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Recent SEC Releases
Monday
Jul022012

Two Plead Guilty in $8.9 Million Ponzi Scheme

Authorities announced that two men entered guilty pleas to charges they operated a Ponzi scheme that defrauded investors our of nearly $9 million.  Jason Snelling, 48, and Jerry Smith, 50, each pled guilty to one count of conspiracy to commit mail and wire fraud, one count of obstruction of justice, and one count of income tax evasion.  The conspiracy and obstruction charge each carry a maximum sentence of twenty years in prison, while the income tax evasion charge carries a five-year maximum sentence.  

Snelling and Smith operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they guaranteed high rates of returns to clients under the guise that the firms were successfully engaging in day-trading.  The two offered guaranteed rates of return ranging from ten to fifteen percent, with some investors receiving higher promised rates.  In an effort to convince investors of the safety of the operation, Snelling and Smith represented that their position would be liquidated to cash at the end of each trading day.  In total, the scheme raised nearly $9 million from seventy-two investors.  But instead of engaging in day-trading, Snelling and Smith spent the majority of investor funds to sustain an exorbitant lifestyle that consisted of boats, jet skis, plastic surgery, and private school tuition.  

Smith is scheduled to be sentenced on September 20, 2012, while Snelling will be sentenced October 2, 2012.  Snelling is currently serving a sentence after being convicted on state securities fraud charges.  

 

 

Monday
Jul022012

Las Vegas Businessman Accused of $75 Million Ponzi Scheme

Authorities arrested a high-rolling Las Vegas businessman last week on charges that he operated an "elaborate" Ponzi scheme that bilked investors out of at least $75 million.  Ramon DeSage, 61, a dual citizen of the United States and Lebanon, was the subject of a complaint filed by the Internal Revenue Service that leveled charges of wire fraud and accused DeSage of using investor funds to sustain a lavish lifestyle that included millions of dollars in gambling losses.  Wire fraud carries a maximum sentence of twenty years in prison, along with a fine up to $250,000.

According to the IRS complaint, DeSage used his company, Cadeau Express, to solicit funds from investors with the promise of high returns.  The company, whose website is still active, describes itself as a "unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers."  The IRS alleges that DeSage and Cadeau Express defrauded at least four wealthy investors, using some of these funds to pay off over $20 million of gambling debts owed by DeSage.  While the full extent of the fraud is unknown due to the complaint being filed under seal, the IRS alleges that investors are currently owed over $75 million.  

At a detention hearing, prosecutors unsuccessfully argued for DeSage to be kept behind bars due to the flight risk posed by his dual-citizenship and significant assets in Lebanon, where he is referred to as a "sheik".  Additionally, DeSage was said to have spent nearly $4 million on private air travel since 2005.  United States Magistrate Judge Peggy Leen allowed DeSage to be released on his own recognizance, but ordered him to surrender his passports and submit to electronic monitoring.  

Thursday
Jun282012

New Jersey Man Indicted For Operating $4 Million Ponzi Scheme 

A New Jersey man was indicted by a federal grand jury Wednesday for masterminding an investment scheme that bilked investors out of $4 million.  George Seporo, 39, was charged with sixteen counts of wire fraud and a single charge of conspiracy to commit wire fraud.  The conspiracy charge carries a maximum five-year prison sentence, while each charge of wire fraud carries a maximum twenty-year prison sentence and $250,000 fine.  

According to authorities, Seporo operated several companies, including Pelt Capital and Caxton Capital Management ("CCM").  Potential investors were told that Seporo had secret access to a program that allowed him to trade foreign currency.  Through this program, Seporo advertised large annual returns and assured investors their principal was safe.  However, rather than invest in the "secret program", Seporo instead used investor funds for a variety of other purposes, including sustaining a lavish lifestyle that included high-end vehicles, luxury travel, and "five-figure bar tabs."  In addition, Seporo is alleged to have taken advantage of an elderly woman by commandeering her annuity account and directing to write him personal checks that ware used for his expenses. 

Investors who are skeptical as to the veracity of a foreign-currency trading operation are encouraged to contact the Commodity Futures Trading Commission, which regulates commodities and futures markets.  

Thursday
Jun282012

Peter Madoff to Plead Guilty on Friday, Agrees to Ten-Year Sentence

Federal prosecutors revealed in a Wednesday court filing that Peter Madoff, brother of convicted swindler Bernard Madoff, is expected to plead guilty on Friday to several fraud charges relating to his involvement in the scheme and has agreed to a ten-year prison sentence.  Mr. Madoff worked under his brother since 1965, and was the former head of compliance for his brother's now-defunct brokerage firm when the scheme unraveled in December 2008.  Court papers signed by a Manhattan federal judge on Wednesday indicate that Mr. Madoff will enter a guilty plea to a single charge of conspiracy to commit securities fraud and a single count of falsifying records of an investment adviser.  Madoff has agreed to a ten-year prison sentence, which represents the total maximum punishment he faced under the charges.  Additionally, Madoff has agreed to a criminal forfeiture of approximately $143.1 billion, representing the total dollar amount of funds that passed through his brother's scheme.  

The move, while not unexpected, is surprising in terms of the seriousness of the allegations and conduct assumedly to be admitted.  Recently, Craig Kugel, an employee supervised by Madoff, pled guilty to several charges relating to the improper use of a corporate credit card and obstructing an IRS investigation.  Many viewed Kugel's guilty plea as an indication that he would cooperate with federal authorities and participate in buttressing a criminal case against Mr. Madoff.  The conduct for which Mr. Kugel pled guilty was unrelated to the fraud Bernard Madoff masterminded, and suggested that Mr. Madoff might face similar charges.  However, by pleading guilty to conspiracy to commit secures fraud, Mr. Madoff will likely admit to conduct supporting the belief of prosecutors (and a skeptic public) that Mr. Madoff was not an innocent victim of his brother's fraud.  Rather, while prosecutors are unlikely to allege that Mr. Madoff had direct knowledge of his brother's fraud, it was Mr. Madoff's dereliction of his duties as chief compliance officer that allowed the Ponzi scheme to continue to operate.  Up until Mr. Kugel's conviction, a criminal prosecution of Mr. Madoff was considered unlikely, even though it had not yet been ruled out by prosecutors. 

The announcement that Mr. Madoff and prosecutors had agreed to a ten-year prison sentence suggests the use of a type of plea agreement known as an 11(c)(1)(C) plea.  Under such a plea agreement, a sentencing judge is given the discretion only to decide whether to accept or reject the terms of the proposed agreement.  Should the judge deem the agreement acceptable, he is then powerless to depart from the suggested prison sentence, and is instead bound by the agreement between the parties.  The pleas are more popular among corporations, especially in the field of Federal Corrupt Practices Act ("FCPA") litigation, where settlements often represent the result of drawn-out and strenuous negotiations.  The plea will also contain a proffer of facts surrounding the charges, the veracity of which Mr. Madoff will attest to.

Several of Madoff's immediate and extended family members served in various capacities with their father's firm. His son, Mark, was employed at the firm's proprietary trading unit, and continued to deny any involvement in the scheme until his suicide on December 9, 2010, two years to the date of his father's confession.  Another son, Andrew, served as co-head of trading along with Mark.  Peter Madoff began working for the firm in 1965, rising through the ranks to become chief compliance officer.  While court-appointed bankruptcy trustee Irving Picard has filed suit against the family for $200 million, there have been no other indications of an imminent criminal case against Andrew Madoff or any other family members.   However, Peter Madoff's daughter, Shana Madoff, also worked in the business as in-house counsel and compliance director.  A recent Wall Street Journal article suggests that prosecutors are now expected to shift their focus to her.

Along with the prison sentence, Mr. Madoff also agreed to a criminal forfeiture order of $143.1 billion representing the total amount of investor funds that passed through the operation.  This forfeiture will include all of Mr. Madoff's real and personal property, and will also include claims to any income Mr. Madoff earns after he is released.  It is likely that any funds recovered will be added to a fund representing government recoveries of Madoff-related assets that have not been claimed by Mr. Picard.  This fund presumably includes the $2,206,157,717 provided to the Justice Department by the estate of Jeffrey Picower, which made the payment as part of a larger $7.2 billion settlement with Picard and the government.  In addition to his position as bankruptcy trustee, Picard has also been appointed by the DOJ as Special Master to oversee the process by which the funds will be distributed back to the victims, known as remission.  Picard, who has recovered nearly $10 billion thus far as trustee, has not yet announced a timetable for the separate remission process.

Tuesday
Jun262012

Supreme Court Declines to Review Calculation of Madoff Victim Losses; Second Distribution "In The Near Future"?  

In a move that was not unexpected, the Supreme Court declined to grant certiorari to a petition filed by a subsection of victims of Bernard Madoff's massive Ponzi scheme who disagreed with the court-appointed trustee's determination of their losses.  By doing so, the Court gave finality to the decision handed down by the Second Circuit Court of Appeals last year that agreed with Picard's use of the "Net Investment Method" to calculate victim losses and declined to give any credence to the balances rendered on the account statement provided to investors in November 2008 just before the scheme's collapse.

Under Picard's method, an investor's loss was determined by off-setting their total principal investment by any distributions or withdrawals.  Thus, victims who withdrew more than they invested, termed "net winners", would not be entitled to share in the distribution of recovered funds to those investors who did not withdraw more than their initial investment.  Additionally, net winners were also likely to be the subject of "clawback" actions seeking the return of any excess profits to be equitably distributed to all victims.  Under the Net Investment Method, Picard estimated the total amount of victim losses at $20 billion.  A group of investors had opposed this method, arguing that the "Last Statement Method" was the proper benchmark for calculating losses.  This alternative method, which would have placed total losses at $60 billion, had been greeted with skepticism by Picard and federal judges, who had likened adopting the method to giving veracity to the fictitious performance numbers generated by Madoff.  Additionally, the method seemingly favored those investors who had invested with Madoff over a longer period of time, and in turn received regular interest payments for years, at the expense of newer investors.  Had the Supreme Court granted certiorari review and chosen the Last Statement Method as the appropriate metric, the number of victims entitled to payouts would have greatly increased, thus drastically reducing the amount available to satisfy all claims.  

Along with providing legal finality to the dispute, the decision also paves the way for Picard to make additional distributions to investors.  While the court challenge was pending, Picard was forced to set aside a majority of the $9 billion in assets recovered thus far, leaving only approximately $1.1 billion to make initial distributions to investors.  Additionally, of that $1.1 billion, approximately $800 million had been provided from the Securities Investor Protection Corporation ("SIPC") by virtue of the Madoff brokerage's membership.  Picard's first distribution to investors made in September 2011 represented only a 4.6% pro rata distribution of approved losses, prompting Picard to estimate that the distribution would have been over 40% had he not been forced to set aside the funds.  According to Stephen P. Harbeck, chief executive of SIPC, 

"these victims can now look forward to receiving a distribution in the near future."

SIPC has also been paying Mr. Picard's fees and costs.

Picard estimates that the decision freed up the majority of a $2.3 billion customer fund for distribution.  Additionally, Picard indicated that an additional $5 billion, representing the proceeds of a settlement with the estate of Jeffrey Picower, may also be added to the customer fund and thus available for distribution if the settlement is not challenged by July 16. The attorney for the main challenger to the Picower settlement, Jim Beasley, has since indicated that he does not plan an appeal, and that "Picard gets the money."  The money is currently being held in escrow, and can only be released upon presentment of a non-appealable court order upholding the deal.  Picard has indicated he will seek court approval for a second distribution "within an expedited time frame."