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Recent SEC Releases
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.

Tuesday
Sep102013

Judge: Madoff Victims Not Entitled To Interest On Losses

"In this zero sum game where funds are limited, hard choices must be made....The plain language, purpose, framework and distribution scheme of SIPA, as well as (legal) precedent, all support the method chosen by the trustee"

- U.S. Bankruptcy Judge Burton Lifland

A federal bankruptcy judge ruled that victims of Bernard Madoff's massive Ponzi scheme were not entitled to have the amount of their losses upwardly adjusted to account for interest during the period of their investment.  More than 1,000 claimants had objected to court-appointed bankruptcy trustee Irving Picard's decision not to include "time-based damages" as part of their loss calculation, arguing that they should be compensated as if their funds had been invested in a legitimate fund that used the strategy Madoff purported to use.  United States Bankruptcy Judge Burton Lifland agreed with Picard that there was no statutory or equitable basis for such a claim, and entered an order denying the motion.  If the ruling is upheld, nearly $1.4 billion Picard had been forced to allocate to reserves would then be available for distribution to victims.

Shortly after his appointment, Picard made the decision to use the "net investment" method (also known as the "cash-in, cash-out" method) to calculate a victim's losses, rather than relying on the fictitious account statements Madoff had provided to his customers for decades showing steady gains.  The net investment method is widely used in Ponzi scheme jurisprudence, and only rarely and under unique circumstances are other methods used (such as the "rising tide" method.).  Picard would receive over 16,000 customer claims - ultimately "allowing" 2,436 claims with a total value of approximately $11.10 billion.  

However, many claimants objected to Picard's decision to use the net investment method, including not only net winners that had profited from Madoff's scheme, but also those net losers that suffered partial or total losses.  Of the various bases for claimant objections, one popular theory was that investors were entitled to receive "time-based damages" that would adjust their losses to account for a theoretical rate of return they could have (but did not) received.  While such a re-calculation would increase the amount of a claimant's net losses, it could also cause some net winners to be converted to net losers - thus significantly increasing the total amount of claims.  To account for the possibility of these changes, Picard has prevented nearly $1.4 billion from being distributed to victims in the three distributions he has made thus far.  

Picard strongly opposed altering his net equity calculation to include any upward adjustment for interest, arguing that nothing in the plain language of the Securities Investor Protection Act ("SIPA") or the statutory framework envisioned any ability to include time-based damages.  Picard also noted that such an adjustment would be at odds with the recovery and distribution approach used in most Ponzi cases and could conflict wth his powers to recover funds from investors that had profited from the scheme.  Indeed, if time-based damages were awarded, Picard stated that most of the reallocated distributions would be paid to feeder funds rather than individual investors.  As Picard summed it up, "[a]warding Time-Based Damages thus would not serve the purpose for which they are intended in most instances, would be extraordinarily expensive, would create enormous delays, and would create arbitrary results."

The objecting claimants must file an appeal within ten days or the order will become final.  

Picard's Motion in support of his position is here.

Monday
Sep092013

Appeals Court Affirms 20-Year Sentence For Florida Man in $19 Million Ponzi Scheme

The Eleventh Circuit Court of Appeals agreed that a federal judge was justified in departing from federal sentencing guidelines in handing down the maximum statutory sentence to a Florida man who masterminded a Ponzi scheme that defrauded more than 500 victims out of $19 million.  David Lewalski received a 20-year sentence when he was sentenced by U.S. District Judge James Whittemore in November 2011, and asserted a variety of reasons why that sentence was in error - including that the sentencing judge should not have considered a letter Lewalski authored to his girlfriend in which he bragged about "snookering the prosecutor and probation officer in order to receive a lighter sentence." 

Lewalski operated Botfly LLC, promising investors they could reap monthly returns of 10% through Lewalski's sucess in trading foreign currencies.  Ultimately, Lewalski raised more than $30 million from over 500 investors.  However, Lewalski only invested a small portion of these funds, and instead misappropriated millions of dollars in investor funds for a variety of personal expenses that included $45,000 in dental work, $244,000 at luxury retailers such as Gucci and Hermes, $475,000 in private jet service, $616,000 on luxury automobiles including a Porsche and Ferrari, and $144,000 on motorcycles and related expenses.  After a complaint by a concerned investor, Lewalski was arrested in April 2010 and later entered into a plea agreement with prosecutors.

Lewalski challenged his sentence for several reasons, including that the sentencing court (1) failed to enforce his plea agreement by sentencing him to a higher range than that contemplated in the plea agreement, (2) improperly considered his pre-sentencing letter to his girlfriend, (3) improperly considered the disclosure by prosecutors that Lewalski had a $100,000 "getaway" fund, and (4) did not adequately explain its decision to make an upward departure from sentencing guidelines.  The Eleventh Circuit dealt with each contention in short shrift, finding that the sentencing court was not bound by the recommended sentence and that Lewalski was expressly informed of this possibility.  Nor did the sentencing court improperly consider the letter to Lewalski's girlfriend or the disclosure of his "getaway" fund.  Finally, the sentencing court's explanation for handing down the maximum sentence was sufficient in that it considered the appropriate factors under 18 U.S.C. § 3553(a) and explained that it had serious concerns about protecting the public from any future criminal conduct by Lewalski and specifically noting his "arrogance and greed."  By considering these factors, the sentencing court satisfied its obligations in handing down the sentence.  

According to the Bureau of Prisons, Lewalski is currently scheduled to be released April 7, 2028.

The Receivership website for Botfly is here.

A copy of the indictment against Lewalski is here.

A copy of Lewalski's Plea Agreement is here.

A copy of the Eleventh Circuit's opinion is here.