Judge Exonerates Denver Company Accused of $49 Million Ponzi Scheme

In a rare development, a Denver federal judge rejected claims by the Securities and Exchange Commission ("SEC") that a Denver oil and gas exploration company was a $49 million Ponzi scheme. The SEC charged St Anselm Exploration Co. ("St. Anselm") and three of its officers in March 2011, alleging that the company operated in 'Ponzi-like fashion' in that it could only satisfy its debt burden by raising new funds from investors. After a two-week trial in July 2012, United States District Judge Robert Blackburn issued an order concluding that "The evidence fails to establish that SAE had any of the true hallmarks of a Ponzi scheme," and ordering the SEC to cover St. Anselm's costs.

St. Anselm is a Denver company that was founded twenty years ago by Michael A. Zakroff ("Zakroff"). Zakroff, along with Mark Palmer, Anna Wells, and Steven S. Etkind, were officers or employees of St. Anselm, which seeks to identify and acquire oil, gas, and geothermal prospects with the goal of enhancing their value and subsequently re-selling the interests in the future. This process often spanned several years, and to fund business operations in the interim, St. Anselm relied on raising funds by issuing short-term promissory notes to investors. According to the SEC, while St. Anselm's business historically focused on oil and gas interests prior to 2007, it began exploring the development of geothermal wells beginning in 2007. However, because of this expansion into geothermal power, the SEC alleged that St. Anselm was unable to meet its debt service obligations through existing revenues, and thus depended on raising funds from new investors. As depicted in two charts in the SEC's complaint, this suggested that St. Anselm depended on the inflow of new investor funds to pay principal and interest to existing investors - the hallmark of a Ponzi scheme:

As the chart shows, while the principal balance of outstanding notes ballooned from $30 million in 2007 to over $60 million in 2010, St. Anselm realized only approximately $24 million in revenues during the same time period, and filled the shortfall with over $40 million in proceeds from the sale of new promissory notes. According to the SEC, even the tens of millions raised in the sale of promissory notes was not enough for St. Anselm, which was forced to delay a July 2010 interest payment to investors due to insufficient funds on hand. According to the SEC, the defendants were keenly aware that their financial survival depended on their ability to raise new investor funds.

However, while these characteristics certainly fit the bill for the typical Ponzi scheme which the SEC has been successful at uncovering in recent years, Judge Blackburn took a very different view of the proffered evidence. Indeed, in his order, Judge Blackburn noted that St. Anselm's typical business cycle often spanned several years, and faulted the SEC for only considering the 2007-2010 time period and not accounting for the potential value of non-liquid assets According to Judge Blackburn, when considering the time period from 2006 - 2010, St. Anselm took in more than $61 million in revenue from sources other than promissory notes, which was enough to satisfy the $57 million in required debt payments during that period. Indeed, the nature of St. Anselm's business meant that while it would regularly achieve multi-million dollar profits on the sale of their investments, these sales did not occur on a routine pace due to the time period required to enhance the value of the interest.

Of particular note to Judge Blackburn, there was no evidence that any investor lost any of their invested principal, and nearly 99% of investors agreed to a debt restructuring effected by St. Anselm in June 2010. Additionally, St. Anselm continues to operate as a going concern, with ample cash to make payments on the restructured notes despite not raising new investor funds. Nor was there any evidence that the defendants were "living a high-budget, jet-setting lifestyle at the expense of unsuspecting investors." Based on these facts, Judge Blackburn concluded that the totality of evidence did not support a finding that:

Any defendant acted with an intent to deceive, manipulate, or defraud in their communications with investors about the state of the company, or that their conduct constituted an extreme departure from the standards of ordinary care, one which they either knew presented a danger of misleading note holders or that was so obvious that defendants must have been aware of it.

Shedding some insight into his reasoning, Judge Blackburn reasoned that the company may have simply gotten too optimistic about its business prospects - rather than operated a Ponzi scheme - and stated that 

What this court perceives from the evidence presented in this case is not fraud, whether intentional or reckless, or even negligence, but a company that got too far out over its skis."

The case is the first in recent memory not only in which the SEC has taken an accused Ponzi schemer to trial, but also in which the SEC has been unsuccessful. Indeed, it may simply be explained as a company at the wrong place at the wrong time - in the era of Post-Madoff enforcement, the SEC has not hesitated to bring enforcement actions where it feels that investor funds are in danger. In this instance, while some circumstances of St. Anselm's business model may have fit the model for the typical Ponzi scheme, the similarities turned out to be part of a legitimate business, rather than a closely-guarded fraud. An SEC spokesman indicated that the agency was reviewing the decision. 

A copy of the SEC complaint is here.

A copy of the Order is here.

Zeek Receiver to Net Winners: Settle By May 31 Or Prepare To Be Sued

I am sending this message to make sure that net-winners understand that there is an opportunity for settlement, but that the window for the  opportunity is closing

- Kenneth D. Bell, Court-appointed receiver.

The court-appointed receiver pursuing the recovery of funds for victims of the $600 million ZeekRewards Ponzi scheme has issued an ultimatum to those 'net winners' who were fortunate enough to profit from their investment: contact the Receiver by May 31, 2013 or prepare to be sued.  The receiver, Kenneth D. Bell, issued a message to those net-winners today via a post on his website, www.zeekrewardsreceivership.com, that he has established as a resource for victims.  Bell has previously estimated that approximately 80,000 such net winners exist, and were fortunate to have realized collective profits totaling nearly $300 million.

In the letter, Bell provided an overview of settlement efforts to date with net winners that he viewed as positive.  He indicated that he would continue those settlement efforts until May 31, 2013, and would then initiate litigation against those net winners that did not initiate settlement talks.   and indicated that he planned to initiate litigation against net winners if he is not contacted by May 31, 2013.  

Bell disclosed that he had received a warm reception from those net-winners who have contacted him, indicating that he had reached a number of settlements ranging from approximately 40% - 80% of those individuals' net winnings.  As is typical, investors that are able to present proof of financial hardship are able to reach discounted settlements.  Alluding to the costs that clawback litigation would entail, Bell indicated that any potential settlement would be subject to a consideration of the legal costs associated with pursuing clawback litigation.  

However, Bell cautioned that not all net winners would be offered the ability to negotiate a discounted settlement, possibly alluding to the stance he would take against those net winners who had a larger role and profile than the typical victims.  Bell had previously indicated in his periodic updates that he was considering litigation against a number of third-parties, including insiders and those with significant involvement with the company.  The basis for those claims would hinge on the contention that those individuals either knew - or should have known - that Zeek was a fraud, and that by lending their support and recruiting others to join Zeek, helped to perpetuate the fraud.  Indeed, there exists the possibility that, under state fraudulent transfer laws, Bell could seek to recover a net winner's entire investment - including that individual's principal investment.

The letter is the latest in Bell's efforts to recover profits from net winners.  In November 2012, Bell sent out approximately 1,200 subpoenas to net winners that had profited most from their investment in Zeek.  Taking the same firm position as he has since his appointment, Bell promised that he was 

committed to pursue the full court process necessary to obtain personal court judgments against 'winning' participants and recover all money owed to the Receivership estate."

Jury Needs Six Minutes to Convict Texas Man of $11 Million Ponzi Scheme

A federal jury needed just six minutes to return with a guilty verdict against a Texas man on trial for a $11 million Ponzi scheme.  Gary Lynn McDuff, 58, was convicted of one count of conspiracy to commit wire fraud and one count of money laundering, each of which carry a maximum sentence of twenty years in prison and criminal penalties.  While federal sentencing guidelines will likely call for a lesser sentence than the maximum, a previous 1994 fraud conviction is likely to result in a more severe sentence for McDuff than a first-time offender.

A co-conspirator of McDuff's, Gary Lancaster, owned and operated Lancorp Investment Fund ("Lancorp") in West Linn, Oregon.  Along with McDuff and another co-conspirator, Robert Thomas Reese, the men solicited investors for Lancorp by claiming that the fund was only authorized to invest in debt securities with at least an "A+" rating, that Lancorp was registered with securities regulators, and that Lancaster was a registered investment adviser under the Investment Adviser Act of 1940.  Investors were assured that Lancorp had secured an insurance policy to protect against possible investor losses.  Based on these promises, more than 50 investors entrusted over $10 million with Lancorp.

However, these representations were all false, and Lancorp was nothing more than a Ponzi scheme that used newly-incoming investor funds to make payments to existing investors.  Indeed, investors were not told that Reese had previously been the subject of a cease-and-desist order from the State of California for his participation in a previous fraudulent scheme or that McDuff had previously been convicted of fraud in 1994.  

Lancaster was sentenced to prison for his role in the scheme, while Reese has since passed away.  

McDuff's indictment is here.

Former Polaroid CEO Faces Clawback Lawsuits Targeting Kickbacks, Bonuses From Petters Ponzi Scheme

The former chief executive officer of Polaroid, a once-iconic photography company that recently succumbed to bankruptcy, is the subject of multiple 'clawback' lawsuits relating to his role as an executive of one of the many companies ensnared in Thomas Petters' $6.5 billion Ponzi scheme.  Lorence Harmer faces clawback lawsuits seeking nearly $6 million from both the court-appointed Petters receiver as well as the Polaroid bankruptcy trustee.  

Petters raised billions of dollars from investors who were promised lucrative returns through the purported purchase and resale of consumer electronics to big-box retail stores. Investors were shown falsified invoices and bank records to paint the illusion of a highly-successful company, but in reality Petters was running a massive Ponzi scheme that ranks as one of the largest in history.  Instead of using investor funds as promised, Petters built up an elaborate business empire by purchasing legitimate companies such as Polaroid and Sun Country Airlines.  However, when the fraud was uncovered in late 2008, those once-legitimate companies imploded along with the rest of Petters' empire.  Petters was eventually sentenced to serve fifty years in prison for the fraud.

One of Harmers' duties was to locate manufacturing facilities in China for the consumer brands division. While Harmer successfully located such manufacturers, later information showed that he had received nine kickback payments from a certain Chinese manufacturer totaling over $5 million.  The kickbacks were not discovered until after Harmer had left the company, and when confronted, Harmer confessed to the charges and agreed to repay the company for the full amount by signing a promissory note.  However, Petters' fraud collapsed shortly after this agreement, and Harmer never made the required payments. 

Additionally, the Petters receiver alleged that Harmer received nearly $500,000 in bonuses and fees in efforts to create the appearance that Petters' businesses were legitimate.  However, because of his close relationship with Petters, the receiver claims that Harmer knew, or should have known, that Petters and his enterprise was a massive fraud.  

The newly-filed cases bring the total amount sought in clawback litigation from Harmer to nearly $10 million, as Harmer also was employed as an executive at several other Petters companies including Petters International and Petters Consumer Brands.

Zeek Receiver Seeks Approval of Claims Process, Notice Procedures, and Proof of Claim Form

The court-appointed receiver overseeing the $600 million ZeekRewards Ponzi scheme has filed a motion seeking approval of a claims process to compensate what could be nearly 1 million victims.  In a 21-page motion (the "Motion"), the receiver, Kenneth Bell, seeks court approval for the proposed procedures and manner of filing claims to be used by victims, as well as the use of an online claims submission form. Victims would be notified by email, would have 120 days from the Order approving the Motion to submit their claims, and any late-filed claims would be disallowed in their entirety.   

The Proposed Claims Process

In the Motion, the Receiver estimates that while approximately 1 million affiliates paid money into Zeek, over 800,000 suffered losses, and the remainder were fortunate enough not only to recoup their principal investment but may also have profited.  Should the Court approve the Motion in its current form, the Receiver proposes that he will provide notice to all interested parties via several methods: 

1. Making the Claims Process publicly available on the Reeiver's website at a soon-to-be-functional Claims Portal;
2. Emailing all known affiliates through email addresses obtained from Receivership records and collected at the Receiver's website; 
3. By U.S. Mail to trade creditors and other known, non-affiliate creditors; and
4. Publishing the Receiver's Notice on the Receiver's website, certain multilevel marketing sites, certain newspapers, and sending the Notice to certain trade groups in the financial industry.

As previously alluded to in earlier articles on Ponzitracker, the Receiver cites the "great cost" of serving the over-2 million claimants by any other method and seeks court approval for the proposed notice procedures.  As a last resort, should an email be found to be no longer valid, the Receiver will attempt service of the notice by an alternative method, which includes a different email address or postcard to the last known address.  

Within 14 days of court approval of the Motion and included in the court-approved notice to claimants, the Receiver proposes to have a Claims Portal active on his website, www.zeekrewardsreceivership.com.  According to the Receiver, the Portal is "designed to capture the claims of all Claimants...in the most cost effective way possible."  Thus, all claimants, whether affiliates or non-affiliates, should files claims at the Claims Portal.  Indeed, 

Failure to submit a validly completed claim on the Claim Portal (or by alternative means that are agreed to between such Claimant and the Receiver prior to the Bar Date) will preclude a Claimant from receiving a distribution from the Receivership Defendant regardless of the validity of the Claimant’s claims.

The Receiver proposes that, if a Valid Proof of Claim is not received by any claimant within 120 days from the date of the Order approving the claims process, that claim shall be forever barred and precluded from sharing in any distribution.  As the Receiver has already collected over half of what he estimates are the $500-$600 million in losses, this could be a substantial penalty for those who fail to timely follow the claims procedures.  

The Claim Form will allow each claimant to upload supporting documentation, if any, for its claim that may be helpful to the Receiver and his team.  The failure to provide any documentation will not automatically cause that claim to be disallowed, but could delay approval - and payment - of the claim. Before submitting any claim, each claimant will be required to attest under penalty of perjury that the supplied information is accurate.  

VIP Points Not Allowed

One issue of note is the Receiver's proposal to omit any inclusion of "Retail Profit Points" or "VIP Points" in the calculation or determination of any claim.  Akin to interest, the VIP Points were accrued by purchasing sample or VIP bids and then re-distributing them to retail customers or back to Zeek.  The VIP Points then allowed the affiliate to participate in the daily percentage payout from Zeek, which averaged approximately 1.5%.  As is universally understood in other receiverships, victims of Ponzi schemes are entitled only to their lost principal balance, and not to any fictitious interest (or, in this case, points) that they may have accumulated.  Indeed, especially since the vast majority of Ponzi schemes are unable to accomplish a total return of victim losses, allowing interest as part of a valid claim would reward some victims at the expense of others.  

A copy of the Motion is here.

A copy of the proposed Claims Form is here.