California Man Gets 14 Years for $16 Million Ponzi Scheme

A Southern California man was sentenced to fourteen years in prison for his role in a Ponzi scheme that bilked investors out of $16 million.  David Lincoln Johnson, 73, received the sentence after electing to stand trial after being indicted on multiple charges of mail fraud.  Following a six-day jury trial, Johnson was convicted of fourteen counts of mail fraud.  Johnson is the last of three defendants to be sentenced for the scheme, with co-defendants Christiano Kawika Hashimoto, and Catherine Lipscomb, previously pleading guilty to mail fraud and receiving sentences of 10 years and two years, respectively.  The three were arrested and charged in an 85-count indictment that was unsealed in June 2009.

According to the indictment, Hashimoto and Lipscomb were officers of Financial Solutions, a California company that purported to raise money that would be used to invest in other companies.  Johnson owned and operated Gentech Fabrication, Inc. ("Gentech"), which was a custom manufacturer of metal products for the United States government, among other entities.  Both Gentech and Financial Solutions maintained bank accounts at Bank of America.  Beginning in early 2004, Hashimoto began soliciting investments in his company, telling prospective investors that one of the companies he planned to invest in was Gentech, which he represented was involved in the construction of equipment for the U.S. government and which purportedly backed Hashimoto's investment contracts.  Unknown to investors was that the majority of Gentech's work derived from its assumption of work for another company with U.S. government contracts.

To convince potential investors of the legitimacy of the operation, Hashimoto arranged with Johnson to provide tours of Gentech's facilities, including representations that the government contract guaranteed their investments.  Once investors were sold on the viability of the operation, Hashimoto then recruited those investors as sales agents, promising them commissions on new investors they recruited equal to a percentage of those new investments.  Potential investors were told that they could expect a fixed rate of interest ranging from 5% to 20%, payable on a monthly basis.  Promissory notes supplied to investors also indicated that their investment was backed by a $100 million government bond. 

In May 2004, the U.S. government cancelled its contract for the work Gentech was purporting to perform. However, existing investors were not informed of this event, and Hashimoto and Johnson continued to solicit new investors on the basis of the contract.  In total, nearly $24 million of deposits were made into Financial Solutions' Bank of America account from mid-2003 until November 2004.  However, less than 5% of those funds was ultimately directed to Gentech.  Instead, nearly $2 million was transferred to Hashimoto for personal use, and approximately $14 million was used to make Ponzi-style payments of interest and principal redemptions to investors.  

In addition to the prison sentence, Johnson was also ordered to pay $17.3 million in restitution to victims of the scheme.  

A copy of the indictment is here.

Montana Man Accused of $5 Million Ponzi Scheme

A Montana man who became a fugitive after being charged with operating a $5 million Ponzi scheme has been located and arrested in Kansas.  Richard F. Reynolds, also known as Richard F. Adkins, taken into custody last week in Overland Park, Kan. after being on the run since February 2012.  Reynolds had been charged with twenty felonies in Gallatin County District Court after a former employee alerted authorities due to concerns over the legitimacy of his operation.  After announcing the charges against Reynolds, Montana authorities issued a $10 million arrest warrant that was thought to be the largest ever issued in Montana.  The charges carry a maximum combined sentence of two hundred years in state prison.

According to authorities, Reynolds and his wife, Lori, operated and managed eight corporations from 2008 to 2011 under the several companies, including United Consultant Investment Corporation ("UCIC"), Buffalo Exchange, and Buffalo Extension.  The two solicited investors for a purported foreign currency trading platform through Buffalo Extension and Buffalo Exchange, and in a gold investment opportunity through Buffalo Investment.  Importantly, none of these investments were approved or registered with any state securities department or the Securities and Exchange Commission ("SEC").  Investors were provided with marketing materials and promised quarterly returns of 100 percent.  In one instance, Reynolds communicated with a promoter for a mining entity who provided him with offering documents after Reynolds offered to help raise money for the operation.  However, even after the promoter discovered that Reynolds had securities problems with Missouri and Montana authorities and ceased communication with Reynolds, it was later discovered that Reynolds still solicited several individuals to invest in the mining operation.  

Additionally, Reynolds also used his close relationship with area pastors to identify and solicit investors.  At least eight pastors introduced investors to Reynolds, and in return became employees of Reynolds and received 10% of all investor funds directed to Reynolds' operations  While the pastors thought that Reynolds was truly investing in the foreign currency and gold opportunities being promoted, they later became suspicious when Reynolds failed to meet investor principal redemptions and made promises he could not keep.  In total, Reynolds and his umbrella of entities raised approximately $5.4 million from over 140 investors in 21 states and six countries.

After the Montana Committee of Securities and Insurance was contacted by several former employees who had become suspicious of Reynolds, an investigation revealed that Reynolds and his wife did not make the gold and foreign currency investments they purported to make.  Instead, the two maintained thirty-one separate bank accounts at Bank of America and Wells Fargo, where they used at least $4.4 million of the $5.4 million they raised to live a lavish lifestyle and make Ponzi-style interest payments and principal redemptions.  Additionally, through investigative subpoenas served to E*Trade, the CSI learned that of a total of $725,000 of investor funds transferred in, approximately $314,015 was lost in speculative penny stock trading.  The CSI also learned that the Reynolds were a 49% owner in a pre-production movie being produced about an Indian heroine.  

As Reynolds was arrested in Kansas, Montana authorities will now seek to have Reynolds extradited back to Montana.  Under federal extradition laws, Reynolds must be delivered to an agent of Montana authorities within thirty days of his arrest or he may be discharged.  

A copy of the arrest affidavit filed is here.

A copy of the criminal Information is here.

3 Plead Guilty in $41 Million ATM Ponzi Scheme

A South Carolina man and two California residents entered into a plea agreement admitting to federal charges that they operated a Ponzi scheme that fleeced hundreds of victims out of $27 million.  Alan Flesher, Wayne Flesher, and Nancy Carol Khalial each pled guilty to seventeen criminal counts stemming from an August 2010 indictment.  Each now faces a statutory maximum sentence of up to 340 years in federal prison.

According to authorities, the trio owned and operated Unlimited Cash, Inc. ("Unlimited Cash") and Douglas Network Enterprises, Inc. ("DNE"), both located in Ventura County, California.  Through these companies, the three solicited potential investors by offering above-average returns through the sales of "money voucher machines" (an ATM variation) and "ad toppers" - computer monitors displaying video advertisements.  The money voucher machine would issue vouchers that could then be used exclusively at a single merchant.  A retail customer using the machine would be charged a $1.50 service fee per transaction.  Investors were invited to purchase the money voucher machine at a cost of $4,000, and given the choice whether to personally handle the complicated process required to setup the machine or to hire a service provider, such as DNE, to handle the process on their behalf.  

Investors were told that if their money voucher machine generated an average of 89 transactions per month, they could expect a payment of $53.40 per unit per month.  On an annual basis, this translated to a return of approximately 16%.  Potential investors in the "ad topper" were also offered a similar method of investment.  Through the generation of transaction fees and advertising revenue generated by clients such as Coca-Cola, Gold's Gym and Paramount Pictures, investors could expect to a constant stream of returns. Over a period of four years, over $41 million was raised from approximately 700 investors.

However, very few of the solicited sales of money voucher machines or ad toppers were placed as promised, nor were the investments registered with any state or federal regulators.  Instead, the trio used investor funds for personal expenses and to make Ponzi-style payments to investors to create the appearance of a successful operation. Additionally, investor funds were used to pay commission payments to a series of brokers solicited new investors.  

 A sentencing date has not yet been set.  

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.

Previous Ponzitracker coverage:

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.