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Recent SEC Releases
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.

Thursday
Sep192013

Husband, Wife, and Son Indicted in $10 Million Ponzi Scheme

In what is being touted as one of the largest investment scams in Boston since Charles Ponzi's infamous scheme nearly 100 years ago, Massachusetts authorities unveiled additional charges against a husband, wife, and previously-uncharged son for orchestrating a massive Ponzi scheme that allegedly bilked investors out of more than $10 million.  A Suffolk County grand jury returned indictments charging Steven Palladino, 56, his wife Lori Palladino, and their son Gregory Palladino each with one count of larceny over $250 and larceny over $250 from a person over 60.  The three were also charged with conspiracy to commit larceny, with Gregory Palladino facing an additional three counts of usury and one count of tampering with evidence. If convicted of all counts, the three could face decades in prison.

The trio were the sole principals of Viking Financial Group ("Viking"), which advertised itself to investors as a high-yield, low-risk investment strategy made possible through the successful practice of making secured loans to borrowers at high interest rates.  These purportedly profitable loans allowed Viking to pay an above-average return to investors while still pocketing the difference for a healthy profit.  Based on these representations, Viking took in more than $10 million from at least 40 victims.  

However, in reality 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% - which would later serve as the basis for three usury charges against Steven Palladino.  The majority of investor funds served only to support a lavish lifestyle for the Palladinos 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.  

The new charges come just after Steven Palladino was arrested on new charges that he had been pressuring a Viking investor for repayment of a loan carrying a 40% annual return - double the maximum rate of return allowed under Massachusetts law.  Palladino was arrested after the woman contacted authorities, and was later apprehended at a local gas station with nearly $5,000 in cash in his pockets and driving a $100,000+ Mercedes.   

The three will be arraigned September 30, 2013.

Friday
Sep132013

Former Hawaiian Political Candidate Gets Four-Year Prison Sentence For $1.4 Million Ponzi Scheme

A Hawaiian man who once served as an Army reservist and former president of the Filipino Chamber of Commerce has been sentenced to four years in prison for masterminding a $1.6 million Ponzi scheme that bilked over 30 investors.  Jason Pascua, 39, received the sentence after previously pleading guilty to a single count of wire fraud, which carries a maximum sentence of twenty years in prison.  Along with the sentence, Pascua must also pay $1,034,000 in restitution to his victims.  

Pascua operated J2 Marketing Solutions ("J2"), which he touted as a profitable concert and nightclub promotions venture.  A regular on the political circuit, Pascua frequently mingled with Hawaii politicians and even tried his hand at running for political office in 2010.  Pascua also had extensive community ties, having previously served as President of the local Filipino Chamber of Commerce and a marketing director of the Hawaii Central Credit Union.  

Beginning in 2009, Pascua used these ties to solicit investors to invest in J2, telling them he worked as a concert and nightclub promoter spliting his time between Honolulu and Las Vegas.  Investors were offered the opportunity to earn short-term returns of 25%-50% by financing Pascua's promotion of multiple concert and night club events.  Pascua assured investors he would spread their investments over the promotion of multiple events in an effort to "mitigate risk."  Ultimately, Pascua would raise more than $1 million from more than 30 victims. 

However, according to authorities, Pascua did not use investor funds to promote concerts or night club events.  Rather, he diverted funds to pay fictitious returns to investors, as well as for personal expenses that included lavish spending at Las Vegas casinos and nightclubs. Ironically, Pascua did use some funds for event promotion - but those events were pet expos at a popular Hawaii entertainment complex.  

Hawaiian authorities have been at a loss to explain the recent "epidemic" of Ponzi schemes targeting Hawaiian citizens.  Pascua's case was the third concert promotion Ponzi scheme investigated by authorities in the past several years.  And after Pascua entered his guilty plea in May 2013, authorities announced the indictment of a Hawaiian husband and wife for operating an $8 million Ponzi scheme.  Ponzitracker has covered other Ponzi schemes perpetrated by or on Hawaiian citizens here, here, here, here, here, and here.

Pascua is scheduled to report to prison in Arizona, where he currently resides and has requested to serve his sentence, on October 24, 2013.