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Recent SEC Releases

SEC Charges Stanford Executives With Securities Violations  

The Securities and Exchange Commission ("SEC") announced Friday it had instituted administrative proceedings against three former executives of Stanford Group Co. ("SGC"), which formed part of the massive $7 billion Ponzi scheme perpetrated by R. Allen Stanford.  Former SGC President Daniel Bogar, Chief Compliance Officer Bernerd E. Young, and Private Client Group President Jason T. Green (the "Respondents") were charged with multiple violations of federal securities laws, alleging that they failed to disclose key facts to Stanford investors despite their key roles in the preparation of offering documents and training material to pitch the investments.  The SEC is seeking a hearing to determine whether sanctions should be imposed, including disgorgement of ill-gotten gains, civil penalties, and a cease-and-desist order from committing future violations.

SGC operated as the exclusive conduit for Stanford International Bank ("SIB") to sell its certificates of deposit (CD's) to investors.  These CD's were pitched to clients as safe and secure, owing to their inclusion in a carefully-managed and  well-diversified portfolio of marketable and liquid securities.  Additionally, investors were assured that SIB maintained a comprehensive insurance program, excess FDIC coverage, and other insurance policies that provided depositor security.  However, in reality, SIB was operated as a massive Ponzi scheme by its creator, Allen Stanford, and fabricated  returns while using investor funds to make Ponzi payments to other investors and finance the operations of Stanford's other businesses.  The multiple layers of insurance were also nonexistent.  After being indicted in 2009 along with several other executives, Stanford was convicted by a federal jury in 2012 and sentenced to serve 110 years in prison.

Consistent with their duties at SGC, Bogar, Young and Green oversaw due diligence on SIB and traveled regularly to Antigua to review offering documents and meet with bank officials.  During these meetings, according to the SEC, they knew or should have known that the SIB offering documents made multiple false or misleading representations to investors. Despite these inaccuracies, Bogar and Young allegedly approved the documents and training materials for marketing to investors, each earning several million dollars over the course of their employment with SGC.  Green, who held multiple securities licenses and served as a financial adviser, sold millions of dollars in CDs to investors while making similar misrepresentations.  

Alleging that the Respondents' conduct both violated federal securities laws and aided and abetted SIB and SGC's violations of federal securities law, the SEC instituted administrative proceedings.  The decision to bring administrative proceedings, rather than formal civil proceedings, is an unusual move.  Administrative proceedings are generally more restrictive than civil proceedings, and frequently operate on an expedited schedule. For example, the SEC has ordered that the Respondents must answer the allegations within twenty days, and a hearing must take place on the allegations within sixty days.  Additionally, the administrative law judge overseeing the matter must issue an initial decision within three hundred days.  

The SEC has taken heat for filing administrative, rather than civil, proceedings in the past, most recently by former Goldman Sachs director Rajat Gupta.  Accused of insider trading, Gupta responded to the proceeding with his own lawsuit, accusing the SEC of using an administrative proceeding to deprive him of certain rights including the right to a trial by jury and to be treated as had similar defendants accused of insider trading.  After a New York federal judge allowed Gupta's suit against the SEC to proceed and publicly questioned the choice to bring an administrative proceeding rather than a federal lawsuit, the SEC later dropped its proceeding.  While Gupta hailed the decision as a victory, such optimism was short-lived.  Indeed, several months later, the SEC used its "full might" to charge Gupta with criminal charges of inside trading, where he was subsequently convicted and faces decades in prison when he is sentenced on October 17.  As a prominent New York lawyer later remarked, "If you have done wrong, do not play the matador and wave a red rag against the bull in the arena.”


ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier's Checks To Court

It has now been over one week since Ken Bell, the court-appointed receiver overseeing ZeekRewards ("Zeek"), held a press conference to brief various members of the media about this progress thus far and plans for the near future. In his remarks, Bell indicated that one of his main priorities going forward was to continue gathering assets for eventual distribution to victims. This included cashiers checks deposited, but not cashed, by Zeek investors just before the scheme's collapse. Following the press conference, Mr. Bell posted an update to his website that included a letter updating investors and additional answers to investor questions.

Since that meeting, a review of the court docket reveals that the recovery of assets continues to be the focus of Mr. Bell and his team. In the past ten days, various financial institutions have submitted sworn statements in response to the court's earlier asset freeze indicating how much, if any, Rex Venture Group ("RVG") maintained in bank accounts. RVG is the parent company of ZeekRewards. Those reports, from institutions such as Charles Schwab and NewBridge Bank, showed that tens of millions of dollars were currently being held in the name of RVG or Paul Burks, Zeek's founder. Additionally, Mr. Bell's lawyers have sparred with Burks in an attempt to gain control of his personal assets.

Shortly after the Securities and Exchange Commission ("SEC") filed suit against Zeek, United States District Judge Graham Mullen issued an order appointing Mr. Bell as receiver. That order listed the various assets over which Mr. Bell would have authority over, including assets held or fraudulently transferred by RVG. These orders are standard in receivership proceedings, and their wording rarely varies. However, Zeek was somewhat unique, in that it highly encouraged the use of cashier's checks to fund a new investor's account. Different from personal checks, a cashier's check operates like cash upon endorsement by the maker. According to the receiver, "numerous" cashier's checks and other forms of payment potentially totaling several million dollars were received either on or after the date the SEC shut down Zeek, Because of this, Mr. Bell sought the Court's approval (the "Motion") to clarify the language of the order appointing receiver to explicitly include those forms of payment as receivership assets.

The Motion also sought to freeze assets in possession of Burks and other third parties, including his family members. In support, Bell noted that while Burks was estimated to have secretly misappropriated roughly $11 million from Zeek, nearly $7 million of that sum was no longer in Burks' possession or control, including $1 million transferred to certain family members.

Not surprisingly, while Burks did not object to the inclusion of uncashed cashier's checks into the receivership estate, he strongly opposed any attempts to now "include Mr. Burks' personal accounts." Noting that the receiver's basis for this request centered on the SEC's allegations in its complaint - which Burks had neither admitted nor denied in his settlement with the SEC as is typical of SEC judgments - Burks' attorney argued that no other evidence existed in support. Additionally, Burks noted that, in addition to the $4 million penalty paid to settle the SEC's allegations, the IRS received more than $5 million in income tax assessments for 2011 and 2012. Arguing that Mr. Bell was overreaching, Burks' lawyers touted his roots in Lexington, marital status, recent successful bouts with cancer, and lack of prior legal troubles. In other words, Burks was not a flight risk.

Apparently swayed, Judge Mullen declined to grant the receiver's request to include Burks' personal accounts in the asset freeze, but did allow the amendment of language in the order appointing receiver to include cashier's checks and other forms of payment as receivership property. However, the receiver certainly has the ability to bring future lawsuits against Burks and/or his family members once he has completed his analysis of Zeek's financial records and been able to trace the flow of assets in and out of Zeek. This investigation is expected to take weeks, if not months, to complete.

The Receiver's Motion to Amend is here.

Burk's Response is here.

Judge Mullen's Ruling is here.


Florida Couple Accused of Fleecing Detroit Police in $10 Million Ponzi Scheme in Story Fit For Hollywood

It reads like the script out of a bad Hollywood movie.  After convincing a Detroit Police and Fire Retirement pension fund to loan $10 million for the purchase and resale of low-income housing, a Florida couple allegedly made off with $5 million, living a lavish lifestyle traversing the Caribbean.  Along with shopping for a $1.5 million house, the couple also purchased exquisite jewelry that included jeweled Russian eggs and sculptures by French sculptor Auguste Rodin.  When the pension fund raised questions about mismanagement of the funds, the couple fled to a Caribbean island to avoid arrest, and a business partner committed suicide.  The husband was eventually arrested upon his return to the United States, while the wife is rumored to be hiding in Costa Rica with the protection of armed guards.

Unfortunately, these actors were real, and their actions devastated many.  The couple, George and Teresa Kastanes, is the subject of a lawsuit by the Police and Fire Retirement System of the City of Detroit (the "Pension Fund"), contending that the couple mismanaged funds from a $10 million loan and owed more than $15 million after subsequently defaulting.  The couple's business partner, Abner McWhorter, committed suicide several months after the lawsuit was initiated.  As the suit moved forward, the Kastanes then filed bankruptcy one day before warrants were to be issued for the couple's arrest for failure to turn over documents.  Weeks later, both fled the country to avoid arrest.

The Kastanes' were featured in a Wall Street Journal article in March 2007 that detailed their involvement in George Kastanes' client's business of flipping low-income foreclosed homes.  George Kastanes, an attorney, then teamed up with McWhorter to enter into a partnership to continue the practice.  After they approached the Pension Fund to pitch the idea of purchaing distressed mortgage loans for resale in the secondary market, the Pension Fund declined to invest but did agree to loan $10 million at an 18% annual rate of interest.  The Pension Fund received regular updates affirming that the operation was functioning as promised, and later requested a second $8 million loan.  However, after making numerous alarming discoveries about the true state of the operation, the Pension Fund declined to make the second loan.  As a result of these discovered deficiencies, the Pension Fund later placed the $10 million loan in default.

Rather than purchase mortgage loans, it was discovered that the Kastanes and McWhorter had been purchasing large lots of foreclosed properties for eventual resale to individuals - contrary to the stated terms of the $10 million loan.  The properties, totaling over 2,500, had been purchased with $5 million of the loan given by the Pension Fund, and many now faced foreclosure or demolition.  Additionally, the proceeds that allegedly resulted from the operation's success were, in reality, being paid through the originally loaned funds.  

The remainder of the loan, $5 million, was allegedly spent by the Kastanes to support a lavish lifestyle that included traveling throughout the Caribbean.  The couple shopped for a $1.5 million house on the Caribbean island of Nevis, purchased exquisite items such as jeweled eggs and Polynesian artwork, and collected gold and diamond jewelry.  The couple also allegedly took active efforts to conceal the source of their wealth from Pension Fund lawyers, taking a series of actions to thwart creditors that included shipping sculptures to St. Kitts and entrusting bags of gold and diamond jewelry with relatives.  Additionally, two months after the lawsuit was filed, Kastanes allegedly told a friend that he had $1.8 million he was "going to be needing to get rid of."  In later testimony, George Kastanes denied each of these allegations.

After the Kastanes fled the country to avoid arrest in March 2012, George Kastanes was arrested upon his return from Costa Rica in May.  His wife is rumored to be holed up in Costa Rica and surrounded by teams of armed guards.  

The Pension Fund is not alone in alleging that the Kastanes operated a Ponzi scheme.  Several other creditors have also intervened in the bankruptcy, alleging that the Kastanes have nearly $40 million in debts.  Mr. Kastanes was the focus of a federal grand jury investigation earlier this year, but no criminal charges were filed.

A copy of the complaint is here.


Rothstein Victim Seeks Nearly $500,000 In Legal Fees For TD Bank Discovery Violations

An investment group victimized by Scott Rothstein's $1.4 billion Ponzi scheme has asked a Florida federal judge to award it nearly half a million dollars in legal fees as a result of discovery violations by TD Bank and its counsel during a trial earlier this year.  Coquina Investments was awarded $67 million in compensatory and punitive damages by a federal jury that faulted TD Bank for its frelationship with Rothstein's massive Ponzi scheme.  After the trial, it was discovered that several crucial documents in TD Bank's possession had been withheld or altered in what Coquina attorney David Mandel referred to as "Rambo litigation tactics."  Coquina filed several motions for sanctions, which United States District Court Judge Martha G. Cooke granted earlier this month.  As part of the relief ordered, Judge Cooke ordered that Coquina's legal fees and expenses incurred as a result of these discovery failures were to be paid by TD Bank and its counsel, Greenberg Traurig.

In a filing this evening, Coquina submitted its request for attorney's fees, arguing that it was entitled to nearly $500,000 in fees and costs brought about by TD Bank's gaffes.  Mandel's firm, Mandel & Mandel, accounts for nearly $300,000 of the amount, while Washington, D.C. firm Gibson Dunn & Crutcher ("Gibson Dunn") accounts for the remainder.  Florida federal courts have determined that fee determinations are calculated using the "lodestar method", which multiplies a reasonable hourly rate by the number of hours reasonably expended by counsel.  

While affidavits submitted in support of the request have been filed under seal, the motion makes it clear that the rates charged by Gibson Dunn, while assumedly higher than those typically charged by attorneys practicing in South Florida, are warranted "as a sanction for litigation misconduct [and serve] the important purpose of deterring future misconduct..."  Gibson Dunn's expertise in this area of law, argues Mandel, warranted the premium involved in securing their representation.

Upon review of the submissions, Judge Cooke has the authority to adjust the award upward or downward based on a variety of judicially-created factors.  It is unknown whether TD Bank or Greenberg Traurig will object to the amount.

A copy of the fee motion is here

A copy of Coquina's Motion for Sanctions is here.

Additional coverage of the Rothstein Ponzi scheme is here.


Woman, 71, Sentenced To Nine Years For $60 Million Ponzi Scheme

An Ohio woman was sentenced to serve nine years in prison after being convicted of assisting her husband in operating a $60 million Ponzi scheme that fleeced hundreds of investors.  Joanne Schneider, 71, pled guilty to multiple state fraud charges in exchange for the nine-year sentence, marking the culmination of a drawn-out legal process that started with an original three-year sentence being thrown out for being too lenient.  Her husband, Alan Schneider, was previously sentenced to a term of probation after pleading guilty in 2009.  Schneider will receive credit for the past 2.5 years in which she has been jailed, and will serve out the remaining 6.5 years in an Ohio state prison.

According to authorities, the scheme began in 2003, when Joanne Schneider solicited family and friends to invest in real estate development projects.  Potential investors were promised a high rate of return ranging from 16% to 20%.  From 2003 until January 2005, Schneider collected $60 million from nearly 900 investors.  A family member later became suspicious and contacted the Ohio Department of Commerce, who issued a cease-and-desist order against Schneider.  After Schneider continued to defy the cease-and-desist order, the state obtained injunctive relief and secured the appointment of a receiver.

After Schneider pled guilty to the original charges, a county judge sentenced her to three years in prison.  Prosecutors appealed, arguing that one of the counts Schneider had pled guilty to carried a mandatory minimum sentence of 10 years.  A state appeals court agreed, and sent the case back to an Ohio county court where Schneider was then sentenced to ten years.  After successfully arguing she had not been able to withdraw her original guilty plea, Schneider had been scheduled to stand trial this week, and entered into her guilty plea at the eve of the trial.  

A court-appointed receiver eventually recovered $10.5 million for the benefit of victims.  A large portion of that amount came from a settlement with the Schneiders' bank, FirstMerit Corp., which was accused of ignoring the classic signs that the Schneiders were running a Ponzi scheme through their bank accounts.  As part of the settlement, FirstMerit did not admit any liability or wrongdoing.