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Recent SEC Releases
Wednesday
Jul182012

Accused Utah Ponzi Schemer Held in Contempt For Hiding Assets From Receiver

A Utah federal judge ordered a Utah man accused of operating a $200 million Ponzi scheme to be held in contempt for his failure to turn over assets to the court-appointed receiver.  Allen Jacobson, charged with his father Wendell in what Utah authorities say is one of the largest Ponzi schemes uncovered to date, is alleged to have withheld over $200,000 in tax refunds that should have been turned over to the receivership estate. United States District Judge Bruce Jenkins agreed, ordering the turnover and forfeit of those assets to the receivership estate and reserving the option to impose further sanctions.

In a May 2012 filing, the court-appointed receiver, John A. Beckstead, contended that Allan Jacobson had violated the court-imposed asset freeze when they received $208,393.33 in state and federal tax returns that were not disclosed to the receiver and instead "secretly deposited into undisclosed bank accounts" held by Jacobson's wife, Cami.  While Jacobson (but not his wife) was released from the asset freeze in March 2012, his wife was not.  In the filing, the SEC detailed a series of transactions taking place in late 2011 and early 2012 between bank accounts held by the Jacobsons and undisclosed to the receiver.  In these accounts, the receiver presented evidence that the Jacobsons deposited state and federal income tax refunds into the accounts, only to turn around and covert the funds to cashier's checks made out to Ms. Jacobson.  For example,

On January 26, 2012, C. Jacobson and A. Jacobson endorsed and deposited into the account two checks from the State of Utah.  Both are income tax refund checks.  The first check (Warrant Number T4621485) was dated January 20, 2012, and was for $51,037.34.  The second check (Warrant Number T4621486), was also dated January 20, 2012, and was for $112,493.40.  

...

The account records show that on January 27, 2012, C. Jacobson purchased five cashier’s checks from the Bank of American Fork using a total of $74,600 of the funds from the income tax refunds deposited the previous day.  The cashier’s checks were for $6,800, $9,200, $8,600, $20,000, and $30,000.  All were made payable to C. Jacobson who also withdrew $9,500 in cash from the account.  

None of these transactions were disclosed to the receiver.  The receiver also contended that the Jacobsons had failed to turn over a 2008 BMW 528xi as previously ordered by the court.  Finally, the receiver informed the court that he had learned of an impending sale of the Jacobsons' personal residence, held in the name of Ms. Jacobson, and that any net proceeds were properly payable to the receivership rather than the Jacobsons.

The restating of previously-filed tax returns is an often-overlooked source of funds in a receivership. Somewhat ironically, Ponzi scheme perpetrators rarely fail to timely file their income tax returns detailing their income from the scheme.  That large income is in turn often accompanied by a substantial tax liability to the IRS.  However, after the discovery of fraud, insiders of the scheme can usually amend previously-filed returns to seek overpayment of taxes for phantom trading profits and newly-discovered investment losses.  Investment losses can then be "carried back" over a period of several years through the filing of a Form 1045 with the IRS, sometimes resulting in refunds in the millions of dollars for larger schemes.

Follwing the discovery of the missing funds, Jacobson turned over $170,000 to the receiver and stated that the remaining $50,000 had been paid to a former attorney.  

A copy of the SEC's motion for contempt is here.

Tuesday
Jul172012

Investment Advisor Sentenced to 5 Years in Prison for $2 Million Ponzi Scheme

A Florida man who operated a Ponzi scheme that defrauded investors out of $2 million was sentenced to serve five years in prison.  Arthur Strasnick, 64, received the sentence after pleading guilty to two counts of mail fraud and one count of identity theft last September.  United States District Judge Thomas McAvoy, sentencing Strasnick in a New York federal court, called Strasnick's actions "less than human" after hearing a victim describe how Strasnick's actions had driven her to nearly commit suicide.  In addition to the five-year sentence, Judge McAvoy also ordered Strasnick to serve three years of supervised release, as well as pay nearly $2 million in restitution to his victims.  

Strasnick owned and operated Backstreet Associates, based in Ormond Beach, Florida and Saratoga Springs, New York.  As President, he solicited potential investors with the lure of guaranteed annual returns ranging from 12% to 20%.  Investors were provided with fictitious account statements showing the "growth" of their account.  Additionally, Strasnick made periodic interest payments to investors to make it appear that the operation was legitimate.  However, as Strasnick admitted, he was operating a classic Ponzi scheme.  Rather than make legitimate investments, Strasnick used investor funds to make interest payments to existing investors and for the payment of personal expenses.

However, apparently operating a Ponzi scheme was not enough for Strasnick.  At the same time, he was also running a mortgage scam, conning some of the same victims of his Ponzi scheme into signing over their mortgage to him under the agreement he would make all principal and interest payments.  Instead, Strasnick obtained a mortgage under the victim's name and then transferred hundreds of thousands of dollars into his personal bank account. The mortgage scam defrauded investors of over $2 million.  

Monday
Jul162012

Texas Couple Begins 14-Year Prison Sentence for $4 Million Art Gallery Ponzi Scheme

A Texas couple reported to prison last week in the culmination of a lengthy and contentious legal battle that began over three years ago with their guilty plea to operating a $4 million Ponzi scheme using their family-owned art auctioneering business.   Jerry and Wyonne Hart, former owners of Hart Galleries, began serving their fourteen-year sentence after losing a bid to have the United States Supreme Court order a new trial after alleged improprieties in the sentencing process by District Judge Randy Roll.  The pair originally pled guilty in April 2009.

The Harts owned and operated Hart Galleries, which specialized in the sale of antiques and was once one of the most prestigious Houston art galleries.  The business had been operated successfully for decades but, according to prosecutors, began using new customer money to pay expenses when debts started to pile up. Customers who enlisted Hart Galleries to assist in the sale of their property soon found themselves unable to collect proceeds of the sale, with the Harts offering various excuses relating to collectibility and, in one case, denying that the item had sold even though the customer attended the auction where the item successfully sold.  After the Harts filed for bankruptcy, authorities opened an investigation and discovered that the couple had stolen more than $4 million from customers.

The Harts were charged with misapplication of fiduciary property, theft, and money laundering. When the Harts agreed to plead guilty to misapplication of fiduciary property, both sides agreed to leave the ultimate sentencing decision up to Judge Roll, with the Harts requesting a sentence of probation. Despite receiving more than 100 letters from Houston socialites and victims urging for leniency, Judge Roll labeled the pair "thieves" and sentenced them to serve fourteen years in prison.

Shortly after being sentenced, the Harts fired their trial lawyers and hired Robert Scardino and Ali Fazel (the same lawyers who served as trial counsel to R. Allan Stanford when he was recently sentenced to 110 years in federal prison for a $7 billion Ponzi scheme).  The couple then moved for a new trial, citing evidence that Judge Roll had obtained sentencing advice from a fellow Judge who opined that he would "start at 15 [years]".  After the motion for new trial was granted, the State of Texas appealed the decision to the Houston Court of Appeals, which reversed the trial court and reinstated the fourteen-year sentence.  A last-ditch effort to petition the United States Supreme Court for a writ of certiorari was unsuccessful.  

A copy of the Hart's brief to the U.S. Supreme Court is here.

Sunday
Jul152012

Two Texas Men Indicted for Role in $485 Million Oil and Gas Ponzi Scheme

Two Dallas men were indicted for their participation in a $485 million oil and gas Ponzi scheme.  Brendan Coughlin, 46, and Henry Harrison, 47, both of Dallas, were charged with one count of conspiracy and ten counts of mail fraud in connection with the collapse of Provident Royalties LLC ("Provident"), an alleged oil and gas Ponzi scheme that involved over $485 million and 7,700 investors throughout the United States.  Each count of mail fraud carries a maximum prison sentence of twenty years, while the conspiracy charge carries a five-year maximum sentence.

Beginning in September 2006, Provident sold preferred stock in a number of private placement offerings, promising annual returns of up to 18% from the acquisition and development of oil and gas exploration and development activities.  Each offering was limited to five hundred investors, and Provident also solicited retail broker-dealers to enter into placement agreements for each offering, who then sold the investments to retail investors.  Each offering featured representations that approximately 86% of funds raised would be used to purchase oil and gas investments, and that dividends would be paid from revenues generated by the sale of assets.  

However, investors were not told that proceeds from various offerings would be commingled together and used to pay dividends in other offerings.  Additionally, less than 50% of investor funds were used to invest in oil and gas assets, in contrast to representation that at least 86% would be used.  Investors were also not told that offering proceeds were used to make millions of dollars in unsecured loans to company founder Joseph Blimline, and that Blimline had previously been convicted of operating a different oil-and-gas Ponzi scheme in the early 2000s. Some of the offering proceeds were used to purchase the worthless assets of that previous Ponzi scheme. Blimline was sentenced to twenty years in federal prison in May 2012 for his role in the scheme. 

The fallout from the scheme had serious consequences for many broker-dealers who participated in the private placements and sold the investments to their retail customers.  Of the approximately 60 broker-dealers that participated, twenty-seven have since shuttered their doors due to the mounting liability from investor lawsuits. The Financial Industry Regulatory Authority ("FINRA") recently fined both Coughlin and Harrison $50,000 for their conduct and banned each from the securities industry for two years.  

Thursday
Jul122012

California Woman Accused of $1 Million Ponzi Scheme

A San Fernando Valley woman was arrested on Wednesday and accused of operating a real estate Ponzi scheme that bilked investors out of over $1 million.  Celia Gallardo, 42, was arrested by FBI agents following her indictment on Tuesday on an assortment of federal charges including seven counts of mail fraud and nine counts of wire fraud.  Both mail fraud and wire fraud carry maximum terms of imprisonment of twenty years per charge along with criminal monetary fines up to $250,000.  At her arraignment Wednesday, she entered a plea of not guilty.

According to the indictment, Gallardo operated a real estate investment program from September 2007 to September 2008.  Potential investors were told that Gallardo would purchase condominiums located in other states that would yield extraordinary short-term returns of as much as 100% in thirty days.  Investors were issued promissory notes evidencing their investment and promised returns.  However, according to the FBI, Gallardo instead used investor funds to support a lavish lifestyle that included a house and travel abroad, as well as payments made to existing investors purporting to be interest and/or principal redemptions.  In total, dozens of investors entrusted more than $1 million to Gallardo. 

At her arraignment, Gallardo was released on $75,000 bond.  United States District Judge Dean D. Pregerson has scheduled a tentative trial date for September 4.