Guilty Plea in Florida Real Estate Investment Ponzi Scheme

A Boynton Beach man who once hosted a television talk show discussing real estate investment pled guilty to a count of mail fraud in connection with a Ponzi scheme he ran for several years in Palm Beach, Florida.  Anthony Cutaia, 65, had recently been indicted on nine counts of mail fraud, each of which carry a maximum prison sentence of twenty years.  In the plea agreement with Cutaia, prosecutors have agreed to recommend that any sentence imposed be at the lower end of the range provided by the probation office, provided Cutaia make full disclosure regarding his crimes and not withhold any facts.  

From 2002 to 2006, Cutaia was the host of a regular Sunday morning television program entitled "Talk About Mortgages and Real Estate."  Cutaia also hosted a radio talk program and hosted seminars throughout the Palm Beach area, in which he solicited investors for CMG Property Investment Group, which he incorporated in late 2002.  Cutaia, through CMG, sold investments in "Contract Participation Agreements" to investors which purported to be commercial real estate investments, specifically for the purchase and sale of various commercial real estate properties.  Per the terms of these "investments", investors would share in profits and receive regular interest payments during the life of the investment.  Instead, only a portion of investor funds were used for their intended purpose, and the majority of funds were used to pay personal expenses and to make payments to investors purporting to be interest payments from what Cutaia heralded as successful and profitable ventures.  According to the plea agreement, Cutaia ultimately collected and misappropriated over $1 million of investor funds.

A sentencing date for Mr. Cutaia has not yet been set.  Mail fraud carries a maximum sentence of twenty years, although the setnencing recommendation from the U.S. Probation Office is likely to be much less.  Under the Mandatory Victim Restitution Act and Victim and Witness Protection Act of 1982, the Court may also order restitution to victims of Cutaia's fraud, along with a fine of up to $250,000.

Judge Rejects Plea Agreement in Utah Ponzi Scheme

In a somewhat-unusual step, a Utah federal judge refused to accept a plea agreement reached between Utah prosecutors and a man accused of operating the second-largest Ponzi scheme in Utah history.  Travis Wright, 48,of Draper, Utah, had earlier pled guilty to one count of mail fraud, under which prosecutors had agreed to seek an eight-year sentence along with an order of restitution to defrauded investors.  However, after reviewing letters from victims who expressed their outrage at the sentence they perceived as inadequate, United States District Judge Clark Waddoups decided that that he would not approve the deal.  His decision means that Wright is free to withdraw his guilty plea and proceed to trial, or negotiate a different plea agreement with prosecutors that would meet the Judge's approval.  Judge Waddoups' comments indicate that an acceptable plea deal will carry a sentence longer than the proposed eight years.

From September 1999 to March 2009, Wright was a manager at Waterford Funding, which purported to use investor funds to make loans secured by commercial real estate investments.  In total, Waterford took in $145 million from 175 investors who were promised returns of up to forty-four percent over nine-month periods. But Wright ultimately used less than 10% of investor funds to make loans through Waterford.  The remaining funds were misappropriated to fund Wright's lavish lifestyle, including the purchase of a $5.5 million home, safari trips to Africa, and an inflated salary.  Additionally, new investor contributions were paid to older investors as interest payments.  Prosecutors have estimated that victim losses could reach in excess of $50 million.  

Prosecutors must now decide whether to negotiate a new sentence with Wright or proceed to trial.  Wright pled guilty to mail fraud, which carries a maximum prison sentence of twenty years and up to a $250,000 fine.

A copy of a previously filed SEC Injunctive Action is here.

UniCredit Defendants Seek Dismissal of Madoff Trustee's $60 Billion Lawsuit

Bank Austria and several other named defendants (the "Bank Austria Defendants") have filed a motion to dismiss Irving Picard's racketeering lawsuit, joining several other high-profile banking entities in recent weeks who have sought to blunt the aggressive campaign by Picard to recover funds for victims of Bernard Madoff's massive Ponzi scheme.  In several motions filed Monday and Tuesday, the Bank Austria Defendants asked United States District Judge Jed S. Rakoff, who earlier agreed that the lawsuit belonged in federal court rather than bankruptcy court, to dismiss the suits based on the Racketeer Influenced and Corrupt Organizations Act ("RICO"), arguing that Picard's application of RICO is too far-reaching to pass legal muster.

Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's now-defunct brokerage, had filed suit against the Bank Austria Defendants in December 2010, seeking damages of $19.6 billion based on Picard's then-estimate of total principal losses by Madoff investors.  Additionally, a successful plaintiff in a RICO suit is entitled to treble damages, which brought the potential total award amount to nearly $60 billion.  

Picard alleges that Sonia Kohn, who controlled Bank Medici, had a relationship with Madoff starting in 1985 in which she steered millions of dollars in investor funds to Madoff's brokerage in return for fees.  Yet, as the Bank Austria Defendants allege, the relationships which form the basis of Picard's claims did not occur until the restructuring of one of the defendant's investments with Madoff following the 2007 acquisition of Bank Austria.  

The Bank Austria Defendants also cite to the recent opinion in MLSMK Investment Co. v. JP Morgan Chase & Co., covered here by Ponzitracker, in which the Second Circuit held that RICO claims brought by a Madoff investor against JP Morgan were barred by the Private Securities Litigation Reform Act ("PSLRA") and thus subject to dismissal.  The Bank Austria Defendants urge Judge Rakoff to adopt this logic, stating, 

"Conduct undertaken to keep a securities fraud Ponzi scheme alive is conduct undertaken in connection with the purchase and sale of securities and is barred by the RICO amendment.  This alone should end the RICO claims in this case."

(internal quotations omitted).  

Finally, the Bank Austria Defendants also raise the issue of the extraterritorial application of Picard's RICO allegations.  The United States Supreme Court recently decided Morrison v. National Australia Bank Ltd. and set forth a test to determine whether Congress intended a statute to have extraterritorial, rather than purely domestic, reach.  Morrison has come to represent a growing inclination of US Courts to abstain from giving extraterritorial reach to a statute without clear Congressional intent.  Moreover, the Second Circuit's recent decision in Norex Petroleum Ltd. v. Access Industries, Inc. interpreted RICO in light of Morrison's newly-espoused test and also concluded that RICO claims could only be enforced domestically.  In light of the feeder funds' status as foreign entities, argue the Bank Austria Defendants, the RICO statute has no extraterritorial reach and thus the claims should be dismissed.

Under federal rules of civil procedure, Picard now has twenty-one days to respond to the motion.

A copy of the original complaint against the Bank Austria Defendants is here.

A copy of the Pioneer Defendant's Motion to Dismiss is here.

A copy of Bank Austria's Motion to Dismiss is here.

Jury Convicts Colorado Man for $30 Million Ponzi Scheme

A Denver federal jury found a Colorado man guilty of thirty-one counts, including money laundering, mail fraud, conspiracy, and conspiracy, stemming from a nearly-decade long Ponzi scheme that cost investors nearly $30 million.  Philip Lochmiller Sr., of Grand Junction, Colorado, faces a prison sentence of up to 415 years if he receives the maximum sentence under each charge.

Lochmiller Sr. operated Valley Investments along with his step-son, Philip Lochmiller Jr. and assistant Shawnee Carver.  Both Lochmiller Jr. and Carver previously entered into guilty pleas which required them to provide testimony against Lochmiller Sr.  Beginning in 1999, Valley Investments acquired several parcels of land to develop affordable housing communities.  Newspaper advertisements solicited potential investors to finance the acquisition, promising annual returns of ten to eighteen percent in return.  Investors were given promissory notes that were purportedly secured by lots of land in the communities.  Instead, investor funds were used to pay expenses, personal bills, and provide interest to older investors.  The scheme came to an end in 2008 when the three were indicted.

While sentencing has not been scheduled, Lochmiller Sr. is due back in Court on October 27 to address the amount of restitution he may be ordered to pay to defrauded investors.  A court-appointed attorney tasked with overseeing Valley Investment assets has previously estimated that victims could expect to recover 3%-5% of their original investment.

Another Setback for Stanford Receiver

Already facing criticism from victims and a potential investigation by the SEC over fees incurred thus far, Stanford receiver Ralph Janvey saw another setback as the Fifth Circuit Court of Appeals vacated its prior ruling in Janvey v. Alguire that had previously held Janvey could not be compelled to arbitrate claims with certain third-party victims of Stanford's scheme. Janvey was appointed by the court to marshal and distribute assets for the benefit of the thousands of victims defrauded by Allen Stanford's $7 billion Ponzi scheme, in which Stanford purportedly sold certificates of deposit to investors with above-average returns.

The Fifth Circuit's ruling, a copy of which is available here, vacates the prior decision rendered on December 15, 2010 (the "December 15 Decision"). In the December 15 Decision, the district court granted Janvey's request for a permanent injunction freezing assets of former financial advisors and employees of Stanford pending the outcome of Stanford's criminal trial. Additionally, while the district court made this decision before deciding on a motion to send the claims to arbitration as requested by Alguire, the Fifth Circuit took the unusual step of deciding that Janvey's claims could not be submitted to arbitration even though the motion had not been addressed by the district court. This decision was a victory for Janvey, who, if forced to arbitrate every claim with defrauded investors who had entered into a contract with the fraudster who had included an arbitration provision, would incur much greater costs rather than resolve the claim through litigation in the court system. The December 15 Decision, while seen as a victory for court-appointed receivers, has quickly seen its effect muted by building opinions to the contrary, including the later-issued decision in Javitch v. First Union Securities. 

In its decision vacating the December 15 Decision, the Fifth Circuit affirmed its findings that the issuance of a permanent injunction was appropriate, but vacated its previous finding that Janvey's claims could not be submitted to arbitration, finding that it had no jurisdiction to decide this question due to the fact that there was "no ruling on the motion to compel arbitration." Instead, the Fifth Circuit remanded the issue back to the district court to decide whether Janvey could be compelled to arbitration. When the decision is made by the district court, it is likely the issue will return for review by the Fifth Circuit.

Javitch joins a growing number of opinions that interpret the Federal Arbitration Act as encouraging a liberal policy to compel arbitration. Yet, many question the propriety of allowing a schemer whose inclusion of an arbitration clause during the commission of a fraud can essentially tie a Court's hands and prevent review. Further, especially in light of the Receiver's court-mandated mission to marshal and distribute assets to defrauded investors, the cost of being forced to arbitrate tens, if not hundreds, of investor claims can result in a staggering depletion of assets that would otherwise be earmarked for distribution. In a report by the Public Citizen, a Washington, D.C. advocacy group, it was surmised that "Arbitration costs will probably always be higher than court costs in any event, because the expenses of a private legal system are so substantial." In light of Congressional action to the contrary, a far-reaching interpretation of the Federal Arbitration Act will continue to pose problems for Court-appointed receivers.