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Recent SEC Releases
Monday
Aug122013

Instead of Prison, Ponzi Schemer Must Work to Repay Victims

A Canadian judge declined to hand down a prison sentence to a man convicted of masterminding a $2 million Ponzi scheme, instead ordering the man to a conditional house arrest that will allow him to work to pay off his defrauded victims.  Jack Michael Shapira, 48, received the sentence from Judge Robert Heinrich, who decided that the best way to punish Heinrich was to let him work in order to pay back nearly $300,000 in losses as a result of his fraud.  Shapira faced up to a two-year sentence after previously pleading guilty to 10 counts of fraud over $5,000.  

Shapira operated Keywest Leasing ("KL"), telling prospective investors that their funds would be used to fund leases of used medical equipment that would subsequently be re-leased to medical organizations and government organizations.  Shapira promised annual returns ranging from 20% - 30%, and clients were told their cash would be used to fund leases of used medical equipment that would then be leased again to medical organizations and government agencies. Shapira promised annual returns in the range of 20%-35%, and eventually collected more than $2 million from investors.

However, several of the companies named on the leases were found to have no connection to Shapira, and it was later revealed that nearly 80% of investor funds were used to fund payouts to existing investors in classic Ponzi scheme fashion.  Shapira also misappropriated investor funds for his own personal use, including to pay off personal debts that included grappling with a major gambling problem.   Investors suffered collective losses of nearly $300,000.  

Under the sentence imposed by Judge Heinrichs, Shapira will be on a conditional house arrest that includes an absolute curfew.  He must work to meet gradually-increasing restitution payments, and will also be subject to a three-year term of supervised probation.  

Sunday
Aug112013

Despite $1 Million In Losses, Michigan Town Agrees To Return Ponzi Scheme Transfers

In a case demonstrating the interplay between federal bankruptcy law and Ponzi scheme litigation, a Michigan town has agreed to repay funds it received from a $12.9 million Ponzi scheme - even though the town suffered nearly $1 million in losses. After previously making a $500,000 good-faith payment, the Comstock Township announced it will repay $190,000 to a court-appointed bankruptcy trustee, bringing the total settlement to nearly $700,000.  The settlement will end litigation by the court-appointed trustee, and will also entitle the Township to participate in later distributions to victims.

The Township invested a total of $1.75 million with Dante DeMiro, who owned and operated an investment firm named MuniVest. From August 2007 to September 2010, DeMiro promised potential clients that he would invest their funds in low-risk certificates of deposit ("CDs") that carried little risk.  This was especially important to DeMiro's clients, which were largely composed of state and local entities such as municipalities, credit unions, labor unions, and even a school district.  DeMiro had forged connections with various officials while previously employed as a registered representative with various Michigan investment firms.  In total, DeMiro raised more than $12 million from various public institutions.  DeMiro was later criminally charged, and received a 10-year prison sentence after pleading guilty to bank and wire fraud charges.

The Comstock Township was one of DeMiro's victims, handing over $1.75 million in April 2009 that it believed would fund the purchase of seven CDs.  DeMiro provided the Township with regular updates and reports summarizing their investments, and on several occasions sent checks to the Township as a result of the maturation of some of these CDs.  According to the bankruptcy trustee, the total amount returned to the Township as purported principal and interest exceeded $1 million.  

Bankruptcy law v. Non-bankruptcy law in Ponzi Schemes

Under federal bankruptcy law, a trustee can pursue the recovery of "preferential" transfers that were made within a certain time period before the bankruptcy petition date.  The reasoning behind this comes from typical bankruptcy cases, where payments made during a "preference" serve to benefit one creditor at the expense of other creditors. These powers are stronger than those in a non-bankruptcy Ponzi proceeding, where federal law typically only allows the recovery of profits received by victims (as always, subject to exceptions).  Thus, while non-bankruptcy law distinguished between the receipt of profits and principal, bankruptcy law simply looks to whether the transfers were made within a certain time window.  Under bankruptcy law, this window is two years, as prescribed by 11 U.S.C. 548, while longer windows are also possible if provided under a corresponding state statute.  

As described in the criminal complaint, the Township began investing with DeMiro in April 2009 and later received transfers exceeding $1 million purportedly representing matured CDs.  Because DeMiro and MuniVest declared bankruptcy in October 2010, the "look-back" period for fraudulent transfers would have extended to October 2008 - well before the Township began investing with DeMiro.  Thus, under bankruptcy law, the amount of the Township's total investment was irrelevant, as allowing the retention of more than $1 million in transfers would unfairly benefit the Township to the detriment of other investors not as fortunate.  Indeed, by returning the transfers, the Township will be entitled to participate in distributions once the bankruptcy trustee decides to begin returning the marshaled assets.  

Going forward, the Township has already implemented measures to ensure that a similar situation cannot occur.  This has included size limits on the amount of any outside investment of Township funds, as the town's MuniVest investment of $1.75 million nearly matched the entire general fund budget of $2.3 million. Now, the town current investments are all liquid, and not one exceeds $250,000.     

A copy of DeMiro's criminal complaint is here.

Thursday
Aug082013

Three-Time Ponzi Schemer Gets 10-Year Prison Sentence

A Utah man holding the dubious distinction of having been convicted of three separate Ponzi schemes over a fifteen-year span will spend the next ten years in federal prison.  Wayne Ogden, 49, received his sentence from United States District Judge Clark Waddoups after a federal jury convicted him of running a $4.8 million Ponzi scheme.  While facing trial on those charges, Ogden was subsequently indicted in 2011 for a $3.5 million Ponzi scheme, to which he is expected to plead guilty and receive a 10-year sentence to be served concurrently.  Ogden has also been ordered to pay more than $8 million to investors.  

Ogden was originally indicted in December 2007 for running a real estate Ponzi scheme in Kiowa, Colorado, where investors were promised returns as high as 100% from the development of a 360-acre parcel of land.  While awaiting trial on those charges, Ogden was charged with concocting a separate Ponzi scheme that solicited underwater homeowners to provide assistance with refinancing and restructuring mortgages.  Ogden's company, Paradigm Acceptance LLC ("Paradigm"), promised short-term returns ranging from 20% to 100%, assuring investors their money was secured by property.  In total, Paradigm raised more than $29 million from investors.

However, each venture was nothing more than an elaborate Ponzi scheme where new investor funds were used to pay older investors in classic Ponzi fashion.  Of the $29 million Ogden raised from Paradigm investors, nearly $23 million was paid back to older investors, and nearly $2 million was paid in salaries to Ogden and his brother.  

At the time Ogden began soliciting investors for his first scheme, he was on parole after he was jailed for a $7 million Ponzi scheme he operated from 1995 to 1997.  Despite being sentence to two consecutive 15-year terms, Ogden was paroled after serving just 28 months.  

Ogden must report to the U.S. Bureau of Prison by September 10, 2013 to begin serving his sentence.

Thursday
Aug082013

SEC Charges Utah Man With Operating $4 Million Ponzi Scheme

A Utah man was hit with civil fraud charges by the Securities and Exchange Commission, who alleged that he had duped investors out of more than $4 million in an elaborate Ponzi scheme.  Steven B. Heinz, of Provo, Utah, was charged with multiple violations of federal securities laws in a complaint filed today in Utah federal court.  The Commission is seeking disgorgement of all ill-gotten gains, as well as injunctive relief and civil monetary penalties.

Heinz worked as a registered representative at several registered broker-dealers from 1986 to 2012, including Northwestern Mutual and Ogilvie Security Advisors Corp.  Beginning in January 2012, Heinz began soliciting current and former brokerage clients to provide "loans" to his company, S.B. Heinz & Associates, Inc ("S.B. Heinz"), telling prospective investors that he had been so successful investing his personal funds that he had decided to assist a select group of others.  These investors, including church associates, family members, and friends, were told they could earn "tax-free" income by providing "loans" to S.B. Heinz, and that they could expect annual returns ranging from 6% to 120%.  To convince investors that their funds would be safe, Heinz represented that he maintained ample cash reserves in the account to repay all investments at any time.

However, Heinz was not the fabled trader he represented himself as to investors.  Rather, since January 2012, Heinz has incurred more than $1.5 million in day-trading losses sustained from trading high-risk futures contracts.  Heinz misappropriated investor funds for a variety of purposes, including to make Ponzi-like payments of interest and principal redemptions to existing investors.  Additionally, Heinz spent more than $1 million on personal expenses including trips to Mexico, cash withdrawals, and funding his adult children's online business opportunities.  By June 2013, only $311,000 was left in Heinz's trading accounts.

The complaint noted that Heinz was believed to have made monthly sizeable cash payments to his wife, who was named as a relief defendant.

A copy of the complaint is here.

Tuesday
Aug062013

$4 Million Ponzi Scheme Purportedly Run By Reincarnation of Hindu Goddess Is Busted

"He had claimed that goddess Vahnavati Sikotar Mata was pleased with him and that she wanted to make members of the Chhara community millionaires. Accordingly, whosoever offered money as prashad to the goddess, would get triple of the amount in three days."

Indian authorities recently froze the assets of an Indian man who told investors he was the reincarnation of a Hindu goddess and could use these powers to triple their money in just three days.  Ashok Jerambhai Jadeja, currently in a county jail in India, is accused of raising more than $4 million from investors in a scheme called "Ek-ka-teen" that spanned several years.  After investors attacked Jadeja when the scheme collapsed, police became involved and Indian authorities later accused Jadeja of money laundering case.  Assets totaling nearly $500,000 were recently frozen by the special money laundering court in Delhi.

According to authorities, Jadeja touted his "Ek-ka-teen" scheme to numerous investors, touting himself as the incarnation of Hindu goddess Vahnavati Skiotar Mata and depicting himself as Jaymadi-Ashok madi.  Jadeja preyed on members of the Chhara community, telling investors that the Hindu goddess was pleased with him and wanted to make members of the Chhara community millionaires. With promises of having their funds tripled within three days, Chhara community members handed over more than $4 million to Jerambhai.  

However, as the number of investors increased, Jadeja was forced to increase the investment term from 3 days to 7 days, and eventually to 25 days.  Instead of possessing divine powers, authorities allege Jadeja's ability to triple investor funds was the result of a massive Ponzi scheme.  Jadeja is accused of using investor funds to purchase a variety of luxury items, including gold and silver ornaments and real estate.  Investor funds were also deposited in bank accounts in the name of Jadeja and his family members.