Florida Couple Accused of Fleecing Detroit Police in $10 Million Ponzi Scheme in Story Fit For Hollywood

It reads like the script out of a bad Hollywood movie.  After convincing a Detroit Police and Fire Retirement pension fund to loan $10 million for the purchase and resale of low-income housing, a Florida couple allegedly made off with $5 million, living a lavish lifestyle traversing the Caribbean.  Along with shopping for a $1.5 million house, the couple also purchased exquisite jewelry that included jeweled Russian eggs and sculptures by French sculptor Auguste Rodin.  When the pension fund raised questions about mismanagement of the funds, the couple fled to a Caribbean island to avoid arrest, and a business partner committed suicide.  The husband was eventually arrested upon his return to the United States, while the wife is rumored to be hiding in Costa Rica with the protection of armed guards.

Unfortunately, these actors were real, and their actions devastated many.  The couple, George and Teresa Kastanes, is the subject of a lawsuit by the Police and Fire Retirement System of the City of Detroit (the "Pension Fund"), contending that the couple mismanaged funds from a $10 million loan and owed more than $15 million after subsequently defaulting.  The couple's business partner, Abner McWhorter, committed suicide several months after the lawsuit was initiated.  As the suit moved forward, the Kastanes then filed bankruptcy one day before warrants were to be issued for the couple's arrest for failure to turn over documents.  Weeks later, both fled the country to avoid arrest.

The Kastanes' were featured in a Wall Street Journal article in March 2007 that detailed their involvement in George Kastanes' client's business of flipping low-income foreclosed homes.  George Kastanes, an attorney, then teamed up with McWhorter to enter into a partnership to continue the practice.  After they approached the Pension Fund to pitch the idea of purchaing distressed mortgage loans for resale in the secondary market, the Pension Fund declined to invest but did agree to loan $10 million at an 18% annual rate of interest.  The Pension Fund received regular updates affirming that the operation was functioning as promised, and later requested a second $8 million loan.  However, after making numerous alarming discoveries about the true state of the operation, the Pension Fund declined to make the second loan.  As a result of these discovered deficiencies, the Pension Fund later placed the $10 million loan in default.

Rather than purchase mortgage loans, it was discovered that the Kastanes and McWhorter had been purchasing large lots of foreclosed properties for eventual resale to individuals - contrary to the stated terms of the $10 million loan.  The properties, totaling over 2,500, had been purchased with $5 million of the loan given by the Pension Fund, and many now faced foreclosure or demolition.  Additionally, the proceeds that allegedly resulted from the operation's success were, in reality, being paid through the originally loaned funds.  

The remainder of the loan, $5 million, was allegedly spent by the Kastanes to support a lavish lifestyle that included traveling throughout the Caribbean.  The couple shopped for a $1.5 million house on the Caribbean island of Nevis, purchased exquisite items such as jeweled eggs and Polynesian artwork, and collected gold and diamond jewelry.  The couple also allegedly took active efforts to conceal the source of their wealth from Pension Fund lawyers, taking a series of actions to thwart creditors that included shipping sculptures to St. Kitts and entrusting bags of gold and diamond jewelry with relatives.  Additionally, two months after the lawsuit was filed, Kastanes allegedly told a friend that he had $1.8 million he was "going to be needing to get rid of."  In later testimony, George Kastanes denied each of these allegations.

After the Kastanes fled the country to avoid arrest in March 2012, George Kastanes was arrested upon his return from Costa Rica in May.  His wife is rumored to be holed up in Costa Rica and surrounded by teams of armed guards.  

The Pension Fund is not alone in alleging that the Kastanes operated a Ponzi scheme.  Several other creditors have also intervened in the bankruptcy, alleging that the Kastanes have nearly $40 million in debts.  Mr. Kastanes was the focus of a federal grand jury investigation earlier this year, but no criminal charges were filed.

A copy of the complaint is here.

Rothstein Victim Seeks Nearly $500,000 In Legal Fees For TD Bank Discovery Violations

An investment group victimized by Scott Rothstein's $1.4 billion Ponzi scheme has asked a Florida federal judge to award it nearly half a million dollars in legal fees as a result of discovery violations by TD Bank and its counsel during a trial earlier this year.  Coquina Investments was awarded $67 million in compensatory and punitive damages by a federal jury that faulted TD Bank for its frelationship with Rothstein's massive Ponzi scheme.  After the trial, it was discovered that several crucial documents in TD Bank's possession had been withheld or altered in what Coquina attorney David Mandel referred to as "Rambo litigation tactics."  Coquina filed several motions for sanctions, which United States District Court Judge Martha G. Cooke granted earlier this month.  As part of the relief ordered, Judge Cooke ordered that Coquina's legal fees and expenses incurred as a result of these discovery failures were to be paid by TD Bank and its counsel, Greenberg Traurig.

In a filing this evening, Coquina submitted its request for attorney's fees, arguing that it was entitled to nearly $500,000 in fees and costs brought about by TD Bank's gaffes.  Mandel's firm, Mandel & Mandel, accounts for nearly $300,000 of the amount, while Washington, D.C. firm Gibson Dunn & Crutcher ("Gibson Dunn") accounts for the remainder.  Florida federal courts have determined that fee determinations are calculated using the "lodestar method", which multiplies a reasonable hourly rate by the number of hours reasonably expended by counsel.  

While affidavits submitted in support of the request have been filed under seal, the motion makes it clear that the rates charged by Gibson Dunn, while assumedly higher than those typically charged by attorneys practicing in South Florida, are warranted "as a sanction for litigation misconduct [and serve] the important purpose of deterring future misconduct..."  Gibson Dunn's expertise in this area of law, argues Mandel, warranted the premium involved in securing their representation.

Upon review of the submissions, Judge Cooke has the authority to adjust the award upward or downward based on a variety of judicially-created factors.  It is unknown whether TD Bank or Greenberg Traurig will object to the amount.

A copy of the fee motion is here. 

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

Additional coverage of the Rothstein Ponzi scheme is here.

Woman, 71, Sentenced To Nine Years For $60 Million Ponzi Scheme

An Ohio woman was sentenced to serve nine years in prison after being convicted of assisting her husband in operating a $60 million Ponzi scheme that fleeced hundreds of investors.  Joanne Schneider, 71, pled guilty to multiple state fraud charges in exchange for the nine-year sentence, marking the culmination of a drawn-out legal process that started with an original three-year sentence being thrown out for being too lenient.  Her husband, Alan Schneider, was previously sentenced to a term of probation after pleading guilty in 2009.  Schneider will receive credit for the past 2.5 years in which she has been jailed, and will serve out the remaining 6.5 years in an Ohio state prison.

According to authorities, the scheme began in 2003, when Joanne Schneider solicited family and friends to invest in real estate development projects.  Potential investors were promised a high rate of return ranging from 16% to 20%.  From 2003 until January 2005, Schneider collected $60 million from nearly 900 investors.  A family member later became suspicious and contacted the Ohio Department of Commerce, who issued a cease-and-desist order against Schneider.  After Schneider continued to defy the cease-and-desist order, the state obtained injunctive relief and secured the appointment of a receiver.

After Schneider pled guilty to the original charges, a county judge sentenced her to three years in prison.  Prosecutors appealed, arguing that one of the counts Schneider had pled guilty to carried a mandatory minimum sentence of 10 years.  A state appeals court agreed, and sent the case back to an Ohio county court where Schneider was then sentenced to ten years.  After successfully arguing she had not been able to withdraw her original guilty plea, Schneider had been scheduled to stand trial this week, and entered into her guilty plea at the eve of the trial.  

A court-appointed receiver eventually recovered $10.5 million for the benefit of victims.  A large portion of that amount came from a settlement with the Schneiders' bank, FirstMerit Corp., which was accused of ignoring the classic signs that the Schneiders were running a Ponzi scheme through their bank accounts.  As part of the settlement, FirstMerit did not admit any liability or wrongdoing.  

Court Approves Second Distribution to Madoff Victims; Customers With Allowed Claims Set to Receive 33.54% Distribution

A New York federal bankruptcy judge approved a request by the trustee liquidating Bernard Madoff's now-defunct brokerage to make a second distribution to victims that could be as high as $2.4 billion.  The ruling by United States District Judge Burton Lifland clears the way for victims holding approved claims to receive a payment representing approximately 33.5% of their net investment with Madoff.  The expected distribution will dwarf the roughly 4% payment made last year that saw Irving Picard, the court-appointed trustee, unable to distribute a majority of recovered funds due to pending legal challenges.  If the timetable of the previous distribution  serves as any guide, victims can expect to receive a payment sometime in early October.

Picard's request for a second distribution was unusual in that the exact amount of any distribution was contingent on the resolution of a new legal issue involving victims' disagreement with Picard's decision not to include interest on investor losses.  These "Time-Based Damages" were not warranted, argued Picard, and certainly not at the 'statutory rate' of 9% as alleged by victims.  Picard also observed that allowing Time-Based Damages would essentially reward older investors at the expense of new investors, for those holding long-term claims would recoup their principal amount at a quicker pace.  Victims would also see their pro rata distribution reduced to approximately 20% of their allowed claim.  

In lieu of reserving over $1 billion to account for the Time-Based Damages, Picard instead proposed a compromise in which he would reserve an amount equivalent to a 3% rate of Time-Based Damages in the event victims succeeded in their argument.  This compromise would allow Picard to make a total distribution of $2.4 billion, which would represent a pro rata distribution of 33.541% of each customer's allowed claim.  Based on the outstanding 1,229 allowed claims, a $2.4 billion distribution would represent an average payment of $1.975 million and would fully satisfy nearly 90% of outstanding approved claims when accounting for funds previously advanced by Picard and the Securities Investor Protection Corporation ("SIPC").

 

At a hearing held Wednesday morning, Judge Lifland heard argument and overruled several objections to Picard's motion.  It is expected that Picard will provide guidance to victims in the near-future.

A copy of the Order is here.

Another Day, Another Ponzi: SEC Busts $7 Million Puerto Rican Ponzi Scheme

Continuing its aggressive campaign to root out Ponzi schemes, the Securities and Exchange Commission ("SEC") announced the filing of civil fraud charges against a Puerto Rico man in what is alleged to be one of the largest Ponzi schemes to originate out of the U.S. territory.  Ricardo Bonilla Rojas ("Rojas") and his firm Shadai Yire ("SY") were charged with multiple violations of federal securities laws after taking in at least $7 million from investors primarily located in Puerto Rico.  The SEC is seeking disgorement of ill-gotten proceeds, injunctive relief, and civil monetary penalties.  Simultaneously with the SEC's announcement, the Department of Justice also announced the filing of criminal charges against Rojas.

Beginning no later than August 2005, the SEC alleged that Rojas and SY solicited investors, including Evangelical Christian groups and factory workers, for a "risk-free" investment that promised 15% to 50% annual returns derived from commodities trading.  Rojas told investors that he had a long history of successful returns in trading commodities, and touted SY as an international enterprise in the business of global private investments.  Besides personal solicitations, Rojas also engaged the services of sales agents who solicited potential investors on a commission basis.  From the beginning of the scheme until February 2009, Rojas and SY collected at least $7 million from investors based on these representations. 

In reality, the SEC claimed that Rojas began misappropriating investor funds as early as October 2005 - two months after the scheme started.  Additionally, Rojas alleged failed to invest any of the funds raised from investors, and instead sent out false account statements purporting to show continued growth in investor accounts.  Instead, at least $4 million was returned to investors in the form of fictitious trading profits and principal redemptions.  Additionally, Rojas used hundreds of thousands of dollars of investor funds for his personal use without the consent or knowledge of investors.  

It has been a busy week for the SEC.  In the past seven days, the SEC has (1) filed charges against a Utah man accusing him of operating a $27 million Ponzi scheme, (2) charged 2 Denver men with a $16 million Ponzi scheme, (3) charged a former college football coach with a $80 million Ponzi scheme, and (4) busted a $600 million multi-level marketing scheme called ZeekRewards.  Whether it represents a shift in department priorities remains to be known, but this recent enforcement spree is easily above average for the SEC.  

While the majority of victims are said to be located in Puerto Rico, investors were also located in the mainland U.S., including Florida, North Carolina, and New York.  

A copy of the SEC's complaint is here.