Investment Advisor Sentenced to 5 Years in Prison for $2 Million Ponzi Scheme

A Florida man who operated a Ponzi scheme that defrauded investors out of $2 million was sentenced to serve five years in prison.  Arthur Strasnick, 64, received the sentence after pleading guilty to two counts of mail fraud and one count of identity theft last September.  United States District Judge Thomas McAvoy, sentencing Strasnick in a New York federal court, called Strasnick's actions "less than human" after hearing a victim describe how Strasnick's actions had driven her to nearly commit suicide.  In addition to the five-year sentence, Judge McAvoy also ordered Strasnick to serve three years of supervised release, as well as pay nearly $2 million in restitution to his victims.  

Strasnick owned and operated Backstreet Associates, based in Ormond Beach, Florida and Saratoga Springs, New York.  As President, he solicited potential investors with the lure of guaranteed annual returns ranging from 12% to 20%.  Investors were provided with fictitious account statements showing the "growth" of their account.  Additionally, Strasnick made periodic interest payments to investors to make it appear that the operation was legitimate.  However, as Strasnick admitted, he was operating a classic Ponzi scheme.  Rather than make legitimate investments, Strasnick used investor funds to make interest payments to existing investors and for the payment of personal expenses.

However, apparently operating a Ponzi scheme was not enough for Strasnick.  At the same time, he was also running a mortgage scam, conning some of the same victims of his Ponzi scheme into signing over their mortgage to him under the agreement he would make all principal and interest payments.  Instead, Strasnick obtained a mortgage under the victim's name and then transferred hundreds of thousands of dollars into his personal bank account. The mortgage scam defrauded investors of over $2 million.  

Texas Couple Begins 14-Year Prison Sentence for $4 Million Art Gallery Ponzi Scheme

A Texas couple reported to prison last week in the culmination of a lengthy and contentious legal battle that began over three years ago with their guilty plea to operating a $4 million Ponzi scheme using their family-owned art auctioneering business.   Jerry and Wyonne Hart, former owners of Hart Galleries, began serving their fourteen-year sentence after losing a bid to have the United States Supreme Court order a new trial after alleged improprieties in the sentencing process by District Judge Randy Roll.  The pair originally pled guilty in April 2009.

The Harts owned and operated Hart Galleries, which specialized in the sale of antiques and was once one of the most prestigious Houston art galleries.  The business had been operated successfully for decades but, according to prosecutors, began using new customer money to pay expenses when debts started to pile up. Customers who enlisted Hart Galleries to assist in the sale of their property soon found themselves unable to collect proceeds of the sale, with the Harts offering various excuses relating to collectibility and, in one case, denying that the item had sold even though the customer attended the auction where the item successfully sold.  After the Harts filed for bankruptcy, authorities opened an investigation and discovered that the couple had stolen more than $4 million from customers.

The Harts were charged with misapplication of fiduciary property, theft, and money laundering. When the Harts agreed to plead guilty to misapplication of fiduciary property, both sides agreed to leave the ultimate sentencing decision up to Judge Roll, with the Harts requesting a sentence of probation. Despite receiving more than 100 letters from Houston socialites and victims urging for leniency, Judge Roll labeled the pair "thieves" and sentenced them to serve fourteen years in prison.

Shortly after being sentenced, the Harts fired their trial lawyers and hired Robert Scardino and Ali Fazel (the same lawyers who served as trial counsel to R. Allan Stanford when he was recently sentenced to 110 years in federal prison for a $7 billion Ponzi scheme).  The couple then moved for a new trial, citing evidence that Judge Roll had obtained sentencing advice from a fellow Judge who opined that he would "start at 15 [years]".  After the motion for new trial was granted, the State of Texas appealed the decision to the Houston Court of Appeals, which reversed the trial court and reinstated the fourteen-year sentence.  A last-ditch effort to petition the United States Supreme Court for a writ of certiorari was unsuccessful.  

A copy of the Hart's brief to the U.S. Supreme Court is here.

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.