SEC Charges Oregon Fund Manager With $37 Million Ponzi Scheme

The Securities and Exchange Commission ("SEC") has filed civil fraud charges against an Oregon fund manager it claims operated a $37 million Ponzi scheme.  Yusaf Jawed, 44, was charged with multiple violations of federal securities laws in connection with his use of various hedge funds to defraud over 100 investors.  In its complaint, the SEC is seeking injunctive relief, civil monetary penalties, and disgorgement of ill-gotten gains with prejudgment interest.  

Jawed controlled Grifphon Asset Management, LLC ("GAM") and Grifphon Holdings, LLC ("GH"), which served as the advisers to numerous hedge funds created and managed by Jawed, including Gripfhon Alpha Fund, L.P. ("Alpha") and Grifphon Iota Fund, L.P.  Investors were told through private placement memoranda that the funds experienced annual returns ranging from 12.8% to 132.5% from 2002-2008 through an investment strategy comprised of holdings in publicly-traded securities, private equities, biotech companies, foreign currencies, and commodities.  Additionally, investors were assured that their funds would be held at prominent institutions such as Lehman Brothers and UBS.  In total, Jawed raised more than $37 million from over 100 investors all over the United States.

However, little, if any, of the claims made to investors were true.  According to the SEC, Jawed misappropriated millions of dollars in investor funds for his personal use, which included luxury vacations, lavish meals, and the payment of nearly $60,000 to settle a sexual harassment lawsuit.  Additionally, Jawed used investor funds as the source of fictitious interest payments designed to lend an aura of legitimacy to the scheme.  Indeed, investors were supplied with account statements and tax returns that purported to show constant profits in investor accounts.  

When two bookkeepers retained by Jawed raised questions concerning the reconciliation of company books and record, Jawed devised an elaborate scheme to create the appearance of value in the funds by providing fictitious records showing evidence of assets from companies Jawed had secretly formed and maintained control over.  

Additionally, when the scheme appeared on the verge of collapse in 2008, Jawed hatched a scheme with the help of Robert Custis, an attorney.  The two began telling investors that a third party would soon purchase the funds' assets, and investors would soon be reimbursed for their investment at a healthy profit.  This pattern of deception lasted an additional two years with the use of various excuses such as the time zone difference of the banks, "dotting I's and crossing T's," and confidentiality problems.  However, this third-party purchaser was none other than an entity created and controlled by Jawed.  For his role in the scheme, Custis was also charged by the SEC.

A copy of the SEC's complaint is here.

Former Retirement Home CEO Charged With $130 Million Ponzi Scheme

Authorities charged the former chief executive officer of a chain of retirement centers with operating a massive Ponzi scheme that conned more than 1,000 investors out of $130 million in one of the largest frauds in Oregon history.  Jon Harder, 47, was charged last week with fifty-six counts of money laundering, mail and wire fraud, criminal forfeiture and aiding and abetting.  If convicted of all charges, Harder could face a maximum prison sentence of hundreds of years in federal prison.  

Harder was the founder and president of Sunwest Management ("Sunwest") and Canyon Creek Development, Inc. ("Canyon Creek").  Founded in 1992 in Salem, Oregon, Sunwest began raising money from investors in early 2001 through numerous offerings in over 100 retirement homes.  These offerings, known as "tenancy-in-common" interests, offered investors the ability to purchase a minimum $100,000 interest in a retirement home and receive a 10% return funded by the receipt of rental income.  Sunwest usually targeted under-performing retirement homes, seeking to streamline operations and bring the business to profitability.  Investors were told in offering documents that their investment was backed by a personal guarantee by Harder and Darryl Fisher, who served as Sunwest's COO.  Based on these and other representations, Sunwest raised more than $430 million from investors from 2001 to 2008.

From 2001 to July 2008, Sunwest made regular interest payments to investors, giving the impression that the operation was wildly successful.  However, unbeknownst to investors, many of the retirement homes sold to investors were not operating profitably.  Indeed, by commingling funds from the homes' operations and incoming funds from investors, Harder was able to support company operations, including the payment of interest to investors.  While nearly 60% of homes experienced negative cash flow by September 2007, the constant stream of incoming funds from new investors helped continue an otherwise unsustainable operation.

As the performance of the operation was inextricably linked to the performance of the real estate market, the nationwide credit crisis beginning in 2007 quickly took its toll on Sunwest.  When Sunwest began to default on an increasing number of retirement homes, creditors began to step up pressure.  When incoming cashflows were no longer able to satisfy investor obligations in late 2008, the scheme collapsed.  From October 2008 to January 2009, approximately twenty-five receivers were appointed for individual facilities, sixty-nine facilities went into foreclosure, and thirty-two facilities were placed into bankruptcy.  On December 31, 2008, Harder himself filed for personal bankruptcy.

Several months after the collapse, the Securities and Exchange Commission ("SEC") charged Harder with multiple violations of federal securities laws, alleging that he operated Sunwest as a giant Ponzi scheme and made numerous misrepresentations to induce over 1,000 people to invest.  According to the SEC, Harder and his wife operated Sunwest “as if it was their personal checkbook....to support their lavish lifestyle.”  A court-appointed receiver estimated that this lifestyle included the acquisition of 18 pieces of property and the purchase of numerous luxury cars, including a Mercedes, a Land Rover, two BMWs, a Cadillac Escalade and a Lexus.  

A team of consultants, accountants, and lawyers took over Sunwest in an effort to turn around the company that has resulted in the recovery of at least 60% of investor losses - an effort that earned the group a "Turnaround of the Year" award in 2011 from an industry group.  The amount was particularly noteworthy considering investors were initially estimated to recover no more than 6% of losses.  This recovery was also funded in part by a $30 million settlement by a law firm used by Sunwest to prepare documents related to the investments.  The SEC case remains ongoing.

In the 30-page indictment, authorities are seeking a money judgment of $130 million, as well as forfeiture of various real estate and other assets held by Harder.  In a court appearance last Friday, Harder entered a plea of not guilty and was released on bond.  A trial could come as early as November.  

A copy of the SEC complaint is here.

Florida Woman Receives 30-Year Prison Sentence for $100 Million Ponzi Scheme

In what is thought to be one of the largest sentences given to a female Ponzi schemer, a Florida woman was sentenced to spend the next thirty years in prison for masterminding a $100 million Ponzi scheme. After being convicted earlier this year of fourteen counts of wire fraud, mail fraud, and conspiracy, United States District Judge Timothy Corrigan handed down his sentence to Lydia Cladek, 68, noting that she showed no remorse to the hundreds of individuals she victimized.  Cladek remained defiant until the end when, given a chance to address the court, she maintained that "I took nobody's funds...I'm innocent.  I will not quit until I prove it."  

Cladek was indicted in November 2010, charged with operating her investment company as a $100 million Ponzi scheme.  According to authorities, Cladek was the president of Lydia Cladek, Inc. ("LCI"), which purportedly purchased high interest automobile retail installment contracts with investor funds with the promise of a hefty annual return of 15% - 20%.  In an effort to connect with older and elderly women, Cladek was known as an avid churchgoer and animal lover, who would often sip tea at social events.  Those who invested would receive a promissory note supposedly secured by the vehicles and other car notes as collateral.  A prosecutor estimated Thursday that $112 million was invested in the company between 2003 and 2010.

However, instead of operating a legitimate operation, authorities accused Cladek of operating a massive Ponzi scheme that used investor funds to pay others fictitious returns.  Additionally, Cladek was accused of using investor funds to support her lavish lifestyle, which included multiple houses, diamond earrings, several paintings, and a baby grand piano.  After being indicted on fourteen charges, Cladek refused to plead guilty, and instead chose to stand trial.  The strategy backfired, as a federal jury convicted her of all fourteen counts.  

News coverage of the sentencing indicated a concerted efforts by victims to convey the destruction brought by Cladek's fraud, many who lost their life savings.  One woman suggested to Judge Corrigan that "I hope she goes to jail until hell freezes over," while another likened the Cladek's actions to "rape."  Attorney Nina La-Fleur, who represented a large amount of Cladek's victims, indicated that the victims were pleased with the sentence.

Both the magnitude of Cladek's Ponzi scheme and her sentence easily gains her the distinction as one of the worst Ponzi schemes perpetrated by a woman.  A review of Ponzi schemes in the past few years shows that while women do account for a small percentage of schemes, as evidenced here, here, here, here, and here, the amount of investor losses in Cladek's scheme dwarfs those schemes.  

A copy of Cladek's indictment is here.

Texas Lawyer Seeks to Intervene on Behalf of Zeek "Victims" Group

A Texas lawyer has indicated in a court filing that he seeks to appear on behalf of a "victims" group with the North Carolina federal court overseeing the $600 million ZeekRewards receivership. Michael Quilling, a partner with Dallas law firm Quilling, Selander, Lownds Winslett & Moser, P.C. ("QSLWM") made the filing known as a pro hac vice application, in which a lawyer not admitted to practice in a particular state seeks the court's permission to appear as an attorney in a specific case. The filing indicates that Quilling intends to represent "Fun Club Usa, Inc. and other entities whose assets were seized in connection with the above-referenced matter." Quilling is a well-known attorney who is board-certified in bankruptcy law and has also served as the receiver in several Securities and Exchange Commission securities fraud case.

As some may recall, Fun Club Usa, Inc. ("Fun Club") is the Florida corporation that, after being administratively dissolved on August 18, 2010, for failure to file an annual report with the Florida Division of Corporations, suddenly came back to life on August 28, 2012, when Craddock re-filed articles of incorporation for Fun Club and indicated that the filing should have an "effective date" of August 24, 2012. Craddock has also been a active member of Zteambiz.com and Zteambiz.net, which began soliciting donations to retain a law firm to "prevent further damage caused by the actions of the SEC". According to a chart on the site, which has since been removed, over 6,000 people made a donation of at least $20. Craddock is also prominent on the Facebook group "Zeek Rewards Affiliates United Against the SEC," which directs users to Zteambiz and circulates frequent updates on the progress of the suit.

The reliability of the updates sent out from the site has been questioned at least once, including a previous article by Ponzitracker that refuted the claim that the Securities and Exchange Commission ("SEC") had confided to an unnamed individual that the case against Zeek was weak. Ponzitracker spoke with an SEC official involved with the case who unequivocally stated that those statements were "inaccurate" and "false."

Another important issue concerns (1) the identity of clients to be represented, and (2) whether those clients were net winners that received more from the scheme than they invested, or net losers that actually suffered a loss on their investment. While victims had been solicited to donate and sign up originally to rectify a "major injustice to all of us affiliates," a September 8th, 2012 update from Zteambiz indicated that legal representation was being sought for the purport of "providing protection against possible crawlback (sic) action by the SEC." Clawback actions are those brought by a receiver against individuals that withdrew more funds from the scheme than they originally invested. Because Zeek is alleged to have operated as a Ponzi scheme, those withdrawals did not constitute true profits, but instead a re-distribution of other investor funds. Clawback actions are frequently used by court-appointed receivers to recover funds for victims, and Zeel receiver Kenneth Bell indicated in so many words that he intended to pursue clawbacks in a recent letter to investors.

This presents an ironic situation if Zteambiz and related entities have been soliciting funds from victims in order to "protect against possible crawlback (sic) action by the SEC," since the funds recovered from clawbacks are used to compensate those victims that did not have the good fortune to make withdrawals from the scheme exceeding their investment. Essentially, those victims who would not be the target of clawback actions would be subsidizing efforts to prevent recovery of additional funds for distribution. Additionally, some have observed the likely conflict of interest involved for an attorney to represent both victims and targets of clawback actions, as each has radically different interests.

While these are scenarios that are months, if not years, away, the likely approval of Mr. Quilling's pro hac vice application sets the process into motion.

The Pro Hac Vice motion is here.

Previous Ponzitracker coverage of ZeekRewards:

Zeek Receiver: Nearly $300 Million Recovered, Clawbacks Likely

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

ZeekRewards Victims: What Happens Next

SEC Shuts Down Zeek Rewards, Alleges It Was $600 Million "Massive Ponzi Scheme" On Verge Of Collapse

Madoff Trustee Makes Second Distribution To Victims Totaling $2.5 Billion; Victims Have Now Recovered Over 50% Of Losses

Irving H. Picard, the court-appointed trustee overseeing the recovery of assets for victims of Bernard Madoff's $65 billion Ponzi scheme, announced today that checks totaling $2.5 billion had been mailed out to victims representing the second pro rata distribution of funds recovered to date.  When combined with funds already returned to victims through both the first interim distribution and monies advanced by the Securities Investor Protection Corporation ("SIPC"), victims have now each received more than 50% of their allowed claim.  According to Picard, the average payment in the current distribution will be slightly more than $2 million, with the smallest check written for $1,784 while the largest check was over $500 million.  Picard also indicated a desire to make "additional distributions as soon as practicable."

The distribution dwarfs the first interim distribution made in September 2011, which featured an average payment to victims of just $222,551.12.  The disparity between the first and second distribution was due to the fact that the majority of funds recovered by Picard at the time of the first distribution, including the $5 billion settlement with the estate of Jeffrey Picower, were required to be held in reserve pending various legal challenges.  Where the first distribution represented just over 4% of each investor's net loss, the second distribution is approximately 1/3 of each investor's total net loss.  Not including the amount advanced to each investor from SIPC, Picard has now paid nearly 40% of allowed claims.

While receiving over 16,000 claims from purported victims, Picard allowed 2,436 claims.  892 of those claims were satisfied with the first SIPC advance and the first interim distribution, and the second distribution will fully satisfy an additional 182 claims.  After the second distribution, 1,048 claims will remain outstanding and entitled to participate in further distributions.

Picard has also provided a chart on his website, www.madoff.com, to illustrate his progress thus far:

While various legal and administrative fees have totaled over $600 million, Picard is quick to note that "not one penny of the funds recovered by the SIPA trustee has been used to pay any administrative expenses in the proceeding."  Instead, these expenses are funded by SIPC, which is an industry-created group that collects donations from industry members.  A look at how SIPC operates is here.