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Recent SEC Releases
Thursday
Dec202012

Missouri Priest Facing 40-Year Prison Sentence For $52 Million Ponzi Scheme

A Missouri clergyman who orchestrated a massive Ponzi scheme that duped investors out of over $50 million is set to receive a 40-year prison term at his sentencing later this month.  According to a sentencing memo authored by United States District Judge Linda Reade, Kansas priest and attorney Martin Sigillito will receive the term when he is sentenced December 28th for a scheme that ensnared over 100 victims.  Sigillito had faced as many as 325 years in prison after a federal jury found him guilty earlier this spring of all twenty criminal charges he faced.  When Sigillito was indicated in May 2011, authorities claimed the scheme was the largest in the history of the Eastern District of Missouri.

Sigillito held himself out as an expert in finance and international law, and claimed he was an adjunct lecturer at England's Oxford University.  In addition to running his own law office, Martin T. Sigillito and Associates, he was also an ordained priest and bishop in a church known as the American Anglican Convention.  

According to the indictment, Sigillito, along with co-conspirator James Scott Brown, a Kansas attorney, began marketing the British Lending Program ("BLP") to investors in 2000.  BLP was advertised as a prominent real estate development venture, and investors were told that another co-conspirator, Derek Smith, was a highly successful real estate investor who had a proven track record of identifying undervalued properties that could be quickly purchased, refurbished, and resold for a quick profit.  Investors were promised that, in return for loaning large amounts of money to BLP, they could expect to receive an above-average rate of interest in return.  Over the life of the scheme, which spanned nearly a decade, investors "loaned" BLP over $50 million.  

Yet, the majority of investor funds were used not for legitimate real estate projects, but instead to sustain an elaborate Ponzi scheme.  Besides misapropriating funds to sustain the trio's lavish lifestyles, approximately $27 million was used to make Ponzi-style payments to investors purporting to be interest and principal payments.  When Sigillito's secretary became suspicious and went to authorities in 2010, BLP was nearly insolvent.  Sigillito himself stole more than $6 million from investors, using the funds to live a high life that included the purchase of antique books, papers, rare coins, a $1,200 bottle of cognac, and a lamp from 34 B.C.

Smith and Brown cooperated with authorities and pled guilty to charges of conspiracy to commit mail fraud and conspiracy to commit wire fraud in September 2011.  Brown received a three-year term earlier this summer.

A copy of the Indictment is here.

Monday
Dec172012

Madoff's Brother Due To Be Sentenced Thursday

The man whose older brother, Bernard Madoff, orchestrated the largest Ponzi scheme in history is set to learn his own fate for his role in the scheme that bilked thousands of investors out of billions of dollars.  Peter Madoff, the youngest brother of Bernard and Mark Madoff, previously agreed to plead guilty to a single charge of conspiracy to commit securities fraud and a single count of falsifying records of an investment adviser back in June.  As part of his plea agreement, he agreed not to seek less than the 10-year term recommended by prosecutors.  In a letter to the sentencing judge, Madoff kept his word, instead seeking only to report to prison after attending his granddaughter's bat mitzvah in January.  Mr. Madoff has steadfastly maintained that he was unaware of his older brother's massive fraud until it was privately disclosed to him on December 9, 2008.  Authorities arrested Bernard Madoff two days later.  

Mr. Madoff served in various capacities at Bernard L. Madoff Investment Securities ("BLMIS") since 1965, holding the position of head of compliance when the scheme was revealed in December 2008.  While prosecutors have refrained from accusing Mr. Madoff of having direct knowledge of his brother's fraud, they instead argue that he committed other crimes that unwittingly allowed the decades-long Ponzi scheme to continue unnoticed.  These crimes included the filing of false forms drastically underreporting the number of customers with accounts at BLMIS and the total funds under management.

Several of Madoff's immediate and extended family members served in various capacities with their father's firm. His son, Mark, was employed at the firm's proprietary trading unit, and continued to deny any involvement in the scheme until his suicide on December 9, 2010, two years to the date of his father's confession.  Another son, Andrew, served as co-head of trading along with Mark.  While court-appointed bankruptcy trustee Irving Picard has filed suit against the family for $200 million, there have been no other indications of an imminent criminal case against Andrew Madoff or any other family members.  

Along with the prison sentence, Mr. Madoff also agreed to a criminal forfeiture order of $143.1 billion representing the total amount of investor funds that passed through the operation.  This forfeiture will include all of Mr. Madoff's real and personal property, and will also include claims to any income Mr. Madoff earns after he is released. Indeed, according to Mr. Madoff's lawyer, the forfeiture order will ensure that he will "live out his days as a jobless pariah."  

Peter Madoff is due to be sentenced Thursday, December 20.  

Monday
Dec172012

Zeek Receiver Updates Investors On Recovery Efforts, Has Harsh Words For Opposition

The receiver appointed to recover assets for victims of the massive $600 million ZeekRewards Ponzi scheme hosted an hour-long conference call earlier this evening in which he provided new updates on the eve of the four-month anniversary of his appointment.  In the call, Receiver Kenneth Bell revealed a wealth of new information, including estimates on total recoveries, the establishment of a claims process, and the number of victims and clawback targets.  Mr. Bell also addressed several recent filings challenging his authority and the legitimacy of the receivership, dismissing them as "absurd."

With the benefit of now having several months to comb through financial records and other documents detailing the inner-workings of Zeek, Mr. Bell provided an update on loss and victim figures.  First, Mr. Bell estimated that approximately 840,000 affiliate ID's invested more with Zeek than they withdrew.  Conversely, Mr. Bell estimated that 77,000 affiliate ID's were fortunate enough to withdraw an amount in excess of their total investment.  In total, and in adherence with previous estimates, Zeek investors suffered collective losses of approximately $500 million to $600 million.  Since his appointment, Mr. Bell has secured the recovery of over $300 million - with a majority of that recovery consisting of funds returned from various financial institutions.

Claims Process

One of the most popular topics was the establishment of a claims process in which investors could eventually be permitted to receive distributions based on their loss amounts.  Mr. Bell stressed that he is working strenuously to institute a claims process, which would first require the submission of a proposed claim form and procedure to United States District Judge Graham Mullen.  According to Mr. Bell, he has set an internal deadline of submitting this information to Judge Mullen by January 31, 2013.  Once the claims form and procedure receives court approval, the claims form will likely be posted to the website and distributed to victims, who will have until a court-imposed deadline by which to submit relevant requested information.  The claim form will also specify what proof is required to substantiate claims. Upon the approval of claim forms and submission by victims, Mr. Bell also indicated his preference to proceed with an 'interim' distribution rather than waiting to make one final distribution at the end of the Receivership.

Clawbacks

Another popular topic was the issue of "clawbacks" against those 'net winners' that were fortunate enough to profit off their investment by withdrawing funds in excess of their investment.  The Receiver sent out a first wave of 1,200 subpoenas to those 'net winners' that were deemed to have profited most off Zeek.  According to Mr. Bell, "scores" of investors responded in a cooperative manner seeking to pay back their false profits.  However, a "whole lot" of recipients have fought back against the requests for information.  If the Receiver is not able to reach an amicable resolution with each clawback target, he will likely proceed with the filing of a lawsuit.  The Receiver took steps last week to ensure that he may properly bring clawback lawsuits in various federal districts around the United States by filing a copy of the SEC Complaint and the Order Appointing Receiver in districts where clawback suits are likely under 28 U.S.C. 754.

Opposition Efforts

Mr. Bell also addressed the various recent filings that have sought to both contest his authority as receiver and challenge the SEC's decision to shut down Zeek in the first place.  This included the filing by Fun Club USA of a motion seeking the appointment of an examiner, as well as a filing by several clawback targets seeking to dissolve the Receivership.  Mr. Bell saved his harshest words for these efforts, calling them "absurd" and disputing their accuracy.  As to the motion for appointment of examiner, Mr. Bell pointed out (as Ponzitracker did here) the inherent conflict of interest that would present itself since the nominee for examiner currently represents "several hundred net winners," as well as the implications of paying such an examiner our of receivership funds.  Mr. Bell also indicated he will oppose the  motion seeking the dissolution of the receivership, saying that the "receivership is here to stay," and represented the only and best way to make victims whole.

In closing, Mr. Bell stated that his goal was to ensure that the Receivership was the most cost-effective Receivership to date, and urged victims to regularly check his website, www.zeekrewardsreceivership.com, for updates.  A copy of the conference call is expected to be available on the website as well.  

Friday
Dec142012

Madoff's Former Lawyer Seeks to Intervene in Zeek Receivership, Dissolve Receiver's Appointment

 

In a wild turn of events Friday evening, Bernard Madoff's former lawyer sought to intervene on behalf of two potential clawback targets in the $600 million Zeek Rewards Ponzi scheme, disputing the Securities and Exchange Commission's ("SEC") characterization that the scheme violated federal securities laws and seeking to end the brief tenure of the court-appointed receiver. The motion, filed by famed New York criminal attorney Ira Lee Sorkin on behalf on Trudy Gilmond ("Gilmond") and Kellie King ("King"), takes issue with the SEC's determination that the fraud perpetrated by Zeek and its principals involved the sale of securities - thus bringing the operation under the ambit of federal securities laws. King and Gilmond are currently being pursued by the court-appointed receiver, Kenneth Bell, for over $1.5 million in "false profits" they received from the scheme based on an original investment of $4,597 - thus giving them plenty of incentive to seek the requested relief.

The crux of Sorkin's motion focuses on the contention that the 'investment products' at issue - the various methods by which a Zeek participant could build up 'profit points' that included either selling penny auction bid packages or purchasing "VIP bids" and giving them away - did not fit under the definition of a security as defined under §2(a)(1) of the Securities Act of 1933. Instead, the filing continually makes the case that the Retail Profit Pool and the Matrix, central parts of Zeek, were actually

"contractual rights entitling independent contractors to a share of a company’s profits in return for their efforts in promoting the company."

The definition of a security was established in the seminal case SEC v. Howey, 328 U.S. 293 (1946), and was set forth in a four-part test:

  1. investment of money due to

  2. an expectation of profits arising from

  3. a common enterprise

  4. which depends solely on the efforts of a promoter or third party

Id. at 298. In disputing that the investment contracts did not satisfy this four-part test, the motion strenuously argues that, rather than simply expect profits from the actions of others, Zeek participants took numerous "time-consuming" actions to "earn" those profits, such as enrolling in a monthly subscription plan, recruiting customers, selling penny auction bid packages, and purchasing VIP bids that were to be given away. Indeed, according to Gilmond's affidavit, she spent "twelve to fourteen hours each day working for ZeekRewards." The motion also argues that the profit points earned by affiliates were not shares of stock, as alleged by the SEC.

Importantly, the motion makes no attempt to address the contention that Zeek ran a Ponzi scheme or explain the discrepancy between the amount of profits actually generated by the scheme and the amount represented to participants that was used to determine their "share" of daily profits. As alleged in paragraph 5 of the SEC complaint,

Approximately 98% ofZeekRewards' total revenues, and correspondingly the purported share of "net profits" paid to current investors, are comprised of funds received from new investors

Instead, the motion seeks to spotlight the "work" involved in recruiting new investors that entitled each participant to a share of the daily profits. Simply, while playing up the roles of the scheme participants, the motion does nothing to dispute the central fact - that the advertised payouts and funds used to make those payouts were made possible through the use of investor funds, rather than legitimate profits.

Courts analyzing whether a scheme fits the parameters of a Ponzi scheme have observed that "the definition of a Ponzi scheme is broad and flexible." In re Bayou Group, LLC, 362 B.R 624, 633 (Bankr. S.D.N.Y. 2007). Under this definition, this involves "any sort of inherently fraudulent arrangement under which the debtor-transferor must utilize after-acquired investment funds to pay off previous investors in order to forestall disclosure of the fraud." Id. Thus, rather than a one-size-fits-all approach, courts have held that "there is no precise definition of a Ponzi scheme, and courts look for a general pattern, rather than specific requirements." In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 12 (S.D.N.Y. 2007).

While the motion faces a difficult probability of success, it will not go unnoticed, as it clearly challenges the authority of the SEC and the legitimacy of the receivership. While the motion takes issue with the characterization that no work was performed, it remains, unless proven otherwise, that Zeek was a massive fraud that promised unrealistic returns payable only by using funds from new investors to pay existing investors - the hallmark of a Ponzi scheme. Proceeding under this assumption, and given the large amount of 'false profits' the Recever is seeking from Gilmond and King, the two likely recruited hundreds, if not thousands, of participants into the scheme. Indeed, according to the receiver, Gilmond and King realized a profit of $1.5 million on an investment of less than $5,000 - a return of 30,000%. According to an unnamed source familiar with King and Gilmond, the two were often present at official Zeek "Red Carpet" events to accept their hefty distribution checks. Meanwhile, according to the receiver, possibly over 1 million participants lost some or all of their investment.

The Receiver and the SEC are expected to file their position shortly with the court.

A copy of the Motion is here.

Wednesday
Dec122012

Convicted $195 Million Ponzi Schemer Offers $19 Million Check For 364-Day Sentence

A Minnesota man trying to avoid a likely-lengthy prison sentence for his role in a $195 million Ponzi scheme took the rather unorthodox approach of offering to deliver a $19 million check to the scheme's victims, but with a large catch - that he receive a one-year prison sentence.  Jason "Bo" Beckman, 42, filed a 68-page sentencing memorandum earlier this week containing the typical pleas for leniency: his wife was sick at home, his role in the scheme was insignificant, and he was a generous giver to charities. But Beckman did not stop there.  Additionally, in exchange for a 364-day sentence followed by a multi-year probation term and community service, Beckman would "arrange for the immediate delivery of a check for $19 million for payment to victims."  

Beckman is the latest to be sentenced for playing a role in the $194 million Ponzi scheme masterminded by Trevor Cook.  The scheme, ranking as the second-largest financial fraud in Minnesota state history, duped investors with the promise of extravagant returns through purported trading in commodities and futures.  Investors were told that Cook was able to achieve such above-average returns because one of his partner companies, Crown Forex, could take out interest-free loans by virtue of its Jordanian operators' adherence to Islamic sharia law that forbade charging interest.  Two of Cook's co-conspirators used their influence as Christian radio talkshow hosts to pitch the investment, while Beckman used his position as a money manager to recruit investors.

Unsurprisingly, the "investment" was too good to be true, and was instead a massive Ponzi scheme.  In total, over $200 million was raised from investors.  However, only half of that amount was actually used for currency trading, and rather than achieving exorbitant gains, resulted in massive trading losses of nearly $70 million.  The remainder was used for the payment of fictitious returns to investors, as well as to maintain extravagant lifestyles.  Cook was sentenced to twenty-five years in prison in August 2010.  

Unsurprisingly, prosecutors scoffed at the offer.  Instead, they took issue with Beckman's "breathtaking" conduct, alleging that 

"Mr. Beckman is the worst and most culpable of all of the criminals who participated in the currency program Ponzi scheme, including Trevor Cook.

Calling him a "very dangerous individual who is certain to hurt people if he is ever released," prosecutors argued that Beckam deserved a life sentence.  

Besides the obvious ethical problems with trying to buy sentencing leniency by offering money to his defrauded victims, the offer also raises questions as to the source and legitimacy of Beckman's apparently newfound riches.  While the nature of the offer suggested the money was in Beckman's possession, Beckman and his wife had earlier been forced to borrow several thousand dollars from the court-appointed receiver for living expenses after the court imposed an asset freeze.  Additionally, both the court-appointed receiver and federal authorities are likely to raise questions about the source of the money, as the receiver is tasked with locating and recovering assets traceable to the scheme and would likely take issue with Beckman's use of scheme proceeds to secure a favorable sentence.  

Ironically, this is not the first time that money has played a factor in the sentencing of a convicted Ponzi schemer.  Former boy band mogul Lou Pearlman, one-time manager of groups 'N Sync and Backstreet Boys but later found guilty of a $300 million Ponzi scheme, found himself on the opposite end of such a proposal in May 2008 at his sentencing before United States District Judge G. Kendall Sharp.  There, Judge Sharp handed down a 300-month sentence, but with the caveat that she would reduce the sentence by 1 month for each $1 million that Pearlman could pay back to investors.  With investor losses pegged at $300 million, Pearlman could have theoretically avoided jail time entirely had he come up with $300 million. Ultimately, Pearlman did not cooperate, and the Federal Bureau of Prisons currently estimates his release date as March 24, 2029.  

Beckman is scheduled to be sentenced on January 3, 2012.