Associated Bank Sued For Facilitating $194 Million Ponzi Scheme

The court-appointed receiver for Trevor Cook's $194 million Ponzi scheme filed a lawsuit against banking behemoth Associated Bank (the "Bank"), alleging that the Bank played a key role in the success of Cook's scheme and providing an aura of legitimacy.  R.J. Zayed, the court-appointed receiver for Cook's scheme, filed a heavily-redacted complaint today against the Bank, which is popular in northern states such as Wisconsin, Illinois, and Minnesota.  Zayed alleges the Bank "knowingly aided and abetted one of the largest Ponzi schemes in Minnesota's history" by ignoring a multitude of red flags that should have prompted an investigation.  

The Bank faces charges of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions.  Zayed is seeking a jury trial, and alleges that the Bank's assistance allowed Cook's scheme to take in over $79 million.

Cook, along with several co-conspirators, pitched Crown Forex, SA ("Crown Forex") to potential investors as a risk-free foreign currency trading program that promised guaranteed 10% annual returns.  Cook later contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds.  According to Zayed, what followed was a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme.  This included:

• Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
• Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
• Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
• Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.

Roughly half of the factual and legal allegations in the complaint are redacted.  Zayed also points to the fact that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.  

Along with alleging that the Bank was responsible for at least $79 million flowing through the Crown Forex account, Zayed is also seeking punitive damages, civil penalties, and pre- and post-judgment interest.  

A previous suit brought by several of Cook's victims was dismissed in Aoril 2010 after a state judge found that the Bank had no duty to non-customers.

A copy of the complaint is here.

Guilty Plea in Home-Flipping Ponzi Scheme

An Arizona man entered a guilty plea to charges that he orchestrated a house-flipping Ponzi scheme that defrauded investors out of nearly $2 million.  Jere Parkhurst (f/k/a Jere Sessions) pled guilty to a single count of wire fraud in a criminal proceeding that was originally spawned from a series of civil lawsuits brought against Parkhurst by disgruntled investors.  After criminal authorities caught wind of the scheme, Parkhurst was indicted in 2011 on seventeen counts of wire fraud and ten counts of money laundering. Both wire fraud and money laundering each carry a maximum potential sentence of twenty years in prison along with a criminal monetary fine.

Parkhurst owned and operated several companies that included C Street Holdings, LLC; Capital Real Estate Co. LLC; and Phoenix Financial Holdings (the "Companies").  Beginning in late 2006, Parkhurst began soliciting potential investors for what he described as the remodeling and resale of historic homes in the Phoenix area.  Investors were promised annual returns that ranged up to 25%, which in turn attracted other investors as original investors began spreading word about their success.

However, according to authorities, Parkhurst misrepresented the use of investor funds, and instead operated the classic Ponzi scheme by using incoming investor funds to make interest and principal payments to existing investors.  Additionally, when Parkhurst actually did use investor funds to purchase real estate, he failed to keep current on mortgage, utility, and insurance payments.  When the real estate market began to head south, Parkhurst fell further behind in scheduled interest payments, which resulted in the filing of several civil lawsuits by burned investors.  Federal authorities began investigating Parkhurst and the Companies soon thereafter.

In a troubling lesson of how valuable it can be for an investor to conduct due diligence before entering into any investment venture, one newspaper reported that several civil judgments had been entered against Parkhurst and his wife beginning in 2004 - several years before the scheme was hatched.  Such judicial records are easily retrievable by conducting an online records search.

Parkhurst is scheduled to be sentenced April 15, 2013.  

Judge Rejects Ponzi Schemers' Settlement With SEC Over "Neither Admits Nor Deny" Language

I refuse to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him. A defendant’s options in this regard are binary: he may admit the allegation or he may go to trial.

- U.S. District Judge John L. Kane

In what is believed to be the first of its kind in Ponzi scheme jurisprudence, a federal judge refused to ratify a proposed settlement reached between the Securities and Exchange Commission ("SEC") and two men accused of masterminding a $15 million Ponzi scheme because the agreement lacked any admissions of guilt.  United States District Judge John L. Kane issued a terse order denying an unopposed motion to enter final judgments against William P. Sullivan and Jane K. Turnock, who were accused of using their company, Bridge Premium Finance, to operate an insurance premium-financing Ponzi scheme.  The rejection is the latest instance of a growing judicial opposition to the use of the "neither admit nor deny" language, which was most famously on display when U.S. District Judge Jed S. Rakoff rejected the SEC's proposed settlement with Citigroup in December 2011 and eloquently noted that the court would not be “a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth…”

From 1996 to 2012, Turnock and Sullivan solicited potential investors to invest in BPF, telling them that their investment would be used to provide capital for BPF's insurance premium financing business. Investors were given promissory notes that promised annual interest payments of 12%, and were told that the investments were safe, conservative, and "100% collateralized."  In total, BPF raised nearly $16 million from more than 100 investors in multiple states.  However,  the insurance loan portfolio generated insignificant returns, and the SEC alleged that BPF was nothing more than a classic Ponzi scheme, using incoming investor funds to make interest and principal payments to existing investors. Indeed, in a telephone call with an investor as the scheme was on the brink of collapse, Sullivan admitted "your money is all gone.  This is a Ponzi scheme."

The SEC filed an emergency enforcement action in August 2012, charging Turnock, Sulliva, and BPF with multiple violations of federal securities law and seeking various relief including disgorgement and civil monetary penalties.  In a motion filed with the court on January 15, 2013, the SEC sought to have the court enter final judgment against the two and indicated that they had agreed to an order to pay over $12 million.  The proposed agreement contained the common "neither admit nor deny" language that has been traditionally employed by the SEC in civil actions.  The language is favored by defense attorneys and the SEC alike because such admissions would have adverse consequences for the accused in ancillary civil litigation (and likely doom the chances of settlement). 

However, in a sharply-worded order that echoes the rising sentiment among the federal judiciary against such agreements, Judge Kane refused to accept an agreement against "a defendant who remains defiantly mute as to the veracity of the allegations against him."  Ironically, as noted by Alison Frankel of Reuters, Judge Kane's position is contrary to his previous stance in 2011, when he approved a similar settlement that did include the questionable language.  In explaining his position, he cited similar concerns expressed by Judge Rakoff, noting that he was particularly troubled by the waiver for any entry of findings of fact and conclusions of law that have traditionally served to inform the public.  

While Judge Kane indicated that "future motions omitting the unacceptable language...will be entertained," it is more likely that the SEC will pursue appellate review, as it did after Judge Rakoff rejected the Citigroup settlement.  There, the Second Circuit has already indicated its inclination to overturn Judge Rakoff, stating that 

We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.

Oral argument is currently scheduled before the Second Circuit in that case for February 9, 2013.

Similar results have been on the rise since Judge Rakoff's ruling, with at least three federal judges rejecting SEC settlements on similar grounds.

A copy of Judge Kane's Order is here. 

A copy of the SEC complaint is here.

Former College Punter and NCAA Record-Holder Indicted for $2 Million Ponzi Scheme

During his storied career as a punter at the University of Texas, Russell Allen Erxleben kicked three field goals longer than sixty yards, a record that still stands, booted a 67-yard field goal that remains tied as the longest field goal kicked in NCAA history, and is one of the top 50 greatest Texas Longhorns football players according to the Bleacher Report.  However, after his football career ended, Erxleben then embarked on a storied crime spree that not only included a 1999 conviction for a $36 million investment scam, but today's announcement that Erxleben was indicted for running a $2 million Ponzi scheme based on World War I German gold bonds and a $58 million painting.  Erxleben, 56, was arrested today and charged with five counts of wire fraud, one count of securities fraud, and two counts of engaging in monetary transactions derived from unlawful activity.  Each count of wire fraud and securities fraud carries a 20-year maximum sentence, while the engaging in monetary transactions charge carries a 10-year maximum sentence.

Erxleben oversaw the operation of several Texas companies, including WALTEC Consultants ("WALTEC"), LRE Holdings ("LRE), and the MDM Group.   Both WALTEC and MDM were said to have alternate meanings, with WALTEC serving as an acronym for We All Like To Earn Cash, and MDM meaning Million Dollar Man or My Damn Money.  Beginning in 2005, Erxleben promoted several investment opportunities to potential customers, including (1) a post-World War I German Gold Bearer Bond investment program, and (2) an investment pool for a supposedly-valuable piece of artwork. Investors were not told that Erxleben had previously served a 7-year prison sentence for a prior securities fraud conviction.

The German Gold Program

The main investment pitched by Erxleben was his ability to purchase defaulted German Gold Bearer Bonds, which had originally been issued by Germany in the 1920s and 1930s to help finance reconstruction and recovery efforts following World War I.  Investors were told that Erxleben could purchase a single bond for $1,000 that represented a legal claim against the German government for $1,000,000. According to Erxleben, the bonds would be placed in a trust and converted into an asset-backed security that would be rated by a major financial ratings company, would greatly appreciate in value, and were favored by institutional investors.  In return, investors were promised annual returns exceeding 100% for thirty years.  

The Artwork Scheme

After his success with the German gold bond venture, Erxleben began soliciting investors in 2009 to participate in the authentication of a late 19th century painting by well-known French artist Paul Gaugin that could possibly be worth $58 million.  Investors were told that an art authenticator could be retained to verify the painting for $75,000 - $25,000 of which was due to be paid immediately.  

In total, Erxleben and his companies raised more than $2 million from investors in the German bond and artwork venture.  However, according to authorities, Erxleben failed to disclose that his previous securities fraud conviction prohibited him from dealing in securities, and that he still owed over $28 million as a result of a restitution order.  Instead, Erxleben operated the classic Ponzi scheme, using investor funds for a variety of unauthorized purposes that included the payment of Ponzi-style payments to existing investors and the misappropriation of funds for the personal use of Erxleben and his family.  

Erxleben appeared before Magistrate Judge Mark Lane on Thursday, where prosecutors sought to have Erxleben kept in custody due to concerns that he was a flight risk and may attempt to intimidate witnesses or obstruct justice.  He was ordered to remain in custody, and formal arraignment is scheduled for next week.  

A copy of the indictment is here.

Youth Soccer Coach Gets Seven-Year Sentence For $36 Million Ponzi Scheme

A California man was sentenced to a seven-year prison term for orchestrating a Ponzi scheme that bilked more than $35 million from victims.  Dean Gross, of Agoura Hills, California, and a former soccer coach with the Agoura Youth Soccer Association, received the sentence after previously pleading guilty to a single count of wire fraud.  In addition to the criminal charges, Gross was also the target of a civil enforcement action filed by the Securities and Exchange Commission that charged him with multiple violations of federal securities laws.  

Beginning in 2006, Gross operated Bridon Entertainment ("Bridon"), telling potential investors that he was a veteran of the advertising industry and had developed a method to profit from the purchase and resale of advertising time and space at below-market rates.  To convince investors of the legitimacy of the scheme, Gross often produced a copy of the purported contracts with the potential ad-buyer.  Investors could make short-term investments with guaranteed rates of return ranging from 8% to 30%, or up to a one-year investment with returns of 10% to 20%.  Investors were drawn in by Gross's 'family man' persona, and from his reputation in the community as a former youth soccer and basketball coach.  In total, nearly 40 investors entrusted approximately $35 million to Bridon.

However, Gross did not have the relationships he purported to have within the advertising industry, nor was he involved in the business of buying and selling discounted advertising time.  Instead, Gross ran a Ponzi scheme in which he used incoming investor money to pay interest and returns of principal to existing investors.  Investor funds were used not only for these Ponzi-style payments, but approximately $6 million was diverted to Gross for various personal expenses.  Authorities estimated that total victim losses exceeded $13 million.  

In addition to his sentence, Gross was also ordered to pay $15.4 million in restitution to victims.  

A copy of the SEC complaint is here.

A copy of the criminal charging document is here.