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Recent SEC Releases

Guilty Plea in $600 Million Prepaid-Funeral Ponzi Scheme

A St. Louis woman has pled guilty to her role in a massive Ponzi scheme that billed itself as a nationwide leader in the sale of prearranged funerals.  Sharon Nekol Province, 69, of Baldwin, Missouri, entered into a plea agreement with prosecutors in advance of a pending August trial date, pleading guilty to six federal charges, including wire fraud, mail fraud, and misappropriation of human premiums.  Province is scheduled to be sentenced on November 7, 2013, before United States District Judge Jean Hamilton, and prosecutors have agreed to recommend a maximum sentence of three years in prison, with the possibility that Province could avoid prison time through a sentence of probation.  

According to authorities, National Prearranged Services ("NPS") was created in 1979 and based in Clayton, Missouri.  Beginning in 1992, and through the use of its two subsidiaries, Lincoln Memorial Life Insurance ("LMIS") and Memorial Service Life Insurance ("MSLI"), it employed an aggressive sales strategy extolling the idea of pre-paying for funeral costs and playing on fears that family members could be footed with the bill.  Potential investors were told that the 'funeral contract' was essentially was an insurance policy ensuring that most, if not all, funeral costs would be taken care of upon an investor's death.  After agreeing on the amount of the policy, which often ranged from $5,000 to $10,000, investors were given the option to pay the entire policy in full or through periodic installments.  To ensure the safety of investor funds, NPS represented that it would deposit the majority of funds with a third-party trustee, often a financial institution, that would hold the funds until they were needed for funeral services. From 1992 to 2008, about 150,000 people purchased prearranged funeral policies through NPS.

However, many of these representations were untrue.  For example, the majority of investor funds were not deposited with neutral third-parties as promised, but instead were retained by NPS.  Additionally, NPS borrowed large amounts of the cash surrender value of the insurance policies taken out by investors, which in turn reduced the amount of death benefits that would be available to policy holders.  Funds were also used from new purchasers to pay policy premiums on the lives of previous purchasers, as well as for reimbursal of funeral services for earlier purchasers.

In 2008, authorities unsealed a 50-count indictment against six individuals that served as officers, directors, or advisers of NPS, including Province and several members of the Cassity family.  Province, who started as an administrative secretary, had risen to serve as secretary of NPS and vice-president of LMIS.  Her attorneys portrayed her as much less culpable than her co-defendants, who enjoyed immense wealth from their role in the scheme.  For example, James Cassity, who had previously served time for conspiracy and tax fraud violations, purchased several expensive homes - including a Nantucket home he sold to Google co-founder Eric Schmidt for $16 million in 2005.  Cassity, who is described by some as the "Bernard Madoff of Missouri," has maintained his innocence.  

A trial is scheduled for early August for the remaining defendants.  


Six Years Later, Boy Band Founder's Ponzi Scheme Victims Set For 4% Payout

Photo: AP Photo/ John RaouxMore than six years after his $300 million Ponzi scheme collapsed, victims of former boy band mogul Lou Pearlman's scheme are set to receive an initial payout of just four cents on the dollar.  In a distribution plan (the "Plan") filed by the bankruptcy trustee appointed to recover funds for Pearlman's victims, an investor with an allowed claim of $100,000 would be entitled to $4,000, with the chance that future distributions could eventually add to this total.  Pearlman, who was arrested in June 2007 after fleeing to Indonesia, and is currently serving a 25-year prison sentence in an Eastern Texas prison.  He is currently scheduled to be released on March 24, 2029.

The Scheme

Pearlman operated a vast array of businesses from airlines to blimp companies to entertainment ventures.  While some of his businesses were legitimate enterprises, he used these profitable businesses to sustain other unprofitable businesses, including TransContinental Airlines ("TCA"). Investors were solicited to invest in TCA, drawn by the promise of above-market interest rates as well as the future possibility of an initial public offering (IPO) that would result in exponential returns for initial investors.  Pearlman also offered investments through TCA in an alleged "Employee Investment Savings Account," which was apparently designed to mimic the Employee Retirement Investment Savings Account (ERISA) established under federal law.  In total, investors contributed nearly $300 million to Pearlman's various ventures.

In addition to his legitimate ventures, Pearlman also used the massive cash horde generated by his creation of two wildly-popular boy bands, 'N Sync and the Backstreet Boys.  While under contract, the groups essentially financed Pearlman's other unprofitable ventures through a stead stream of cash.  However, after the groups successfully sued to escape their contract, Pearlman was faced with mounting investor obligations while cash inflows decreased.  As a last ditch effort, Pearlman even established his own fake accounting firm, Cohen & Siegel ("C&S"), which existed solely to forward phones and generate bogus accounting reports and audits. After an unsuccessful attempt to quickly liquidate assets to support the failing scheme, Pearlman fled to Thailand in 2007.  After he was spotted by a tourist, he was arrested, extradited back to the United States, and pled guilty in February 2008.

The Plan

The bankruptcy trustee, Soneet Kapila, was appointed in early 2007 and was tasked with unraveling Pearlman's fraud and marshaling funds for defrauded investors.  Discovering that little cash was left from Pearlman's businesses, the trustee filed over 700 'clawback' lawsuits targeting investors who had received distributions in excess of their principal investment.  Notably, one of these clawback lawsuits was profiled on Discovery Channel's True Crime with Aphrodite Jones, in which the investor sued by Kapila hired a hitman to kill him in order to allow his family to collect on a generous life insurance policy.  The hired killer was later caught and sentenced to twenty years in prison.

Of the 700-plus clawback cases, Kapila and his team have recovered more than $30 million, and litigation remains ongoing.  However, administrative fees due to Kapila and other professionals have reduced the amount of cash on hand to approximately $14 million.  

The Plan proposes that, after paying administrative and priority claims totaling approximately $4 million, investors holding nearly $260 million in unsecured claims will be entitled to a distribution amounting to 4% of their approved claim.  Because those investors will receive less than the full amount of their claim, federal bankruptcy laws entitle them to submit ballots voting for or against the Plan.  The committee representing unsecured creditors has urged approval of the Plan, warning that drawn-out litigation threatens to eliminate any recovery.

A confirmation hearing on the Plan will be held on July 17, 2013 at 2:30 p.m.  

A copy of the Distribution Plan is here.


New Zealand's 'Madoff' Charged With Country's Largest Ponzi Scheme

A New Zealand fund manager was charged with masterminding a $320 million Ponzi scheme which, if true, would rank as the largest Ponzi scheme in New Zealand's history.  David Ross, 63, was charged with four counts of false accounting and one theft charge relating to his investment firm, Ross Asset Management, which drew scrutiny last year after payments were delayed to investors.  Each false accounting charges carries a maximum sentence of ten years, while the fraud charge carries a maximum seven-year term.

According to authorities, Ross Asset Management ("RAM") and numerous associates entities solicited investors with the promise of guaranteed and lucrative returns - including returns of nearly 40% in some years.  Investors received regular returns, and Ross was generally perceived as an astute investor.  However, in late 2012, many investors began complaining about delays in scheduled payments, and in November 2012, authorities from New Zealand's Financial Markets Authority raided RAM's offices.  A Receiver was appointed to sort out RAM's finances, and a preliminary report issued shortly after his appointment showed that RAM had roughly $10 million of investments - approximately 2% of the $449 million reported to investors.  

The Receiver, John Fisk, identified investments of nearly $450 million held on behalf of more than 900 investors holding 1720 individual accounts.  Since 2000, Fisk estimated, RAM took in over $300 million, keeping nearly $30 million kept as management fees while $290 million was withdrawn or paid to investors.  Additionally, since 2007, fund outflows have exceeded incoming funds - the lifeblood of a Ponzi scheme - by at least $60 million.  

Ross was hospitalized in November for treatment under New Zealand's Mental Health Act, and remains free on bail with a court-imposed allowance of $1,000 per week.


Thailand Ponzi Schemer Allegedly Murdered By Associates

In a bizarre developing story out of Thailand, the murder of a man accused of a decades-old Ponzi scheme has been linked to a pre-meditated murder plot by several of his associates.  Akeyuth Anchanbutr, 54, had been reported missing for nearly a week before authorities arrested his driver, Santiphap Pengduang, and several associates this week for his murder.  Pengduang led authorities to a shallow grave today, where a body was exhumed that is believed to be  Anchanbutr's.  Authorities believe that Anchanbutr's murder was motivated by money.

Anchanbutr was the former leader of Charter Investment Co. Ltd ("Charter"), a controversial pyramid scheme that gained popularity in the early 1980s.  After he was criminally charged in 1983, he fled the country to England, where he waited twenty years for the statute of limitations on his case to expire before returning to Thailand.  When he returned, he launched a crusade against Thailand authorities, including the Prime Minister, accusing them of political abuses in the stock market.  While Anchanbutr's assets were seized after he fled the country, he was rumored to have built a sizeable fortune 

Late last week, authorities were alerted to a possible abduction after it was reported that security cameras at Anchanbutr's house had been tampered with and a sizeable amount of cash was reported missing.  Authorities soon named Pengduang, Anchanbutr's driver, as a person of interest, noting that he had a criminal record and had recently been charged with extortion.  After Pengduang was located, he initially told police that Anchanbutr had planned his own disappearance.  However, after further questioning, Pengduang confessed to the killing, and implicated several associates - including his father.  According to Pengduang, the murder had been planned for several months to coincide with one of Anchanbutr's trips to the bank, where he regularly withdrew sizeable sums of money.  

Authorities flew Pengduang by helicopter to a supposed location where Anchanbutr had been buried.  Authorities located a naked body in a 'crude' grave that was pending forensic confirmation that it was Anchanbutr.  

Anchanbutr's lawyer maintains that the killing was politically motivated.


Jury Convicts Minnesota Man For Role in $3.65 Billion Ponzi Scheme

After three days of deliberations, a federal jury found a Minnesota man guilty on twelve fraud counts for his role in the massive Ponzi scheme masterminded by Thomas Petters.  James Fry, a former Minnesota businessman, was convicted of twelve counts of wire fraud and securities for his role as an investment manager who funneled hundreds of millions of dollars into Petters' scheme.  Fry, who will remain free on bail until his sentencing, faces up to a twenty-year term for each of the five wire fraud counts, and up to five years for each securities fraud count.  Petters is currently serving a 50-year term after he was convicted of twenty fraud counts in December 2009.

According to authorities, Fry was the CEO of Arrowhead Capital Management, LLC ("Arrowhead"), which served as an investment advisor to a number of hedge funds.  Beginning in 1999, Fry began working with Frank Vennes to raise funds to invest in promissory notes issued by Petters' company, Petters Company Inc. ("PCI").  PCI raised billions of dollars from investors who believed their funds were being used by PCI to purchase and resale consumer electronics to big-box retailers.  From 1999 to September 2008, Fry was accused of funnelling hundreds of millions of dollars he raised through Arrowhead to be invested in PCI.  While Fry told investors that a 'big-box' retailer would make payments directly to an Arrowhead bank account, the reality was that Arrowhead received all payments from PCI.  Authorities alleged that, despite knowing the falsity of these representations, Fry continued soliciting investors.  In total, Fry received more than $41 million in commissions from PCI.

While Fry's lawyers claimed that Fry believed Petters was conducting a legitimate business and was simply another of the victims duped by Petters, the jury was not convinced.  The trial lasted over three weeks, and the jury had reached the third day of deliberations before it was able to agree on a verdict.  

The Superseding Indictment charging Fry is here.