Miami Accountant Gets Seven Years For $5 Million Ponzi Scheme

A Miami man received a seven-year sentence in federal prison for masterminding a Ponzi scheme that took in $5 million from victims.  Juan Carlos Rodriguez, 49, faced up to twenty years after pleading guilty to wire fraud in June.  In addition to the sentence, United States District Judge William Dimitrouleas ordered Rodriguez to pay nearly $1.1 million in restitution to his victims, along with a $10,000 fine. Before being taken into custody, Rodriguez apologized to Judge Dimitrouleas and pledged to satisfy his restitution obligations.  

Rodriguez operated Vares Tax, which performed various accounting work for clients.  Using those connections, Rodriguez solicited his clients to invest with him through his investment business, MDN Financial, Inc. ("MDN").  Potential investors were promised monthly returns ranging from twenty to fifty percent through investments in stocks, bonds, and other securities - promises which resulted in approximately 116 investors entrusting nearly $5 million.  Offering 6-month to 1-year investment periods, Rodriguez encouraged investors to "roll-over" their acquired gains into a new investment, to which most investors complied.  Some investors also received regular "annuity" payments in an effort to lend an air of legitimacy to the scheme.  

However, Rodriguez's operations - purporting to pay annual returns exceeding 400% - were nothing more than a Ponzi scheme, with Rodriguez failing to invest as advertised and instead using investor funds for a variety of unauthorized purposes.  This included hundreds of thousands of dollars in mortgage, credit card, and car payments.  In October 2010, as investor redemption requests faced increasing delays, Rogriguez vanished from his office, and the scheme collapsed.  According to authorities, victim losses were pegged at $1.9 million.

Prosecutor Robert Luck termed Rodriguez's promise to repay victims as "comical" and suggested that victims would likely only receive pennies on the dollar.  

Authorities Charge Scott Rothstein's Wife With Concealing $1 Million Of Jewelry

The wife of convicted Ponzi schemer Scott Rothstein was charged by authorities on Thursday with concealing over $1 million of assets purchased with proceeds of her husband's $1.4 billion Ponzi scheme. According to charging documents, Mrs. Rothstein and several others conspired to withhold numerous pieces of jewelry from the federal government after Rothstein's scheme was uncovered, including a 12.08 carat diamond ring.  In a criminal information, Kim Rothstein was charged with conspiracy to commit money laundering, obstruction of justice, and witness tampering.  While the charges carry possible maximum sentences of at least 5 years, the choice of charging document suggests that a plea deal has been reached or is in the works.

According to authorities, Rothstein and two others, including her former attorney Scott F. Saidel, took steps to prevent numerous pieces of jewelry from being turned over to federal authorities that was purchased with tainted proceeds of her husband's scheme.  In addition to the mentioned 12.08 carat diamond ring, other withheld pieces of jewelry included:

• An engagement ring and wedding band with 18 emerald cut diamonds;
• 10 watches, including a Rolex with leopard design, a woman's Piaget and a platinum/diamond Pierre Kunz;
• 5 sets of earrings, several necklaces, and a variety of gold coins;
• Pearl, diamond, and sapphire cufflinks, and 50 1-ounce gold bars

After the items were withheld from authorities, Rothstein and two others attempted to sell several of the pieces to local jewelers, two of which were also charged by authorities.  Additionally, Scott Rothstein was also pressured to lie to investigators about the whereabouts of the missing jewelry.  

Besides Rothstein and Saidel, three others were charged.  The two jewelers, Eddy Marin and Patrick Daoud, had charges filed against them in a type of charging document that does not suggest a forthcoming plea deal.  Indeed, Daoud's attorney, Fred Haddad, has indicated that his client will be fighting the charges against him, which include obstruction of justice and perjury concerning the 12-carat ring.  

In a 2010 story from NBC Miami, it was reported that Kim Rothstein forfeited approximately 300 pieces of jewelry to authorities worth nearly $1 million after the scheme collapsed.  

SEC Charges Stanford Executives With Securities Violations

The Securities and Exchange Commission ("SEC") announced Friday it had instituted administrative proceedings against three former executives of Stanford Group Co. ("SGC"), which formed part of the massive $7 billion Ponzi scheme perpetrated by R. Allen Stanford.  Former SGC President Daniel Bogar, Chief Compliance Officer Bernerd E. Young, and Private Client Group President Jason T. Green (the "Respondents") were charged with multiple violations of federal securities laws, alleging that they failed to disclose key facts to Stanford investors despite their key roles in the preparation of offering documents and training material to pitch the investments.  The SEC is seeking a hearing to determine whether sanctions should be imposed, including disgorgement of ill-gotten gains, civil penalties, and a cease-and-desist order from committing future violations.

SGC operated as the exclusive conduit for Stanford International Bank ("SIB") to sell its certificates of deposit (CD's) to investors.  These CD's were pitched to clients as safe and secure, owing to their inclusion in a carefully-managed and  well-diversified portfolio of marketable and liquid securities.  Additionally, investors were assured that SIB maintained a comprehensive insurance program, excess FDIC coverage, and other insurance policies that provided depositor security.  However, in reality, SIB was operated as a massive Ponzi scheme by its creator, Allen Stanford, and fabricated  returns while using investor funds to make Ponzi payments to other investors and finance the operations of Stanford's other businesses.  The multiple layers of insurance were also nonexistent.  After being indicted in 2009 along with several other executives, Stanford was convicted by a federal jury in 2012 and sentenced to serve 110 years in prison.

Consistent with their duties at SGC, Bogar, Young and Green oversaw due diligence on SIB and traveled regularly to Antigua to review offering documents and meet with bank officials.  During these meetings, according to the SEC, they knew or should have known that the SIB offering documents made multiple false or misleading representations to investors. Despite these inaccuracies, Bogar and Young allegedly approved the documents and training materials for marketing to investors, each earning several million dollars over the course of their employment with SGC.  Green, who held multiple securities licenses and served as a financial adviser, sold millions of dollars in CDs to investors while making similar misrepresentations.  

Alleging that the Respondents' conduct both violated federal securities laws and aided and abetted SIB and SGC's violations of federal securities law, the SEC instituted administrative proceedings.  The decision to bring administrative proceedings, rather than formal civil proceedings, is an unusual move.  Administrative proceedings are generally more restrictive than civil proceedings, and frequently operate on an expedited schedule. For example, the SEC has ordered that the Respondents must answer the allegations within twenty days, and a hearing must take place on the allegations within sixty days.  Additionally, the administrative law judge overseeing the matter must issue an initial decision within three hundred days.  

The SEC has taken heat for filing administrative, rather than civil, proceedings in the past, most recently by former Goldman Sachs director Rajat Gupta.  Accused of insider trading, Gupta responded to the proceeding with his own lawsuit, accusing the SEC of using an administrative proceeding to deprive him of certain rights including the right to a trial by jury and to be treated as had similar defendants accused of insider trading.  After a New York federal judge allowed Gupta's suit against the SEC to proceed and publicly questioned the choice to bring an administrative proceeding rather than a federal lawsuit, the SEC later dropped its proceeding.  While Gupta hailed the decision as a victory, such optimism was short-lived.  Indeed, several months later, the SEC used its "full might" to charge Gupta with criminal charges of inside trading, where he was subsequently convicted and faces decades in prison when he is sentenced on October 17.  As a prominent New York lawyer later remarked, "If you have done wrong, do not play the matador and wave a red rag against the bull in the arena.”

ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier's Checks To Court

It has now been over one week since Ken Bell, the court-appointed receiver overseeing ZeekRewards ("Zeek"), held a press conference to brief various members of the media about this progress thus far and plans for the near future. In his remarks, Bell indicated that one of his main priorities going forward was to continue gathering assets for eventual distribution to victims. This included cashiers checks deposited, but not cashed, by Zeek investors just before the scheme's collapse. Following the press conference, Mr. Bell posted an update to his website that included a letter updating investors and additional answers to investor questions.

Since that meeting, a review of the court docket reveals that the recovery of assets continues to be the focus of Mr. Bell and his team. In the past ten days, various financial institutions have submitted sworn statements in response to the court's earlier asset freeze indicating how much, if any, Rex Venture Group ("RVG") maintained in bank accounts. RVG is the parent company of ZeekRewards. Those reports, from institutions such as Charles Schwab and NewBridge Bank, showed that tens of millions of dollars were currently being held in the name of RVG or Paul Burks, Zeek's founder. Additionally, Mr. Bell's lawyers have sparred with Burks in an attempt to gain control of his personal assets.

Shortly after the Securities and Exchange Commission ("SEC") filed suit against Zeek, United States District Judge Graham Mullen issued an order appointing Mr. Bell as receiver. That order listed the various assets over which Mr. Bell would have authority over, including assets held or fraudulently transferred by RVG. These orders are standard in receivership proceedings, and their wording rarely varies. However, Zeek was somewhat unique, in that it highly encouraged the use of cashier's checks to fund a new investor's account. Different from personal checks, a cashier's check operates like cash upon endorsement by the maker. According to the receiver, "numerous" cashier's checks and other forms of payment potentially totaling several million dollars were received either on or after the date the SEC shut down Zeek, Because of this, Mr. Bell sought the Court's approval (the "Motion") to clarify the language of the order appointing receiver to explicitly include those forms of payment as receivership assets.

The Motion also sought to freeze assets in possession of Burks and other third parties, including his family members. In support, Bell noted that while Burks was estimated to have secretly misappropriated roughly $11 million from Zeek, nearly $7 million of that sum was no longer in Burks' possession or control, including $1 million transferred to certain family members.

Not surprisingly, while Burks did not object to the inclusion of uncashed cashier's checks into the receivership estate, he strongly opposed any attempts to now "include Mr. Burks' personal accounts." Noting that the receiver's basis for this request centered on the SEC's allegations in its complaint - which Burks had neither admitted nor denied in his settlement with the SEC as is typical of SEC judgments - Burks' attorney argued that no other evidence existed in support. Additionally, Burks noted that, in addition to the $4 million penalty paid to settle the SEC's allegations, the IRS received more than $5 million in income tax assessments for 2011 and 2012. Arguing that Mr. Bell was overreaching, Burks' lawyers touted his roots in Lexington, marital status, recent successful bouts with cancer, and lack of prior legal troubles. In other words, Burks was not a flight risk.

Apparently swayed, Judge Mullen declined to grant the receiver's request to include Burks' personal accounts in the asset freeze, but did allow the amendment of language in the order appointing receiver to include cashier's checks and other forms of payment as receivership property. However, the receiver certainly has the ability to bring future lawsuits against Burks and/or his family members once he has completed his analysis of Zeek's financial records and been able to trace the flow of assets in and out of Zeek. This investigation is expected to take weeks, if not months, to complete.

The Receiver's Motion to Amend is here.

Burk's Response is here.

Judge Mullen's Ruling is here.

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.