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Recent SEC Releases
Monday
Jan142013

Former Pastor Pleads Guilty in $2.5 Million Ponzi Scheme

A South Carolina man who once served as pastor of a local church has entered into a plea agreement with prosecutors to charges that he operated a commodities-based Ponzi scheme that bilked investors - some his former congregants - out of over $2.5 million.  Archie Larue Evans, 42, agreed to plead guilty to one charge of mail fraud and one charge of structuring financial transactions to avoid federal scrutiny.  In return, prosecutors agreed not to pursue an additional seven counts of mail fraud and five counts of money laundering.  The charges carry a combined statutory maximum of twenty-five years in prison, although federal sentencing guidelines will likely result in a lesser recommended range.

Evans was a farmer and former pastor at the Tilley Swamp Baptist Church ("Tilley Church") in Conway, South Carolina.  In addition, beginning in 2004, Evans also operated Gold & Silver LLC ("Gold & Silver"), which purported to invest in silver futures markets and offered quarterly returns ranging from 10% - 12%. Investors, some of whom included members of Tilley Church, were provided with regular account statements purporting to show regular account gains.

However, in reality, Evans misappropriated investor funds as he ran the classic Ponzi scheme.  Rather than achieve the exorbitant rates of return he represented to investors, he instead used funds for personal expenses, to make interest payments to investors, and suffered trading losses on the funds actually invested.  At the time Evans was indicted in late 2011, his seized bank accounts showed a balance of just $1,919.86.

Authorities also discovered Evans' ownership of two non-profit agencies apparently used to spread the message against homosexuality.  One of the non-profits, Pale Productions, apparently published a book entitled "Nature's Pairs: The Demise of Homosexuality," which featured Evans' 'indisputable' evidence against homosexuality.  According to this order form, the book appears to have been published while Evans operated the scheme, raising the possibility that investor funds may have been diverted to the venture.

Evans remains free on $25,000 bond pending sentencing.  

Monday
Jan072013

While Rothstein Victims Wait, Appellate Court Hears Argument Over Entitlement To Forfeited Assets

When it became clear that Ft. Lauderdale power-attorney Scott Rothstein was behind a massive Ponzi scheme, federal authorities took quick action to preserve proceeds of the fraud, seizing tens of millions of dollars of assets that symbolized Rothstein's larger-than-life persona, including more than 20 properties, exotic cars that included a $1.5 million Bugatti, 304 pieces of jewelry, and $15 million Rothstein had wired to Morocco just before the scheme's collapse.  In all, the criminal forfeiture proceedings, as they are known in legal parlance, yielded approximately $50 million of assets acquired with proceeds of Rothstein's $1.2 billion Ponzi scheme.  

However, now over three years later, not one of Rothstein's victims has seen a penny from the court-appointed bankruptcy trustee, who has been locked in a court battle with federal authorities over the right to dispose of those assets and distribute proceeds to victims.  Instead, in what legal experts describe as a murky area of legal jurisprudence long overdue for a showdown, the seized assets have remained in legal limbo as the two unlikely adversaries litigated their claims to possession in a clash between criminal forfeiture law and bankruptcy jurisprudence.  

This week, the Eleventh Circuit Court of Appeals heard argument this week over entitlement to the assets, with at least one judge expressing unbridled skepticism at the government's position.  Circuit Judge Gerald Tjoflat, a long-tenured Eleventh Circuit justice and a respected expert on bankruptcy law, took an active role during the arguments, repeatedly questioning the government's attorneys and insinuating that the government's actions were overreaching and unwarranted.  While a ruling is forthcoming, many expect the issue to make its way to the doorsteps of the U.S. Supreme Court.  

The Dispute

The source of contention between the trustee and the government boils down to one simple issue: who can more efficiently distribute proceeds to victims of Rothstein's fraud.  United States District Judge James I. Cohn, a sitting judge in the Southern District of Florida where Rothstein's fraud was based, largely sided with prosecutors in forfeiture proceedings, questioning why assets should be returned to the bankruptcy estate where they would be returned to the pool of money available to all creditors - not just Rothstein's victims. Judge Cohn vocalized these concerns, noting that 

It would be patently inequitable to return that money to RRA's estate when it can be returned directly to the clients and qualified investors.

And he may have a point.  While Rothstein ran a classic Ponzi scheme, he did it in his position as chairman of one of South Florida's largest law firms, Rothstein Rosenfelt Adler ("RRA").  When the scheme collapsed, RRA soon was forced into bankruptcy and over 70 RRA lawyers lost their jobs.  The resulting bankruptcy proceeding included not only victims of Rothstein's scheme, but also other creditors expected when a large law firm went into bankruptcy, including landlords, service providers, and former clients. Thus, because investors would not be the only ones sharing in the pot of recovered assets, the additional number of claims means that subsequent distributions would be accordingly diluted.  

But Herbert Stettin, the court-appointed bankruptcy trustee, has maintained that the assets rightfully belong to the bankruptcy estate, as they were acquired with tainted funds and thus constituted proceeds of Rothstein's fraud.  Already, Stettin's recovery efforts are likely to fall well short of the over $1 billion of estimated losses, due in part to Rothstein's dangerous penchant for burning through large amounts of money in activities with little or no prospect of recovery such as call girls, prostitutes, and nights on the town.  The inability to bring those disputed assets into the bankruptcy estate means that Stettin will have to rely largely on litigation, including clawbacks from scheme profiteers, to to bring assets into the bankruptcy estate.  

Increase in Forfeiture Actions Yields Positive Results 

While the relationship between authorities and court-appointed bankruptcy trustees or receivers has not always been so contentious, the government has recently embarked on an aggressive push in bringing criminal forfeiture actions that has resulted in a spike in recoveries by the Department of Justice's Asset Forfeiture Program.  While recoveries remained fairly constant from 2000 - 2005, forfeitures suddenly doubled in 2006 and have continued at an increasing pace to a record $1.684 billion in 2011, as shown by the table below:

Year     Recoveries

  • 2000: $507,033,378
  • 2001: $439,930,324
  • 2002: $453,132,562
  • 2003: $466,968,207
  • 2004: $537,113,193
  • 2005: $578,803,657
  • 2006: $1,143,341,308
  • 2007: $1,583,388,625
  • 2008: $1,327,604,903
  • 2009: $1,583,388,625
  • 2010: $1,600,370,705
  • 2011: $1,684,810,126

The reports are available here.  While not solely attributable to the recent proliferation in Ponzi schemes, the correlation is unmistakable.  

However, while bankruptcy trustees and court-appointed receivers are obligated to distribute all net asset recoveries, the government is under no such obligation with forfeiture proceeds.  Instead, the government is given sole discretion in determining the proper use of the funds, and these decisions are not subject to review or judicial oversight.  According to financial statements provided by the DOJ, on average less than one-third of yearly recoveries is used to compensate fraud victims.  

Victims Still Waiting

The dispute could arguably be blamed for the reason that, despite Rothstein's scheme unraveling more than three years ago, victims have yet to see a single penny from Stettin's recovery efforts.  Indeed, the recovery and disposal of assets acquired with scheme proceeds occurs soon after a receiver or trustee's appointment, and the resulting proceeds are often used to fund initial distributions.  While clawback litigation is also a significant source of asset recoveries, fruits of those efforts are often not realized until years later after the litigation has worked its way through the system.  

Saturday
Jan052013

JP Morgan Given January 11th Deadline to Disclose Madoff-Related Documents; Investigation Related To Money Laundering Policies?

Bringing to light a previously-undisclosed investigation, the Office of the Comptroller of the Currency ("OCC") has accused financial behemoth JP Morgan Chase ("JP Morgan") of withholding requested documentation pertaining to an investigation of the bank's relationship with infamous Ponzi schemer Bernard Madoff.  According to a letter from Treasury Inspector General Eric Thorson to JP Morgan's general counsel, the dispute seems to center on documents that JP Morgan has taken the position are protected by the attorney-client privilege.  Thorson, in dismissing the bank's claims, cautioned that further inaction would be viewed as "continuing purposeful impediment" to the OCC that would merit "further action by our office."

Inquiry May Have Been Spawned By Madoff Trustee's Investigation

The OCC's investigation, while not publicly known, is not surprising in light of previous claims made in a lawsuit brought by Irving Picard, the bankruptcy trustee tasked with recovering assets for Madoff's victims.  In a 148-page lawsuit filed in June 2011, Picard accused JP Morgan of turning "a blind eye" to Madoff's fraud "as the drive for fees and profits became a substitute for common sense, ethics, and legal obligations."  (A federal judge later dismissed a majority of the claims, which Picard has since appealed.)  

The lawsuit is rich with numerous examples purportedly demonstrating that JP Morgan was aware of Madoff's fraud for over a decade, including an internal email in June 2007 from JP Morgan's chief investment officer observing that

For whatever it[']s worth, I am sitting at lunch with Matt Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme.

This knowledge, coming from JP Morgan's role as Madoff's primary banker for decades, allegedly allowed the bank to quietly withdraw nearly $300 million from Madoff's scheme just before it unraveled in December 2008.  JP Morgan later claimed the withdrawals stemmed from a routine re-balancing of the bank's hedge-fund exposure. 

In addition to avoiding those losses, JP Morgan also benefitted from use of the billions of dollars in Madoff accounts.  Indeed, according to a study conducted by a respected finance professor, JP Morgan realized an after-tax profit of at least $483 million.  Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette, arrived at this figure using several factors, including JP Morgan's reported net interest margin levels.  Wilson's treatise is available for purchase here.

Possible Hints Into Subject Of Inquiry

While the OCC has not specified the focus of its investigation, recent comments made by a JP Morgan spokeswoman suggest that the documents sought concerned communications seeking guidance from the bank's lawyers.  Additionally, the presence of the OCC as the lead investigative agency suggests that the inquiry could be related to JP Morgan's obligation under the Bank Secrecy Act of 1970 ("BSA") to file suspicious activity reports ("SAR's") regarding the detection of "certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA." SAR's are typically shrouded in secrecy - indeed, the unauthorized disclosure of an SAR is by itself a criminal offense.  

Authorities have bolstered efforts to crack down on financial institutions skirting their duty to file SAR's, with the OCC recently leading an investigation that culminated with banking giant Wachovia agreeing to pay a then-record $160 million fine stemming from a "woefully inadequate" anti-money laundering program.  

A copy of the Trustee's lawsuit against JP Morgan is here.

Saturday
Jan052013

Former Colorado Sheriff Accused of Duping Co-Workers in $1.2 Million Ponzi Scheme

A former Colorado sheriff's deputy is accused of deceiving co-workers and other law enforcement officials in a Ponzi scheme that promised annual returns of over 100%.  David Hawkins, a former El Paso County Sheriff deputy who then operated an indoor-football league, entered an initial plea of not guilty to charges of wire fraud and spending of unlawfully-obtained funds.  Wire fraud carries a maximum prison term of twenty years and a $250,000 fine, while the charge of spending money illegally carries a ten-year maximum sentence and a $250,000 fine.  

Hawkins was hired by the El Paso Sheriff's Office in 2001, where he was sworn in as a sheriff's deputy in 2002.  He remained in that position until his resignation in December 2011.  However, beginning in late 2009, Hawkins began soliciting investments in his PD Hawk Investments Fund - apparently without receiving written approval for outside employment as required by his employer.  Hawkins touted himself as a currency trader, and boasted that he had three years of experience in obtaining consistent and steady profits as high as 62%.  Hawkins' investors included fellow sheriff's deputies and law enforcement officers, who were promised monthly returns of 10% with the understanding that Hawkins would keep any amount over that threshold.  In total, Hawkins is said to have raised over $1 million.

Hawkins also was heavily involved in an indoor football league, announcing his plans at a July 2011 news conference that his Danville Dragons would start a 14-game season beginning in March 2012.  However, when these plans were abruptly cancelled several months later, authorities began an investigation that revealed Hawkins was apparently not the astute currency trader he held himself out to be.  Instead, according to authorities, Hawkins never earned any profits from his trading.  Instead, he used investor funds to run the classic Ponzi scheme - making fictitious interest payments and for a variety of personal expenses, including spending more than $18,000 at an Oregon automobile dealership.  

The Colorado-Springs Gazette reports that Hawkins has retained a high-powered defense attorney and is currently negotiating a plea agreement.  

Friday
Jan042013

Minnesota Man Who Offered $19 Million For 1-Year Sentence Instead Receives 30 Years For Role In $194 Million Ponzi Scheme

A Minnesota businessman convicted for his role in a $194 million Ponzi scheme who tried a variety of tactics to obtain a light sentence - including offering a $19 million check and begging the sentencing judge for mercy - was ultimately unsuccessful as a Minnesota federal judge sentenced him to a thirty-year term.  Jason "Bo" Beckman, one of the major players in Trevor Cook's massive Ponzi scheme that defrauded nearly 1,000 people, received the sentence after a federal jury convicted him of 18 counts that included mail fraud, wire fraud, and conspiracy to commit money laundering.  Two of Beckman's co-conspirators, Gerald Durand and Christopher Pettengill, also were sentenced, while a third, Patrick Kiley, was scheduled to be sentenced before accusing his attorney of misconduct.

Along with Cook, the men operated Crown Forex SA and JDFX Technologies, which they represented could achieve risk-free and tax-free returns through currency trading.  Potential investors were told that the above-average returns were possible due to the fact that the source of his loans complied with Islamia sharia law and thus could not charge interest.  Cook used the men to pitch the scheme to potential investors, as both Kiley and Durand hosted successful radio talk shows. Indeed, Kiley alone brought in nearly two-thirds of the total investors.  Beckman used his money-management firm, Oxford Private Client Group, to solicit affluent clients.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million 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.  

The morning of the sentencing was spent reviewing defense attorneys' motion for a new trial after prosecutors alleged that Durand and Pettengill had previously discussed murdering Beckman in order to collect on a life insurance policy.  United States District Judge Michael Davis denied that request.  The court then heard from numerous victims of the scheme, many urging the maximum sentence for the defendants.  

Beckman was sentenced first, but not before he spoke for nearly an hour, often choking up and continuing to deny any knowledge of the scheme.  He lambasted the lack of evidence used to convict him, and intimated that he would gladly join those wrongfully convicted of crimes.  His wife also testified, imploring Judge Davis to tread lightly in delivering his sentence and instead allowing Beckman to continue his search for the missing cash.  Judge Davis had little patience for the acts, remarking that Beckman's grandstanding proved that

"some people should not have access to the English dictionary.  You have used the English language to do violence to so many.  It is not a gun.  It is worse than a gun."

Assistant U.S. Attorney David MacLaughlin also weighed in, observing that "Mr. Beckman is the worst white-collar defendant in the history in the District of Minnesota."  Beckman was then sentenced to serve a thirty-year prison term.  One co-defendant, Gerald Durand, received a twenty-year sentence. Another, Christopher Pettengill, who has been cooperating with the prosecution since pleading guilty several years ago, was sentenced a 7.5-year term.  Judge Davis indicated that, if not for Pettengill's cooperation, he too would have received a 20-year sentence.  Beckman's attorney indicated he would appeal the sentence.

Kiley was also scheduled to be sentenced, with his attorney seeking a lenient sentence due to Kiley's age and medical maladies.  However, when Kiley took the stand, he claimed that he had never been shown his pre-sentencing report - a document prepared by the U.S. Probation Office that detailed the crimes and calculated a recommended sentencing range.  Additionally, Kiley accused his attorney of attempting to gain from his representation through various internet postings describing his representation of Kiley.  Following this, Judge Davis indicated he would replace Kiley's attorney with a public defender and continue sentencing until a later date.  

Ironically, the admitted mastermind of the scheme, Trevor Cook, received a 25-year sentence in August 2010 after pleading guilty and will serve less time than Beckman.  With credit for good behavior, Beckman could be released in 2037.  

A copy of Pettengill's plea agreement is here.

A copy of Durand, Kiley, and Beckman's indictment is here.