Two Utah Men Indicted in "Ponzi Scheme Within Ponzi Scheme"

In what is at least the second instance this year, two Utah men were indicted last week for operating separate Ponzi schemes in which one invested in the other.  Robert L. Holloway, 54, was arrested in San Diego on four counts of wire fraud and one of filing a false tax return in connection with his trading company.  Robert J. Andres, 60, was arrested in Houston and charged with five counts of wire fraud.  Each count of wire fraud carries a maximum sentence of twenty years in federal prison, along with a fine of up to $250,000.

Andres, who claimed to be an attorney, operated Winsome Investment Trust ("Winsome"), which solicited investors to participate in an unnamed commodities pool.  Since at least 2005, Andres and other Winsome employees provided potential investors with a prospectus that contained an overview of the purported trading program and describing it as a joint venture investment.  The program was said to generate historical returns of 2%-10% a day, and investors could reasonably expect a 1% daily return.  "Loss" days were described as "nonexistent," with only one "loss" day having occurred since the program's inception.  Investors were told that the pool funds would be managed by an experienced member of the securities industry who previously managed over 200 people at a brokerage firm and had a seat on the Chicago Mercantile Exchange.  In total, Winsome took in more than $25 million from investors. That "manager" was Holloway.

Holloway operated US Ventures LC ("USV"), which also purported to participate in an unnamed commodity pool, and controlled nine commodity futures trading accounts in the name of USV.  From May 2005 to November 2008, USV took in approximtely $29.3 million from investors - $24.8 million of which was directed from Andres and Winsome.  To conceal their fraud, both USV and Winsome distributed fictitious account statements to investors that depicted steady account gains.  Investors were shown that their accounts were purportedly generating daily average returns ranging from .2729% to .85% - a compound annual return easily exceeding 50%.  Additionally, virtually no losses were shown. 

Instead of generating consistent trading profits, both Andres and Holloway operated Ponzi schemes, using funds from new investors to pay returns to existing investors.  Engaging in trading partly funded by investors of Andres' scheme, Holloway sustained nearly $11 million in losses from February 2005 through March 2007, and withdrew an additional $15.7 million.  The majority of these withdrawals was used to make Ponzi-style payments to existing investors.  Both Holloway and Andres also misappropriated investor funds for personal use, including the financing of Holloway's wife's eBay business and Andres' purchase of an aerospace consulting business.  

A complaint filed against the two entities by the U.S. Commodity Futures Trading Commission ("CFTC") alleges that Andres recently contacted investors under the guise of confirming the amount to be returned to each investor.  If investors indicated that they had given or assisted others in taking legal action against Winsome or Andres, then the return of funds would be delayed and handled by an attorney.  None of these funds were returned.

Both Andres and Holloway are free on bail and required to appear in Salt Lake City for upcoming hearings.  A court-appointed receiver, Wayne Klein, has filed 22 lawsuits in attempts to recover money for defrauded investors, with plans to file an additional 42.  

A copy of a Justice Department press release announcing Holloway's arrest is here.

A copy of a Justice Department press release announcing Andres' arrest is here

A copy of the CFTC Complaint filed against Andres and Winsome Ventures is here.

SEC Files Lawsuit Against SIPC in Dispute Over Coverage of Stanford Ponzi Scheme

In a likely unprecedented move, the Securities and Exchange Commission ("SEC") filed a lawsuit against the Securities Investor Protection Corporation ("SIPC") as the culmination of a six-month effort to force SIPC to compensate victims of R. Allen Stanford's $7 billion Ponzi scheme.  The suit, filed late Monday, comes after negotiations between the two agencies reached an impasse, according to the Wall Street Journal, which first broke news of the SEC's intentions early Monday morning.  The move follows increased pressure by the SEC in urging SIPC to provide coverage for victims of Stanford's fraud and illustrates the fundamental disagreement between the two agencies.

The lawsuit may have caught some by surprise, for recent news reports had speculated that SIPC was preparing to make an offer to the SEC to resolve the dispute.  Indeed, the Wall Street Journal quotes an unnamed source who confirms that SIPC made an offer to compensate each Stanford victim up to $250,000 - half of the $500,00 coverage that SIPC is authorized to provide per customer account - which the SEC rejected.  While the outcome of the SEC's decision to resort to litigation remains uncertain, a protracted and lengthy court battle will only delay any possible payment to Stanford victims.  

An earlier Ponzitracker post detailed the extensive back-and-forth between the SEC and SIPC.  After the SEC instituted civil proceedings against Stanford in February 2009, the court-appointed receiver, Ralph Janvey, inquired as to whether SIPC would compensate victims of Stanford's fraud, as Stanford Group Company ("SGC") was a broker-dealer registered with SEC and SIPC.  Responding to Janvey's letter, Stephen Harbeck, the President of SIPC, took the position that the certificates of deposit ("CDs") sold to SGC investors did not qualify for SIPC protection, as the CDs themselves were technically issued by Stanford International Bank ("SIB") in Antigua, which was not a SIPC member.  Additionally, said Mr. Harbeck, Stanford's representations to investors that the CDs were subject to SIPC protection were irrelevant. 

Over the next two years, Stanford victims appealed to their political representatives in Congress, who sent at least ten letters to then-SEC Chairwoman Mary Shapiro, requesting that the SEC take immediate action to order a liquidation proceeding of SGC and examine the possibility of extending SIPC coverage to Stanford victims. Following this, the SEC concluded in June 2011 that a liquidation under the Securities Investor Protection Act of 1970 ("SIPA") was warranted, and provided its findings to SIPC, which promised to render a decision at its September 15 meeting.  However, SIPC did not issue any decision on September 15, and members of Congress continued to press SIPC for an answer, with a recent letter threatening to hold hearings on the matter should SIPC fail to deliver a decision by December 15.  

The lawsuit makes a concerted effort to illustrate the nexus between the Stanford entities and the United States. This is likely in an effort to downplay SIPC's expected response that the CDs, because they were issued by an Antiguan bank that was not a SIPC member, do not qualify for SIPC coverage. The SEC points out that SGC (1) was based in Houston, Texas; (2) operated 29 offices throughout the United States that primarily marketed the sale of securities issued by SIB; (3) used the apparent legitimacy offered through U.S. regulation to generate sales of the CDs; and (4) provided account applications to potential investors touting SGC's status as a SIPC member.  

In its requested relief, the SEC asked the Court to enter an Order to Show Cause essentially directing SIPC to demonstrate why it should not be compelled to initiate a SIPA liquidation of the Stanford entities.  Should SIPC's response be deemed insufficient, the SEC also asked for the Court to issue an Order directing SIPC to take necessary action in commencing a SIPA liquidation.  

Shortly after the suit was filed, SIPC issued a press release responding to the lawsuit.  Like the SEC, SIPC sought to bolster its position by focusing on the geographic location of the entities involved.  Disagreeing with the SEC's position that "SIPC must provide financial guarantees for investors who chose to purchase CDs issued by an offshore bank in Antigua," the press release highlighted the links between the fraud and Antigua.  Additionally, and perhaps for the first time, SIPC raised the issue of potential financial shortfalls associated with the SEC's position, saying that an adverse decision

would vastly exceed SIPC's Fund, and would jeopardize the availability of the Fund for the legitimate purposes for which it was created."

A quick look at SIPC's 2010 financial statements adds some veracity to such a claim.  According to its balance sheet as of December 31, 2010, SIPC had assets of approximately $1.38 billion and liabilities of $1.28 billion, thus resulting in roughly $100 million of net assets.  Interestingly, $1.27 billion of the stated liabilities were allocated to "estimated costs to complete customer protection proceedings in progress."  Nearly all of these costs are the result of the SIPA liquidation of Bernard L. Madoff Investment Securities, under which $1.09 billion has been advanced out of an estimated total cost to SIPC of $2.3 billion.  The financial statements also indicate that the weight of the Madoff proceeding caused SIPC to operate at a loss in 2010 and reduced net assets from $344 million at the beginning of 2010 to $100 million at the end of the year.  The recent bankruptcy of MF Global, a SIPC member, threatens to further strain resources depending on the severity of investor losses.  

In the Madoff proceeding, SIPC advanced approximately $800 million to cover roughly $7.3 billion in 2,425 allowed claims.  Using this rough 10% ratio of SIPC coverage to allowed claims, a Stanford SIPA liquidation with $7 billion in allowed claims would also require an outlay of $700 million in SIPA funds to victims - a cost that would outweigh the $409 million in member assessments received in 2010.  SIPC does retain authority to increase its member assessments should its assets run low.  SIPC will likely address the situation in its response to the lawsuit.

As the administrator of SIPA, which established SIPC, the SEC's interpretations are given deference in court.

A copy of the SEC's lawsuit is here.

A link to SIPA is here.

CPA Firm Faces $150 Million Lawsuit for Role in Seattle Ponzi Scheme

The nation's 11th largest CPA firm has been sued for $150 million and accused of failing to detect the largest Ponzi scheme in the history of the Pacific Northwest despite issuing clean opinion letters following several audits of the funds from 2001 to 2007.  Mark Calvert, the court-appointed trustee overseeing the liquidation of the Meridian Mortgage funds, filed the lawsuit in a Washington state court, accusing Moss Adams, LLP ("Moss Adams") of professional malpractice, negligent supervision, fraud, and violations of Washington's Consumer Protection Act.  The lawsuit, which also names alleged mastermind Frederick Darren Berg as a defendant, seeks monetary damages, disgorgement of profits received, and all fees and expenses incurred by Calvert, including attorneys' fees and expert fees.

The Meridian funds were created in 2001, and represented to potential investors that it invested in seller-financed real estate contracts and hard money loans.  Investors would then receive annual interest payments from the cash flow generated from these activities.  In total, approximately 750 investors entrusted $150 million to various Meridian entities.   To convince investors of the legitimacy of Meridian, Berg hired Moss Adams to serve as the independent auditor of Meridian and its agent, MPM Investor Services, Inc. ("MPM") from 2001 to 2007.   Additionally, Moss Adams also performed other functions for Berg personally, including his taxes.

In its role as auditor, Moss Adams issued clean audit/opinion report during audits performed from 2001 to 2007.  These audit reports were then touted to potential investors to demonstrate the legitimacy of the operation.  According to the lawsuit, Moss Adams failed to follow both internal and industry standards in conjunction with the audits of various Meridian funds.  Among these allegations is the claim that the audits performed by Moss Adams contained numerous violations of the Generally Accepted Auditing Standards ("GAAS").   By turning a blind eye to numerous "red flags" associated with Berg's scheme, the complaint alleges that Berg personally benefited by tens of millions of dollars, and also allowed Moss Adams to generate substantial fees for the firm and its partners.  

The trustee, Calvert, has estimated that, excluding any proceeds from the Moss Adams lawsuit, investors will recover approximately 10% of their losses.  

A copy of the lawsuit is here.

California Radio Host Indicted in $20 Million Ponzi Scheme

A California man who previously hosted a financial radio talk-show was indicted on charges that he masterminded a $20 million Ponzi scheme whose victims included his listeners.  John Farahi, 54, was charged in a 40-count indictment that included a wide array of offenses including wire fraud,mail fraud, loan fraud, alteration of documents, and witness tampering.  The charges carry a maximum of 717 years in federal prison.  Also indicted was Farahi's attorney, David Tamman, whose representation of Farahi's brokerage firm in a number of corporate transactional matters included the preparation of various offering documents.  Tamman, 44, once an attorney at prominent national law firm Greenberg Traurig, faces one count of conspiracy, three counts of obstruction of justice, five counts of alteration of records, and one count of being an accessory after the fact to the charged mail fraud and securities violations.  Both have also been the target of previous civil enforcement actions by the Securities and Exchange Commission ("SEC").

According to authorities, Farahi operated NewPoint Financial Services ("NewPoint") since at least 2003 and represented to investors that their funds would be used to invest in low-risk investments like certificates of deposit, corporate bonds backed by the Troubled Asset Relief Program ("TARP"), and deeds of trust backed by substantial amounts of borrower equity.  Many investors, like Farahi, were Iranian-American, and learned of NewPoint by word of Farahi's Los Angeles daily finance radio program hosted in Farsi.  Farahi also previously hosted a satellite radio finance show, and was a frequent public speaker on the topic of finance.  Potential investors who expressed interest were invited to make an appointment at NewPoint's office, where they were solicited to purchase debentures issued by NewPoint.  Only a portion of the investors received a private placement memorandum ("PPM") explaining the investment and its risks.

Additionally, while the PPM was only provided to select investors, it also included disclosures stating the high-risk nature of the investments.  In addition, with the alleged help of attorney Tamman, language was later added - after the offering had concluded - disclosing that roughly one-third of the money raised would be loaned to Farahi.  In total, more than $20 million was raised through the debenture offering. The vast majority of the funds were transferred to a brokerage account overseen by Farahi that engaged in risky options trading.  That account alone suffered more than $18 million in trading losses.  Other investor funds were used to construct a multi-million dollar residence for Farahi and to make interest and principal payments to existing investors in Ponzi-fashion.

In April 2009, the SEC initiated an investigation into NewPoint and its debenture offerings.  In an un-announced examination of NewPoint's office, the SEC discovered information that NewPoint might be engaged in offering fraud.  After learning of the SEC's investigation, Tamman then quickly sought to add disclosure language regarding the loans to Farahi in various PPM's that were provided to investors in the 2003 and 2008 offerings.

In connection with the SEC's investigation, formal document requests were issued to NewPoint and Tamman seeking various documents provided to NewPoint investors. After NewPoint retained separate counsel, Tamman then provided the altered versions of the PPMs including the disclosures that Farahi was taking significant loans out of investor funds.  These documents were produced to the SEC.  However, the SEC soon became suspicious after noting discrepancies in the metadata saved in those offering documents, and requested the native copies of the documents.  (Metadata is information saved by the word-processing program which can often be used to show revisions and other characteristics of the document.)  Shortly after, Tamman then instructed his firm's IT department to remove the metadata from the documents, and provided those altered documents to outside counsel for production to the SEC.  The unaltered documents were eventually provided to the SEC, who later initiated administrative proceedings against Tamman for improper professional conduct.

Radio and television shows are becoming more enticing to fraudsters as a conduit to solicit investments from listeners.  A Florida man pled guilty in July to running a $1 million Ponzi scheme after hosting a regular Sunday morning television program entitled "Talk About Mortgages and Real Estate." Additionally, two former radio hosts were indicted in July for operating a $3 million real-estate Ponzi scheme that solicited investors through weekend radio infomercial shows called "Academy of Real Estate," "Money Intelligence" and "The Ken & Katie Show".  And in 2009, authorities charged a Minnesota radio host with soliciting investors for a $190 million Ponzi scheme run by money manager Trevor Cook through the radio show, "Follow the Money," which was broadcast in more than 200 markets and on Christian shortwave radio.

A copy of the Complaint filed by the SEC is here.

San Francisco Attorney Pleads Guilty to $10 Million Ponzi Scheme

A Harvard-educated former lawyer pled guilty to operating a Ponzi scheme that took in more than $10 million from investors.  Robert Tunnell, Jr., 72, entered a guilty plea to one count of mail fraud and one count of wire fraud, each of which carries a maximum prison sentence of twenty years.  An indictment handed down in July charged Tunnell with seven counts of mail fraud, thirteen counts of wire fraud, and one count of money laundering.  As part of the plea agreement, prosecutors agreed to recommend a 57-month prison sentence.  

A Dartmouth and Harvard Law alumnus, Tunnell was an attorney in San Francisco from 1971 to 2001, when he resigned from the California state bar after being charged with stealing approximately $300,000 from his law firm and diverting the funds to his personal trading account.  Telling those closest around him - including his girlfriend - that he was a semi-retired international attorney who had successfully traded commodities including coffee and copper, Tunnell promised investors above-average returns while representing that his investment style was low-risk and conservative.  Many friends and relatives believed him, and a total of $10 million was given to Tunnell to invest.  However, Tunnell did not engage in low-risk trading, and instead lost nearly $7 million in risky commodities trading.  The remainder was paid to investors in the form of principal and interest payments, a classic hallmark of a Ponzi scheme.  

A sentencing hearing is currently scheduled for February 22, 2012.  The sentencing judge will also likely order Tunnell to pay restitution to his victims.