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Recent SEC Releases
Thursday
Aug162012

Hall of Fame College Football Coach Charged In $80 Million Ponzi Scheme

A former college football coach at the University of Georgia has been charged with operating a Ponzi scheme that took in more than $80 million from victims that included fellow coaches and former players. The Securities and Exchange Commission ("SEC") alleged in a complaint filed Thursday that Jim Donnan committed multiple violations of federal securities laws by soliciting investors for his liquidation business and promising exorbitant annual rates of return ranging from 50% to 380%.  According to the SEC, Donnan used little of the $80 million raised for authorized purposes, using the rest to operate one of the largest Ponzi schemes in Georgia history.  The SEC is seeking injunctive relief, disgorgement of all ill-gotten proceeds, and civil monetary penalties.

Donnan, along with Gregory Crabtree ("Crabtree"), operated GLC Limited ("GLC"), which was formed in 2004 and purported to be in the wholesale liquidation business.  Beginning in 2007, potential investors were told that GLC would purchase discontinued or damaged merchandise from major retailers at a discount, and then resell those goods at a substantial profit to other liquidators or discount retailers.  The merchandise ranged from out-of-season toys, patio furniture, or holiday decorations.  Investors were given the opportunity to "fund" specific deals, with GLC and the investor splitting the resulting "profits".  The deals, according to Donnan, offered interest rates of 13% to 40% which, when represented returns of 50% to 380% on an annualized basis.  Between August 2007 and October 2010, nearly 100 investors contributed approximately $80 million to the scheme.  

However, out of the $80 million raised from investors, slightly more than 10% was used to purchase merchandise for resale.  Of that merchandise, only $4.1 million was ever resold.  The remainder, or nearly $68 million, was used to make payments of purported interest and principal redemptions to investors.  Crabtree and Donnan also misappropriated millions of dollars of investor funds, with Crabtree taking approximately $1 million, and Donnan paying himself $7.4 million in "returns" on his original $5.8 million investment.  After GLC began missing interest payments, a group of investors obtained the appointment of a Restructuring Officer, who discovered the fraud and, in February 2011, caused GLC to file a voluntary bankruptcy petition.  Donnan also filed for personal bankruptcy following increasing claims from GLC victims.

Before his tenure as head football coach at the University of Georgia, Donnan was the head coach at Marshall University.  He lwas inducted into the College Football Hall of Fame, and later served as an ESPN analyst.  It was through these connections, alleged the SEC, that Donnan recruited scores of victims to GLC.  These victims included fellow football coaches Tommy Tuberville of Texas Tech, Frank Beamer of Virginia Tech, and former Dallas Cowboys coach Barry Switzer, as well as at least one former player who Donnan solicited based on his "fatherly-figure" stature.  

In its complaint, the SEC also singled out two of Donnan's children and a son-in-law for receiving large "returns" from the scheme, naming them as relief defendants in the complaint.  A relief defendant is not alleged to have committed any wrongdoing, but rather has funds that are traceable to the wrongdoing and cannot assert any legitimate claim to.  The children, their investment amounts, and their "returns" are listed here:

  • Todd Donnan: invested $232,000 - received $620,333.
  • Tammy Donnan: Invested $16,000 - received $140,000.
  • Gregory Johnson: Invested $141,000 - received $617,875.

In order to keep the funds, the Donnan children must be able to show a legitimate origin of the funds. The SEC will likely seek the return of the funds from the children through summary procedures.

Donnan's lawyer questioned the motives of the SEC, claiming that Donnan was "broke".  

A copy of the SEC's complaint is here.

Wednesday
Aug152012

SEC Charges Denver Men With $16 Million Ponzi Scheme

 On or about July 20, 2012, in a telephone call with one investor, Sullivan candidly admitted, “Your money is all gone. This is a Ponzi scheme.”

- SEC Complaint

The Securities and Exchange Commission today announced that it had filed fraud charges against a Denver company and two Colorado residents, charging them with carrying on a decades-long Ponzi scheme that took in at least $15.7 million from investors nationwide.  Michael J. Turnock, William P. Sullivan, and their company Bridge Premium Finance, LLC ("BPF") were charged with multiple violations of federal securities laws.  It is estimated that investors losses may near ten million dollars, and the SEC is seeking an emergency asset freeze to prevent further dissipation of investor funds.  

Turnock was the principal of BPF, while Sullivan was the chief financial officer.  BPF, which until September 2005 was known as Berjac of Colorado, LLC ("Berjac"), purported to be in the business of insurance premium funding.  In 1996, Turnock bought a majority interest in Berjac, eventually purchasing the remaining interest in 2004.  Potential investors were told they would be paid an annual return of twelve percent, and that their funds would be used to extend short-term loans to small businesses that would use the funds to pay up-front commercial insurance premiums.  Further details were spelled out in a short brochure distributed by Turnock, including that the investment was "100% safe" and protected by the "Colorado Insurance Guarantee Fund."

Investors were issued promissory notes, known as "Berjac Notes" from 1996 to 2005, and "Bridge Notes" from 2005 thereafter.  These notes, which were open-ended in term, were said to be payable on demand by investors, which was touted to investors as evidence of the liquidity of the investment.  Ultimately, more than 120 investors contributed approximately $15.7 million to the scheme.  BPF's promissory note offerings were never registered with any federal or state securities regulator.

Turnock claimed that BPF could afford to pay such generous returns due to the rate of interest BPF received on the "bridge loans" it was making.  However, according to the SEC, while BPF had not had a profitable year in over a decade and had generated less than $2.5 million in revenue from 1998 to 2012, it still managed to make payments consisting of purported interest and principal redemptions to investors totaling $12.3 million.  Indeed, revenues had been negative since at least January 2011.  The company depended on a constant inflow of new investor funds in order to satisfy interest payments and redemption requests - a classic hallmark of a Ponzi scheme.  The SEC began investigating in June 2012.  After an investor telephoned Sullivan after learning of the investigation, Sullivan told him, 

“I have a lawyer and I shouldn’t be talking to you.  But I feel bad because you were just here in May.  Your money is all gone.  This is a Ponzi scheme.” 

In subsequent interviews with SEC officials, Turnock and Sullivan refused to answer investigator's questions, citing their Fifth Amendment privileges against self-incrimination due to the possibility of criminal charges.  While certainly permitted, the invocation of Fifth Amendment privileges in a civil lawsuit also comes with the strong possibility that those refusals to answer will be accompanied by an adverse inference when presented to a finder of fact, whether it be a judge or jury.  See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).

The SEC is seeking injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties.

A copy of the SEC's complaint is here.

Tuesday
Aug142012

SEC Charges Utah Man With Operating $27 Million Ponzi Scheme; Is Utah 'Ponziland'?

The Securities and Exchange Commission ("SEC") charged a Utah man with operating a real estate Ponzi scheme that may have bilked investors nationwide out of up to $27 million.  In the latest in a string of Ponzi schemes recently uncovered in Utah, Ivan Wade Brown, 45, is alleged to have duped investors by purporting to provide "bridge loans" to homebuilders.  The SEC's complaint, filed Monday, charges Brown with multiple violations of federal securities laws, and seeks injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties.  Additionally, the SEC has requested an asset freeze and the appointment of a receiver over Brown's companies.

Brown owned and operated Avanti Capital Partners, LLC (“Avanti”) and Highland Residential, LLC ("Highland"), which he formed for the purpose of raising capital to make real estate loans.  Potential investors were told that they could expect above-average returns achieved by making "bridge loans" to aspiring homeowners who were currently unable to obtain a conventional home loan.  These investments were advertised as nearly risk-free, with a worst case scenario resulting in only a 10% loss to an investor's principal.  Investors were provided with promissory notes evidencing their investment and containing their promised rate of return.  Ultimately, Brown issued nearly $13 million in Highland notes from October 2004 to January 2007, and nearly $14 million in Avanti notes from January 2007 to May 2008.  Nearly 100 individuals nationwide invested with Brown, though a large amount were Utah residents.

However, according to the SEC, Brown failed to invest the majority of investor funds as promised.  Instead, investor funds were used to make millions of dollars in interest and principal payments to existing investors, as well as to sustain Brown's lavish lifestyle.  These personal expenses included the purchase of a luxury home in Alpine, Utah, a $120,000 down payment on his residence, a $225,000 airplane, and $650,000 towards the production of a motion picture.

Ironically, of the investments Brown did make on behalf of his investors, several were unwittingly made in unrelated Ponzi schemes.  These included $1.25 million placed with DGB Enterprises, a company that purportedly operated a mineral refinery that promised a return of $11 million in nine months - a 1,040% return.  Not surprisingly, DBG ended up being a fraud, and did not pay any of the advertised returns.  Additionally, Brown purchased $28,000 in real estate insurance contracts, called LIVE-GRIPS, that promised to protect the value of Avanti's properties even if the real estate market took a downturn.  This was also a fraud, and Brown lost his entire investment in LIVE-GRIPS.  

The case is the latest in a number of high-profile Ponzi schemes recently uncovered in Utah.  In late June, Wayne LaMar Palmer ("Palmer") and his company, National Note of Utah were charged with operating a $100 million Ponzi scheme.  Additionally, a Utah father and son were accused in December 2011 with masterminding a massive Ponzi scheme that raised over $200 million.  The widespread frauds prompted a CNBC segment hosted by Scott Cohn, dubbing Utah as "Ponziland" and noting that fraud had become so widespread that public authorities launched a public service campaign in 2010 to try and educate citizens.  The piece pegged the current caseload at over 100 cases with an estimated $1.5 billion in losses.  Authorities point to the large Mormon population as a primary target for fraudsters in what is termed "affinity fraud."

The CNBC Video can be viewed here:

 

A copy of the SEC's complaint is here.

Monday
Aug132012

Soccer Gold Medalist, NFL Players Sue Bank and Investment Advisor For Ponzi Scheme Investment

Several prominent athletes, including a newly-minted gold medalist member of the U.S. Olympic Soccer Team, have sued their former financial advisor and his employer, SunTrust Bank ("SunTrust"), alleging that they were unwitting investors in several Ponzi schemes that ultimately resulted in millions of dollars of losses.  Several National Football League players, including St. Louis Rams quarterback A.J. Feeley and his wife, U.S. Olympic soccer team player Heather Mitts, were listed as plaintiffs in a lawsuit against Suntrust and financial advisor William Crafton, Jr.  In the suit, the plaintiffs alleged that, rather than make conservative investments, Crafton invested the plaintiffs' funds into several high-risk investments, including at least one Ponzi scheme, that resulted in a loss of millions of dollars.  

According to the complaint, Crafton began soliciting his NFL clients while he was a registered investment advisor with CSI Capital Management ("CSI") in 2003.  Playing to the short and uncertain nature of the career of a professional athlete, Crafton represented that he would employ a very conservative and low-risk strategy with the principal strategy of conserving underlying principal.  Beginning with Brandon Whitting, a member of the Philadelphia Eagles football team, Crafton began signing up various NFL players, including Brent Celek, Kevin Curtis, and Whitting's roomate, A.J. Feeley.  Additionally, Feeley's wife, recent U.S. Olympic soccer gold medalist team member Heather Mitts, also became a client.  All told, the complaint alleges that Crafton ultimately provided financial advisory services to at least 20 other professional athletes, whom Crafton referred to as his "roster".  

Reassured by Crafton's promises that he would only invest in low-risk conservative investments, the plaintiffs ultimately entrusted nearly $8 million with Crafton.  However, contrary to these promises, Crafton instead placed client funds into several high-risk and illiquid investments with whom he had either close personal or business relationships.  For example, Crafton invested plaintiffs in Westmoore Capital, a firm with which one of Crafton's brokers maintained a personal relationship with the principal. Westmoore was later shut down in June 2010 after being accused of operating a $53 million Ponzi scheme.  Additionally, Crafton invested in "Mar Vista", a high-risk venture in which Crafton, unbeknownst to plaintiffs, served as a partner.  This investment also resulted in a nearly-complete loss of principal.

Crafton moved around between several financial advisor firms before selling his "roster" to SunTrust in December 2009 and agreeing to serve as the head of SunTrust's San Diego office.  When the Westmoore scheme was unearthed in August 2010, SunTrust began notifying clients that those investments were essentially worthless.  However, Crafton and his team disputed this in communications with his clients, claiming that SunTrust was trying to fire him and poach away his "roster".  Ultimately, by early 2011, Crafton was no longer employed with SunTrust.  

In the complaint, the plaintiffs charge Suntrust, Crafton, and Crafton's previous employers with multiple violations of federal securities laws.  Additionally, it is also alleged that SunTrust negligently hired Crafton and failed to adequately supervise him.  Plaintiffs are requesting a jury trial, and seek compensatory and punitive damages, as well as fees, pre-judgment interest, and costs. 

A copy of the complaint is here

Saturday
Aug112012

Two New Jersey Men Admit to $3.5 Million Ponzi Scheme; 'Secret Computer Trading Program' Was Fake  

Two New Jersey men pled guilty to charges that they masterminded a Ponzi scheme that duped investors out of nearly $4 million.  Carmelo Provenzano, 29, and Daniel Dragan, 41, both entered into plea agreements with prosecutors in which they pled guilty to a single charge of wire fraud conspiracy.  Both men face a maximum prison sentence of twenty years, along with a fine of up to $250,000 or twice the gain or loss from the offense.  

According to authorities, the scheme began in 2009, when Provenzano, Dragan, and another man, George Sepero, represented to investors that they owned several hedge funds in New Jersey known as Caxton Capital Management and CCP Pro Consulting Inc (the "Hedge Funds").  Potential investors were told that the Hedge Funds could achieve extraordinary gains through the use of a proprietary computer algorithm to trade foreign currencies.  Over the past two years, the trio boasted that the trading program had yielded returns of over 170%.  Relying on these representations, investors contributed more than $3.5 million to the Hedge Funds.

However, there was no secret computer algorithm and little, if any, funds were actually invested.  Instead, the three operated a classic Ponzi scheme, mailing investors fictitious account statements showing profits and using inflows of investor funds to make payments of interest and principal to existing investors.  Investors also received "screen-shots" showing their funds being traded in foreign currency markets; in reality, the images were from a fictional account.  Additionally, the two lived lavish lifestyles traveling across the globe and racking up monthly credit card bills that regularly exceeded $25,000.  On two separate nights at a Las Vegas nightclub, the pair spent over $10,000, including a $4,000 tip.  Provenzano also purchased a luxury Range Rover sport.  

Sepero is currently awaiting trial after being indicted on seventeen counts of wire fraud.  Provenzano is scheduled to be sentenced on November 16, while Dragan will be sentenced on November 20.

A copy of the indictment filed against Sepero is here.