Recent Filings Demonstrate SEC's Difficulty in Obtaining Cooperation in PermaPave Investigation

Recent filings by the SEC in the ongoing civil action against PermaPave Industries, LLC ("PermaPave") suggest that the company has been less than cooperative in the SEC's investigation as to whether PermaPave operated an alleged $26 million Ponzi scheme.  Originally covered by Ponzitracker here, authorities filed both civil and criminal charges against PermaPave and several of its principals late last week.  The SEC's recent Motion for Contempt illustrates the difficulty encountered thus far in the investigation.  

The Motion for Contempt details the "repeated and flagrant attempts to flout" court-imposed discovery obligations on PermaPave.  After apparently ignoring investigative subpoenas from the SEC, the motion alleges that even after a court order, PermaPave continued to ignore the SEC's requests.  These included requests for:

• Purchases and sales of PermaPave products from June 1, 2008 to present;
• Documents reflecting compensation paid for the sale of securities;
• Documents concerning entities that are controlled by Aronson and that received funds from accounts held by the PermaPave Entities containing investor funds;
• Correspondence between a PermaPave Entity and investors; and
• Emails sent or received by Aronson concerning dealings with investors or the possible sale of the PermaPave entities.

According to the SEC, after obtaining the court order directing compliance, PermaPave then produced duplicates of documents that had previously been produced in January 2011.  Additionally, after acknowledging that audio copies of some correspondence with investors existed, PermaPave "produced a DVD containing audio files, most of which were either damaged or in a format that could not be played on any commonly used media player."  Additional documents were then provided after the court-imposed deadline of August 9, 2011, in which the SEC again claimed were deficient due to PermaPave's failure to provide a list briefly describing each item.  Counsel for PermaPave also later claimed that a delay in producing additional documents was the result of the landfall of Hurricane Irene in New York.  Finally, in early September, PermaPave produced several hundred pages of documents, some of which included copies of computer screen shots reflecting file folders containing presumably responsive audio files.  Yet this, according to the SEC, was irrelevant to the Subpoena requests, and was akin to "how a photo of a file cabinet would be irrelevant to a subpoena requesting documents contained in the cabinet."

The filing seeks to hold PermaPave in civil contempt, and requests the imposition of coercive and compensatory sanctions.  These sanctions include the assessment of a daily fine, increasing by the week, for the continued non-compliance by the PermaPave entities, along with the award of nearly $10,000 in attorney's fees for the drafting of the filing.

A copy of the Motion for Contempt is here.

SEC: Oil Drilling Company Was a Ponzi Scheme

The Securities and Exchange Commission ("SEC") filed charges against a California-based energy company and four men on Tuesday, alleging that instead of drilling oil wells, the company operated an $11 million Ponzi scheme.  Progressive Energy Partners LLC, based in Costa Mesa, California, along with Jerry Aubrey, Tim Aubrey, Brian Cherry, and Aaron Glasser were charged with violating the antifraud, securities registration and broker-dealer registration provisions of U.S. securities laws. 

According to the SEC, PEP salespeople purchased contact information from lead brokers, and utilized tactics such as cold calls and high-pressure sales tactics to contact potential investors.  The salespeople pitched $25,000 private placement investments in the development and support of oil and gas wells in West Virginia.  Potential investors were promised annual returns exceeding fifty percent.  In total, the company raised $11 million from over 200 investors.  Yet, the company used less than $1 million to drill oil wells, and never engaged in any profitable operations.  Instead, funds from new investors were used to pay returns to existing investors.  Additionally, $2 million was paid to PEP salespeople in the form of commissions, and over $3 million was allegedly misappropriated by the Aubreys to pay rent at their lavish home, which featured giant fish aquariums with miniature sharks, a hot tub, pool, and tennis court.

The SEC action follows moves by at least three other states to obtain cease-and-desist orders against PEP and its salespeople for violations of state securities laws.  This included actions by South Dakota, Pennsylvania, and most recently, Washington, which instituted an action in October 2009 charging PEP with securities law violations relating to the unregistered sale of interests in oil and gas wells.  Canada also recently opened an inquiry, with the Alberta Securities Commission scheduling hearings as to whether any securities laws were broken by PEP and its principals.  

The SEC is seeking relief including permanent injunctions, disgorgement of allegedly ill-gotten gains along with prejudgment interest, and civil monetary penalties.

A copy of the complaint filed by the Washington Department of Financial Institutions is here.

Hip-Hop Promoter Accused of $4 Million Ponzi Scheme

Federal authorities arrested a former hip-hop mogul and accused him of operating a $4 million Ponzi scheme that purported to invest in derivatives of United States Treasury bonds.  Tyrone Gilliams Jr., 44, was arrested last week on federal wire fraud charges, which carry a maximum prison sentence of twenty years and up to a $250,000 fine.  If convicted, he may also be ordered to pay restitution to victims.

Gilliams, a former hip-hop promoter, is now an internet preacher, and maintains a page at StreamingFaith, a provider of internet broadcast services to faith-based corporations.  According to a bio on the site, Gilliams formerly worked with "music mogul Sean Puffy Combs creating Bad Boy Sports.  Tyrone was eventually called to collaborate with the ultimate mogul our Lord and Savior Jesus Christ."

According to a recently unsealed criminal complaint, Gilliams operated TL Gilliams, LLC, and held himself out as a successful investor in United States Treasury Strips. Treasury Strips are derivatives of Treasury bonds, and operate by separating each periodic interest payment and corresponding future return of principal into individual securities.  During the spring of 2010, an individual investor made a $4 million investment with Gilliams' company with the stated purpose of obtaining income to operate a charitable foundation.  Two contracts signed between the victim and an intermediary stated that the funds would be invested in "treasury strips, treasury bills [and] U.S government paper."  

Instead, Gilliams is alleged to have misappropriated at least $2 million of the original $4 million investment, using over $1 million to fund a black-tie gala called the 'Joy to the World' festival at the Philadelphia Ritz-Carlton.  Additionally, approximately $1.6 million was sent to Ghana in what Gilliams described as an investment in gold.  Funds were also used to sustain a lavish lifestyle that included international travel.  Gilliam represented himself in an earlier civil suit filed by the victim, and in a motion to dismiss, alleged that the original contract called for an investment in gold and commodities in West Africa, specifically Ghana.  

Gilliams was arrested on October 5th, and was scheduled to be arraigned later that day.  

A copy of the Justice Department's press release is here.

A copy of the unsealed criminal complaint is here.

Potential $1 Billion Ponzi Scheme Uncovered in China

Forbes reports that a potential $1 billion Ponzi scheme may have been uncovered in China.   Police investigating the kidnapping of the wife of the chief of the Inner Mongolia branch of the Bank of China discovered that the scheme was carried out by several bank clerks who had been previously terminated for suspected embezzlement of client funds.  According to authorities, three bank clerks at the Bank of China branch stole at least $312 million from the bank in order for the mastermind, Tuya, to make speculative investments in property and mines or to make loans at high interest rates.  

The scheme was discovered in June, when a routine audit discovered the absence of deposits from over forty accounts at the branch.  The initial amount believed stolen was approximately $300 million, and it is believed that Tuya may have employed similar operations at the Inner Mongolia branches of Agricultural Bank of China and Baoshang Bank.  Authorities estimated that the total amount stolen could reach $1 billion.

When the wife of the chief of the Inner Mongolia branch was kidnapped, the kidnappers made ransom demands for approximately $30 million, and additionally demanded the reinstatement of the three fired bank clerks.  Authorities were alerted to the connection between the embezzlement and the kidnapping, and arrested eight individuals.   The scheme remains under investigation.

The strength of the Chinese economy in the past decade, spurred by loose lending standards and fiscal stimulus, has caused many to wonder whether the wave of Ponzi schemes recently unraveling in the United States could possibly occur in China.  As Ponzi schemes are generally a lagging indicator of unfavorable economic conditions, could the Ponzi scheme described above be a sign of things to come?

Utah Man Sentenced to Prison for Operating Ponzi Scheme that Invested in Other Ponzi Schemes

A Utah man was sentenced to nearly four years in federal prison for swindling investors out of nearly $2 million in what investors thought was a sophisticated foreign currency trading operation.  Instead, Frederick H.K. Baker had come up with the idea that he could identify other Ponzi schemes and be one of the early investors who received high yields from such operations.  According to his attorney, Baker effectively ran a Ponzi scheme to invest in other Ponzi schemes.  Baker was sentenced to forty-one months in federal prison after previously pleading guilty to two counts of wire fraud and conspiracy earlier this summer.  Another defendant, Mark Akins, was named in a 49-count indictment charging him with marketing Baker's scheme to other investors.

From June 2006 to June 2008, Baker told potential investors that he could promise them monthly returns ranging from eight to twelve percent from a system he had developed that profited off fluctuations in world currency markets.  With the alleged help of Akins, he received nearly $2 million from approximately seventy investors.  Yet, instead of using the funds to make forex investments, Baker invested in several other Ponzi schemes with the intent to be one of the early investors in the schemes and in effect "scam the scammers."  Baker planned to invest, collect returns, and then withdraw his principal.  According to prosecutors, Baker utilized E-Bullion to make transfers of money.  E-Bullion is a California company that has also been referenced in the AdSurfDaily Ponzi scheme.  

Baker was also ordered to pay $776,000 in restitution to victims of his fraud.  His co-defendant, Akins, is currently scheduled to stand trial on January 3, 2011.