Accomplished Toronto Pianist Charged With Second Ponzi Scheme in Three Years

A Toronto man was charged with operating a $9 million Ponzi scheme, marking the second time he has been charged with operating a multi-million diollar Ponzi scheme in the past three years.  Tzvi Erez, 44, was charged with ten counts of fraud after police alleged that that he bilked investors through the sale of fraudulent investments. Erez was originally charged in 2009 with operating a $27 million Ponzi scheme based on the same fraudulent printing contracts.  However, prosecutors dropped the charges last year, claiming that the court lacked resources to further pursue the case. According to authorities, new information received in the past several months led to the filing of new charges.  Coincidentally, Erez is also an accomplished pianist, whose latest album, "Tzvi Erez Plays Chopin", is available here at Amazon. 

According to authorities, Erez ran a small print shop in Richmond Hill called E Graphix Ltd. ("E Graphix").  Erez would tell potential investors that he had secured printing contracts for several high-profile clients, including Tommy Hilfiger, Movado, Colgate-Palmolive, Loblaw and Subway, for whom he would produce catalogues, brochures and other promotional material  Investors were offered the opportunity to invest in those contracts and promised annual returns on their investment ranging from 20% to 36%. However, according to prosecutors, no such high-profile printing contracts existed.  Instead, Erez operated a Ponzi scheme, using funds from new investors to pay returns to existing investors. The scheme was uncovered when E Graphix filed for bankruptcy in 2009.

Erez was first charged in 2009 with operating a scheme based on similar fraudulent printing contracts. That scheme, which ran from 2003 to 2009, allegedly defrauded investors out of $27 million.  As a result of E Graphix filing for bankruptcy, a receiver was appointed to investigate the alleged fraud.  The receiver filed a 295-page report concluding that, of the nearly $39 million that moved through Erez-controlled bank accounts, the majority was paid out to investors, a classic hallmark of a Ponzi scheme. The remainder was apparently wired to casino accounts and withdrawn as cash.  The receiver also concluded that, while the scheme was a Ponzi scheme, its true size was smaller than the amount alleged.  However, prosecutors subsequently dropped criminal charges in September 2010 due to insufficient resources to proceed with the case.  Investors also pursued civil claims against Erez, but his financial state of affairs remains doubtful in light of his recent bankruptcy.

Erez is scheduled to make a court appearance on December 6.

California Woman Sentenced to Prison in $7 Million Ponzi Scheme

A California woman was sentenced to nine years in prison for orchestrating a Ponzi scheme that took in nearly $7 million from investors.  Guadalupe Valencia, 47, of West Covina, California, was sentenced by United States District Judge S. James Otero, who also ordered Valencia to pay $5.2 million in restitution to her victims, which was the amount authorities estimated as the total loss amount.  Valencia has been in custody since December 2010, when she pled guilty to six federal charges: two counts of mail fraud, two counts of wire fraud and two counts of tax fraud.  She had faced a maximum possible sentence of 86 years in federal prison and fines totalling $1.5 million.

Valencia, who also went by Lupe Valencia, operated The Real Estate and Loan Consultants, a.k.a RE Equity Group, LLC ("RE Group") from 2001 until 2009, promoting two investment pools that funded loans to purchase real estate and fund small businesses.  In return for their investment, investors were provided with promissory notes that Valencia promised were fully secured and backed by various forms of collateral that operated as a "money-back guarantee."  Valencia promised investors short-term returns ranging from 8% to 20%, often in as little as forty-five days.  In total, 150 investors entrusted over $6 million with Valencia and RE Group.  But instead of funding loans to purchase real estate or lending to small businesses, Valencia admitted to using new investor funds to pay returns to existing investors in a classic Ponzi scheme.  Additionally, Valencia failed to qualify the promissory notes as securities in violation of the California Corporate Securities Law of 1968.  

Valencia was also charged with tax fraud charges due to her failure to report $280,000 in income on her 207 tax return and $470,000 in income on her 2008 tax return.

A copy of the Desist and Refrain Order issued by the California Corporations Commission is here.

Katz and Wilpon Oppose Madoff Trustee's Request for Immediate Appellate Review of Rakoff Decision

In a move that was not entirely unexpected, attorneys representing the New York Mets owners asked United States District Judge Jed S. Rakoff to deny immediate appellate review of his decision that dismissed many of the claims asserted by the court-appointed receiver of Bernard Madoff's massive Ponzi scheme.  While Irving Picard, the court-appointed bankruptcy trustee, cited the far-reaching implications of the decision, attorneys for Mets owners Fred Wilpon and Saul Katz downplayed the need for immediate review, stating that no hardship or injustice would result from waiting until the currently scheduled March 2012 trial to raise any appealable issues.

As part of his quest to recover the estimated $20 billion in principal losses resulting from Madoff's scheme, Picard filed over 1,000 preference actions under the Bankruptcy Code that are more commonly known as clawback suits.  Picard sought nearly $1 billion from Katz and Wilpon, who, because of their sophisticated investment knowledge, he argued should also be compelled to return their $300 million principal investment to the bankruptcy estate for the benefit of Madoff victims.  In a decision issued last month, Judge Rakoff rejected many of Picard's claims and limited his maximum possible recovery to less than $400 million out of the $1 billion originally sought.  Judge Rakoff based his rationale on several theories, including the "safe harbor" provision located in section 546(e) of the Bankruptcy Code, which, under Judge Rakoff's interpretation of "settlement payments" defined in the provision, prevented Picard from recovering any funds transferred beyond the two-year look-back period set forth in the Bankruptcy Code.  Importantly, this would prohibit Picard from utilizing longer 'look-back' periods codified in the New York Debtor and Creditor Law, under which Picard had previously proceeded under and which allowed the clawback of funds transferred up to six years before Madoff's firm was forced into bankruptcy.

Judge Rakoff's decision had several immediate consequences, the most notable of which was the postponement of the first scheduled distribution of funds to victims while Picard's legal team assessed the potential impact of the decision on future recoveries.  The distribution was made several days later, but not before one of Picard's lawyers estimated that the decision would eliminate several billion dollars in future potential recoveries.  The decision also shaved the maximum possible recovery in the Katz and Wilpon clawback suit from $1 billion to under $400 million.  The essence of Judge Rakoff's decision was made brutally simple: if an investor didn't make withdrawals from their account at Madoff's brokerage within two years of the date the firm was forced into bankruptcy, they were essentially immune from the reach of a clawback suit.  Further, Judge Rakoff ruled that, in order to recover the underlying principal investments, Picard would have to demonstrate that the owners were "willfully blind" to the Ponzi scheme.

Following the decision, many observers assumed it was inevitable that Picard would appeal the decision, simply due to the ramifications on current and future clawback litigation.  As expected, Picard appealed the ruling, and sought an expedited review by the Second Circuit Court of Appeals.  However, such immediate review is not a guaranteed right.  Instead, one of two conditions must be satisfied.  The first instance involves the finality of the order.  Ordinarily, appellate review is granted only for final orders.  The second involves the statutory process under 12 U.S.C. 1292(b) involving when an appeal of a non-final order - commonly referred to an an interlocutory appeal - is allowed.  In his motion in support of this immediate right to appeal, Picard sought either the certification of Judge Rakoff's dismissal as a final order under Rule 54(b) of the Federal Rules of Civil Procedure, or, in the alternative, the certification of the issues for immediate appeal under Section 1292(b) as the ruling was disputed and involved a controlling question of law.  

Specifically, Picard sought appellate review of three issues: (1) whether the payments made by Madoff to investors constituted "settlement payments" and thus qualified for inclusion in the safe harbor provision of § 546(e); (2) whether the application of section 546(e) prevents Picard from recovering avoidable transfers from subsequent transferees; and (3) , as a matter of law, the safe harbor provision of § 546(e) bars recovery from immediate or mediate transferees pursuant to § 550 of transfers that are avoidable as against the initial transferee pursuant to § 548(a)(1)(A); and (3) whether the Court's order with respect to section § 78fff- 2(c)(3) of SIPA and § 502(d) of the Bankruptcy Code was contrary to Second Circuit's previous "net equity" decision.

The Securities Investor Protection Corporation, which has compensated Madoff victims for up to $500,000 of their losses and also pays Picard's legal fees, also weighed in on the issue, stating that rather than restricting Picard's reach to a two-year limit on clawbacks, “the court must consider all transfer regardless of timing.” 

Picard's motion in favor of immediate appeal is here.

North Carolina Man Pleads Guilty to $40 Million Ponzi Scheme

As expected, a North Carolina man entered a guilty plea to federal charges that he operated a $40 million Ponzi scheme.  Bryan Keith Coats, 51, had been expected to plead guilty following court records indicating a change of plea hearing had been set.  Originally indicted on charges of investment fraud and money laundering, Coats pled guilty to one count of conspiracy to commit fraud and one count of money laundering conspiracy.  Coats faces a maximum sentence of fifteen years in federal prison, although federal sentencing guidelines will likely result in a lower sentence.  

According to a separate enforcement action filed by the United States Commodity Futures Trading Commission, the scheme started in April 2007, when Coats, along with defendants Keith Simmons and Deanna Salazar, solicited customers to invest in various entities operating as Black Diamond Capital Solutions, LLC and Black Diamond Holdings (collectively, "Black Diamond").  Potential investors were told that Black Diamond operated a sophisticated forex trading system, and had three years of experience engaging in highly successful forex trading. Investors were promised average monthly returns of up to four percent, and assured that various safety mechanisms were in place to protect the underlying principal, including the representation that no more of twenty percent of invested funds were at risk.  

In June 2008, Coats established his own hedge fund, Genesis Wealth Management, LLC, through which he solicited customers for Black Diamond.  As a result, at least 240 individuals invested $35 million with Black Diamond.  However, in March 2009, Black Diamond began to refuse principal redemptions and interest payments, providing investors with several false excuses.  Following an investigation by the CFTC, a company principal admitted that Black Diamond "has never traded currency, held brokerage accounts, or advised anyone on currency trades," and utilized hypothetical trading results to calculate the gains customers were supposedly making.  

Coats is the seventh individual to plead guilty in the scheme thus far.  He is scheduled to be sentenced at a later date.

A copy of the CFTC complaint is here.

Florida Man Sentenced to Prison for Role in $30 Million Forex Ponzi Scheme

A Florida man was sentenced to thirty months in prison for his role in a Ponzi scheme that took in more than $30 million from investors.  Jon Hammill, of St. Petersburg, Florida, pled guilty in August to bankruptcy fraud and faced a maximum sentence of up to five years in federal prison.  The bankruptcy fraud charge resulted from Hammill's failure to disclose his involvement in the scheme after he filed personal bankruptcy in February 2009. The mastermind of the scheme, David Lewalski, recently pled guilty to charges of wire fraud and faces up to twenty years in federal prison at sentencing.

According to court records, Lewalski and Hammill operated and marketed Botfly LLC ("Botfly") to investors beginning in January 2008.  Potential investors were told that Botfly was a very successful commodities trading firm, and were promised returns of up to 10% monthly through the buying and selling of foreign currencies.  Investors were provided promissory notes from Botfly reflecting their investments, along with a password to access monthly statements.  Hammill, who was an investor in Botfly before going to work there in November 2008, was paid to handle investor paperwork and solicit new investors.  In total, more than 500 investors entrusted approximately $30 million with Botfly.  But rather than engage in forex trading, Botfly failed to invest the majority of the $30 million it raised.  Instead, $15 million was used to pay returns to existing investors. Additionally, nearly $2 million was used to sustain Lewalski's lavish lifestyle that included expenses for luxury automobiles, lavish hotels, private jet charters, and designer clothing.  

When Hammill filed for personal bankruptcy in February 2009, he failed to disclose his involvement or income stream from Botfly, instead directing funds from Botfly to a shell corporation he controlled and cashing paychecks rather than depositing them in his bank account.  Hammill received total wages exceeding $1 million, paid out of investor funds.   A bankruptcy court later revoked Hammill's discharge of his pre-bankruptcy debts.

The Receivership website for Botfly is here.

A copy of the complaint filed by the Florida Attorney General against Hammill is here.

A copy of the indictment against Lewalski is here.

A copy of Lewalski's Plea Agreement is here.