Guilty Plea in $1.3 Million Ponzi Scheme

A New York investment adviser admitted this week to orchestrating a Ponzi scheme that robbed family members and friends out of over $1 million.  Timothy J. Geidel, 49, pled guilty Tuesday to a federal count of wire fraud as part of a plea agreement with prosecutors.  While wire fraud carries a maximum prison sentence of twenty years, the U.S. Probation Department will fashion a likely lower range using federal sentencing guidelines.  Geidel also agreed to make $1.3 million in restitution to victims, although Geidel's ability to meet this obligation remains unclear.

Geidel was arrested in November 2010 by the United States Secret Service and charged with wire fraud and money laundering.  Prior to the arrest, Geidel worked at Georgetown Capital Group, Inc. ("Georgetown"), where he worked as an investment adviser.  In his capacity as a registered representative, Geidel first solicit clients to invest at Georgetown.  After winning their trust, Geidel then persuaded those clients to liquidate their accounts with Georgetown and entrust the funds to Geidel, who promised to invest in high-yield investment vehicles.  In total, approximately $1.4 million was collected from 57 victims.  Instead of investing the funds, Geidel misappropriated the funds, using them for personal expenses and to make interest payments to current clients.  

Geidel was recently barred from associating in any capacity with any financial institution per the terms of a settlement with the Financial Industry Regulatory Authority ("FINRA").  Geidel is scheduled to be sentenced in January 2012, where he is expected to receive at least four years in federal prison.

A Copy of Geidel's Agreement with FINRA is here.

Chicago Man Sentenced to Seven Years in Prison For Ponzi Scheme

An Illinois man was sentenced to eighty-four months in prison for his role in a Ponzi scheme that caused victim losses exceeding $3 million.  Francis Alan Schimitz, 60, of Long Grove, Illinois, was arrested in May 2010 and charged with mail fraud after allegedly defrauding financial institutions out of millions of dollars in fraudulent loans.  He pled guilty in March 2011 to a single count of defrauding financial institutions, which carried a maximum prison sentence of thirty years in prison.  As part of his plea agreement, prosecutors agreed to seek a sentence in the range of 6 1/2 to 8 years.  

Between 2003 and 2010, as the head of Long Grove Real Estate Partners, Schmitz falsely represented that he was the beneficiary of a multi-million dollar trust fund.  Using this fictitious trust, Schmitz managed to secure several loans and lines of credit totaling $6 million from six banks, including Harris Bank and First Midwest Bank.  Rather than use the proceeds of these loans to make investments as he pledged, Schmitz instead used the proceeds to make payments on existing and defaulted loans.  Authorities estimated that total losses among the banks were approximately $3 million.  

United States District Judge Rebecca Pallmeyer also ordered Schmitz to pay over $3 million in restitution to defrauded investors.  

A Copy of the Plea Agreement can be found here.

New York Investment Adviser Pleads Guilty in $2 Million Ponzi Scheme

A Florida man entered a guilty plea to operating a Ponzi scheme that scammed more than $2 million from investors.  Arthur Strasnick, 63, of Ormond Beach, Florida, pled guilty to two counts of mail fraud and one count of possession of means of identification of another with intent to commit a crime.  Mail fraud carries a maximum prison sentence of fifteen years, while the possession count carries a maximum sentence of ten years.  The United States Probation Department will deliver a sentencing recommendation based on federal sentencing guidelines.

As part of his guilty plea, Strasnick admitted that in his role as President and CEO of Backstreet Associates, he made false representations to investors to entice them to invest with him.  Among these misrepresentations, Strasnick guaranteed investors annual rates of return ranging from twelve to twenty percent.  Investors were provided with fictitious account statements that purported to show investment growth, and received periodic interest payments purporting to represent continuing investment returns.  Strasnick also admitted to the use of another individual's identification in order to open an American Express account that was used to make unauthorized purchases.  In total, authorities allege that Strasnick caused losses exceeding $2.1 million to investors.

Sentencing has been scheduled for January 19, 2012.

New York Ponzi Schemer Receives Thirteen Year Prison Sentence

A federal judge sentenced a New York man to thirteen years in federal prison for orchestrating a Ponzi scheme that defrauded investors out of nearly $6 million.  Guy W. Gane, 56, of Clarence, New York, faced a maximum total sentence of thirty years after previously pleading guilty to single charges of mail fraud and money laundering.  Delivering the sentence, United States District Judge William Skretny told Gane he was a "wolf in sheep's clothing."

Starting in 2005, Gane and Lorenzo Altadonna raised at least $5.7 million from the sale of fraudulent, unregistered securities transactions through two companies Gane owned, M-One Financial and Watermark Financial Services Group.  Nearly all of this amount, $5.1 million, was collected from the sale of convertible debentures issued by Watermark Financial and Watermark Holdings to approximately 90 investors, who were promised a fixed annual return of 10%.  The remainder of the funds were raised through the sale of promissory notes that advertised monthly returns ranging from 1% to 3.5%.  Investors were told that their investments would be used to purchase or develop real estate.  However, new investor funds were used not to purchase real estate, but instead to pay returns and note redemptions to old investors.  Additionally, Gane transferred nearly three million dollars to himself or family members, and over $500,000 to a Florida company Denkon Inc. for no apparent consideration. 

Both the SEC and the Justice Department filed actions against Gane and his conspirators.  The SEC filed an emergency enforcement action in May 2008 to halt Gane's fraud that resulted in a $5 million judgment.  Gane and two other individuals, James F. Lagona, 50, and Ian Campbell Gent, 58, were later charged in March 2010 in a 51-count indictment in connection with the scheme.   All were charged with mail fraud and conspiracy to commit mail fraud.  Gane was also charged with securities fraud and money laundering.  At a February 2011 trial, jurors convicted Gent and Lagona of conspiracy and mail fraud with the aid of Gane's testimony for the prosecution.

Additionally, Altadonna was sentenced in August 2010 to three years of supervised release for his role, and was also ordered ro pay $1.8 million in restitution to defrauded investors.  Total investor losses are estimated to exceed $5 million.  

A Copy of the SEC Complaint is here.

Stanford Investors: Receiver Can't Prove Stanford Operated Ponzi Scheme

A group of investors sued by the court-appointed receiver of R. Allen Stanford's alleged Ponzi scheme has filed their opposition to an attempt to have a judicial declaration that Stanford's scheme was, in fact, a Ponzi scheme.  Receiver Ralph Janvey had filed a motion for summary judgment seeking the determination that Stanford's purported operation of selling certificates of deposit ("CD's") to investors was nothing more than an elaborate Ponzi scheme.  Such a move would not only provide the first judicial decree that Stanford's operation was a Ponzi scheme, but would also serve the added effect of bolstering Janvey's campaign to recover interest payments made to investors as fraudulent transfers.  Without a judicial declaration, either civil or criminal, investors finding themselves targets of Janvey's suits have incentive to contest the issue, ultimately forcing the receiver to expend more time to the suits.  Already, at least one investor has taken issue with Janvey's fees and sought an investigation.  

The importance of Janvey's quest to have a judicial stamp of approval that Stanford operated a Ponzi scheme lies in the legal basis under which Janvey is proceeding.  Janvey seeks to recover interest payments paid to purchasers of Stanford-issued CD's, arguing that he is entitled to these fraudulent transfers under the Uniform Fraudulent Transfer Act ("UFTA").  Under the UFTA, a transfer is fraudulent if (1) the transferor either made the transfer with actual intent to hinder or defraud, or (2) the transfer was constructively fraudulent.  Proceeding under the latter theory requires that the debtor does not receive "reasonably equivalent value" in return for the transfer.  Courts have found this to occur when either the debtor is insolvent at the time of transfer, or after the transfer is left with insufficient capital to continue the business.  

To recap, a fraudulent transfer is recoverable under the UFTA when the debtor either had actual intent to defraud or the transfer was constructively fraudulent.  However, the evolving Ponzi scheme caselaw has yielded several important conclusions in this area. First, the establishment of the existence of a Ponzi scheme is sufficient to prove a debtor's intent to defraud.  In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 850 (Bankr. M.D. Fla. 2003).  This conclusion provides the 'actual intent' requirement of UFTA.  Additionally, courts have also concluded that an established Ponzi scheme is effectively insolvent at inception, thus preventing a transferee from claiming they received reasonably equivalent value.  Thus, the judicial declaration that Janvey seeks would in essence remove any bargaining chips victims may have in opposing such a clawback suit.  As observed by the Court in McCarn's Allstate Finance, the establishment of a Ponzi scheme effectively ends the Receiver's duty:

Once it is established that the Investors’funds were transferred by Debtor as part of a Ponzi scheme, the Trustee has met her burden with respect to avoiding those transfers so long as they were made within either the [look-back periods contained in the Bankruptcy Code or state law].

Not surprisingly, the victims opposing Janvey's motion for summary judgment make arguments that (1) the interest payments were received in good faith, and (2) the investors exchanged reasonably equivalent value.  The victims seek to distinguish the caselaw cited by Stanford, arguing that unlike those cases, the payment of interest according to the CDs were contractual payments made according to contractual liability - not merely promises of regular returns as seen in other Ponzi schemes.  In support, the victims cite a 2002 Connecticut federal case in which dollar-for-dollar forgiveness of contractual debt in satisfaction of an antecedent debt was determined to be reasonably equivalent value.  In re Carrozzella & Richardson, 286 B.R. 480, 490-91 (D. Conn. 2002).  The victims also attack the strict standard of proof required for Janvey's request, alleging that the evidence raises numerous genuine issues of fact that prevent summary judgment.

Under the federal rules of civil procedure, Janvey is entitled to file a reply to the victim's response.  

A Copy of the Investor's Opposition to Janvey's Motion for Summary Judgment is here.