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Recent SEC Releases
Thursday
Apr182013

Judge Denies Former Senator's Claim in Rothstein Ponzi Scheme

A Florida bankruptcy judge has ruled that a former New York senator did not have a valid claim to participate in the claims process for victims of Scott Rothstein's $1.4 billion Ponzi scheme.  Alfonse M. D'Amato, a New York senator from 1981 to 1999, had invested $1 million with a fund that invested heavily with Rothstein.  United States Bankruptcy Judge Raymond Ray agreed with the court-appointed trustee, Herbert Stettin, that D'Amato's claim was "duplicative" and that he lacked standing to participate in the claims process established for investors that invested directly with Rothstein.

D'Amato originally invested $1 million with the Banyan Income Fund ("Banyan Fund"), which had invested over $775 million with Rothstein as its largest investor.  Banyan solicited investors for Rothstein's "employee settlement financing", touting the investment as a lucrative "niche market" that "lacks visibility due to confidentiality issues."  The Banyan Fund later was pushed into bankruptcy, and the co-founders, George Levin and Frank Preve, were later charged by the Securities and Exchange Commission for multiple violations of federal securities laws relating to their solicitation of investors for Rothstein's fraud.  Levin also previously agreed to surrender the bulk of his estimated $100 to $200 million in assets to the Rothstein bankruptcy estate.  

Stettin objected to D'Amato's claim, arguing that D'Amato did not make any 'investments' with Rothstein, but rather with Banyan Fund.  This logic flows from recent court decisions involving investors in feeder funds of Bernard Madoff's massive Ponzi scheme, where those 'indirect' investors were not permitted to recover from the bankruptcy estate because they were not customers of Madoff.  A recent Second Circuit Court of Appeals case cited several factors in support of this logic, including that the indirect investors:

  • Had no direct relationship or accounts with the firm;
  • Were not identified in the firm's books and record;
  • Had no property interest in the assets invested by the feeder fund; and
  • Lacked control over the feeder fund's investments.

Thus, because D'Amato had already filed a claim in the Banyan Fund bankruptcy, Stettin argued that the claim in the Rothstein bankruptcy was duplicative and, ultimately, unwarranted.  D'Amato never filed a response to Stettin's objection. 

Stettin has recently proposed a distribution plan that he believes could fully compensate investors for their losses.

A copy of Stettin's objection is here.

A copy of the Order sustaining the objection is here.

Tuesday
Apr162013

Oregon Hedge Fund Manager Pleads Guilty to $37 Million Ponzi Scheme

An Oregon hedge-fund manager has agreed to plead guilty to charges he raised as much as $50 million from investors in a massive Ponzi scheme.  Yusaf Jawed, of Portland, Oregon, pled guilty to seventeen counts of mail fraud and wire fraud in an agreement with prosecutors that will result in a recommended sentence of 6.5 years in prison.  While Jawed at one point claimed he managed more than $60 million, the deal calls for Jawed to repay just over $6 million to 10 investors taken from February 2008 and September 2009.  

Jawed operated Grifphon Asset Management, LLC ("GAM") and Grifphon Holdings, LLC ("GH"), which served as the advisers to numerous hedge funds created and managed by Jawed, including Gripfhon Alpha Fund, L.P. ("Alpha") and Grifphon Iota Fund, L.P.  Investors were told through private placement memoranda that the funds experienced annual returns ranging from 12.8% to 132.5% from 2002-2008 through an investment strategy comprised of holdings in publicly-traded securities, private equities, biotech companies, foreign currencies, and commodities.  Investors were supplied with account statements and tax returns that purported to show constant profits in investor accounts, and were assured that their funds would be held at prominent institutions such as Lehman Brothers and UBS.  In total, Jawed raised at least $37 million from over 100 investors all over the United States.

However, little, if any, of the claims made to investors were true.  According to authorities, Jawed misappropriated millions of dollars in investor funds for his personal use, which included luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.  Additionally, Jawed used investor funds as the source of fictitious interest payments designed to lend an aura of legitimacy to the scheme. 

When the scheme appeared on the verge of collapse in 2008, Jawed hatched a scheme with the help of Robert Custis, an attorney.  The two began telling investors that a third party would soon purchase the funds' assets, and investors would soon be reimbursed for their investment at a healthy profit.  This pattern of deception lasted an additional two years with the use of various excuses such as the time zone difference of the banks, "dotting I's and crossing T's," and confidentiality problems.  However, this third-party purchaser was none other than an entity created and controlled by Jawed.  For his role in the scheme, Custis was also charged by the SEC.

As part of his plea agreement, Jawed is also expected to cooperate with a lawsuit brought by investors against Grifphon's former accounting and law firms.  A positive outcome in the lawsuit could be investors' best chance of any recovery, as a federal court previously found that Jawed was penniless, throwing into question whether the restitution obligation is anything more than symbolic.  

A copy of the SEC's complaint is here.
Tuesday
Apr162013

Former College Football Coach Indicted in $80 Million Ponzi Scheme

Federal authorities unveiled criminal charges against the former University of Georgia football coach, alleging he scammed dozens of investors, including fellow coaches and former players, out of more than $80 million.  Jim Donnan, of Athens, Georgia, was charged in an eighty-five count indictment that also named his former business partner, Gregory L. Crabtree.  The criminal charges come less than a year after the U.S. Securities and Exchange Commission ("SEC") filed civil charges against the men.  Both men were released on $25,000 bond, and ordered to restrict their travel plans and surrender their passports.

Donnan and Crabtree operated GLC Limited ("GLC"), also known as Global Liquidation Center, which was formed in 2004 and purported to be in the wholesale liquidation business.  Beginning in 2007, the men solicited potential investors, promising short-term returns ranging from 50% to 200% from the purchase and resale of discontinued or damaged merchandise acquired from major retailers at a discount, which ranged from out-of-season toys, patio furniture, or holiday decorations.  Donnan was in charge of attracting investors, using his contacts from his previous tenure as head football coach of the University of Georgia to recruit fellow coaches and former players.  In total, nearly 100 investors contributed over $80 million to the scheme.   

However, out of the $80 million raised from investors, slightly more than 10% was used to purchase merchandise for resale, and the company booked less than $6 million in total sales.  The remainder, or nearly $64 million, was used to make payments of purported interest and principal redemptions to investors.  Crabtree and Donnan also misappropriated millions of dollars of investor funds, with Crabtree profiting by approximately $1.6 million and Donnan taking home more than $13 million on an initial $4.7 million investment.  Donnan's family is also said to have profited by over $1 million from the scheme.  When GLC began falling behind on interest payments, a group of investors obtained the appointment of a Restructuring Officer, who discovered the fraud and, in February 2011, caused GLC to file a voluntary bankruptcy petition.  Donnan and his wife also filed for personal bankruptcy following increasing claims from GLC victims.

According to Donnan's attorney, the failed business venture wiped Donnan out financially, but maintained that "there is no criminal intention here."  

Donnan enjoyed a storied career in college football, leading Marshall to a national championship and later being inducted to the College Football Hall of Fame.  

Monday
Apr152013

Indian Regulators Warn Public of Goat-Raising Ponzi Scheme

Indian regulators have issued an alert to residents warning of a Ponzi scheme that promises lucrative returns in echange for investing in a goat-rearing venture.  Citizens of the Jammu and Kashmir province, the northermost state in India, were advised to steer clear of the Sheep Husbandry Department, which is advertising 2% monthly returns from an investment in goat-rearing farms. Ironically, the scheme comes just months after investors were warned of a similar scam also seeking investors for goat-rearing farms.

According to the Securities and Exchange Board of India ("SEBI"), Sheep Husbandry Department ("SHD") has solicited investments from the public basd on claims that its goat-rearing farms could double investors' money in 3-4 years by offering 2% monthly returns.   SEBI has opened an investigation, with details about the number of affected investors or estimated losses unavailable.

SEBI warned investors about a similar scheme in November 2012, opening an investigation into the Beetal Livestock & Farm (P) Ltd ("Beetal").  Beetal took out advertisements in local newspapers to solicit potential investors, who were told that they also could double their money in several years by offering consistent monthly returns.  For example, with an initial investment of several thousand rupees, an investor would purchase a goat.  Investors were told that an average goat had four kids per year, which offered the possibility of exponential returns through subsequent births by those offspring in later years.  The masterminds of Beetal did not cooperate with investigators, and are suspected to be on the lam.  

Surprisingly, such schemes are not uncommon in India, where unconventional investments such as livestock or farm animals have been the subject of similar schemes.  For example, a Ponzi scheme centered around raising emus recently collapsed, with thousands of investors facing up to $50 million in losses.  There, a company known as Susi Emu Farms ("Susi") promised investors a steady stream of income in return for raising an Emu chick.  After two years, investors were given the chance to "exchange" their two-year old Emu for another Emu chick.  A VIP program soon followed, in which investors could receive a similar return while Susi took on the obligation of raising the emu.  Word quickly spread of the dependability of the promised returns, and an advertising campaign headlined by popular Indian film stars quickly made Susi a household name.  The operation soon spread throughout India, gaining thousands of investors. When the scheme collapsed, total losses were estimated to be as high as $50 million.

Wednesday
Apr102013

Court Tosses Madoff Investors' Lawsuit Against SEC

Despite the 'regrettable inaction' by the Securities and Exchange Commission ("SEC") in failing to detect Bernard Madoff's historic $65 billion Ponzi scheme, a federal appeals court ruled that those victimized by Madoff's fraud could not hold the SEC accountable for negligence.  Citing a law that protects federal agencies in the exercise of their discretionary powers, a three-judge appellate panel of the Second Circuit Court of Appeals upheld a lower court's dismissal of the lawsuit.  

Investors brought the lawsuit after a highly critical report by the SEC's inspector general that highlighted a myriad of missed opportunities to detect Madoff's fraud at an earlier stage that could have prevented billions of dollars in losses.  This included several reports by Harry Markopolos, an independent financial fraud investigator who raised questions regarding the legitimacy of Madoff's operation.  These claims went largely unheeded, aided by an inter-office communication system that effectively impeded the flow of information between various SEC branch offices. This disconnect between branch offices was highlighted in the Second Circuit's opinion, which noted:

“As a result of the S.E.C.’s repeated failure to alert other branch offices of ongoing investigations, properly review complaints and staff subsequent inquiries, and follow up on disputed facts elicited in interviews, the S.E.C. missed many opportunities to uncover Madoff’s multibillion-dollar fraud.”

Following the report by the inspector general, the SEC took extensive steps not only to discipline those responsible for failing to detect Madoff, but also orchestrated a massive overhaul of the way the agency deals with the receipt of tips and complaints.  After the internal watchdog's report was filed, the SEC hired an outside Washington law firm to recommend disciplinary action against any employees associated with Madoff's fraud.  By law, the SEC is prohibited from disciplining former employees, and the decision to terminate any employee must come directly from the agency's human resource director.  The law firm's investigation ultimately recommended the termination of one employee unless that would have an adverse effect on the agency's work.  That employee was ultimately suspended for thirty days without pay, demoted, and had their pay decreased.  Seven other employees were also disciplined, with punishments ranging from a seven-day suspension to pay reductions.

The SEC also focused on encouraging the flow of information between its regional offices, enacting reforms that dealt mainly with the inflow of tips and complaints from the public.  Under the previous system, access to tips and complaints was limited to the specific branch office where originally received.  Thus, a complaint received at the Boston office was essentially inaccessible to any other regional office for review or dissemination to other employees.  In March 2011, the SEC implemented a Tips, Complaints and Referrals database which, known to insiders as TCR, established a database for inter-agency use.  An important addition was the new partnership with the Federal Bureau of Investigation, which allowed the agencies to cooperate on investigations.  As a result of TCR, all SEC employees are now able to view and add information once a tip or complaint is received by their office.

Earlier this year, another federal appeals court reached a similar result in dismissing a separate lawsuit filed by Madoff investors against the SEC, again finding that the suit fell within the Commission's discretionary powers and thus was shielded under an exception to the Federal Tort Claims Act.  

One of the attorneys representing the victims, Howard Kleinhendler, has vowed to appeal the issue to the United States Supreme Court.

A copy of the Report of Investigation conducted by the Office of Inspector General is here.