Two Texas Men Indicted for Role in $485 Million Oil and Gas Ponzi Scheme

Two Dallas men were indicted for their participation in a $485 million oil and gas Ponzi scheme.  Brendan Coughlin, 46, and Henry Harrison, 47, both of Dallas, were charged with one count of conspiracy and ten counts of mail fraud in connection with the collapse of Provident Royalties LLC ("Provident"), an alleged oil and gas Ponzi scheme that involved over $485 million and 7,700 investors throughout the United States.  Each count of mail fraud carries a maximum prison sentence of twenty years, while the conspiracy charge carries a five-year maximum sentence.

Beginning in September 2006, Provident sold preferred stock in a number of private placement offerings, promising annual returns of up to 18% from the acquisition and development of oil and gas exploration and development activities.  Each offering was limited to five hundred investors, and Provident also solicited retail broker-dealers to enter into placement agreements for each offering, who then sold the investments to retail investors.  Each offering featured representations that approximately 86% of funds raised would be used to purchase oil and gas investments, and that dividends would be paid from revenues generated by the sale of assets.  

However, investors were not told that proceeds from various offerings would be commingled together and used to pay dividends in other offerings.  Additionally, less than 50% of investor funds were used to invest in oil and gas assets, in contrast to representation that at least 86% would be used.  Investors were also not told that offering proceeds were used to make millions of dollars in unsecured loans to company founder Joseph Blimline, and that Blimline had previously been convicted of operating a different oil-and-gas Ponzi scheme in the early 2000s. Some of the offering proceeds were used to purchase the worthless assets of that previous Ponzi scheme. Blimline was sentenced to twenty years in federal prison in May 2012 for his role in the scheme. 

The fallout from the scheme had serious consequences for many broker-dealers who participated in the private placements and sold the investments to their retail customers.  Of the approximately 60 broker-dealers that participated, twenty-seven have since shuttered their doors due to the mounting liability from investor lawsuits. The Financial Industry Regulatory Authority ("FINRA") recently fined both Coughlin and Harrison $50,000 for their conduct and banned each from the securities industry for two years.  

California Woman Accused of $1 Million Ponzi Scheme

A San Fernando Valley woman was arrested on Wednesday and accused of operating a real estate Ponzi scheme that bilked investors out of over $1 million.  Celia Gallardo, 42, was arrested by FBI agents following her indictment on Tuesday on an assortment of federal charges including seven counts of mail fraud and nine counts of wire fraud.  Both mail fraud and wire fraud carry maximum terms of imprisonment of twenty years per charge along with criminal monetary fines up to $250,000.  At her arraignment Wednesday, she entered a plea of not guilty.

According to the indictment, Gallardo operated a real estate investment program from September 2007 to September 2008.  Potential investors were told that Gallardo would purchase condominiums located in other states that would yield extraordinary short-term returns of as much as 100% in thirty days.  Investors were issued promissory notes evidencing their investment and promised returns.  However, according to the FBI, Gallardo instead used investor funds to support a lavish lifestyle that included a house and travel abroad, as well as payments made to existing investors purporting to be interest and/or principal redemptions.  In total, dozens of investors entrusted more than $1 million to Gallardo. 

At her arraignment, Gallardo was released on $75,000 bond.  United States District Judge Dean D. Pregerson has scheduled a tentative trial date for September 4.

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.