Spokane Woman Indicted for $126 Million Payday Loan Ponzi Scheme

The Department of Justice charged a Washington woman with orchestrating a Ponzi scheme that took in more than $126 million from investors worldwide.  Prosecutors filed a 110-count indictment against Doris "Dee" Nelson, accusing her of operating the scheme to support a payday lender known as Little Loan Shoppe.  Nelson faces 71 counts of wire fraud, 22 counts of mail fraud and 17 counts of international money laundering, which could result in a prison sentence of hundreds, if not thousands, of years if she is convicted of the charges.  The charges come several months after the SEC instituted civil proceedings against Nelson.

According to the indictment, Nelson used numerous different business entities to operate a payday/short-term lending business called the Little Loan Shoppe ("LLS").  Originally centered in British Colombia, LLS moved its operations to Spokane in or around 2001.  Shortly after in 2003, LLS closed all physical operations and and began conducting the business over the internet.    According to the indictment, the scheme began in or around May 2000, when Nelson began soliciting investors by promising high yields on investor funds which Nelson claimed would be paid from the profits of the short-term operations of LLS.  These purported returns ranged from forty to sixty percent annually, and were often paid to investors via post-dated interest checks mailed to the investor at the time of their investment.  When the operation began to encounter financial difficulties in October 2008, investors were offered reduced interest rate payments of ten percent.  However, the financial difficulties continued, and by March 2009, Nelson had ceased making any payments.

While Nelson represented to investors that LLS generated huge profits that were used to pay the exorbitant returns, in reality the entire operation was a massive Ponzi scheme, with nearly all investor funds being used to pay interest to existing investors and to sustain Nelson's lavish lifestyle.   Nelson alone received over $3 million in funds diverted from investor funds, which were used to purchase, among other things, a motor home, a Chevrolet Corvette, and a Mercedes Benz S550.  Additionally, Nelson used investor funds to gamble at Las Vegas casinos, losing nearly $500,000 between 2005 and 2008.  Nelson also paid commissions to several investors in return for directing further investment to Nelson's operation.  

Little Loan Shoppe filed for bankruptcy in 2009, and the trustee appointed to oversee the liquidation process has filed clawback lawsuits against LLS investors who received interest payments in excess of their original investment.

A copy of the Indictment is here.

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

A Gainesville man received a twenty year sentence in prison for orchestrating a Ponzi scheme that bilked investors out of $30 million.  David Lewalski, 48, received the maximum sentence from United States District Judge James Whittemore after previously pleading guilty to mail fraud.  Lewalski had originally faced additional charges of conspiracy and wire fraud before pleading guilty to a single charge of mail fraud.  Along with the sentence, Lewalski was also ordered to forfeit nearly $30 million, along with various electronic equipment that was purchased with proceeds of the fraud.

Lewalski operated Botfly LLC ("Botfly"), which held itself out to be a successful foreign currency trading operation.  In soliciting investors, Lewalski promised monthly returns of up to ten percent, which equated to annualized returns exceeding 100%.  In total, more than 500 investors entrusted approximately $30 million with Botfly. Only a small portion of funds were invested, and little if any trading profits were generated.  Instead, Lewalski used the majority of investor funds to operate a Ponzi scheme, paying roughly $15 million to investors in the form of principal and interest payments.  In addition, Lewalski used investor funds to sustain a lavish lifestyle that included high-end real estate in New York City, private jets, and Ferraris.  

An accomplice of Lewalski was sentenced last month to nearly three years in prison as a result of his failure to report income received from the scheme after filing personal bankruptcy.  Jon Hammill received total wages exceeding $1 million from his involvement in marketing Botfly to potential investors.  

The Receivership website for Botfly is here.

A copy of the indictment against Lewalski is here.

A copy of Lewalski's Plea Agreement is here.

Canadian Man Sentenced to 6 Years in Prison for $37 Million Ponzi Scheme

A Calgary man was sentenced to six years in prison for his role in a Ponzi scheme that defrauded its victims out of over $37 million.  Murray Harold Stark, 74, received the sentence after pleading guilty to one count of fraud over $5,000.  Provincial court Judge Mike Dinkel defended concerns that the sentence was too light in relation to the severity of the crime, stating that the six years Stark would spend in prison could likely be a death sentence. Judge Dinkel also declined to impose a restitution order, on the basis that many of the investors have filed a class-action suit in the hope of recovering some assets from Stark.

The scheme allegedly began in November 2000, when Stark and Robert Fyn commenced a joint investment program under the name HMS Financial ("HMS").  HMS solicited investors in Canada and North America, promising returns of eight to twelve percent a month, compounded quarterly.  Investors were told that their investments were protected by a $30 million bond held by a lawyer friend of Fyn's.  In actuality, no such bond or trust account holding such a bond existed.  Additionally, multiple banking accounts of HMS were closed or suspended due to suspicious trading activity.  Instead of making legitimate investments, investor principal and interest payments were made using funds belonging to new and existing investors.  In total, investors sustained losses exceeding $30 million.  Fyn is expected to plead guilty next month to his role in the fraud, and is facing an estimated eight-year sentence.  

The ruling comes weeks after the enactment of stricter penalties dealing with financial crimes.  Bill C-21, titled "The Standing Up For Victims of White Collar Crime Act" (the "Bill"), took effect on November 1st, and imposes mandatory minimum sentences of two years for fraud over $1 million along with the addition of aggravating factors available for the court to consider in imposing a tougher sentence.  Additionally, the Bill requires judges to consider the imposition of restitution - which Stark did not receive in this case.  One of the statutory equivalents in the United States, the Mandatory Victim Restitution Act, forbids sentencing judges from taking into account the existence of civil litigation in crafting an order of restitution.

Stanford Receiver Proposes Claims Process for Victims

The Receiver tasked with marshaling and distributing assets to victims of R. Allen Stanford's alleged $7 billion Ponzi scheme has filed papers asking a U.S. judge to approve a proposed plan to review and pay claims by victims. In a filing in the Northern District of Texas (the "Motion"), Receiver Ralph Janvey asked United States District Judge David Godbey to (1) establish a bar date for potential claims; (2) approve the form and manner of the notice to be sent to potential victims; and (3) approve the proof of claim form and other procedures associated with the submission of the proof of claim by victims.  

According to the Motion, Janvey seeks a "Claims Bar Date" established as 180 days from the entry of the enclosed proposed order affirming Janvey's plan for the claims process.  Specifically, victims would have until 5:00 P.M. Central Standard Time on the date 180 days after Judge Godbey approves Janvey's proposed plan.  The Receiver plans to provide notice of the claims process by mail, email, publication, and inquiry to any interested parties.  The Motion also specifically directed that any victim who has previously filed a claim in the liquidation proceedings in Antigua and Bermuda in conjunction with Stanford International Bank, Ltd. is not relieved from the obligation to file a claim with Janvey in order to preserve any potential entitlement to a future distribution of assets in the United States proceeding.  A "Claimant Form" filed by an individual or entity on the Stanford Receiver website before the entry of Judge Godbey's order affirming the claims process will be treated as a timely and sufficient Proof of Claim Form but may require future additional documentation.  

While the Motion does not elaborate on the expected amount of funds available for future distribution, Janvey's recent Third Interim Report, filed November 11, indicated that the Receivership had $114.5 million of cash on hand and $96.6 million in assets as of October 31, 2011.  Additionally, the Report estimates that nearly $1 billion of external assets could potentially be recovered for the benefit of victims.  However, language in the Motion alludes to the expectation that total recovered assets will likely fall below that of investor's original invested principal:

With limited proceeds available for distribution, the Claims Procedures will ensure that the available proceeds are maximized and distributed to Claimants that hold valid Claims and that submitted proofs of claim prior to the deadline for doing so.  

Finally, Janvey states in the motion that the ultimate methodology used to calculate the exact amount of victim claims has not yet been established, "although for investor claimants, the amount of the investor’s net investment in the ponzi scheme will be one of the most significant factors."  The Net Investment Method, widely used in Ponzi proceedings, including the Madoff bankruptcy, sets a victim's claim as the total amount of principal investments minus any withdrawals over the course of the scheme. Victims who withdraw more than the amount of their principal investment ("net winners") are typically relegated to a subordinate status than "net loser" victims.  Additionally, those "net winners" may even find themselves the target of a clawback suit seeking to recover any funds withdrawn in excess of the principal investment.  

A copy of the Motion Seeking Approval of the Claims Process is here.

A copy of the Receiver's Third Interim Report is here.

Bank Seeks Mistrial in Rothstein Case

The first jury trial seeking to hold a financial institution liable for its complicity in Scott Rothstein's $1.4 billion Ponzi scheme faces uncertainty after the institution filed a motion seeking a mistrial following testimony of a key witness.  TD Bank, being sued by Texas investment partnership Coquina Investments, filed the motion after verbally making the motion following questioning of its former Vice President, Frank Spinosa, concerning his relationship with Rothstein.  Under the threat of possible pending criminal charges, Spinosa declined to answer the majority of the questions posed by Coquina's attorney and took the Fifth amendment.  

The Fifth Amendment applies to both criminal and civil proceedings, and is available to a witness who may have reasonable apprehension from providing a direct answer that may subject him or her to future criminal prosecution.  As eloquently stated by the Supreme Court in 1924,

The privilege is not ordinarily dependent upon the nature of the proceeding in which the testimony is sought or is to be used. It applies alike to civil and criminal proceedings, wherever the answer might tend to subject to criminal responsibility him who gives it. The privilege protects a mere witness as fully as it does one who is also a party defendant.  

McCarthy v. Arndstein, 266 U.S. 34, 40 (1924).  While it is well-established in American jurisprudence that a judge may not allow a jury to make an adverse inference concerning a defendant's decision to not testify in his case, the result is different when a defendant chooses to testify but declines to answer based on the Fifth Amendment.  As the Supreme Court stated in Baxter v. Palmigiano, 

 [T]he Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them: the Amendment ‘‘does not preclude the inference where the privilege is claimed by a party to a civil cause.’’

425 U.S. 308, 317 (1976).  

During the questioning, Spinosa took the Fifth amendment to more than 170 questions over a morning of testimony.  These questions included whether Spinosa flew on a plane with Rothstein to a Super Bowl or whether Spinosa accepted an envelope from Rothstein containing $50,000.  Following the questioning, United States District Judge Marcia Cooke granted a request by Coquina to allow the jury to draw an adverse inference from Spinosa's decision not to testify for fear of criminal prosecution.  Judge Cooke ruled that Coquina could propose an instruction to the jury to be considered during their deliberation that "[y]ou can infer that the answers would have been adverse to TD Bank's interest."  

While TD Bank's attorneys seem to acknowledge that an adverse inference may be taken from Spinosa's decision to plead the Fifth, they take exception with Judge Cooke's apparent wording that seemed to acknowledge that liability could be inferred.