Appeals Court Affirms Co-Defendant Sentence in Petters Ponzi Scheme

Larry Reynolds, charged by authorities for his role in the multi-billion dollar Ponzi scheme orchestrated by Minnesota businessman Tom Petters, has lost his bid to appeal his sentence.  Reynolds was sentenced to 130 months for his role in the $3.7 billion scheme, which consisted of allowing Petters to wire funds through Reynolds' business - a total of $12 billion over six years - in return for a percentage of the laundered funds.  While Reynolds appealed this sentence, the Eighth Circuit Court of Appeals on Friday, June 24, 2011 affirmed Reynolds' sentence, agreeing that "Reynolds' involvement in Petters's scheme warranted severe punishment."

Reynolds, 68, owned Nationwide International Resources, a wholesaler that sold shoes and clothing to retail outlets.  Petters scheme involved the purported purchase of consumer electronics at wholesale prices and subsequent sale to large retailers at a substantial markup.  Petters enlisted the help of individuals including Reynolds to create the appearance that large sums of money were being paid to vendors for these purported goods.  Instead, Petters was doing nothing more than running an elaborate Ponzi scheme, and individuals such as Reynolds received compensation for their assistance.  From 2002 until September 2008, Reynolds received $9.9 million for his role in the scheme.  

Petters was sentenced to 50 years in prison in April 2010, following a jury trial in which the Minnesota businessman was convicted by a jury of numerous counts including wire fraud and money laundering. The sentence, which was the longest financial-related sentence in Minnesota history, would later be eclipsed by the 150-year sentence handed down to Bernard Madoff.  

The Department of Justice has established a webpage devoted to the criminal prosecutions against Petters and his associates here.

Hearing Set for July 12th to Approve First Interim Distribution to Madoff Investors

A hearing has been scheduled for July 12th to determine whether Irving Picard, the court-appointed trustee liquidating Bernard Madoff's massive Ponzi scheme, may make his first distribution of money back to Madoff's defrauded investors.  The motion filed by Picard and his attorneys reveals many details about the efforts thus far to recover money for the benefit of defrauded investors, and suggests that the possibility of Madoff victims receiving 100% of their allowed losses may be much greater than previously thought.

In the filing, Picard proposes making a first interim distribution of approximately 4.1% of each customer's allowed claim, along with money advanced by the Securities Investor Protection Corporation ("SIPC"). SIPC authorizes reimbursement of up to $500,000 per investor claim in a failed member broker-dealer. Thus, under the trustee's proposed plan, an investor with a $550,000 claim will receive a total of $522,500: (1) $500,000 in SIPC funds, and (2) $22,500 - 4.1% of the allowed $550,000 claim.  Such a customer would thus receive approximately 90% of their allowed claim, with additional distributions exceeding the amount of the allowed claim being returned to the SIPC.  As Picard's filing notes, 868 investor claims will be fully satisfied by the funds advanced to Picard by SIPC.  

The calculation of the first interim distribution appears quite complex in Picard's filing.  While Picard states that he would prefer to distribute $7.6 billion, which is the amount recovered to date, various appeals relating to a large amount of funds recovered mean that "instead of a 44% distribution, the Trustee is only able to make a 4% distribution at this time."  The various appeals, one of which is the $5 billion settlement reached in early 2011 with the estate of Jeffrey Picower, reduce the available funds for distribution to $2.3 billion.  

Additionally, the proposed interim distribution of 4.1% of allowable claims is calculated assuming that customer claims could be asserted for the balances on customer statements on November 30, 2008 - a position already rejected by the court and which Picard opposes.  However, this decision has been appealed to the Second Circuit Court of Appeals, and thus Picard is not able to instead use the amount of allowed claims to date - $17.2 billion.   As Picard notes, the distribution of the full amount of funds recovered to date - $7.6 billion - based on the total amount of allowed losses - $17.2 billion - would result in a 44% distribution rather than a 4% distribution, a point that Picard ensures is not lost on the Court.

Picard also reveals several other interesting tidbits in the filing. As of March 31, 2011, 16,518 customer claims had been submitted.  Nearly all have been determined, with 2,409 of those claims being accepted.  Over 13,000 claims were denied.  Picard has also received nearly 450 claims totalling $1.7 billion on behalf of unsecured and secured creditors.  None of these creditors will receive any money as part of the first interim distribution - all distributions will go to customers.  Finally, it is also revealed that customers may also be eligible to receive "billions of dollars of assets relating to the fraud" that were forfeited to the Department of Justice.  Picard has been appointed as the special master to determine customer eligibility to these funds.  

A copy of the motion is available here. 

Madoff Trustee Amends JP Morgan Lawsuit, Now Seeking $19 Billion

Irving Picard, the court-appointed trustee liquidating Bernard Madoff's investment firm, announced late Friday that he had filed an amended complaint against JP Morgan.  While Picard had originally sought $5.4 billion, the amended complaint seeks life-to-date damages of $19 billion, along with $1 billion in fraudulent transfers.  Picard has also included a request for a jury trial.

The amended complaint includes new allegations to the case against JP Morgan, including the assertion that "not only should have known that a fraud was being perpetrated, they did know."  Attorneys for Picard cite numerous red flags that should have alerted JP Morgan to the fraud, including the visible transfer of funds between customer accounts, contradictory regulatory filings, and the revelation that an unnamed financial institution closed its accounts with Madoff after receiving unsatisfactory questions to a due diligence review.

Picard filed the amended complaint in response to JP Morgan's motion seeking to have the original complaint dismissed on June 1, 2011.  JP Morgan must file a response to the amended complaint by August 1, 2011.

Authorities Charge Miami Man With $768k Ponzi Scheme

A South Florida man and his company have been accused of swindling $768 thousand from investors as part of a Ponzi Scheme.  Juvenal Eduardo Machado, along with Invers Forex, was charged by the U.S. Commodities Futures Trading Commission ("CFTC") of defrauding at least 28 investors by operating a Ponzi Scheme under the guise of a foreign currency trading operation.

In return for opening an account with Machado, investors were promised monthly returns exceeding five percent.  Instead, Machado used a majority of the funds for personal and business expenses, including the payment of false interest payments to investors.  The complaint filed by the CFTC alleges that only $135,000 was invested in currency trading, and nearly all of the $135,000 was lost.  

Many of the investors were said to have attended prayer services at Machado's home.

Texas Man Indicted for $4 Million Ponzi Scheme

A Texas man was indicted today for his role in a Ponzi Scheme estimated to have pulled in $4 million of investor funds.  Christopher Blackwell, 32, was charged with two counts of wire fraud under 18 U.S.C. 1343.  Each charge carries a maximum sentence of twenty years in federal prison along with a $250,000 fine.

Prosecutors allege that Blackwell, operating AV Bar Reg Inc. and Millers A Game LLC, claimed to have an established trading program in which investors could receive gains of 25% - 30% per month.  In attempting to bolster his credibility and reputation, Blackwell made a variety of representations concerning his academic and professional background.  These claims included masters and doctoral degrees from a Spanish university and previous employment at Goldman Sachs and the Bank of Madrid.  All of these claims were false.  

Thus far, twenty victims have been identified.  The Securities and Exchange Commission filed a complaint against Blackwell in February, which was settled in March.  

A copy of the criminal complaint is here.

A copy of the complaint filed by the Securities and Exchange Commission is here.