CFTC Sues U.S. Bank For Aiding 'Midwest Madoff' Ponzi Scheme

United States securities regulators launched a lawsuit against a well-known financial behemoth, alleging it allowed an Iowa man dubbed the 'Midwest Madoff' to knowingly misappropriate investor funds as he masterminded a $215 million Ponzi scheme.  The Commodity Futures Trading Commission ("CFTC") filed a complaint in federal court against U.S. Bank National Association ("U.S. Bank"), alleging it played an integral role in the massive Ponzi scheme perpetrated by Russell Wassendorf, Sr. through his company, Peregrine Financial Group, Inc. ("Peregrine").  The CFTC charged US. Bank with multiple violations of the Commodity Exchange Act and requested a variety of relief including court-ordered restitution, disgorgement of gains tied to the fraud, and civil monetary penalties.  

Peregrine was a renowned commodities broker whose founder, Wassendorf, was once considered an icon in the commodities industry.  However, this changed with Wassendorf's arrest in July 2012 following a failed suicide attempt outside Peregrine's headquarters.  In a suicide note he left, Wassendorf confessed to a long-running fraud, and was later indicted, pled guilty, and sentenced to fifty years in prison.  He was ordered to pay more than $215 million in restitution.  

According to the complaint, Peregrine became registered with the CFTC in August 1992, and Wassendorf soon began using U.S. Bank for Peregrine's needs as a result of his previous banking relationship with the bank.  The bank would later maintain more than 30 accounts for Wassendorf and Peregrine, including personal accounts for Wassendorf and his family, Peregrine accounts, and accounts for other Wassendorf businesses.  Over the course of this relationship, Peregrine would deposit more than $300 million of customer funds with U.S. Bank.

Wassendorf enjoyed a preferential status with U.S. Bank due to his wealth and potential as a long-term customer.  This resulted in the bank making unusual concessions to Wassendorf, including allowing him to limit access to an account, with an account number ending in 1845 (the "1845 Account") that held millions of dollars of Peregrine's customer funds, to only him.  Indeed, U.S. Bank's internal computer system carried a memo for the 1845 Account stating that

“Per Russ Wasendorf request no account balance confirmations authorized on acct”

The bank was notified that the 1845 Account was designated as a Commodity Exchange Act Customer Segregated Account, consisting of funds from two primary sources: deposits at its Cedar Falls, Iowa branch, and wire transfers from a Peregrine customer account at JP Morgan.  As a customer segregated account, the 1845 Account was subject to various rules and regulations under the Commodity Exchange Act.

However, according to the CFTC, U.S Bank frequently flouted industry rules and regulations in allowing Wassendorf to use funds from the 1845 Account for a variety of prohibited purposes - effectively allowing him to use the account as Peregrine's commercial checking account.  This included the outflow of millions of dollars to an account related to the construction of Peregrine's new headquarters, more than $5 million to an account for Wassendorf's restaurant, My Verona, and even the transfer of more than $2 million as part of Wassendorf's 2010 divorce settlement.  

The complaint singles out a female employee identified only as "Banker A" for having a close relationship with Wassendorf.  

U.S. Bank has denied responsibility, instead accusing the CFTC of attempting to deflect blame for its failure to detect Wassendorf's fraud.  

A copy of the CFTC's complaint is here.

$11 Million Movie Production Ponzi Scheme Nets 27-Year Sentence for Mastermind

A film producer who promised investors exorbitant returns through the production of independent movies, including one starring reality TV star Flavor Flav, was sentenced to serve 27 years in prison.  Mahmoud "Mike'' Karkehabadi, 55, received the sentence after he was previously convicted on fifty-one criminal counts, including grand theft and the fraudulent sale of securities.  While Karkehabadi was convicted at trial, his business partner, Timothy Cho, was acquitted of all charges.  

Karkehabada, also known as Mike Karkeh, was a partner in Alliance Group Entertainment ("AGE") along with Cho.  AGE produced a total of five movies, each having a crime or mixed martial arts theme, and starring a host of lower level celebrities, including Flavor Flav, Quinton "Rampage" Jackson, and Armand Assante.  Investors were solicited to contribute to the production costs of the movies, under the premise that Karkeh had already secured a lucrative distribution deal and that returns of 18% - 35% were guaranteed - even if the audiences never showed.  When the economy began faltering in 2008, Karkeh told investors that the distribution deal had supposedly fallen apart, and solicited them to 'roll over' their investment into a second film.  In total, 21 investors contributed over $11 million to Karkeh and AGE.

However, the films did not net the exorbitant returns advertised by Karkeh, but instead brought in only $500,000 of revenue.  Faced with returns far less than promised, Karkeh used incoming investor funds to pay distributions of profits and principal to existing investors - a classic hallmark of a Ponzi scheme.  

Ironically, a third co-conspirator, Deanna Ray Salazar, was also involved with an unrelated Ponzi scheme.  She pled guilty last June to her role in the scheme and received a two-year prison sentence.  

Hawaii Father and Daughter Indicted in $8 Million "Parking Lot" Ponzi Scheme

A federal grand jury indicted a Hawaii man and his daughter for carrying out a Ponzi scheme that took in more than $8 million from unsuspecting investors.  George Lindell, 65 , and Holly Hoaeae, 39, charged with thirteen counts of mail fraud, three counts of wire fraud, and one count of conspiracy to commit money laundering.  Each of those counts carries a statutory maximum sentence of twenty years' imprisonment, as well as criminal monetary penalties.  

According to authorities, Lindell and Hoaeae operated the Mortgage Store, which solicited potential investors, many of whom were Maui residents, to invest in what the pair called the "parking lot," which promised to pay interest above that being paid by financial institutions.  Investors were told that their funds would be invested in safe investments such as bonds. Additionally, Lindell and Hoaeae used the Mortgage Store to refinance investor mortgages for amounts well in excess of their existing mortgages.  In total, investors entrusted over $8 million to the pair.

However, Lindell and Hoaeae engaged in little legitimate business, and instead used incoming investor funds to pay existing investors in a classic Ponzi scheme.  The majority of investor funds were used for personal expenditures for the pair, including the construction of a residence in Lahaina, Maui, the purchase of a Lexis automobile, payment of a $27,967 debt on a truck loan, and payment of $28,500 for a New Zealand safari.

The Mortgage Store had filed for bankruptcy in September 2010, listing debts of more than $10 million.  Lindell and Honaeae agreed to surrender $6 million that was obtained from the scheme in a settlement with the bankruptcy trustee.  In a sign that criminal charges might be pending, Lindell agreed in the settlement agreement that some of the transactions were made "with an actual intent to hinder, delay or defraud creditors of The Mortgage Store."

Judge Approves 1% Distribution for Stanford Victims

A federal judge has cleared the way for victims of Allen Stanford's $7 billion Ponzi scheme to receive a first interim distribution amounting to 1% of their estimated losses.  United States District Judge David C. Godbey approved the distribution plan proposed by Ralph Janvey, the receiver appointed to marshal and recover assets for Stanford's victims.  Under Janvey's plan, a total distribution of $55 million will be made to approximately 17,000 claimants holding collective claims exceeding $5 billion.  According to Janvey's attorney, “We will follow it up in a subsequent distribution as the money comes in."

Janvey originally sought approval for a claims process back in November 2011, reporting that the Receivership had $114.5 million of cash on hand and $96.6 million in assets, and estimating that nearly $1 billion of external assets could potentially be recovered for the benefit of victims.  The court approved the proposed claims process in May 2012, and established September 1, 2012 as the deadline by which victims had to submit proof of claim forms detailing their losses.  In January 2013, Janvey proposed his distribution plan, explaining that he had received over 30,000 investor claims with net investor losses of approximately $5.13 billion.   With Judge Godbey's approval, victims can expect to receive a distribution check within 90 days of the date of the order.  

Stanford was convicted of running the second-largest Ponzi scheme in history, and was sentenced to 110 years in prison in June 2012.  

Ponzi Schemer's Ferrari, Harley, Boats Scheduled For Auction

Several luxury cars, boats, and a motorcycle, including a Ferrari Spyder 348 Convertible, are scheduled to be auctioned off after their previous owner was convicted of operating a Ponzi scheme that duped hundreds of investors out of more than $50 million.  John Bravata, of Kalamazoo, Michigan, was found guilty in March 2013 of fifteen criminal charges, including fourteen counts of wire fraud.  Each count of wire fraud carries a maximum statutory sentence of up to twenty years in prison, as well as up to a $250,000 fine.  The auction is scheduled for June 18th - the same day Bravata is scheduled to be sentenced.

The Scheme

 Bravata operated BBC Equities, LLC ("BBC") and Bravata Financial Group, LLC ("Bravata Financial"), along with his son, Antonio, who served as a sales associate, and Richard Trabulsy, who served as chief executive.  According to Bravata, the 'BBC' used in the entity names was an acronym for 'Billionaire Boys Club.'  BBC was touted to potential investors as a successful real estate investment fund, initially raising more than $3 million from family and friends.  Later, BBC and Bravata Financial hosted free seminars where potential investors were provided with a free lunch and told that their investments would be used to purchase real estate that would provide a guaranteed annual return of 12%.  Investors were provided with offering materials, including private placement memoranda outlining the proposed use of investor funds.  BBC also used a variety of advertisements to reach potential investors, including an elaborate websites and magazine advertisements, including a spread in Forbes magazine in December 2008.  In total, over 400 investors contributed approximately $50 million.  Neither the Bravatas nor their two funds were registered with the Securities and Exchange Commission.  

However, neither BBC nor Bravata Financial was a legitimate business, and instead were used by John Bravata to perpetrate a massive Ponzi scheme that survived only by constantly soliciting new investors. Of the $50 million raised from investors, only $20 million was spent on real estate that was not only highly-leveraged, but did not produce income.  Indeed, it is estimated that, at the time the fraud was uncovered, existing mortgages on these properties exceeded $128 million.  The remainder of investor funds were used to sustain an elaborate lifestyle for the Bravatas and Trabulsy, with purchases ranging from luxury vehicles to vacations to artwork.  

The Toys

The Securities and Exchange Commission filed a complaint against Bravata and his related entities in 2009, and a receiver was ultimately appointed to marshal assets for the benefit of defrauded investors.  In its complaint, the SEC alleged that Bravata had used investors funds for a variety of purposes, including to sustain a luxury lifestyle that included the purchase of fancy boats and cars.  One car, a 1995 Ferrari 348 Spyder, was the source of legal wrangling between Bravata and the SEC, with the SEC ultimately seeking to have Bravata held in contempt after they alleged he traded the Ferrari with a business associate to settle previous debts.  Bravata later claimed he needed the Ferrari as collateral to pay his legal debts. 

In March 2011, after a criminal case was instituted, a federal judge ordered the seizure of numerous luxury automobiles and watercraft belonging to Bravata.  This included:

• 1969 Ferrari conversion
• 2007 Maserati Quattroporte
• 1995 Ferrari 348 Spider
• 2003 Ford Pickup
• 2004 Seadoo personal watercraft
• 2003 Seadoo personal watercraft 
• 2006 Chevrolet Corvette
• 2004 Nortech Catamaran

Since their seizure, the cars and boats have been maintained by an auction company.  With Bravata's conviction, five of those items have been scheduled for auction: the 1995 Ferrari, the 2007 Maserati, two of the Seadoo personal watercraft, and a 2003 Harley Davidson.  The auction is scheduled to begin June 18, 2013, at 8:00 A.M. EST, and each item will have a beginning asking price of $1,000.  

All proceeds from the auction will go to Bravata's victims.  

A link to the auction website is here.