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Recent SEC Releases
Monday
Dec052011

China Voice Consents to Judgment Admitting its Participation in Ponzi Scheme Orchestrated by Executives

The Securities and Exchange Commission ("SEC") announced that it had obtained final judgments against a publicly-traded company and its former CFO/President to settle charges that the company committed numerous violations of federal securities law and later received funds derived from a Ponzi scheme operated by several executives.  China Voice Holding Corp. ("China Voice"), along with former president David Ronald Allen and several related entities, settled the charges originally brought by the SEC back in April.  Allen consented to a permanent injunction enjoining him from future violations of federal securities laws, along with the disgorgement of $225,468 in ill-gotten gains and a civil penalty of $212,821. Additionally, Allen's wife consented to disgorge nearly $150,000 in ill-gotten gains.  Under the consent judgment, China Voice must also hire an independent consultant to evaluate the company's internal controls.

Based in Boca Raton, Florida, China Voice trades in over-the-counter stock markets and claims to have a portfolio of telecommunications products and services in both the U.S. and China.  Through its subsidiaries, the company claimed to provide VOIP telephone services, office automation, wireless broadband, and prepaid calling card services.  Since 2006, numerous press releases touted purported new business and made numerous other false and misleading statements to maintain the outside appearance that the company was prosperous.  These efforts included the company's source of capital, business opportunities, and the omission of negative business information.  However, when the company began disclosing audited financial statements in 2008, the company maintained these claims even though it was forced to state that a majority of its operations came from domestic sales of calling cards.  Additionally, the company paid more than one million dollars for stock promotion campaigns that included blast faxes and the strategic placement of company profiles on stock trading websites.  While the company was touted as a successful company, in reality it was bleeding cash and suffered a net loss of $15 million during the fiscal year ended June 30, 2010.

The SEC initiated an investigation of China Voice on October 29, 2008.  Two weeks after this disclosure, Allen and several other China Voice executives began soliciting investments in sixteen different entities that Allen controlled directly or indirectly.  None of these entities or offerings were registered with the SEC.  Investors were solicited by Integrity Driven Network ("IDN"), an Allen-controlled entity, through meetings or internet advertisements guaranteeing an annual rate of return of at least 25% paid in installments throughout the year.  Investors were told that nearly all of their investment would be used to make asset-backed loans that carried minimal risk.  In total, $8.6 million was raised from investors.  However, rather than being used to make asset-based loans, investor funds were used to pay returns to earlier investors in prior limited partnerships.  The remainder of funds were either misappropriated by Allen or other principals or used to make high-interest loans to China Voice, some which carried interest rates of up to 30% annually.  

The SEC still has charges pending against several defendants.  The SEC previously entered into settlements with other named defendants, which can be found here and here.  

A copy of the SEC Complaint is here.

 

Saturday
Dec032011

Largest Ponzi Scheme in Finnish History Nets Man 4-Year Sentence

A Finland man accused of operating the largest Ponzi scheme in the country's history was sentenced to serve four years in prison.  Hannu Kailajärvi had faced charges of aggravated fraud and collection crimes after allegedly masterminding a foreign currency trading operation.  The company, which did business as WinCapita in Finland, may have raised over 100 million euros from investors, according to authorities.  In addition, Kailajärvi's girlfriend was found to be an accomplice to the crime, and received a 1-year prison sentence.

According to authorities, Kailajärvi originally began the operation under the name "WinClub" in 2005.  However, when a news report in 2007 hinted at a police investigation of WinClub, Kailajärvi changed the company's name to WinCapita.  Presenting itself as a foreign-exchange investment club that was closed to the public and open only through invitation, potential investors were told that an initial investment of several thousand euros could lead to investment returns of up to 400%.  To demonstrate the legitimacy of the operation, investors were shown "signal clock" software which purported to act as a buy/sell indicator for foreign currency.  A purported screen capture from the software is here:

WinCapita solicited new investment primarily through holding presentation meetings, at which current members could bring family and friends.  In total, WinCapita is alleged to have raised approximately 100 million euros, which at today's currency exchange rates, is roughly $140 million.  Authorities estimate total losses from the scheme as at least 37 million euros, or approximately $52 million.  

Along with Kailajärvi and his girlfriend, at least three other individuals still at large are accused of playing a role in the scheme.  Now that Kailajärvi's trial has concluded, authorities will now hold a separate proceeding to determine compensation to the victims.  Additionally, authorities have also indicated their intention to bring criminal charges against those suspected of promoting the clubs.

The sentence serves to illustrate the disparities between criminal penalties for financial fraud across the world.  A four-year sentence for losses estimated as exceeding $50 million would certainly be decried as lenient in the United States, which has among the toughest criminal penalties for financial fraud.  This is due to the ability to charge those accused of financial fraud with mail and wire fraud, which each carry maximum prison sentences of twenty years.  In addition, Canada recently enacted Bill C-21, which imposes mandatory minimum sentences of two years for fraud over $1 million, along with the addition of aggravating factors that courts may now consider in deciding to enhance sentences. 

Friday
Dec022011

Authorities Charge Two More Rothstein Employees in $1.4 Billion Ponzi Scheme

Federal prosecutors unveiled charges against two more former employees of convicted Ponzi schemer Scott Rothstein's now-defunct law firm Rothstein Rosenfeldt Adler ("RRA"), accusing them of playing a role in Rothstein's massive fraud.  Marybeth Feiss, Rothstein’s former administrative assistant, and William Boockvor, who handled bookkeeping and other administrative duties, were charged in two separate criminal informations.   Feiss was charged with conspiracy to violate the Federal Election Campaign Act and to defraud the United States, while Boockvor was charged with conspiracy to commit wire fraud.  Each faces up to five years in prison under the conspiracy charge.  

Rothstein's scheme involved purported settlements of various sexual harassment, discrimination and whistleblower lawsuits in which investors were solicited to fund the initial lump-sum to the settling plaintiffs.  In return, investors were to receive the scheduled installment payments owing under the settlement agreements, which were supposedly paid into trust accounts at TD Bank controlled by Rothstein and his associates.  Boockvor, who was referred to in the charging document as "Uncle Bill" as he is Rothstein's uncle, was accused of providing employees of TD Bank with fraudulent bank balance statements that falsely reflected the balances of trust accounts held by RRA at TD Bank.  Boockvor would also help TD Bank employees in preparing envelopes and correspondence stating that the balances were accurate when, in fact, they were not.

As Rothstein's former administrative assistant, Feiss' duties included assistance in organizing events, which included political fundraising events.  During the 2008 Presidential Election, Rothstein, with the assistance of Feiss, hosted several events at his house and elsewhere in which he solicited campaign contributions towards John McCain's campaign.  Rothstein enlisted many of the attorneys and staff at RRA to make campaign contributions at these events.  Feiss, at the direction of Rothstein, later reimbursed those attorneys and staff making campaign contributions in violation of federal election campaign laws.  Through these numerous donations, RRA was the top contributor to two of McCain's fundraising entities, McCain Victory 2008 and McCain-Palin Victory 2008, and the top total contributor to the joint fundraising committees for McCain.  As a result of Rothstein's clout with the Republican Party, he was later named a delegate to the 2008 Republican National Committee and a member of the Judicial Nominating Committee.

The decision by prosecutors to file charges through the use of a criminal information is also indicative of the possible outcome of the case.  The move to bypass a grand jury indictment and instead file an information suggests that Boockvor and Feiss intend to cooperate with the government or are in the process of negotiating a plea deal.  The charges against Boockvor and Feiss bring the total number of people charged for their role in Rothstein's scheme to eight - and according to U.S. Attorney Wilfredo A. Ferrer, "we are not done yet."
 
A copy of a Justice Department press release is here.
A copy of the charging document filed against Feiss is here.
A copy of the charging document filed against Boockvor is here.
Wednesday
Nov302011

Prison Sentence in Husband-and-Wife Ponzi Scheme

In a case that demonstrates the risks of rejecting a plea agreement and standing trial, a federal judge sentenced a Sarasota man to ten years in prison for his role in operating a Ponzi scheme that took in nearly $30 million from investors, while his wife, who was convicted by a jury for her role in the scheme, likely faces a much longer sentence.

John S. Morgan, 53, accepted a plea deal from prosecutors in June in which he pled guilty to one charge of conspiracy and one charge of money laundering, and faced a combined maximum sentence of fifteen years in federal prison.  However, his wife, Marian Morgan, refused to plead guilty, and instead took her chances and fought the charges at trial.  The strategy backfired, however, when jurors refused to believe her claims of innocence and convicted her of all twenty-two charges.  She is scheduled to be sentenced on December 20, and likely faces a prison sentence exceeding twenty years.  

From 2005 to 2009, the Morgans owned and operated Morgan European Holdings, which promised potential investors triple-digit returns in 90 days from foreign arbitrage deals also known as prime bank instrument trading programs.  In total, approximately 87 investors entrusted $28 million to the Morgans.  However, rather than engage in complex arbitrage trading, the Morgans instead operated a classic Ponzi scheme in which funds from new investors were used to pay principal and interest payments to existing investors in order to create the appearance of a successful business.  Of the $28 million, the Morgans used over $10 million to support a lavish lifestyle, buying expensive mansions in Sarasota and luxury automobiles.  A portion of the remainder was used to make fictitious payments to existing investors.

The Morgans achieved notoriety when they failed to appear at a contempt of court hearing and were later discovered to have fled to Sri Lanka.  Sri Lanka later ordered their expulsion, and they have remained in U.S. custody since their extradition in December 2009.  

In addition to their prison sentences, the Morgans must also pay over $10 million in restitution to their victims.  A Tampa defense attorney conceded that was unlikely, stating

"Whatever the scheme of the day happens to be, most of the time the investors receive pennies on the dollar, if anything. That is the reality of it."

Wednesday
Nov302011

Questions About Stanford's Competency Linger as January 2012 Trial Date Appears Uncertain

A Texas businessman scheduled to stand trial in January 2012 to face charges he orchestrated a $7 billion Ponzi scheme is not competent to stand trial, according to his attorney.  Disgraced financier R. Allen Stanford, 61, has remained in federal custody since his arrest in June 2009, but became addicted to prescription medication following a severe beating at the hands of fellow prison inmates in October 2009.  While he has received extensive medical treatment, his attorneys dispute that he has progressed to a state where he would be found competent to stand trial.  Should questions remain about Stanford's competency, his trial, currently scheduled to begin January 30, 2012, appears likely to be delayed.

In January 2011, United States District Judge David Hittner found Stanford incompetent to stand trial following complications resulting from his injuries including prescription medication addiction.  Doctors testified that Stanford may have suffered brain damage from the beating.  Judge Hittner ordered Stanford to undergo medical treatment at the Bureau of Prisons medical center in Butner, North Carolina.  Coincidentally, several other convicted high-profile Ponzi schemers also call Butner home, including Bernard Madoff and Arthur Nadel.  After apparently completing his treatment earlier this month, Stanford was transferred to a federal detention center in Houston, Texas, where he is being held without bail due to the determination that he is a flight risk.  

While Stanford's attorneys are under a gag order not to discuss his medical condition, one of Stanford's civil lawyers revealed in a court filing earlier this month that Stanford continued to suffer memory loss.  Judge Hittner rebuked the lawyer and barred him from having any contact with Stanford until the completion of the criminal proceeding.  

The receiver appointed to recover assets for defrauded investors, Ralph Janvey, has faced difficulty since his appointment and to date has recovered just pennies on the dollar for victims.  Janvey has insisted that many of the assets sought to compensate investors, including nearly $1 billion outstanding and potentially recoverable, are overseas and obtainable only with a successful prosecution and resolution of the criminal charges.  Janvey recently submitted filings seeking to initiate a claims process to eventually begin distributions to victims.