Accounting Firm Ordered to Pay $180,000 in Sanctions For Withholding Documents Relating to Seattle's 'Mini-Madoff'

A federal judge ruled that an accounting firm should pay $180,000 in legal fees resulting from multiple failures to respond to a subpoena issued by the trustee overseeing a massive Seattle Ponzi scheme whose mastermind became known as Seattle's 'Mini-Madoff'.  Moss Adams, the nation's 12th-largest accounting firm, had been asked to produce documents relating to its dealings with Darren Berg, who pled guilty in July 2011 to running a $150 million Ponzi scheme.  Moss Adams, which counted Berg as a client for ten years, had been found in contempt in April for failing to timely produce thousands of documents.

The trustee in charge of recovering funds for Berg's investors served a subpoena on Moss Adams shortly after Berg was arrested in July 2010.  While nearly 12,000 pages of documents were initially produced in response to the subpoena, Moss Adams would eventually make several additional supplemental productions of thousands of pages of additional responsive documents over the next two years.  This included additional emails, billing records, voicemails, and Berg's tax returns.  Finally, after the engagement of a third-party to assist in discovery efforts, Moss Adams made their last production in January 2013 of another 1,200 pages of documents.  

The trustee's counsel sought sanctions against Moss Adams, arguing that their failure to fully comply with the subpoena had significantly hampered their efforts to gain a thorough understanding of Berg's scheme, especially since crucial documents such as Berg's tax records and other financial documents were not produced until much later after the deadline for compliance.  Additionally, due to restrictions in place with Moss Adams file retention systems, the failure to timely respond to the subpoena meant that some documents had been lost forever.  This was especially prejudicial, argued the trustee's attorneys, since they believed that those records may have bolstered their claim that a Moss Adams employee had an inappropriate relationship with Berg that may have helped to further Berg's scheme.   

The federal judge overseeing the case, United States District Judge Karen A. Overstreet, agreed that these shortcomings significantly hampered the trustee's ability to accurately ascertain the financial status of Berg's financial empire.  As Judge Overstreet concluded,

"Moss Adams’ failure to fully comply with the Subpoena hampered the Trustee both with regard to his duties to marshal the estates’ assets and his efforts to evaluate the estates’ claims against Moss Adams."

While the trustee had sought up to $277,000 in legal fees, Judge Overstreet ruled that $180,000 was an appropriate amount in sanctions.  Moss Adams' counsel has filed a motion asking the judge to reconsider her ruling.

$27 Million ATM Ponzi Scheme Results in Prison For California Brothers, Woman

Two California brothers and a woman who lived with them were sentenced for masterminding a $27 million Ponzi scheme based on video advertisement screens mounted on ATMs and vending machines.  Alan G. Flesher, 65, Wayne D. Flesher, 62, and Nancy Carol Khalial, 65, (the "Trio") received sentences of 210 months, 72 months, and 48 months, respectively.  Flesher's sentence was significantly higher than his two co-defendants as he was recognized as the leader of the scheme.  Under statutory sentencing guidelines, each of the Trio had faced up to 340 years in federal prison after pleading guilty last year to seventeen counts of mail fraud.

From 2001 to 2005, the Trio operated Unlimited Cash Inc. ("Unlimited Cash") and Douglas Network Enterprises Inc. ("DNE").  Potential investors were promised lucrative returns made possible through the placement of Ad Toppers - video monitors capable of displaying video advertisements - on vending machines and ATMs.  The Ad Toppers would show advertisements for popular companies such as Coca-Cola, Gold’s Gym, and Paramount Pictures, taking in a portion of ATM transaction fees and advertisement revenue.  Based on these promises, nearly 800 investors invested more than $40 million with the two companies.

However, contrary to their representations, the Trio did not use a majority of the funds raised to place ATMs and Ad Toppers.  Rather, investor funds were used for a multitude of unauthorized purposes, including personal salaries, sales commissions and payments to existing investors - a classic hallmark of a Ponzi scheme.  In addition to the prison sentences, the court also ordered a total of $27.4 million in restitution - the estimated amount of investor losses.

Death Sentence for Chinese Woman Convicted of $70 Million Ponzi Scheme

A Chinese woman who masterminded a $70 million Ponzi scheme has been sentenced to death by a Chinese court - possibly by firing squad.  Haiyan Lin, 39, from the Wenzhou province, received the sentence as part of a broader push by Chinese authorities to crack down on the underground lending industry that has found itself awash with cash as part of Chinese stimulus efforts.  Haiyan is the latest of several women who have received a death sentence for their role in investment frauds.

According to Chinese authorities, Lin began soliciting funds in 2007, telling friends, former classmates, and family members that she could deliver high returns with little risk.  While evidence suggests that her business began as a legitimate venture, she soon began to encounter heavy losses as a result of investing in multiple high-risk investments, including futures and speculative stocks.  Lin eventually collected approximately $70 million from investors. 

However, instead of disclosing her mounting losses to investors, Lin instead continued to solicit new investments.  In turn, Lin used funds from these newly-solicited investments to make payments to existing investors - a textbook example of a Ponzi scheme.  The scheme eventually collapsed in October 2011.

China differs from the United States in that it allows the imposition of the death penalty for nearly sixty offenses, including fraud and economic crimes.  By contrast, the United States allows only a handful of offenses to qualify for the death penalty.  This results in one of the highest amounts of executions annually, with it estimated that China executed approximately 4,000 prisoners in 2011.  This has also included death sentences for women accused of Ponzi schemes, including Wang Caiping, was sentenced to death last year after an investment fraud that racked up losses of nearly $20 million through risky futures and gold trading.  

However, Chinese courts allow the commutation of a death penalty to life in prison after serving two years of the sentence, which was recently seen in the case of Wu Ying.  Ying, who had been sentenced to death for a $60 million Ponzi scheme, had her sentence commuted to a life sentence in May 2012.  

California Man Guilty in $250 Million Ponzi Scheme

A federal jury has returned a guilty verdict against a California man for masterminding a massive Ponzi scheme that bilked investors out of over $250 million.  James Stanley Koenig, 60, was found guilty of all but one of the three dozen criminal charges levied against him by prosecutors.  Koenig will remain in custody until his June 11, 2013 sentencing, and could receive a sentence of up to 50 years in prison.

Koenig ran Asset & Real Estate Investment Company ("AREI") along with fifty affiliated companies, telling potential investors that it specialized in senior housing centers.  Beginning in 1997, AREI controlled more than twenty senior housing and residential assisted-living centers, representing that they were suitable as a secure and profitable vehicle for tax-sheltered property exchanges.  After purchasing an assisted living facility, Koenig would then sell ownership shares in the property to investors.  Eventually, more than 1,000 victims would invest hundreds of millions of dollars with Koenig.

However, while Koenig represented that investor funds and facility revenues were reinvested back into the facilities, this was not the case.  Instead, Koenig used investor funds to to pay returns to existing investors, as well as finance a luxury lifestyle enjoyed by himself and two co-conspirators.  This lifestyle included an 80-acre castle estate, a Lear jet, luxury homes and fancy cars.  

While investigators charged that AREI was insolvent no later than May 2007, Koenig continued to bring in new investors based on promises of false profitability.  After an investigation, criminal authorities arrested Koenig in 2009 and charged him with 77 criminal charges - 40 counts of securities fraud and 37 counts of residential burglary that were predicated on Koenig's entry into investor homes to induce them to invest in his scheme.  Investor losses were estimated at over $200 million.

According to authorities, Koenig failed to disclose to investors that he had a previous 1986 conviction stemming from his role in a gold-selling scam.  He served two years in federal prison and was ordered to pay over $5 million in restitution to defrauded investors. 

Petters Wants 50-Year Sentence Overturned

The man responsible for the third-largest Ponzi scheme in history has filed papers seeking to have his fifty-year sentence overturned, claiming that his former attorney failed to disclose that prosecutors had previously offered a 30-year sentence in plea negotiations.  Thomas Petters, 56, chose to stand trial in 2009 on allegations that he masterminded a $3.7 billion Ponzi scheme, even taking the witness stand to profess his innocence.  However, the strategy backfired, and Petters was sentenced to a fifty-year term after a federal jury found him guilty of all charges.  Petters' previous efforts to challenge the sentence have failed, and he is currently scheduled to be released in 2052 - just shy of his 95th birthday.  

Petters was arrested on October 3, 2008 after prosecutors alleged that his company, Petters Company, Inc., was not operating a successful and highly-profitable re-sale business as he claimed, but rather a massive Ponzi scheme that had taken in billions of dollars from investors.  According to Petters' motion, Petters' then-attorney, Jon Hopeman, spoke several days later with an assistant U.S. attorney, who allegedly informed Hopeman that the government would agree not to recommend a sentence of more than 30 years in exchange for Petters' guilty plea.   Petters was subsequently indicted on twenty charges, including wire fraud, mail fraud, money laundering, and conspiracy, which carried a possible term of hundreds of years in prison.  

Shortly after the indictment was unsealed, Petters met with Hopeman, who allegedly told Petters that he had not received any plea offer from the government.  The next week, Hopeman against met with the U.S. Attorney, who reiterated the 30-year sentence offer.  According to the motion, and as allegedly depicted in Hopeman's personal files, Hopeman informed the prosecutor that, "as a matter of personal pride," his "professional integrity would not allow" him to advise Petters to accept the offer.  In an affidavit filed with the Motion, Petters avers that he was never advised of this offer.  Petters then proceeded to trial, and on December 2, 2009, was convicted on all counts.  

Following Petters' conviction, Hopeman met with Shauna Kieffer to discuss possible issues that might arise during post-conviction proceedings.  In an affidavit, Kieffer claims that Hopeman told her of the Government's offer, and that he did not advise Petters of the offer because he felt "it was not a respectable offer."  The Motion concludes by stating that the sentence should be vacated or modified because of Hopeman's ineffective assistance of counsel and, in a claim likely disputed by Petters' victims, that the sentence was cruel and unusual because it was disproportionate to Petters' crimes.  

In the Motion, Petters' current counsel cites to Missouri v. Frye, a recent case decided by the U.S. Supreme Court involving the ramifications of the failure to disclose plea offers to an accused.  In Frye, the Court acknowledged the crucial role plea bargaining plays in the criminal justice system, stating that " Ours is for the most part a system of pleas, not a system of trials…To a large extent ...horse trading [between prosecutor and defense counsel] determines who goes to jail and for how long.  That is what plea bargaining is. It is not some adjunct to the criminal justice system; it is the criminal justice system."   Missouri v. Frye, 132 S. Ct. 1399, 1402 (2012).  Holding that there were certain responsibilities required of defense counsel in the plea bargain process to render adequate assistance of counsel under the Sixth Amendment, the Court ruled that, as a general rule, defense counsel had an affirmative duty to communicate formal offers for settlement from the prosecution to the accused defendant.  

While it is almost certain that the government will oppose the Motion, it will be interesting to see what position the response will tae.   Frye stands in contrast to the position that  an accused's guarantee to a fair and impartial trial is an adequate backstop that immunizes any errors in the pre-trial process. The government may also seek to distinguish its communications with Petters' former counsel from the "formal offers for settlement" addressed by the Court in Frye, noting that the lack of any written offer of settlement supports a position that the 30-year offer was merely part of an informal negotiating process that did not progress to any meaningful discussion.  

A copy of the Motion is here.