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Recent SEC Releases
Saturday
Jun212014

Cay Clubs Executives Arrested In Central America To Face U.S. Obstruction And Fraud Charges

Just weeks after a Florida federal judge dismissed the Securities and Exchange Commission's civil enforcement action accusing five executives of a failed real estate company of operating a $300 million Ponzi scheme, the Department of. Justice announced that two of the executives had been arrested in Central America and returned to the United States to face conspiracy and obstruction charges.  Fred Davis Clark, Jr., 56, and his wife, Cristal R. Clark a/k/a Cristal Coleman, 41, face a newly-unsealed indictment charging them with one count of conspiracy to commit mail and wire fraud, three counts of mail fraud, and one count of obstructing an official proceeding.  Each of the charges carries a maximum twenty-year prison sentence.

Cay Clubs was a Florida company that raised more than $300 million from over 1,000 investors through the 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.  The two also had ownership interests or exercised control over several other entities, including Cayman Islands-based CMZ Group, LTD ("CMZ"), Cristal Clear Charters, LLC ("CCC"), and DC6, LLC ("DC6").  Cay Clubs touted investments in interests in residential real estate, promising guaranteed annual returns of 15% purportedly derived from the purchase of decaying or abandoned properties properties that would be refurbished and upgraded into five-star resorts nationwide.  From 2004 to 2008, the company was able to raise over $300 million from investors.

After an investigation that spanned several years, the Commission initiated a civil enforcement action against Cay Clubs and five of its executives in January 2013, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end recently 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.  

The criminal action alleges that the Clarks not only provided false and misleading testimony during the Commission's investigation, but also took steps to conceal the status and whereabouts of their assets to further thwart the investigation.  The conspiracy charge relates to the Clarks' operation of CMZ, which operated pawn shops throughout the Caribbean.  According to the Indictment, the Clarks used CMZ to transport raw materials, including gold and precious metals, from the pawn shops to a third-party Illinois smelting plant, where the resulting proceeds were diverted to the CCC and DC6 bank accounts for their own personal use.  The mail fraud charges related to the delivery of bank statements for CCC's Bank of America account on several occasions from November 2010 to May 2011, while the obstruction charge related to Fred Clark's allegedly false and misleading testimony given to the Commission that included engaging in certain financial transactions to conceal his assets.  The Indictment also seeks the forfeiture of the funds involved in the allegations, which totals over $5 million.

While many may question the timing of the Clarks' arrest given the recent dismissal of the Commission's civil enforcement action, a review of the underlying criminal court docket reveals that the case has been pending under seal since November 2013, with the Indictment handed down on November 26, 2013. Shortly after the Indictment, the court docket reveals that authorities sought a partial lifting of the seal order to provide the indictment and arrest warrants to Interpol and foreign governments in an effort to bring the Clarks into custody and possibly cancel their passports.  These efforts culminated in the Clarks' arrest on June 20, 2014, with the Department of Justice announcing that Fred Clark had been apprehended as he was traveling from Honduras to Panama, while Cristal Clark was apprehended in Honduras.  The two made their first appearances before Key West Magistrate Judge Lurana S. Snow, and a detention hearing has been scheduled for Friday June 27, 2014 at 2:00 P.M.  Court files indicate that noted criminal defense lawyer Todd Foster has entered an appearance for Fred and Cristal Clark.

The Indictment is below:

Indictment

 

Wednesday
Jun182014

Utah Man Indicted For $72 Million "Legal" Ponzi Scheme

A Utah man who claimed that he was conducting a "legal Ponzi scheme" is now facing twenty-three felonies on charges that his "legal" scheme nearly 700 people out of at least $72 million.  Dee Randall, 63, was charged with one count of pattern of unlawful activity and twenty-two counts of securities fraud.  Each of the securities fraud charges carries a punishment of 1-15 years in state prison as well as a fine of up to $10,000.  The Salt Lake Tribune reported that a warrant has been issued for Randall's arrest and bond set at $100,000.  

Randall operated several Utah businesses, including Horizon Mortgage & Investment, Horizon Financial & Insurance Group and Horizon Auto Funding.  He advertised to potential investors, many of whom were retirees, that he could protect their retirement funds through investments in real estate, auto leases or insurance products through the purchase of "Horizon Notes" that offered annual returns of 9% to 17%.  In touting the investments, Randall emphasized his reputation in the insurance industry and membership in the Church of Jesus Christ and Latter-day Saints.  These investments were memorialized through private placement memorandums ("PPMs"), which are detailed disclosures to potential investors of a securities offering that often outline a myriad of potential risk factors.  Apparently, included in these offering documents was language to the effect that, while not described as a"Ponzi scheme," Randall would be transferring investor funds from company to company to meet obligations.  

After interest payments stopped in 2009, Randall filed Chapter 11 bankruptcy in December 2010, which allows a debtor to propose a plan of reorganization while holding creditors at bay.  However, after allegations of fraud surfaced, authorities sought the appointment of an independent bankruptcy trustee to conduct an investigation and oversee the bankruptcy process.  United States Bankruptcy Judge Joel Marker appointed a forensic accountant as the US Trustee, who has taken control of Randall's finances and is conducting an investigation.  The Trustee noted Randall's lack of cooperation with the investigation, and even discovered that Randall had continued soliciting investments after the bankruptcy filing.

Ironically, a YouTube video posted by user "deearandal" on March 10, 2010 contains an endorsement from Garrett B. Gunderson, a noted financial author:

Randall filed bankruptcy later that year on December 20, 2010.  Another testimonial from Kyle Bennett was uploaded on June 7, 2010.  Bennett was later the subject of a regulatory action by the Idaho Department of Finance, Securities Bureau, accusing him of violations of Idaho's Uniform Securities Act for his role in soliciting investors for Horizon Auto Funding, LLC - a Randall entity that later filed for bankruptcy in 2011.  Bennett later entered into a Stipulation and Consent of Judgment with Idaho regulators.  The testimonial is below:

A website containing information and court pleadings for Randall's bankruptcy is here.

Wednesday
Jun182014

Atlanta Man Indicted For $5 Million Ponzi Scheme That Targeted Churches

Federal authorities have indicted a Kansas man on fraud charges, alleging that he operated a $5 million Ponzi scheme that preyed on congregants of prominent mega-churches across the country.  Ephren Taylor II, 31, and a co-conspirator, Wendy Connor, face multiple criminal charges, including conspiracy, mail fraud, wire fraud, and money laundering.  Each could face decades in prison if convicted of the charges and sentenced to the maximum sentence.  Taylor surrendered to authorities yesterday.

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, 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 more than $11 million from the sale of the promissory notes and sweepstakes machines.

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.

The SEC's 2012 complaint is below:

Taylor SEC

Tuesday
Jun172014

Madoff Accountant Expected To Plead Guilty

Bernard Madoff's former accountant will plead guilty to charges that he manipulated trading records and conspired to help Madoff conceal his massive Ponzi scheme.  Paul Konigsberg, 77, is expected to enter a guilty plea before U.S. District Judge Laura Taylor Swain next week, as disclosed by the government during a pre-trial hearing today.  With the guilty plea, Konigsberg will join 14 other defendants that have previously pleaded guilty to or been convicted of charges for their role in Madoff's $65 billion Ponzi scheme.  

In a five-count indictment filed by prosecutors last year, Konigsberg was indicted on two conspiracy counts and three counts of falsification of records.  The indictment accused Konigsberg of serving as the primary accountant for many of Madoff's clients in order to ensure that the fictitious returns promised by Madoff were properly reflected.  Prosecutors alleged Konigsberg orchestrated an intricate system to carry out Madoff's instructions, including the frequent back-dating of options trades to create the false appearances of consistent gains, the creation of "amended" monthly statements to provide to certain trusted clients, and even adding one of Konigsberg's relatives to the firm's payroll from 1992 until the firm's collapse in 2008.  

Konigsberg's would be the second accountant to plead guilty to his role in Madoff's fraud.  In November 2009, David Friehling pleaded guilty to nine charges, including securities fraud, investment-adviser fraud, and three counts of obstructing tax law administration.  Despite pleading guilty nearly 5 years ago, Friehling has had his sentencing date continuously postponed during his extensive cooperation with the government, including testifying against five of Madoff's employees last year.  Friehling could face over 100 years in prison when sentenced, and his cooperation is aimed at securing a reduced sentence.

A copy of the Konigsberg indictment is below:

Konigsberg, Paul S11 Indictment

Monday
Jun162014

Judge: No Priority Payment For Ponzi Schemer's Legal Fees

A Pennsylvania judge has denied a request to allow a convicted Ponzi schemer's lawyer to collect his legal fees from funds earmarked for victims.  Defense lawyer George Heitczman had petitioned the court to permit payment of his approximately-$20,000 in legal fees from funds forfeited from his client Richard Freer, who was recently convicted of a $10 million Ponzi scheme and sentenced to serve at least twelve years in state prison.  The move drew fire from both prosecutors and Freer's victims, as authorities had seized approximately $54,430 - meaning that victims would have recovered less than 1% of their losses while Heitczman would have recouped his entire fee for defending Freer.  

Heitczman had argued that the funds forfeited by authorities were not tied to the Ponzi scheme, but rather were Freer's personal funds that could be applied towards the approximately-$20,000 owed to Heitczman for his legal services.  After Heitczman filed his motion, prosecutors immediately signaled their opposition, noting that their intention remained to ask the court to apply the forfeited funds toward the $7.75 million in restitution owed by Freer.  Judge Sletvold may have also tipped her feelings as she issued an order seeking written responses to several questions she had relating to Heitczman's motion, including whether Heitczman's fees could be paid out of criminal proceeds or whether doing so would have any effect on Freer's ability to pay his restitution obligations.

At a hearing last week, Heitczman slightly changed his position, indicating that he was seeking only approximately $8,700 from the forfeited funds that could be traced to social security income received by Freer and his wife.  However, Judge Sletvold rejected that request, questioning how Heitczman could be entitled to priority over Freer's victims and signifying her belief that any payment towards Heitczman's legal fees would have to be commensurate with payments to victims.

Heitczman has indicated he does not plan to appeal the ruling.

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