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Recent SEC Releases
Wednesday
Aug282013

TD Bank Sued In New South Florida Ponzi Scheme

A south Florida attorney who disappeared before being arrested on federal bank fraud charges has been accused of perpetrating a million-dollar Ponzi scheme in a recently-filed lawsuit that also includes TD Bank, N.A. as a defendant.  Timothy McCabe, 55, disappeared in early April after being accused of unethical behavior by the Florida Bar, and authorities later discovered that several million dollars was missing from his law firm's trust account.  While McCabe sent cryptic messages alluding to committing suicide, he later returned to face criminal charges.  Now, a recently-filed lawsuit accuses McCabe of misappropriating funds to support a $1.2 million Ponzi scheme.  Also named in the lawsuit is TD Bank, which has already paid out hundreds of millions of dollars since being implicated in another south Florida Ponzi scheme - the infamous $1.4 billion Ponzi scheme perpetrated by disgraced Florida attorney Scott Rothstein. 

McCabe was a partner at Lake Worth law firm McCabe and Samiljan LLC ("M&S"), which advertised itself as a real estate and foreclosure defense law firm.  M&S also served as a title agent for Old Republic Title Insurance Company ("Old Republic"), assisting in the issuance of title insurance policies and serving as a closing agent in real estate transactions.  McCabe was also a managing member of City Title, LLC ("City Title").  

The lawsuit alleges McCabe used his position as principal of City Title and as a signatory on the M&S Escrow Trust account to commingle incoming funds, which often included the deposit of checks in the M&S Trust Account held at TD Bank that were directed to City Title.  McCabe is also alleged to have diverted hundreds of thousands of dollars intended for the satisfaction of client mortgages for unauthorized purposes, including the sustenance of an "investment club" McCabe operated that is alleged to have been nothing more than a Ponzi scheme.  

The complaint asserts Racketeer Influenced and Corrupt Organization ("RICO") charges against McCabe and numerous other defendants, including McCabe's law partner, Old Republic, and M&S.  The Complaint also accuses TD Bank of failing to exercise proper supervision over the M&S Trust Account by allowing McCabe to improperly deposit checks into the account that were made payable to other parties.  TD Bank has been embroiled in numerous lawsuits relating to its role in Scott Rothstein's $1.4 billion Ponzi scheme, which has resulted in hundreds of millions of dollars in settlements and one jury verdict.  

A copy of the lawsuit is here.

Wednesday
Aug282013

Guilty Plea in $300 Million New Zealand Ponzi Scheme

A New Zealand man called New Zealand's "Madoff" has pleaded guilty to masterminding a massive Ponzi scheme that took in nearly $300 million from investors and is believed to be the country's largest Ponzi scheme.  David Ross, 63, appeared in court today to plead guilty to five charges of false accounting and theft.  Ross, who was previously hospitalized in November for treatment under New Zealand's Mental Health Act, had been free on bail with a court-imposed allowance of $1,000 per week.  

Ross was the director of Ross Asset Management ("RAM"), which he used along with numerous associated entities to solicit investors with the promise of guaranteed and lucrative returns - including annual returns of up to nearly 40%.  Investors received regular returns, and Ross was generally perceived as an astute investor.  However, in late 2012, many investors began complaining about delays in scheduled payments, and in November 2012, authorities from New Zealand's Financial Markets Authority raided RAM's offices.

After a Receiver was appointed to sort out RAM's finances, a preliminary investigation showed that while RAM reported investments of nearly $450 million to nearly 1,000 investors, only $10 million remained in RAM's accounts.  The Receiver, John Fisk, estimated that RAM took in over $300 million since 2000, keeping nearly $30 million kept as management fees while $290 million was withdrawn or paid to investors.  Fisk also found that the fund was insolvent since 2007 - that is, fund outflows exceeded new investor inflows, sometimes by $60 million.  When authorities raised RAM's offices in November, the scheme was on the verge of collapse.

Ross will remain jailed until his sentencing in October. Each false accounting charges carries a maximum sentence of ten years, while the fraud charge carries a maximum seven-year term.

Tuesday
Aug272013

Madoff Trustee Reaches $98 Million Settlement With Feeder Fund

The trustee tasked with recovering funds for victims of Bernard Madoff's $65 billion Ponzi scheme announced he had reached a settlement with a Connecticut hedge fund that acted as a "feeder fund" in shoveling millions of dollars into Madoff's scheme.  Irving Picard, the court-appointed trustee, recently sought court approval for a settlement with Maxam Absolute Return Fund ("Maxam") that called for the return of nearly $98 million in funds that had been withdrawn from Madoff's scheme just before its collapse.  In return, an allowed claim of over $276 million will be recognized on behalf of Maxam, which will be permitted to share in future distributions to investors.  The settlement brings the total amount of funds recovered by Picard to nearly $9.5 billion - with total allowed claims to date of just over $11 billion.

Picard sued Maxam in December 2010, as well as its founder, Sandra Manzke, and several of her family members.  In the lawsuit, Picard alleged that Maxam and its principals disregarded well-known red flags surrounding Madoff's brokerage to take advantage of the steady and constant returns offered.  Indeed, despite the detailed procedure set forth in Maxam's due diligence questionnaires, S. Manzke later testified that no due diligence was performed - rather, the investment was simply a continuation of an earlier investment made while she served as CEO of Tremont Capital Managment ("Tremont").  Maxam invested nearly $300 million into Madoff's scheme, and in the two years preceding Madoff's fraud, withdrew a total of over $97 million.

Under the terms of the settlement with Picard, Maxam will return the nearly $98 million it withdrew in the two years preceding the bankruptcy filing by Madoff's brokerage firm.  In return, Picard will drop all litigation against Maxam and the individual parties, and will recognize an allowed claim on behalf of Maxam in the amount of $276,687,000.00 (the "Allowed Claim").  Based on the amount of funds recovered by Picard since his appointment, it is likely that Maxam will recover a significant portion of that amount. 

Under federal bankruptcy laws, a bankruptcy trustee may recover transfers received by a defendant within two years of the bankruptcy petition date under 11 U.S.C. § 548(a)(1)(A).  Once actual fraud is established (which is satisfied by the finding that the perpetrator operated a Ponzi scheme), a defendant must then demonstrate that he/she both received the transfers in good faith and provided value.  See 11 U.S.C. § 548(c).  Here, while it is typically understood that an investor gives "value" when receiving redemptions of their principal investment (that is, the amount of their withdrawals has not yet eclipsed the total principal amount of their investment), the dispute likely centered on whether Maxam had taken the withdrawals in good faith. Indeed, Picard's complaint is rife with allegations that Maxam disregarded, ignored, and flouted their purported due diligence procedures in an attempt to show that obvious red flags were ignored in the pursuit of above-average profits from Madoff's scheme.  Relevant caselaw has required that a transferee must demonstrate the undertaking of a diligent investigation, and a simple inquiry with the schemer is not sufficient.  Thus, the decision to settle likely took into account the evidence that Maxam had not properly conducted due diligence.

Coincidentally, S. Manzke formed Maxam in 2005 after leaving her previous position as CEO of Tremont Capital Management ("Tremont"), which later reached a $1 billion settlement with Picard over its Madoff exposure.

A copy of the Settlement Motion is here.

Monday
Aug262013

SEC: Indiana Man Funded Bounty Hunter TV Show With $6 Million Ponzi Scheme

The Securities and Exchange Commission filed civil fraud charges against an Indiana man, charging him with operating a $6 million Ponzi scheme that targeted retirement funds and was used to fund several failed startup businesses - including a bounty hunter reality show.  John K. Marcum, 49, of Noblesville, Indiana, was charged with multiple violations of federal securities laws after he was recorded telling several investors that his scheme was on the verge of collapse.  Marcum also told those investors that he was waiting for a "suicide clause" to take effect after a two-year waiting period in which he would kill himself in order to see that investors were repaid.  The SEC is seeking disgorgement of all ill-gotten gains, as well as injunctive relief and civil monetary penalties.

Marcum operated Guaranty Reserves Trust LLC ("Guaranty"), touting himself as an experienced trader and asset manager.  Beginning in 2010, Marcum began soliciting investors, promising annual returns of nearly 20% while guaranteeing the safety of the underlying principal.  Marcum specifically targeted investors with retirement funds, convincing them to roll-over their existing IRA accounts into newly-established self-directed IRA accounts in which Marcum was given access.  Investors were told that Marcum would invest only in popular widely-held stocks, and were provided with regular account statements showing the promised growth in their accounts.  Ultimately, Marcum raised more than $6 million from investors.

However, Marcum was not the savvy investor he held himself out to be.  Rather, his trading skills resulted in losses of nearly $1 million in investor funds.  Instead, Marcum used incoming investor funds to make interest payments and principal redemptions to existing investors - a classic hallmark of a Ponzi scheme.  Of the remainder of investor funds that were not lost in trading or paid out to existing investors, Marcum financed a lavish lifestyle that included airline tickets, luxury car payments, hotel stays, sports and event tickets, and tabs at a Hollywood nightclub.  Marcum also unsuccessfully attempted to finance several start-up businesses, including a bridal store, a bounty hunter reality television show, and even a soul food restaurant operated by the bounty hunters.  The SEC indicated that Marcumhad less than $2,000 of investor funds remaining.

As Marcum's scheme began to unravel in mid-2013, he began falling behind on payment obligations to investors.  During a June 2013 conference call with several investors, which was secretly recorded, Marcum apparently admitted to malfeasance with investor funds.  In an attempt to placate the investors, Marcum offered to name them as beneficiaries on an existing life insurance policy and, after the expiration of a two-year "suicide clause", offered to kill himself to make the investors whole.  

Sunday
Aug252013

Couple Files Bankruptcy To Avoid Ponzi "Clawback" Lawsuit

A New Mexico couple facing the possible "clawback" of nearly $1 million from the largest Ponzi scheme in New Mexico history has filed for bankruptcy in a bid to avoid dodge the lawsuit.  Mark and Maura Dahrling, of Albuquerque, New Mexico, were among hundreds of investors that lost approximately $75 million to now-convicted Ponzi schemer Doug Vaughn and his real estate company. After being sued in a "clawback" suit by a court-appointed bankruptcy trustee seeking hundreds of thousands of dollars in transfers from Vaughn, the Dahrlings filed a bankruptcy petition seeking to put an end to the "sinister clawback litigation" - listing the only substantial liability as their possible exposure to the clawback lawsuit.

Doug Vaughn operated Vaughn Company Realtors ("VCR"), which was once the largest independent residential brokerage firm in New Mexico. Started in 1983, Vaughn and VCR pitched 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, Vaughn ran an elaborate Ponzi scheme that used investor funds for a variety of unauthorized purposes, including the payment of Ponzi-style payments to investors, massive bonuses, and the payment of corporate expenses for VCR, which was hemorrhaging money having lost $54 million from 2004 to 2009 and nearly $14 million in 2009 alone.  The scheme began to collapse in late 2009, as payment obligations surpassed incoming fund inflows, and Vaughn soon began making preferential payments to investors and insiders.  Vaughn filed for personal and corporate bankruptcy protection in February 2010, indicating that nearly 600 investors were owed approximately $75 million. 

Soon after Vaughn declared bankruptcy, Judith Wagner was appointed as bankruptcy trustee and tasked with recovering funds for victims.  After identifying a number of investors that had been fortunate enough to receive returns of principal or profits from their investment with Vaughn and VCR, Wagner filed a wave of "clawback" lawsuits seeking not only the payment of profits from the scheme, but also the return of preferential payments made just before Vaughn filed for bankruptcy protection.  Wagner filed a total of 153 clawback lawsuits - flooding the U.S. Bankruptcy Court in Albuquerque and single-handedly representing approximately 70% of the total adversary lawsuits filed the previous year.  

The Dahrlings were among Wagner's clawback targets, facing lawsuits not only for their personal investment with Vaughn but also that of their business, Dahrling Enterprises.  Notably, Maura Dahrling had previously been an employee of VCR, pitting her as an insider of Vaughn and thus subject to higher scrutiny than a typical investor.  Under federal bankruptcy laws, even if the Dahrlings had not profited from the scheme, they still could be pursued for receiving preferential payments made by Vaughn just before the scheme collapsed. Federal bankruptcy laws identify different time period just preceding a bankruptcy petition in which transfers may be subject to clawback. Indeed, because a debtor is presumed to be insolvent 90 days before filing for bankruptcy, all payments made during that time period are subject to attack.  Earlier this year, a federal judge ruled in favor of Wagner in her suit against Dahrling Enterprises and entered a judgment in the amount of $338,056.  However, the litigation against the Dahrlings in their individual capacity remained ongoing, with Wagner seeking the return of over $600,000.  

After the judgment was entered against Dahrling Enterprises, Maura Dahrling indicated in a court filing opposing her upcoming deposition that she had decided to file bankruptcy to avoid continuing legal fees. In July, the Dahrlings filed a petition for chapter 7 liquidation, listing among their assets a $735,000 house and eight vehicles.  Under Chapter 7, assets that do not qualify for exemptions are sold and distributed to creditors - in this case, Wagner.  In a statement emailed to the Albuquerque Business Journal, Mark Dahrling indicated that

“We are good people and have done nothing wrong.  We have been forced into bankruptcy in order to stop this sinister clawback litigation against us and hopefully put an end to this unbelievable nightmare.”

While the filing of bankruptcy will halt any ongoing litigation against the Dahrlings, they must still satisfy the means test to qualify for Chapter 7 protection, which involves a series of eligibility requirements.  If they satisfy the means test, obtaining a subsequent discharge would forever bar Wagner from pursuing the clawback lawsuit.  

A copy of Vaughn's indictment is here.