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Recent SEC Releases
Sunday
Apr072013

Investors Sue "SEC APPROVED" Ponzi Schemers And County Bank For $5.1 Million

A group of investors that lost millions of dollars in what authorities alleged was a $60 million Ponzi scheme filed a lawsuit against the alleged Ponzi schemers and the community bank listed on their marketing materials as a reference. The lawsuit named Santa Cruz County Bank (the "Bank") as a co-defendant, along with John A. Geringer, Christopher Luck and Keith Rode, who operated the GLR Growth Fund.  The lawsuit asserted claims of conspiracy and violations of federal securities laws against all defendants, as well as claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and negligent misrepresentations against the Bank. 

Geringer, Luck and Rode formed the GLR Growth Fund, L.P. (the "Fund") in 2003.  Geringer, who managed the Fund's trading accounts and made investing decisions, told potential investors that the Fund consistently achieved annual returns ranging from 17% to 25%, including a return of 24% in 2008 (when the S&P 500 lost 38.5%.).  In marketing materials distributed to investors, the Fund purported to invest 75% of its assets in publicly traded securities, options, and commodities.  Investors were also told that the Fund used the services of an independent accountant, and account statements regularly included the caption "MEMBER NASD AND SEC APPROVED".  Based on these representations, the Fund raised at least $60 million from hundreds of investors.  

However, the Fund did not consistently earn double-digit returns, but in reality experienced trading losses every year from 2005 to 2009, including a 33% loss in 2008 and a 92% decline in 2009.  Additionally, rather than invest in publicly traded securities, the Fund instead invested nearly $30 million, or half of the total funds raised from investors, in two private startup technology companies that were highly illiquid.  By mid-2009, the Fund had stopped trading entirely after suffering massive losses. With no trading returns to pay to investors, Geringer instead used funds contributed by existing investors to create the false appearance of profitability - a classic hallmark of a Ponzi scheme.  The SEC filed a civil enforcement action in May 2012, and Geringer, Luck, and Rode were indicted in December 2012.  

According to the lawsuit, the Fund's marketing materials listed the Bank and Chuck Maffia - then a vice-president at the Bank - as a "Banking Reference".  Investors that contacted Maffia were told that the Fund was a safe, conservative investment option, with Maffia disclosing that his own retirement funds were invested in the Fund.  Additionally,

Maffia emphasized that the Fund’s clients had never sustained any losses; Geringer was an excellent investment manager; and the Bank handled and oversaw all the funds in the Fund Account.  Finally, Maffia told Mr. Elliot that Maffia would not have invested his own retirement money in the Fund but for the confidence both the Bank and he had in Geringer. 

Some investors also allegedly were provided with tax returns and other documents that supposedly verified the Fund's consistent returns.  As the Complaint makes clear, investors were assured by Maffia's statements regarding the safety and legitimacy of the Fund, and would not have invested absent these assurances.

While asserting claims against financial institutions for their role in facilitating Ponzi schemes has been historically difficult due to the high standard of proof required to show liability, the case evokes multiple similarities to the circumstances surrounding TD Bank's role in the massive Ponzi scheme by Florida lawyer Scott Rothstein.  There, TD Bank was ultimately forced to pay out hundreds of millions of dollars in settlements and adverse verdicts from investors who alleged that Rothstein was assisted by a TD Bank vice-president who lent the scheme an aura of legitimacy.

A copy of the complaint is below.

2013-03-21 Geringer_Complaint

Friday
Apr052013

SEC Files Suit Against Profitable Sunrise, Calls It "Fraud and Pyramid Scheme"

The Securities and Exchange Commission ("SEC") charged a British company doing business as Profitable Sunrise with multiple violations of federal securities law, alleging it was a fraud and pyramid scheme that took in tens of millions of dollars from tens of thousands of investors.  The complaint, filed in federal court in the Northern District of Georgia, was accompanied by an emergency request for (and subsequent order granting) an asset freeze to preserve investor funds in the interim.  The SEC named Inter Reef Ltd., which does business as Profitable Sunrise, as the sole defendant, and also named several entities as relief defendants which received funds from individuals wishing to invest in Profitable Sunrise.  The SEC is seeking injunctive relief, an order freezing bank accounts in the Czech Republic and Hungary, an order requiring accounting of funds received from investors, and civil monetary penalties.

Beginning no later than December 2012, Profitable Sunrise offered investors the opportunity to profit "with every sunrise" by promising astronomical returns to investors.  The company heavily emphasized its religious ties, including multiple Bible quotes on its website and claiming to donate a large portion of its profits to charity.   Investors were told that they could receive daily returns ranging from 1.6% to 2.7% as a result of Profitable Sunrise's lucrative business making loans to other businesses at high rates.  The company represented that an investment had very little risk, as each loan was insured against default.  

Investors were given the option to choose one of five investment plans:

  1. The Starter Plan;
  2. The Regular Plan;
  3. The Advanced Plan;
  4. The Private Plan; and 
  5. The Long Haul Plan.

The first three plans required minimum investments of $10, $500, and $2,500, respectively, and promised daily interest rates of 1.6%, 1.8%, and 2%, respectively.  Each of those plans carried a term of 180 business days, with balances compounding daily.  The fourth plan, the Private Plan, was available only to groups.  The last plan, the Long Haul Plan, had a 240-day duration, and promised a daily 2.7% interest rate with a minimum $500 investment.  

Once an individual became an investor, he or she was then allowed to recruit additional investors with the understanding that they would be entitled to 5% of all investments, and subsequent earnings, they brought in.  This resulted in an onslaught of solicitations, which only assisted in spreading the word about Profitable Sunrise.  As one video on Youtube noted, a $5,000 investment would yield nearly $186,000 in less than six months - a return of nearly 4,000%.  

However, according to the SEC, Profitable Sunrise did not make lucrative loans with other businesses, nor did it insure its loans with a leading investment bank.  Rather, it operated a massive fraudulent fraud and pyramid scheme, using the promise of astronomical returns and referral incentives to take in what is likely to be tens or even hundreds of millions of dollars from investors.  Indeed, the SEC alleges that at least one promoter claims to have raised tens of millions of dollars from investors. The SEC estimates that tens of thousands of investors were likely duped in the scheme.

The SEC named several Czech Republic companies as relief defendants, which were used to collect money from investors.  These companies are Melland Company S.R.O., Solutions Company S.R.O., Color Shock S.R.O., and Fortuna K.S.R.O.  According to the SEC, millions of dollars in investor funds flowed between these companies.

The move comes as multiple states, including South Dakota, Nevada, Missouri, and North Carolina,   have recently moved for cease-and-desit orders against Profitable Sunrise.

A hearing on the SEC's preliminary injunction is scheduled for April 15, 2013.

A copy of the Complaint is here.

h/t to ASDUpdates.

 

Thursday
Apr042013

Former Political Candidate Who Promised 'Real Change' Indicted in Concert Promotion Ponzi Scheme

“The people of Hawaii need to learn that there is no such thing as an investment with guaranteed returns of 25 percent to 50 percent.  Somehow these cases keep recurring here. It’s baffling."

-FBI Special Agent Tom Simon

A Hawaii man who once ran for political office was indicted on charges that his concert and promotion business was a Ponzi scheme that took in over $1 million from at least 29 Hawaii families.  Jason Pascua, a U.S. Army Reservist and former candidate for the Hawaii House of Representatives, was charged with a single count of wire fraud, which carries a maximum prison sentence of twenty years in prison as well as criminal monetary penalties.  According to authorities, Pascua is not currently in Hawaii and has not been arrested, with news reports suggesting that he will plead guilty upon his return on May 23, 2013.  

Pascua was the sole owner of J2 Marketing Solutions ("J2"), which purported to be in the concert and nightclub promotions industry.  A regular on the political circuit, Pascua frequently mingled with Hawaii politicians and even tried his hand at running for political office in 2010.  Pascua also had extensive community ties, having previously served as President of the local Filipino Chamber of Commerce and a marketing director of the Hawaii Central Credit Union.  

Beginning in 2009, Pascua used these ties to solicit investors to invest in J2, telling them he worked as a concert and nightclub promoter spliting his time between Honolulu and Las Vegas.  Investors were offered the opportunity to earn short-term returns of 25%-50% by financing Pascua's promotion of multiple concert and night club events.  Pascua assured investors he would spread their investments over the promotion of multiple events in an effort to "mitigate risk."  Ultimately, Pascua would raise more than $1 million from nearly 30 Hawaii families. 

However, according to authorities, Pascua did not use investor funds to promote concerts or night club events.  Rather, he diverted funds for his own personal use, as well as pay fictitious returns to investors.  Ironically, Pascua did use some funds for event promotion - but those events were pet expos at a popular Hawaii entertainment complex.  

Tuesday
Apr022013

Judge Exonerates Denver Company Accused of $49 Million Ponzi Scheme

 

In a rare development, a Denver federal judge rejected claims by the Securities and Exchange Commission ("SEC") that a Denver oil and gas exploration company was a $49 million Ponzi scheme. The SEC charged St Anselm Exploration Co. ("St. Anselm") and three of its officers in March 2011, alleging that the company operated in 'Ponzi-like fashion' in that it could only satisfy its debt burden by raising new funds from investors. After a two-week trial in July 2012, United States District Judge Robert Blackburn issued an order concluding that "The evidence fails to establish that SAE had any of the true hallmarks of a Ponzi scheme," and ordering the SEC to cover St. Anselm's costs.

St. Anselm is a Denver company that was founded twenty years ago by Michael A. Zakroff ("Zakroff"). Zakroff, along with Mark Palmer, Anna Wells, and Steven S. Etkind, were officers or employees of St. Anselm, which seeks to identify and acquire oil, gas, and geothermal prospects with the goal of enhancing their value and subsequently re-selling the interests in the future. This process often spanned several years, and to fund business operations in the interim, St. Anselm relied on raising funds by issuing short-term promissory notes to investors. According to the SEC, while St. Anselm's business historically focused on oil and gas interests prior to 2007, it began exploring the development of geothermal wells beginning in 2007. However, because of this expansion into geothermal power, the SEC alleged that St. Anselm was unable to meet its debt service obligations through existing revenues, and thus depended on raising funds from new investors. As depicted in two charts in the SEC's complaint, this suggested that St. Anselm depended on the inflow of new investor funds to pay principal and interest to existing investors - the hallmark of a Ponzi scheme:

As the chart shows, while the principal balance of outstanding notes ballooned from $30 million in 2007 to over $60 million in 2010, St. Anselm realized only approximately $24 million in revenues during the same time period, and filled the shortfall with over $40 million in proceeds from the sale of new promissory notes. According to the SEC, even the tens of millions raised in the sale of promissory notes was not enough for St. Anselm, which was forced to delay a July 2010 interest payment to investors due to insufficient funds on hand. According to the SEC, the defendants were keenly aware that their financial survival depended on their ability to raise new investor funds.

However, while these characteristics certainly fit the bill for the typical Ponzi scheme which the SEC has been successful at uncovering in recent years, Judge Blackburn took a very different view of the proffered evidence. Indeed, in his order, Judge Blackburn noted that St. Anselm's typical business cycle often spanned several years, and faulted the SEC for only considering the 2007-2010 time period and not accounting for the potential value of non-liquid assets According to Judge Blackburn, when considering the time period from 2006 - 2010, St. Anselm took in more than $61 million in revenue from sources other than promissory notes, which was enough to satisfy the $57 million in required debt payments during that period. Indeed, the nature of St. Anselm's business meant that while it would regularly achieve multi-million dollar profits on the sale of their investments, these sales did not occur on a routine pace due to the time period required to enhance the value of the interest.

Of particular note to Judge Blackburn, there was no evidence that any investor lost any of their invested principal, and nearly 99% of investors agreed to a debt restructuring effected by St. Anselm in June 2010. Additionally, St. Anselm continues to operate as a going concern, with ample cash to make payments on the restructured notes despite not raising new investor funds. Nor was there any evidence that the defendants were "living a high-budget, jet-setting lifestyle at the expense of unsuspecting investors." Based on these facts, Judge Blackburn concluded that the totality of evidence did not support a finding that:

Any defendant acted with an intent to deceive, manipulate, or defraud in their communications with investors about the state of the company, or that their conduct constituted an extreme departure from the standards of ordinary care, one which they either knew presented a danger of misleading note holders or that was so obvious that defendants must have been aware of it.

Shedding some insight into his reasoning, Judge Blackburn reasoned that the company may have simply gotten too optimistic about its business prospects - rather than operated a Ponzi scheme - and stated that 

What this court perceives from the evidence presented in this case is not fraud, whether intentional or reckless, or even negligence, but a company that got too far out over its skis."

The case is the first in recent memory not only in which the SEC has taken an accused Ponzi schemer to trial, but also in which the SEC has been unsuccessful. Indeed, it may simply be explained as a company at the wrong place at the wrong time - in the era of Post-Madoff enforcement, the SEC has not hesitated to bring enforcement actions where it feels that investor funds are in danger. In this instance, while some circumstances of St. Anselm's business model may have fit the model for the typical Ponzi scheme, the similarities turned out to be part of a legitimate business, rather than a closely-guarded fraud. An SEC spokesman indicated that the agency was reviewing the decision. 

A copy of the SEC complaint is here.

A copy of the Order is here.

Monday
Apr012013

Zeek Receiver to Net Winners: Settle By May 31 Or Prepare To Be Sued

 

I am sending this message to make sure that net-winners understand that there is an opportunity for settlement, but that the window for the  opportunity is closing
- Kenneth D. Bell, Court-appointed receiver.

The court-appointed receiver pursuing the recovery of funds for victims of the $600 million ZeekRewards Ponzi scheme has issued an ultimatum to those 'net winners' who were fortunate enough to profit from their investment: contact the Receiver by May 31, 2013 or prepare to be sued.  The receiver, Kenneth D. Bell, issued a message to those net-winners today via a post on his website, www.zeekrewardsreceivership.com, that he has established as a resource for victims.  Bell has previously estimated that approximately 80,000 such net winners exist, and were fortunate to have realized collective profits totaling nearly $300 million.

In the letter, Bell provided an overview of settlement efforts to date with net winners that he viewed as positive.  He indicated that he would continue those settlement efforts until May 31, 2013, and would then initiate litigation against those net winners that did not initiate settlement talks.   and indicated that he planned to initiate litigation against net winners if he is not contacted by May 31, 2013.  

Bell disclosed that he had received a warm reception from those net-winners who have contacted him, indicating that he had reached a number of settlements ranging from approximately 40% - 80% of those individuals' net winnings.  As is typical, investors that are able to present proof of financial hardship are able to reach discounted settlements.  Alluding to the costs that clawback litigation would entail, Bell indicated that any potential settlement would be subject to a consideration of the legal costs associated with pursuing clawback litigation.  

However, Bell cautioned that not all net winners would be offered the ability to negotiate a discounted settlement, possibly alluding to the stance he would take against those net winners who had a larger role and profile than the typical victims.  Bell had previously indicated in his periodic updates that he was considering litigation against a number of third-parties, including insiders and those with significant involvement with the company.  The basis for those claims would hinge on the contention that those individuals either knew - or should have known - that Zeek was a fraud, and that by lending their support and recruiting others to join Zeek, helped to perpetuate the fraud.  Indeed, there exists the possibility that, under state fraudulent transfer laws, Bell could seek to recover a net winner's entire investment - including that individual's principal investment.

The letter is the latest in Bell's efforts to recover profits from net winners.  In November 2012, Bell sent out approximately 1,200 subpoenas to net winners that had profited most from their investment in Zeek.  Taking the same firm position as he has since his appointment, Bell promised that he was 

committed to pursue the full court process necessary to obtain personal court judgments against 'winning' participants and recover all money owed to the Receivership estate."