Stanford CFO Pleads Guilty to Obstruction of Justice

Just days after R. Allen Stanford received his 110-year prison sentence, the Department of Justice ("DOJ") announced that Stanford's former chief investment officer will plead guilty to charges that she obstructed the government's investigation of Stanford's scheme.  Laura Pendergest-Holt ("Holt"), 38, who was scheduled to stand trial in September, will now plead guilty to a single count of 18 U.S.C. 1505 relating to obstruction of the Securities and Exchange Commission's ("SEC") investigation of Stanford and his financial empire.  In exchange for her guilty plea, the DOJ has agreed to recommend a sentence of thirty-six months in prison, a three-year period of supervised release following her completion of the sentence, and a fine to be determined by the Court.

Holt was originally indicted along with Stanford and several other executives on June 19, 2009 and charged with twenty-one counts of mail fraud, conspiracy, and obstruction.  Along with her alleged role in the fraud, the indictment also highlighted efforts by Holt and others to impede an SEC investigation into Stanford International Bank, Ltd.'s ("SIBL") operation in January 2009.  After the SEC subpoenaed Stanford and another employee to provide testimony concerning Stanford's assets, a Stanford attorney convinced the SEC that Holt would be better off giving the requested testimony. Following weeks of meetings in which the executives discussed the testimony Holt would give, Holt gave testimony before the SEC in February 2009 that omitted her recent discussions with other executives about the fragile state of SIBL's finances and omitted or misrepresented other pertinent information.  

Of particular note is the DOJ's choice of a plea agreement pursuant to Rule 11(c)(1)(C) of the Federal Rules of Criminal Procedure.  Called a "(c)(1)(C)" plea in legal parlance, the agreement is notable in that it leaves little to the discretion of the sentencing judge.  In those situations, the proposed sentence is included in the plea agreement submitted to the court.  Thus, if a judge accepts the plea agreement, the judge is bound to sentence the defendant to agreed-upon sentence and has no ability to depart from the sentence in a downward or upward fashion as is permitted under other forms of plea agreements.  If a judge decides that one or more parts of the plea agreement are unacceptable, the defendant is then given the option to withdraw from the plea agreement. The agreements are often disfavored by judges, who feel that a (c)(1)(C) plea effectively ties their hands.  Judge Hittner will ultimately decide as to the sufficiency of the plea agreement.

A hearing is scheduled for 11:00 a.m. on June 21, 2012 before Judge David Hittner in which Holt is expected to enter her guilty plea.  A copy of the plea agreement will then be filed with the Court.

A copy of the indictment is here.

Alaska Woman Sentenced to Seven Years in Prison for $5 Million Ponzi Scheme

An Anchorage woman received a seven-year sentence for masterminding a Ponzi scheme that lasted over a decade and bilked investors out of over $5 million.  Samantha Delay-Wilson, 65, received the sentence from United States District Court Judge Russell Holland, who noted the "amazing length" of the scheme and the devastating effect on some of Delay-Wilson's investors in handing down the sentence.  The sentence comes after Delay-Wilson was convicted of various state court charges relating to the fraud and sentenced in April to five years in state prison.  The sentences will be served consecutively, rather than concurrently, which will prevent Delay-Wilson from receiving credit towards both sentences simultaneously.

Delay-Wilson pleaded guilty in February to using her two companies, Nona Oma Investments and Money Source`s Alaska, to solicit prospective investors by guaranteeing high rates of annual return exceeding ten percent through a variety of investments including a global investment fund, European sub-prime loans, and an investment banking service company.  During the scheme, which took place from 1996 to 2004, Delay-Wilson made false representations to investors concerning her experience and background, and provided fictitious documents concerning her purported investments.  Yet, instead of making these investments, Delay-Wilson instead commingled investor funds and used them for her personal expenses, to make Ponzi-style interest payments, and fund a lavish lifestyle that included the purchase of a $150,000 diamond ring for herself. 

Delay-Wilson will also be required to repay investors through an order of restitution to be determined at a later date.

Trial Begins for Indiana Man Accused of $200 Million Ponzi Scheme

The trial of an Indianapolis businessman accused of orchestrating a Ponzi scheme that bilked victims out of more than $200 million began last week in an Indiana federal court.  Tim Durham has been charged with twelve felony counts of securities fraud, wire fraud, and conspiracy to commit wire and securities fraud, and faces decades in prison if convicted of all counts.  The case is unique in that prosecutors are expected to use wiretaps as part of their case against Durham, utilizing a form of evidence that is common in drug cases but relatively rare in white-collar crime until its recent use in the high-profile insider-trading convictions of businessmen Raj Rajaratnam and Rajat Gupta.  The government's intent to use wiretaps against Durham marks the first time in recent memory that the evidence is being used in a Ponzi scheme case.

From at least 2005 through November 2009, Durham served as chief executive officer of Fair Finance Company ("Fair Finance"), along with James F. Cochran ("Cochran") as Chairman and Rick D. Snow ("Snow") as chief financial officer.  Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a successful finance company that purchased finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%.  Fair Finance would then profit off the difference between the purchase price and the money collected from the arrangement.  Purporting to continue the historically profitable business, Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5000 investors.  

According to authorities, instead of continuing Fair Finance's business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them.  By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments.  Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles.  These living expenses included more than 40 classic and exotic cars worth `over $7 million, a $3 million private jet, and a $6 million yacht in Miami. 

By October 2009, Fair Finance was on the brink of collapse, having taken in $230 million from investors while extending approximately $200 million in loans to Durham's companies and to the principals.  Fair Finance investors were informed of a sixty-day wait on any redemptions, and investors were urged to instead re-invest their principal to conserve cash.  After the Ohio Division of Securities failed to renew the company's registration over questions about outstanding loans, Fair Finance was forced into involuntary bankruptcy and the company was raided by the FBI.  Durham, Cochran and Snow were indicted in March 2011.

Durham maintains that while he made some bad business decisions, those actions did not constitute fraud. Rather, Durham's attorney alleges that the government had not shown any evidence of actual fraud.  However, the wiretaps, recorded in November 2009, demonstrate the men discussing the next steps when Fair Finance would no longer be able to cover distributions.

The men were also charged in a parallel SEC enforcement action in March 2011.

A copy of the SEC Complaint is here.

Allen Stanford Sentenced to 110 Years in Prison for $7 Billion Ponzi Scheme

A federal judge handed down a 110-year sentence to R. Allen Stanford for bilking thousands of investors in a $7 billion Ponzi scheme that spanned the globe.  United States District Judge David Hittner delivered the sentence after hearing from prosecutors, defense attorneys, two victims and Stanford himself.  Prosecutors had argued for a sentence of 230 years, the maximum allowed, while Stanford's attorneys had urged Judge Hittner to sentence Stanford to a maximum of 44 months - essentially a sentence for time served.  

Stanford gave a 40-minute statement to Judge Hittner before the court, claiming he was a scapegoat and regusing to take responsibility for his actions.  He blamed the federal government and the SEC-initiated receivership for the demise of his business, continuing to maintain that his financial enterprise was a legitimate business, and arguing that he did not run a Ponzi scheme.  Said Stanford, “I did not run a Ponzi scheme. I didn’t defraud anybody.”  

Prosecutor William Stellmach seized on this lack of remorse, calling him arrogant and remorseless and pointing to the massive losses sustained by the victims of Stanford's scheme that numbered in the thousands.  Two victims also spoke, explaining the financial devastation wrought by Stanford's actions.  

In handing down the sentence, Judge Hittner both ensured that Stanford will spend the rest of his life in prison (assuming that any appeals are unsuccessful) and made sure that Stanford's sentence, like his crime, would pale in comparison only to Bernard Madoff's scheme.   The sentence places Stanford between Madoff, who was  sentenced to 150 years in prison in June 2009, and Thomas Petters, who was sentenced to 50 years in prison for his $3.65 billion Ponzi scheme.  Additionally, in a largely symbolic move, Judge Hittner approved prosecutors' request for a $5.9 billion restitution order, which is highly unlikely to ever be satisfied considering Stanford's indigent status.

Three other Stanford executives are scheduled to stand trial later this year, and a former Antiguan regulator is currently awaiting extradition to face charges after being indicted.   

Self-Described "Financial Pyramid" Collapses in Russia; Police Open Criminal Investigation

“It’s necessary to face the truth – it’s impossible to run the MMM-2011 anymore…There is naturally not enough money for everybody in the pyramid so the MMM-2012 [Mavrodi’s new ponzi scheme] will help…We will take some money from it,” 

-Sergei Mavrodi

Russian police have opened a criminal investigation into potential fraud surrounding the unraveling of a company whose founder, Sergei Mavrodi, readily admits he is operating a pyramid scheme.  MMM-2011, which was started by Mavrodi in 2011, is estimated to have upwards of thirty-five million participants who invested in the scheme despite Mavrodi's warnings that the company is a Ponzi scheme, and that the depositors run the risk of losing their money at any moment.  After word spread about the police investigation and scrutiny intensified on the legitimacy of MMM-2011, Mavrodi recently disclosed that there was not enough money left in the pyramid to make each investor whole, and announced the creation of a new scheme, MMM-2012.  

Mavrodi is well-known in Russia, having previously served several years in jail for operating a pyramid scheme called "MMM" in the early 1990s.  That scheme, which had between two to five million investors including high-profile celebrities, solicited investors through an aggressive TV and radio campaign and promised returns of up to one thousand percent.  Because the company was not traded on any stock exchange, the company itself determined its share price and reported it to the public through newspapers.   When the scheme collapsed in 1994, cumulative investor losses totaled approximately $1.5 billion, and over 50 investors committed suicide.  After Mavrodi briefly dabbled in politics - entitling him to immunity - he disappeared, and was then found and arrested in 2003.  In April 2007, he was convicted of fraud and sentenced to four years in prison.  Having been in custody since 2003, he was soon released after receiving credit for time served.

MMM-2011 was launched in January 2011.  Apparently taking several pointers from the failure of the original MMM scheme, MMM-2011 sold investors virtual currency units called "Mavros" that claimed to increase exponential in value over various currencies.  Investors could buy Mavros with different growth rates for varying time periods, realizing profits when the Mavros were sold back to the system at their present value.  According to the projects website, 

You just have to get registered (and get your bonus $20 as a registration gift), join the System, 'buy' your MAVRO money, and keep on lying on your couch and watching how rapidly your capital grows in value, with up to 20 or 30% of gain a month. (Note that your deposit grows even faster, up to 75% each month.

The operation makes it clear to potential investors that they are participating at their own risk, explaining that "There are no rules. The only rule is that there are no rules at all!"  Following its creation, many questioned the legitimacy of the scheme, with the Federal Antimonopoly Service issuing an opinion in February 2011 that MMM-2011 had many attributes of fraud and was a pyramid scheme, as it would never bring about the advertised profitability.  

Despite its advertised fraudulent nature, MMM-2011 gained popularity and was estimated to have millions of investors.  However, its downward spiral began in late May, when experts from Russia's Higher School of Economics ("RHSE") speculated that the scheme could soon file for bankruptcy.  Following the report, Mavrodi seemingly confirmed the dire condition of MMM-2011, releasing a video message to inform investors he had commenced a "Phoenix" operation to save the pyramid, and immediately reducing the yield on deposits from 40% to 10% monthly.  Additionally, all unprofitable units were closed.  Experts from RHSE surmised from Mavrodi's actions that the scheme could implode soon, and estimated that the scheme could implode as soon as June 2012.

Following the RHSE report, authorities opened an investigation into a "group of unidentified persons".  However, Mavordi's lawyer was quick to point out that Mavordi was neither the founder nor operator of MMM-2011, instead clarifying that Mavrodi was an "advisor" who gave recommendations to clients.  In response, Mavrodi announced that he was started MMM-2012.

With Mavrodi's Saturday announcement that not enough money remained to pay all participants, the pyramid has essentially imploded.  The lifeblood of a Ponzi scheme comes from the constant inflow of funds to ensure that enough money exists to make the continuing interest payments to existing investors.  With the intensified scrutiny surrounding MMM-2011, it is likely that many investors made requests for principal redemptions, likely depleting all funds.  Taking a cue from recently convicted financier Allen Stanford, Mavrodi lashed out at Russian authorities for commencing a criminal case against him, saying it had contributed to the downfall of his business.

If anything can be taken from today's announcement, it is that the pain is only beginning for MMM-2011 investors.  At least one investor has committed suicide, and as more information is obtained about the sheer magnitude of the scheme and amount of money lost, that figure is likely to change.

In a review of Mavrodi's website touting the new MMM-2012 scheme, he explains in the "Rules" section that:

WARNING!

WARNING!

This is a pyramid scheme!

This is a pyramid scheme!

This is a pyramid scheme!

Judging from recent history, it appears that the disclaimers will be only symbolic.

A link to Mavrodi's webpage touting MMM-2012 is here. (Note - webpage is in Russian)