described as a minor player in the scheme - was viewed as a bellwether for the upcoming trials against Joseph Signore, Laura Grande-Signore, and Paul Schumack, who authorities have alleged played a key role in the alleged virtual concierge Ponzi scheme.  Under federal sentencing guidelines, Hipp could face at least 12.5 years in federal prison.

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises' ("JCS") Virtual Concierge program, which involved the purchase of a virtual concierge machines ("VCM") through a one-time fee ranging from $2,600 to $4,500 per VCM.  The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were told that the VCMs generated substantial returns, which in turn were used to pay annual returns to investors ranging from 80% to 120%. In addition, investors were provided with the location of the VCMs they had purportedly purchased, and even given the ability to track the VCM activity online.

Investors were solicited in several ways, including several websites controlled by the entities and through videos posted on popular video-sharing website YouTube.  The videos promised that the VCM would "generate income for years," and promised that a $3,500 investment could produce "huge returns."  Potential investors also received emails from Schumack, who touted his graduation from West Point Military Academy in 1979 and whose email signature also featured a Bible passage intended to create a false sense of security for investors.  

However, authorities allege that the outsized returns touted by the defendants were the result of a Ponzi scheme.  According to the SEC, the production of VCMs was not close to the amount of VCMs purportedly sold to investors, and the guaranteed returns were "a farce."  Instead, investor funds were commingled and used for a variety of unauthorized purposes, including the unauthorized transfer of more than $2 million to Signore and his family.  An additional $56,000 in investor funds were used for expenses including restaurants, stores, and a tanning salon.  Finally, approximately $4 million in investor funds were transferred to an unrelated account from which Schumack and others allegedly made more than 100 cash withdrawals of nearly $5 million. 

During the trial, Hipp's defense team sought to portray him as a devoted employee who was unaware of the fraud.  Hipp's lawyers highlighted his 11th grade education and previous employment as a carpenter, painting him as a low-level employee who was fascinated by Signore's larger-than-life persona and willing to believe Signore's claims that billionaire Carlos Slim was about to buy the business for $500 million.  As his lawyers argued, Hipp was the personification of a "fall guy" who was "duped like all the others."  

In addition to the criminal charges, authorities are also seeking forfeiture of the Signores' and Schumack's real and personal property - including their homes.  

A copy of the indictment is below:

May Indict

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