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Recent SEC Releases
Thursday
Aug222013

64-Month Sentence for California Man Who Operated $7 Million Ponzi Scheme

A California man will spend the next 64 months in prison after defrauding investors out of over $7 million in what he advertised as a computer program that could generate exorbitant profits by identifying market trends.  Douglas Hollingworth, 64, received the sentence after previously pleading guilty earlier this year to wire fraud and money laundering counts.  Hollingsworth was also ordered to pay $4.9 million in restitution to his victims.

Hollingsworth owned and operated several companies, including Baytree Investors, LLC ("Baytree"), and Capsule Partners, LLC ("Capsule").  Beginning in June 2007, Hollingsworth began soliciting potential investors to invest in Baytree or Capsule, telling them they could expect potential monthly returns of 6% (72% annually).  Hollingsworth explained to potential investors that he had developed computer trading software that allowed him to profit from the advanced identification of market trends by engaging in the short-term trading of securities.  Some investors were also told that Hollingsworth was developing additional trading software - to improve on his existing trading software - and that some of their funds would be devoted to creating that software.  

Despite being visited by federal law enforcement in 2010 concerning his investment activities, and the subsequent seizure of certain bank accounts under his control, Hollingsworth continued to solicit investors for Baytree and Capsule.

Not surprisingly, Hollingsworth was not able to pay monthly 6% returns to investors through expertly-timed trading strategies; rather, Hollingsworth operated an elaborate Ponzi scheme that used incoming investor funds to pay returns and principal redemptions to existing investors.  As is typical in Ponzi schemes, Hollingsworth used investor funds for a variety of uses, including not only payments to investors, but also to sustain a lavish lifestyle that included the purchase of fine jewelry, at least $14,000 in Best Buy purchases, and over $20,000 in dental care.  

At the sentencing hearing, U.S. District Judge Charles R. Breyer ordered Hollingsworth to surrender immediately to begin serving his sentence.  After serving his sentence, Hollingsworth will also be subject to a three-year period of supervised release.

A copy of a superseding indictment is here.

Tuesday
Aug202013

Grand Juror Indicted After Tipping Off Ponzi Schemer 

A federal grand juror is facing criminal charges after he allegedly disclosed details regarding the investigation and indictment of a suspected Ponzi schemer to a witness during a chance encounter at a local Costco - which resulted in the witness tipping off the fraudster.  Terry Jones, of Des Moines, Iowa, was charged with a single count of criminal contempt in a recently-unsealed indictment.  The Ponzi schemer, John F. Holtsinger, later pleaded guilty to a $1.1 million Ponzi scheme, and received a 7-year prison sentence.

According to authorities, Jones was empaneled as a grand juror in June 2011 for the Southern District of Iowa.  Federal grand jury proceedings are secret in nature, and Jones was given instructions during the empanelment process from multiple officials regarding the confidentiality of the proceedings, including a U.S. District Judge, a United States Attorney, and an Assistant U.S. Attorney.  After his empanelment, Jones heard testimony from a number of witnesses concerning their experiences with Holtsinger.  Following the witness testimony, the grand jury returned a sealed indictment and arrest warrant against Holtsinger.

However, two days following issuance of the sealed indictment, and before Holtsinger had been arrested, a Secret Service agent received an anonymous tip that Holtsinger had been tipped off as to the existence of the indictment and arrest warrant - even though both were sealed.  Additionally, Holtsinger was allegedly aware of the exact number of witnesses that had testified before the grand jury, as well as whether those witnesses had testified "for" or "against" him.  

Authorities learned that a grand juror had communicated with a witness during a chance encounter at a West Des Moines Costco two days after the indictment was issued.  After identifying the witness, authorities also learned that Jones was a member at the same Costco.  Store records revealed that both Jones and the witness had purchased items within minutes of each other on "Costco register lane 5," and video surveillance footage maintained by Costco showed the two men engaging in a conversation. (The complaint discloses that while the Secret Service agent asked the Costco manager for a copy, the ensuing copy that was made was lost, and the footage was overwritten and permanently deleted.)  During a later interview with authorities, Jones admitted initiating a conversation with the witness at Costco after stating that he recognized the witness from the grand jury proceedings.  Jones allegedly told the witness that the grand jury had felt sorry for him and the other victims, and that an indictment was issued against Holtsinger.  

Unbeknownst to Jones, the witness was highly loyal to Holtsinger and immediately informed him of the substance of his conversation with Jones.  Luckily for authorities, Holtsinger made no attempt to flee, and later surrendered to authorities.  Jones, however, failed to appreciate the secret nature of the grand jury proceedings despite being informed by several court officials - and even admitted to authorities that this was not the first time he had provided information to individuals not associated with the grand jury.

A copy of the criminal complaint is here.

Thursday
Aug152013

Michigan Man Receives 15-Year Sentence For $72 Million Ponzi Scheme

 

"We do not offer ridiculously high interest rates.  We leave that to the scam artists.  One of our goals is to put these scammers out of business.  Drive 'em right off the 'Net!"
- Gregory N. McKnight
A Michigan man who masterminded a massive Ponzi scheme that duped thousands of victims nationwide out of tens of millions of dollars has been sentenced to serve more than 15 years in federal prison.  Gregory N. McKnight, 53, received the sentence after previously pleading guilty to a single count of wire fraud, which carried a maximum sentence of twenty years in prison.  In addition to the 188-month sentence handed down by United States District Judge Mark A. Goldsmith, McKnight was also ordered to pay nearly $49 million in restitution to his victims.

McKnight operated Legisi Holdings, LLC, which was a shell company headquartered in the territory of Nevis in the West Indies.  Beginning in December 2005, McKnight began soliciting investors for a pooled investment program referred to as both Legisi.com or Legisi.  In an effort to reach as many potential investors as possible, McKnight also promoted the investment at www.legisi.com.  Investors were told that McKnight would invest all offering proceeds, and use his trading profits to pay monthly returns to investors.  According to McKnight, his investing activities regularly generated monthly profits of at least 15%, and told investors they would receive a minimum monthly return of 15%.  Investors were also assured that McKnight would set aside 10% of his monthly trading profits for a reserve fund established for the benefit of Legisi investors.  In total, McKnight and Legisi raised more than $70 million from at least 3,000 investors from all 50 states.

However, McKnight was not the prodigious trader he held himself out to be.  Rather than generating 15%-18% monthly trading profits, McKnight suffered trading losses of more than $3 million.  McKnight invested less than half of the approximately $72 million raised from investors, instead diverting the remainder for a variety of unauthorized uses.  This included the payment of fictitious profits and principal redemptions to investors, more than $2 million for personal expenses, and over $100,000 for vacations.  

Authorities questioned McKnight in May 2007 about his purported trading.  According to the SEC, within hours of that conversation, McKnight posted an announcement on the Legisi website announcing the Legisi program was closed to investors  (which he attributed to a "massive influx" of new investors).  McKnight also closed the Legisi website to the public, and began requiring a login and password.  

While the Securities and Exchange Commission initiated a civil enforcement action in 2008, McKnight was not criminally charged until February 2012.  An associate, Matthew J. Gagnon, was also sentenced to a 5-year term for his role in the fraud.

A copy of the SEC Complaint is here.

Thursday
Aug152013

Astrology-Based Ponzi Scheme Nets 3-Year Prison Sentence For Florida Man

A Florida man received a three-year prison sentence for operating a Ponzi scheme in which investors were not told that investment decisions were primarily based off of lunar cycles and other astrological metrics.  Gurudeo "Buddy" Persaud, 47, was arrested earlier this year and charged with one count of mail fraud and four counts of wire fraud in connection with the scheme.  Rather than face trial, Persaud agreed to plead guilty to the charges, and was also ordered to pay restitution of nearly $1 million to his defrauded investors.  

Persaud was employed as a registered representative of broker-dealer Money Concepts Capital Corp. ("Money Concepts") beginning in February 2003, according to his FINRA Broker Check.  Persaud founded the White Elephant Trading Company LLC ("White Elephant") in late 2007, which he registered with the Florida Department of State under the name of his two brothers to avoid his obligation to report his outside business activities to his employer, which was required under industry regulations.  In soliciting investors, which sometimes took place at the brokerage firm where he worked, Persaud promised annual risk-free returns ranging from 6% to 18%, which he represented were generated by investments in the futures market and other markets.  Potential investors were assured that Persaud that their funds would be safe, with Persaud touting his extensive experience in the financial services industry as a certified financial planner.  In total, Persaud and White Elephant raised approximately $1 million from fourteen investors.

However, Persaud failed to disclose to his investors that, rather than invest in the futures markets, "his trading strategies were based on lunar cycles and the gravitational pull between Earth and the moon." Additionally, Persaud misappropriated over $400,000 from investor funds, using that money to support his and his family's lavish lifestyle.  Of the money that Persaud did invest, he sustained extensive trading losses beginning in the first month he began trading that totaled $400,000.  Additionally, Persaud used investor funds to make distributions of purported profits and principal redemptions - a hallmark of a Ponzi scheme.
 
In the aftermath of Persaud's arrest, some investors have filed lawsuits against Money Concepts alleging the brokerage is responsible for Persaud's fraud.  Thus far, Money Concepts has denied liability.  The SEC has also levied civil fraud charges against Persaud.  

A copy of the SEC complaint is here.
Tuesday
Aug132013

Indian Ponzi Promoter Commits Suicide Over Pressure From Jilted Investors

An Indian woman tasked with raising funds for what was revealed to be a $15 million Ponzi scheme has reportedly committed suicide after demands from disgruntled investors apparently became overwhelming.  According to police, Manorama Haidar, 32, was found hanging at her home in the West-Bengal town of Basuldanga.  The death is the latest in a series of suicides and even one murder resulting from an aggressive government crackdown on so-called "chit fund" Ponzi schemes that targeted lower-class Indian citizens seeking higher returns on their savings.  The largest scheme, the Saradha Group, is estimated to have duped hundreds of thousands of Indian investors out of billions of dollars.

Haidar acted as an agent for Basil International Limited ("Basil"), which offered redeemable preference shares that carried purported annual returns ranging from 11% - 14%.  Basil utilized a wide network of agents to solicit potential investors, fanning out over remote areas to draw in typically lower-income investors that generally had a lack of finance knowledge.  The company is also alleged to have used television advertisements to reach potential investors, and eventually raised close to $15 million.

However, an investigation conducted by the Securities Exchange Board of India ("SEBI") found that the company was using investor funds for a variety of unauthorized purposes, including the payment of huge commission to its agents, investing in business operations, and general misappropriation of funds.  In May, SEBI issued an order forbidding Basil from raising any future funds from investors, and directed the company not to dispose of any company assets or divert any funds in the company's possession.  

In addition to investing approximately $13,000 of her own money, Haidar also raised more than $50,000 from numerous investors who thought their funds were safe with Basil.  After SEBI issued the order shuttung down the company, investors reportedly began pressuring Haidar for the return of their funds.