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Recent SEC Releases

Former Lawyer Receives 10-Year Sentence For $7.8 Million Ponzi Scheme

In a courtroom packed with victims wearing a red ribbon to show solidarity, a former Houston lawyer who admitted to masterminding a real-estate Ponzi scheme that duped investors out of nearly $8 million was sentenced to serve ten years in federal prison.  Billy Frank Davis, 68, received the sentence from United States District Court Judge David Hittner, who took the unusual step of making an upward departure from the recommended range computed using federal sentencing guidelines.  Davis had previously agreed to a plea deal last year with prosecutors in which he pled guilty to a single count of wire fraud, which carries a statutory maximum term of twenty years. 

According to authorities, Davis held himself out as a successful real estate investor, telling potential investors that he could generate market-beating returns with little to no risk.  Davis was well-known at several Houston-area golf courses, where he frequently solicited investors and touted his investing prowess.  Man were convinced of the scheme's legitimacy after scheduled interest payments were made without a hitch for over a decade.  In total, more than 20 investors contributed millions of dollars.  

While Davis used a small portion of investor funds for legitimate investment activity, the majority was used to perpetrate a classic Ponzi scheme by using newly-invested funds to pay returns to older investors. Davis also misappropriated funds to sustain his lavish lifestyle.  Authorities pegged total victim losses at nearly $8 million.

Following the completion of his sentence, Davis must serve three years of supervised release.  He was also ordered to pay $7.8 million in restitution to his victims.


Two South Florida Cops Suspended For Rothstein Ties Amid Criminal Probe

A newly-installed south Florida sheriff made one of his first priorities the suspension of two deputies connected to Scott Rothstein's $1.4 billion Ponzi scheme, including one that unwittingly provided Rothstein a personal escort to a private plane on the eve of the scheme's collapse.  Lt. David Benjamin and Detective Jeff Poole, both employees of the Broward County Sheriff's Office, were suspended last week with pay by Sheriff Scott Israel after the disclosure that the men were "under criminal investigation by an outside agency." During his high-flying days, Rothstein regularly hired Fort Lauderdale police officers for personal protection, including round-the-clock patrols at his residence.     

While little is known of Detective Poole's relationship with Rothstein, it was Lt. Benjamin who Rothstein contacted in mid-October 2009 for a police escort to a waiting plane bound for Morocco.  However, little did Lt. Benjamin know that this 'business trip' came as Rothstein's Ponzi scheme was on the verge of collapse after missing scheduled investor payments. As detailed in Chuck Malkus's upcoming Rothstein tell-all, the trip's destination was far from random - instead the result of a seemingly-innocuous research project posed by Rothstein to his fellow lawyers just days prior asking which country(ies) did not have an extradition treaty with both Israel and the U.S.  

When Rothstein boarded the plane, he not only had a duffel bag containing at least $2 million and a collection of expensive watches, but had already wired at least $15 million to a Moroccan bank account. In exchange for his services, Rothstein allegedly gave Benjamin one of these watches - a high-priced Swiss timepiece.  Benjamin later agreed to return the watch, along with $30,000 in payments from Rothstein for various protection services, to the court-appointed bankruptcy trustee.

It remains unclear exactly what conduct the men are being investigated for, though it has long been rumored that Rothstein had extensive connections with law enforcement.  The speculation even prompted the publishing of an anonymous e-book purporting to shed light on rampant corruption in the sheriff's office, including the Rothstein connection.


Former Pastor Pleads Guilty in $2.5 Million Ponzi Scheme

A South Carolina man who once served as pastor of a local church has entered into a plea agreement with prosecutors to charges that he operated a commodities-based Ponzi scheme that bilked investors - some his former congregants - out of over $2.5 million.  Archie Larue Evans, 42, agreed to plead guilty to one charge of mail fraud and one charge of structuring financial transactions to avoid federal scrutiny.  In return, prosecutors agreed not to pursue an additional seven counts of mail fraud and five counts of money laundering.  The charges carry a combined statutory maximum of twenty-five years in prison, although federal sentencing guidelines will likely result in a lesser recommended range.

Evans was a farmer and former pastor at the Tilley Swamp Baptist Church ("Tilley Church") in Conway, South Carolina.  In addition, beginning in 2004, Evans also operated Gold & Silver LLC ("Gold & Silver"), which purported to invest in silver futures markets and offered quarterly returns ranging from 10% - 12%. Investors, some of whom included members of Tilley Church, were provided with regular account statements purporting to show regular account gains.

However, in reality, Evans misappropriated investor funds as he ran the classic Ponzi scheme.  Rather than achieve the exorbitant rates of return he represented to investors, he instead used funds for personal expenses, to make interest payments to investors, and suffered trading losses on the funds actually invested.  At the time Evans was indicted in late 2011, his seized bank accounts showed a balance of just $1,919.86.

Authorities also discovered Evans' ownership of two non-profit agencies apparently used to spread the message against homosexuality.  One of the non-profits, Pale Productions, apparently published a book entitled "Nature's Pairs: The Demise of Homosexuality," which featured Evans' 'indisputable' evidence against homosexuality.  According to this order form, the book appears to have been published while Evans operated the scheme, raising the possibility that investor funds may have been diverted to the venture.

Evans remains free on $25,000 bond pending sentencing.  


While Rothstein Victims Wait, Appellate Court Hears Argument Over Entitlement To Forfeited Assets

When it became clear that Ft. Lauderdale power-attorney Scott Rothstein was behind a massive Ponzi scheme, federal authorities took quick action to preserve proceeds of the fraud, seizing tens of millions of dollars of assets that symbolized Rothstein's larger-than-life persona, including more than 20 properties, exotic cars that included a $1.5 million Bugatti, 304 pieces of jewelry, and $15 million Rothstein had wired to Morocco just before the scheme's collapse.  In all, the criminal forfeiture proceedings, as they are known in legal parlance, yielded approximately $50 million of assets acquired with proceeds of Rothstein's $1.2 billion Ponzi scheme.  

However, now over three years later, not one of Rothstein's victims has seen a penny from the court-appointed bankruptcy trustee, who has been locked in a court battle with federal authorities over the right to dispose of those assets and distribute proceeds to victims.  Instead, in what legal experts describe as a murky area of legal jurisprudence long overdue for a showdown, the seized assets have remained in legal limbo as the two unlikely adversaries litigated their claims to possession in a clash between criminal forfeiture law and bankruptcy jurisprudence.  

This week, the Eleventh Circuit Court of Appeals heard argument this week over entitlement to the assets, with at least one judge expressing unbridled skepticism at the government's position.  Circuit Judge Gerald Tjoflat, a long-tenured Eleventh Circuit justice and a respected expert on bankruptcy law, took an active role during the arguments, repeatedly questioning the government's attorneys and insinuating that the government's actions were overreaching and unwarranted.  While a ruling is forthcoming, many expect the issue to make its way to the doorsteps of the U.S. Supreme Court.  

The Dispute

The source of contention between the trustee and the government boils down to one simple issue: who can more efficiently distribute proceeds to victims of Rothstein's fraud.  United States District Judge James I. Cohn, a sitting judge in the Southern District of Florida where Rothstein's fraud was based, largely sided with prosecutors in forfeiture proceedings, questioning why assets should be returned to the bankruptcy estate where they would be returned to the pool of money available to all creditors - not just Rothstein's victims. Judge Cohn vocalized these concerns, noting that 

It would be patently inequitable to return that money to RRA's estate when it can be returned directly to the clients and qualified investors.

And he may have a point.  While Rothstein ran a classic Ponzi scheme, he did it in his position as chairman of one of South Florida's largest law firms, Rothstein Rosenfelt Adler ("RRA").  When the scheme collapsed, RRA soon was forced into bankruptcy and over 70 RRA lawyers lost their jobs.  The resulting bankruptcy proceeding included not only victims of Rothstein's scheme, but also other creditors expected when a large law firm went into bankruptcy, including landlords, service providers, and former clients. Thus, because investors would not be the only ones sharing in the pot of recovered assets, the additional number of claims means that subsequent distributions would be accordingly diluted.  

But Herbert Stettin, the court-appointed bankruptcy trustee, has maintained that the assets rightfully belong to the bankruptcy estate, as they were acquired with tainted funds and thus constituted proceeds of Rothstein's fraud.  Already, Stettin's recovery efforts are likely to fall well short of the over $1 billion of estimated losses, due in part to Rothstein's dangerous penchant for burning through large amounts of money in activities with little or no prospect of recovery such as call girls, prostitutes, and nights on the town.  The inability to bring those disputed assets into the bankruptcy estate means that Stettin will have to rely largely on litigation, including clawbacks from scheme profiteers, to to bring assets into the bankruptcy estate.  

Increase in Forfeiture Actions Yields Positive Results 

While the relationship between authorities and court-appointed bankruptcy trustees or receivers has not always been so contentious, the government has recently embarked on an aggressive push in bringing criminal forfeiture actions that has resulted in a spike in recoveries by the Department of Justice's Asset Forfeiture Program.  While recoveries remained fairly constant from 2000 - 2005, forfeitures suddenly doubled in 2006 and have continued at an increasing pace to a record $1.684 billion in 2011, as shown by the table below:

Year     Recoveries

  • 2000: $507,033,378
  • 2001: $439,930,324
  • 2002: $453,132,562
  • 2003: $466,968,207
  • 2004: $537,113,193
  • 2005: $578,803,657
  • 2006: $1,143,341,308
  • 2007: $1,583,388,625
  • 2008: $1,327,604,903
  • 2009: $1,583,388,625
  • 2010: $1,600,370,705
  • 2011: $1,684,810,126

The reports are available here.  While not solely attributable to the recent proliferation in Ponzi schemes, the correlation is unmistakable.  

However, while bankruptcy trustees and court-appointed receivers are obligated to distribute all net asset recoveries, the government is under no such obligation with forfeiture proceeds.  Instead, the government is given sole discretion in determining the proper use of the funds, and these decisions are not subject to review or judicial oversight.  According to financial statements provided by the DOJ, on average less than one-third of yearly recoveries is used to compensate fraud victims.  

Victims Still Waiting

The dispute could arguably be blamed for the reason that, despite Rothstein's scheme unraveling more than three years ago, victims have yet to see a single penny from Stettin's recovery efforts.  Indeed, the recovery and disposal of assets acquired with scheme proceeds occurs soon after a receiver or trustee's appointment, and the resulting proceeds are often used to fund initial distributions.  While clawback litigation is also a significant source of asset recoveries, fruits of those efforts are often not realized until years later after the litigation has worked its way through the system.  


JP Morgan Given January 11th Deadline to Disclose Madoff-Related Documents; Investigation Related To Money Laundering Policies?

Bringing to light a previously-undisclosed investigation, the Office of the Comptroller of the Currency ("OCC") has accused financial behemoth JP Morgan Chase ("JP Morgan") of withholding requested documentation pertaining to an investigation of the bank's relationship with infamous Ponzi schemer Bernard Madoff.  According to a letter from Treasury Inspector General Eric Thorson to JP Morgan's general counsel, the dispute seems to center on documents that JP Morgan has taken the position are protected by the attorney-client privilege.  Thorson, in dismissing the bank's claims, cautioned that further inaction would be viewed as "continuing purposeful impediment" to the OCC that would merit "further action by our office."

Inquiry May Have Been Spawned By Madoff Trustee's Investigation

The OCC's investigation, while not publicly known, is not surprising in light of previous claims made in a lawsuit brought by Irving Picard, the bankruptcy trustee tasked with recovering assets for Madoff's victims.  In a 148-page lawsuit filed in June 2011, Picard accused JP Morgan of turning "a blind eye" to Madoff's fraud "as the drive for fees and profits became a substitute for common sense, ethics, and legal obligations."  (A federal judge later dismissed a majority of the claims, which Picard has since appealed.)  

The lawsuit is rich with numerous examples purportedly demonstrating that JP Morgan was aware of Madoff's fraud for over a decade, including an internal email in June 2007 from JP Morgan's chief investment officer observing that

For whatever it[']s worth, I am sitting at lunch with Matt Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme.

This knowledge, coming from JP Morgan's role as Madoff's primary banker for decades, allegedly allowed the bank to quietly withdraw nearly $300 million from Madoff's scheme just before it unraveled in December 2008.  JP Morgan later claimed the withdrawals stemmed from a routine re-balancing of the bank's hedge-fund exposure. 

In addition to avoiding those losses, JP Morgan also benefitted from use of the billions of dollars in Madoff accounts.  Indeed, according to a study conducted by a respected finance professor, JP Morgan realized an after-tax profit of at least $483 million.  Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette, arrived at this figure using several factors, including JP Morgan's reported net interest margin levels.  Wilson's treatise is available for purchase here.

Possible Hints Into Subject Of Inquiry

While the OCC has not specified the focus of its investigation, recent comments made by a JP Morgan spokeswoman suggest that the documents sought concerned communications seeking guidance from the bank's lawyers.  Additionally, the presence of the OCC as the lead investigative agency suggests that the inquiry could be related to JP Morgan's obligation under the Bank Secrecy Act of 1970 ("BSA") to file suspicious activity reports ("SAR's") regarding the detection of "certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA." SAR's are typically shrouded in secrecy - indeed, the unauthorized disclosure of an SAR is by itself a criminal offense.  

Authorities have bolstered efforts to crack down on financial institutions skirting their duty to file SAR's, with the OCC recently leading an investigation that culminated with banking giant Wachovia agreeing to pay a then-record $160 million fine stemming from a "woefully inadequate" anti-money laundering program.  

A copy of the Trustee's lawsuit against JP Morgan is here.