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Recent SEC Releases
Monday
Nov122012

Ponzi Schemer Receives 27-Year Sentence for $12.3 Million Scheme

A Georgia federal judge handed down a 27-year sentence - the longest of its its kind in Atlanta for a fraudulent investment scheme - to a New York man convicted of operating a Ponzi scheme that duped investors out of more than $12 million.  Andrew Mackey, 62, received the sentence from United States District Judge Bill Duffey, who noted that Mackey's case was the worst of all the Ponzi scheme cases he had presided over.  Earlier this summer, a federal jury had convicted Mackey and his common-law wife, Inger Jensen, on 15 counts of wire fraud, mail fraud, and conspiracy to commit wire fraud and mail fraud.  For her role, Jensen received a fourteen-year sentence.

According to authorities, Mackey and Jensen were the owners of ASM Financial Funding Corporation, which was marketed to potential investors as a "wealth enhancement club."  Holding themselves out to investors as experienced investment professionals, Mackey and Jensen promised investors lucrative returns of up to 20% per month by investing in several different ventures, including private and confidential offshore business deals and mortgage financing.  Per the terms of the mortgage financing investment, investors were told that they could pay off a 30-year mortgage in less than five years if they paid 17%-25% of the mortgage up front. Investors were told that these ventures were guaranteed, and lured by advertisements touting the lucrative terms:

"Please note the true beauty of this program: Your total out of pocket expenses after 5 years is only $109,960 and you now own a $200,000 home. That's right! YOU FINANCED $200,000, BUT ONLY PAID BACK $109,960!"

In total, Mackey raised more than $12 million from investors.  As is now known, the promised returns that seemed too good to be true were, in fact, too good to be true.  Instead, the returns were the classic hallmark of a Ponzi scheme - unsustainable returns made possible not through legitimate investments, but by making Ponzi-style payments consisting of redistributed investor principal.  

At his sentencing, Mackey refused to take responsibility for his crimes, instead noting that he "did not intend to steal" and that it was "hard to hear that people feel bitter."  While this likely played a role in the severity of the sentence handed down by Judge Duffey, Mackey was also a convicted felon due to a prostitution-related 1987 arrest for his role as one of the "biggest pimps" in New York.  

Monday
Nov122012

Mastermind of $60 Million Silver Ponzi Scheme Faces Sentencing

A South Carolina man accused of masterminding a $60 million Ponzi scheme, one of the largest schemes in state history, is scheduled to be sentenced Tuesday.  Ronnie Wilson, of Anderson County, South Carolina, was arrested in early April and charged with mail fraud in an alleged Ponzi scheme that held itself out as a silver investment company.  Wilson later pled guilty to two counts of mail fraud in July.  Mail fraud carries a maximum statutory sentence of twenty years per count, as well as a $250,000 criminal fine.  Typically, the US Probation Office prepares a sentencing report providing details on the calculation of a sentencing range, as well as estimated investor losses.  This recommendation is advisory, not binding, on the federal judge tasked with delivering the sentence.

Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") for at least a decade, representing to potential investors that they could realize profits from ownership of silver without having to actually physically possess the silver.  To accomplish this, Wilson purported to purchase and warehouse silver on behalf of investors. Investors were told that their silver would be held in safe-keeping at a Delaware depository, and were provided with regular account statements allegedly showing regular appreciation in their holdings.   In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, in reality, Wilson used the majority of investor funds not for the purchase of silver, but to perpetrate a massive Ponzi scheme in which "profits" paid to existing investors were simply the re-distribution of incoming investor funds.  While investors were told that Wilson kept nearly $17 million of silver at a Delaware depository, they later discovered that the depository had never heard of Wilson.  Of the $90 million raised from investors, authorities and the court-appointed receiver have since pegged investor losses at approximately $60 million.  The outlook for recovery of those funds remains dim; court-appointed receiver Beattie B. Ashmore, has indicated that he "would paint a very dim picture" of the chance of a large-scale recovery.

In a related development, a recent filing by the Receiver illustrates the possible location of some scheme proceeds.  In early October, the receiver sought to expand the scope of the receivership to include Wallace Lindsey Howell and Tracy Neily.  While Howell was recently charged by authorities, the emergence of Neily's name in the case is new.  In the filing, Ashmore explained that his investigation has revealed that

Tracy Neily, individually and through companies already subject to the Court Order, operated as an alter-ego of Wilson and/or AB&C and thus should be added to the Court Order. The Receiver is in possession of data showing that Neily, directly or indirectly, profited substantially from the Ponzi scheme and, in concert with Wilson, diverted funds directly to her and her family members.

Several days later, United States District Judge J. Michelle Childs granted the receiver's request, issuing an order granting Ashmore authority to, among other things, take immediate possession of all assets and property traceable to Wilson's fraud currently in possession of Wilson, Howell, and/or Neily's family members and acquaintances.

Sunday
Nov112012

Former Madoff Controller Pleads Guilty To Fraud Charges

The first non-Madoff employed at Bernard Madoff's brokerage firm pled guilty to aiding and abetting Madoff's $65 billion Ponzi scheme for more than two decades.  Irwin lipkin, the former controller of Bernard L. Madoff Investment Services ("BLMIS") and the third employee after Madoff and his wife, entered a guilty plea to several fraud charges including conspiracy to commit securities fraud, to falsify records, and to make false filings with the SEC.  Pursuant to his plea agreement with authorities, Lipkin, 74, faces up to ten years in federal prison.

Lipkin was hired in 1964 as the first non-Madoff at BLMIS, and participated in maintaining the firm's financials in his job as Controller, as well as assisting Madoff in performing internal audits of the securities positions held by BLMIS.  Along with several other Madoff employees, Lipkin maintained the BLMIS General Ledger and Stock Record.  Beginning in the 1970's, Lipkin falsified entries in the General Ledger designed to manipulate the purported profits and losses realized by BLMIS, and were done at Madoff's behest.  Additionally, in connection with audits by the Internal Revenue Service ("IRS"), Lipkin and others backdated the General Ledger and other supporting documents to appear consistent with representations made to the IRS.  After his retirement, Lipkin also instructed other Madoff employees how to continue his duties to perpetuate the fraud.  

According to authorities, Lipkin also arranged for his wife to receive a regular paycheck from BLMIS despite the fact that she did not work at BLMIS or provide any services on its behalf.  Even though Lipkin retired in 1998, he continued to receive a salary and benefits until the scheme was uncovered in December 2008.  

As part of his restitution agreement, Lipkin has agreed to forfeit $170 billion, which includes all real and personal property owned.  He is scheduled to be sentenced on March 13, 2013.  

A copy of the criminal charging document against Lipkin is here.

Saturday
Nov102012

First Batch of Zeek Subpoenas Arrive; Victims Solicited For New 'Pay-To-Object' Venture

As promised last week, the court-appointed receiver tasked with recovering assets for the victims of the $600 million ZeekRewards Ponzi scheme (the "scheme") has begun sending out a first batch of 1,200 subpoenas to 'affiliates' that profited from the scheme.  The detailed subpoenas seek a variety of information ostensibly related to the location and/or use of scheme profits.  Meanwhile, the de facto voice of those leading the efforts to oppose the receiver, who earlier predicted that "there likely will be no clawbacks" and later characterized the subpoenas as "fishing for information", is now "offering" Zeek victims legal representation to object to the subpoenas...for a "simple and reasonable flat fee of $300."

Clawbacks and Subpoenas

In an update to victims last week, Kenneth Bell, the court-appointed receiver, indicated that he intended to vigorously pursue those who "profited most from from ZeekRewards."  According to Mr. Bell, more than 100,000 User ID's were fortunate enough to profit from their investment with Zeek, which purportedly amounts to "hundreds of millions of dollars."  Following that announcement, approximately 1,200 subpoenas were sent to those 'net winners' seeking a variety of information concerning their dealings with the scheme.  The subpoena was accompanied by a brief letter from Mr. Bell specifying an amount sought, as well as his not-so-subtle statement that he was

"committed to pursue the full court process necessary to obtain personal court judgments against "winning" participants and recover all money owed to the Receivership estate."

At the end of the letter, Mr. Bell indicated that he was open to discussing the return of any false profits without the institution of litigation, and provided contact details for those interested.

The subpoena is quite sweeping in nature, and requests numerous documents in twenty-six (26) different document requests.  A closer look suggests that the subpoena targets are not only Zeek investors, but also business partners, employees, and third-parties.  For instance, request 4 seeks documents related to any work or assistance provided as an employee, independent contractor, vendor, or agent of Rex Venture Group ("RVG"), which is the parent company of Zeek that was charged by the SEC.  Additionally, request 5 seeks documents related to any employment agreement or other contract with RVG, as well as any salary or compensation received.  

Not surprisingly, the majority of the subpoena requests concern the receipt and use of funds received from RVG or any of the related Zeek entities.  This includes copies of banking and financial statements, as well as documentation evidencing the purchase of assets with those funds such as boats, airplanes, real estate, household furnishings, jewelry, and any other assets exceeding $1,500 in value.  Because money is a fungible commodity, the deposit of "tainted" funds from the scheme into an individual's bank account theoretically taints the entire amount of funds in that account, and any subsequent use of funds up to the amount transferred in potentially "taints" the ownership rights in that asset.  

As is common in Ponzi scheme litigation, a receiver/bankruptcy trustee may seek possession of a high-ticket item without going through the litigation process if he is confident that the item was purchased with tainted proceeds from the scheme.  While that notion certainly has its critics, these actions are taken in the name of equity, and are designed to prevent clawback targets from shielding assets beyond the reach of potential creditors.  The scope and detailed nature of the subpoenas are no doubt implicitly designed to encourage settlement and avoid tedious (and expensive) litigation.  

Victims Solicited for 'Pay-to-Object' Arrangement

The group that has openly opposed the SEC and the receiver's mission has also interjected itself into the subpoena issue.  That group, Fun Club USA, earlier obtained approval to intervene in the SEC civil case as an interested party and appears to operate in tandem with another group, Zteambiz.  An individual associated with the two groups, Robert Craddock, who himself previously acknowledged being the target of a SEC subpoena relating to his relationship with RVG and Zeek, has provided ongoing updates to Zeek victims that are openly critical of the Receiver's duties.  

In a November 3, 2012 update, Craddock characterized the subpoenas as an effort to "fish[] for information" and "in my opinion, scare tactics."  Expanding on that assessment, Craddock stated that

Next, I have been instructed by the attorneys fighting for us to inform you that any request you have received to voluntarily turn over any monies earned is just that a request. You are not bound to turn over any money.  Why, you may ask and that is simple there has not been any judge ordering you to do so and the likelihood of that happening is slim to none.

Several days later, victims received an update stating that a Charlotte, NC law firm would handle subpoena objections for a flat fee of $300.  This came as a surprise to some who were part of the group that had initially responded to a Zteambiz request to raise funds to retain legal representation to "allow us to hire one of the best if not the best firm in the country to protect us." This effort was apparently quite successful, for a chart on Zteambiz (since removed) indicated that over 6,000 victims had contributed at least $120,000.  Besides the Notice of Appearance filed on behalf of "Fun Club USA," there has been no update or accounting for those funds.

However, a closer look at the engagement agreement to obtain legal representation for the "simple and reasonable flat fee of $300" raises several issues which should be considered by victims and could result in the incurrence of thousands of dollars in subsequent legal fees.  Specifically, the agreement makes clear (in bold print) that the $300 fee only covers the preparation of an initial objection to the subpoena. However, the filing of an objection to the subpoena is likely the beginning, rather than end, of involvement with the Receiver.  Under federal rules of civil procedure, the receiver may then set the matter for a hearing and/or serve an additional filing known as a "Motion to compel" which takes issue with the objections and allows the receiver to seek attorney's fees and further relief if the asserted objections are deemed by a Judge to be frivolous or designed to frustrate the receiver's purpose. Additionally, the next likely step after the subpoena, assuming the issues are not resolved, is the institution of litigation against clawback targets.

The retainer agreement is seemingly aware of this, and states that in the event the aforementioned events do happen, the "simple and reasonable flat fee of $300" does not cover representation in those instances.  Instead, the client would be responsible for the attorney's services at standard hourly billing rates ranging from $200 to $375.  Additionally, potential clients are informed that the fees generated may be shared with the same law firm that currently represents Fun Club USA.  

Craddock has also provided a link to the Objection filed on his behalf, which consists of nearly nine pages of general and specific objections to nearly every subpoena request.  Appearing to not provide any responsive documents, the Objection instead provides that, because Craddock had previously complied with requests from the SEC for documents, that Mr. Bell may contact the SEC for those documents.  

Friday
Nov092012

Authorities Charge Second Man in South Florida Ponzi Scheme That Targeted Gay Community

A second man has been charged in what authorities charge was a $8 million Ponzi scheme that targeted members of South Florida's gay community.  Authorities unveiled criminal and civil charges against James F. Ellis, of Wilton Manors, Florida, who allegedly assisted the mastermind of the scheme, George Elia. While federal prosecutors charged Ellis with a single count of conspiracy to commit fraud, the Securities and Exchange Commission also charged Ellis with multiple violations of federal securities laws.  If convicted of the criminal charges, Ellis faces a maximum term of five years in federal prison.  

According to authorities, Elia targeted members of the south Florida gay community Wilton Manors, telling them that he was an established day trader who could achieve quarterly returns of 20% for investors. From March 2005 to January 2012, Elia raised more than $11 million from investors for various entities he controlled, including Investor Funding Group and a series of Vision Equity Funds.  

Ellis, who was well-known in the Wilton Manors nightlife scene, added to Elia's legitimacy by representing to potential investors that he had invested over $5 million with Elia and that the $20,000 - $25,000 monthly returns allowed him to live a flashy lifestyle that included expensive cruises and luxury travel. Ellis also used his social connections to recruit potential investors, including residents of an apartment community managed by his daughter. 

However, rather than use the entirety of investor funds for their promised purpose, Elia misappropriated large amounts of investor funds, transferring money to other companies he controlled and paying personal expenses such as mortgage and car payments.  In the marginal amount of trading actually conducted, Elia did not achieve the advertised lucrative gains, but instead incurred losses or only minimal gains.  While Ellis did in fact receive monthly payments from Elia that often totaled $20,000 - $25,000, these payments were not investment returns but rather 'kickbacks' given in exchange for Ellis's recruitment of new investors to Elia's scheme.   Totaling over $500,000 in just the first six months of 2007 alone, Ellis made major profits at the expense of innocent investors.

Elia was arrested in March after returning from "vacation" in Cyprus - a country known for its lack of extradition treaties with the United States.  After apparently rebuffing attempts by authorities to enter into plea negotiations over an initial single charge of wire fraud, Elia found himself the subject of a subsequent indictment in September that unveiled eight more charges of wire fraud.  Each count of wire fraud carries a maximum sentence of up to twenty years in prison.  

A copy of the SEC's complaint against Ellis is here.

A copy of the SEC's complaint against Elia is here