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Recent SEC Releases
Wednesday
Nov072012

Convicted Ponzi Schemer Balks At Proposed 225-Year Prison Sentence

An Indiana businessman convicted of orchestrating a $200 million Ponzi scheme has objected to a pre-sentencing report that recommends he spend the next 225 years in federal prison, as well as pay over $200 million in restitution to his victims.  Tim Durham, 50, was found guilty in June of twelve counts of securities fraud, conspiracy, and wire fraud after his choice to stand trial backfired when a federal jury convicted him of all counts.  As is customary before sentencing, the probation office has prepared a pre-sentencing report that essentially serves as a report-and-recommendation to the sentencing judge and is meant to provide the court with a factual record that may be helpful in determining an appropriate sentence.  While the report is usually sealed and revealed only to the sentencing judge and counsel, Durham's attorney filed a 38-page objection that decried the recommended sentence as "absurd."

Durham served as chief executive officer of Fair Finance Company ("Fair Finance") from 2005 through November 2009, a company that he and James F. Cochran purchased in 2002.  Prior to its change in ownership, Fair Finance had been a successful business that engaged in the purchase of financial contracts between businesses and their customers that carried high annual interest rates, usually between 18% and 24%.  The company profited by pocketing the difference between the contract's purchase price and the total money collected over the life of the contract.  

After purchasing Fair Finance, Durham purported to continue the profitable business, and succeeded in raising approximately $230 million from over 5000 investors who were enticed by the prospect of the steady and above-market returns.  However, as the money poured in, Durham began to misappropriate an increasing amount of investor funds for unauthorized purposes, including financing various businesses owned by Durham and Cochran.  While investors continued to receive annual checks purporting to be profit from Fair Finance's operations, these profits were, in reality, simply the re-distribution of investor funds in typical Ponzi scheme fashion.  Durham and Cochran also used investor funds to sustain their lavish lifestyles, which at one point included more than 40 classic and exotic cars worth over $7 million, a $3 million private jet, and a $6 million yacht in Miami. 

By 2009, the misappropriation of investor funds had resulted in more than $200 million in loans to Durham and Cochran's various unprofitable businesses - more than 90% of the supposed investments that were being made with investor funds.  Investor redemptions soon dried up, and the company was eventually forced to declare bankruptcy and was raised by the Federal Bureau of Investigation.  Indictments soon followed.

Durham's trial was somewhat unique in that prosecutors unveiled wiretaps of Durham and others allegedly confirming their knowledge that they were engaging in criminal activities.  The use of wiretap evidence is unique in that it is typically seen in instances of organized crime and violent offenses.  Several of the wiretaps are available here.

In the pre-sentencing report, losses from the scheme were pegged at $200 million - a number that Durham's attorney vehemently disputes.  According to Durham's attorney, probation officials failed to explain their reasoning for the $209 million investor loss - a figure he termed "incorrect."  Additionally, the objection levels some of the blame for the hefty investor losses on federal authorities - a claim commonly seen based on the theory that the accused could have somehow 'righted the ship' had authorities not stepped in.  

Along with Durham, Cochran and another co-conspirator, Rick D. Snow, were also convicted at their June trial.  Sentencing is currently scheduled for November 30, 2012.  

Monday
Nov052012

Former Gold Dealer Receives 51-Month Sentence For $4 Million Ponzi Scheme

A 72-year old Oregon man was sentenced to serve more than four years in prison for masterminding a Ponzi scheme that bilked more than $4 million from victims who thought they were investing in gold and silver.  Lawrence Heim, of Portland, Oregon, learned his fate from United States District Court Judge Marco A. Hernandez, who also ordered Heim to pay more than $4 million in restitution to his defrauded victims.  Heim, who was originally indicted for thirteen counts of mail and wire fraud, had pled guilty to s single count of wire fraud earlier this year.  

Heim served as President of U.S. Gold & Silver Investments ("USCGI").  Through a local radio program he hosted, Heim touted USCGI as a vehicle for investors to profit off the recent appreciation in gold and silver prices.  Investors were told that, in return for sending money to USCGI, gold and/or silver coins would be purchased on their behalf.  Heim provided investors with with his "calculations" as to the future value of gold and silver, and investors assumed that they would directly benefit from an upward swing in prices.  However, while Heim initially used investor funds to purchase coins, he soon fell behind as the price of gold and silver increased, and later altogether ceased using investor funds for legitimate purposes. 

Altogether, nearly 50 victims would lose over $4 million in the scheme, which collapsed in early 2011.

Friday
Nov022012

Judge To Accused Ponzi Schemer: Stop Gambling At Vegas Casinos

"I am not a degenerate gambler.  I love this country."

- Ramon Desage

A federal judge had harsh words for a man accused of running a $75 million Ponzi scheme after authorities caught him gambling over two dozen times in Las Vegas casinos while awaiting trial.  Ramon Desage, arrested earlier this summer and charged with wire fraud, was ordered by Magistrate Judge Peggy Leen to stop gambling and stay away from casinos.  DeSage, who according to authorities appears to fancy video poker, had been ordered to submit to electronic home monitoring as one of the conditions that allowed him to remain out of jail while the criminal case progresses.  From his past track record gambling, Judge Leen has good reason to worry: in the criminal complaint, authorities painted DeSage as a "prodigious gambler" who allegedly lost over $20 million at various Vegas casinos since 2006. 

According to authorities, DeSage operated a massive Ponzi scheme using his company Cadeau Express, which described itself as a "unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers."  Rather than use investor funds for these described purposes, DeSage allegedly made Ponzi-style payments to existing invesetors and financed a lavish lifestyle that included a 40,000 square foot palace in his native Lebanon and a $10 million real estate portfolio.  Authorities moved to arrest DeSage in June when investor losses were said to approach over $75 million and DeSage was on the verge of fleeing the country to Lebanon.

Ironically, when DeSage's lawyers successfully obtained his release from jail following his arrest, Judge Leen explicitly included a ban on casino visits as part of the home monitoring restrictions  However, those instructions apparently took several weeks to reach pretrial service officers in charge of supervision, who unknowingly violated those orders when they allowed DeSage to visit casinos 26 times over an eight-week period.  For his part, DeSage maintains that he did not deliberately violate Judge Leen's order.  

Thursday
Nov012012

Zeek Receiver Posts "Subpoena FAQ" for Clawback Targets

Yesterday, the court-appointed receiver tasked with gathering assets for victims of the $600 million ZeekRewards Ponzi scheme provided various updates on the claims process, asset recoveries, and his intention to pursue those who actually profited off the scheme.  Kenneth Bell, the receiver, indicated he would begin sending out subpoenas this week as part of his plan to institute "clawback" litigation against those "net winners" that, according to Mr. Bell, withdrew hundreds of millions of dollars in profits from Zeek.  As Mr. Bell stated, the first batch of subpoenas would be sent out this week, and "thousands" more would follow in the coming weeks.

The Receiver has now added a "Subpoena FAQ" to his website established for scheme victims, www.zeekrewardsreceivership.com.  Under the tab, the Receiver lists nine commonly asked questions, and in doing so, provides several new details on the clawback process.  First, he indicates that a possible target of a subpoena can include an affiliate, participant, agent, or employee of Zeek Rewards, suggesting that he is not limiting the search to just participants in the scheme.  Second, it appears as if the scope of the subpoenas is more broad than simply the turnover of financial documents, as electronic documents and communications are being sought.  Thus, in addition to bank statements, the Receiver is also likely seeking any communications those "net winners" may have had with the Receiver or possibly other affiliates.  Finally, as speculated yesterday, the Receiver confirms that the first batch of the subpoenas are indeed sent to those "the Receiver currently believes may have won the most money." 

The FAQ's also contain a section not only for those who have received a subpoena and do not want to proceed with litigation, but also for those who wish to avoid receiving a subpoena in the future (i.e., profited from the scheme but were not the recipient of the first batch of subpoenas).  FAQ # 9 provides that those who wish to reach an arrangement with the receiver to return those profits without "the necessity of lengthy and expensive legal action" may contact the Receiver at zeeksettlement@mcguirewoods.com to discuss the possibility of a settlement.  There is no explicit mention of a slight discount as an incentive to settle, but the wording does suggest that there may be some wiggle room.  Of course, if there is a discount offered, it would likely be an 'across-the-board' discount to avoid the appearance of favoritism or unfairness.

A link to the FAQ's is here.

Wednesday
Oct312012

Update From ZeekRewards Receiver: Claims Process Coming, Potentially "Hundreds of Millions of Dollars" In Clawback Lawsuits

The receiver appointed to recover assets for victims of the $600 million ZeekRewards Ponzi scheme has posted a letter on his website providing an update to investors and indicating that he intends to vigorously pursue those who received profits from the scheme - profits he estimates are in the hundreds of millions of dollars.  Kenneth E. Bell, appointed by United States District Judge Graham Mullen, disclosed that the total amount recovered thus far exceeds $300 million and is likely to increase while he pursues additional funds being held in financial institutions.  Additionally, Mr. Bell indicated that once victims completed a court-approved Official Claim Form, he would proceed with a preliminary and partial distribution rather than make one final distribution at the conclusion of the Receivership.

Pegging the number of true victims who lost more in the scheme than they were able to withdraw as approximately 800,000, the Receiver estimated that total losses ranged from $500 million to $600 million.  For those victims, the Receiver indicated that an Official Claim Form will be posted to his website once he received Court approval.  There will likely be a deadline for victims to submit their completed Form, after which the Receiver indicated he will proceed with a preliminary and partial distribution.  It appears as if the affiliate User ID's will be used as a method of identification for victims, as Mr. Bell refers to those IDs several times in his letter.

While the updates on Mr. Bell's intent to proceed with a claims process are similar to what he has indicated in prior updates, today's update provides a wealth of new information surrounding those investors whose withdrawals/distributions from Zeek exceeded their initial investment.  In a Forbes article I posted shortly after the scheme was uncovered, I estimated that the prospect of "clawback" lawsuits was "amost certain" once the Receiver had completed his initial investigation.  While Mr. Bell later confirmed that he would be pursuing those affiliates "who took more out of Rex Ventures than they put in," he did not provide specific numbers on the amount of potential clawback victims or recovery.

Apparently having completed his initial investigation, the Receiver disclosed that "there are more than 100,000 User IDs" that took more out of the scheme than they invested.  While declining to provide specifics on the potential amount of clawback recoveries, Mr. Bell did disclose that the 'false profits' enjoyed by these individuals numbered in the "hundreds of millions of dollars."  Mr. Bell indicated that subpoenas would be sent out "this week" to approximately 1,200 of these likely clawback targets, seeking documentation of financial dealings with the scheme and, if necessary, depositions and litigation.  

While not mentioned in the letter, it is likely that these 1,200 individuals received the highest amount of distributions from the scheme.   Additionally, in an attempt to allow settlement without litigation, a letter will also be included with the subpoena offering the possibility of negotiating the voluntary surrender of profits without litigation.  While the letter does not elaborate, it is likely that a slight discount will be offered as an incentive to avoid litigation costs.  These 1,200 likely represent the first batch of clawback targets, as Mr. Bell also indicated that subpoenas and demand letters will be served on "thousands more" in the upcoming weeks.  

With over $300 million in the bank and an estimated "hundreds of millions of dollars" in potential clawback recoveries, there is an increasing possibility that Zeek victims could eventually recover an amount close to, if not equal to, their net investment.  While Mr. Bell was quick to caution against counting on a 100% recovery, he stated that "if we don't it won't be for lack of trying."

The Receiver's letter is here.