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Recent SEC Releases
Friday
Sep142012

Accountant Pleads Guilty in $6 Million Ponzi Scheme

A New York man pleaded guilty to fraud charges for masterminding a Ponzi scheme that bilked victims out of $6 million.  Alan Ritter, 69, appeared in a New York federal court today where he agreed to plead guilty to three counts of wire fraud.  Wire fraud carries a maximum prison sentence of twenty years as well as criminal monetary penalties.  According to Ritter's attorney, Ritter's gambling problem was "the root cause of these really awful acts."

Since 2001, Ritter used his position as a self-employed accountant to solicit funds towards various business investments from clients and personal friends.  As Ritter continued to receive funds from investors, the majority of incoming funds were used to make Ponzi-style payments on the loans and for personal expenses that apparently included a penchant for gambling.  

The guilty plea to three charges of wire fraud is on the high side for sentencing based on the amount of victim losses.  While it is highly unlikely that Ritter's eventual sentence will be anywhere near the maximum sentence of sixty years, it is likely that the sentence could be a life sentence given Ritter's age.

Sentencing is scheduled for January 16, 2013.  While it is likely restitution will be ordered to Ritter's victims, his attorney has indicated that Ritter is destitute.  

Thursday
Sep132012

Former Stanford Chief Investment Officer Receives Three-Year Prison Sentence

The former chief investment officer of Allen Stanford's financial empire was sentenced to serve three years in prison after she pled guilty to obstructing an investigation by the Securities and Exchange Commission ("SEC") into Stanford's operations.  Laura Pendergest-Holt, 39, had agreed to plead guilty only days after Allen Stanford was sentenced to 110 years in prison after being convicted of operating a $7 billion Ponzi scheme rivaled only by Bernard Madoff.  The sentence is consistent with her plea agreement, in which prosecutors agreed to recommend a sentence of thirty-six months in prison followed by a term of supervised release.  It was unclear from immediate news reports whether United States District Judge David Hittner ordered Pendergest-Holt to pay restitution.  

The charges derived from the SEC's initial investigation into Stanford's operations, which resulted in the issuance of subpoenas to Stanford and another employee to provide testimony on the operations of Stanford International Bank, Ltd. ("SIB").  After the subpoenas were issued, a Stanford attorney convinced the SEC to allow the substitution of Pendergest-Holt to give testimony, intimating that she was more familiar with operations than Stanford.  Pendergest-Holt then participated in several weeks of meetings with Stanford executives where she was coached on the testimony she was expected to give.  Her testimony omitted crucial details of SIB's finances and omitted or misrepresented other relevant information.  According to prosecutors,

"Holt acknowledged that her eventual appearance and sworn testimony before the SEC was a stall tactic designed to frustrate the SEC's efforts to obtain important information about SIB's investment portfolio.  Holt admitted she took this action intentionally and corruptly, knowing that her testimony would impede the SEC's investigation and help SIB continue operating."

Holt is the third-highest ranking official to receive prison time after Stanford and Stanford's CFO, James Davis.  Incidentally, Pendergest-Holt carried on an affair with Davis, who served as the prosecution's chief witness against Stanford.  Two other Stanford officials are scheduled to stand trial beginning later this month.  

A copy of the indictment is here.

Thursday
Sep132012

Zeek Receiver: Nearly $300 Million Recovered, Clawbacks Likely

The receiver appointed to recover assets in the $600 million ZeekRewards Ponzi scheme announced today that he had recovered nearly $300 million in assets for eventual distribution to the estimated one million victims.  The receiver, Ken Bell, also estimated that "tens of millions of dollars more" are still unaccounted for, and hinted at their eventual recovery as well.  While victims certainly should be optimistic about the developments to date, Mr. Bell urged patience going forward, stating that "this process will take months, if not longer."

Also of note in the letter was Mr. Bell's most pointed statements to date that he intends to pursue clawback litigation against those "affiliates who took more out of Rex Ventures than they put in."  While many victims received few, if any, distributions and instead chose to re-invest their gains, some affiliates were rumored to have withdrawn tens or even hundreds of thousands of dollars in excess of their initial contribution.  Citing principles of equity, Mr. Bell declares that "in order to make everyone as whole as possible, those who profited from participating should surrender their gains" (emphasis added). Courts routinely approve the use and legal theory surrounding clawbacks, and they are very difficult to defend.

It also appears that the beginning of a claims process is near.  Mr. Bell indicated that an "information template" will be posted to the Receivership website soon that, while it will not function as an official claims form, will allow the Receivership to begin collecting victim information and also enable an accurate method of communication as the case proceeds.

Finally, and likely in response to increased and rampant speculation over recent comments made by some affiliates in which they purported to have spoken to the Receiver or the SEC about the negative merits of the case, the Receiver issued a strong statement denying the rumors.  According to Mr. Bell, false information is being circulated by these claimants" (emphasis added). Going forward, Mr. Bell urged victims to consider only what the SEC posts on its website for its position on the matter.

Ponzitracker published an article several days ago consistent with Mr. Bell's comments after having been forwarded an email that purported to contain comments attributed to the SEC concerning the "weakness" in Zeek's case.  In a conversation with a top SEC official involved in the litigation, Ponzitracker was able to confirm that the statements being circulated were false.

Tuesday
Sep112012

New Mexico Ponzi Schemer Sentenced to Twelve Years in Prison

"Unfortunately, you have become the most infamous criminal in New Mexico history. You have exceeded Billy the Kid, (train robber) Black Jack Ketchum, others who have been notorious in this territory."

- United States District Judge Bruce Black
An Albuquerque man who masterminded the largest Ponzi scheme in New Mexico's history was sentenced to serve twelve years in prison.  Doug Vaughn, 64, operated the scheme, which spanned decades, that scammed more than 600 investors nationwide out of approximately $75 million.   After being charged in a 30-count indictment unsealed in early 2011, Vaughn pled guilty to wire fraud and mail fraud charges in December 2011.  As part of the agreement, prosecutors agreed to recommend a prison sentence ranging from 10 to 12 years .  While some victims urged United States District Judge Bruce Black to reject the plea agreement and give Vaughn the maximum sentence, Judge Black sentenced Vaughn to the high end of the range recommended by prosecutors, concluding that ""I don't think despicable covers it quite frankly."  

Vaughn operated Vaughn Company Realtors ("VCR"), which was once the largest independent residential brokerage firm in New Mexico. Started in 1983,VCR, through Vaughn, solicited investments in the form of promissory notes, promising potential investors annual returns averaging 17.5%.  In return, Vaughn represented that investor funds would be used for real estate investments.  In total, VCR collected more than $86 million from investors in eight states.  

However, rather than use the funds for real estate investments, authorities alleged that Vaughn used investor monies to (1) make Ponzi-style payments to investors; (2) pay himself under the guise of salary or bonuses; and (3) to prop up VCR corporate operations, which was not generating sufficient revenues through legitimate operations.  Indeed, VCR was hemorrhaging money, losing $54 million from 2004 to 2009 and nearly $14 million in 2009 alone.

The scheme began to collapse in late 2009, with Vaughn unable to meet monthly interest obligations and unilaterally deciding which investors would receive checks.  Finally, in February 2010, Vaughn filed for personal and corporate bankruptcy protection, claiming that nearly 600 investors were owed approximately $75 million.  

Vaughn was given 48 hours to report to prison.  Given his age, it is likely to be a life sentence.

A copy of the indictment is here.
Monday
Sep102012

SEC Admissions Of Weakness In Zeek Case "Inaccurate"; Tactics and Motivations of Zeek Victim Group Questioned

On August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency enforcement action to shut down ZeekRewards (“Zeek”), calling it a massive $600 million Ponzi scheme.  According to the SEC, while Zeek promised participants a daily payout of “net profits,” these profits were nearly exclusively derived from the funds of new investors – the classic hallmark of a Ponzi scheme.  At the SEC’s request, the court then approved the appointment of Ken Bell as the receiver, who would be tasked with gathering and safekeeping assets for eventual distribution to victims. 

Emotions have run high since Zeek’s shutdown, as many lament their losses amid what was such a promising operation that seemingly defied the age-old “if it’s too good to be true..” mantra.  However, a select (and growing) group has taken their dissatisfaction to another level, soliciting the assistance of other victims to fight the “illegal” and “unlawful” actions taken by the SEC.  While their rousing rhetoric is critical of the SEC, recent representations made regarding the SEC's handling of the case may have crossed the line from opinion to misrepresentation.  Indeed, an SEC official briefed on the claims by Ponzitracker explicitly refuted such allegations.

Shortly after the SEC stepped in, several groups, including “Zeek Rewards Affiliates United Against The SEC” and “Zteambiz” were formed, and appear to operate in tandem.  Zteambiz describes itself on its website, www.zteambiz.com, as “a professional organization designed to secure competent legal counsel to prevent further damage caused by the actions of the SEC actions against Rex Venture Group aka, Zeek Rewards.”  Dave Kettner and Robert Craddock are several of the individuals behind these sites, as evidenced by multiple postings attributed to them.  Using the site, both have solicited Zeek victims to “donate” towards a fund being set up to retain a top law firm to fight the SEC’s allegations and reopen Zeek.   A September 5, 2012 update from Kettner implored victims to donate if possible to be added to the “protected group.”  The response seems to have been positive, and on August 30, 2012, a notice was posted indicating that SNR Denton, a well-known international law firm, had been retained:

“Important notice:

SNR Denton US LLP represents Fun Club USA and all inquiries about this representation should be directed to Fun Club USA at xxxxxxxxx. SNR Denton’s legal representation is limited to Fun Club USA; SNR Denton does not represent and does not have an attorney-client relationship with affiliates of Zeek, Zeek Rewards, Rex Venture Group LLC or with any individual or party that chooses to provide funds to Fun Club USA.”

The notice is seemingly at odds with representations contained in the "People Helping in the Legal costs” tab on Zteambiz, which indicated that those who had donated – numbering over 6,000 as of September 1, 2012 when it was last updated – were “now being represented by counsel, to protect their moneys (sic) earned by Zeek Rewards and monies currently held by Zeek Rewards.”  The notice, which has since been removed, was clear that “SNR Denton’s legal representation is limited to Fun Club USA."  A quick search on Florida’s Division of Corporations website yielded a “Fun Club USA Inc.” registered on August 28, 2012.  The President of Fun Club, as shown on its Articles of Incorporation?  Robert Craddock. 

Zteambiz has been vocal in its criticism of the SEC, alleging that “all the pages that were submitted…by the SEC that froze the assets of Rex Venture Group, LLC has all been one sided and what we believe to be a misrepresentation of the truth and facts of what Zeek Rewards was as a viable and legal business.”  Additionally, Zteambiz claimed that “the SEC mislead (sic) the judge” in securing an emergency asset freeze.

This past Saturday, an email from “Dave” updated recipients based on information recently learned from Craddock.  One of the first revelations was that SNR Denton had decided to no longer represent Zeek, reportedly due to the “tons of calls” received by the firm from victims that interfered with Denton’s “entire law firm operations.”  A new law firm was said to be in the works, whose identity would remain a secret until court filings were unveiled “early next week.”  What piqued the interest of many, however, were the representations made immediately after.  The paragraph is reproduced below:

Here is the great news...The law firm has already talked to the SEC and the NC DOJ. On Thursday, Robert got a call from one of our attorneys regarding the conversation that he had with the SEC. Here
is what he said:

The SEC acknowledged that there are a couple of problems with the case against Zeek Rewards and Rex Venture group. Here are the problems:
1.    We (the SEC) are not able to find a victim in this case. We are not able to find anybody at this time that has been harmed by Zeek Rewards.
2.    We (the SEC) are having a hard time finding a security. In the complaint, it said that Zeek was selling securities and was an investment scheme.
Based on their (the SEC) new knowledge of the Zeek Rewards business model, they are having a hard time moving forward in making their case. And they are now looking for a path or way to back out of this.

These apparent admissions by the SEC quickly spread over the internet, with dozens of websites frequented by the multi-level marketing community accepting the statements as fact and quickly proclaiming that the SEC was close to capitulating.  

The claims seem skeptical for several reasons.  First, it is highly unlikely that these kind of admissions would be made to a potentially adversarial party and/or attorney.  Second,  both Rex Venture Group and Paul Burks have each already entered into a consent judgment agreeing to waive any right of appeal, and, in Burk's case, paying a $4 million civil penalty.  Further, a link to an information page established by the SEC now features prominently on the SEC's homepage, www.sec.gov.  

These suspicions were confirmed today after Ponzitracker spoke with a top SEC official familiar with the case.  After reviewing the allegations, the official, who declined to be named, labeled the statements as "inaccurate" and "false".  Additionally, it would be highly impractical for the SEC to make such moves and statements without allowing the receiver to complete his initial investigation and make appropriate recommendations.

Craddock is no stranger to controversy in his affiliation with Zeek and Rex Venture Group.  Several months before Zeek was shut down by the SEC, a blogger who goes by the name of KSChang posted an article presenting a detailed look into the legitimacy of Zeek.  The article contained a wealth of information about Zeek, its past, and, perhaps most prescient, asked whether "ZeekRewards [is] a Ponzi Scheme?". However, shortly after the article was published, the site's administrator received a letter from a person purporting to act on behalf of Rex Venture Group alleging that:

It has come to our attention that your website Hubpages.com is broadcasting and delivering content that is both copyrighted and, Trademark Protected. In addition, the content constitutes a tortuous interference with us and our 1.2 million independent advertising reps around the world.

The following page was brought to our attention yesterday (July 21, 2012) and we would request this page to be removed before greater damage is done to our business model and reputation. 

The author of the letter?  Robert Craddock, on behalf of Rex Venture Group LLC.  The letter succeeded temporarily, as the article was removed by the site administrator while the claim was investigated.  Apparently not satisfied with the allegations, the article was allowed back online after six days.  KSChang provided a summary of his efforts while the site was down:

When I requested details from this person, he said he couldn't POSSIBLY create a list of what's untruthful or libelous and why about the hub by Monday. (I contacted him on THURSDAY). When I pressed for more details, he replied with veiled legal threats about "pursue all legal venues".

Less than three weeks later, the SEC confirmed the article's skepticism and shut down Zeek.  

The 9/8/2012 email is here.

The Fun Club USA Articles of Incorporation are here.

The "takedown" letter sent by Craddock is here.

Recent Zeek Coverage:

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