SEC Accuses Life Settlement Company of Operating $5 Million Ponzi Scheme

The United States Securities and Exchange Commission announced it had obtained an emergency injunction and asset freeze of a California-based company that was operating as a life settlement broker.  According to the SEC, Daniel C.S. Powell, 29, and his company Christian Stanley Inc. ("Christian Stanley"), purported to operate as a legitimate company in the life settlement industry.  In a filing with the United States District Court for the Central District of California, the SEC obtained a temporary restraining order and asset freeze against Powell and Christian Stanley Inc., and obtained the appointment of a receiver to marshal assets related to the fraud.

According to a complaint filed by the SEC, Powell and Christian Stanley raised nearly $5 million through the offer and sale of unregistered securities in the form of senior secured corporate debenture indentures (the "Securities").  The Securities were typically for a term of five years, and paid annual interest payments ranging from 10% to 15.5%.  Investors purchasing the Securities received assurances that proceeds from the sale would be used to acquire either (1) life settlements, (2) Kentucky coal leases worth $11.8 billion, or (3) interests in certain goal mining reserve claims in Nevada.  Yet, of the $4.5 million invested with Powell, less than $90,000 was used for corporate purposes, and according to the SEC, not a single life settlement was purchased.  Instead, the majority of investor funds were used to fund Powell's personal and business expenses, which included the purchase of luxury cars and expensive trips.  

Powell and Christian Stanley were charged with several violations of the 1933 and 1934 Securities Acts, including the unregistered sale of securities and fraud in connection with the sale of securities - more commonly known as 10(b)(5) violations.  The SEC is seeking disgorgement of ill-gotten gains, civil monetary penalties, and any other relief deemed appropriate.

A Copy of the SEC Complaint is here.

Guilty Plea in NASCAR Merchandise Ponzi Scheme

A California man pled guilty to operating a Ponzi scheme that scammed investors who thought they were financing the retail dsitribution of NASCAR merchandise.  Eliott Jay Dresher, 64, of Chatsworth, California, entered a plea of guilty to a single count of mail fraud before United States District Judge Philip S. Gutierrez. The victims, most of whom were friends and family members, invested more than $13.5 million with Dresher before the scheme was uncovered.

From 1998 to October 2009, Dresher solicited potential investors with the prospect of substantial monthly returns, often ranging from twenty to twenty-five percent every six months, in return for investing in a business that purchased NASCAR merchandise at wholesale prices and resold to big box retailers such as Costco and Ross.  Yet, instead of operating the business, Dresher misappropriated investor funds for personal use and to fund investor interest payments and principal redemptions.  The scheme was uncovered when Dresher was unable to meet investor redemption requests in late-2009.

Dresher had been scheduled to stand trial on January 26, 2012.  He faces up to twenty years in prison for his guilty plea, although federal sentencing guidelines will likely recommend a lower sentence.  He is scheduled to be sentenced December 19, 2011.

Madoff Trustee's Disagreement With HSBC Ruling Takes Center Stage in Response to JP Morgan Motion to Dismiss

"Without arguing the Trustee’s appeal in this case, the Trustee respectfully submits that the HSBC decision is unsound in multiple respects and should not be followed by this Court."

Late this past week, the trustee appointed to recover funds for the benefit of investors defrauded by Bernard Madoff's massive Ponzi scheme filed his response to an effort by JP Morgan ("JPM") to dismiss a suit seeking billions in damages for JPM's alleged role in the scheme. In the amended complaint filed in June, Irving Picard tripled the amount sought from JP Morgan from $5.4 billion to nearly $20 billion based on JPM's willingness 

to assist in the daily operation of a Ponzi scheme on an unprecedented scale: to routinely enable billions of dollars to bounce back and forth between BLMIS and its customers with an evident lack of legitimate business purpose, to overlook the lack of securities trading, to decline to inquire into or report fictitious account activity, and to cloak the whole enterprise in the respectability of a renowned financial institution. 

In his 168-page opposition to JPM's Motion to Dismiss, Picard makes several arguments in response to JPM's claims, including (1) that Picard has standing under SIPA and the Bankruptcy Code to bring a contribution claim, (2) that Picard has standing to stand in the shoes of a judgment creditor and assert common law claims, (3) that Picard has sufficient standing as bailee and subrogee to bring common law claims, (4) that Wagoner and the doctrine of in Pari Delicto are inapplicable to his claims, (5) that Picard's claims are not barred by the Securities Litigation Uniform Standards Act, (6) that Picard has sufficiently pled each cause of action under which he is proceeding against JPM, and (7) the specific transfers sought to be avoided are in fact avoidable.  Many of the issues are hardly new to Picard, who has faced steady opposition in his quest to recover damages outside the "comfort zone" of bankruptcy clawback suits and settlements with various feeder funds.  Both UBS and HSBC, among other banking institutions facing similar suits from Picard, have asserted some form of these arguments in their efforts to win dismissal.  

But it is not Picard's latest legal wrangling with these issues that stands out in this filing.  Instead, perhaps most notable is the fact that it is one of the first substantive filings since Judge Rakoff's ruling that Picard lacked standing to assert the same common law claims against HSBC - potentially erasing $9 billion in prospective damages for Madoff's victims. And while Picard appealed that ruling to the Second Circuit Court of Appeals several days ago, he lays out his discontent with Judge Rakoff's ruling in this filing.  

The focal point of Picard's discontent lies in the differing interpretations of the standing conferred on a trustee proceeding under the authority of the Securities Investor Protection Act ("SIPA") or the Bankruptcy Code.  The term "standing" refers to the ability of a party to show a sufficient connection to and harm from the matters at issue to justify that party's involvement in the case.  Such an issue has been hotly contested in the forum of court-appointed receivership and bankruptcy proceedings, where often the most common claims pursued by the receiver or trustee are on behalf of the class of defrauded victims.  

Perhaps luckily for Picard, Judge Rakoff is not overseeing the suit against JP Morgan.  Instead, the suit is before United States District Court Judge Colleen McMahon.  In accordance with the Federal Rules of Civil procedure, JP Morgan will now have an opportunity to file a Reply to Picard's Response.

A Copy of Picard's Amended Complaint against JP Morgan is here.

A Copy of Picard's Response is here.

Madoff Trustee Fires Next Salvo of Clawback Lawsuits

Irving Picard, the court-appointed trustee tasked with marshalling assets for defrauded victims of Bernard Madoff's massive Ponzi scheme, filed the next round of clawback lawsuits stemming from his previous settlement with the largest Madoff feeder fund, Fairfield Sentry.  Picard filed six more lawsuits Thursday, seeking an additional $219 million from entities he claimed were subsequent transferees of Fairfield Sentry, which is alleged to have received over $3 billion in "fraudulent transfers" from Madoff subject to avoidance under federal and New York law.

The latest institutions targeted join a growing list of lawsuits related to Picard's previous settlement with Fairfield Sentry, under which Picard secured the right to pursue customers of Fairfield who had withdrawn partial or total amounts of their investment with Madoff.  Since August 1, Picard has sued at least thirteen institutions that invested through Fairfield for nearly $600 million, including the investment arm of Abu Dhabi.  The current lawsuit brings the total to nearly $800 million, and targets six entities:

• Barclays PLC - $67.4 million
• Sumitomo Mitsui Trust Holdings Inc. - $54.3 million
• Korea Exchange Bank - $33.6 million
• Cathay Life Insurance Co. - $41.7 million
• Banque Privee Espirito Santo SA - $11.4 million 
• Banca Carige SpA - $10.5 million

A copy of the Barclays Complaint is here.

A copy of the Sumitomo Blank is here.

A copy of the Korea National Bank Complaint is here.

A copy of the Cathay Complaint is here.

A copy of the Banque Privee Complaint is here.

A copy of the Banca Carige Complaint is here.

Former Investment Radio Hosts Charged in California Ponzi Scheme

Two former radio hosts who ran several investment infomercial shows were charged with another man of orchestrating a $3 million real estate Ponzi scheme.  Kenneth Powell, 58, Kathryn Rose, 62, and Paul Charles Lascola, 68, were all charged with multiple felony counts relating to a real estate investment operation promoted through weekend radio infomercial shows called "Academy of Real Estate," "Money Intelligence" and "The Ken & Katie Show" on KVTA 1520 AM in Ventura County, California.  Powell faces forty-two felonies; Rose twenty-nine; and Lascola twenty-four.  

Authorities allege that from 2005 to 2008, investors were encouraged to attend investment seminars after listening to the infomercials.  At those seminars, potential victims were offered annual returns ranging from twelve to fourteen percent for the construction and development of vacant lots in Taft, California.  victims were promised returns of between 12 percent and 14 percent for the construction and development of vacant lots in the Central Valley city of Taft.  These returns would be funded in part by profits realized after the developed homes were sold.  In reality, few, if any, homes were built on the parcels, most of which were encumbered with liens or were already under different ownership.  The scheme was perpetuated through the use of incoming investor funds to pay returns to previous investors.  

If convicted, each of the three faces several years in state prison, with Powell facing a maximum of 52 months, Rose up to 40 months, and Lascola 35 months.