Madoff Trustee Seeks to Make Second Distribution to Victims - But With a Billion Dollar Catch

The trustee appointed to recover assets for victims of Bernard Madoff's infamous Ponzi scheme has sought court approval for a second distribution of $2.4 billion that, if approved, will fully satisfy nearly 90% of outstanding approved claims.  The move was made possible after the trustee, Irving Picard, obtained two recent favorable outcomes freeing up billions of dollars in contested funds, as (1) the United States Supreme Court refused to hear arguments relating to the method used to calculate victim losses, and (2) a final non-appealable order was entered approving the $5 billion settlement with the estate of Jeffrey Picower.  If approved, the distribution stands to dwarf the approximately $300 million doled out to investors in the first distribution in September 2011, where the majority of funds available were held in reserve pending the outcome of various legal challenges.  However, while those challenges have been resolved, a new dispute has taken center stage concerning whether victims are entitled to a time-based upwards adjustment in the value of their claim.  While Picard proposes a second distribution of $2.4 billion, he states that a single unresolved objection to his distribution procedure will result in the reduction of the second distribution by nearly $1 billion.  

As of June 30, 2012, Picard and his team had received over 16,000 customer claims, with approximately 2,436 of those claims being "allowed" and having a total value of $7.47 billion.  In addition to the first distribution in September 2011 which represented a roughly 4% payout, Madoff victims with allowed claims have also received up to $500,000 each from the Securities Investor Protection Corporation ("SIPC"), which provides protection against the failure of registered broker-dealers.  Those payouts from SIPC have totaled over $800 million, which alone satisfied nearly 900 claims asserted by investors.  

While the net equity calculation and Picard settlement disputes were settled, over 1,000 investors have objected to Picard's decision not to adjust the value of losses based on the amount of time each investor's funds were invested with Madoff's brokerage ("Time-Based Damages").  The objectors assert several bases for this contention, including that they are entitled to prejudgment interest at a statutory rate of 9%.  Picard calls these arguments "specious at best", noting that there is no basis in the Securities Investor Protection Act ("SIPA") nor has any court construed SIPA to provide for Time-Based Damages.  According to Picard,

SIPA is designed to return customer property to customers, rather than compensate them for injuries caused by a broker’s fraud.  Claims for breach of contract or fraud are “not within the protection afforded by the Act,” but rather are general estate claims.

Additionally, Picard also takes exception to the statutory prejudgment interest rate of 9%, arguing that it has "no relation to normal interest rates in the commercial world."  He points to a recent opinion out of the Southern District of New York, Sriraman v. Patel, which observed that the 9% rate was "absurd" and "effectively creates a windfall for plaintiffs".  A 9% interest rate would also reward those who had long-term investments with Madoff at the expense of shorter-term investors, for the annual interest would allow those investors to recoup their original investment much quicker than the short-term investors.  

Were Picard not forced to maintain reserves while the Time-Based Damages issue was resolved, he states he would be able to distribute a pro rata distribution of 41.286% of each customer's allowed claim. Maintaining reserves for Time-Based Damages of 9% cuts that figure in half, with a proposed pro rata distribution of 20.563% while the dispute is pending.  In an effort to compromise, Picard contacted various objecting claimants, asking whether they would agree to maintain reserves representing Time-Based Damages of 3%, a figure slightly higher than the consumer price index.  Picard received several responses, some which agreed and some which objected.

Despite the objections received, Picard decided to move forward with maintaining reserves to account for Time-Based Damages of 3%, which would result in a distribution representing 33.541% of each customer's allowed claim with incorporated Time-Based Damages of 3%.  This would represent an average payment of $1.975 million for each of the 1,229 allowed claims.  However, mindful of the likely delays associated with an appeal of the distribution, Picard conditions this distribution on the absence of any unresolved objections to the motion.  Should any objections be made and remain unresolved, Picard planned to submit an order that would establish the amount of reserves for Time-Based Damages at (i) 9%, (ii) an amount agreed to by the parties, or (iii) a percentage directed by the court.

In the Motion, Picard also provides an update on the status of the $2.2 billion forfeited by Jeffrey Picower to the Department of Justice ("DOJ"), which was in addition to the $5 billion paid to the bankruptcy estate.  Picard was appointed by the DOJ to serve as special master in the distribution of those funds, which are likely to go to "many of the customers to whom the Trustee proposes to distribute pursuant to this Motion."  Thus, in addition to the over-$8 billion allocated to the Customer Fund for distribution to victims, an additional $2.2 billion would remain available for a future distribution.  

Any objections to the Motion are due by August 8, 2012.  A hearing has been scheduled for August 22, 2012 at 10:00 A.M.

A copy of the Distribution Motion is here. 

Fingerprint Match in Vegas DUI Stop Leads to Arrest of German Man Suspected of $100 Million Ponzi Scheme

A German man who had been a fugitive for the past five years following the accusation that he mastermnded a $100 million Ponzi scheme was arrested last week after a fingerprint match from a DUI stop in Las Vegas prompted the interest of American and German authorities.  Ulrich Felix Anton Engler, 51, was arrested by U.S. immigration authorities last week and is currently awaiting extradition to Germany to face multiple criminal charges.  A warrant was issued by a German court for Engler's arrest in February 2007, charging him with multiple criminal charges carrying a maximum prison sentence of twenty years.  

From June 2003 to December 2004, Engler owned and operated Private Commercial Office ("PCO").  Engler, through PCO, solicited investments from investors worldwide by promising significant investment returns through 'conservative' day trading of securities on the New York Stock Exchange.  Potential investors were told that Engler had developed powerful trading software that could analyze approximately 5,000 stock trades per second, which therefore enabled Engler to capture profits before other similarly situated traders.  Based on these representations, investors deposited over $150 million into bank accounts owned by Engler.  

Austrian securities regulators issued a notice to investors in November 2006 alerting them to the fact that Engler and PCO were not authorized to provide investment advice or manage client portfolios.  Wachovia, which serviced Engler's accounts, was notified of this notice, but failed to close Engler's accounts until January 2008.  By then, the account had been depleted to a balance of $53,000.  After Engler became a fugitive, a group of PCO creditors filed an involuntary petition for bankruptcy against Engler and PCO, and a trustee was appointed on April 30, 2008.  A suit was filed on behalf of investors against Wachovia (now known as Wells Fargo) on December 15, 2011, alleging numerous causes of action including aiding and abetting breach of fiduciary duties and unjust enrichment.   

Engler had been a fugitive for several years when he was arrested in February 2011 for suspicion of driving under the influence in Las Vegas, Nevada.  After Engler's fingerprints matched those supplied by German authorities, U.S. authorities began secretly investigating Engler, discovering that he was operating a similar fraudulent scheme in Las Vegas under the assumed name of Joseph Miller.  After his arrest last week, authorities executed a search warrant on a storage facility rented by Engler in southern Nevada, where they discovered a stash of more than 1,000 pieces of artwork.  Authorities are continuing to investigate Engler's activities in his time as a fugitive.

Upon learning of Engler's arrest, the court-appointed bankruptcy trustee, Robert Tardif, Jr., sought court approval to interview Engler at his place of incarceration before his deportation in a request known as a Rule 2004 examination.  That motion was granted today by United States District Judge Michael G. Williamson, who ordered that Tardif would be able to interview Engler prior to any deportation or extradition.  

A link to the website maintained by the bankruptcy trustee is here.

A copy of the class action lawsuit filed against Wells Fargo is here. 

SEC Sues Pennsylvania Man Who Facilitated $100 Million Ponzi Scheme

The United States Securities and Exchange Commission ("SEC") initiated a civil enforcement action against a Pennsylvania man for his role in funneling at least $30 million in investor funds into a $100 million foreign currency Ponzi scheme.  Emanuel L. Sarris, and his company, Sarris Financial Group, Inc. ("Sarris Financial") were charged with multiple violations of federal securities laws in their solicitation of investors for the Kenzie Fund, which defrauded investors worldwide out of over $100 million.  The SEC is seeking injunctive relief, disgorgement of ill-gotten proceeds, and civil monetary penalties.  

According to the SEC, Sarris provided estate planning and insurance sales to investors through Sarris Financial.  By soliciting existing Sarris Financial clients and holding numerous seminars and "free dinners", Sarris convinced over 70 individuals to invest over $30 million with the Kenzie Funds, making a variety of misrepresentations designed to lend an air of legitimacy to the investment.  For instance, Sarris told investors that he was independent of the Kenzie Funds and that his advice was unbiased and objective.  Additionally, Sarris represented that he had performed due diligence on the Kenzie Funds, and that he had personally seen the Funds' trading and banking records.

However, each of these representations was false.  In reality, Sarris received hundreds of thousands of dollars in salary as an employee of the Kenzie Funds, and also was paid approximately $1.5 million in incentive fees based on the amount of assets under management attributable to Sarris.  Sarris also never saw any foreign currency trading records or communicated with Kenzie's bankers.  Instead, Sarris ignored numerous red flags about the safety and legitimacy of the Kenzie Funds, including that some clients often received different returns for the same time period, and that the telephone number for the Funds' outside auditor had been disconnected since 2006.  Additionally, on at least two occasions, Sarris proposed to Kenzie executives that investor redemption requests be funded by using investor funds. Nevertheless, Sarris continued to solicit new investors for the Kenzie Funds.

The SEC obtained an emergency restraining order and asset freeze against the Kenzie Funds in June 2010.  Shortly thereafter, the operator of the Kenzie Funds was ordered to pay $44 million in disgorgement, along with a $150,000 civil penalty.

A copy of the complaint is here.

South Carolina Man Pleads Guilty to $90 Million Ponzi Scheme

A former city councilman agreed to plead guilty to charges that he operated a Ponzi scheme that bilked investors out of at least $60 million.  Ronnie Wilson, of Anderson County, South Carolina, pled guilty before U.S. District Judge J. Michelle Childs to two charges of mail fraud during a hearing Monday in a South Carolina federal court.  Wilson was arrested in April and charged with multiple counts of mail fraud, which carries a maximum prison sentence of twenty years per charge and up to a $250,000 fine.  A sentencing date has not yet been set.

According to authorities, Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") from at least 2001 through 2012, telling investors they could expect above-average returns through profits earned from the purchase and sale of silver futures contracts.  To convince investors of the scheme's legitimacy, Wilson represented that all silver purchased would be held in safe-keeping at a Delaware depository.  In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, Wilson failed to purchase a sufficient amount of silver to reflect the funds raised from investors.  Instead, a majority of investor funds were used for a variety of unauthorized purposes, including personal expenses of Wilson and his family and to make Ponzi-style payments representing fictitious interest to investors.  Authorities estimate that Wilson lost at least $60 million of the $90 million raised from investors.

In addition to the criminal action, Wilson and ABC are also the subject of an enforcement action filed by the U.S. Commodity Futures Trading Commission.   That proceeding, which is pending, seeks rrestitution to defrauded investors, disgorgement of ill-gotten gains, injunctive relief, and civil monetary penalties.  

Wilson remains free on $1 million bond.  The court-appointed receiver, Beattie B. Ashmore, indicated that he has met with Wilson several times during his investigation, but at this point, "would paint a very dim picture" in terms of recovery.

Indonesian Man Suspected of $630 Million Ponzi Scheme Involving Meat-Trading Company

While Ponzitracker usually reports on Ponzi schemes in the United States, a scheme recently uncovered int he Indo-Pacific region is drawing attention due to the severity of the alleged losses.  Indonesian authorities announced they had arrested a man they suspected of running a Ponzi scheme that had bilked its victims of $630 million since 2010.   Jaya Komara was arrested at a hotel in Purwakarta following a manhunt led by the special crimes unit of the Indonesian National Police.  Komara, who was arrested carrying a large amount of cash, is believed to have stashed most of his assets in Purwakarta and is currently being questioned there.

Komara owned Kooperasi Langit Biru, a meat-trading company that operated on a multi-level marketing program ("MLM").  MLM programs operate in a pyramid-like style, compensating sales agents not only for their personal sales but also for sales of other salespeople that they recruit.  Komara, who started out selling meat door-to-door in 2003, instituted a program in 2010 through a company, Transindo Jaya Komara, where investor funds could be used to purchase meat from producers and then sell to retailers.  In exchange, Komara offered exorbitant returns of 240% in just ten months.  The company continued to grow, and at point one had over 125,000 members.

However, the scheme imploded in June when Komara stopped paying dividends to investors and later disappeared.  As is the case with Ponzi schemes offering substantial rates of return, when the inflow of new investor funds cannot support the monthly "dividend" payments, the scheme unravels.  Authorities are still trying to account for the missing money.