Soccer Gold Medalist, NFL Players Sue Bank and Investment Advisor For Ponzi Scheme Investment

Several prominent athletes, including a newly-minted gold medalist member of the U.S. Olympic Soccer Team, have sued their former financial advisor and his employer, SunTrust Bank ("SunTrust"), alleging that they were unwitting investors in several Ponzi schemes that ultimately resulted in millions of dollars of losses.  Several National Football League players, including St. Louis Rams quarterback A.J. Feeley and his wife, U.S. Olympic soccer team player Heather Mitts, were listed as plaintiffs in a lawsuit against Suntrust and financial advisor William Crafton, Jr.  In the suit, the plaintiffs alleged that, rather than make conservative investments, Crafton invested the plaintiffs' funds into several high-risk investments, including at least one Ponzi scheme, that resulted in a loss of millions of dollars.  

According to the complaint, Crafton began soliciting his NFL clients while he was a registered investment advisor with CSI Capital Management ("CSI") in 2003.  Playing to the short and uncertain nature of the career of a professional athlete, Crafton represented that he would employ a very conservative and low-risk strategy with the principal strategy of conserving underlying principal.  Beginning with Brandon Whitting, a member of the Philadelphia Eagles football team, Crafton began signing up various NFL players, including Brent Celek, Kevin Curtis, and Whitting's roomate, A.J. Feeley.  Additionally, Feeley's wife, recent U.S. Olympic soccer gold medalist team member Heather Mitts, also became a client.  All told, the complaint alleges that Crafton ultimately provided financial advisory services to at least 20 other professional athletes, whom Crafton referred to as his "roster".  

Reassured by Crafton's promises that he would only invest in low-risk conservative investments, the plaintiffs ultimately entrusted nearly $8 million with Crafton.  However, contrary to these promises, Crafton instead placed client funds into several high-risk and illiquid investments with whom he had either close personal or business relationships.  For example, Crafton invested plaintiffs in Westmoore Capital, a firm with which one of Crafton's brokers maintained a personal relationship with the principal. Westmoore was later shut down in June 2010 after being accused of operating a $53 million Ponzi scheme.  Additionally, Crafton invested in "Mar Vista", a high-risk venture in which Crafton, unbeknownst to plaintiffs, served as a partner.  This investment also resulted in a nearly-complete loss of principal.

Crafton moved around between several financial advisor firms before selling his "roster" to SunTrust in December 2009 and agreeing to serve as the head of SunTrust's San Diego office.  When the Westmoore scheme was unearthed in August 2010, SunTrust began notifying clients that those investments were essentially worthless.  However, Crafton and his team disputed this in communications with his clients, claiming that SunTrust was trying to fire him and poach away his "roster".  Ultimately, by early 2011, Crafton was no longer employed with SunTrust.  

In the complaint, the plaintiffs charge Suntrust, Crafton, and Crafton's previous employers with multiple violations of federal securities laws.  Additionally, it is also alleged that SunTrust negligently hired Crafton and failed to adequately supervise him.  Plaintiffs are requesting a jury trial, and seek compensatory and punitive damages, as well as fees, pre-judgment interest, and costs. 

A copy of the complaint is here. 

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.