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Recent SEC Releases
Tuesday
Sep252012

Co-Founder of Zeek “Victim Group” That Openly Challenged SEC Reportedly Receives SEC Subpoena  

One of the individuals leading an advocacy group openly critical of the Securities and Exchange Commission’s (“SEC”) handling of the alleged $600 million Zeek Rewards Ponzi scheme has reportedly been subpoenaed to appear before the SEC.  The individual, Robert Craddock, made this disclosure in a September 22, 2012 mass email directed to victims who have rallied behind claims that the SEC may have mis-handled the case.  While the SEC did not provide the reason for the subpoena, some have speculated that recent comments attributed by Craddock to the SEC concerning purported admissions of fault in the SEC's case against Zeek which were later refuted may have piqued the SEC's interest.

The SEC shut down Zeek in mid-August, alleging that the operation was nothing more than an elaborate Ponzi scheme that paid existing investors with funds raised from new investors.  The same day the SEC filed its complaint containing these allegations, it also disclosed that the two defendants, Rex Venture Group, which was the parent company of Zeek, and Paul Burks, the company's founder, had agreed to enter into consent judgments to resolve the case without admitting or denying the conduct alleged. Burks also agreed to pay a $4 million civil penalty.  With the cases against RVG and Burks all but resolved, the SEC then obtained the court's approval to appoint Kenneth Bell as receiver over Zeek's assets.

However, within days after Zeek was shut down, several groups were formed protesting Zeek's shutdown and rallying victims by promising to take action.  The groups appeared to be operating in tandem, and one group, "Zeek Rewards Affiliates United Against The SEC," claimed that the SEC had "mislead" the federal judge overseeing the Zeek case and began soliciting funds from victims for the establishment of a "united legal front" to petition the court to re-open Zeek.  The group, in conjunction with Zteambiz.com, claimed it was formed by the "leaders of Zeek Rewards," and promised that "donating anything from $20 dollars to $100 dollars (sic) will allow us to hire one of the best if not the best firm in the country to protect us."  The quest seemed to be quite successful; in a chart posted on Zteambiz (but later removed), it appeared to show that at least 6,000 victims had contributed a minimum of $20 towards this "legal fund" – if true, this indicates that over $100,000 had been raised.

As the group grew in number, the regular updates continued to lambaste the SEC's handling of the case and appeal for donations.  An August 25th message from another "leader" of the group, Dave Kettner, promised recipients that information would be provided "which will disprove everything the SEC has stated”, and, in return for their donation, they would be "part of the protected group who will be fully represented by our law firm that will be retained."

However, it was a September 8th update that gained immediate attention when a law firm purportedly hired by the group disclosed several "facts" to Craddock in a phone call, including: 

The SEC acknowledged that there are a couple of problems with the case against Zeek Rewards and Rex Venture group. Here are the problems:
1.    We (the SEC) are not able to find a victim in this case. We are not able to find anybody at this time that has been harmed by Zeek Rewards.
2.    We (the SEC) are having a hard time finding a security. In the complaint, it said that Zeek was selling securities and was an investment scheme.
Based on their (the SEC) new knowledge of the Zeek Rewards business model, they are having a hard time moving forward in making their case. And they are now looking for a path or way to back out of this.

If true, the SEC would be taking the nearly-unprecedented step of admitting a massive mistake even though the company and individual behind the alleged scheme had already entered consent judgments in which they did not deny the allegations made.  However, several issues with the revelation  raised suspicions, including that such admissions would be highly unlikely to originate from the SEC and especially to an unrelated party to the civil proceeding.  Ponzitracker confirmed these suspicions several days later during a conversation with an SEC lawyer involved in the case who categorically denied the allegations as "inaccurate" and "false".   A later update from Zteambiz decried the "junk and lies being posted around the internet," and began directing victims to join a private mailing list to avoid future updates from being posted publicly.

The group continued to criticize the SEC, and in a September 12, 2012, update, Dave Kettner urged victims to "disregard" letters from the receiver, Ken Bell, as they were "nothing important."  An update several days later on September 18th from Craddock cautioned victims not to "fall for the trap the receiver would like everyone one (sic) of you to fall into," questioning why victims should fill out a claim form for the receiver "thus saying they were a victim."  Just after that announcement, Craddock reported that he had been served with a notice to appear in front of the SEC - the timing of which he deemed "highly suspect."

According to Washington, D.C. white collar defense lawyer Mark Schamel with Womble Carlyle Sandridge & Rice, assuming Craddock did indeed receive an SEC subpoena, “he has picked up a sufficiently large stick to poke the tiger in the eye."  By making statements to a mailing list of likely thousands of victims purporting to contain admissions of fault by the SEC and urging non-compliance with the court-appointed receiver, the SEC may have felt it had no choice but to act to prevent the spread of misleading information on such a large scale, especially in the infancy of what may be the largest receivership proceeding ever conducted.  While Craddock is certainly entitled to make the statements, according to Schamel, "it is not freedom of speech if you are obstructing an investigation."  In an update several days later, Craddock hinted at the SEC's focus, indicating that:

“My day has been filled with getting the requested files showing my involvement with Zeek.”

The move also comes as a Texas law firm has sought court approval to appear as legal counsel for Fun Club USA, Inc. and other victims whose “assets were seized” as a result of the receivership.  As discussed in a previous article, Fun Club is a Florida entity operated by Craddock. 

It appears the alleged subpoena may have had its desired effect; in an update yesterday, Craddock indicated that "after speaking with the attorneys today they have requested that I go silent for a while and not give any more updates."  

Monday
Sep242012

SEC Charges Oregon Fund Manager With $37 Million Ponzi Scheme

The Securities and Exchange Commission ("SEC") has filed civil fraud charges against an Oregon fund manager it claims operated a $37 million Ponzi scheme.  Yusaf Jawed, 44, was charged with multiple violations of federal securities laws in connection with his use of various hedge funds to defraud over 100 investors.  In its complaint, the SEC is seeking injunctive relief, civil monetary penalties, and disgorgement of ill-gotten gains with prejudgment interest.  

Jawed controlled Grifphon Asset Management, LLC ("GAM") and Grifphon Holdings, LLC ("GH"), which served as the advisers to numerous hedge funds created and managed by Jawed, including Gripfhon Alpha Fund, L.P. ("Alpha") and Grifphon Iota Fund, L.P.  Investors were told through private placement memoranda that the funds experienced annual returns ranging from 12.8% to 132.5% from 2002-2008 through an investment strategy comprised of holdings in publicly-traded securities, private equities, biotech companies, foreign currencies, and commodities.  Additionally, investors were assured that their funds would be held at prominent institutions such as Lehman Brothers and UBS.  In total, Jawed raised more than $37 million from over 100 investors all over the United States.

However, little, if any, of the claims made to investors were true.  According to the SEC, Jawed misappropriated millions of dollars in investor funds for his personal use, which included luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.  Additionally, Jawed used investor funds as the source of fictitious interest payments designed to lend an aura of legitimacy to the scheme.  Indeed, investors were supplied with account statements and tax returns that purported to show constant profits in investor accounts.  

When two bookkeepers retained by Jawed raised questions concerning the reconciliation of company books and record, Jawed devised an elaborate scheme to create the appearance of value in the funds by providing fictitious records showing evidence of assets from companies Jawed had secretly formed and maintained control over.  

Additionally, when the scheme appeared on the verge of collapse in 2008, Jawed hatched a scheme with the help of Robert Custis, an attorney.  The two began telling investors that a third party would soon purchase the funds' assets, and investors would soon be reimbursed for their investment at a healthy profit.  This pattern of deception lasted an additional two years with the use of various excuses such as the time zone difference of the banks, "dotting I's and crossing T's," and confidentiality problems.  However, this third-party purchaser was none other than an entity created and controlled by Jawed.  For his role in the scheme, Custis was also charged by the SEC.

A copy of the SEC's complaint is here.
Monday
Sep242012

Former Retirement Home CEO Charged With $130 Million Ponzi Scheme

Authorities charged the former chief executive officer of a chain of retirement centers with operating a massive Ponzi scheme that conned more than 1,000 investors out of $130 million in one of the largest frauds in Oregon history.  Jon Harder, 47, was charged last week with fifty-six counts of money laundering, mail and wire fraud, criminal forfeiture and aiding and abetting.  If convicted of all charges, Harder could face a maximum prison sentence of hundreds of years in federal prison.  

Harder was the founder and president of Sunwest Management ("Sunwest") and Canyon Creek Development, Inc. ("Canyon Creek").  Founded in 1992 in Salem, Oregon, Sunwest began raising money from investors in early 2001 through numerous offerings in over 100 retirement homes.  These offerings, known as "tenancy-in-common" interests, offered investors the ability to purchase a minimum $100,000 interest in a retirement home and receive a 10% return funded by the receipt of rental income.  Sunwest usually targeted under-performing retirement homes, seeking to streamline operations and bring the business to profitability.  Investors were told in offering documents that their investment was backed by a personal guarantee by Harder and Darryl Fisher, who served as Sunwest's COO.  Based on these and other representations, Sunwest raised more than $430 million from investors from 2001 to 2008.

From 2001 to July 2008, Sunwest made regular interest payments to investors, giving the impression that the operation was wildly successful.  However, unbeknownst to investors, many of the retirement homes sold to investors were not operating profitably.  Indeed, by commingling funds from the homes' operations and incoming funds from investors, Harder was able to support company operations, including the payment of interest to investors.  While nearly 60% of homes experienced negative cash flow by September 2007, the constant stream of incoming funds from new investors helped continue an otherwise unsustainable operation.

As the performance of the operation was inextricably linked to the performance of the real estate market, the nationwide credit crisis beginning in 2007 quickly took its toll on Sunwest.  When Sunwest began to default on an increasing number of retirement homes, creditors began to step up pressure.  When incoming cashflows were no longer able to satisfy investor obligations in late 2008, the scheme collapsed.  From October 2008 to January 2009, approximately twenty-five receivers were appointed for individual facilities, sixty-nine facilities went into foreclosure, and thirty-two facilities were placed into bankruptcy.  On December 31, 2008, Harder himself filed for personal bankruptcy.

Several months after the collapse, the Securities and Exchange Commission ("SEC") charged Harder with multiple violations of federal securities laws, alleging that he operated Sunwest as a giant Ponzi scheme and made numerous misrepresentations to induce over 1,000 people to invest.  According to the SEC, Harder and his wife operated Sunwest “as if it was their personal checkbook....to support their lavish lifestyle.”  A court-appointed receiver estimated that this lifestyle included the acquisition of 18 pieces of property and the purchase of numerous luxury cars, including a Mercedes, a Land Rover, two BMWs, a Cadillac Escalade and a Lexus.  

A team of consultants, accountants, and lawyers took over Sunwest in an effort to turn around the company that has resulted in the recovery of at least 60% of investor losses - an effort that earned the group a "Turnaround of the Year" award in 2011 from an industry group.  The amount was particularly noteworthy considering investors were initially estimated to recover no more than 6% of losses.  This recovery was also funded in part by a $30 million settlement by a law firm used by Sunwest to prepare documents related to the investments.  The SEC case remains ongoing.

In the 30-page indictment, authorities are seeking a money judgment of $130 million, as well as forfeiture of various real estate and other assets held by Harder.  In a court appearance last Friday, Harder entered a plea of not guilty and was released on bond.  A trial could come as early as November.  

A copy of the SEC complaint is here.

Friday
Sep212012

Florida Woman Receives 30-Year Prison Sentence for $100 Million Ponzi Scheme

In what is thought to be one of the largest sentences given to a female Ponzi schemer, a Florida woman was sentenced to spend the next thirty years in prison for masterminding a $100 million Ponzi scheme. After being convicted earlier this year of fourteen counts of wire fraud, mail fraud, and conspiracy, United States District Judge Timothy Corrigan handed down his sentence to Lydia Cladek, 68, noting that she showed no remorse to the hundreds of individuals she victimized.  Cladek remained defiant until the end when, given a chance to address the court, she maintained that "I took nobody's funds...I'm innocent.  I will not quit until I prove it."  

Cladek was indicted in November 2010, charged with operating her investment company as a $100 million Ponzi scheme.  According to authorities, Cladek was the president of Lydia Cladek, Inc. ("LCI"), which purportedly purchased high interest automobile retail installment contracts with investor funds with the promise of a hefty annual return of 15% - 20%.  In an effort to connect with older and elderly women, Cladek was known as an avid churchgoer and animal lover, who would often sip tea at social events.  Those who invested would receive a promissory note supposedly secured by the vehicles and other car notes as collateral.  A prosecutor estimated Thursday that $112 million was invested in the company between 2003 and 2010.

However, instead of operating a legitimate operation, authorities accused Cladek of operating a massive Ponzi scheme that used investor funds to pay others fictitious returns.  Additionally, Cladek was accused of using investor funds to support her lavish lifestyle, which included multiple houses, diamond earrings, several paintings, and a baby grand piano.  After being indicted on fourteen charges, Cladek refused to plead guilty, and instead chose to stand trial.  The strategy backfired, as a federal jury convicted her of all fourteen counts.  

News coverage of the sentencing indicated a concerted efforts by victims to convey the destruction brought by Cladek's fraud, many who lost their life savings.  One woman suggested to Judge Corrigan that "I hope she goes to jail until hell freezes over," while another likened the Cladek's actions to "rape."  Attorney Nina La-Fleur, who represented a large amount of Cladek's victims, indicated that the victims were pleased with the sentence.

Both the magnitude of Cladek's Ponzi scheme and her sentence easily gains her the distinction as one of the worst Ponzi schemes perpetrated by a woman.  A review of Ponzi schemes in the past few years shows that while women do account for a small percentage of schemes, as evidenced here, here, here, here, and here, the amount of investor losses in Cladek's scheme dwarfs those schemes.  

A copy of Cladek's indictment is here.

Thursday
Sep202012

Texas Lawyer Seeks to Intervene on Behalf of Zeek "Victims" Group

A Texas lawyer has indicated in a court filing that he seeks to appear on behalf of a "victims" group with the North Carolina federal court overseeing the $600 million ZeekRewards receivership. Michael Quilling, a partner with Dallas law firm Quilling, Selander, Lownds Winslett & Moser, P.C. ("QSLWM") made the filing known as a pro hac vice application, in which a lawyer not admitted to practice in a particular state seeks the court's permission to appear as an attorney in a specific case. The filing indicates that Quilling intends to represent "Fun Club Usa, Inc. and other entities whose assets were seized in connection with the above-referenced matter." Quilling is a well-known attorney who is board-certified in bankruptcy law and has also served as the receiver in several Securities and Exchange Commission securities fraud case.

As some may recall, Fun Club Usa, Inc. ("Fun Club") is the Florida corporation that, after being administratively dissolved on August 18, 2010, for failure to file an annual report with the Florida Division of Corporations, suddenly came back to life on August 28, 2012, when Craddock re-filed articles of incorporation for Fun Club and indicated that the filing should have an "effective date" of August 24, 2012. Craddock has also been a active member of Zteambiz.com and Zteambiz.net, which began soliciting donations to retain a law firm to "prevent further damage caused by the actions of the SEC". According to a chart on the site, which has since been removed, over 6,000 people made a donation of at least $20. Craddock is also prominent on the Facebook group "Zeek Rewards Affiliates United Against the SEC," which directs users to Zteambiz and circulates frequent updates on the progress of the suit.

The reliability of the updates sent out from the site has been questioned at least once, including a previous article by Ponzitracker that refuted the claim that the Securities and Exchange Commission ("SEC") had confided to an unnamed individual that the case against Zeek was weak. Ponzitracker spoke with an SEC official involved with the case who unequivocally stated that those statements were "inaccurate" and "false."

Another important issue concerns (1) the identity of clients to be represented, and (2) whether those clients were net winners that received more from the scheme than they invested, or net losers that actually suffered a loss on their investment. While victims had been solicited to donate and sign up originally to rectify a "major injustice to all of us affiliates," a September 8th, 2012 update from Zteambiz indicated that legal representation was being sought for the purport of "providing protection against possible crawlback (sic) action by the SEC." Clawback actions are those brought by a receiver against individuals that withdrew more funds from the scheme than they originally invested. Because Zeek is alleged to have operated as a Ponzi scheme, those withdrawals did not constitute true profits, but instead a re-distribution of other investor funds. Clawback actions are frequently used by court-appointed receivers to recover funds for victims, and Zeel receiver Kenneth Bell indicated in so many words that he intended to pursue clawbacks in a recent letter to investors.

This presents an ironic situation if Zteambiz and related entities have been soliciting funds from victims in order to "protect against possible crawlback (sic) action by the SEC," since the funds recovered from clawbacks are used to compensate those victims that did not have the good fortune to make withdrawals from the scheme exceeding their investment. Essentially, those victims who would not be the target of clawback actions would be subsidizing efforts to prevent recovery of additional funds for distribution. Additionally, some have observed the likely conflict of interest involved for an attorney to represent both victims and targets of clawback actions, as each has radically different interests.

While these are scenarios that are months, if not years, away, the likely approval of Mr. Quilling's pro hac vice application sets the process into motion.

The Pro Hac Vice motion is here.

Previous Ponzitracker coverage of ZeekRewards:

Zeek Receiver: Nearly $300 Million Recovered, Clawbacks Likely

ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier's Checks To Court

ZeekRewards Victims: What Happens Next

SEC Shuts Down Zeek Rewards, Alleges It Was $600 Million "Massive Ponzi Scheme" On Verge Of Collapse