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Recent SEC Releases
Wednesday
Jun132012

"Amish Bernie Madoff" Sentenced to 6.5 Years in Prison 

An Ohio man dubbed the "Amish Bernie Madoff" convicted of swindling thousands of investors, mostly members of the Amish community, out of nearly $17 million was sentenced to spend 6.5 years in federal prison.  Monroe Beachy, 78, had pled guilty in March, and faced a recommended sentence of 12.5 to 15.5 years in prison under federal sentencing guidelines.  However, it seems that a campaign by Beachy to seek forgiveness from each of his victims through written letters may have swayed United States District Judge Benita Pearson, who acknowledged receiving seventy-five letters from victims asking to forgive Beachy, while only two victims sought a prison sentence.  However, Judge Pearson rejected Beachy's request for home confinement, stating that "There can be no carve-out because you belong to a religious community that I respect."

Beachy was arrested in September 2011 after authorities uncovered evidence of a Ponzi scheme involving the Ohio Amish community spanning several decades.  According to the indictment, Beachy solicited primarily Amish investors through his company A&M Investments.  From 1990 to 2010, potential investors were assured that their principal would remain safe, and that they could expect a stream of constant annual returns.  Beachy told investors that their funds would be invested in Ginnie Mae Bond Funds, a type of mortgage-backed security issued by the Government National Mortgage Association and guaranteed by the United States government.  Investors were provided with monthly hand-written account statements showing continuing growth in their accounts.  In total, approximately 2,698 people and entities invested $33 million with Beachy.  Yet, instead of investing in bonds, Beachy allegedly sustained heavy losses investing in risky stocks and junk bonds.  Authorities estimated that total losses from the scheme at roughly $16.8 million.

One factor that set the case aside from frauds of similar proportion was the acknowledgement by both the Government and Beachy's attorney that no evidence existed showing that Beachy diverted any investor funds for his own personal gain.  Beachy's lawyer noted that Beachy and his wife continued to live in a modest farmhouse during the scheme.  However, viewed in light of typical Amish traditions of modesty and frugality, the distinction is perhaps more understandable.

A copy of the indictment is here.

Wednesday
Jun132012

Stanford Sentencing Today: U.S. Seeking 230 Year Prison Sentence, $5.9 Billion in Restitution

"The nature and circumstances of Stanford's fraud, his own role and personal history, and the need for forceful deterrence calls for the most severe punishment permitted by law."

- Stanford Prosecutors


Convicted swindler Allen Stanford is scheduled to be sentenced today in what will rank as the second-largest financial crime in history, behind only Bernard Madoff's $65 billion Ponzi scheme.  Following a trial where he was convicted on thirteen of fourteen counts, the Department of Justice has asked for a 230-year prison sentence - the maximum term for each count.  If followed by the Judge, the sentence would eclipse even that of Madoff, who received a 150-year sentence for his scheme.  Additionally, the US filed papers with a Houston federal court on Tuesday seeking an order of $5.9 billion in restitution - a move that is likely symbolic given the government's previous acknowledgement that restitution would be impractical due to its complexity, Stanford's claim of indigency and the difficulties encountered thus far by the court-appointed receiver overseeing the gathering and liquidation of Stanford's assets.

On the eve of the sentencing, Stanford's attorneys filed papers accusing the government of sensationalizing Stanford's plight, with court-appointed attorney Ali Fazel arguing that

"Although Ponzi scheme makes for a great sound bite and may help defer the fact that the Government has missed, on all cylinders, uncovering the shenanigans of the banks and other financial institutions in 2008 and 2009, it simply does not describe what Stanford was or what Stanford did,"

In a move that may not bode well for Stanford, Fazel continued to dispute that Stanford had orchestrated a Ponzi scheme, noting that unlike a Ponzi scheme where customers receive fictitious returns from little or no real investments, Stanford "made investments in real estate, private equity; he invested and created foreign banks, foreign and domestic investment companies and airlines."  United States Judge David Hittner, who will ultimately decide the appropriate sentence for Stanford, is likely to consider Stanford's remorse and acceptance of responsibility for his crime as a factor in handing down a sentence.  Stanford's continued denial of guilt could potentially be a death sentence in itself if it causes Judge Hittner to inflate Stanford's sentence.  According to Scott Cohn at CNBC, Stanford does plan to make a statement in open court, as is customarily afforded to defendants before they are sentenced.  It is also likely that Judge Hittner will hear from Stanford victims who wish to share their plight with the Court, both by written letter and by open testimony. 

Stanford's lawyers have countered with a request for a prison term of 31 to 44 months, which could result in the immediate release of Stanford given his current period of incarceration before trial and customary good-behavior reductions given by the Bureau of Prisons. 

In seeking $5.9 billion in restitution, U.S. Attorney Kenneth Magidson called the figure "conservative", noting that it derived from the simple subtraction of $1.3 billion in fictitious interest from the $7.2 billion in account balances at the time Stanford's empire was placed into receivership in February 2009.  Magidson cited the incomplete nature of Stanford's financial records as one of the reasons for the figure - echoing previous speculation that court-appointed receiver Ralph Janvey was having trouble piecing together investor losses after the Proof of Claim Form distributed to potential victims included a section requiring victims to provide documentation supporting their loss figures.

Sentencing is scheduled to begin at 10:00 A.M.  

Tuesday
Jun122012

Three Convicted for Role in $194 Million Minnesota Ponzi Scheme

A federal jury convicted three Minnesota men for their role in the $194 million Ponzi scheme masterminded by Trevor Cook that ranks as the second-largest Ponzi scheme in Minnesota history.  Jason "Bo" Beckman, 42, Gerald Durand, 62, and Patrick Kiley, 73, were convicted of all charges and immediately taken into custody.  The three were convicted of 12 counts of wire and mail fraud, one count of conspiracy to commit mail and wire fraud, and two counts of money laundering. In addition, Beckman was convicted on two counts of wire fraud, two counts of mail fraud, two counts of filing a false tax return, and one count of tax evasion. Durand was also convicted on two counts of concealing a material fact from the United States and three counts of filing a false tax return. Each likely faces over one hundred years in prison if sentenced to the maximum term for each count.

Cook's scheme, only second in Minnesota history to Thomas Petters' $3.65 billion Ponzi scheme, purported to achieve above-average returns through trading in commodities and futures.  Partnering with two firms, Crown Forex SA and JDFX Technologies, 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.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million of that amount was used to trade currency, of which $68 million was lost.  The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.  

According to prosecutors, Cook used Beckman, Kiley and Durand to pitch the scheme to potential investors.  Both Kiley and Durand hosted radio shows hosted on Christian broadcast radio.  Kiley, by far the most successful conduit for new investors, brought in nearly two-thirds of all investors to Cook's scheme, and boasted that he had forty years of experience in the financial industry despite never graduating from college and previously selling appliances and other consumer products.  According to Kiley, the opportunity to invest in Cook's scheme had previously only been open to banks and international corporations, but available to Kiley's audience - whom he called "truth seekers" - in order to "protect them from an impending economic collapse."  Kiley would then close each show with a prayer.  Beckman conducted numerous seminars touting the scheme and also solicited affluent clients through his company, Oxford Private Client Group.

The criminal trial had several notable incidents, including the order by Chief United States District Judge Michael Davis to allow several attorneys hired by Beckman to break the attorney-client privilege concerning their conversations with Beckman in his ultimately unsuccessful bid to purchase a stake in an NHL team.  The trial also saw Beckman give heated testimony about his lack of knowledge concerning Cook's scheme.

Judge Davis has not yet scheduled a sentencing date.

A copy of the indictment against the three men is here.

Tuesday
Jun122012

Fourteen Brokers Sued by SEC for Promoting $415 Million Agape Ponzi Scheme

The Securities and Exchange Commission ("SEC") today sued fourteen individuals who misrepresented the safety of investments in the now-defunct Agape World ("Agape") that was later discovered to be a $415 million Ponzi scheme.  Those named are Bryan Arias, Hugo A. Arias, Anthony C. Ciccone, Salvatore Ciccone, Diane Kaylor, Jason A. Keryc, Anthony Massaro, Christopher E. Curran, Ryan K. Dunaske, Michael P. Dunne, Martin C. Hartmann III, Michael D. Keryc, Ronald R. Roaldsen, Jr., and Laura Ann Tordy.  These defendants were brokers, account representatives, and vice presidents for Agape, and in their capacity as the principal sales agents for the scheme, made misrepresentations to thousands of investors as to the safety of their investment whilst also promising above-average returns in a very short period of time.  The SEC is pursuing injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties against each of the defendants. 

Agape was a nationwide Ponzi scheme orchestrated by Nicholas J. Cosmo, whose exploits earned him the nickname as the "New York Mini-Madoff".  After being indicted in April 2009, Cosmo pled guilty to one count of wire fraud and one count of mail fraud, and was sentenced to twenty-five years in federal prison in October 2011.  According to prosecutors, Agape solicited over 5,000 investors nationwide, offering exorbitant short-term returns that were the equivalent of eighty percent annually.  Cosmo told potential investors that these returns were achieved by making profitable short-term bridge loans.  As a result, Cosmo and Agape took in approximately $413 million from thousands of investors nationwide.  However, in reality Cosmo used only $30 million to make the bridge loans, and also squandered $80 million by engaging in unauthorized trading in commodities and futures positions. Approximately $232 million was paid to investors in the form of fictitious interest payments.

According to the SEC, over $60 million was paid in commissions to Agape brokers for continuing to bring in new investors.  As alleged in the SEC's complaint, Defendants Bryan and Hugo Arias, Anthony and Salvatore Ciccone, Kaylor, Jason Keryc, and Massaro worked as brokers for Agape, with the remainder of the defendants working as so-called "sub-brokers".  In their capacities as brokers and sub-brokers, the Defendants made numerous misrepresentations to potential investors, including the use of their funds, and the safety of the underlying investments.  Additionally, in light of the short-term nature of the investments, the Defendants urged investors to "roll-over" their principal and accrued interest to continue to perpetuate the scheme and ignored numerous red flags of fraud, including Cosmo's prior criminal convictions for fraud, the promised exorbitant returns, and representation that only 1% of an investor's principal was at risk.  

Defendants Jason Keryc, Anthony Massaro, Anthony Ciccone, and Diane Kaylor were also recently criminally charged with one count of conspiracy to commit mail fraud.  If convicted, each faces criminal monetary penalties, as well as a maximum of ten years in federal prison.

A copy of the SEC Complaint is here.
A copy of the SEC Litigation release is here.
A copy of the criminal complaint filed against Defendants Keryc, Massaro, Ciccone, and Kaylor is here.

 

Sunday
Jun102012

US Will Not Seek Restitution For Stanford Victims

The United States will not seek an order of restitution when Robert Allen Stanford is sentenced on June 14th, stating that to do so would be impractical and instead indicating it seeks to provide Stanford victims with proceeds of forfeited assets.  In a June 4th filing with a Houston federal court, the government instead sought permission to compensate victims through the process of remission, claiming that an order of restitution would conflict with the judicial claims process already in place by the receiver chosen by the Securities and Exchange Commission.  The jury that convicted Stanford also found that funds in nearly 30 foreign accounts constituted proceeds of Stanford's fraud and were thus subject to forfeiture.  Additionally, the US indicated it will seek the imposition of a money judgment against Stanford at his sentencing that could allow further forfeiture of Stanford assets.  

Generally, an order of restitution is mandatory in a crime involving fraud under the Mandatory Victim Restitution Act ("MVRA").  However, there exist several exceptions to mandatory restitution under the MVRA, including when “the number of identifiable victims is so large as to make restitution impracticable” or if “determining complex issues of fact related to the cause or amount of the victim’s losses would unnecessarily complicate or prolong the sentencing process."  In invoking these exceptions, the US points to several factors, including (1) the estimate that over 21,000 investors lost money in Stanford's scheme, (2) complications involved in calculating loss amounts when over $1 billion in fictitious interest was paid to investors and the fact that some investors withdrew portions of their principal while some kept all funds with Stanford, and (3) the likely duplication of efforts already underway by the SEC Receiver.  The US indicated that it was cooperating closely with the SEC Receiver, who recently obtained court approval for a claims process to return funds to victims and established a September 1 "bar date" by which prospective victims must notify the SEC Receiver of their alleged loss.  Additionally, the DOJ and SEC have agreed to a joint distribution process by which to distribute any assets that are obtained by the DOJ through the forfeiture process.

While unusual in that the criminal defendant is usually the party arguing that an order of restitution would be impractical or unduly complex, the DOJ's proposal makes a lot of sense.  For one, the SEC Receiver appointed by the Court has a core mission that includes the directive to "marshal, liquidate, and distribute assets to victims." The distribution process is often the primary duty of a court-appointed receiver, which is often the party that takes control of scheme operations and is intimately familiar with the scheme.  Additionally, the addition of the DOJ into the distribution process would likely result in duplicative efforts and, ultimately, reduced payouts to victims.  As a government agency already bursting at the seams, the DOJ is ill-equipped to deal with a complicated and extensive restitution process.

Stanford is scheduled to be sentenced June 14, 2012.

A copy of the June 4th filing is here