$50 Million Avian Ponzi Scheme Busted in India; 100,000 Emus Looking For New Home

"When you whistle, they dance," he said. "And they peck at your jewelry. They like gold, like most Indians."

In what may be the most bizarre Ponzi scheme in recent memory, more than 10,000 Indian investors are said to have lost $50 million after the collapse of what authorities are calling a massive Ponzi scheme centered around raising Emus.  According to Indian authorities, investors who agreed to raise an Emu chick were promised to double their investment within two years.  The alleged mastermind behind the scheme, M.S. Guru, was arrested in early August and charged with conspiracy and cheating after initially fleeing his hometown following the scheme's collapse.  Authorities must deal not only with the  thousands of victims, but also what is estimated to be 100,000 emus abandoned by the fraudsters when the scheme later collapsed.  

Guru founded Susi Emu Farms ("Susi") in 2006, offering investors the promise of a steady stream of income in return for raising an Emu chick.  Additionally, after two years, investors were offered the ability to "exchange" their two-year old Emu for another Emu chick.  A VIP program soon followed, in which investors could receive a similar return while Susi took on the obligation of raising the emu.  Word quickly spread of the dependability of the promised returns, and an advertising campaign headlined by popular Indian film stars quickly made Susi a household name.  The operation soon spread throughout India, with numerous copycat operations springing up demonstrating the popularity of the operation.  Thousands of Indians chose to invest with Susi, with many mortgaging their home or dipping into their savings to increase their return.

However, while many investors simply took at face value claims that emu meat and oil was highly sought after, the truth was that neither emu meat, oil, or skin was a profitable venture.  Instead, authorities believe that Guru and his associates ran a massive Ponzi scheme that used incoming investor funds to pay Ponzi-like returns to existing investors.  This was possible when potential investors could be depended on for a constant stream of incoming funds.  Additionally, existing investors were offered reinvestment "bonuses" to roll-over their investments at the end of the two-year investment term.  However, when the pace of incoming funds was eclipsed by the required outflows to existing investors, monthly distribution checks ceased and the scheme soon collapsed. Authorities estimate that losses from 8,000 to 12,000 investors could eventually total more than $100 million.

To compound issues facing authorities in the wake of the scheme's collapse, at least 100,000 emus were abandoned at various Susi farms as Guru and his associates fled.  When a public uproar ensued following the revelation that the emus were being left to starve, the Indian government was forced to step in and purchase $200,000 in emergency rations to feed the emus.  Additionally, the price of emu meat has collapsed from $6/pound to just $1/pound as both the Indian government and afflicted investors pursue all avenues to get rid of their "investments".    

To date, more than 4,000 investors have filed complaints with Indian authorities.  In addition to Guru, seven others have been charged with various crimes for their involvement in the scheme.  Authorities have also taken steps to freeze company assets.  

Recidivist Fraudster Convicted in $6 Million Ponzi Scheme

A Texas man was convicted by a federal jury for operating a Ponzi scheme that duped investors out of $6 million. It took a Houston jury four hours to convict Richard M. Plato, 64, of one count of conspiracy to commit mail fraud and five counts of mail fraud.  Plato, who has previously been convicted of fraud on three other occasions in Taxas, Florida, and Louisiana, could face up to 120 years in federal prison for the charges, although federal sentencing guidelines are likely to produce a much lower recommendation.  

Plato, a former attorney before being disbarred, was indicted in October 2011, along with his business partner and long-time mistress.  Authorities charged that Momentum Production Corp ("MPC"), owned and operated by Plato, held itself out as an owner and servicer of oil-producing wells.  Plato and his business partner allegedly promised potential investors high rates of return in exchange for an investment in one of several MPC funds.  Investors were assured that each of the funds was secured by MPC's interests in various oil and gas wells.  Between June 2005 and December 2006, nearly forty investors entrusted over $6 million to MPC.  None of these investments were registered with federal or state regulatory authorities.

However, investors were not informed of Plato's checkered past, which included his criminal history and outstanding restitution orders totaling nearly $30 million for previous frauds.  Instead, Plato used investor funds to make interest payments on various promissory notes issued to investors - a classic hallmark of a Ponzi scheme.  Of the approximately $6.2 million raised from investors, Plato was alleged to have misappropriated nearly $2 million for his personal use.  When the scheme collapsed, investors were told that a downtown in the oil and gas markets, along with operational difficulties at various wells, were to blame.  

Plato's trial lasted ten days, after which a federal jury needed only four hours to deliver a guilty verdict. Many damning internal emails , featured prominently in Plato's indictment, may have played a role, as Plato made no secret of his misuse of investor funds.  Indeed, one email from Plato stated that

"My thoughts are after paying off your car at the bank and paying several past due vendors and the Am Ex cards, we should have about $100,000 left to put towards our needs..."

Plato will remain in custody until his sentencing hearing, which does not yet appear to have been scheduled.  

A copy of the indictment is here. 

Co-Founder of Zeek “Victim Group” That Openly Challenged SEC Reportedly Receives SEC Subpoena

One of the individuals leading an advocacy group openly critical of the Securities and Exchange Commission’s (“SEC”) handling of the alleged $600 million Zeek Rewards Ponzi scheme has reportedly been subpoenaed to appear before the SEC.  The individual, Robert Craddock, made this disclosure in a September 22, 2012 mass email directed to victims who have rallied behind claims that the SEC may have mis-handled the case.  While the SEC did not provide the reason for the subpoena, some have speculated that recent comments attributed by Craddock to the SEC concerning purported admissions of fault in the SEC's case against Zeek which were later refuted may have piqued the SEC's interest.

The SEC shut down Zeek in mid-August, alleging that the operation was nothing more than an elaborate Ponzi scheme that paid existing investors with funds raised from new investors.  The same day the SEC filed its complaint containing these allegations, it also disclosed that the two defendants, Rex Venture Group, which was the parent company of Zeek, and Paul Burks, the company's founder, had agreed to enter into consent judgments to resolve the case without admitting or denying the conduct alleged. Burks also agreed to pay a $4 million civil penalty.  With the cases against RVG and Burks all but resolved, the SEC then obtained the court's approval to appoint Kenneth Bell as receiver over Zeek's assets.

However, within days after Zeek was shut down, several groups were formed protesting Zeek's shutdown and rallying victims by promising to take action.  The groups appeared to be operating in tandem, and one group, "Zeek Rewards Affiliates United Against The SEC," claimed that the SEC had "mislead" the federal judge overseeing the Zeek case and began soliciting funds from victims for the establishment of a "united legal front" to petition the court to re-open Zeek.  The group, in conjunction with Zteambiz.com, claimed it was formed by the "leaders of Zeek Rewards," and promised that "donating anything from $20 dollars to $100 dollars (sic) will allow us to hire one of the best if not the best firm in the country to protect us."  The quest seemed to be quite successful; in a chart posted on Zteambiz (but later removed), it appeared to show that at least 6,000 victims had contributed a minimum of $20 towards this "legal fund" – if true, this indicates that over $100,000 had been raised.

As the group grew in number, the regular updates continued to lambaste the SEC's handling of the case and appeal for donations.  An August 25th message from another "leader" of the group, Dave Kettner, promised recipients that information would be provided "which will disprove everything the SEC has stated”, and, in return for their donation, they would be "part of the protected group who will be fully represented by our law firm that will be retained."

However, it was a September 8th update that gained immediate attention when a law firm purportedly hired by the group disclosed several "facts" to Craddock in a phone call, including: 

The SEC acknowledged that there are a couple of problems with the case against Zeek Rewards and Rex Venture group. Here are the problems:
1.    We (the SEC) are not able to find a victim in this case. We are not able to find anybody at this time that has been harmed by Zeek Rewards.
2.    We (the SEC) are having a hard time finding a security. In the complaint, it said that Zeek was selling securities and was an investment scheme.
Based on their (the SEC) new knowledge of the Zeek Rewards business model, they are having a hard time moving forward in making their case. And they are now looking for a path or way to back out of this.

If true, the SEC would be taking the nearly-unprecedented step of admitting a massive mistake even though the company and individual behind the alleged scheme had already entered consent judgments in which they did not deny the allegations made.  However, several issues with the revelation  raised suspicions, including that such admissions would be highly unlikely to originate from the SEC and especially to an unrelated party to the civil proceeding.  Ponzitracker confirmed these suspicions several days later during a conversation with an SEC lawyer involved in the case who categorically denied the allegations as "inaccurate" and "false".   A later update from Zteambiz decried the "junk and lies being posted around the internet," and began directing victims to join a private mailing list to avoid future updates from being posted publicly.

The group continued to criticize the SEC, and in a September 12, 2012, update, Dave Kettner urged victims to "disregard" letters from the receiver, Ken Bell, as they were "nothing important."  An update several days later on September 18th from Craddock cautioned victims not to "fall for the trap the receiver would like everyone one (sic) of you to fall into," questioning why victims should fill out a claim form for the receiver "thus saying they were a victim."  Just after that announcement, Craddock reported that he had been served with a notice to appear in front of the SEC - the timing of which he deemed "highly suspect."

According to Washington, D.C. white collar defense lawyer Mark Schamel with Womble Carlyle Sandridge & Rice, assuming Craddock did indeed receive an SEC subpoena, “he has picked up a sufficiently large stick to poke the tiger in the eye."  By making statements to a mailing list of likely thousands of victims purporting to contain admissions of fault by the SEC and urging non-compliance with the court-appointed receiver, the SEC may have felt it had no choice but to act to prevent the spread of misleading information on such a large scale, especially in the infancy of what may be the largest receivership proceeding ever conducted.  While Craddock is certainly entitled to make the statements, according to Schamel, "it is not freedom of speech if you are obstructing an investigation."  In an update several days later, Craddock hinted at the SEC's focus, indicating that:

“My day has been filled with getting the requested files showing my involvement with Zeek.”

The move also comes as a Texas law firm has sought court approval to appear as legal counsel for Fun Club USA, Inc. and other victims whose “assets were seized” as a result of the receivership.  As discussed in a previous article, Fun Club is a Florida entity operated by Craddock. 

It appears the alleged subpoena may have had its desired effect; in an update yesterday, Craddock indicated that "after speaking with the attorneys today they have requested that I go silent for a while and not give any more updates."  

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.