Judge Dismisses Madoff Investor Suit Against JP Morgan

In a decision that may have larger implications, the Second Circuit Court of Appeals dismissed a lawsuit against JP Morgan brought by a Florida partnership alleging that JP Morgan conspired with Bernard Madoff to continue his Ponzi scheme. MLSMK Investment Co., out of Palm Beach, Florida, lost $12.8 million as a result of Madoff's scheme.  In its lawsuit, it sought to hold JP Morgan under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), which is enticing in that treble damages are available to successful litigants.

However, and as recognized by Judge Robert Sack writing for the majority, a federal ban on civil RICO claims based on securities fraud also applies to claims of aiding and abetting securities fraud, under which MLSMK had sought to hold JP Morgan liable.  The federal ban referred to by Judge Sack is the Private Securities Litigation Reform Act of 1995 ("PSLRA"), (15 U.S.C.A. § 77 et seq.).  Under the PSLRA, civil RICO claims brought on the basis of securities fraud are not allowed unless an underlying criminal conviction for securities fraud has already been successfully concluded.

The decision may have a much larger impact than those investors of MLSMK Investment Co., however. Irving Picard, the trustee appointed to liquidate Bernard Madoff's failed brokerage, recently amended his complaint against JP Morgan to seek treble damages under the same theory.  This outcome, while not dispositive of Picard's litigation, resolves a current circuit split and also signifies the leanings of the Second Circuit, which handle appeals from New York District Courts, where Picard's litigation is currently pending.  Picard, who has filed over 1,000 lawsuits seeking over $100 billion for defrauded investors, is currently seeking nearly $60 billion from a variety of defendants under the treble damages theory.  He has recovered nearly $10 billion to date.

A copy of the Opinion is here.

Seattle Man Charged With $20 Million Ponzi Scheme

A 28-year old Seattle man was charged today with five counts of wire fraud in connection with what authorities classified as a Ponzi Scheme.  Jose Nino de Guzman, Jr., a former employee and investment group manager at U.S. Bank, was arrested in California and is currently in the process of being transported back to Seattle to face the charges.  Each count of wire fraud carries a maximum of 20 years in federal prison along with a monetary penalty.

In the indictment, brought by the United States Attorney for the Western District of Washington, Guzman is alleged to have collected more than $20 million for 160 investors under the premise that Guzman would make real-estate investments in Peru.  According to authorities, these investments did not exist. Instead, Guzman is alleged to have used the money to fund a lavish lifestyle, which included the purchase of a $1.8 million house, a $600,000 yacht, a $250,000 suite at Seattle Seahawks games, and a $200,000 Bentley automobile.  

A recent graduate of the University of Washington, Guzman started NDG Investment Group, which was used as the vehicle to solicit prospective investors.  Annual returns of 40%-60% were promised in return for investments.  Guzman solicited family and friends from both his former position at U.S. Bank and also from those whom he had hired to work at NDG.  According to the U.S. Attorney prosecuting the case, Guzman also sought out prospective clients in lavish presentations at Seattle clubs and hotels.  

A similar investigation into Guzman and NDG was disclosed by the Washington State Department of Financial Institutions ("DFI") in June 2010, charging Guzman with the same crimes alleged in the indictment unsealed today.  Additionally, DFI alleged that neither the salespeople selling the securities nor the securities themselves were ever registered with DFI.  The status of that investigation is unknown.

South Florida Man Sentenced to 17.5 Years for $3.3 Million Ponzi Scheme

A Miami man was sentenced to 17.5 years in federal prison for operating a Ponzi Scheme that bilked family and friends out of more than $3 million.  The scheme operated by Lorn Leitman, 61, addressed in greater detail in an earlier Ponzitracker post, consisted of seniors and relatives who thought they were investing in loans for residential mortgages and military personnel.  Instead, Leitman paid old investors with money from new investors, the hallmarks of a classic Ponzi scheme.

The sentence is notable in that not only is it higher than the typical sentence handed down for the corresponding loss, but also the disparity between the sentence and that recommended under the federal sentencing guidelines.  Federal sentencing guidelines are not binding, but are usually followed.  However, in handing down a sentence nearly 50% more severe, United States District Court Judge Donald Graham considered the offensiveness of Leitman's conduct, which included deceiving family and friends for nearly a decade.  There is no parole in federal prison, so it is likely Leitman will serve the majority of his sentence.  

Judge Graham also ordered Leitman to pay restitution to his victims for their losses.  However, in light of Leitman's inability to even make bail after his arrest, such a possibility may appear unlikely.

Former Candidate for Tennessee Congress Sentenced to Four Years for Running Ponzi Scheme

A Tennessee man who once was featured on the most-wanted list of the Tennessee Bureau of Investigation was sentenced to four years in federal prison for operating a Ponzi scheme ultimately causing over $500,000 in losses to its investors.  Jeffrey L. Cassman, 35, a former financial advisor and a one-time candiate for the Tennessee House of Representatives, pled guilty in December 2010 to felony counts of mail fraud and securities fraud.  Cassman faced a maximum sentence of twenty years in federal prison for each charge.

According to an indictment unsealed in late 2008, Cassman ran a Ponzi scheme from January 2003 to November 2005, representing to investors that he would invest in tax liens and other types of investments. These investments, according to Cassman, were risk-free, and promised high rates of annual return.  However, Cassman never invested in tax liens or any other investments, and instead misappropriated investor funds to pay personal expenses. Among Cassman's victims were friends, family, and members of Cassman's church.  

Upon learning of impending charges, Cassman fled the country with his wife and nine children.  After nearly two years on the run, he was apprehended near Antigua, Guatemala and extradited back to the United States.  

Elementary School PTA Moms Accused of $3M Ponzi Scheme

Three members of the Parent Teacher Association at Armstrong Elementary School in central California are in custody after they were arrested for allegedly operating an elaborate Ponzi scheme in which victims are suspected of losing nearly $3 million.  The three women - Marciela Barajas (aka Marciela Torres), 41, Juliana Menefee, 50, and Eva Perez, 51 - were arrested on multiple state felony charges, including seven counts of grand theft and fifteen counts of securities fraud.

According to police, investors were approached at social functions and school events under the ruse that the three women had the exclusive rights to sell AltaDena dairy products at small retailers and Disneyland.  Promising annual returns exceeding 100%, unwitting investors were convinced to fund their investments with second mortgages on their homes and maxing out credit cards.  In total, police say the three women raised over $14 million in the scheme.  Of the $14 million, $10 million was returned as payments to investors, while $1.5 million has been confirmed as losses.  Approximately $2.5 million remains unaccounted for, with police speculating that the three women used the amount for luxury items and travel.  According to a local news site, nearly 40 victims invested amounts ranging from $5,000 to $208,000.

Two of the women, Barajas and Menefee, are scheduled to be arraigned Thursday, July 7.  The remaining woman, Perez, incidentally, is already in jail after after pleading guilty in 2010 to a similar scheme.  In addition to serving her current 11-year sentence, Perez is expected to face new charges for her role in this scheme.  The arrests came with the culmination of a six-month fraud investigation conducted by the Los Angeles County Sheriff's Commercial Crime Bureau.  It is unknown whether the women will face federal charges as well.