SEC: Secretive 'Trust' With World War II Ties That Promised 38% Annual Returns Was $15 Million Ponzi Scheme

The Securities and Exchange Commission ("SEC") instituted a civil enforcement action against a Florida man and a California woman, alleging that the investment opportunity promising 38% annual returns and requiring strict secrecy was, in reality, a Ponzi scheme that raised more than $15 million from unsuspecting investors.  Billy W. McClintock, 70, and Diane Alexander, also 70, were charged with multiple violations of federal securities laws in connection with the alleged scheme, which promised lucrative gains through a highly-secretive entity known as the "Trust".  The SEC is seeking injunctive relief, an asset freeze, disgorgement of all ill-gotten gains, and civil monetary penalties.

According to the SEC, McClintock was a resident of Bradenton, Florida, and had previously served time in prison due to a cocaine trafficking conviction.  McClintock and Alexander apparently shared a long-time friendship, and sometime before 2002, McClintock confided to Alexander that he was associated with a secretive investment club known as the "Trust".  Apparently, while on a trip to London, McClintock had happened upon a man named "John" who was a member of the Trust and disclosed to McClintock that he could lend money to the Trust and receive a 38% annual return.  The "Trust" was allegedly formed after World War II by several wealthy European families, with offices in Luxembourg and Zurich, and had the power to create money "through fractional banking and the sale of banking debentures"

The "Trust" was shrouded by heavy secrecy, with McClintock being told that the communication of any details about the trust to any third person, such as an attorney, certified financial accountant, or financial planner, would result in that person's permanent ban from participating in the Trust.  After hearing McClintock's story, Alexander accepted McClintock's offer to serve as United States Regional Director for the Trust, in addition to three other unnamed Regional Directors.  Along with McClintock - the 'United States National Director' - the two relayed the same story to potential investors, along with the promise of steady annual returns of 38%.  The two also appealed to investors' religious beliefs, telling them to "put your money in the Trust and your trust in God.” In total, approximately 220 investors contributed over $15 million to the "Trust".

However, contrary to their representations, there is no evidence that any secretive Trust ever existed, and neither Alexander nor McClintock ever sent any investor funds to any Trust.  Rather, according to the SEC, investor funds were simply pooled together in classic Ponzi scheme fashion, and the regular interest payments made to investors were in fact comprised of these commingled funds.  Additionally, investors were not told that, in return for referring investors to the "Trust", Alexander received a 'management' fee of 5%, which she also received for every investor that 'rolled over' their principal investment upon expiration. As the SEC stated, 

the Trust is a Ponzi scheme in which new investor funds, not Trust profits, pay the purported fees  and interest owed to earlier investors. 

Ironically, Alexander sought to convince investors to disregard the old agage that  'If it sounds too good to be true, it probably is,' claiming that it was simply 'a lie that came from the pit of hell.' 

A copy of the SEC complaint is here.

Two Former Stanford Accounting Executives Convicted of Fraud Charges

A Houston federal jury found two former Stanford Group accounting executives guilty of multiple fraud charges as criminal prosecutions draw to a close in those accused of playing a role in R. Allen Stanford's $7 billion Ponzi scheme.  Gilbert Lopez Jr., 70, and Mark Kuhrt, 40, were each convicted of nine counts of wire fraud, as well as one count of conspiracy to commit wire fraud.  Each of those charges carries a maximum term of twenty years in prison.  Prosecutors had accused the two of conspiring to inflate the value of certain assets to meet massive shortfalls in Stanford's scheme, including trying to flip a Caribbean resort property among various Stanford entities to inflate its value from $63 million to over $3 billion - in a matter of months.  

According to the superseding indictment, both Lopez and Kuhrt joined Stanford Financial Group ("SFG") in 1997.  Lopez was hired as SFG's assistant controller, while Kuhrt initially served as the fixed aset manager of SFG affiliate Stanford Leasing Company.  Lopez rose up the ranks to become SFG's Chief Accounting Officer in 2006, while Kuhrt was named Global Controller of Stanford Financial Group Global Management ("SFGGM").  

During the course of their employment, Lopez and Kuhrt participated in a series of sham transactions designed to both inflate the amount of capital contributions purportedly made by Stanford and misrepresent the extent of Stanford's repayment of billions of dollars in personal loans made by Stanford International Bank ("SIB").  Emails between Lopez and Kuhrt discussing the sham payments were featured prominently in the charging documents and used by prosecutors to show their awareness and culpability.  

Defense lawyers sought to sway jurors by claiming that Lopez and Kuhrt were simply following Stanford's instructions and never intended to commit any crimes.  Rather, it was Stanford's 'inner circle', which included former Chief Financial Officer James Davis and Chief Investment Officer Laura Pendergast-Holt, who kept other Stanford executives in the dark about the true nature of the scheme.  But the jury didn't buy this explanation, and instead sided with prosecutors in convicting the pair.  Sentencing has been scheduled for February 14, 2013, where each defendant will likely face a hefty prison sentence.

The convictions also mark the end of a string of prosecutions brought against Stanford and other executives.  Along with Stanford, who received a 110-year sentence after standing trial earlier this year, others convicted for their role in the scheme include: 

• Laura Pendergast-Holt - Chief Investment Officer - sentenced to 3-year prison term for obstructing SEC investigation;
• Jim Davis - Chief Investment Officer - After entering plea agreement with prosecutors in April 2009, has cooperated extensively and served as government's star witness at several trials;
• Tom Raffanello and Bruce Perraud - Stanford security team - Acquitted on charges relating to shredding of documents, where judge called evidence "extremely thin."

Davis, whose sentencing had been delayed while he provided extensive cooperation to prosecutors, is likely to see his sentencing date set in the near-future now that there are no pending trials.  While Davis will no doubt seek leniency for his cooperation, the charges to which he pled guilty to - conspiracy to commit mail/wire/securities fraud, mail fraud, and conspiracy to obstruct an SEC investigation - are serious charges with lengthy possible prison terms.  

A copy of the superseding indictment is here.

Previous Ponzitracker coverage of the Stanford scheme is here. 

Ponzi Schemer Who Fled to Peru When Scheme Collapsed Receives 14-Year Prison Sentence

A U.S. citizen that operated a foreign currency trading Ponzi scheme that bilked victims out of nearly $18 million was sentenced to serve more than fourteen years in federal prison.  Jeffrey Lowance, 51, was sentenced by United States District Judge Charles Norgle to serve 140 months in federal prison after previously being indicted on five counts of mail fraud, one count of wire fraud, and four counts of money laundering.  Lowrance was arrested in Peru last year, where he had reportedly fled after authorities began investigating his currency-trading operation

Beginning in at least 2004, Lowrance owned and operated Mentor Investment Group ("MIG") in San Diego, California.  MIG represented itself as a firm skilled in foreign-currency trading, soliciting potential investors with the promise that they could expect monthly returns ranging from 4% to 7%.  After the State of California issued a cease-and-desist order against MIG in 2006, Lowrance moved to Panama City, Panama, and arranged for MIG to be acquired by First Capital Savings &  Loan, Ltd. ("First Capital"), a New Zealand-based company also controlled by Lowrance.  Through First Capital, Lowrance continued to solicit investors, and raised more than $30 million from investors until the scheme's collapse in 2009.

As early as April 2008, undercover federal agents posed as potential investors and were told by Lowrance that his company was managing $37 million from over 400 investors.  However, according to authorities, First Capital was bankrupt by September 2008, and investors stopped receiving scheduled payments in July 2008.  In 2009, Lowrance fled from Panama City to Peru.  There, he is alleged to have continued his scheme operating a new entity, Private Global Banks, under the alias of Alan Carpenter. 

According to an update sent to investors in February 2009, Lowrance confessed that all of the investors' funds were gone due to his mismanagement. Lowrance was not the skilled forex trader he had represented himself to be, but instead had tried numerous methods to find a trading program that worked, including hiring two Peruvians from a trading class he started to do "chart review".  However, when the "chart review" strategy was tested with investor funds, it was not profitable.  In the update, Lowrance also warned people against going to authorities, as investors' chances of getting their money back would be hindered if Lowrance was locked up.  Lowrance was later arrested in Peru in 2011, and was subsequently extradited to the United States.  He also faced charges by the Securities and Exchange Commission and Commodity Futures Trading Commission.  

Along with this sentence, Lowrance was also ordered to pay restitution to his victims in the amount of $17.64 million.  

A compilation of legal documents pertaining to Lowrance's case is here.

The SEC complaint is here.

Cincinnati Man Sentenced to 40 Years In Third Separate Sentencing For $9 Million Ponzi Scheme

Continuing a recent spate of harsh sentences for sub-$25 million Ponzi schemes, a Cincinnati man receiving his sentence in the third jurisdiction that prosecuted him for a $9 million Ponzi scheme was sentenced to serve 40 years in state prison.  Jason Snelling, 48, had earlier pleaded guilty to twenty-five charges that included securities fraud, unlawful acts in the sale of securities, and failure to register as a broker-dealer.  Franklin Circuit II Judge Clay Kellerman handed down an eight-year sentence for each of five criminal events, but rather than ordering the terms to be served concurrently (at the same time), Judge Kellerman decided that the sentences would be served consecutively.  This is Snelling's third conviction for his role in the scheme, having previously received a six-year sentence from an Ohio state judge and an eleven-year term by an Ohio federal judge.  He was also ordered to pay $5.3 million in restitution, as well as forfeit various personal property acquired using scheme proceeds.

Snelling, along with partner Jerry Smith, operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they promised lucrative returns through purported day-trading.  The two offered guaranteed rates of return ranging from ten to fifteen percent, with some investors receiving higher promised rates.  To assure investors of the safety of their funds, Snelling and Smith represented that their position would be liquidated to cash at the end of each trading day.  In total, the scheme raised nearly $9 million from seventy-two investors.  But instead of engaging in day-trading, Snelling and Smith spent the majority of investor funds to sustain an exorbitant lifestyle that consisted of boats, jet skis, plastic surgery, and private school tuition.  

Authorities arrested the pair last summer.  Snelling and Smith later pled guilty to federal charges, and a federal judge later sentenced him to serve eleven years.  Smith is currently awaiting two state court trials on securities fraud charges.  

It is unclear which sentence Snelling will begin serving first.  While there is no parole in the federal prison system, Snelling will be eligible for parole and a variety of sentence reductions for his state prison sentences.  

Petters Trustee Sues BMO Bank For "Aiding and Abetting" $3.5 Billion Ponzi Scheme

The court-appointed trustee tasked with recovering assets for victims of Thomas Petters' $3.5 billion Ponzi scheme is taking aim at Petters' former bank, alleging that it ignored numerous red flags that should have alerted it to Petters' fraud, including over $35 billion in deposits.  BMO Bank, the current owner of M&I Bank ("M&I"), was accused of multiple charges, including aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and conspiring to commit fraud. Doug Kelley, the court-appointed bankruptcy trustee, is seeking unspecified damages in excess of $50,000. 

The lawsuit centers on the "astronomical" sum of $35 billion in deposits that flowed into a Petters Companies Inc. account from 2003 until the fraud was uncovered in September 2008.  Petters raised funds from investors by promising lucrative returns from the purchase and resale of consumer electronics to big-box retail stores.  Despite the staggering amount of deposits made, Kelley alleges that none of the deposits originated from the retail stores that were supposedly the focal point of Petters' operation. 

Additionally, nearly $70 million was siphoned off into various personal accounts controlled by Petters, including at least seventeen transfers exceeding $1 million.  Despite M&I's apparent knowledge of the "frenzied activity" taking place in the account, Kelley argues that bank executives turned a blind eye to the possibility of wrongdoing to preserve the steady generation of fees from their business relationship with Petters. 

Mixed Success In Similar Lawsuits

Lawsuits against financial institutions by those tasked to recover assets in the wake of failed Ponzi schemes have met with mixed success, in part due to the heightened legal standard required to succeed on claims such as aiding and abetting fraud and/or breach of fiduciary duty.  Rather than a simple preponderance of the evidence, a bank must either have actual knowledge of the fraud, or knowledge and/or deliberate ignorance of certain "badges of fraud" that would put a reasonable person on notice.  Additionally, some courts have found that bankruptcy trustees or equity receivers do not have "standing" to bring the suits. 

For example, as part of his quest to recover assets for victims of Bernard Madoff's infamous Ponzi scheme, court-appointed trustee Irving Picard filed suit against several financial behemoths, including JP Morgan Chase and HSBC Bank, seeking not only the return of fraudulent transfers received from Madoff, but also billions of dollars in damages under various common law theories including aiding and abetting fraud and aiding and abetting breach of fiduciary duty that centered on the alleged ignorance of "myriad red flags and indicia of fraud."

After successfully winning the transfer of the suits from Bankruptcy Court (thought to be favorable to Picard) to a New York federal court, the financial defendants argued that Picard did not have legal "standing" to bring the claims.  Standing, as defined by United States District Court Judge Jed S. Rakoff, requires a would-be litigant to demonstrate "the existence of a case or controversy and a personal stake in the outcome of the case." 

Not only did Picard lack standing to bring claims on behalf of the bankruptcy estate against third-parties like HSBC, ruled Judge Rakoff, but under the doctrine of in pari delicto, Picard was barred from suing to recover for a wrong that the bankruptcy entities essentially took part in.  Additionally, United States District Court Judge Colleen McMahon likened Picard's plight to that of a parking garage owner attempting to assert claims on behalf of a car that suffered damage while in traffic and before it entered the garage.  Picard has since appealed those rulings.

However, a recent win by victims of Scott Rothstein's $12 billion Ponzi scheme against TD Bank has some questioning whether the tides have turned.  In January 2012, a group of investors won a $65 million jury verdict against TD Bank in a Miami federal court after alleging that the bank and at least one of its executives had taken actions to further Rothstein's fraud in order to boost bank profits.  Besides the favorable verdict, the case was also notable in that it featured a TD Bank executive asserting his fifth amendment rights on the witness stand and the post-trial discovery that critical documents had been altered and/or withheld by the bank.  Following that verdict, TD Bank settled with another investor group led by the same attorney that had asserted similar claims.

While the prospect of holding a financial institution liable for investor losses from a massive Ponzi scheme such as Petters certainly is alluring, Mr. Kelley's likelihood of success is far from guaranteed.  Much will depend on the discovery as to whether M&I executives truly suspected Petters of fraud.  Additionally, internal risk documents such as Suspicious Activity Reports ("SAR's") a by-product of Patriot Act legislation requiring banks to report suspicious activity to the government, could also potentially be useful to gauge the bank's level of knowledge.  One could also speculate that Petters himself could be a favorable witness for Kelley - should he choose to cooperate.