Three Men Arrested in $26 Million Landscaping Ponzi Scheme

Three New York men were charged both civilly and criminally in what authorities allege was a Ponzi scheme operated as a landscaping business.  Eric Aronson, 43, Vincent Buonauro Jr., and Robert Kondtratick each face criminal charges stemming from their executive positions in PermaPave Companies, a conglomerate of related companies controlled by Aronson.  Additionally, the Securities and Exchange Commission separately filed an emergency action seeking an asset freeze of the individuals and companies.

According to authorities, the various PermaPave entities ("PermaPave") engaged in a Ponzi scheme since at least March 2006, selling unregistered promissory notes and "use of funds" agreements to investors.  Investors were told that their funds would be used to purchase PermaPave pavers from Australia for subsequent resale in the United States.  Aronson and the other defendants told potential investors that there existed an enormous backlog of orders for the pavers, and that investors would be repaid out of profits from the guaranteed sales.  Investors were promised monthly returns ranging from 7.8% to 33.3%, which equated to annual returns of up to 400%. 

When PermaPave began to fall behind on payments in late 2008, investors were mollified by an agreement to exchange the promissory notes for convertible debentures with a lower interest rate and a deferral of principal due.  In total, at least 140 investors entrusted $16 million with the company.  In 2009, investors were told that the company had been sold, and urged to convert their debentures into equity shares.  In reality, the company had not been sold, and had never been profitable, instead operating at substantial losses.  Additionally, only approximately $600,000 was used to purchase the pavers, and those pavers were sold at a substantial loss.  Unable to use profits from the pavers to repay investors, PermaPave and its principals instead used $10 million in investor funds to make fictitious interest payments.  Each of the defendants is also accused of misappropriating investor funds for personal gain.

Ironically, Aronson pled guilty to fraud more than a decade ago in an unrelated offering scam.  According to authorities, he used proceeds of the current scheme to make court-ordered restitution payments to victims of the scheme to which he pled guilty in 2000 and later served time in federal prison.  While it is customary to seek all 'fraudulent transfers' made by individuals carrying out a Ponzi scheme, it will no doubt add a layer of complications to any effort by a court-appointed trustee or receiver to pursue Aronson's previous victims for these payments.

The SEC is seeking a permanent ban on the defendants' future ability to serve as an officer or director of a public company, the disgorgement of ill-gotten gains, and civil monetary penalties.

A copy of the SEC Complaint is here.

Utah Man Claims he is Running 'Legal Ponzi Scheme'

A Utah man facing scrutiny after his businesses filed for bankruptcy protection has taken the position that he was running a 'legal Ponzi scheme', and thus should not be subject to oversight.  Dee Allen Randall, of Kaysville, Utah, filed Chapter 11 bankruptcy in December 2010, which allows a debtor to propose a plan of reorganization while holding creditors at bay.  However, after allegations of fraud surfaced, authorities sought the appointment of an independent bankruptcy trustee to conduct an investigation and oversee the bankruptcy process.

Randall operated several Utah businesses, including Horizon Mortgage & Investment, Horizon Financial & Insurance Group and Horizon Auto Funding.  The US Trustee overseeing the bankruptcy has identified at least twenty entities through which Randall did business, 12 of which are currently active.  He advertised to potential investors, many of whom were retirees, that he could protect their retirement funds through investments in real estate, auto leases or insurance products.  These various investments were conducted through the use of private placement memorandums ("PPMs"), which are detailed disclosures to potential investors of a securities offering that often outline a myriad of potential risk factors.  Apparently, included in these offering documents was language to the effect that, while not described as a"Ponzi scheme", Randall would be transferring investor funds from company to company to meet obligations.  

United States Bankruptcy Judge Joel Marker appointed a forensic accountant as the US Trustee, who has taken control of Randall's finances and is conducting an investigation.  According to the Trustee, Randall has been less than cooperative with the investigation, soliciting investments after he sought bankruptcy protection and using funds without court permission.  

Guilty Plea in $7 Million California Real Estate Ponzi Scheme

A California man pled guilty to charges he operated a $7 million Ponzi scheme that purported to offer high short-term returns on real estate loans.  Mark Alan Hensing, 51, of Tustin, California, entered a guilty plea to sixty-eight felony counts, including grand theft, filing false recorded documents, elder financial exploitation and sentencing enhancements for white-collar crime over $500,000 and excessive stealing.  Helsing was originally arrested in June 2009 by state police.

According to authorities, Helsing operated as a broker for 'hard money lenders' through his four businesses: Sea View Investments, HLHS Financial Services, Inc., Foothill Realty, and Sea View Mortgage.  From May 2004 to June 2007, Helsing solicited investors to fund short-term real estate loans, promising returns exceeding 15% annually.  To convince investors of the authenticity of the scheme, Helsing provided potential investors with fictitious paperwork and loan documents.  In total, Helsing took in nearly $7 million from friends and family.  Yet, rather than fund the purported short-term loans, Helsing instead used money from new investors to pay returns to existing investors.  The exact amount of losses are unknown, but believed to exceed $1 million.

A press release issued by the Orange County District Attorney's Office stated that Helsing is scheduled to be sentenced on December 2, where  victims will have the opportunity to make victim impact statements.  Helsing faces a maximum of up to fifteen years in state prison.

A press release from the Orange County District Attorney is here.

Madoff Trustee Set to Make Initial $312 Million Distribution to Victims on Wednesday

Victims of Bernard Madoff's massive Ponzi scheme are set to receive their first distribution of funds recovered in the wake of the fraud on Wednesday, five days after the initial distribution date was delayed.  Irving Picard, the court-appointed trustee, had originally intended to make the distribution by September 30th to investors holding claims as of September 15th.  However, the distribution was delayed after a federal judge dismissed most of Picard's claims against several owners of the New York Mets last week.  Along with the dismissal of nearly all of Picard's claims, United States District Judge Jed S. Rakoff also made several rulings that could potentially threaten the magnitude of any future recoveries in the approximately 1,000 cases filed by Picard thus far. Ponzitracker covered Judge Rakoff's ruling in greater detail here.  In a statement late last week, Picard announced that out of an abundance of caution, his legal team was delaying the scheduled distribution to evaluate the impact of the rulings.

The majority of lawsuits filed by Picard have sought to "claw back" false profits from investors who withdrew more funds than they invested with Madoff.  Based partly in equity, this procedure seeks to pool all recovered funds and make pro rata distributions to all investors, rather than allowing some investors, usually those that were able to invest in the scheme earlier on, to keep their profits while ignoring others who had invested later and had not received as many purported interest payments to offset their principal investment losses.  Because of the duration of Madoff's scheme, which Picard argues spanned several decades, thousands of investors had accounts with Madoff.  Some who were fortunate to invest in the early days of the scheme have since recouped their original investment by many times.  Picard's largest single recovery to date comes from the estate of one of these early investors, Jeffrey Picower, who agreed to return over $7 billion of false profits received during his relationship with Madoff.  

In the ruling last week, Judge Rakoff dismissed nearly all of Picard's claims asserted against several principals of the New York Mets.  Picard had taken the rare step of not only asking for any false profits, but also for the return of the original principal investment, arguing that the mens' close relationship with Madoff and investing knowledge should have alerted them to the fraud.  Judge Rakoff's ruling severely limited Picard's reach, holding that a "Safe harbor" provision in the U.S. Bankruptcy Code forbade Picard from seeking any false profits received over two years from the date Madoff's brokerage filed for bankruptcy.  This safe harbor provision restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents the interplay between bankruptcy and securities law.  While Picard had argued that the "safe harbor" provision did not apply, Judge Rakoff held otherwise.  

In his statement issued today, Picard stated that additional settlements had allowed him to increase the amount of the initial distribution from $272 million to $312 million.  This distribution would account for roughly 4.6% of allowed investor losses.  Picard also stated that the total funds recovered for victims thus far had increased to $8.694 billion - approximately 50% of the $17.3 billion amount Picard had estimated was lost by Madoff's victims.  Of the nearly $2.4 billion available for distribution, most remains tied up by pending litigation.  

Investors with allowed claims have also received over $700 million in total cash advances from the Securities Investor Protection Corporation ("SIPC"), a federally-mandated non-profit that protects investors if a broker-dealer fails.  Nearly all broker-dealers registered with the Securities and Exchange Commission are members of SIPC.  Under SIPC guidelines, investors holding securities or cash in accounts of failed broker-dealers are entitled to receive up to $500,000 in cash advances to cover their losses.

A copy of the Statement issued today by the Trustee is here.

Utah Man Faces New Indictment in $100 Million Ponzi Scheme

A Utah man accused of running a $100 million Ponzi scheme now faces a new indictment after a federal grand jury re-indicted him for various charges including investment and tax fraud.  Claud R. Koerber, also known as Rick Koerber, 36, of Alpine, Utah, had originally been indicted in 2009 for his alleged role in the scheme, but a federal judge dealt a blow to the case when he threw out a key piece of evidence against Koerber.  After making small changes to a portion of the indictment describing the scheme and means used to defraud, a federal grand jury returned a new indictment substantively identical to the original indictment.  Koerber was charged with one count of mail fraud, six counts of fraud in the offer and sale of securities, one count of sale of unregistered securities, ten counts of wire fraud, two counts of money laundering, and two counts of tax evasion.  A conviction on all of the charges would leave Koerber facing a maximum sentence of hundreds of years in federal prison.

According to authorities, Koerber operated Founders Capital, LLC ("Founders Capital"), Franklin Squires Investments, LLC ("Franklin Squires"), and Franklin Squires Companies, LLC ("Franklin Squires Co.").  Beginning in 2004, potential investors were solicited through real estate seminars in which Koerber described an operation that would acquire various real estate for use in the 'Equity Mill.'  Investors were paid monthly returns ranging from 1% to 5%, and told that their investments were secured or collateralized by real estate of equal or greater value.  In total, Koerber raised over $100 million from investors.  However, authorities allege that neither Koerber nor his companies were profitable, and sustained losses in 2005, 2006, and 2007.  Instead, Koerber used $50 million in investor funds to pay interest or principal payments to existing investors.  Additionally, Koerber lived a lavish lifestyle, spending $850,000 at restaurants, $1 million on cars, and over $5 million to make a movie.  

Gabriel Joseph, a partner with Koerber in Franklin Squires Cos., also faces federal charges in connection with his alleged failure to file tax returns in 2004 and 2005.  He is scheduled to stand trial in December 2011. 

A copy of the original 2009 indictment is here.