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Recent SEC Releases
Monday
Sep242012

Former Retirement Home CEO Charged With $130 Million Ponzi Scheme

Authorities charged the former chief executive officer of a chain of retirement centers with operating a massive Ponzi scheme that conned more than 1,000 investors out of $130 million in one of the largest frauds in Oregon history.  Jon Harder, 47, was charged last week with fifty-six counts of money laundering, mail and wire fraud, criminal forfeiture and aiding and abetting.  If convicted of all charges, Harder could face a maximum prison sentence of hundreds of years in federal prison.  

Harder was the founder and president of Sunwest Management ("Sunwest") and Canyon Creek Development, Inc. ("Canyon Creek").  Founded in 1992 in Salem, Oregon, Sunwest began raising money from investors in early 2001 through numerous offerings in over 100 retirement homes.  These offerings, known as "tenancy-in-common" interests, offered investors the ability to purchase a minimum $100,000 interest in a retirement home and receive a 10% return funded by the receipt of rental income.  Sunwest usually targeted under-performing retirement homes, seeking to streamline operations and bring the business to profitability.  Investors were told in offering documents that their investment was backed by a personal guarantee by Harder and Darryl Fisher, who served as Sunwest's COO.  Based on these and other representations, Sunwest raised more than $430 million from investors from 2001 to 2008.

From 2001 to July 2008, Sunwest made regular interest payments to investors, giving the impression that the operation was wildly successful.  However, unbeknownst to investors, many of the retirement homes sold to investors were not operating profitably.  Indeed, by commingling funds from the homes' operations and incoming funds from investors, Harder was able to support company operations, including the payment of interest to investors.  While nearly 60% of homes experienced negative cash flow by September 2007, the constant stream of incoming funds from new investors helped continue an otherwise unsustainable operation.

As the performance of the operation was inextricably linked to the performance of the real estate market, the nationwide credit crisis beginning in 2007 quickly took its toll on Sunwest.  When Sunwest began to default on an increasing number of retirement homes, creditors began to step up pressure.  When incoming cashflows were no longer able to satisfy investor obligations in late 2008, the scheme collapsed.  From October 2008 to January 2009, approximately twenty-five receivers were appointed for individual facilities, sixty-nine facilities went into foreclosure, and thirty-two facilities were placed into bankruptcy.  On December 31, 2008, Harder himself filed for personal bankruptcy.

Several months after the collapse, the Securities and Exchange Commission ("SEC") charged Harder with multiple violations of federal securities laws, alleging that he operated Sunwest as a giant Ponzi scheme and made numerous misrepresentations to induce over 1,000 people to invest.  According to the SEC, Harder and his wife operated Sunwest “as if it was their personal checkbook....to support their lavish lifestyle.”  A court-appointed receiver estimated that this lifestyle included the acquisition of 18 pieces of property and the purchase of numerous luxury cars, including a Mercedes, a Land Rover, two BMWs, a Cadillac Escalade and a Lexus.  

A team of consultants, accountants, and lawyers took over Sunwest in an effort to turn around the company that has resulted in the recovery of at least 60% of investor losses - an effort that earned the group a "Turnaround of the Year" award in 2011 from an industry group.  The amount was particularly noteworthy considering investors were initially estimated to recover no more than 6% of losses.  This recovery was also funded in part by a $30 million settlement by a law firm used by Sunwest to prepare documents related to the investments.  The SEC case remains ongoing.

In the 30-page indictment, authorities are seeking a money judgment of $130 million, as well as forfeiture of various real estate and other assets held by Harder.  In a court appearance last Friday, Harder entered a plea of not guilty and was released on bond.  A trial could come as early as November.  

A copy of the SEC complaint is here.

Friday
Sep212012

Florida Woman Receives 30-Year Prison Sentence for $100 Million Ponzi Scheme

In what is thought to be one of the largest sentences given to a female Ponzi schemer, a Florida woman was sentenced to spend the next thirty years in prison for masterminding a $100 million Ponzi scheme. After being convicted earlier this year of fourteen counts of wire fraud, mail fraud, and conspiracy, United States District Judge Timothy Corrigan handed down his sentence to Lydia Cladek, 68, noting that she showed no remorse to the hundreds of individuals she victimized.  Cladek remained defiant until the end when, given a chance to address the court, she maintained that "I took nobody's funds...I'm innocent.  I will not quit until I prove it."  

Cladek was indicted in November 2010, charged with operating her investment company as a $100 million Ponzi scheme.  According to authorities, Cladek was the president of Lydia Cladek, Inc. ("LCI"), which purportedly purchased high interest automobile retail installment contracts with investor funds with the promise of a hefty annual return of 15% - 20%.  In an effort to connect with older and elderly women, Cladek was known as an avid churchgoer and animal lover, who would often sip tea at social events.  Those who invested would receive a promissory note supposedly secured by the vehicles and other car notes as collateral.  A prosecutor estimated Thursday that $112 million was invested in the company between 2003 and 2010.

However, instead of operating a legitimate operation, authorities accused Cladek of operating a massive Ponzi scheme that used investor funds to pay others fictitious returns.  Additionally, Cladek was accused of using investor funds to support her lavish lifestyle, which included multiple houses, diamond earrings, several paintings, and a baby grand piano.  After being indicted on fourteen charges, Cladek refused to plead guilty, and instead chose to stand trial.  The strategy backfired, as a federal jury convicted her of all fourteen counts.  

News coverage of the sentencing indicated a concerted efforts by victims to convey the destruction brought by Cladek's fraud, many who lost their life savings.  One woman suggested to Judge Corrigan that "I hope she goes to jail until hell freezes over," while another likened the Cladek's actions to "rape."  Attorney Nina La-Fleur, who represented a large amount of Cladek's victims, indicated that the victims were pleased with the sentence.

Both the magnitude of Cladek's Ponzi scheme and her sentence easily gains her the distinction as one of the worst Ponzi schemes perpetrated by a woman.  A review of Ponzi schemes in the past few years shows that while women do account for a small percentage of schemes, as evidenced here, here, here, here, and here, the amount of investor losses in Cladek's scheme dwarfs those schemes.  

A copy of Cladek's indictment is here.

Thursday
Sep202012

Texas Lawyer Seeks to Intervene on Behalf of Zeek "Victims" Group

A Texas lawyer has indicated in a court filing that he seeks to appear on behalf of a "victims" group with the North Carolina federal court overseeing the $600 million ZeekRewards receivership. Michael Quilling, a partner with Dallas law firm Quilling, Selander, Lownds Winslett & Moser, P.C. ("QSLWM") made the filing known as a pro hac vice application, in which a lawyer not admitted to practice in a particular state seeks the court's permission to appear as an attorney in a specific case. The filing indicates that Quilling intends to represent "Fun Club Usa, Inc. and other entities whose assets were seized in connection with the above-referenced matter." Quilling is a well-known attorney who is board-certified in bankruptcy law and has also served as the receiver in several Securities and Exchange Commission securities fraud case.

As some may recall, Fun Club Usa, Inc. ("Fun Club") is the Florida corporation that, after being administratively dissolved on August 18, 2010, for failure to file an annual report with the Florida Division of Corporations, suddenly came back to life on August 28, 2012, when Craddock re-filed articles of incorporation for Fun Club and indicated that the filing should have an "effective date" of August 24, 2012. Craddock has also been a active member of Zteambiz.com and Zteambiz.net, which began soliciting donations to retain a law firm to "prevent further damage caused by the actions of the SEC". According to a chart on the site, which has since been removed, over 6,000 people made a donation of at least $20. Craddock is also prominent on the Facebook group "Zeek Rewards Affiliates United Against the SEC," which directs users to Zteambiz and circulates frequent updates on the progress of the suit.

The reliability of the updates sent out from the site has been questioned at least once, including a previous article by Ponzitracker that refuted the claim that the Securities and Exchange Commission ("SEC") had confided to an unnamed individual that the case against Zeek was weak. Ponzitracker spoke with an SEC official involved with the case who unequivocally stated that those statements were "inaccurate" and "false."

Another important issue concerns (1) the identity of clients to be represented, and (2) whether those clients were net winners that received more from the scheme than they invested, or net losers that actually suffered a loss on their investment. While victims had been solicited to donate and sign up originally to rectify a "major injustice to all of us affiliates," a September 8th, 2012 update from Zteambiz indicated that legal representation was being sought for the purport of "providing protection against possible crawlback (sic) action by the SEC." Clawback actions are those brought by a receiver against individuals that withdrew more funds from the scheme than they originally invested. Because Zeek is alleged to have operated as a Ponzi scheme, those withdrawals did not constitute true profits, but instead a re-distribution of other investor funds. Clawback actions are frequently used by court-appointed receivers to recover funds for victims, and Zeel receiver Kenneth Bell indicated in so many words that he intended to pursue clawbacks in a recent letter to investors.

This presents an ironic situation if Zteambiz and related entities have been soliciting funds from victims in order to "protect against possible crawlback (sic) action by the SEC," since the funds recovered from clawbacks are used to compensate those victims that did not have the good fortune to make withdrawals from the scheme exceeding their investment. Essentially, those victims who would not be the target of clawback actions would be subsidizing efforts to prevent recovery of additional funds for distribution. Additionally, some have observed the likely conflict of interest involved for an attorney to represent both victims and targets of clawback actions, as each has radically different interests.

While these are scenarios that are months, if not years, away, the likely approval of Mr. Quilling's pro hac vice application sets the process into motion.

The Pro Hac Vice motion is here.

Previous Ponzitracker coverage of ZeekRewards:

Zeek Receiver: Nearly $300 Million Recovered, Clawbacks Likely

ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier's Checks To Court

ZeekRewards Victims: What Happens Next

SEC Shuts Down Zeek Rewards, Alleges It Was $600 Million "Massive Ponzi Scheme" On Verge Of Collapse

Thursday
Sep202012

Madoff Trustee Makes Second Distribution To Victims Totaling $2.5 Billion; Victims Have Now Recovered Over 50% Of Losses

Irving H. Picard, the court-appointed trustee overseeing the recovery of assets for victims of Bernard Madoff's $65 billion Ponzi scheme, announced today that checks totaling $2.5 billion had been mailed out to victims representing the second pro rata distribution of funds recovered to date.  When combined with funds already returned to victims through both the first interim distribution and monies advanced by the Securities Investor Protection Corporation ("SIPC"), victims have now each received more than 50% of their allowed claim.  According to Picard, the average payment in the current distribution will be slightly more than $2 million, with the smallest check written for $1,784 while the largest check was over $500 million.  Picard also indicated a desire to make "additional distributions as soon as practicable."

The distribution dwarfs the first interim distribution made in September 2011, which featured an average payment to victims of just $222,551.12.  The disparity between the first and second distribution was due to the fact that the majority of funds recovered by Picard at the time of the first distribution, including the $5 billion settlement with the estate of Jeffrey Picower, were required to be held in reserve pending various legal challenges.  Where the first distribution represented just over 4% of each investor's net loss, the second distribution is approximately 1/3 of each investor's total net loss.  Not including the amount advanced to each investor from SIPC, Picard has now paid nearly 40% of allowed claims.

While receiving over 16,000 claims from purported victims, Picard allowed 2,436 claims.  892 of those claims were satisfied with the first SIPC advance and the first interim distribution, and the second distribution will fully satisfy an additional 182 claims.  After the second distribution, 1,048 claims will remain outstanding and entitled to participate in further distributions.

Picard has also provided a chart on his website, www.madoff.com, to illustrate his progress thus far:

 

While various legal and administrative fees have totaled over $600 million, Picard is quick to note that "not one penny of the funds recovered by the SIPA trustee has been used to pay any administrative expenses in the proceeding."  Instead, these expenses are funded by SIPC, which is an industry-created group that collects donations from industry members.  A look at how SIPC operates is here.

Wednesday
Sep192012

Lawyer's Fight to Recover Ponzi Scheme Losses Results in Bankruptcy, Suspension of Law License

"I expose a Ponzi scheme, I've turned over and worked with the FBI to find all kinds of hidden money, I'm probably single-handedly responsible for the Hoffmans being indicted,"
- John O. Murrin
The Minnesota Supreme Court suspended a semi-retired Twin Cities lawyer's law license for six months, determining that he filed multiple frivolous lawsuits in an ill-fated effort to recover $600,000 in losses he suffered from a real estate Ponzi scheme.  John O. Murrin, III, who also founded the referral service DIAL L-A-W-Y-E-R-S, headed a successful law practice for several decades.  However, after a hefty investment in a real estate speculation firm turned out to be a Ponzi scheme, Murrin played an instrumental role in exposing the scheme, working with the Federal Bureau of Investigation and helping to obtain the convictions of several of the scheme principals.  However, it was his quest to seek civil relief from those he deemed responsible that eventually culminated with a voluntary bankruptcy filing, and now, a suspension of his license to practice law.

In 2004, Murrin decided to invest $600,000 into Avidigm Capital Group, Inc. ("Avidigm"), which advertised itself as speculating in real estate through "foreclosure prevention."  Avidigm promised to pay Murrin $11,000 monthly interest payments in return for his investment.  In the beginning, Avidigm made interest payments as promised.  However, Murrin became alarmed when the flow of interest payments stopped in 2006. Additionally, the security interest granted to Murrin that supposedly was worth $900,000 turned out to be worth merely $200.  

Murrin then approached the FBI with his suspicious, and over the next few years, played a key role in a federal investigation of Avidigm that resulted in the filing of criminal charges against Avidigm CEO Steve Mattson and Texas couple Jim and Teresa Hoffman, who allegedly operated Avidigm behind the scenes.  Mattson was sentenced to a year in prison, and the Hoffmans are scheduled to be sentenced in November for mortgage fraud convictions.  

Not content to stop there, Murrin then began the sequence of events that would eventually leave him bankrupt and result in his law license being suspended.  According to the Minneapolis Star Tribune, which provides a detailed account of Murrin's travails, Murrin filed a 131-page lawsuit in a Minnesota state court seeking damages against nearly 50 defendants for their alleged roles in the scheme.  Judge Denise Reilly, finding that the lawsuit was so "confusing as to be comprehensible," dismissed the suit several times while giving Murrin a chance to amend the suit to provide more clarity.  Finally, with the suit still lacking, Judge Reilly dismissed the case outright and ordered Murrin and his wife to pay civil sanctions of nearly $500,000 to the defendants he had sued.  

Murrin and his wife appealed the award of sanctions, and the court ruled that Murrin's wife was exempt from the sanctions.  Following that decision, Murrin's wife then filed another lawsuit in state court, this one tipping the scales at 181 pages.  This time, the defendants removed the case to federal court, which generally has less tolerance for such suits.  The suit was only slightly more successful, and met with equal displeasure by the assigned judge, United States District Judge Patrick J. Schultz.

Indeed, in an Order for Judgment entered in Murrin's favor, Judge Schultz pulled no punches in summarizing Murrin's litigation tactics:

This Court has first-hand knowledge of the Murrins’ litigation strategy, which the Court earlier observed “resembles nothing so much as peine forte et dure — a method of torture by which heavier and heavier weights are placed on the chest of a defendant until the defendant either confesses or suffocates.”  Docket No. 337 at 2.  Perhaps never in the history of this District has more paper been filed by a litigant to less effect.  By way of example, the Court points out that the docket in this case contains over four hundred entries despite the fact that this action has barely progressed past the pleading stage.  The Murrins have proven to be singularly incapable of following the Federal Rules of Civil Procedure and singularly incapable of following the directions of this Court.

However, the order of sanctions against Murrin was not overturned, and several of those originally sued by Murrin then helped push Murrin into bankruptcy in retribution for what they deemed excessive and overreaching legal tactics.  A bankruptcy judge later imposed a receivership on Murrin's assets, observing that

"Ultimately, far too much of his asserted right to root around in discovery was based on a shallow and conclusory theory of 'conspiracy' among nearly four dozen named defendants, and nothing more.

After Judge Reilly filed an ethics complaint against Murrin with the Office of Lawyers Professional Responsibility, it was recommended that Murrin's law license should be suspended for a year.  After reviewing the recommendation, the Minnesota Supreme Court agreed, but imposed a six-month suspension.  Murrin insinuated he would fight the decision, maintaining that "I got hit for doing the right thing.  And I'll never back down."

A copy of the Judgment obtained against Avidigm by Murrin is here.

A copy of the Minnesota Supreme Court's decision suspending Murrin is here.