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Recent SEC Releases
Monday
Sep092013

Miami Law Firm To Pay $5 Million To Settle Ponzi Lawsuit 

A prominent Miami law firm has agreed to pay $5 million to settle claims it played a pivotal role in "aiding and abetting" the massive $930 million Ponzi scheme operated by notorious fraudster Nevin Shapiro.  Shook, Hardy & Bacon ("SHB") reached the settlement with the court-appointed bankruptcy trustee, Joel Tabas, during a mediation last week.  The settlement, which is subject to approval by U.S. Bankruptcy Judge Laurel M. Isicoff, brings the total amount recovered for Shapiro's victims to $40 million - of which $13 million has been returned to victims.  

Shapiro was a Miami businessman who raised nearly $1 billion from investors through his grocery brokerage business, Capitol Investments, which Shapiro touted as a highly-profitable grocery wholesaling business.  Shapiro told investors Capitol Investments was a highly-profitable grocery diverter - a business that purchased low-priced food in one region and re-sold the goods for a profit elsewhere.  Shapiro used investor funds for a variety of unauthorized purposes, including Ponzi-style payments to existing investors and the diversion of tens of millions of dollars to sustain a lavish lifestyle that included a $5 million house, floor seats to Miami Heat basketball games, and numerous contributions to the University of Miami's athletic program.  Shapiro later attracted national attention when he disclosed he had provided illegal gifts to dozens of current and former college athletes at the University of Miami.  

One of Shapiro's high-school friends, Marc Levinson, had become an attorney at SHB and remained close with Shapiro.  Beginning in 2003, SHB and Levinson began handling Shapiro's legal affairs, including his dealings with investors in Capitol Investments.  According to Tabas, the firm "aided and abetted" Shapiro's violation of numerous federal securities laws, even after an internal memo circulated by the firm in December 2006 concluded that Shapiro was likely violating federal securities laws.  Despite these warning signs, Shapiro continued to operate his scheme for several years until his arrest in April 2010.  Shapiro would later plead guilty to securities fraud and was sentenced to a twenty-year prison term in June 2011.  

The settlement is the latest in what has become an increasing effort to hold law firms liable for either assisting or failing to detect a client's Ponzi scheme.  While none of the recently-filed lawsuits have proceeded to trial, several notable settlements involving law firms include a $25 million settlement by Holland and Knight for their role in Arthur Nadel's $330 million Ponzi scheme, as well as a $77.5 million settement by Greenberg Traurig and Quarles & Brady in the $900 million Mortgages Ltd. Ponzi scheme.

Of note, Tabas is compensated for his work as trustee under a contingency arrangement - a rarity in Ponzi scheme jurisprudence.  Whereas typically court-appointed receivers and bankruptcy trustees are compensated at an (often discounted) hourly rate for their work in recovering funds for victims, Tabas's arrangement allows his legal team to retain approximately 33% of his recoveries.  While the exact reason is unclear, the general use of a contingency arrangement can reflect a variety of factors, including the difficulty or uncertainty of prevailing.  Thus, under Tabas's arrangement, the $40 million recovered thus far will yield attorney's fees of more than $13 million.  

A copy of the SHB Lawsuit is here

Thursday
Sep052013

Alleged Ponzi Schemer Faces New Loan-Sharking Charges

A Massachusetts man already accused of orchestrating a multi-million dollar Ponzi scheme with his wife faced new charges of loan-sharking after he was arrested at a gas station with thousands of dollars stuffed in his pockets after he allegedly sought to collect a 40% return on an investment previously made by his company.  Steven Palladino, 57, was arraigned on a single count of usury after prosecutors alleged he contacted a woman demanding the repayment of a loan he previously made through his business that featured an interest rate wice the maximum allowed under Massachusetts law. As Palladino was already out on bail on more than one dozen charges, Judge Michael Cayne granted a request by prosecutors to impose an additional $25,000 cash bail. 

According to authorities, Palladino and his wife, Lori, owned and operated Viking Financial Group ("Viking") along with their 28-year old son.  Potential investors were told that Viking profited by making loans that carried exorbitant interest rates.  However, Viking made very few loans, and of these loans, many were made in violation of a state statute prohibiting loan interest rates exceeding 20%.  Indeed, three of the loans extended in 2007 and 2008 carried interest rates exceeding 60% - resulting in three charges of usury.

The Palladinos attempted to evade suspicion by falsifying company books and records to make it appear as if Viking was making legitimate loans.  However, in reality, investor funds were used primarily to sustain a life of luxury for the couple that included Bahamas trips, rent for Steven Palladino's mistress, and hundreds of thousands of dollars in gambling losses.  Additionally, nearly $400,000 in investor funds were used to satisfy a condition of Steven Palladino's probation stemming from a 2007 conviction for, ironically enough, defrauding an elderly relative.  

Palladino and his wife were indicted in March on numerous charges including four counts of larceny over $250, three counts of making false entries in corporate books, and three counts of usury, commonly referred to as loan sharking.  Due to his lengthy criminal record that featured more than 24 prior larceny convictions, Steven Palladino was charged as a 'common and notorious thief'.

The new charges allege that, even after his arrest in March, Palladino had been recently contacting a Massachusetts woman to seek a $30,000 payment for a $25,000 loan she received from Viking back in March.  While Massachusetts law prohibits the making of any loan carrying more than a 20% annual interest rate, the payment demanded by Palladino would have equated to a 40% annual return - double the rate allowed under law.  Palladino was subsequently apprehended at a local gas station with nearly $5,000 in cash in his pockets and driving a $100,000+ Mercedes.   

Palladino is also expected to face charges for allegedly transferring the title of several vehicles he owned solely or jointly with his wife to that of his wife's name alone.

Wednesday
Sep042013

Zeek Victims Face Sept 5th Deadline To File Claims

Victims of the $600 million ZeekRewards Ponzi scheme have approximately 24 hours to timely submit a claim to ensure they are afforded a chance to participate in the funds recovered by the court-appointed receiver.  According to receiver Kenneth D. Bell, victims of the largest Ponzi scheme in North Carolina's history face a midnight deadline on September 5th in order for their submission of a proof of claim to be considered timely.  While Bell recently indicated that over 100,000 claims had been submitted thus far, previous estimates pegged the total number of victims as at least 800,000 - meaning hundreds of thousands of potential claims could be at risk of being permanently lost.

The Court approved the Receiver's proposed claims process on May 8, 2013, giving investors until September 5, 2013 to submit claims for review and approval by the Receiver. According to the Update, significant effort was required just to provide the required notice to potentially interested parties.  Due to the sheer amount of potential claimants (the Receiver estimated there were approximately 2.2 million unique User IDs), the Receiver attempted to send 1.7 million emails notifying individuals of their rights under the claims process.  Of these 1.7 million emails, approximately 1.3 million were successfully delivered.  Of the approximately 420,000 emails that were not delivered, the Receiver ended up sending more than 330,000 postcards to physical mailing addresses, as well as over 7,000 postcards to financial institutions that could feasibly hold claims.  

The Receiver opened an online claims portal on May 15, 2013, which was to serve as the central mechanism by which investors could submit claims.  In a recent update, the Receiver indicated he had received nearly 54,000 claims to date.  Including claims marked as "in progress" on the Claims Portal, the aggregate amount of potential claims submitted thus far is approximately $355 million.  This amount slightly exceeds the total amount of funds recovered to date by the Receiver, which is currently approximately $325.1 million.

After the claims portal closes, the Receiver plans to seek court approval of the next phase of the claims process, including the proper method to determine claims and how to deal with claimants who object to the Receiver's claim determination.  It is expected that once the Receiver issues his claim determinations to the respective claimants, he will then seek approval for an interim distribution of a to-be-determined amount.  

The Receiver has posted a list of frequently asked questions on his website here.

The ZeekRewards Claims Portal is here.

 

Tuesday
Sep032013

Authorities Charge Two South Florida Lawyers For Aiding Rothstein Ponzi Scheme

[This article originally appeared on Forbes.com on Friday, August 30, 2013]

Two South Florida lawyers were arrested today and charged with fraud-related charges for allegedly participating in the massive Ponzi scheme run by disgraced Florida attorney Scott Rothstein.  The arrests of Chrstina M. Kitterman and Douglas L. Bates by Internal Revenue Service agents are sure to add new life to continued speculation that Rothstein was not alone in taking in more than $1 billion in a giant Ponzi scheme that would later bankrupt his 70-attorney law firm.  Kitterman and Bates made their first appearances in federal court, and details remain sparse concerning the charges each will face.  Both attorneys were previously named by Rothstein in deposition testimony as having provided assistance in perpetrating parts of his fraud.

Rothstein was arrested in December 2009 after his return from Morocco, where he had been since October after learning the country refused to extradite criminal suspects to the U.S.  Upon returning, Rothstein was charged with operating a $1.2 billion Ponzi scheme that involved the sale of discounted stakes in high-dollar pre-suit settlements of sexual-harassment and whistleblower lawsuits.    While investors were told that they could collect the full amount when the case settled, the reality was that there were no such cases.  Instead, Rothstein masterminded an elaborate Ponzi scheme that catapulted him into a position as a powerful lawyer in the south Florida community, and he flaunted this newfound wealth by buying expensive cars, real estate, and boats.

After his arrest, Rothstein quickly changed his not-guilty plea to a guilty plea, and began cooperating with authorities.  While Rothstein hoped that this cooperation would result in a lighter sentence, a Florida federal judge latersentenced sentenced him to a 50-year term – 10 years more than prosecutors’ recommended sentence.   The sentence was the longest for any Florida Ponzi schemer, and ranked below only the 150-year sentence given to Bernard Madoff and the 110-year sentence handed down to Allen Stanford – both of whose schemes were multiple times larger than Rothstein’s.

In an effort to reduce his sentence, Rothstein continued to cooperate with authorities after the sentence and promised to name those who had provided him assistance.   Indeed, Rothstein painted a tantalizing picture for prosecutors by fingering other lawyers and law enforcement officers.  At several depositions, Rothstein readily offered up others, including Kitterman and Bates.  Kitterman, who formerly worked at Rothstein’s firm, Rothstein Rosenfelt Adler (“RRA”), was said to have impersonated an official of the Florida Bar during discussions with an investor in Rothstein’s scheme.  Rothstein also testified that Bates agreed to sign his name to a letter threatening a discrimination action against a company Rothstein represented in order to inflate his legal bills.

In addition to Kitterman and Bates, Rothstein has also implicated several other RRA lawyers as well as a vice-president at TD Bank.

Monday
Sep022013

Alleged Ponzi Schemer Dies; $10+ Million Still Owed to Victims

A former Sunday school teacher who allegedly used his tax preparation service to dupe victims in a $10 million Ponzi scheme has passed away - just months after a court-appointed bankruptcy trustee warned victims that a 3% - 4% recovery was likely.  Jack Brown, owner of Soddy Daisy-based Brown's Tax Service ("BTS") and frequent preacher/Sunday school teacher at the Sale Creek Church of God, saw his business forced into involuntary bankruptcy in late 2012 amid mounting concerns from clients who had invested over $10 million with him.  While Brown had initially refused to cooperate, recent reports suggested that he had been cooperating with bankruptcy trustee Jerry Farinash.

Using his relationship with clients of BTS, as well as his connections through his Sunday School teaching position, Brown began promising annual returns of up to 15% that were purportedly attainable as a result of his God-given gift as a successful stock day trader.  The investments were memorialized through promissory notes, and while the first promissory note was issued in 1989, the pace quickened in 2003.  By 2012, Brown and BTS had raised more than $10 million from investors.

However, mounting concerns began to materialize in late 2012 about the solvency of Brown's operation.  These concerns were confirmed when a local attorney filed a petition to have BTS placed in bankruptcy, alleging that Brown had been operating a Ponzi scheme that had just collapsed.  Rather than using investor funds to day-trade as promised, Brown was accused of misappropriating millions of dollars to purchase lakefront property that was lavishly outfitted with an indoor gymnasium, a golf simulator, a full bar, various games, several vintage automobiles, and even the authentic floor from the Boston Garden sports arena.  In bankruptcy filings, Brown claimed only $1.4 million in assets while representing a yearly income of less than $30,000.  

After the appointment of a bankruptcy trustee, Brown initially refused efforts to cooperate, citing his failing health.  According to the trustee, Brown "refused to answer questions which would not be protected under the Fifth Amendment" while also claiming that his health has deteriorated to the point where he is movable only by ambulance.   This lack of cooperation soon changed in March 2013, when Brown, appearing at a creditor's meeting telephonically from his hospital bed, confessed to operating the scheme.  However, Brown maintained through his attorney that there was no money to return, because all the victims had not only been paid back, but some had profited handsomely from the scheme - hinting that the victims knew they were not paying taxes on their gains.  

In the months following Brown's confession, the bankruptcy trustee accused Brown's son of participating in the scheme in what was called a "family Ponzi scheme."  Additionally, Brown's wife has since invoked her Fifth Amendment right against self-incrimination numerous times.