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Recent SEC Releases
Sunday
Aug252013

Couple Files Bankruptcy To Avoid Ponzi "Clawback" Lawsuit

A New Mexico couple facing the possible "clawback" of nearly $1 million from the largest Ponzi scheme in New Mexico history has filed for bankruptcy in a bid to avoid dodge the lawsuit.  Mark and Maura Dahrling, of Albuquerque, New Mexico, were among hundreds of investors that lost approximately $75 million to now-convicted Ponzi schemer Doug Vaughn and his real estate company. After being sued in a "clawback" suit by a court-appointed bankruptcy trustee seeking hundreds of thousands of dollars in transfers from Vaughn, the Dahrlings filed a bankruptcy petition seeking to put an end to the "sinister clawback litigation" - listing the only substantial liability as their possible exposure to the clawback lawsuit.

Doug Vaughn operated Vaughn Company Realtors ("VCR"), which was once the largest independent residential brokerage firm in New Mexico. Started in 1983, Vaughn and VCR pitched investments in the form of promissory notes, promising potential investors annual returns averaging 17.5%.  In return, Vaughn represented that investor funds would be used for real estate investments.  In total, VCR collected more than $86 million from investors in eight states.  

However, rather than use the funds for real estate investments, Vaughn ran an elaborate Ponzi scheme that used investor funds for a variety of unauthorized purposes, including the payment of Ponzi-style payments to investors, massive bonuses, and the payment of corporate expenses for VCR, which was hemorrhaging money having lost $54 million from 2004 to 2009 and nearly $14 million in 2009 alone.  The scheme began to collapse in late 2009, as payment obligations surpassed incoming fund inflows, and Vaughn soon began making preferential payments to investors and insiders.  Vaughn filed for personal and corporate bankruptcy protection in February 2010, indicating that nearly 600 investors were owed approximately $75 million. 

Soon after Vaughn declared bankruptcy, Judith Wagner was appointed as bankruptcy trustee and tasked with recovering funds for victims.  After identifying a number of investors that had been fortunate enough to receive returns of principal or profits from their investment with Vaughn and VCR, Wagner filed a wave of "clawback" lawsuits seeking not only the payment of profits from the scheme, but also the return of preferential payments made just before Vaughn filed for bankruptcy protection.  Wagner filed a total of 153 clawback lawsuits - flooding the U.S. Bankruptcy Court in Albuquerque and single-handedly representing approximately 70% of the total adversary lawsuits filed the previous year.  

The Dahrlings were among Wagner's clawback targets, facing lawsuits not only for their personal investment with Vaughn but also that of their business, Dahrling Enterprises.  Notably, Maura Dahrling had previously been an employee of VCR, pitting her as an insider of Vaughn and thus subject to higher scrutiny than a typical investor.  Under federal bankruptcy laws, even if the Dahrlings had not profited from the scheme, they still could be pursued for receiving preferential payments made by Vaughn just before the scheme collapsed. Federal bankruptcy laws identify different time period just preceding a bankruptcy petition in which transfers may be subject to clawback. Indeed, because a debtor is presumed to be insolvent 90 days before filing for bankruptcy, all payments made during that time period are subject to attack.  Earlier this year, a federal judge ruled in favor of Wagner in her suit against Dahrling Enterprises and entered a judgment in the amount of $338,056.  However, the litigation against the Dahrlings in their individual capacity remained ongoing, with Wagner seeking the return of over $600,000.  

After the judgment was entered against Dahrling Enterprises, Maura Dahrling indicated in a court filing opposing her upcoming deposition that she had decided to file bankruptcy to avoid continuing legal fees. In July, the Dahrlings filed a petition for chapter 7 liquidation, listing among their assets a $735,000 house and eight vehicles.  Under Chapter 7, assets that do not qualify for exemptions are sold and distributed to creditors - in this case, Wagner.  In a statement emailed to the Albuquerque Business Journal, Mark Dahrling indicated that

“We are good people and have done nothing wrong.  We have been forced into bankruptcy in order to stop this sinister clawback litigation against us and hopefully put an end to this unbelievable nightmare.”

While the filing of bankruptcy will halt any ongoing litigation against the Dahrlings, they must still satisfy the means test to qualify for Chapter 7 protection, which involves a series of eligibility requirements.  If they satisfy the means test, obtaining a subsequent discharge would forever bar Wagner from pursuing the clawback lawsuit.  

A copy of Vaughn's indictment is here.
Friday
Aug232013

Criminal Charges Filed in $30 Million Ponzi Scheme Targeting Haitian Community 

Federal authorities unsealed an indictment charging a Florida man with operating a Ponzi scheme that targeted members of the Haitian and Haitian-American community and took in more than $30 million from victims.  George L. Theodule, 53, was charged with thirty-six counts of wire fraud, one count of securities fraud, and two counts of money laundering. Each of the wire fraud charges carries a maximum sentence of twenty years in prison - meaning that Theodule could potentially receive a sentence of hundreds of years in prison if convicted.  

Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC").  Using these companies, and a variety of other entities and investment clubs he formed, Theodule held himself out as a financial expert to the Haitian community, touting his 17+ years of experience trading stocks and options.  Theodule promised astronomical returns, guaranteeing potential investors 100% returns on their investment in just 90 days as a result of his supposed expertise in trading stocks and options. As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone.  Based on these representations, Theodule is said to have raised more than $30 million from July 2007 to December 2008.

However, authorities alleged that Theodule's claims of trading success were completely false, and that instead he was operating a massive Ponzi scheme.  Rather, Theodule supposedly suffered trading losses of at least $18 million, and spent the remainder of investor funds to sustain a lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas.

The Securities and Exchange Commission filed charges in December 2010, accusing Theodule of multiple violations of federal securities laws.  According to the court-appointed receiver, Theodule had spent early 100% of the money he took in, and little remained for victims.

A copy of the indictment is here.

Thursday
Aug222013

64-Month Sentence for California Man Who Operated $7 Million Ponzi Scheme

A California man will spend the next 64 months in prison after defrauding investors out of over $7 million in what he advertised as a computer program that could generate exorbitant profits by identifying market trends.  Douglas Hollingworth, 64, received the sentence after previously pleading guilty earlier this year to wire fraud and money laundering counts.  Hollingsworth was also ordered to pay $4.9 million in restitution to his victims.

Hollingsworth owned and operated several companies, including Baytree Investors, LLC ("Baytree"), and Capsule Partners, LLC ("Capsule").  Beginning in June 2007, Hollingsworth began soliciting potential investors to invest in Baytree or Capsule, telling them they could expect potential monthly returns of 6% (72% annually).  Hollingsworth explained to potential investors that he had developed computer trading software that allowed him to profit from the advanced identification of market trends by engaging in the short-term trading of securities.  Some investors were also told that Hollingsworth was developing additional trading software - to improve on his existing trading software - and that some of their funds would be devoted to creating that software.  

Despite being visited by federal law enforcement in 2010 concerning his investment activities, and the subsequent seizure of certain bank accounts under his control, Hollingsworth continued to solicit investors for Baytree and Capsule.

Not surprisingly, Hollingsworth was not able to pay monthly 6% returns to investors through expertly-timed trading strategies; rather, Hollingsworth operated an elaborate Ponzi scheme that used incoming investor funds to pay returns and principal redemptions to existing investors.  As is typical in Ponzi schemes, Hollingsworth used investor funds for a variety of uses, including not only payments to investors, but also to sustain a lavish lifestyle that included the purchase of fine jewelry, at least $14,000 in Best Buy purchases, and over $20,000 in dental care.  

At the sentencing hearing, U.S. District Judge Charles R. Breyer ordered Hollingsworth to surrender immediately to begin serving his sentence.  After serving his sentence, Hollingsworth will also be subject to a three-year period of supervised release.

A copy of a superseding indictment is here.

Tuesday
Aug202013

Grand Juror Indicted After Tipping Off Ponzi Schemer 

A federal grand juror is facing criminal charges after he allegedly disclosed details regarding the investigation and indictment of a suspected Ponzi schemer to a witness during a chance encounter at a local Costco - which resulted in the witness tipping off the fraudster.  Terry Jones, of Des Moines, Iowa, was charged with a single count of criminal contempt in a recently-unsealed indictment.  The Ponzi schemer, John F. Holtsinger, later pleaded guilty to a $1.1 million Ponzi scheme, and received a 7-year prison sentence.

According to authorities, Jones was empaneled as a grand juror in June 2011 for the Southern District of Iowa.  Federal grand jury proceedings are secret in nature, and Jones was given instructions during the empanelment process from multiple officials regarding the confidentiality of the proceedings, including a U.S. District Judge, a United States Attorney, and an Assistant U.S. Attorney.  After his empanelment, Jones heard testimony from a number of witnesses concerning their experiences with Holtsinger.  Following the witness testimony, the grand jury returned a sealed indictment and arrest warrant against Holtsinger.

However, two days following issuance of the sealed indictment, and before Holtsinger had been arrested, a Secret Service agent received an anonymous tip that Holtsinger had been tipped off as to the existence of the indictment and arrest warrant - even though both were sealed.  Additionally, Holtsinger was allegedly aware of the exact number of witnesses that had testified before the grand jury, as well as whether those witnesses had testified "for" or "against" him.  

Authorities learned that a grand juror had communicated with a witness during a chance encounter at a West Des Moines Costco two days after the indictment was issued.  After identifying the witness, authorities also learned that Jones was a member at the same Costco.  Store records revealed that both Jones and the witness had purchased items within minutes of each other on "Costco register lane 5," and video surveillance footage maintained by Costco showed the two men engaging in a conversation. (The complaint discloses that while the Secret Service agent asked the Costco manager for a copy, the ensuing copy that was made was lost, and the footage was overwritten and permanently deleted.)  During a later interview with authorities, Jones admitted initiating a conversation with the witness at Costco after stating that he recognized the witness from the grand jury proceedings.  Jones allegedly told the witness that the grand jury had felt sorry for him and the other victims, and that an indictment was issued against Holtsinger.  

Unbeknownst to Jones, the witness was highly loyal to Holtsinger and immediately informed him of the substance of his conversation with Jones.  Luckily for authorities, Holtsinger made no attempt to flee, and later surrendered to authorities.  Jones, however, failed to appreciate the secret nature of the grand jury proceedings despite being informed by several court officials - and even admitted to authorities that this was not the first time he had provided information to individuals not associated with the grand jury.

A copy of the criminal complaint is here.

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.