Court Dismisses SEC Bid to Force SIPC to Cover Stanford Victim Losses

A federal judge has denied an attempt by the Securities and Exchange Commission ("SEC") to force an industry-funded nonprofit to institute a claims process for the victims of R. Allen Stanford's $7 billion Ponzi scheme.  United States District Judge Robert Wilkins issued an order today finding that the SEC had failed to demonstrate that investors in Stanford's scheme were entitled to compensation from the Securities Investor Protection Corporation ("SIPC").  While expressing sympathy for the victims, Judge Wilkins found that the Securities Investor Protection Act of 1970 ("SIPA"), as enacted by Congress, did not encompass the purported certificates of deposit issued by non-SIPC member Stanford International Bank Ltd.

After initially deciding that Stanford victims were not entitled to SIPC protection, the SEC reversed course in June 2011 and concluded that a SIPA liquidation was required to compensate investors who had purchased certificates of deposit at the heart of Stanford's scheme.  Following unsuccessful attempts by Congress to put pressure on SIPC, the SEC filed suit against SIPC in December 2011, contending that a SIPA liquidation was warranted by virtue of the Stanford Group Company's ("SGC") membership in SIPC.  In response, SIPC countered that the fraudulent certificates of deposit sold to Stanford's victims originated not from SGC, but were instead issued by Stanford International Bank, an Antiguan entity that was not a SIPC member.  Thus, as the Court observed:
the key issue in dispute is whether the persons who purchased the SIBL CDs are “customers” of SGC within the meaning of SIPA, because if they are, then SIPC has refused to act for their protection and the Application should be granted. On the other hand, if they are not customers, then the Application must be denied.
In its analysis, the Court noted that the "critical aspect of the customer definition" hinged on whether an investor entrusted cash with a broker-dealer who became insolvent.  To reach this conclusion, a SIPC member must have actually possessed an investor's funds or securities.  Applying these concepts to the facts presented, the Court found that "the SEC cannot show that SGC ever physically possessed the investors' funds at the time that the investors mad their purchases."  Notably, investor checks were made out to SIBL, not SGC, and were never deposited in an account belonging to SGC.  In narrowly construing the customer definition as set forth in SIPA, Judge Wilkins rejected the SEC's contention that the definition of a customer was not dependent solely on the identify of the entity receiving the initial deposit of funds.  Judge Wilkins also used former policy positions of the SEC against it, referencing remarks from former SEC director Richard G. Ketchum positing that "for purposes of...[SIPA], the introducing broker-dealer's customers are presumed to be customers of the carrying broker-dealer."

The decision is a huge blow for Stanford victims, who already face bleak prospects of any immediate meaningful recovery through the ongoing receivership process headed by court-appointed receiver Ralph Janvey.  A SIPA liquidation would not only cover the costs incurred by the receiver and his team (which were estimated at over $100 million), but would also provide insurance of up to $500,000 of each customer's net loss, including up to $250,000 in cash.  By way of example, SIPC paid out nearly $800 million towards the losses of victims of Bernard Madoff's Ponzi scheme, whose brokerage Bernard L. Madoff Investment Securities was a SIPC member.  SIPC has also covered fees and expenses totaling several hundred million dollars of the team appointed to liquidate Madoff's business and distribute assets to investors, headed by Irving Picard.  While Janvey recently received approval to institute a claims process for Stanford victims, he has indicated the first distribution will likely be minimal.

The SEC has sixty days to appeal the decision.  An SEC spokesman indicated that the agency is reviewing its options.  

A copy of the order is here.

A copy of the SEC's complaint is here.

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SEC Files Suit Against Peter Madoff

The Securities and Exchange Commission announced Friday that it filed civil charges against Peter Madoff for his role in the $65 billion Ponzi scheme perpetrated by his brother, Bernard Madoff.  The charges, which include fraud, making false statements to regulators, and falsifying books and records, stem from Madoff's failure to carry out his duties as chief compliance officer of Bernard L. Madoff Investment Securities.  The civil charges were announced alongside Madoff's agreement to plead guilty to criminal charges relating to the same conduct.  

According to the complaint, Peter Madoff was "responsible for catastrophic compliance failures" during his tenure as chief compliance officer.  These failures included intricate efforts to create the appearance of a rigorous compliance program, including constant revision of policies and procedural manuals.  Additionally, Madoff was also involved in making numerous material representations concerning his brother's registration as a registered investment advisor, among which included the gross understatement of the number of clients investing with BLMIS (he said there were 23 client accounts, when in reality there were over 4,000) and the amount of assets under management.  Finally, Peter acted at the direction of his brother in the final days of the scheme when it became apparent that there were insufficient funds to satisfy redemption requests and the two took measures to distribute hundreds of millions of dollars to family and friends.  For this, alleged the SEC, Peter Madoff was rewarded handsomely, receiving tens of millions of dollars in salary, bonuses, and doctored profitable trades.

The SEC is seeking injunctive relief, disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties.  

A copy of the SEC's complaint is here.

Two Plead Guilty in $8.9 Million Ponzi Scheme

Authorities announced that two men entered guilty pleas to charges they operated a Ponzi scheme that defrauded investors our of nearly $9 million.  Jason Snelling, 48, and Jerry Smith, 50, each pled guilty to one count of conspiracy to commit mail and wire fraud, one count of obstruction of justice, and one count of income tax evasion.  The conspiracy and obstruction charge each carry a maximum sentence of twenty years in prison, while the income tax evasion charge carries a five-year maximum sentence.  

Snelling and Smith operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they guaranteed high rates of returns to clients under the guise that the firms were successfully engaging in day-trading.  The two offered guaranteed rates of return ranging from ten to fifteen percent, with some investors receiving higher promised rates.  In an effort to convince investors of the safety of the operation, Snelling and Smith represented that their position would be liquidated to cash at the end of each trading day.  In total, the scheme raised nearly $9 million from seventy-two investors.  But instead of engaging in day-trading, Snelling and Smith spent the majority of investor funds to sustain an exorbitant lifestyle that consisted of boats, jet skis, plastic surgery, and private school tuition.  

Smith is scheduled to be sentenced on September 20, 2012, while Snelling will be sentenced October 2, 2012.  Snelling is currently serving a sentence after being convicted on state securities fraud charges.  

 

 

Las Vegas Businessman Accused of $75 Million Ponzi Scheme

Authorities arrested a high-rolling Las Vegas businessman last week on charges that he operated an "elaborate" Ponzi scheme that bilked investors out of at least $75 million.  Ramon DeSage, 61, a dual citizen of the United States and Lebanon, was the subject of a complaint filed by the Internal Revenue Service that leveled charges of wire fraud and accused DeSage of using investor funds to sustain a lavish lifestyle that included millions of dollars in gambling losses.  Wire fraud carries a maximum sentence of twenty years in prison, along with a fine up to $250,000.

According to the IRS complaint, DeSage used his company, Cadeau Express, to solicit funds from investors with the promise of high returns.  The company, whose website is still active, describes itself as a "unique company that caters to hotels and casinos who roll out the red carpet for selective guests and high-end gamblers."  The IRS alleges that DeSage and Cadeau Express defrauded at least four wealthy investors, using some of these funds to pay off over $20 million of gambling debts owed by DeSage.  While the full extent of the fraud is unknown due to the complaint being filed under seal, the IRS alleges that investors are currently owed over $75 million.  

At a detention hearing, prosecutors unsuccessfully argued for DeSage to be kept behind bars due to the flight risk posed by his dual-citizenship and significant assets in Lebanon, where he is referred to as a "sheik".  Additionally, DeSage was said to have spent nearly $4 million on private air travel since 2005.  United States Magistrate Judge Peggy Leen allowed DeSage to be released on his own recognizance, but ordered him to surrender his passports and submit to electronic monitoring.  

New Jersey Man Indicted For Operating $4 Million Ponzi Scheme

A New Jersey man was indicted by a federal grand jury Wednesday for masterminding an investment scheme that bilked investors out of $4 million.  George Seporo, 39, was charged with sixteen counts of wire fraud and a single charge of conspiracy to commit wire fraud.  The conspiracy charge carries a maximum five-year prison sentence, while each charge of wire fraud carries a maximum twenty-year prison sentence and $250,000 fine.  

According to authorities, Seporo operated several companies, including Pelt Capital and Caxton Capital Management ("CCM").  Potential investors were told that Seporo had secret access to a program that allowed him to trade foreign currency.  Through this program, Seporo advertised large annual returns and assured investors their principal was safe.  However, rather than invest in the "secret program", Seporo instead used investor funds for a variety of other purposes, including sustaining a lavish lifestyle that included high-end vehicles, luxury travel, and "five-figure bar tabs."  In addition, Seporo is alleged to have taken advantage of an elderly woman by commandeering her annuity account and directing to write him personal checks that ware used for his expenses. 

Investors who are skeptical as to the veracity of a foreign-currency trading operation are encouraged to contact the Commodity Futures Trading Commission, which regulates commodities and futures markets.