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Recent SEC Releases

Cay Clubs Founder Gets 40 Years In Prison For $300 Million Ponzi Scheme

Over seven years after the collapse of a Florida real estate investment company that took in more than $300 million from thousands of investors, a federal judge sentenced the company's founder to a 40-year prison term.  Fred Davis Clark, aka Dave Clark, received the sentence from U.S. District Judge Jose E. Martinez two months after a federal jury convicted Clark on multiple charges stemming from his tenure over Cay Clubs Resorts and Marinas, including three counts of bank fraud, three counts of making false statements to a financial institution, and obstruction of an official investigation.  Clark was convicted of the charges during a December 2015 trial after a previous trial resulted in a mistrial for clark and an acquittal for his wife, Cristal Coleman.  In addition to the sentence, Judge Martinez also ordered Clark to forfeit over $300 million.

The Scheme

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 luxury 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 was alleged to have lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs allegedly 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.  

Original Trial

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and extradition from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

A forensic analysis conducted by the government alleged that Cay Clubs evolved into a Ponzi scheme as early as April 2005, with $2 out of every $3 paid to investors allegedly coming from existing investors.  The forensic analysis also showed that the Clarks lived lavishly, including nearly $20 million in boat purchases and expenses, $5 million in aircraft expenses, and $3 million in personal credit card bills.  Fred Clark also allegedly spent over $3 million at a Bradenton golf and country club.

After a five-week trial earlier this summer, a federal jury deliberated for four days before acquitting Cristal Clark of all charges and deadlocking on the charges against Dave Clark. 

Superseding Indictment

Shortly after the mistrial, authorities handed down a superseding indictment that signaled a slight change in strategy.  While the previous indictment focused onthe Clarks' alleged operation of a Ponzi scheme through Cay Clubs, the superseding indictment honed in on the insider transactions that were used to artificially inflate the unit prices and allegedly defraud the lending institutions.  The new indictment alleged that Clark would identify certain family members to act as "straw borrowers for loans that were used to purchase Cay Clubs units." These straw borrowers would prepare fraudulent loan applications, which included representations about the borrower's employment and income, designed to induce lenders to approve the extension of credit.  Clark and others also allegedly prepared fraudulent HUD-1 Statements in which they certified that the borrowers had made the required down payment and cash-to-close payments when, in reality, those payments were made by a Cay Clubs entity controlled by Dave Clark.  

The retrial began November 9th and lasted four weeks.

Post Trial Efforts

Clark made several post-trial attempts to overturn his conviction or secure a new trial, arguing among other things that prosecutors failed to prove their case, that the jury ruled on insufficient evidence, and his conviction was based on presumptions.  Clark's motion for a new trial was denied earlier this month without accompanying explanation.  Clark also sought to have Judge Martinez recused for exhibiting bias during the trial, as purportedly evidenced by excerpts from the trial transcript.  The US opposed Clark's motion for recusal, observing that:

Defendant was extremely manipulative, non-responsive, and obstructive during his trial testimony. During his direct examination he refused to answer the questions of his own lawyer and instead continuously provided long, narrative and rambling statements...The court had to direct him on multiple occasions to answer the questions asked.

Judge Martinez denied the recusal motion on February 10th.


Rothstein's Bank - Not Victims - Will Get Proceeds Of Auctioned Luxury Items

An upcoming auction of luxury items seized from convicted Ponzi schemer Scott Rothstein, including a 12-carat diamond ring, the most expensive women's Rolex ever made, and a $550,000 watch, will likely bring in millions of proceeds payable to an unlikely beneficiary: the Canada-based bank which has paid hundreds of millions of dollars in settlements for its role in Rothstein's scheme.  A Florida jeweler is tasked with auctioning off the remaining part of Scott Rothstein's extensive jewelry collection - an assortment built with no limits using stolen funds from hundreds of duped investors.  However, while the proceeds would typically go to pay back Rothstein's victims, that is not the case as those victims have already been made 100% whole through an unprecedented recovery effort by bankruptcy trustee Herbert Stettin.  As such, in a final twist of irony, the bank which has paid dearly for its role in the fraud will start to recoup its $132.5 million claim recognized by the trustee.

The Scheme

Rothstein touted lucrative returns to investors through the purchase of highly confidential legal settlements purportedly stemming from claims of sexual harassment, whistle-blower, and qui tam actions against large corporations.   According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to receive that settlement at a discount.  With the investor sworn to secrecy and enamored by the prospect of an lucrative return, there was a built-in incentive for all parties to remain tight-lipped. Potential investors were assured that their funds would remain safe in a firm trust account held at TD Bank, with some provided "lock letters" authored by bank officials purportedly assuring them that their funds were impervious to ill will or influence.  

As would later emerge in spectacular fashion, Rothstein's alleged secretive settlements were bogus and nothing more than what would later be revealed as the largest Ponzi scheme in Florida history.  Indeed, as he would later confide in authorities as part of one of the most memorable (and effective) post-conviction cooperation campaigns, Rothstein pointed the finger at numerous individuals who he claimed shared blame for the scheme, including Frank Spinosa - the then-regional Vice President of the TD Bank branch in Ft. Lauderdale.  As alleged by Rothstein (and later by both civil and criminal authorities), Spinosa played an integral role in the scheme through a series of actions that included making false representations to investors and authoring bogus "lock letters."  Spinosa later pleaded guilty to wire fraud conspiracy and is scheduled to begin a 30-month prison sentence this Thursday.

Unprecedented Recovery

The court-appointed bankruptcy trustee, who assumed his position in late 2009 with Rothstein's once-prominent law firm shuttered and Rothstein having fled with $15 million, announced a liquidation plan in February 2013 that sought to return 100% of victim losses - a remarkable outcome that was possible only due to TD Bank's culpability in Rothstein's scheme.  At the time of the proposed distribution plan, TD Bank was the subject of numerous lawsuits brought by Rothstein victims and had already been on the losing end of several suits to the tune of at least $132.5 million in damages.  Stettin sought and received approval to largely exclude those victims who had already recovered from TD Bank from participating in the liquidation plan. 

The funds available for the proposed liquidation plan also included a $72.45 million payment from TD Bank to resolve all claims Stettin could have brought against the bank.  The payment essentially acted to stop the increasing spigot of lawsuits brought by Rothstein victims as it was conditioned upon the Court's entry of a "bar order" which would forever enjoin any current or future lawsuits against the bank.  The settlement essentially ensured that Stettin would have available funds to make good on his intention to make Rothstein's victims 100% whole.

The liquidation plan was approved by the Court in July 2013, albeit as a result of a marathon negotiating session that naturally resulted in the extraction of additional settlements from TD Bank.  At the time the plan was approved, TD Bank's total toll from Rothstein's fraud stood in the hundreds of millions of dollars - including $257 million in settlements for lawsuits brought by one attorney alone. 

TD Bank's Subordinated Claim

The liquidation plan provided that TD Bank was permitted a $132.45 million subordinated claim, an amount which represented the current total of settlements and jury verdicts rendered against the bank at the time the liquidation plan was proposed.  TD Bank's claim was subordinated to the lowest possible priority, meaning that it would not be entitled to receive any distribution on its claim until all other claims had been paid. 

The Auction

With the Rothstein saga in its seventh year, the bankruptcy estate is seeking to wind down and close the estate.  That means that Michael Goldberg, a court-appointed liquidating trustee, is entrusted with auctioning off the remainder of a collection of luxury assets that once symbolized the rock-star lifestyle enjoyed by Rothstein with investor funds.  The auction, which will take place in early April, includes a 30-piece jewelry collection fit for a king, including:

  • Wife Kim Rothstein's 11.8 carat diamond engagement ring;
  • A Zenith Zero-G Tourbillion watch that cost $550,000 to make;
  • a Harry Winston watch;
  • a 12.08 carat yellow canary diamond ring;
  • a women's Rolex watch estimated to be the most expensive ever made; and
  • A bracelet with at least 1,350 diamonds.

The jewelry collection is appraised at roughly $10 million, although it is estimated the auction will bring in roughly 20%-40% of that amount.  Participants can also bid on a nearly-10,000 square foot unfinished mansion in Boca Raton that was custom built by a Rothstein victim and later purchased by Rothstein.  The mansion, which has an elevator, atrium, pool, spa, and waterfall, has several rooms that are still unfinished.  The price for the mansion will be set at $2.5 million.

The conclusion of the auction will mark a closing chapter in a saga that has gripped the south Florida scene for the better part of a decade.  The resulting efforts by the court-appointed trustee have resulted in significant accolades, including the largest Ponzi scheme to see its victims receive 100% compensation.  It is then perhaps fitting that TD Bank, which has paid dearly for its involvement with Scott Rothstein, will perhaps receive the last token payment. 

More Ponzitracker coverage of the Rothstein scheme is here.


Former Soccer Club President Gets Prison For $5 Million Ponzi Scheme

A former soccer club president will spend the next 51 months in federal prison after pleading guilty to operating a Ponzi scheme that took in at least $5 million from investors, including fellow members of the soccer club.  Robert Rocco, 48, received the maximum sentence after previously pleading guilty to a single count of wire fraud.  Rocco was previously indicted on five counts of wire fraud and nine counts of mail fraud. In addition, the government is also seeking forfeiture of all proceeds traceable to the fraud, including Rocco's New York house.

According to the indictment, Rocco was the president of the Dix Hills Soccer Club ("DHSC"), which allowed him exclusive control of the club's bank accounts.  Rocco was also the founder and owner of Limestone Capital Services ("Limestone"), which purported to provide wholesale financing of cigarette purchases for a tobacco shop located on the Shinnecock Native American Reservation (the "Reservation").  Limestone also allegedly provided credit card services to retail users seeking to purchase cigarettes from the Reservation.

Beginning in 2006, Rocco solicited friends and family members of the DHSC to invest in Limestone, representing that investor funds would be used to finance the wholesale purchase of cigarettes on the Reservation.  Investors were provided with promissory notes that stated annual rates of return ranging from 15% to 18%.  Rocco also solicited the assistance of an unnamed acquaintance to recruit additional investors.  In total, over two dozen investors entrusted amounts ranging from $25,000 to $1.2 million with Limestone for a collective investment of over $5 million.  

While investors received regular checks purporting to be interest payments, Rocco revealed in February 2009 that a rival Indian tribe had stolen approximately $4 million - $5 million of uninsured cigarette inventory from the Reservation, resulting in a massive loss.  Rocco then formed Advent Equity Partners ("AEP"), which purported to deal in credit card processing services, and solicited a total of $1.3 million from an unnamed victim.

According to authorities, Rocco was not able to pay his advertised returns through legitimate businesses such as Limestone or AEP, but rather used incoming investor funds to pay returns to existing investors in classic Ponzi scheme fashion.  In addition, Rocco is accused of diverting nearly $67,000 from DHSC bank accounts to cover redemption obligations to investors.  This had the effect of depleting club coffers, with DHSC managing to stay afloat only by soliciting donations from benefactors.

Rocco's indictment is below:

Rocco Indictment by jmaglich1


Did A $70 Million Wine Ponzi Scheme Just Collapse?

A now-bankrupt California wine retailer that specialized in "future delivery" of expensive wines to customers is now reportedly under investigation by the FBI over claims that it operated a massive Ponzi scheme that duped thousands of consumers.  Wine Spectator Magazine is reporting that Premier Cru, based out of Berkeley, California, is the subject of an FBI investigation looking into "claims of a Ponzi scheme involving the [company]."  Premier Cru filed for bankruptcy protection early last month, which was followed by the personal bankruptcy filing this week by the company's president John Fox.  Already, the collapse has been estimated to be the "biggest wine retail-related default to have ever occurred in America."

Premier Cru, which operated as Fox Ortega Enterprises, sought out purveyors of fine wines by offering attractive prices on rare bottles that often handily beat competitors. The company also specialized in selling "pre-arrival" or "futures" wine, offering tantalizingly low prices on rare wine vintages that were currently bottling and had not yet been bottled.  The waiting period for such wines could range for months or even years, with some customers waiting up to five years to receive their purchased wine.  

The company came under fire last year when nearly a dozen customers filed lawsuits accusing the company of fraud and of operating a pyramid scheme.  Those customers alleged that Premier Cru had failed to deliver millions of dollars in pre-arrival wine and instead offered only excuses and empty refund promises.  Shortly after those lawsuits were filed, the company shut its doors and purportedly transitioned to an online-only sales platform.

In early January, Premier Cru sought bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code.  In its petition, the company listed assets of $1million to $10 million but liabilities of $50 million to $100 million.  The petition listed the near-entirety of the company's assets as $6.5 million in wine inventory but also disclosed nearly $70 million in unsecured creditors who are suspected of purchasing - but never receiving - rare wines.  A 1,401-page bankruptcy petition lists over 3,950 creditors with debts ranging from $50 to over $100,000.  The list of creditors contains several well-known wine collectors, including Accel Partners' Arthur Patterson who is reportedly owed more than $830,000.  Fox's petition was filed earlier this week, listing assets of $0 to $50,000 compared to liabilities of $50 million to $100 million.  

The court-appointed bankruptcy trustee in the Premier Cru bankruptcy has disclosed that approximately 35,000 bottles of wine remain in the company's inventory, with a small percentage of those bottles segregated for approximately 120 "paid-up" customers.  While the trustee has indicated that he intends to sell off all of the wine - including the pre-sold wine - for the benefit of creditors, he does anticipate that those "paid-up" buyers may attempt to assert their interests.  The judge overseeing the bankruptcy case has cautioned the trustee against racing to liquidate the wine while potential creditors' claims may be asserted.  

The trustee will conduct a so-called "341 Meeting" on February 24th in which creditors will have the opportunity to question Premier Cru principals - including John Fox - under oath about the company's position.  The FBI has asked that interested individuals send complaints and tips to


China's Madoff Moment: The Latest About The Alleged $7.6 Billion Ponzi Scheme

Last week authorities arrested nearly two dozen employees of a shuttered Chinese peer-to-peer lender on accusations that the company was a massive Ponzi scheme that had taken in billions from countless investors.  These mind-blowing figures were soon followed by revelations of lavish purchases by key insiders - including a $12 million diamond ring - as well as some slick policing that uncovered (literally) nearly 100 bags of evidence buried 20 feet underground.  As the rest of the world struggles to get their head around the sheer size of this scheme, which would be the second largest Ponzi scheme in history, more details have started to trickle out which shed further light on the allegations. 

Ezubao (also referred to as Ezubo by several publications) shot to prominence in the past two years as one of many Chinese peer-to-peer lenders operating in China’s “shadow banking” industry.  Ezubao and others catered to smaller or underserved business segments which might not qualify or meet the standards for the extension of credit from established financial institutions.  As a subsidiary of Yucheng International Holdings Group, Ezubao purported to finance equipment purchases for small to medium-sized businesses, who in turn paid rental payments to Ezubao for the use of that equipment.  Ezubao pointed to these profitable lending relationships in soliciting investors with promises of annual returns ranging from 9% to 14%.  These above-average returns, which were up to ten times higher than the official rate offered by Chinese banks on deposits, caused investors to flock to Ezubao.  In total, at least 900,000 investors handed over at least $7.6 billion. 

One of the reasons for Ezubao’s explosive growth may lie in its extensive use of marketing to cultivate a favorable reputation and public image.  Last year, the company reached millions by sponsoring online broadcasts of the National People’s Congress and even having its logo hung in the Great Hall of the People in Beijing.  The broadcasts were carried by a subsidiary of Xinhua, which is a Chinese state-owned news agency.  The company also ran prime-time television advertisements on state-owned television channels and had its logos covering seats on the Shanghai-Beijing high-speed train. In a particular stroke of irony, the company was even the recipient of an award given to the most responsible internet finance companies from state-run news company China Newsweek.  In addition to creating the impression that it was blessed by the Chinese government, Ezubao also used its own employees to project an appearance of success by implementing a formal dress code.  Indeed, more than $100 million was distributed to employees this past November, with a portion of the funds earmarked for the purchase of luxurious clothing and jewelry.  The company also sponsored industry conferences, including one just months ago that featured government officials and other industry leaders extolling Ezubao’s business plan and prospects.  

But authorities now allege that Ezubao’s business was a massive fraud built on lies.  China’s news agency is now reporting that approximately 95% of the investment projects listed on Ezubao’s website were simply made up.  Similarly, of the 207 companies Ezubao claimed to call business partners, only one of those partners had apparently ever done business with Ezubao.  Authorities discovered that the company had shelled out as much as 800 million yuan to buy business plans from corporate brokers and use those details to fabricate investment projects used to solicit potential investors.  In a confession being broadcast by Chinese state-run media, Ezubao founder Ding Ning admits that he embezzled close to 1.5 billion yuan from the company and lavished Yucheng president (and girlfriend) Zhang Min with hundreds of millions of yuan in cash payments and the purchase of luxury items such as a 12-million yuan diamond ring.  

As the scheme began to collapse in December 2015, Ning and Min claimed in their confessions that they began making plans to run away and hide evidence.  Authorities somehow caught wind of the scheme and were able to learn that employees had hidden dozens of bags of documents underground in the outskirts of a Chinese province.  Two excavators and twenty hours of digging later, authorities uncovered the hidden documents.  

It remains unknown as to what charges Ning, Min, and the other Ezubao employees will face, but China differs from the United States in that it allows the imposition of the death penalty for nearly sixty offenses, including fraud and economic crimes.  One Chinese businessman labeled as China's "Madoff" was secretly executed back in 2013 after being convicted of running a $460 million Ponzi scheme.  

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