Massachusetts Man Accused of $10.4 Million Ponzi Scheme

A Massachusetts man was accused of operating a Ponzi scheme that defrauded victims nationwide out of over $10 million.  John W. Cranney, of Belmont, Massachusetts, was accused of multiple violations of the Massachusetts Uniform Securities Act, including the failure to register his companies as broker-dealers with the State and the sale of unauthorized securities to investors.  In the complaint, the Massachusetts Securities Division is seeking a cease-and-desist order, disgorgement of ill-gotten proceeds, injunctive relief, and administrative fines.

According to authorities, Cranney used his affiliation as an independent distributor with Shaklee Corporation ("Shaklee") to lure in family, friends, and colleagues.  Shaklee is a multi-level marketing system of independent distributorships that sell health and personal nutrition products, and Cranney's family was credited for introducing Shaklee to the east coast.  Cranney has been with the company since 1967, and served as a "sponsor" for approximately 50,000 distributorships in a business model similar to Avon or Mary Kay Cosmetics.  

Through these connections, Cranney held himself out as a financial advisor and operated several companies including Cranney Capital I, LLC, Cranney Capital II, LLC, Cranney Capital III, LLC, Cranney Industries, and Cranney Capital I Employee Stock Ownership Plan. Beginning in mid-2002, Cranney solicited potential investors by offering short to medium-term investments with annual returns ranging from 10% to 12% annually through a legitimate investment vehicle as part of a qualified retirement plan.  These investemnts were memorialized in the form of promissory notes, and when the note matured, many investors opted to "roll-over" their investment into a new promissory note offering similar returns.  

Based on these representations, Cranney raised approximately $10.4 million from thirty-six investors nationwide, many elderly and at least one of Cranney's relatives. However, according to authorities, instead of making investments as promised, Cranney misappropriated investor funds to fund his Shaklee distributorships, pay personal expenses, and meet investor redemptions.  When the financial markets began experiencing difficult times in 2008, Cranney began to default on making payments of principal and/or interest to investors, and soon altogether ceased returning investor funds.  Several investors later filed suit against Cranney, obtaining attachments on his personal residence that was recently listed for sale at an asking price of $3.8 million.  

Cranney's lawyer acknowledged that his client was aware of the investigation and ihad been cooperating with authorities.  

A copy of the Complaint filed by the Massachusetts Securities Division is here. 

Wisconsin Man Pleads Guilty to $4 Million Ponzi Scheme

A Wisconsin man entered into a plea agreement with prosecutors admitting that he masterminded a Ponzi scheme that defrauded investors, including his brother, out of at least $3 million.  Eric Schmickle, 37, indicated that he planned to plead guilty to a single charge of wire fraud, which carries a maximum sentence of twenty years in federal prison along with a $250,000 fine.  However, Schmickle will likely serve much less than the maximum, with federal sentencing guidelines calling for a sentence in the range of 57 to 71 months in prison.  The plea agreement also calls for Schmickle to pay $2.9 million in restitution to his victims.

According to prosecutors, Schmickle promised to trade commodity futures contracts through his companies, Q Wealth Management and Aquinas.  Friends and family members gave him $300,000 to start in 2009, with the understanding that Schmickle would be entitled to 25% of any investment profits.  Schmickle claimed to achieve substantial gains, which attracted additional investors who contributed a total of approximately $4.2 million.  However, Schmickle admitted that any reported gains were untrue, and in reality, he racked up trading losses that exceeded $3 million when the scheme was uncovered earlier this year.  Investor funds were also used for a variety of Schmickle's personal expenses.  According to authorities, only a few thousand dollars remained when the scheme came to light. 

As part of his obligation to pay restitution, Schmickle agreed to turn over various bank accounts and title to his home in Bolivar, Missouri.  It is unknown whether the assets will satisfy the $2.9 million restitution order.  Schmickle's sentencing date is unknown.  

Accused Utah Ponzi Schemer Held in Contempt For Hiding Assets From Receiver

A Utah federal judge ordered a Utah man accused of operating a $200 million Ponzi scheme to be held in contempt for his failure to turn over assets to the court-appointed receiver.  Allen Jacobson, charged with his father Wendell in what Utah authorities say is one of the largest Ponzi schemes uncovered to date, is alleged to have withheld over $200,000 in tax refunds that should have been turned over to the receivership estate. United States District Judge Bruce Jenkins agreed, ordering the turnover and forfeit of those assets to the receivership estate and reserving the option to impose further sanctions.

In a May 2012 filing, the court-appointed receiver, John A. Beckstead, contended that Allan Jacobson had violated the court-imposed asset freeze when they received $208,393.33 in state and federal tax returns that were not disclosed to the receiver and instead "secretly deposited into undisclosed bank accounts" held by Jacobson's wife, Cami.  While Jacobson (but not his wife) was released from the asset freeze in March 2012, his wife was not.  In the filing, the SEC detailed a series of transactions taking place in late 2011 and early 2012 between bank accounts held by the Jacobsons and undisclosed to the receiver.  In these accounts, the receiver presented evidence that the Jacobsons deposited state and federal income tax refunds into the accounts, only to turn around and covert the funds to cashier's checks made out to Ms. Jacobson.  For example,

On January 26, 2012, C. Jacobson and A. Jacobson endorsed and deposited into the account two checks from the State of Utah.  Both are income tax refund checks.  The first check (Warrant Number T4621485) was dated January 20, 2012, and was for $51,037.34.  The second check (Warrant Number T4621486), was also dated January 20, 2012, and was for $112,493.40.  

...

The account records show that on January 27, 2012, C. Jacobson purchased five cashier’s checks from the Bank of American Fork using a total of $74,600 of the funds from the income tax refunds deposited the previous day.  The cashier’s checks were for $6,800, $9,200, $8,600, $20,000, and $30,000.  All were made payable to C. Jacobson who also withdrew $9,500 in cash from the account.  

None of these transactions were disclosed to the receiver.  The receiver also contended that the Jacobsons had failed to turn over a 2008 BMW 528xi as previously ordered by the court.  Finally, the receiver informed the court that he had learned of an impending sale of the Jacobsons' personal residence, held in the name of Ms. Jacobson, and that any net proceeds were properly payable to the receivership rather than the Jacobsons.

The restating of previously-filed tax returns is an often-overlooked source of funds in a receivership. Somewhat ironically, Ponzi scheme perpetrators rarely fail to timely file their income tax returns detailing their income from the scheme.  That large income is in turn often accompanied by a substantial tax liability to the IRS.  However, after the discovery of fraud, insiders of the scheme can usually amend previously-filed returns to seek overpayment of taxes for phantom trading profits and newly-discovered investment losses.  Investment losses can then be "carried back" over a period of several years through the filing of a Form 1045 with the IRS, sometimes resulting in refunds in the millions of dollars for larger schemes.

Follwing the discovery of the missing funds, Jacobson turned over $170,000 to the receiver and stated that the remaining $50,000 had been paid to a former attorney.  

A copy of the SEC's motion for contempt is here.

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.