Stanford Judge OK's Claims Process; Victims Have Until September 1 to File Proof of Claim

A federal judge has approved a request to establish a claims process for victims of R. Allen Stanford's $7 billion Ponzi scheme, paving the way for victims to recoup some of their losses since Stanford's scheme was uncovered in February 2009.  The court-appointed receiver, Ralph Janvey, had initially filed papers seeking to establish a claims process in late 2011. At that time, Janvey indicated that the Receivership currently had approximately $114.5 million in cash on hand, which would represent a fractional return to investors.  While the establishment of a claims process is a significant step towards returning money to investors, it could still be months or even years before a first distribution could be sent out.

With the ruling of United States District Judge David Godbey, victims must submit a completed Proof of Claim form by September 1, 2012.  The Receivership established a website, www.stanfordfinancialclaims.com, which contains instructions pertaining to the process and provides a downloadable Proof of Claim form here.  Victims who have already filed a claim in connection with the Antiguan liquidation proceeding must still file a Proof of Claim to preserve their right to any return of funds recovered by the U.S. Receivership.

A review of the Proof of Claim form suggests that the Receivership's financial records relating to the scheme may be incomplete or lacking.  For example, investors are asked to detail each deposit they made with Stanford, along with any withdrawal they made before the scheme was uncovered.  This information is required to calculate an investor's "net investment amount" that is in turn used to determine an investor's allowed claim. In other schemes where this information is available to the Receiver, investors have often been given the Receiver's determination of their "net investment amount" in the initial proof of claim form and then asked whether the investor is in agreement with that calculation.  If so, additional information is usually unneeded.  However, if an investor disagrees with the Receiver's calculation, documentation supporting the investor's figure is then requested.  

While the Receiver may simply be seeking verification of already-calculated figures, this could also suggest that records of investor contributions/withdrawals may be incomplete or lacking.  Moreover, investors are required to submit documentation supporting their claim calculation, or provide an explanation for its absence.  Inevitably, some investors may not have kept meticulous records of their investment activity, which could complicate the process to calculate the claim amount.  

Investors expecting to see a distribution check soon could be disappointed.  The time between the close of the claims process and the issuance of distribution checks could be lengthy, especially considering that Janvey and his team will be combing through large amounts of supporting documentation.  Additionally, many investors will be asked to address discrepancies or omissions in their initial proof of claim form, which can take time.  Once all claims are received, the Receiver must then make determinations whether to allow or deny each claim.  Following this, the Receiver must obtain court approval of his determinations, and an objection period is typical to allow investors with a denied claim an opportunity to contest that determination.  Finally, the Receiver will seek court approval to make a first distribution.  In short, a distribution in 2012 seems unlikely.  

The website established for investors to file a claim is here.  Investors may file their Proof of Claim electronically on the website, or submit their completed Proof of Claim form by mail, fax, or email.  

The Proof of Claim Form is available here.

Clerical Error Results in Overpaid Investors Being Asked to Return Excess Distributions

Some investors in the $194 million Ponzi scheme orchestrated by Trevor Cook recently learned that, as a result of a clerical error by the U.S. District Clerk's office in making interim distributions, they inadvertently received more than the allotted pro rata share that was due to each investor.  As a result, the Receiver and the U.S. Treasury are now demanding that overpaid investors return the excess funds.  The problem is, not all investors are complying.

R.J. Zayed, the receiver appointed to recover and marshal funds for victims of Cook's scheme, has been receiving assistance in preparing the interim distributions to investors from the District Court clerk's office by order of Chief U.S. District Judge Michael Davis.  Judge Davis reasoned that, by enlisting the assistance of the clerk's office, the Receiver would avoid the expense associated with the immense amount of work preparing distributions to the 723 investors determined to have suffered losses in Cook's scheme.  The process worked without issue for several distributions in 2010 and 2011.

The receiver recently settled with two financial firms, Western International Securities, Inc. ("Western") and NRP Financial, Inc. ("NRP Financial"), who he alleged provided substantial assistance to Cook and other individuals behind the $194 million scheme.  After reaching the settlements, which raised nearly $2 million for investors, Zayed petitioned the court for authority to distribute the funds to investors with allowed claims.  Following court approval, the clerk's office prepared and mailed distribution checks to investors.  However, an apparent administrative error resulted in 92 investors receiving underpayments and 91 getting overpayments.  To complicate matters, the U.S. Treasury Department, which issued the checks, will not cover the deficits owed to the underpaid investors until the excess payments have been returned.  While most overpaid investors have complied, some have resisted, leading the receiver to remark that, while he had limited power to correct the situation, 

the United States Treasury Department will collect the money back from them one way or another -- and that is not an outcome that will be good for anybody.

This marks the fourth distribution made by the receiver to Cook's defrauded investors.  The first three distributions resulted in pro rata distributions to investors of 1.58%, .71%, and .95%, respectively.  With the most recent settlement representing a distribution of .8% of an investor's allowed claim, the cumulative distribution to investors thus far still remains under 5% at 4.3%.

From 2005 to July 2009, Trevor Cook masterminded a Ponzi scheme that solicited investors by promising above-average returns through a foreign currency trading program known as Universal Brokerage Services ("UBS"). Through the efforts of Cook and several co-conspirators, approximately $194 million was contributed by investors.  Of this $194 million, roughly half was actually used for currency trading, while nearly $70 million was lost in higher-risk trading and $52 million was paid out to investors in fictitious interest payments.  Cook was sentenced to 25 years in federal prison in August 2010; the trial of three of his co-conspirators began in mid-April.

The Receivership website is located here.

The Receiver's history of distributions is here.

New York Woman Indicted in $4.7 Million Ponzi Scheme

Federal authorities indicted a Long Island woman for allegedly operating a Ponzi scheme that defrauded investors out of millions of dollars.  Laurie Schneider, 37, of Oceanside, New York, was charged with three counts of wire fraud.  Each count of wire fraud carries a maximum prison sentence of twenty years, along with criminal monetary penalties.  

According to the indictment, Schneider operated several businesses, including Janitorial Close-Out City Corporation.  ("Janitorial Close-Out").  Investors were told that Janitorial Close-Out invested in industrial equipment and machinery produced by Chinese companies.  In soliciting investments in Janitorial Close-Out, Schneider represented that the company was able to purchase and re-sell janitorial equipment and machinery at a profit margin of 15% to 60% over a short-time period.  It was these high profits margins, according to Schneider, that allowed her to pay annual interest payments to investors ranging up to 60%.  In total, authorities estimate that Schneider solicited investments in Janitorial Close-Out of over $4 million from over 25 individuals.  Additionally, Schneider also allegedly operated other related schemes that took in an additional $5 million.  

Rather than operate as a legitimate business, prosecutors allege that neither Schneider nor her companies had any connection with any Chinese company.  Rather, Janitorial Close-Out and other related companies operated by Schneider were nothing more than Ponzi schemes that pooled investor funds and used these funds as the source of purported interest payments to existing investors.  Schneider's lawyer maintains that the business was a legitimate business that simply failed.

Schneider has already been the target of at least one lawsuit by a defrauded investor who alleges losses of over $400,000.  Schneider failed to answer the lawsuit, and a default was entered in February 20120. A copy of the default is here.

Jury Convicts Florida Woman of $100 Million Ponzi Scheme

A Florida woman was convicted of running a Ponzi scheme that bilked investors out of $100 million.  Lydia Cladek, 67, was originally indicted in November 2010 and charged with four counts of wire fraud, nine counts of mail fraud, and one count of conspiracy to commit fraud.  Electing to proceed to trial rather than negotiate a plea agreement with prosecutors, Cladek's decision backfired as a federal jury convicted her of all fourteen of those counts.  While each count of mail fraud and wire fraud carries a maximum potential prison sentence of twenty years, a recommendation under federal sentencing guidelines will likely be lower.  However, in light of the substantial amount of money involved and length of the fraud, Cladek will likely face what will amount to a life sentence in prison.

Cladek was president and founder of Lydia Cladek Inc. ("LCI"), which purported to engage in the business of high interest motor vehicle retail installment contracts.  Situated in St. Augustine Beach, Florida, LCI would buy subprime automobile finance contracts from car dealers at discounted rates, and in return for funds from investors, promised a sizable portion of the interest collected as a return on investor principal.  These advertised returns often exceeded 15% to 20% annually.  Authorities allege that while the business started in 1998 as a legitimate business, declining business conditions forced Cladek to use investor funds to make interest payments to existing investors by 2003.  Such a practice is a common trademark of a Ponzi scheme.  In total, investors sunk over $100 million into Cladek's scheme.  Among the victims were several non-profits that Cladek supported, whose contributions were "clawed back" in order to pay back defrauded investors.

After her conviction, United States District Judge Timothy Corrigan granted the prosecution's request to revoke Ms. Cladek's bail, and announced that sentencing would occur within 90 days.  Cladek will also likely be ordered to pay restitution to her victims, although her financial status is likely precarious.

A copy of Cladek's indictment is here.

Miami's "Mini-Madoff" Pleads Guilty to $135 Million Ponzi Scheme; Victims Decry 'Sweetheart Deal' And Bleak Outlook For Recovery

A Cuban-American and former prominent businessman pled guilty Wednesday to operating a real estate Ponzi scheme that took in $135 million from hundreds of victims.  Gaston E. Cantens, 73, pled guilty as part of a plea agreement with prosecutors that allowed him to plead guilty to a single count of conspiracy, which carries a maximum prison sentence of five years.  Cantens was originally charged in a criminal information with one count of conspiracy to commit mail and wire fraud.  The use of a criminal information as a charging document was a sign that a plea agreement was likely in the works.  Many victims expressed outrage at the leniency of the sentence, which pales in comparison to recent sentences for Ponzi schemers who stole similar amounts.  Additionally, the bankruptcy of Cantens' business yielded a return to investors that amounted to pennies on the dollar, with little chance of future recoveries.  

Cantens operated Royal West Properties ("Royal West"), which held itself out as a successful real estate investing firm.  Beginning in 1993, Royal West sold sold real estate investments as a way to finance its real estate and mortgage business, promising returns to investors as high as 16%.  These investments were purportedly secured by mortgages on real estate projects operated by Royal West.  To gain the trust of potential investors, Canten and his wife Teresita appealed to fellow members of South Florida's Cuban exile community and insinuated that well-known members of the Cuban-American community had invested in Royal West.  Over sixteen years, Royal West raised more than $135 million from more than 400 investors.

However, in reality, Royal West was not the profitable company it held itself out to be.  Instead, Royal West began operating at a loss beginning in 2002, especially in light of a rising default among purchasers whom it had entered into purchase money mortgages with.  By 2006, the company was incurring monthly shortfalls of up to $600,000 per month.  In order to perpetuate the image of a successful company, Royal West began using funds from new investors to pay returns of principal and interest to existing investors, a classic hallmark of a Ponzi scheme.  Royal West continued to conceal its deteriorating financial position from new investors, and raised $63 million from August 2006 to January 2009 alone.  

The company began to encounter liquidity problems in 2008, and by February 2009 had informed investors that it was ceasing interest payments due to economic conditions.  A group of investors later forced the company into bankruptcy in May 2009.  The trustee appointed to oversee the bankruptcy discovered that the company had operated as a Ponzi scheme since 2002, and found that despite the $135 million raised from investors, very little remained for investors.  Indeed, only $4.3 million in assets was recovered during the trustee's investigation, but only $1.3 million found its way into investor's hands after attorneys' fees, distributions to the IRS, and property tax collectors.  This resulted in an approximate distribution of 3% - 4% per investor.  One of these investors, the Miami Heat basketball team, received a distribution of $2,700 on an investment of $88,800.  

Sentencing has been scheduled for April 4, 2012.  The Cantens were also charged by the Securities and Exchange Commission in March 2010 in a civil enforcement action that remains pending. 

A copy of the SEC Complaint is here.