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Recent SEC Releases
Tuesday
Jul232013

SEC Alleges Texas Man Ran $4.5 Million Bitcoin Ponzi Scheme

The Securities and Exchange Commission has filed civil fraud charges against a Texas man, accusing him of masterminding a Ponzi scheme using the virtual currency known as Bitcoin that promised annual returns exceeding 300%.  Trendon T. Shavers, 30, was charged with violations of federal securities laws for operating a digital hedge fund that offered and sold Bitcoin-denominated investments to thousands of investors.  Bitcoin is a peer-to-peer payment system created in 2009 that is popular among certain groups due to its promises of security and anonymity.  The Commission is seeking injunctive relief, disgorgement of illicit profits, and civil penalties.

According to the Commission, Shavers, known as Pirateat40 on popular Bitcoin Forum Bitcointalk.org, began soliciting investors to park their Bitcoins ("BTC") in a digital hedge fund named Bitcoin Savings & Trust ("BTCST") in 2011.  Investors were required to "park" at least 50 BTC with BTCST, and in return were promised exorbitant returns of 1% daily with no minimum holding requirements.  When asked how he was able to achieve such lucrative returns, Shavers intimated that he was acting as a middleman for individuals who wished to purchase large quantities of BTC "off the radar."  Shavers later expanded on this explanation, saying

“If my business is illegal then anyone trading coins for cash and back to coins is doing something illegal. :)”  

When further asked about his profit margins, Shavers indicated that he achieved gross returns of nearly 11% per week, while paying out approximately 6%.  As the operation progressed, the minimum investment amount was raised to 100 BTC, and investors were permitted to re-invest their profits.  

In July 2012, the scheme was estimated to have raised hundreds of thousands of BTC, which then had an average price of approximately $7 per BTC.  However, Shavers announced in a post that the interest rate would decrease to 3.9% weekly beginning August 1, 2012, and began making preferential payouts to friends and longtime investors.  Later that month, Shavers declared default:

As much as I've tried to meet the deadlines within the community, there're conditions beyond my control which have escalated the process to the point it is today.  Bitcoin Savings & Trust has hereby given notice of default to its account holders.

The decision was based on the general size and overall time required to manage the transactions. As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system. On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits. In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.

However, according to the Commission, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  Shavers took in more than 700,000 BTC, returning approximately 500,000 BTC to investors through purported returns of interest or principal.  Of the remainder, Shavers transferred approximately 150,000 BTC - approximately $1 million based on the average price during that time period - to his personal account, which he used for a variety of unauthorized personal expenses including rent, car-related purchases, and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

To date, the Commission has identified at least 66 "investors" that contributed BTC's to BTCST.  That number is almost certain to rise, perhaps exponentially, based on both the enormity of the scheme and the attention the operation attracted in Bitcoin Talk (see here).  While the total amount of losses have not been identified, it is assumed that those who received profits in excess of their original investment could face "clawback" lawsuits designed to recoup those excess profits to be distributed to investors who were not as fortunate.  

A copy of the Commission's Complaint is here.

Tuesday
Jul232013

College Dropout Pleads Guilty in $30 Million Ponzi Scheme

A college dropout that swindled investors out of $30 million through an elaborate Ponzi scheme has pleaded guilty to wire fraud and money laundering charges.  Jose L. Nino Guzman, 30, of Seattle, Washington, entered the plea last week, approximately two years after he was arrested and charged with five counts of wire fraud.  While each count of wire fraud carries a statutory maximum term of twenty years, prosecutors are recommending a 151-month sentence, or roughly 12.5 years.  Guzman is scheduled to learn his fate at a November sentencing.  

Guzman attended the University of Washington, where he also worked as a bank teller for U.S. Bank.  He did not finish his schooling, instead choosing to drop out and form an investment company known as NDG Investment Group ("NDG").  Beginning in 2006, potential investors were told that Guzman had an extensive background in real estate, having served as a business and commercial lending officer.  Guzman told investors he would use their funds to develop real estate in Peru, which he had previously done quite successfully.  These investments carried little risk, as Guzman represented that each investment was secured by Peruvian real estate, and also would generate an above-average rate of return.  To convince investors of the legitimacy of the investment, Guzman provided periodic "updates" showing progress in the projects. Based on these representations, Guzman collected more than $30 million from over 200 investors - including family members, friends, and co-workers.

While several pieces of land were purchased in Peru, neither Guzman nor NDG successfully completed any of the projects, and there were no lucrative profits.  Rather, Guzman operated the classic Ponzi scheme, using incoming investor funds to satisfy obligations to existing investors.  Additionally, Guzman used investor funds to support a lavish lifestyle that included a $365,000 diamond ring, a $600,000 yacht, a $250,000 suite to watch Seattle Seahawks football games, and a $200,000 Bentley automobile. 

The Washington State Department of Financial Institutions issued a cease-and-desist order against Guzman and NDG in 2009 after an NDG employee became aware of the scheme.  

Tuesday
Jul162013

Madoff Investors Close To Settlement With Connecticut Bank

On the eve of closing arguments in one of the first lawsuits to proceed to trial stemming from Bernard Madoff's $65 billion Ponzi scheme, a group of investors suffering collective losses of approximately $60 million have reportedly reached a settlement with a Connecticut bank they claim should have discovered the fraud.  Westport National Bank, in Westport, Connecticut, was accused by over 200 investors of negligence in failing to exercise adequate caution in its role as custodian overseeing more than $60 million of Madoff investments.  The trial, which began last month, was scheduled to begin closing arguments last week before the sides reached a tentative settlement that could potentially return a fraction of investor losses.  The recovery, even if fractional, could be a welcomed event by those investors since their status as indirect investors has prevented any recovery from the bankruptcy trustee overseeing the liquidation of Madoff's brokerage firm.  

Westport National Bank ("Westport") is a small regional bank with branches scattered throughout Connecticut. Beginning in 1999, many investors began moving their Madoff accounts to Westport, which agreed to serve as custodian of the accounts.  Investors contended that they were under the impression that the bank would take possession, as well as verify the existence, of their assets by virtue of its custodial position.  This apparently was not done, as the accounts maintained by the bank were among those lost when Madoff's scheme was revealed in December 2008.

At trial, it was revealed that Westport's custodial department consisted of a single individual, who testified that "thick envelopes" containing trade confirmations were reviewed from time to time only "out of curiosity," and were usually placed directly in a filing cabinet.  Testimony from other bank officials was equally damaging, with Westport's former president unable to answer questions about how the bank maintained accurate records for its investors and even confessing he was unsure as to what due diligence was conducted to confirm that customer assets on account with Madoff did in fact exist.  

A reported settlement will not end the bank's exposure to Madoff, though.  The trustee for Madoff's broker-dealer, Irving Picard, has also filed a lawsuit against Westport seeking $28 million, and the Office of the Comptroller of the Currency previously settled allegations with the bank that unsafe and unsound banking practices existed.  The bank has lost over $20 million since 2009, and the Wall Street Journal reports that Westport's liability insurance was cancelled due to an exemption covering bankruptcies like that in the Madoff case.  

More Ponzitracker coverage of the Madoff case is here.

Monday
Jul152013

"China's Madoff" Reportedly Secretly Executed For $460 Million Ponzi Scheme

A Chinese businessman who allegedly operated a Ponzi scheme that bilked nearly 60,000 victims out of $460 million has reportedly been secretly executed for his crimes.  Various news outlets are reporting that Zeng Chengjie was executed by lethal injection last Friday, July 12, 2013, after previously being sentenced to death (originally by firing squad) for "illegal fund-raising," which is the Chinese catch-all designation used for financial and investment fraud.  The execution has sparked outrage, particularly among Zeng's family who complained that they were not informed of the pending execution contrary to Chinese law.  

Zeng was once a highly-successful Chinese businessman whose talents were recognized and supported by China's ruling party.  Investor funds were used to support his company that placed bids for city development projects, including local landmarks and public facilities, in Jishou, a small city in Hunan. While these efforts were initially successful, a change in the ruling elite resulted in Chinese politicians withdrawing their investments, which triggered widespread panic among civilian investors.  

In a series of events described as highly suspicious by Zeng's attorneys, he was quickly jailed for masterminding the scheme, with his assets sold at fire-sale prices to a state-owned asset company that reportedly reaped a huge profit from the transactions.  The trial was also plagued with accusations of corruption and partiality, with Zeng's daughter alleging that Zeng's conviction was upheld by the Chinese Supreme Court only after the city leader of Hunan was appointed as chief justice.

The news has caused an uproar, particularly among Chinese nationals who noted that China's laws gives death row inmates the right to meet with family before an execution.  Zeng's daughter has alleged that she learned of the news two days after the execution and that she was not permitted to see her father's body before it was cremated.  The issue was further thrust into the spotlight after a Chinese intermediate court posted and then quickly deleted a message on a popular social media platform that China’s laws do not decree that a death row inmate must meet with his family before execution.  Many then pointed out that the Supreme People’s Court had actually issued an interpretation that did give death row inmates the right to meet with family. 

China differs from the United States in that it allows the imposition of the death penalty for nearly sixty offenses, including fraud and economic crimes.  This has resulted in China earning the distinction of having one of the highest amounts of annual executions, including approximately 4,000 executions in 2011 alone.  Notably, this has included death sentences for several women accused of high-profile Ponzi schemes, including Wang Caiping, was sentenced to death last year after an investment fraud that racked up losses of nearly $20 million through risky futures and gold trading, and Wu Ying, who had been sentenced to death for a $60 million Ponzi scheme.  As is commonly permitted in China, Ying had her sentence reduced in May 2012 to "death with a two-year reprieve" as is commonly done where courts deem the perpetrator sufficiently reformed. 

Monday
Jul152013

Former Radio Host Gets 20-Year Sentence For Role In $194 Million Ponzi Scheme

A former radio host who played a role in the second-largest Ponzi scheme in Minnesota history was sentenced to serve the next twenty years in federal prison.  Pat Kiley, 75, who initially took the offensive and sued various newspapers for linking him to Trevor Cook's $194 million Ponzi scheme, received the sentence after a federal jury convicted him last year of numerous charges, including 12 counts of wire and mail fraud, one count of conspiracy to commit mail and wire fraud, and two counts of money laundering.  Kiley was scheduled to be sentenced earlier this year along with two co-defendants, but was granted a reprieve during the sentencing hearing when he alleged various missteps by his then-attorney. Along with the sentence, U.S. District Judge Michael Davis also ordered Kiley to pay over $155 million in restitution to victims.  

Kiley hosted a homemade radio show, broadcast nationwide on over 200 stations, called "Follow the Money."  Kiley represented himself as a senior economist and financial advisor, and called his listeners 'truth seekers' as many sought financial security in the midst of a tumultuous financial climate.  Kiley's long-time friend, Trevor Cook, operated Crown Forex SA and JDFX Technologies along with Christpher Pettingill, Jason 'Bo' Beckmann, and Gerald Durand.  Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out.  Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight.  Cook used the men to pitch the scheme to potential investors, as Beckman operated a money-management firm, Oxford Private Client Group, that catered to affluent clients, while both Kiley and Durand hosted radio talk shows.  Indeed, authorities alleged that Kiley alone brought in nearly two-thirds of the total investors.   In total, Cook and his associates raised nearly $200 million from over 700 investors.  

However, the men did not operate a legitimate currency trading firm, but instead masterminded one of the largest Ponzi schemes in history.  Approximately half of the funds raised from investors were used to trade currency, of which $68 million was lost.  Cook and Kiley diverted tens of millions of dollars for their own use, including the transfer of nearly $13 million to Panamanian bank accounts for construction of a casino, $12 million for personal expenses, nearly $5 million in gambling losses, and nearly $3 million withdrawn in cash and cashier's checks.  

The arrest and prosecution of Cook and his associates was filled with several strange incidents, including Kiley's defamation lawsuit against several Minnesota newspapers, allegations that Durand and Pettingill had discussed murdering Beckmann to collect on a life insurance policy, and Beckmann unsuccessfully offering to tender a $19 million check in exchange for a 1-year sentence.