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Recent SEC Releases

Seven Year Prison Sentence for New Jersey Man in $9 Million Health Care Ponzi Scheme

A 73-year old New Jersey man was sentenced to serve the next seven years in federal prison for masterminding a $9 million Ponzi scheme purporting to be an investment fund that made loans to nursing homes.  Maxwell B. Smith was sentenced by United States District Judge Mary L. Cooper, who also ordered him to serve three years of supervised release after completing his sentence.  Smith had pled guilty nearly four years ago to five counts of mail fraud, which carried a maximum sentence of twenty years per count, as well as a $250,000 fine.  Smith was also charged by state authorities, and also pled guilty in 2009 to one count of first-degree money laundering.  

According to authorities, Smith was employed as a financial advisor at various financial firms in New Jersey where he provided investment advice to individual clients.  In addition to providing investment advice, Smith also created Health Care Financial Partners ("HCFP"), which held itself out as an investment fund with hundreds of millions of dollars in assets.  In an investment prospectus provided to investors, HCFP advertised guaranteed annual returns ranging from 7.5% to 9% supposedly generated through lucrative loans to healthcare facilities such as nursing homes.  Investors were offered the opportunity to purchase bond offerings in amounts ranging from $25,000 to $300,000, and Smith touted the ability to treat any gains as tax-free.  In total, Smith raised over $9 million from investors.

However, rather than using these funds for a legitimate purpose, Smith instead misappropriated millions of dollars to live a life of luxury that included dining, gambling, entertainment, overseas travel, and renting a villa in France.  Smith paid out approximately $2 million in purported interest payments that were, in reality, simply principal belonging to other investors.

Ironically, Smith's scheme is said to have collapsed after the daughter of an elderly investor couple thought that the venture seemed very similar to Bernard Madoff's Ponzi scheme.  This led to a civil lawsuit, which later led to criminal charges.  While Smith's home was sold to benefit defrauded investors, this led to a shortfall of nearly $9 million.  


Colorado Couple Who Offered Up To 1,000% Annual Returns Sentenced to Prison in $17 Million Ponzi Scheme

A Colorado man and his wife have been sentenced to prison for operating a Ponzi scheme that defrauded investors in the United States and five foreign countries.  Richard Dalton, and his wife Marie, were given ten-year and five-year sentences, respectively, after each entered into a plea agreement with prosecutors.  Richard Dalton pled guilty to a single count of money laundering, while his wife pled guilty to a single count of conspiracy to commit mail fraud.  A hearing is scheduled for July 24 to determine the amount of restitution.

The Daltons owned and operated Universal Consulting Resources LLC ("UCR").  Beginning in March 2007, OCR promised potential investors lucrative returns through trading in diamonds and international note trading.  Investors were told that the investments were "extremely low risk," and that their money could be returned to them at any time.   These two investment ventures, known as the "Trading Program" and the "Diamond Program," were also pitched by "finders" or "brokers" who received commissions from UCR for each investor they successfully brought into the program.  

According to Richard Dalton, the Trading Program featured an unnamed European trader who would use investor funds to buy and sell investment notes, and this trading was so profitable that investors were guaranteed monthly returns ranging from 4% - 5%.  Some investors were promised even higher rates, including one investor who was promised 75% - 80% per month - an annual return of nearly 1,000%.  Similarly, the Diamond Program purported to trade in diamonds, and promised a 10% monthly return.  In total, the Daltons and UCR raised approximately $17 million from investors.  

Not surprisingly, the exorbitant returns promised by the Daltons had no basis in reality, and were instead part of an elaborate Ponzi scheme in which new investor funds were used to pay returns and principal to existing investors.  Over $5 million of investor funds were used to make 'Ponzi payments,' and over $1 million was used for a variety of personal expenses, including $35,000 in custom dental work, the Daltons' daughter's wedding, and a $1 million house.  

While the Daltons stopped making scheduled payments to investors in early 2010, they provided numerous written and verbal misrepresentations to investors concerning the status of their invested principal, including:

  • that the European trader had betrayed the Daltons;
  • that the Daltons were busy liquidating a cache of diamonds;
  • an airplane that made weekly trips to Africa to pick up diamonds had the 'number three engine go out'; and 
  • that the African government had mixed in 18,000 fake diamonds.

In late 2010, Richard Dalton even sought to reassure an impatient investor, telling him he had been in constant contact with the Securities and Exchange Commission, stating 

So they know that and know I’m not Bernie Madoff, you know, I didn’t go out there and get into a huge lifestyle off of your dough. So they’re backing off and letting me clean this thing up.

The Daltons were later indicted in September 2011, and were arrested after returning from South Africa.

A copy of the SEC Complaint is here.


Former Youth Pastor Gets 51 Months in $3.4 Million Jewelry Ponzi Scheme

A former youth pastor was sentenced to serve 51 months in federal prison for masterminding a Ponzi scheme purporting to buy and sell precious jewels.  Matthew James Addy, 34, received the sentence from United States District Judge James C. Cacheris after previously pleading guilty to a single count of securities fraud back in February.  He was also ordered to pay approximately $2.74 million in restitution to defrauded investors.

According to authorities, Addy owned Edward J & Compant, which operated LaPorte Jewelers ("LaPorte"). Beginning in 2010, Addy began seeking investors for promissory notes in which the proceeds would be used for the purchase and resale of wholesale jewelry and loose precious stones.  In exchange for their investments, individuals were given promissory notes carrying above-average rates of interest that purportedly were linked to specific jewelry transactions entered into by Addy.  In seeking investors, Addy relied on his affiliations with various religious organizations, and a majority of the 40-plus total investors were recruited from these groups.  In all, Addy raised more than $3 million.

However, according to the FBI and as admitted by Addy, LaPorte was nothing more than a front for an elaborate Ponzi scheme that used investor funds to make Ponzi-style payments and for a variety of other unauthorized uses.  While approximately $665,000 was paid to investors, these payments came not from legitimate profits, but instead from the funds of new investors - the hallmark of a Ponzi scheme.  When LaPorte originally closed down in June 2012, Addy blamed the store's bad fortunes on mounting monthly losses due to declining revenues.  


TD Bank Settles Another Rothstein Investor Suit For $70 Million

A hedge fund specializing in arbitrage trading that had invested hundreds of millions of dollars in Scott Rothstein's $1.3 billion Ponzi scheme has reached a settlement valued at nearly $70 million from TD Bank and others it claimed facilitated the scheme.  Platinum Partners Value Arbitrage Fund, L.P. ("Platinum Partners") was one of hundreds of investors in Rothstein's purportedly lucrative business of investing in confidential structured settlements, ultimately investing more than $400 million along with two of its sister hedge funds.  The fund brought claims against TD Bank and others in the aftermath of Rothstein's collapse, claiming the bank played a vital role in Rothstein's scheme.  In the announced settlement, TD Bank will be on the hook for approximately $44 million which, according to Paul Brinkmann of the South Florida Business Journal, brings the bank's financial exposure thus far to roughly $374 million.

The settlement is a welcome reversal in roles for Platinum Partners, which found itself and two partner  funds, Centurion Structured Growth and Level 3 Capital, the target of a $400 million lawsuit by the trustee appointed to recover funds for Rothstein's victims.  The trustee, Herbert Stettin, filed suit in December 2010 and sought more than $400 million - an amount representing the amount of funds that flowed in and out of Platinum during Rothstein's fraud.  Platinum Partners settled with the trustee in June 2012, agreeing to pay $32 million to the bankruptcy estate, which represented the amount of transfers made during the 90-day period preceding the bankruptcy filing in which Rothstein was legally presumed insolvent.  In exchange, Stettin agreed to allow Platinum Partners to hold claims of $28 million, as well as subordinated claims of $26 million.  

Meanwhile, Platinum Partners had joined a multitude of other Rothstein victims in pursuing claims against TD Bank, claiming that the bank and its executives willingly aided Rothstein's scheme.  That strategy had become increasingly popular in the wave of several high-profile settlements by TD Bank, as well as a jury verdict awarding punitive damages.  The adverse verdict served as a powerful incentive for settlement, and the bank has since settled several other suits.

Under the terms of the settlement with Platinum Partners, TD Bank agreed to make a cash payment of $18 million, as well as satisfy the fund's remaining obligation to Stettin of approximately $26 million.  Platinum Partners will also recover its legal fees in pursuing the multi-year litigation.  Additionally, Platinum Partners still has its $54 million in claims submitted to the bankruptcy estate, including an allowed claim with equal priority to other investor-victims of $28 million that is expected to be nearly or fully satisfied out of recoveries by Stettin.  Thus, assuming a payout percentage of 80% or more, Platinum Partners will stand to recover approximately $70 million - a figure that seems even more impressive considering some estimates that the fund recovered all but $19.5 million of its original investment with Rothstein.

TD Bank has been a central focus of Stettin's efforts to formulate an exit plan from bankruptcy that has featured a heavily-debated ban on current and future litigation against TD Bank in exchange for a cash payment to the bankruptcy estate.  The proposal has pitted Stettin and the creditors' committee against a group of investors with pending claims of nearly $300 million against TD Bank who would be 'forced' to 'only' receive whatever payments they would be entitled under a bankruptcy plan.  Stettin supports the plan because victims would be on track to receive close to a 100% recovery - an outcome only possible with the cash payment by TD Bank in exchange for a bar order.  Under a recently proposed version of the plan - one that still includes a bar order - creditors will have the chance to submit their vote in advance of a July confirmation hearing.  

A copy of the Trustee's lawsuit against Platinum Partners is here.


CFTC Sues U.S. Bank For Aiding 'Midwest Madoff' Ponzi Scheme

United States securities regulators launched a lawsuit against a well-known financial behemoth, alleging it allowed an Iowa man dubbed the 'Midwest Madoff' to knowingly misappropriate investor funds as he masterminded a $215 million Ponzi scheme.  The Commodity Futures Trading Commission ("CFTC") filed a complaint in federal court against U.S. Bank National Association ("U.S. Bank"), alleging it played an integral role in the massive Ponzi scheme perpetrated by Russell Wassendorf, Sr. through his company, Peregrine Financial Group, Inc. ("Peregrine").  The CFTC charged US. Bank with multiple violations of the Commodity Exchange Act and requested a variety of relief including court-ordered restitution, disgorgement of gains tied to the fraud, and civil monetary penalties.  

Peregrine was a renowned commodities broker whose founder, Wassendorf, was once considered an icon in the commodities industry.  However, this changed with Wassendorf's arrest in July 2012 following a failed suicide attempt outside Peregrine's headquarters.  In a suicide note he left, Wassendorf confessed to a long-running fraud, and was later indicted, pled guilty, and sentenced to fifty years in prison.  He was ordered to pay more than $215 million in restitution.  

According to the complaint, Peregrine became registered with the CFTC in August 1992, and Wassendorf soon began using U.S. Bank for Peregrine's needs as a result of his previous banking relationship with the bank.  The bank would later maintain more than 30 accounts for Wassendorf and Peregrine, including personal accounts for Wassendorf and his family, Peregrine accounts, and accounts for other Wassendorf businesses.  Over the course of this relationship, Peregrine would deposit more than $300 million of customer funds with U.S. Bank.

Wassendorf enjoyed a preferential status with U.S. Bank due to his wealth and potential as a long-term customer.  This resulted in the bank making unusual concessions to Wassendorf, including allowing him to limit access to an account, with an account number ending in 1845 (the "1845 Account") that held millions of dollars of Peregrine's customer funds, to only him.  Indeed, U.S. Bank's internal computer system carried a memo for the 1845 Account stating that

“Per Russ Wasendorf request no account balance confirmations authorized on acct”
The bank was notified that the 1845 Account was designated as a Commodity Exchange Act Customer Segregated Account, consisting of funds from two primary sources: deposits at its Cedar Falls, Iowa branch, and wire transfers from a Peregrine customer account at JP Morgan.  As a customer segregated account, the 1845 Account was subject to various rules and regulations under the Commodity Exchange Act.

However, according to the CFTC, U.S Bank frequently flouted industry rules and regulations in allowing Wassendorf to use funds from the 1845 Account for a variety of prohibited purposes - effectively allowing him to use the account as Peregrine's commercial checking account.  This included the outflow of millions of dollars to an account related to the construction of Peregrine's new headquarters, more than $5 million to an account for Wassendorf's restaurant, My Verona, and even the transfer of more than $2 million as part of Wassendorf's 2010 divorce settlement.  

The complaint singles out a female employee identified only as "Banker A" for having a close relationship with Wassendorf.  

U.S. Bank has denied responsibility, instead accusing the CFTC of attempting to deflect blame for its failure to detect Wassendorf's fraud.  

A copy of the CFTC's complaint is here.