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Entries in Ponzi (2)


North Carolina Man Sentenced to Fifty Years in Prison for $40 Million Ponzi Scheme

A federal judge sentenced a North Carolina man to fifty years in prison for what prosecutors called "the worst financial crime in this district in memory."  Keith Simmons, 47, received the sentence after being convicted of one count of securities fraud, one count of wire fraud and two counts of money laundering in December 2010.  In delivering the sentence, which was the term sought by prosecutors, United States District Court Judge Robert Conrad labeled the case the most damaging financial crime he had presided over.  

Simmons was the mastermind of a foreign currency ("forex") trading operation known as Black Diamond.  Through a network of co-conspirators and feeder funds, Simmons solicited investors beginning in 2007 for the purported purpose of engaging in forex trading through a Black Diamond trading platform that had been highly successful.  Potential investors were told that average returns exceeded four percent per month, and that their investment was safe as no more than 20% of invested funds would be at risk at any time.  Additionally, Simmons is said to have quoted Bible verses and stressed his devout Christianity to induce people into investing with Black Diamond.  In total, approximately 240 investors contributed at least $35 million to the scheme.  These investors received monthly account statements that made it appear as if investors' accounts were enjoying steady growth.

However, rather than conducting any forex trading, Simmons and several co-conspirators misappropriated millions of dollars for personal and business expenses.  This included funding a lavish lifestyle of money, sex, and wealth for Simmons, who prosecutors alleged paid women for sex and furnished "lavish love condominiums" with investor funds.  Additionally, approximately $18 million was returned to investors in the form of fictitious monthly returns.  

After monthly interest payments ceased in March 2009, Simmons was arrested by the FBI in December 2009. Several of Simmons' co-conspirators have also been arrested or pled guilty.  One of his co-conspirators, Brian Coats, pled guilty in October 2011 to one count of conspiracy to commit fraud and one count of money laundering conspiracy.  Coats is awaiting sentencing and faces up to fifteen years in federal prison.  Additionally, Deanna R. Salazar, 53, was also sentenced on Wednesday, receiving a fifty-four month sentence from Judge Conrad and ordered to pay $5,112,687 in restitution.  She pled guilty in December 2010 to conspiracy to commit securities, commodities and wire fraud and tax fraud.   

The case was also significant in that the bank used by Simmons to perpetuate the scheme, CommunityONE Bank, N.A., was criminally charged over its lack of an effective anti-money laundering program.  The bank entered into a deferred prosecution agreement ("DPA") with the government, under which the bank, after paying $400,000 in restitution to the victims of Simmons' scheme, will be able to have the criminal charges dismissed after two years.  According to U.S. Attorney Anne Tompkins,

This bank’s failure to detect and report a ponzi scheme cost it 16 percent of its value.  Other financial institutions should heed this warning:  the Bank Secrecy Act applies to more than just drug and terrorist financing.”

CommunityONE Bank is not the only bank to suffer financially after failing to detect a Ponzi scheme.  In January 2012, a federal jury awarded $67 million to victims of Scott Rothstein's $1.4 billion Ponzi scheme, finding that the bank ignored clear signs of Rothstein's scheme and facilitated its existence.  Rothstein was also sentenced to fifty years in prison for masterminding his scheme.  

The government's sentencing memorandum is here.


Secondary Market for Investor Claims Gaining in Popularity

Investors in now-infamous Ponzi Schemes run by those such as Bernard Madoff are now seeing renewed interest by financial institutions interested in buying any rights to proceeds eventually recovered and distributed by the court-appointed receiver or trustee.  These offers essentially represent both an opportunity for an investor to immediately receive a mutually-agreed amount for any future claim to proceeds in the Ponzi scheme and also a bet by the buying financial institution that the recovered proceeds will return an amount greater than for what the investor is willing to part with their claim.

The financial institutions rumored to be bidding for investor claims include Goldman Sachs, Deutsche Bank, UBS, and Royal Bank of Scotland.  Particularly noteworthy is the fact that the latter two are currently embroiled in litigation with the Madoff Trustee, Irving Picard, as a result of their alleged connections with Bernard Madoff Investment Securities, the broker-dealer utilized by Madoff to perpetrate the scheme.  As one commenter has noted, those banks facing litigation from Picard may be seeking to hedge any potential litigation losses by buying claims.  

The prospect of receiving a lump-sum payment in return for relinquishing any legal claim to future proceeds may entice investors who lost a substantial portion of their assets and may not have the financial stability to wait out the lengthy legal process of unraveling the scheme.  Interestingly enough, when the practice first began in early 2010, investors were offered an average of around 20-25 cents on the dollar for their claim to whatever Picard finally recovered.  However, when the estate of Jeffrey Picower settled with Picard in December 2010 for $7 billion and bringing Picard's then-total recovery to $10 billion, the offer to investors shot up to a range of 70% - 75% per allowed claim.  Of course, it goes without saying that those institutions now offering that amount have even more faith that Picard can continue to negotiate hefty settlements.

Additionally, the dynamics of distributions from recovered Ponzi assets may also favor banks in enticing investors to accept these offers.  Because the process of recovering funds is an ongoing procedure and is dependent on the conclusion of pending litigation, distributions are often made on a yearly or bi-yearly basis depending on the availability of funds.  Thus, it is not at all uncommon to have 3-5 distributions over the course of a Receivership, with a final distribution often coinciding with the official conclusion of the process.  The prospect of receiving an up-front payment will particularly appeal to those who are unable to wait out the lengthy process.