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Recent SEC Releases
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.

 

Monday
Sep092013

Miami Law Firm To Pay $5 Million To Settle Ponzi Lawsuit 

A prominent Miami law firm has agreed to pay $5 million to settle claims it played a pivotal role in "aiding and abetting" the massive $930 million Ponzi scheme operated by notorious fraudster Nevin Shapiro.  Shook, Hardy & Bacon ("SHB") reached the settlement with the court-appointed bankruptcy trustee, Joel Tabas, during a mediation last week.  The settlement, which is subject to approval by U.S. Bankruptcy Judge Laurel M. Isicoff, brings the total amount recovered for Shapiro's victims to $40 million - of which $13 million has been returned to victims.  

Shapiro was a Miami businessman who raised nearly $1 billion from investors through his grocery brokerage business, Capitol Investments, which Shapiro touted as a highly-profitable grocery wholesaling business.  Shapiro told investors Capitol Investments was a highly-profitable grocery diverter - a business that purchased low-priced food in one region and re-sold the goods for a profit elsewhere.  Shapiro used investor funds for a variety of unauthorized purposes, including Ponzi-style payments to existing investors and the diversion of tens of millions of dollars to sustain a lavish lifestyle that included a $5 million house, floor seats to Miami Heat basketball games, and numerous contributions to the University of Miami's athletic program.  Shapiro later attracted national attention when he disclosed he had provided illegal gifts to dozens of current and former college athletes at the University of Miami.  

One of Shapiro's high-school friends, Marc Levinson, had become an attorney at SHB and remained close with Shapiro.  Beginning in 2003, SHB and Levinson began handling Shapiro's legal affairs, including his dealings with investors in Capitol Investments.  According to Tabas, the firm "aided and abetted" Shapiro's violation of numerous federal securities laws, even after an internal memo circulated by the firm in December 2006 concluded that Shapiro was likely violating federal securities laws.  Despite these warning signs, Shapiro continued to operate his scheme for several years until his arrest in April 2010.  Shapiro would later plead guilty to securities fraud and was sentenced to a twenty-year prison term in June 2011.  

The settlement is the latest in what has become an increasing effort to hold law firms liable for either assisting or failing to detect a client's Ponzi scheme.  While none of the recently-filed lawsuits have proceeded to trial, several notable settlements involving law firms include a $25 million settlement by Holland and Knight for their role in Arthur Nadel's $330 million Ponzi scheme, as well as a $77.5 million settement by Greenberg Traurig and Quarles & Brady in the $900 million Mortgages Ltd. Ponzi scheme.

Of note, Tabas is compensated for his work as trustee under a contingency arrangement - a rarity in Ponzi scheme jurisprudence.  Whereas typically court-appointed receivers and bankruptcy trustees are compensated at an (often discounted) hourly rate for their work in recovering funds for victims, Tabas's arrangement allows his legal team to retain approximately 33% of his recoveries.  While the exact reason is unclear, the general use of a contingency arrangement can reflect a variety of factors, including the difficulty or uncertainty of prevailing.  Thus, under Tabas's arrangement, the $40 million recovered thus far will yield attorney's fees of more than $13 million.  

A copy of the SHB Lawsuit is here

Thursday
Sep052013

Alleged Ponzi Schemer Faces New Loan-Sharking Charges

A Massachusetts man already accused of orchestrating a multi-million dollar Ponzi scheme with his wife faced new charges of loan-sharking after he was arrested at a gas station with thousands of dollars stuffed in his pockets after he allegedly sought to collect a 40% return on an investment previously made by his company.  Steven Palladino, 57, was arraigned on a single count of usury after prosecutors alleged he contacted a woman demanding the repayment of a loan he previously made through his business that featured an interest rate wice the maximum allowed under Massachusetts law. As Palladino was already out on bail on more than one dozen charges, Judge Michael Cayne granted a request by prosecutors to impose an additional $25,000 cash bail. 

According to authorities, Palladino and his wife, Lori, owned and operated Viking Financial Group ("Viking") along with their 28-year old son.  Potential investors were told that Viking profited by making loans that carried exorbitant interest rates.  However, 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% - resulting in three charges of usury.

The Palladinos attempted to evade suspicion by falsifying company books and records to make it appear as if Viking was making legitimate loans.  However, in reality, investor funds were used primarily to sustain a life of luxury for the couple 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.  

Palladino and his wife were indicted in March on numerous charges including four counts of larceny over $250, three counts of making false entries in corporate books, and three counts of usury, commonly referred to as loan sharking.  Due to his lengthy criminal record that featured more than 24 prior larceny convictions, Steven Palladino was charged as a 'common and notorious thief'.

The new charges allege that, even after his arrest in March, Palladino had been recently contacting a Massachusetts woman to seek a $30,000 payment for a $25,000 loan she received from Viking back in March.  While Massachusetts law prohibits the making of any loan carrying more than a 20% annual interest rate, the payment demanded by Palladino would have equated to a 40% annual return - double the rate allowed under law.  Palladino was subsequently apprehended at a local gas station with nearly $5,000 in cash in his pockets and driving a $100,000+ Mercedes.   

Palladino is also expected to face charges for allegedly transferring the title of several vehicles he owned solely or jointly with his wife to that of his wife's name alone.

Wednesday
Sep042013

Zeek Victims Face Sept 5th Deadline To File Claims

Victims of the $600 million ZeekRewards Ponzi scheme have approximately 24 hours to timely submit a claim to ensure they are afforded a chance to participate in the funds recovered by the court-appointed receiver.  According to receiver Kenneth D. Bell, victims of the largest Ponzi scheme in North Carolina's history face a midnight deadline on September 5th in order for their submission of a proof of claim to be considered timely.  While Bell recently indicated that over 100,000 claims had been submitted thus far, previous estimates pegged the total number of victims as at least 800,000 - meaning hundreds of thousands of potential claims could be at risk of being permanently lost.

The Court approved the Receiver's proposed claims process on May 8, 2013, giving investors until September 5, 2013 to submit claims for review and approval by the Receiver. According to the Update, significant effort was required just to provide the required notice to potentially interested parties.  Due to the sheer amount of potential claimants (the Receiver estimated there were approximately 2.2 million unique User IDs), the Receiver attempted to send 1.7 million emails notifying individuals of their rights under the claims process.  Of these 1.7 million emails, approximately 1.3 million were successfully delivered.  Of the approximately 420,000 emails that were not delivered, the Receiver ended up sending more than 330,000 postcards to physical mailing addresses, as well as over 7,000 postcards to financial institutions that could feasibly hold claims.  

The Receiver opened an online claims portal on May 15, 2013, which was to serve as the central mechanism by which investors could submit claims.  In a recent update, the Receiver indicated he had received nearly 54,000 claims to date.  Including claims marked as "in progress" on the Claims Portal, the aggregate amount of potential claims submitted thus far is approximately $355 million.  This amount slightly exceeds the total amount of funds recovered to date by the Receiver, which is currently approximately $325.1 million.

After the claims portal closes, the Receiver plans to seek court approval of the next phase of the claims process, including the proper method to determine claims and how to deal with claimants who object to the Receiver's claim determination.  It is expected that once the Receiver issues his claim determinations to the respective claimants, he will then seek approval for an interim distribution of a to-be-determined amount.  

The Receiver has posted a list of frequently asked questions on his website here.

The ZeekRewards Claims Portal is here.