Two New Jersey Men Admit to $3.5 Million Ponzi Scheme; 'Secret Computer Trading Program' Was Fake

Two New Jersey men pled guilty to charges that they masterminded a Ponzi scheme that duped investors out of nearly $4 million.  Carmelo Provenzano, 29, and Daniel Dragan, 41, both entered into plea agreements with prosecutors in which they pled guilty to a single charge of wire fraud conspiracy.  Both men face a maximum prison sentence of twenty years, along with a fine of up to $250,000 or twice the gain or loss from the offense.  

According to authorities, the scheme began in 2009, when Provenzano, Dragan, and another man, George Sepero, represented to investors that they owned several hedge funds in New Jersey known as Caxton Capital Management and CCP Pro Consulting Inc (the "Hedge Funds").  Potential investors were told that the Hedge Funds could achieve extraordinary gains through the use of a proprietary computer algorithm to trade foreign currencies.  Over the past two years, the trio boasted that the trading program had yielded returns of over 170%.  Relying on these representations, investors contributed more than $3.5 million to the Hedge Funds.

However, there was no secret computer algorithm and little, if any, funds were actually invested.  Instead, the three operated a classic Ponzi scheme, mailing investors fictitious account statements showing profits and using inflows of investor funds to make payments of interest and principal to existing investors.  Investors also received "screen-shots" showing their funds being traded in foreign currency markets; in reality, the images were from a fictional account.  Additionally, the two lived lavish lifestyles traveling across the globe and racking up monthly credit card bills that regularly exceeded $25,000.  On two separate nights at a Las Vegas nightclub, the pair spent over $10,000, including a $4,000 tip.  Provenzano also purchased a luxury Range Rover sport.  

Sepero is currently awaiting trial after being indicted on seventeen counts of wire fraud.  Provenzano is scheduled to be sentenced on November 16, while Dragan will be sentenced on November 20.

A copy of the indictment filed against Sepero is here.

Kansas Lawyer Receives Three-Year Prison Sentence for Assisting Priest in $52 Million Ponzi Scheme

A Kansas lawyer has been sentenced to three years in federal prison for his role in a $52 million Ponzi scheme that bilked investors out of millions of dollars.  James Scott Brown, of Leawood, Kansas, received the sentence after previously pleading guilty in September to charges of conspiracy to commit mail and wire fraud.  Brown was originally indicted in April 2011.  

Brown practiced law in England for several years before associating with the British Lending Program ("BLP"), a program organized by Martin Sigillito, an ordained bishop and attorney.  BLP purported to operate as a loan program in which the proceeds were used to purchase land in England.  Potential investors were solicited through family and friends, as well as Sigillito's church, and received marketing materials that contained a variety of misrepresentations.  Investors were told that, in exchange for a 1-year "loan" made to BLP, they would receive an annual return ranging from 17.5% to 25%.  In addition, Sigillito and Brown assured investors that there was little to no risk involved, as BLP had sufficient assets to cover its operations, and in the event of a default, English laws contained a quick and efficient process to reclaim the land that would have an investor's original principal investment returned within 60 to 90 days. At the end of the loan period, investors were urged to roll-over their investment into a new loan.  In total, BLP raised more than $52 million from approximately 140 investors over the ten-year period from 2000 to 2010.

Rather than purchase land in England, authorities allege that BLP paid extravagant management fees to its principals and used new investor funds to make purported interest payments to existing investors.  For instance, Brown collected nearly $1.5 million in management fees, while Sigillito pocketed approximately $6 million. Sigillitolived a lavish lifestyle, collecting expensive antiques, including a $120,000 German book from the 15th century, Persian rugs, and British jewelry.  He was regularly shuffled around in a black Lincoln town car by his chauffeur, Virgil.  

As the real estate market collapsed in tandem with financial markets during 2008 and 2009, many concerned investors began to demand the return of their investment.  Many of these requests were rebuffed by Sigillito, who blamed the delays on the "world of international funding/transfers."  The Federal Bureau of Investigation ("FBI") became involved in May 2010 after being contacted by an investor, eventually convincing Sigillito'ssecretary to wear a wire.  The secretary (who later pled guilty to tax fraud for stealing money from Sigillito) provided the FBI with evidence of Sigillito's fraud and in April 2011, Sigillito, along with Brown and another co-defendant, was charged with twenty-two counts of fraud.  A federal jury later found Sigillito guilty of twenty counts.  

In addition to his sentence, Brown was also ordered by United States District Court Judge Linda R. Reade to pay $34 million in restitution to defrauded investors.  Sigillito is awaiting sentencing after his request for a new trial was denied. 

86-Year Old Former Church Usher Pleads Guilty To $3.5 Million Ponzi Scheme

An 86-Year old Georgia man pled guilty to charges he defrauded members of his church and gym out of more than $3 million in a Ponzi scheme.  Joseph Klos, 86, pled guilty to ten counts of securities fraud and agreed with prosecutors to serve one year in jail an pay $2.3 million in restitution to his victims.  Klos, who at 86 is believed to be the oldest individual since at least 2002 implicated in a Ponzi scheme, had originally faced up to 55 years in prison after being charged in April 2011 with twenty-eight counts of securities fraud.  According to the terms of his agreement with prosecutors, the one-year sentence is contingent on Klos fully satisfying the restitution order by the scheduled sentencing date of December 28.  Should he fail to fully repay his victims by then, the sentence changes to a sixty-eight month sentence.  

Klos was charged with using his companies, Stephen Klos & Associates, Genesis and Genesis II, along with his position as head usher at the Mercer Island Covenant Church to solicit investors, targeting elderly congregants,  Investors were told that their money would be used to invest in the stock market and could expect to receive annual returns of fifteen percent.  According to prosecutors, Klos told investors that the Bible did not advocate charging interest, and thus he chose to invest victim's money "out of the goodness of his heart."  In total, Klos raised approximately $3.5 million from his victims between 2004 and 2009.  Of that amount, Klos pocketed nearly $1 million, while over $2 million was returned to investors in the form of fictitious interest payments.  

Not surprisingly, this was the second time Klos had been accused of operating a Ponzi scheme.  Indeed, he had been barred from future association with securities institutions after being implicated in another Ponzi scheme in the early 1990's that raised more than $3 million from investors.  While the case was settled without an admission of guilty and Klos never faced criminal charges, he was ordered to repay nearly $400,000 in penalties.  

Sentencing is currently scheduled for December 28, 2012.  

Madoff Trustee Seeks to Block New York's $410 Million Settlement With Madoff Investor

The court-appointed trustee overseeing the liquidation of Bernard Madoff's former brokerage firm has filed a lawsuit seeking to block a recently announced $410 million settlement between the New York Attorney General's Office and hedge fund manager J. Ezra Merkin.  The trustee, Irving Picard, claims that the settlement encroaches on his exclusive authority to recover assets for the benefit of Madoff's victims, many of whom stand to receive nothing from the complaint.   Instead, only select investors in Merkin's hedge funds will be entitled to share in the proceeds, which will be doled out through the establishment of a separate complex distribution process.  According to Picard, the settlement will leave little, if any, remaining funds to satisfy Picard's pending claims against Merkin and his hedge funds that total $500 million.  

The suit names the parties to the settlement as defendants, which include the New York Attorney General, Eric T. Schneiderman, as well as Merkin, his four hedge funds, and the court-appointed receivers for two of those hedge funds.  Reached in late June, the settlement pending litigation instituted by the New York Attorney General's ("NYAG") Office and the court-appointed receiver for two of Merkin's funds (the "Settlement").  Both sought damages from Merkin and his funds, seeking hundreds of millions of dollars in fees "earned" by Merkin for investing customer funds when, in reality, nearly all of those funds were turned over to Madoff.  Merkin, according to the lawsuits, failed to adequately investigate Madoff's operation or oversee the investment of customer funds with Madoff.  Consequently, when Madoff's scheme collapsed in December 2008, Merkin's investors lost hundreds of millions of dollars, even though many had no idea that they were indirectly investing with Madoff.  

The Settlement would compensate investors in Merkin's funds depending on a determination as to whether they were aware that Merkin was investing their funds with Madoff.  Those investors who were unaware of this delegation would be eligible to receive over 40% of their cash losses, while investors who were aware of Madoff's role would be entitled to a smaller recovery.  

Picard makes his frustration evident, claiming that the Settlement is "nothing less than an out and out assault on this Court's jurisdiction over the BLMIS estate and the equitable distribution scheme put into place by this Court and affirmed by the Second Circuit."  No doubt aware of the ramifications of the settlement, the NYAG resisted efforts by Picard's office to obtain a copy of the settlement agreement despite lengthy negotiations that included a proposed confidentiality agreement, eventually deeming the request as "premature."  

The focal point of Picard's argument appeals to the Bankruptcy Court's exclusive jurisdiction under the Bankruptcy Code to institute actions and recover assets for the benefit of Madoff's victims.  Allowing the Settlement would not only undermine the Court's jurisdiction, argues Picard, but would also circumvent the claims process overseen by Picard.  This exclusive jurisdiction includes an automatic stay provision under 11 U.S.C. 362(a), which prevents third-parties from interfering with the trustee's exclusive right to seek recovery of fraudulently transferred property of the bankruptcy debtor. 

Under the Bankruptcy Code, a trustee is permitted to institute "avoidance actions" to recover transfers made by the debtor to outside parties within time periods statutorily imposed by state and federal law.  The Bankruptcy Code permits the recovery of these "fraudulent transfers", as they are known, made within two years of the bankruptcy petition date, while New York State law allows recovery for transfers made within six years of the petition date.  Because most, if not all, of the funds held by the Hedge Funds consist of fraudulent transfers from Madoff, Picard argues that the funds rightfully belong to the bankruptcy estate.  According to Picard, "The recovery of these amounts by the NYAG would significantly reduce the Merkin Defendants’ assets, and possibly exhaust available liquid assets, rendering any victory by the Trustee in his litigation pyrrhic." 

Picard is seeking a declaration that the Settlement violates the automatic stay provision, as well as injunctive relief prohibiting the payment of funds to satisfy the Settlement or institution of any claims process by the NYAG. 

A copy of the Complaint is here.

Previous coverage of the Settlement is here.

Miami Federal Judge Sanctions TD Bank, Law Firm for "Simply Incredible" Discovery Errors During Rothstein Trial

A Florida federal court judge imposed sanctions against TD Bank and its law firm, Greenberg Traurig, for "willfully" hindering and obfuscating the production of evidence that painted a much more culpable role of TD Bank in Scott Rothstein's $1.2 billion Ponzi scheme.  The order by United States District Judge Martha G. Cooke comes after the successful attempt by a Rothstein investor, Coquina Investments, to hold TD Bank liable for its participation in Rothstein's fraud.  A federal jury deliberated for four hours in January 2012 before rendering a $67 million verdict against TD Bank, including the imposition of punitive damages.  

The dispute arose concerning the sufficiency of TD Bank's participation in discovery, the court-supervised exchange of information in a lawsuit.  One of Coquina's central contentions was that TD Bank knew that Rothstein was a high-risk customer, but ignored the warning signs associated with the fraud in favor of the lucrative relationship it had with Rothstein.  During the trial, TD Bank maintained that it had not designated Rothstein as a "High Risk" customer, which would have required enhanced due diligence by the bank including robust monitoring and scrutiny.  In support, TD Bank offered Rothstein's Customer Due Diligence Form into evidence, which did not contain any indication that Rothstein was considered a high-risk customer.  This distinction was emphasized by the bank's testifying expert, and played a key role in its defense.  Many observed that the jury award could have been much higher had Rothstein indeed been a high-risk customer.

Coquina's attorney, David Mandel of Mandel & Mandel, is also representing another Rothstein victim in a related trial against TD Bank.  That case, Emess Capital v. TD Bank, not only features the same charges pursued by Coquina, but also possible treble damages under the Racketeering Influenced and Corrupt Organizations Act (RICO).  RICO was originally used primarily against organized crime defendants, but has recently been used to target white collar crime.  During ongoing discovery in that case, Mandel's team discovered that TD Bank had produced Rothstein's Customer Due Diligence Form, the same one it produced in the Coquina trial, albeit with an important distinction - the newly-produced Form had a bright red band at the top that read "HIGH RISK".  According to Mandel, "the “HIGH RISK” designation appears to have been blacked out and omitted from" the form produced in the Coquina trial.  A comparison of the documents is helpful:

 

Attacking the previously-produced form as a "sanitized" version of the document, Coquina sought sanctions against TD Bank and Greenberg Traurig ("Greenberg"), seeking:

1. sanctions as determined by the Court;
2. the referral of TD Bank to the United States Attorney's Office for possible obstruction of justice charges; and
3. referral of defense counsel to the Florida Bar for an investigation into their role, if any.

Coquina also alleged that documents known as "Standard Investigative Protocols" were withheld from it, produced several months after the verdict was reached.  The documents had been hotly contested during trial and the subject of at least one motion for sanctions.  Judge Cooke held several days of hearings that featured testimony from TD Bank employees and several of the Greenberg attorneys involved (TD Bank ceased using Greenberg after the verdict).  Mandel scoffed at the insinuation that the omission of the "high-risk" denotation was a copying error, stressing that the multiple errors were not "a series of coincidences", but instead "Rambo litigation tactics." 

In her 30-page ruling, Judge Cooke eloquently summarized the nature of the dispute:

In many ways, this is a case of too many cooks spoiling the broth. Over 200 Greenberg Traurig attorneys were involved in this case. There were separate teams of Greenberg Traurig lawyers to handle banking issues, document production, and pretrial and trial practice. TD Bank retained two different firms to work on different aspects of the Rothstein fallout, but the firms did not have any mutual coordination. One of the firms, Sullivan & Cromwell, then hired a consultant to perform work, which was relevant to the Rothstein litigation, but no one ever informed Greenberg Traurig. As a result, it often times appears that this litigation was conducted in an Inspector Clouseau-like fashion. However, unlike a Pink Panther film, there was nothing amusing about this conduct and it did not conclude neatly. 

After a thorough review of the alleged discovery violations, Judge Cooke concluded that sanctions were warranted against Greenberg and TD Bank for a "pattern of discovery violations" that deprived Coquina of the ability to "drive[] home" to the jury that Rothstein's account warranted additional scrutiny.  Noting that Coquina faced several post-trial motions challenging the sufficiency of the evidence out forth against TD Bank, Judge Cooke ordered that several facts, including that TD Bank’s monitoring and alert systems were unreasonable and that TD Bank had actual knowledge of Rothstein’s fraud, would be established as true for those actions.  The second finding concerning actual knowledge is particularly damaging to TD Bank, as many previous attempts to hold financial institutions liable under these theories fell short of the heightened standard of knowledge required to impose liability.  

Additionally, Judge Cook also ordered Greenberg and TD Bank to pay Coquina's fees and costs incurred in preparing its Fourth and Fifth Motions for Sanctions, as well as fees and costs associated with any litigation resulting from TD Bank's notice of the existence of the Standard Investigative Protocol documents.  A specific request for those fees is due from Coquina's counsel on or before August 23, 2012.  As to Greenberg's attorneys, Judge Cooke found that none had acted willfully or in bad faith, and declined to impose individual sanctions.

TD Bank indicated it plans to appeal Judge Cooke's ruling, as well as the jury verdict.

A copy of the Order is here.

A copy of Coquina's Motion for Sanctions is here.

Additional coverage of the Rothstein Ponzi scheme is here.

Paul Brinkmann, a reporter for the South Florida Business Journal, has also provided detailed coverage of the Ponzi scheme.  You can view his articles here.