Arizona Man Indicted in $6.3 Million Ponzi Scheme

A Phoenix man was charged with sixty-seven felonies in what authorities allege was a Ponzi scheme that defrauded investors out of over $6 million.  Jeffrey Paul Navin, 52, of Phoenix, was accused of selling fraudulent certificates of deposit to senior citizen investors, falsely representing that the CD's were FDIC insured.  He was charged with forty-five counts of mail fraud, eight counts of false personation, and fourteen counts of money laundering.  Both wire fraud and money laundering carry a maximum prison sentence of twenty years per offense, while false personation carries a maximum sentence of three years per offense.  

Navin created or used a multitude of entities to market fictitious CD's to potential investors, including BankNet, Nationwide Banknet Services, Capital One Custodial Services, and WWI, Inc.  Navin also claimed that he was a licensed FDIC Broker and that the CD's were FDIC-insured.  At least seventeen investors placed money with Navin, with each losing at least $125,000.  In total, Navin collected $6.3 million from investors who thought they were purchasing government-insured securities.  Instead, authorities allege that Navin did not purchase a single CD, and that neither Navin nor the CD's were FDIC-insured.  Investors were provided with fictitious account documents, and Navin used the majority of investor funds for personal expenses and to make Ponzi-like payments to victims for interest and return of principle.

In addition to the criminal charges, authorities are seeking the forfeiture of any property traceable to Nevin's scheme.  According to court documents, Navin was released on his own recognizance and ordered to surrender his passport during the pendency of criminal proceedings.  

A Copy of the Indictment is here.

Colbert Report Addresses Rick Perry's Claims That Social Security is a Ponzi Scheme

Texas Governor and Presidential candidate Rick Perry recently ignited a fierce debate when he took the stance that social security is nothing more than a Ponzi scheme.  While many have drawn parallels between the general nature of a Ponzi scheme and the stated purpose of social security, Bloomberg provides an excellent analysis, noting that most financial experts have dismissed the comparison.  A Ponzi scheme is, by definition, fraudulent and operates by promising above-average investment returns to investors that are instead funded through new investor contributions.  Usually, none to little investing actually takes place, and instead the Ponzi schemer 'converts' new investment funds into investment returns.  On the other hand, according to Larry DeWitt, a program historian, social security  
"is and always has been either a ‘pay-as- you-go’ system or one that was partially advance-funded.  Its structure, logic and mode of operation have nothing in common with Ponzi schemes or chain letters or pyramid schemes.”
Adds Mitchell Zuckoff, author of a book detailing the scheme of man whose name became forever associated with the term 'Ponzi scheme,'  “[w]e can argue about whether it’s a good system. But you can’t call it a fraud.”
Comedian Stephen Colbert recently addressed the controversy on his nightly program, and provides an amusing take on Perry's comments.

Madoff Trustee Sets Record Date of September 15th for Victims Entitled to First Distribution

According to a court filing by the trustee tasked with marshalling assets for the benefit of victims of Bernard Madoff's multi-billion dollar Ponzi scheme, investors holding claims as of September 15th, 2011, will be entitled to receive the $272 million set aside for a first interim distribution.  Additionally, Irving Picard, the court-appointed trustee, also stated that holders of claims that were sold or transferred are eligible to receive a distribution only if the sale or transfer of the claim was made on or before August 25, as such sale or transfer is subject to a 21-day notice and objection period.  As Bloomberg reports, the initial distribution will go out by the end of the third quarter, or September 30th.  

In his Motion for an Order Approving Initial Allocation of Property (the "First Distribution Motion"), filed May 4, 2011 and approved by United States Bankruptcy Judge Burton R. Lifland on July 12, 2011, Picard sought to make an initial distribution of $272 million to Madoff victims, an amount that Picard stated would have been much higher if not for the pending appeals preventing the availability of additional funds.  As explained by Picard,

The reduced amount is the result of various appeals that have been filed, including, but not limited to, the appeal relating to the “net equity” dispute, ... the appeals relating to the $5 billion Picower settlement, ... and the appeal relating to the settlement with the Levy family.

The distributions will be paid on claims relating to 1,224 former accounts at Madoff's brokerage.  According to Picard, the average payment amount to each of those holders will be $222,551.12.

Legal developments since the First Distribution Motion have bolstered the position of investors Picard termed "net losers" whose account losses exceeded any withdrawals.  The most important decision was the August 16th order of the Second Circuit Court of Appeals affirming the method Picard used to determine investor claims.  While some investors argued that they were entitled to recover the market value of the securities reflected on their last account statement before Madoff's scheme collapsed, Picard disagreed, arguing that the class of customers with allowable claims were those who deposited more cash in their investment account than they withdrew.  The Second Circuit agreed with Picard's method, stating that:

Use of the Last Statement Method in this  case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations. 

This decision was an important victory for Picard, who was forced in his First Distribution Motion to "maintain... significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%."  This percentage was further reduced to 4% of claims due to various settlements under appeal.  Assuming that the Second Circuit's order is not appealed to the Supreme Court, it is likely that Picard's next distribution to investors will have significant additional funds available.

A Copy of the First Distribution Motion is here.

A Copy of Picard's filing setting the Record Date is here.

A Copy of the Second Circuit's Order Affirming the Net Investment Method is here.

Judge Accepts Guilty Plea in Florida Ponzi Scheme

A Florida federal judge agreed to accept a plea agreement reached between authorities and a man accused of orchestrating a $22 million Ponzi scheme whose victims included retired teachers and county employees in Polk County, Florida.  As previously covered by Ponzitracker, James David Risher, 61, had earlier pled guilty to single counts of mail fraud, money laundering, and engaging in an illegal monetary transaction.  

From early 2007 until July 2010, Risher solicited funds from individuals for investment in a private equity fund known by several names, including Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. The fund was advertised as “an investment vehicle that would allow investors to capitalize from both bull and bear markets.”  Potential investors were provided with offering materials that contained numerous misrepresentations, including a successful history of annual returns for the fund ranging from 14% to more than 124% since 2000.   To convince investors the operation was legitimate, fictitious account statements were generated showing purported quarterly returns ranging from 2.28% to 5.64%.   While investors were sold shares representing interests in the fund, no registration statement was filed or in effect with the SEC as required under federal securities law. Instead, the operation was a Ponzi scheme that used new investor contributions to sustain the fraudulent scheme.

The charges in the plea agreement carry a maximum sentence of fifty years in federal prison, although federal sentencing guidelines will likely recommend a lower range.   A sentencing date has not yet been set.

A copy of the Criminal Complaint filed against Risher is here.

A copy of Risher's Plea Agreement is here.

Appeals Court Affirms 30-Year Sentence for Louisiana Ponzi Schemer

The Fifth Circuit Court of Appeals today affirmed the sentence given to a man prosecutors alleged orchestrated the largest Ponzi scheme in Louisiana's history.  A federal judge had sentenced Matthew Pizzolata, 27, to thirty years in federal prison in for masterminding a scheme that took in nearly $20 million from 160 victims, most of whom were senior citizens.  While the plea agreement between Pizzolata and prosecutors called for a recommended sentence of 151 to 180 months, United States District Judge Lance Africk doubled the maximum recommendation, basing his decision on the emotional harm and advanced age of many of Pizzolata's victims.  Pizzolata appealed the sentence, contending that facts and argument supplied to the sentencing judge by the Government supporting a longer sentence breached the plea agreement.

Pizzolata was charged with sixty-four federal offenses in connection with the scheme he ran from 2005 to 2009.  Claiming to be one of the top 10 financial planners in the country, Pizzolata told investors that their money would be invested in conservative securities.  Investors were also told that Pizzolata was a certified estate planner and had graduated from law school, and were provided with fictitious account statements purporting to show account growth.  None of these representations were true.  Instead, Pizzolata used investor funds to conduct high-risk futures and commodities trading, as well as to pay fictitious returns on investments.  Pizzolata also misappropriated funds to sustain a lavish lifestyle that included luxury cars and vacations.

Rather than go to trial, Pizzolata entered a (c)(1)(B) plea agreement in which he agreed to plead guilty to twenty-one counts  of  mail  fraud,  one  count  of  wire  fraud,  three  counts  of  money laundering,  one  count  of  securities fraud,   and one  count  of  witness tampering.  Prosecutors agreed to recommend a sentence of 151-180 months of imprisonment.  However, the Pre-Sentencing Report issued by the Probation Department suggested that an upward departure from the recommended sentencing range might be appropriate based on the non-monetary and emotional harm inflicted on investors.   Because Pizzolata entered into a (c)(1)(B) plea agreement, which is not binding on the court, and not a binding (c)(1)(C) agreement, this upward departure was permissible.  The district court, after reviewing victim letters and testimony, then issued a sentence of thirty years in prison.  

The Fifth Circuit evaluated Pizzolata's objections to the sentence, noting that the dispositive question was whether the Government breached its obligations under the plea agreement.  Noting that the agreement was a (c)(1)(B) agreement, the Court found that

 

The district court was correct, therefore, when it determined that the Government agreed only that a particular sentencing range was appropriate, not that a particular sentence was appropriate.  The district court was correct, therefore, when it determined that the Government agreed only that a particular sentencing range was appropriate, not that a particular sentence was appropriate.  

 

Concluding that the record was clear that the district court independently decided to depart upwardly from the recommended sentencing guidelines, the Fifth Circuit affirmed Pizzolata's sentence.

A Copy of the Fifth Circuit's Order is here.