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Recent SEC Releases
Thursday
Jan242013

Former College Punter and NCAA Record-Holder Indicted for $2 Million Ponzi Scheme

During his storied career as a punter at the University of Texas, Russell Allen Erxleben kicked three field goals longer than sixty yards, a record that still stands, booted a 67-yard field goal that remains tied as the longest field goal kicked in NCAA history, and is one of the top 50 greatest Texas Longhorns football players according to the Bleacher Report.  However, after his football career ended, Erxleben then embarked on a storied crime spree that not only included a 1999 conviction for a $36 million investment scam, but today's announcement that Erxleben was indicted for running a $2 million Ponzi scheme based on World War I German gold bonds and a $58 million painting.  Erxleben, 56, was arrested today and charged with five counts of wire fraud, one count of securities fraud, and two counts of engaging in monetary transactions derived from unlawful activity.  Each count of wire fraud and securities fraud carries a 20-year maximum sentence, while the engaging in monetary transactions charge carries a 10-year maximum sentence.

Erxleben oversaw the operation of several Texas companies, including WALTEC Consultants ("WALTEC"), LRE Holdings ("LRE), and the MDM Group.   Both WALTEC and MDM were said to have alternate meanings, with WALTEC serving as an acronym for We All Like To Earn Cash, and MDM meaning Million Dollar Man or My Damn Money.  Beginning in 2005, Erxleben promoted several investment opportunities to potential customers, including (1) a post-World War I German Gold Bearer Bond investment program, and (2) an investment pool for a supposedly-valuable piece of artwork. Investors were not told that Erxleben had previously served a 7-year prison sentence for a prior securities fraud conviction.

The German Gold Program

The main investment pitched by Erxleben was his ability to purchase defaulted German Gold Bearer Bonds, which had originally been issued by Germany in the 1920s and 1930s to help finance reconstruction and recovery efforts following World War I.  Investors were told that Erxleben could purchase a single bond for $1,000 that represented a legal claim against the German government for $1,000,000. According to Erxleben, the bonds would be placed in a trust and converted into an asset-backed security that would be rated by a major financial ratings company, would greatly appreciate in value, and were favored by institutional investors.  In return, investors were promised annual returns exceeding 100% for thirty years.  

The Artwork Scheme

After his success with the German gold bond venture, Erxleben began soliciting investors in 2009 to participate in the authentication of a late 19th century painting by well-known French artist Paul Gaugin that could possibly be worth $58 million.  Investors were told that an art authenticator could be retained to verify the painting for $75,000 - $25,000 of which was due to be paid immediately.  

In total, Erxleben and his companies raised more than $2 million from investors in the German bond and artwork venture.  However, according to authorities, Erxleben failed to disclose that his previous securities fraud conviction prohibited him from dealing in securities, and that he still owed over $28 million as a result of a restitution order.  Instead, Erxleben operated the classic Ponzi scheme, using investor funds for a variety of unauthorized purposes that included the payment of Ponzi-style payments to existing investors and the misappropriation of funds for the personal use of Erxleben and his family.  

Erxleben appeared before Magistrate Judge Mark Lane on Thursday, where prosecutors sought to have Erxleben kept in custody due to concerns that he was a flight risk and may attempt to intimidate witnesses or obstruct justice.  He was ordered to remain in custody, and formal arraignment is scheduled for next week.  

A copy of the indictment is here.

Wednesday
Jan232013

Youth Soccer Coach Gets Seven-Year Sentence For $36 Million Ponzi Scheme

A California man was sentenced to a seven-year prison term for orchestrating a Ponzi scheme that bilked more than $35 million from victims.  Dean Gross, of Agoura Hills, California, and a former soccer coach with the Agoura Youth Soccer Association, received the sentence after previously pleading guilty to a single count of wire fraud.  In addition to the criminal charges, Gross was also the target of a civil enforcement action filed by the Securities and Exchange Commission that charged him with multiple violations of federal securities laws.  

Beginning in 2006, Gross operated Bridon Entertainment ("Bridon"), telling potential investors that he was a veteran of the advertising industry and had developed a method to profit from the purchase and resale of advertising time and space at below-market rates.  To convince investors of the legitimacy of the scheme, Gross often produced a copy of the purported contracts with the potential ad-buyer.  Investors could make short-term investments with guaranteed rates of return ranging from 8% to 30%, or up to a one-year investment with returns of 10% to 20%.  Investors were drawn in by Gross's 'family man' persona, and from his reputation in the community as a former youth soccer and basketball coach.  In total, nearly 40 investors entrusted approximately $35 million to Bridon.

However, Gross did not have the relationships he purported to have within the advertising industry, nor was he involved in the business of buying and selling discounted advertising time.  Instead, Gross ran a Ponzi scheme in which he used incoming investor money to pay interest and returns of principal to existing investors.  Investor funds were used not only for these Ponzi-style payments, but approximately $6 million was diverted to Gross for various personal expenses.  Authorities estimated that total victim losses exceeded $13 million.  

In addition to his sentence, Gross was also ordered to pay $15.4 million in restitution to victims.  

A copy of the SEC complaint is here.

A copy of the criminal charging document is here.  

Tuesday
Jan222013

Former Stanford CFO Gets Five-Year Sentence

The former chief financial officer of R. Allen Stanford's $7 billion Ponzi scheme was sentenced to a five-year prison term for his role in the scheme.  James Davis, 64, began cooperating with authorities soon after Stanford's scheme unraveled and played an instrumental role in the successful prosecutions of several Stanford associates, including Stanford himself.  United States District Judge David Hittner seemed to recognize the value of this cooperation in making a downward departure from the 10-year sentence urged by prosecutors.  Davis pled guilty in April 2009 to charges of conspiracy to commit mail/wire/securities fraud, mail fraud, and conspiracy to obstruct an SEC investigation, but his sentencing was delayed while he continued to cooperate with authorities.  

Stanford masterminded a $7 billion Ponzi scheme that purported to offer above-average returns through the sale of supposedly-safe certificates of deposit ("CD's").  The scheme spanned several decades, and attributed its ability to pay the unusually-high returns to Stanford's unique investment strategy.  However, the operation was nothing more than a massive Ponzi scheme that ranks second only to Bernard Madoff's infamous scheme.  Stanford used investor funds for a variety of unauthorized purposes, including funding a cricket team and making millions of dollars in personal loans.  Stanford was convicted and received a 110-year sentence in June 2012.

Davis played a key role in helping Stanford perpetuate his massive fraud.  In his position as CFO, he oversaw the operations of Stanford International Bank ("SIB"), which included making false ledger entries to misrepresent SIB's banking performance to regulators.  Originally chartered in Montserrat, Davis was instrumental in moving operations to Antigua after he became concerned over heightened scrutiny from regulators.  Over the course of the scheme, Davis conspired with other employees to manipulate SIB financials to  consistently show profits from operations and convince investors of the safety of the CD's. As a result of Stanford's blood oath with Antiguan banking regulators, Davis also assisted in making bribe payments to avoid Antiguan oversight.  

Davis is the latest - and likely last - to be sentenced from the government's largely successful prosecution of Stanford co-conspirators.  Besides Stanford, prosecutors also obtained the convictions of chief investment officer Laura Pendergest-Holt and accounting executives Gilbert Lopez Jr. and Mark Kuhrt.  

In addition to his sentence, Judge Hittner also ordered Davis to pay $1 billion in rstitution to defrauded investors.  

A copy of Davis's plea agreement is here.

Monday
Jan212013

Canadian Regulators Levy Charges Against Washington Woman Accused Of $135 Million Ponzi Scheme

Canadian securities regulators became the latest to bring charges against a Washington woman accused of orchestrating a massive $135 million payday loan Ponzi scheme.  Doris Nelson, a Canadian citizen, faces charges of fraud, illegal distribution of securities, and making false statements after the British Columbia Securities Commission initiated civil enforcement proceedings against her with the filing of a Notice of Hearing.  Nelson is currently under house arrest in Colbert, Washington after she was civilly and criminally charged by US authorities in late 2011.  The hearing, which Nelson or her counsel is required to attend, has been set for February 19, 2013.

This marks the third set of charges against Nelson, who is accused of using numerous businesses to operate a payday/short-term lending business known as the Little Loan Shoppe ("LLS").  LLS was originally based in British Columbia, but moved operations in 2001 to Spokane, Washington.  According to authorities, she began the scheme in the late-1990s or 2000 by soliciting potential investors to finance her payday loan business by promising annual returns ranging from 40%-60%.  Investors were told that the operation was wildly successful, and received post-dated interest checks at the time of their investment.  

However, the scheme was nothing more than an elaborate Ponzi scheme, with Nelson using incoming investor funds to satisfy principal and interest payments.  Nelson also diverted investor funds to sustain her lavish lifestyle, including spending nearly $500,000 at various Vegas casinos, buying $50,000 of artwork from an at-sea auction, and buying nearly $500,000 on high-end clothing from retailers such as Nordstrom. 

As all Ponzi schemes do, LLS began encountering financial difficulties that eventually led to its demise. Nelson first tried to offer new investors a reduced 10% return, and was later forced to declare bankruptcy in 2009.  Of the $135 million raised by the scheme, Nelson paid out approximately $118 million to investors, $2.2 million in commissions, and $17 million in operating costs and other expenses. 

A copy of the Indictment is here.

Monday
Jan212013

Uproar As Madoff's Brother Delays Prison To Attend Granddaughter's Bat Mitzvah

When Peter Madoff appeared before United States District Court Judge Laura Swain in late December to learn his fate for his role in his brother's $65 billion Ponzi scheme, he did not attempt to protest his innocence or sway the sympathies of those present.  Rather, he had one simple request - that Judge Swain delay his incarceration date until early 2013 so that he could attend his granddaughter's Bat Mitzvah.  Perhaps swayed by pleas from family and Madoff's rabbi, Judge Swain granted the request and ordered Madoff to report to prison by February 6, 2013.  

But Madoff neglected to tell Judge Swain that the Bat Mitzvah, which took place this past weekend, would be an extravagant event splashed across the front page of the New York Post and leave many of Madoff's victims seething with rage.  The ceremony, which took place at historic Central Synagogue in Midtown Manhattan and was also streamed online, featured Madoff saying a brief prayer in Hebrew before his granddaughter took the stage, telling the congregation that "the suffering of others should not be forgotten."  After the ceremony, the party continued at the ritzy venue 404 NYC for a 200-guest event estimated to cost approximately $100,000.    Several Madoff victims were quoted in various news outlets expressing their displeasure with the situation.

Madoff agreed to plead guilty in June to changes of commit securities fraud and falsifying documents, accepting a 10-year prison sentence that represented the maximum possible under the charges.  Madoff also agreed to turn over all of his assets as part of a $143.1 billion criminal forfeiture order.  He will report to the Otisville medium-security prison in early February, which features a full-time Jewish chaplain, a kosher kitchen, and was named by Forbes as one of the "12 Best Places to Go to Prison."