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Recent SEC Releases
Thursday
Aug152013

Michigan Man Receives 15-Year Sentence For $72 Million Ponzi Scheme

 

"We do not offer ridiculously high interest rates.  We leave that to the scam artists.  One of our goals is to put these scammers out of business.  Drive 'em right off the 'Net!"
- Gregory N. McKnight
A Michigan man who masterminded a massive Ponzi scheme that duped thousands of victims nationwide out of tens of millions of dollars has been sentenced to serve more than 15 years in federal prison.  Gregory N. McKnight, 53, received the sentence after previously pleading guilty to a single count of wire fraud, which carried a maximum sentence of twenty years in prison.  In addition to the 188-month sentence handed down by United States District Judge Mark A. Goldsmith, McKnight was also ordered to pay nearly $49 million in restitution to his victims.

McKnight operated Legisi Holdings, LLC, which was a shell company headquartered in the territory of Nevis in the West Indies.  Beginning in December 2005, McKnight began soliciting investors for a pooled investment program referred to as both Legisi.com or Legisi.  In an effort to reach as many potential investors as possible, McKnight also promoted the investment at www.legisi.com.  Investors were told that McKnight would invest all offering proceeds, and use his trading profits to pay monthly returns to investors.  According to McKnight, his investing activities regularly generated monthly profits of at least 15%, and told investors they would receive a minimum monthly return of 15%.  Investors were also assured that McKnight would set aside 10% of his monthly trading profits for a reserve fund established for the benefit of Legisi investors.  In total, McKnight and Legisi raised more than $70 million from at least 3,000 investors from all 50 states.

However, McKnight was not the prodigious trader he held himself out to be.  Rather than generating 15%-18% monthly trading profits, McKnight suffered trading losses of more than $3 million.  McKnight invested less than half of the approximately $72 million raised from investors, instead diverting the remainder for a variety of unauthorized uses.  This included the payment of fictitious profits and principal redemptions to investors, more than $2 million for personal expenses, and over $100,000 for vacations.  

Authorities questioned McKnight in May 2007 about his purported trading.  According to the SEC, within hours of that conversation, McKnight posted an announcement on the Legisi website announcing the Legisi program was closed to investors  (which he attributed to a "massive influx" of new investors).  McKnight also closed the Legisi website to the public, and began requiring a login and password.  

While the Securities and Exchange Commission initiated a civil enforcement action in 2008, McKnight was not criminally charged until February 2012.  An associate, Matthew J. Gagnon, was also sentenced to a 5-year term for his role in the fraud.

A copy of the SEC Complaint is here.

Thursday
Aug152013

Astrology-Based Ponzi Scheme Nets 3-Year Prison Sentence For Florida Man

A Florida man received a three-year prison sentence for operating a Ponzi scheme in which investors were not told that investment decisions were primarily based off of lunar cycles and other astrological metrics.  Gurudeo "Buddy" Persaud, 47, was arrested earlier this year and charged with one count of mail fraud and four counts of wire fraud in connection with the scheme.  Rather than face trial, Persaud agreed to plead guilty to the charges, and was also ordered to pay restitution of nearly $1 million to his defrauded investors.  

Persaud was employed as a registered representative of broker-dealer Money Concepts Capital Corp. ("Money Concepts") beginning in February 2003, according to his FINRA Broker Check.  Persaud founded the White Elephant Trading Company LLC ("White Elephant") in late 2007, which he registered with the Florida Department of State under the name of his two brothers to avoid his obligation to report his outside business activities to his employer, which was required under industry regulations.  In soliciting investors, which sometimes took place at the brokerage firm where he worked, Persaud promised annual risk-free returns ranging from 6% to 18%, which he represented were generated by investments in the futures market and other markets.  Potential investors were assured that Persaud that their funds would be safe, with Persaud touting his extensive experience in the financial services industry as a certified financial planner.  In total, Persaud and White Elephant raised approximately $1 million from fourteen investors.

However, Persaud failed to disclose to his investors that, rather than invest in the futures markets, "his trading strategies were based on lunar cycles and the gravitational pull between Earth and the moon." Additionally, Persaud misappropriated over $400,000 from investor funds, using that money to support his and his family's lavish lifestyle.  Of the money that Persaud did invest, he sustained extensive trading losses beginning in the first month he began trading that totaled $400,000.  Additionally, Persaud used investor funds to make distributions of purported profits and principal redemptions - a hallmark of a Ponzi scheme.
 
In the aftermath of Persaud's arrest, some investors have filed lawsuits against Money Concepts alleging the brokerage is responsible for Persaud's fraud.  Thus far, Money Concepts has denied liability.  The SEC has also levied civil fraud charges against Persaud.  

A copy of the SEC complaint is here.
Tuesday
Aug132013

Indian Ponzi Promoter Commits Suicide Over Pressure From Jilted Investors

An Indian woman tasked with raising funds for what was revealed to be a $15 million Ponzi scheme has reportedly committed suicide after demands from disgruntled investors apparently became overwhelming.  According to police, Manorama Haidar, 32, was found hanging at her home in the West-Bengal town of Basuldanga.  The death is the latest in a series of suicides and even one murder resulting from an aggressive government crackdown on so-called "chit fund" Ponzi schemes that targeted lower-class Indian citizens seeking higher returns on their savings.  The largest scheme, the Saradha Group, is estimated to have duped hundreds of thousands of Indian investors out of billions of dollars.

Haidar acted as an agent for Basil International Limited ("Basil"), which offered redeemable preference shares that carried purported annual returns ranging from 11% - 14%.  Basil utilized a wide network of agents to solicit potential investors, fanning out over remote areas to draw in typically lower-income investors that generally had a lack of finance knowledge.  The company is also alleged to have used television advertisements to reach potential investors, and eventually raised close to $15 million.

However, an investigation conducted by the Securities Exchange Board of India ("SEBI") found that the company was using investor funds for a variety of unauthorized purposes, including the payment of huge commission to its agents, investing in business operations, and general misappropriation of funds.  In May, SEBI issued an order forbidding Basil from raising any future funds from investors, and directed the company not to dispose of any company assets or divert any funds in the company's possession.  

In addition to investing approximately $13,000 of her own money, Haidar also raised more than $50,000 from numerous investors who thought their funds were safe with Basil.  After SEBI issued the order shuttung down the company, investors reportedly began pressuring Haidar for the return of their funds.  

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.