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Recent SEC Releases

Potato Ponzi Scheme Perpetrators Ordered To Issue Refunds Or Face Charges

Continuing a recent trend of fraudulent schemes based on highly-unusual investments (see cows, goats, and even emus), Indian securities regulators have ordered the perpetrators of a potato-trading Ponzi scheme to return funds to investors or risk facing civil and criminal prosecution.  Sumangal Industries Ltd. ("Sumangal"), based in Kolkata, India, was ordered by the Securities and Exchange Board of India ("SEBI"), to wind down the scheme and return investor funds within three months.  The scheme, which had offered over 100% returns to investors, had recently been issued a show-cause notice by SEBI in April 2013.

Sumangal began attracting the attention of SEBI when regulators discovered a newspaper advertisement soliciting the public to invest in Sumangal's 'Flexi Potato Purchase Scheme'.  The company pitched the investment as a lucrative opportunity, promising exorbitant returns ranging from 20% - 100% within a 15-month period.  Investors were told the returns were due to the company's expertise in the potato trade; Sumangal would buy potatoes from the market when prices were low, keeping them in cold storage until the price later rose and the potatoes could be resold at a hefty profit.  It is unknown how many investors were ultimately induced to contribute to the scheme.

After commencing a probe into Sumangal following discovery of the newspaper advertisement, SEBI ordered the company to cease the venture until it had obtained the proper licensure.  Sumangal initially pushed back, claiming that it had a license for its potato trsading, and that it "was dealing in agricultural and non-agricultural products within and outside India."  However, when pressed, Sumangal was unable to provide substantive proof in support of these claims.

Indian securities regulators have significantly increased oversight of the so-called 'collective investment schemes' in light of the recent discovery of a massive Ponzi scheme that is said to have duped investors out of billions of dollars.  In additional to financial ruin for many, the schemes have also left a swath of suicides in their wake.


Madoff Office Artwork, Including Warhol and Matisse Pieces, Set For Auction

Andy Warhol - Chicken and DumplingsA federal judge has cleared the way for the public auction of a vast collection of fine art that once graced the walls of Bernard Madoff's now-defunct brokerage firm.  The collection, which is valued at nearly $600,000 and includes pieces by Henri Matisse, Pablo Picasso, and Andy Warhol (one piece is pictured right), was displayed at Madoff's main office in the famed Lipstick Building in Manhattan or his back-up office in Queens.  Bankruptcy trustee Irving Picard, citing the annual costs of nearly $20,000 to insure and store the pieces, requested approval from U.S. Bankruptcy Judge Burton R. Lifland to offer the artwork for auction during the upcoming fall sales in New York.  Notable auction houses Sotheby's and Stair Galleries will oversee the sales.

After Madoff was arrested in December 2008, Picard secured insurance on the collection, and in June 2009 coordinated the transfer of the artwork to climate-controlled storage.  Picard hired Helen D. Lally, of Helen D. Lally Fine Arts, Ltd., as an art consultant to monitor the fine art market and determine an appropriate time and method for liquidation fo the artwork.  As the general economy has improved since Madoff's arrest, the art market has followed in tandem, and Picard informed the Court that 2013 spring sales for artwork were 'quite strong'.  As such, Picard requested authority to offer the artwork for sale at the upcoming fall auctions, which occur in October and November.

The artwork features over sixty pieces, including single works by Pablo Picasso, Roy Lichtenstein and Henri Matisse, as well as multiple pieces by Andy Warhol.  

Madoff's victims holding approved claims have received more than $5 billion from Picard in several distributions, with the most recent distribution coming back in February.  This amount represents nearly half of the approximately $11 billion in claims approved thus far by Picard.

A copy of the Motion for Authority for Sale is here.

A copy of the Order Approving Sale is here.


Father and Son Convicted in $100 Million Ponzi Scheme

After a two-week trial, a federal jury convicted an Arizona father and son of orchestrating a $100 million Ponzi scheme that targeted members of the Church of Jesus Christ of Latter-day Saints.  Guy Williams, 42, and Brent Williams, 66, were found guilty of thirty-eight felony charges, including conspiracy, wire fraud, mail fraud, and money laundering.  Each could face hundreds of years in prison.  Based on the severity of the scheme and the numerous charges, the duo could potentially face a sentence of hundreds of years in prison.

The Williamses operated a group of investment funds known as the "Mathon" entities, which offered several investment opportunities involving short-term loans to third-party borrowers.  Beginning in November 2002, potential investors were promised high interest rates on the loans of up to 75% annually, and were told that the Williamses and their partners had substantial experience in this business.  Investors were assured that each loan was collateralized with specific assets having a value much higher than the value of the loan, and were also told that many of the loans were also further secured by personal guarantees from the borrowers.  Many of the investors were members of Arizona's Mormon community.  From November 2002 until February 2004, the scheme took in more than $100 million from over 175 investors.  

However, the Mathon entities were nothing more than an elaborate Ponzi scheme, using incoming investor funds to pay returns to existing investors as well as sustaining their lavish lifestyles.  Investor funds were also used to pay over $10 million in salaries and bonuses to the founders, as well as to operate businesses they secretly controlled.  

The Williamses are scheduled to be sentenced September 30.

A copy of the indictment is here.


'Muslim Madoff' Gets 12-Year Sentence for $49 Million Ponzi Scheme

A Pakistani-American who became known as the 'Muslim Madoff' received a 151-month prison sentence for orchestrating a Ponzi scheme that counted a number of Pakistani-Americans as victims.  Syed Qaisar Madad, 66, received his sentence after pleading guilty earlier this year to wire fraud and tax fraud, and had faced a statutory maximum sentence of up to 23 years in federal prison.  

Madad, a Pakistani native, founded Technology for Telecommunication and Multimedia, Inc. ("TTM") in 1993. Beginning in 2005, Madad solicited family and friends, including members of the Pakistani-American community in Diamond Bar, California where Madad was a prominent figure, to invest in TTM with the promise of significant profits through his proficiency as a day-trading investor.  Madad touted his day-trading strategy, telling investors they could expect annual profits ranging from 30% - 65%.  Investors were assured that Madad sought to avoid risk by both beginning and ending the trading day with 100% cash, and were provided with regular monthly account statements showing consistent trading gains.  In total, Madad took in nearly $50 million.

However, Madad's purported investment prowess was nothing more than an elaborate Ponzi scheme in which incoming funds from new investors was used to pay fictitious returns to existing investors.  Additionally, Madad stole over $15 million of investor funds to sustain his lavish lifestyle, which included $6 million in personal credit card bills, $1.3 million in improvements to his house, a 5.25-carat diamond ring and a $180,000 sapphire and diamond necklace, and a $600,000 down payment on a house for his daughter.  Additionally, Madad used investor funds to make more than $1 million in contributions to numerous charities in Pakistan, India, Egypt and the United States.  Madad even once hosted a fundraiser at his house that included an appearance by former Pakistan President General Pervez Musharref.

Madad was also ordered to pay restitution to his victims in an amount to be determined at a later date.


73-Year Old New Jersey Financial Advisor Sentenced to 15 Years For $9.8 Million Ponzi Scheme

A 73-year old New Jersey former financial advisor was sentenced to serve fifteen years in state prison for orchestrating a $9.8 million Ponzi scheme.  Maxwell Smith, of Fair Haven, New Jersey, received the sentence after previously pleading guilty to a state charge of money laundering.  He will serve the sentence concurrently with a seven-year sentence handed down by federal authorities after he pled guilty to federal mail fraud charges.  In addition to his prison terms, Smith is permanently barred from ever working again in the securities industry, and will also owe nearly $8 million in restitution to his victims.

According to authorities, Smith was employed as a financial advisor at various financial firms in New Jersey where he provided investment advice to individual clients.  In addition to providing investment advice, Smith also created Health Care Financial Partners ("HCFP"), which held itself out as an investment fund with hundreds of millions of dollars in assets.  In an investment prospectus provided to investors, HCFP advertised guaranteed annual returns ranging from 7.5% to 9% supposedly generated through lucrative loans to healthcare facilities such as nursing homes.  Investors were offered the opportunity to purchase bond offerings in amounts ranging from $25,000 to $300,000, and Smith touted the ability to treat any gains as tax-free.  In total, Smith raised over $9 million from investors.

However, rather than using these funds for a legitimate purpose, Smith instead misappropriated millions of dollars to live a life of luxury that included dining, gambling, entertainment, overseas travel, and renting a villa in France.  Smith paid out approximately $2 million in purported interest payments that were, in reality, simply principal belonging to other investors.

Ironically, the scheme's demise is attributed to suspicions raised by the daughter of an elderly investor couple that invested $7 million with Smith who thought that the venture seemed very similar to Bernard Madoff's Ponzi scheme.  This led to a civil lawsuit, which later led to criminal charges.  While Smith's home was sold to benefit defrauded investors, this led to a shortfall of nearly $9 million.  

Thus far, victims have recovered more than $4 million - the majority of which is comprised of FINRA arbitration awards against brokerage firms that employed Smith.  Even with an additional $1.3 million of claims, it is believed investors will still suffer collective losses of at least $4 million.