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Recent SEC Releases
Thursday
Dec032015

California Man Gets Nearly Five Years For $15 Million Ponzi Scheme

A California man will serve nearly five years in federal prison after pleading guilty to operating a $15 million Ponzi scheme that ensnared close to 250 victims.  William Yotty, 69, received the sentence from U.S. District Judge Margaret M. Morrow, who remarked that it was "important that people who engage in business frauds face substantial sentences."  Yotty pleaded guilty earlier this year to one count of mail fraud and one count of wire fraud, and could have been sentenced to a maximum term of forty years in prison.  Yotty was also ordered by Judge Morrow to pay over $15 million in restitution to his victims.  It remains unknown whether Yotty will be able to satisfy the restitution order.

Beginning in Spring 2007, Yotty began soliciting victims to purchase interests in various debt instruments that he represented were safe, secure, and would pay substantial returns of up to 25% annually.  Potential investors were told that the companies issuing the debt instruments were adequately capitalized to pay the promised interest and that they could be counted on to repay the principal investment upon maturity.  Based on these representations, Yotty raised more than $11 million from investors.  Payments to investors ceased in 2009.

In a second scheme, which started sometime in the summer of 2007, Yotty pitched investments in two companies he owned - including one called Fortuno Millionaire Club - which offered above-average annual returns through profits purportedly earned through purchasing foreclosed real estate and flipping it to earn 200% - 300%.  In presentations to investors, Yotty told potential investors that “Our club member receives the down payment, the monthly payments from the new buyer, and all the proceeds from the sale of the Note!  It’s a win…win…win!”  Another presentation promised it could show investors "how to take $400 and turn it into $25,000 in the next 30 days."

However, while Yotty was flipping houses, he was selling houses that he had previously purchased at a deep discount to his investors, often at prices several times what he had originally paid.  And while Yotty promised that the houses were in livable condition and that he would undertake management, the reality was that the houses were dilapidated and uninhabitable.  Because of the deplorable condition and the inflated value, those investors were often unable to resell the houses.   

Yotty had been held without bail since he was arrested in May 2014.  

Monday
Nov302015

JP Morgan Wants To Make It Harder To Recover Ponzi Scheme Transfers

JP Morgan Chase, the banking behemoth that agreed last year to pay over $2.5 billion in civil and criminal penalties to resolve claims it turned a blind eye to Bernard Madoff's massive Ponzi scheme, has filed at least two "friend of the court" briefs this year in a quiet campaign to make it more difficult for receivers and bankruptcy trustees to recover funds transferred to third parties from a suspected Ponzi scheme.  In a recently-filed amicus curiae brief in Janvey v. The Golf Channel, a case currently on appeal to the Texas Supreme Court that involves payments made by convicted Ponzi schemer R. Allen Stanford to purchase television advertising to promote his scheme, the bank asked the Texas Supreme Court to invalidate the "Ponzi scheme presumption," a tool widely used by receivers and trustees in recovery efforts.  The brief, filed by a high-powered New York law firm and a renowned University of Michigan law professor, is the second filed this year by JP Morgan in cases involving contested suits to recover transfers to third parties in Ponzi schemes - with the first coming earlier this year in a case before the Minnesota Supreme Court that rejected the 'Ponzi scheme presumption.'

Madoff's "Primary Banker" 

JP Morgan was Madoff's primary banker for several decades prior to the conman's arrest in 2008, with billions of dollars flowing through Madoff's bank accounts and the bank even investing with Madoff and selling structured products tied to Madoff feeder funds.  The bank profited handsomely from the affiliation, ultimately reaping more than $500 million in commissions and fees despite a growing chorus from inside the bank that was increasingly skeptical of Madoff's legitimacy.  The bank waited until just months before Madoff's arrest to make a suspicious activity filing with a British regulator while simultaneously liquidating its $276 million investment with Madoff.  In January 2014, the bank agreed to pay $2.6 billion in civil and criminal penalties, including $1.7 billion which was earmarked for a fund to compensate Madoff victims.  

The Ponzi Scheme Presumption

In the case of a collapsed Ponzi scheme, a receiver or bankruptcy trustee is often appointed and tasked with recovering assets for the benefit of defrauded victims.  One of the most common avenues used to recover funds often comes in the form of "clawback" lawsuits that seeks to recover funds transferred to third parties, including participants that profited from their investment and other third parties that may have provided services to or for the scheme.  Under both state law and the U.S. Bankruptcy Code, these fraudulent transfer actions are often pursued through theories of either actual fraud or constructive fraud.  One, actual fraud, involves an actual intent to hinder, delay, or defraud creditors, while a constructively fraudulent transfer focuses not on the transferor's intent but rather the underlying transaction and whether "reasonably equivalent value" was provided.   

In recent years, courts have employed a 'Ponzi scheme presumption' in holding that a transferor's fraudulent intent is assumed upon the showing that the transfer was made in furtherance of a Ponzi scheme.  Indeed, until earlier this year (and as discussed in depth below), courts unanimously endorsed the 'Ponzi scheme presumption,' reasoning that “transfers made in the course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or defraud creditors.” Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund, Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007).  The benefits of such a presumption benefit receivers and trustees, who are able to satisfy the actual intent prong of the fraudulent intent analysis without proceeding through a rigorous analysis of the actual intent of the transferor or weighing circumstantial evidence to demonstrate adequate 'badges of fraud.'  As such, the 'Ponzi scheme presumption' is a favored tool of receivers and trustees in pursuing recipients of fraudulent transfers.

The Minnesota Supreme Court Issues Its Finn Decision - In Which JP Morgan Was Also Involved 

Earlier this year the Minnesota Supreme Court issued an opinion in Finn v. Alliance Bank, a case brought by a receiver seeking to recover fraudulent transfers made to various financial institutions (not JP Morgan) in a Ponzi scheme. The district court relied on the 'Ponzi scheme presumption' and sided with the receiver.  On appeal, the appellate court entered a mixed ruling, finding that certain parts of the presumption were supported by Minnesota's fraudulent transfer statute but concluding that one portion was not.  On review, the Minnesota Supreme Court sided against the Receiver and found that:

Even if there is evidence to support the inference that Ponzi-scheme operators generally intend to defraud investors, MUFTA does not contain a provision allowing a court to presume fraudulent intent. Instead, MUFTA contains a list of factors, commonly referred to as “badges of fraud,” that a court may consider to determine whether a debtor made a transfer with an actual intent to defraud creditors. See Minn. Stat. § 513.44(b). That “the debtor was involved in a Ponzi scheme” is not among them.

....

Thus, although a court could make a “rational inference” from the existence of a Ponzi scheme that a particular transfer was made with fraudulent intent,  Finn, 838  N.W.2d at 599, there is no statutory justification for relieving the Receiver of its burden of proving or for preventing the transferee from attempting to disprove fraudulent intent.

The court "rejected each component of the Ponzi scheme presumption." 

Perhaps unsurprisingly, JP Morgan was one of three banks which filed an amicus curiae brief in the Finn case.  The bank was also represented by the same University of Michigan law school professor and high-powered New York law firm.  While that brief is not immediately available, it would not be a stretch to assume that the bank's position was also firmly against adoption of the Ponzi scheme presumption.

Janvey v. Golf Channel

In Janvey, the court-appointed receiver in Allen Stanford's massive Ponzi scheme filed a clawback suit seeking the return of nearly $6 million paid to The Golf Channel ("TGC") for television advertisements.  While a trial court had likened TGC to an 'innocent trade creditor' and dismissed the claims, a federal appeals court sided with the receiver and found that the services provided by TGC did not provide any "value" to Stanford's creditors as required under Texas's fraudulent transfer statute.  However, that same court later vacated that opinion and entered a different opinion certifying the question of what constituted "value" under TUFTA to the Texas Supreme Court.  

In an amicus curiae brief filed by JP Morgan, the bank first acknowledged that the question certified by the U.S. Court of Appeals for the Fifth Circuit concerned the definition of value under "TUFTA," but argued that:

[A]lthough the Fifth Circuit did not specifically certify a question with respect to the Golf Channel I panel’s conclusion that all transfers of any kind made by a Ponzi scheme perpetrator are intentional fraudulent transfers, the certified question concerning the establishment of “value” under TUFTA would not even arise absent the conclusive Ponzi scheme presumptions applied in Golf Channel I. 

JP Morgan also suggested that "the Fifth Circuit “disclaim[ed] any intention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the question certified.” 

With that aside, the brief launches into an unabashed attack on the 'Ponzi scheme presumption,' beginning with a pointed attack on the validity of the presumption:

The conclusive presumption applied by the Golf Channel I panel that all transfers by an entity operating a Ponzi scheme are by definition intentional fraudulent transfers is not a correct statement of Texas law. It has no basis in TUFTA’s statutory text, misapprehends the purposes of fraudulent transfer law, and has never been endorsed by a Texas court. Without this presumption, the Receiver’s case would have been dismissed on the pleadings, because under longstanding principles of fraudulent transfer law, a debtor’s purchase of goods or services in an arms-length transaction and at a reasonable market rate is not an intentional fraudulent transfer—regardless of whether the debtor is generally engaged in fraud or uses the fruits of the transaction in a manner that somehow deepens its insolvency. Application of this presumption eliminated the Receiver’s burden of actually pleading and proving its prima facie case, and immediately shifted the burden to Golf Channel to satisfy TUFTA’s statutory affirmative defense for transferees who take in good faith and for value. Nothing in TUFTA suggests that this wholesale elimination of the plaintiff’s burden of proof is appropriate. 

The brief then embarked on a detailed dissection and analysis of TUFTA and an attempt to distinguish the current status quo.  The bank argues that the Ponzi scheme jurisprudence developed by federal courts in recent decades is mistaken, that the line had been blurred between fraudulent transfer actions and fraud actions, and that the current jurisprudence was the product of a mistaken emphasis on the transferor's general business rather than the specific transaction(s) at issue.  Like Finn, the bank urged the Texas Supreme Court to focus on the specific transactions at issue and conclude that no 'Ponzi scheme presumption' should apply.  

Implications

While the identity of any other third parties filing amicus curiae briefs is unknown, JP Morgan's involvement in both the Finn and Golf Channel case suggests a deliberate and concerted campaign by the bank to target a legal precedent that has existed for several decades and has greatly assisted in the recovery of funds to be distributed to victims of Ponzi schemes.  The effort are far from altruistic; financial institutions are routinely targeted by receivers or trustees for their role in providing services to Ponzi schemers. However, while those institutions frequently assert a defense that they owe no duty to investigate their customers, fraudulent transfer actions contain different elements; the establishment of actual fraudulent intent then places the good faith of a transferee at issue.  This trend is likely to continue as settlements with third parties in Ponzi scheme litigation are often the greatest source of recoveries.  Indeed, an Ohio bank was just recently hit with a $72 million judgment that found the bank liable for each of the transfers that passed through its accounts.  

JP Morgan's amicus curiae brief is below:

 JPM Amicus (1)

 

Wednesday
Nov252015

Jury Convicts 20-Year Old Nightclub Owner Of $500,000 Ponzi Scheme

After several days of deliberations, a federal jury convicted a 20-year old Connecticut nightclub owner of operating a Ponzi scheme that promised outsized returns from the resale of electronic devices.  Ian Parker Bick, 20, was convicted on six counts of wire fraud and one count of money laundering after a trial that began earlier this month.  The jury found Bick not guilty of two counts of wire fraud and one count of making a false statement to law enforcement, while a mistrial was declared on the remaining three counts of wire fraud and one count of money laundering.  Each of the wire fraud counts carries a maximum twenty-year sentence, while the money laundering charge carries a ten-year sentence.  

Bick is the owner of a popular Danbury, Connecticut club known as Tuxedo Junction.  In addition, Bick also owned multiple entities such as This is Where It's At Entertainment, Planet Youth Entertainment, W&B Wholesale and W&B Investments. According to authorities, Bick used these entities to solicit friends, business partners, and even his parents with the promise that their investments would be used for multiple purposes to yield lucrative returns in short time periods.  For example, potential investors were told that their funds would be used to buy electronics and subsequently resell them for a profit, as well as for the organization and promotion of concerts in Connecticut and Rhode Island.  These investments were memorialized through "loan agreements" and "music venture participation agreements."  In total, approximately $500,000 was raised from at least 15 investors.

However, authorities alleged that Bick did not use investor funds to purchase electronics or organize concerts.  Rather, Bick is accused of diverting investor funds for his own personal use, including luxury travel, the purchase of jet skis, and the payments of fictitious interest to investors.  At an interview with U.S. Postal Inspection Service in June 2014, Bick represented to investigators that 70% - 80% of investor funds had been used on "artist deposits."  However, in reality, only a minimal portion of investor funds were allegedly used as promised.

Bick's sentencing has been scheduled for March 2, 2016.

At 19 years of age at the time of his arrest, Bick is likely one of the youngest known defendants accused of a Ponzi scheme.  Donald French, a Florida man, was 25 when he was arrested in 2012 and charged with operating a $10 million Ponzi scheme.  French is currently serving a 10-year prison sentence. 

Wednesday
Nov252015

Court: TelexFree Was a Ponzi And Pyramid Scheme

A court has ruled for the first time that TelexFree, a consortium of companies that peddled interests in voice-over-internet-protocol ("VoIP") services to millions worldwide, was operated as a Ponzi and pyramid scheme. U.S. Bankruptcy Judge Melvin S. Hoffman entered an order granting a motion by Trustee Stephen B. Darr requesting a finding that TelexFree, LLC, TelexFree, Inc., and TelexFree Financial, Inc. (collectively, "TelexFree") "were engaged in a Ponzi/pyramid scheme and that such finding be applicable to all matters in this proceeding."  The ruling, which comes as Mr. Darr seeks court approval to implement an electronic claims process to begin returning funds to over 1,000,000 estimated victims, will have lasting implications beyond the claims process - including paving the way to initiate adversary actions against parties that received transfers from TelexFree.  

The Scheme

As is well known by now, TelexFree raised billions of dollars from hundreds of thousands of investors through the sale of a VoIP program and a separate passive income program.  The latter was TelexFree's primary business, offering annual returns exceeding 200% through the purchase of "advertisement kits" and "VoIP programs" for various investment amounts.  Not surprisingly, these large returns attracted hundreds of thousands of investors worldwide, and participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses.  Ultimately, while the sale of the VoIP program brought in negligible revenue, TelexFree's obligations to its "promoters" quickly skyrocketed to over $1 billion.  After an unsuccessful attempt to quickly usher the companies through bankruptcy, state and federal agencies initiated enforcement actions accusing the company of operating a massive Ponzi and pyramid scheme that defrauded hundreds of thousands, if not millions, of victims worldwide. Mr. Darr was subsequently appointed as trustee, and the company's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges.

Mr. Darr has been working through the Herculean task of sifting through the daunting amount of records present in a scheme of such massive proportions.  He recently disclosed that he had identified more than 900,000 unique email accounts associated with investors had registered with the scheme - with each suffering an average loss of approximately $2,000.  Mr. Darr initially delayed the creation of a typical claims process, citing the complexity of the scheme.  Indeed, if each participant submitted a hard copy of a 5-page proof of claim form, the stack alone would be nearly half a mile high, and would stretch nearly 800 miles end to end.

Claims Process

In early October, Darr filed motions seeking (1) establishment of a claims process, proof of claim form, and bar date, and (2) entry of an order finding that TelexFree had been operated as a Ponzi and pyramid scheme.  Darr argued that TelexFree's scheme "had elements of both a Ponzi and pyramid scheme," and as such any "accumulated credits" by scheme participants were simply fictitious profits and thus should not be recoverable by participants.  As the trustee explained,

The accumulated credits based on the posting of meaningless advertisements are equivalent to the fictitious profits promised in Ponzi schemes. The Participants were guaranteed an astronomical return by merely purchasing a membership plan and posting internet advertisements reportedly supplied by the Debtors. Participants were not required to sell a product to receive payment. Accordingly, claims based on the accumulated credits for the posting of advertisements should be disallowed. 

Darr's position is not a novel one, as recognizing investors' accumulation of profits would not only honor the schemer's wishes but would also serve to favor those earlier scheme investors who had more time to accumulate fictitious profits at the expense of new investors.  By finding that TelexFree operated a Ponzi and pyramid scheme, Darr will seek to utilize a "net equity" analysis to determine investor claims by reducing any investment amount by any amounts an investor received from the scheme.  

The court ultimately continued its hearing on the trustee's motion to approve the form and procedure of the proposed claims process, ordering the trustee to serve notice on all affected parties that "allowance of the motion will cause all prior claims filed by any persons against the debtors or governmental authorities to be disqualified."

Ramifications of Ponzi/Pyramid Finding

While the trustee ostensibly sought the Ponzi/pyramid finding as part of his proposed claims procedure, the reality is that the ramifications of such a finding will be much farther reaching.  Indeed, former TelexFree principals Wanzeler and Merrill filed a limited objection opposing "the Trustee's request that the Court's findings made pursuant to the Motion 'shall be applicable throughout these proceedings, for all purposes.'"  Both Wanzeler and Merrill have been criminally charged for their role in the scheme, and at least Merrill will face trial in the near future while Wanzeler remains a fugitive in Brazil.  Wanzeler and Merrill argued that the issue should be decided on a case-by-case basis by the courts in which the issue is pending, and demanded a jury trial and expanded discovery to explore the allegations.

In addition to the potential ramifications in the criminal proceeding involving Merrill, the finding will also simplify the process by which Mr. Darr may seek to recover transfers made by TelexFree to insiders and other parties.  Under both state law and the Bankruptcy code, a trustee may seek to recover transfers made during the course of a Ponzi or pyramid scheme that were made with actual fraudulent intent.  Numerous courts around the country have been nearly uniform in holding that a transfer was made in the course of a Ponzi scheme satisfies the requisite fraudulent intent required by statute.  Thus, in gaining a finding that TelexFree was engaged in a Ponzi scheme, Darr may not only target the nearly-70,000 unique accounts which profited from TelexFree by an average of $20,000, but also those individuals or entities which provided services to TelexFree.

More Ponzitracker coverage of TelexFree is here.

Wednesday
Nov252015

ABA Journal Selects Ponzitracker For 2015 "Blawg 100"

For the third year in a row, Ponzitracker is honored to announce it has been selected for inclusion in ABA Journal's "Blawg 100," a collection of the top 100 legal blogs.  The 9th Annual ABA Journal Blawg 100, compiled by staff and reader submissions, was selected from more than 4,000 "blawgs" maintained in the site's "blawg directory."  The list is available online here, and will also be featured in ABA Journal's December 2015 magazine issue.

Ponzitracker is honored to be included in the Blawg 100.  The blog was originally started with the simple goal of serving as a resource for those interested in Ponzi schemes, whetheboth 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 gathered from dozens of Ponzi receiverships and bankruptcy proceedings nationwide.  

The site has recently added sections on top investor recoveries in Ponzi schemes as well as 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.  The blog also reached its 1,000 blog post earlier this fall.

In short, thank you to all who have made Ponzitracker a regular on your blog list.  

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