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Recent SEC Releases
Tuesday
Sep242013

Oregon Hedge Fund Manager Receives 6.5 Year Sentence For $6.4 Million Ponzi Scheme

A Portland hedge fund manager was sentenced to serve 6.5 years in federal prison for a Ponzi scheme that took in at least $37 million from investors.  Yusaf Jawed received the sentence after previously pleading guilty to seventeen counts of mail fraud and wire fraud.  In an agreement with prosecutors that cited his "substantial assistance to prosecutors," authorities agreed to recommend a 6.5 year sentence - even though a pre-sentencing report recommended a minimum term of at least 8 years.  While Jawed has promised to repay victims, he faces an uphill quest; he must pay restitution of $6.4 million in the criminal case, and recently had a $34 million judgment entered against him in a case brought by the Securities and Exchange Commission.

Jawed operated Grifphon Asset Management, LLC ("GAM") and Grifphon Holdings, LLC ("GH"), which served as the advisers to numerous hedge funds created and managed by Jawed, including Gripfhon Alpha Fund, L.P. ("Alpha") and Grifphon Iota Fund, L.P.  Investors were told through private placement memoranda that the funds experienced annual returns ranging from 12.8% to 132.5% from 2002-2008 through an investment strategy comprised of holdings in publicly-traded securities, private equities, biotech companies, foreign currencies, and commodities.  Investors were supplied with account statements and tax returns that purported to show constant profits in investor accounts, and were assured that their funds would be held at prominent institutions such as Lehman Brothers and UBS.  In total, Jawed raised at least $37 million from over 100 investors all over the United States.

However, little, if any, of the claims made to investors were true.  According to authorities, Jawed misappropriated millions of dollars in investor funds for his personal use, which included luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.  Additionally, Jawed used investor funds as the source of fictitious interest payments designed to lend an aura of legitimacy to the scheme. 

When the scheme appeared on the verge of collapse in 2008, Jawed hatched a scheme with the help of Robert Custis, an attorney.  The two began telling investors that a third party would soon purchase the funds' assets, and investors would soon be reimbursed for their investment at a healthy profit.  This pattern of deception lasted an additional two years with the use of various excuses such as the time zone difference of the banks, "dotting I's and crossing T's," and confidentiality problems.  However, this third-party purchaser was none other than an entity created and controlled by Jawed.  For his role in the scheme, Custis was also charged by the SEC.

As part of his cooperation with authorities, Jawed agreed to cooperate with a lawsuit brought by investors against Grifphon's former accounting and law firms.  At Jawed's sentencing hearing, prosecutors announced that a settlement had been reached in that case, but terms were unavailable.  Jawed was previously ruled destitute by the federal court, meaning that the potential recovery against the former accounting and law firms likely represents the sole avenue for compensation for defrauded victims.
Tuesday
Sep242013

Former Model Gets 7-Year Sentence For $7 Million Ponzi Scheme

A Florida woman was sentenced to serve seven years in federal prison for concocting a $7 million Ponzi scheme masquerading as a construction company.  Tina Louise Mangiardi, a former model, received the sentence after previously pleading guilty in in March 2013 to one count of mail fraud and one count of wire fraud in a plea agreement reached with Orlando prosecutors.  Mangiardi could have potentially faced up to 40 years in prison if sentenced to the statutory maximum for each count.  Mangiardi was also ordered to pay restitution to investors; the exact amount will be determined at a later hearing.

Mangiardi was the principal of two Orlando businesses, T.L.M. Builders & Design, LLC, and Tlm Design and Construction, Inc.  Beginning in or around 2008, Mangiardi began pitching potential investors to invest in "bid bonds" for various Orlando-area projects, including restaurant chains, local hospitals, and even Disney.  A bid bond, which is not considered investment grade, is used to guarantee the financial viability and amount of a bid given by a construction company, and is typically issued by insurers.  In return for this authentication, the contractor would usually must pay a small fee to the insurance company. Mangiardi explained that she could double or triple investors' money within weeks, and lured investors by stressing her strong Christian faith and explaining that her gender would allow her to qualify as a minority in bidding for government contracts.  Based on these promises, Mangiardi raised millions of dollars from at least 40 Orlando-area victims - many of whom, according to authorities, were male business associates.

However, complaints soon began mounting when scheduled payments fell behind, and at one point the U.S. Secret Service began an investigation.  Court records show at least eight lawsuits against Mangiardi and her companies since 2010, with $1.4 million in judgments obtained to date.  Mangiardi was arrested and later pleaded guilty in March 2013.  Interestingly, before pleading guilty, Mangiardi had a series of exchanges with The Ledger, a Lakeland, FL area newspaper, in which she maintained her innocence, blasted those who had sought repayment of their loans, and even maintained that she was in possession of agreements that provided that any investor "talking or defaming me and my company causes instant void of payment plans and forfeit of payments."

Shortly after Mangiardi pleaded guilty in March 2013, her name appeared again in news reports - this time as a victim of an alleged encounter with a victim of her scheme.  According to authorities, Mangiardi visited a Longwood, FL gym owned by Adam Pollock, who had invested in her venture.  Upon her arrival, Pollock allegedly tried to "get even" with Mangiardi by pulling a knife on her and threatening to cut off her fingers and toes as "collateral."  Pollock was subsequently arrested on multiple charges, including felony battery by strangulation, kidnapping/false imprisonment, aggravated assault with a deadly weapon, and battery.  Trial is scheduled on the charges for early October, with jury selection set for October 7, 2013. Ironically, if convicted, it is possible that Pollock's sentence could exceed Mangiardi's sentence.

Monday
Sep232013

Convicted Ponzi Schemer Challenges Use Of Wiretaps 

An Indiana man that received a 50-year prison sentence for masterminding a $200 million Ponzi scheme has appealed his sentence, claiming that authorities should not have been permitted to obtain wiretaps of his phone calls with co-conspirators.  Tim Durham, along with his co-defendants Jim Cochran and Rick Snow, have filed an appellate brief with the Seventh Circuit Court of Appeals, arguing in part that a series of wiretapped phone conversations that would later prove to be highly damaging at trial were not properly obtained by authorities.  Durham received a 50-year sentence after his trial, while Cochran and Snow received a 25-year and 10-year sentence, respectively.

 The Scheme

Durham served as CEO of Fair Finance Company ("Fair Finance"), with Cochran and Snow serving as Chairman and CFO, respectively.  Durham and Cochran purchased Fair Finance for $23 million in 2002, representing to investors that they planned to continue the company's highly-successful practice of purchasing finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%.  Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5000 investors.  

However, instead of continuing Fair Finance's legitimate business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them.  By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments.  Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles.  These living expenses included more than 40 classic and exotic cars worth `over $7 million, a $3 million private jet, and a $6 million yacht in Miami.  The scheme collapsed in late 2009 with investors owed more than $200 million.

Durham, Cochran and Snow were indicted in March 2011, and chose to contest the allegations at trial.  At trial, prosecutors disclosed that they had obtained a series of incriminating wiretapped phone conversations between the trio in which the men discussed ways to save the business and paint a more optimistic picture of Fair Finance's financial health to investors.  At one point, Durham tells Cochran that the current financial uncertainty would make it a "perfect time" to have Fair Finance fail.  (Some of the wiretaps are available here.)  Based in part on these wiretaps, the men were convicted and received relatively-high sentences for their crimes.

Wiretaps Meet White-Collar Crime

The crux of the trio's argument on appeal is that authorities did not follow the proper procedures required to obtain permission to collect wiretaps, and that the amassed phone calls are inadmissible as a result.  Wiretaps, which are quickly becoming a potent weapon in the arsenal of prosecutors investigating white-collar crimes, were historically intended to be a last resort, rather than a first choice, in the prosecution of drug- and gang-related crimes.  When Congress passed the Omnibus Crime Control and Safe Streets Act in 1968, it required that the government must first provide a “full and complete statement as to whether or not other investigative procedures have been tried and failed or why they reasonably appear to be unlikely to succeed if tried or to be too dangerous.”  The consequences of failing to heeding this admonition were severe – evidence resulting from an improperly obtained wiretap could be prohibited from use at trial.  For organized crime and drug-trafficking cases, this standard was often easily overcome or satisfied, as there existed few alternatives in building a case that did not present a real risk of danger to both authorities and the public.

However, the ability to satisfy the conditions for obtaining a wiretap are not as clear cut in white-collar investigations, where the possibility of satisfying the “too dangerous” prerequisite is drastically reduced since violent acts are typically the exception rather than the norm.  Thus, a showing would likely be required that other investigative procedures have been tried and failed.  In white-collar crime investigations, criminal prosecutions are often aided by a parallel civil investigation that has the ability to utilize a variety of fact-finding techniques.  Thus, rushing to obtain a wiretap before exhausting or at least exploring these avenues could potentially result in a later motion to suppress.  Additionally, there is the chance that the subject could learn of authorities’ suspicions, since while these investigations are usually not made public, a subject’s acquaintance could receive a subpoena or even the subject himself could be requested to submit sworn testimony themselves.

The government has had enormous success in using wiretaps to prosecute insider-trading, with the successful prosecution of Raj Rajaratnam essentially opening the floodgates for use of the technique.  Notably, Rajaratnam was unsuccessful in suppressing the use of wiretaps at his trial, with both a district judge and a federal appeals court rejecting claims that prosecutors had circumvented the required procedures.  

Durham's attorneys plan to employ a similar strategy, arguing that the wiretaps must be suppressed as a result of the failure of authorities to first exhaust all investigative techniques before applying to use wiretaps.  Authorities will now have 30 days to file an answer brief.  

Monday
Sep232013

TD Bank To Pay $52.5 Million In Fines To Regulators Over Role In Rothstein Ponzi Scheme

A South Florida financial institution has agreed to pay over $50 million in fines to several federal agencies to settle charges that it played a role in Scott Rothstein's elaborate $1.4 billion Ponzi scheme.  In separate announcements by the Securities and Exchange Commission ("Commission") and the Office of the Comptroller of the Currency ("OCC"), TD Bank agreed to the imposition of $52.5 million in total fines based on its extensive role in Rothstein's scheme, including the Commission's characterization that it "told outright lies to [Rothstein] investors."  Former exec Frank Spinosa was also named by the SEC, and has indicated he plans to fight the charges.

TD Bank was the primary banking institution used by Rothstein while he sold over $1 billion in purportedly-discounted pre-lawsuit settlements to investors for several years until October 2009.  Potential investors were told that the settlements had already been deposited into a separate trust account in their name at TD Bank, and were provided so-called "lock letters" signed by Spinosa indicating that distribution of the funds was restricted only to the investor named in the lock letter.  Spinosa also participated in at least one conference call with potential investors in which he supplied scripted answers to a series of Rothstein's questions.  In total, Rothstein raised approximately $1.4 billion from investors.

According to the Commission, none of these representations concerning TD Bank were accurate.  In reality, the "locked" accounts described by Rothstein typically contained less than $100, and there were no procedures employed by TD Bank locking or restricting the accounts in any way.  

Additionally, the OCC alleged that numerous activities occurring in Rothstein's accounts should have triggered alerts in the bank's anti-money laundering system that warranted the filing of suspicious activity reports ("SAR's") under federal law.  However, TD Bank either ignored or dismissed this activity, and no SAR's were ever filed that could have potentially prompted further scrutiny into Rothstein's activities.  

While TD Bank agreed to settle with the OCC and the Commission, Spinosa indicated through his lawyer that he planned to fight the charges and maintained that he denied the Commission's allegations.  These allegations included that Spinosa provided false "lock letters" to investors, provided false balances to investors, and made false representations regarding purported restrictions on investor bank accounts.  The Commission is seeking the imposition of civil monetary penalties against Spinosa.  

According to the OCC, TD Bank's exposure from the Rothstein Ponzi scheme has nearly eclipsed $600 million, including hundreds of millions of dollars in jury verdicts and settlements and a $73 million settlement with the court-appointed bankruptcy trustee, Herbert Stettin.  

It is interesting to note that the Commission chose to bring an administrative proceeding, rather than a typical enforcement action, in announcing the charges against TD Bank.  Perhaps more noteworthy, the charges contained the acknowledgement that TD Bank would be paying the fines without admitting or denying the SEC's findings - a once-common practice by the Commission that has been scaled back as of late.  Earlier this summer, the Commission announced in a memo to enforcement staff that some cases might “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement.”  One reason for the use of the neither-admit-nor-deny language could be the tacit acknowledgement in the cease-and-desist order that the Commission had taken into account the remedial efforts and cooperation undertaken by the bank.

A copy of the complaint against Spinosa is here.

A copy of the Commission's Cease and Desist Order is here.

A copy of the OCC's announcement is here.

Previous Ponzitracker coverage of the Rothstein Ponzi scheme is here.

Thursday
Sep192013

Utah Man Receives 6.5 Year Sentence For $49 Million Ponzi Scheme

A Utah businessman was sentenced to serve more than six years in federal prison for operating a Ponzi scheme that took in nearly $50 million from over 100 victims.  Kenneth Case Tebbs, 42, received the sentence from U.S. District Judge David Sam after previously pleading guilty to a single count of wire fraud in February 2013.  A hearing is scheduled for October to determine the amount of restitution Tebbs must pay to defrauded victims.

Tebbs owned and operated Twin Peaks Financial Inc. and MNK Investments Inc., which purported to purchase houses and undeveloped lots for resale or development.  Beginning in 2005, the companies solicited investors by offering annual returns of up to 18%, as well as an origination fee of up to 5%.  Ultimately, more than 100 investors entrusted nearly $50 million with Tebbs based on these promises. 

However, while the companies did engage in some legitimate business, the operation morphed into a Ponzi scheme in 2006 when Tebbs' decision to pursue larger subdivision projects resulted in insufficient funds to satisfy investor obligations.  As a result, Tebbs began falsifying documents and made Ponzi-style payments to existing investors.  When Tebbs was no longer able to fulfill interest payments and redemption requests, the scheme collapsed and Twin Peaks declared bankruptcy in November 2007.  Of the nearly $50 million taken in by Tebbs, approximately $37 million was returned to investors, and investors suffered losses of about $17 million when including the payment of profits to long-time investors. 

Tebbs must report to prison by 12:00 P.M. on October 28, 2013.