Former Bank of America Banker Charged in $2.1 Million Ponzi Scheme

A Massachusetts woman who worked as a personal banker at Bank of American for more than a decade has been charged with operating a Ponzi scheme that duped victims out of more than $2 million.  Elaina Patterson, 53, was charged with 16 counts of larceny over $250 and 15 counts of larceny over $250 from a person over 60.  Each charge of larceny over $250 carries a maximum jail term of five years (less if a fine is also ordered), while each charge of larceny from a person over 60 carries a maximum imprisonment of ten years.  

According to authorities, Patterson began working at Bank of America in 1999 at a branch in Reading, Massachusetts.  After gaining the trust of family and friends, she began pushing investments that she represented were reserved only for corporate and high-level clients due to their lucrative annual returns ranging from 10% to 15%.  Customers were given fake depository receipts and tax forms to add an air of legitimacy, and Patterson took in a total of more than $6 million from over 30 investors.

However, Patterson allegedly did not use the funds as intended, instead setting up a series of shadow accounts that she used to funnel investors funds both to herself and to other investors under the guise of interest payments.  In total, nearly $4 million was paid back to investors.  When the scheme began to falter in 2009, Patterson allegedly stole money from the accounts of older investors to disguise the theft.

Bank of America became aware of the fraud after doing its own initial investigation, and subsequently notified authorities. 

After Several Bizarre Twists, California Man Receives Sixteen Years for $80 Million Ponzi Scheme

“You are a liar. Numerous victims have described their financial crisis as a result of your crime and the heart rendering consequences they are enduring because of your fraudulent conduct....A substantial prison sentence will be important...to protect the public.”

-U.S. District Judge Garland E. Burrell, Jr. 

After a series of bizarre events that included an extortion attempt involving the impersonation of federal officers and an unsuccessful attempt to withdraw a guilty plea, a California man was sentenced to serve the next sixteen years in federal prison for masterminding a Ponzi scheme that took in more than $80 million from investors.  After originally pleading guilty to one count of wire fraud in February 2013, Anthony Vassallo, 34, recently tried to change his plea when he claimed that he had been coerced into entering the plea agreement by prosecutors and his own defense attorney.  However, United States District Judge Garland E. Burrell Jr. did not mince his words in rejecting this attempt, declaring that Vassallo had no credibility and branding him a 'liar' at a later hearing.

Beginning in April 2006, Vassallo, along with several others, operated Equity Investment, Management, and Trading Inc. (EIMT) in Folsom, California.  EIMT purported to be a hedge fund investment company that achieved lucrative returns through the use of a computer program designed by Vassallo to time the stock market.  These returns, which were as high as 36% annually, were promised with little to no risk of loss of an investor's principal.  To convince investors of the scheme's legitimacy, investors were invited to visit Vassallo's office to observe the trading program in action.  In total, investors contributed more than $80 million to the scheme.

However, according to authorities, the computer screens shown to investors were nothing more than 'dummy' computer screens designed only to fool investors.  Rather than deliver the exorbitant returns through legitimate trading, Vassallo perpetrated the classic Ponzi scheme by using investor funds to make payouts to existing investors.  While Vassallo did engage in some trading, he experienced heavy losses of investor funds, and by September 2007 he had virtually ceased trading.  Of the remaining funds, Vassallo made Ponzi-like payments to investors, as well as sustaining a lavish lifestyle that included the purchase of a $103,000 Lexus for his wife.

The case also featured an attempt at 'vigilante' justice when Vassallo's former bodyguard was charged with impersonating a federal agent in an attempt to 'shake-down' a pair of businessmen who had recently invested with Vassallo.  Along with several others, the bodyguard confronted the men and demanded the return of over $378,000.  The men, who brandished fake identification, bullet-proof vests, and radio earpieces, also threatened at least one of the investor's families.  The bodyguard and the men were each sentenced to a term of probation.

A hearing has been set for August 23, 2013 to determine the amount of restitution Vassallo will be ordered to pay to his victims.

Appeals Court Rules Madoff Trustee Can't Pursue Banks for $30 Billion in Claims

"No doubt, there are advantages to the course Picard wants to follow. But equity has its limits." 

A federal appeals court dealt a significant setback to the quest to recover funds for victims of Bernard Madoff's $65 billion Ponzi scheme, ruling that the court-appointed bankruptcy trustee could not pursue claims totaling more than $30 billion against financial institutions accused of aiding the scheme.  The U.S. Court of Appeals for the Second Circuit issued a unanimous order Thursday upholding the dismissal of claims that JP Morgan, HSBC, Unicredit, and UBS (the "Financial Institutions") 'aided and abetted' Madoff's fraud by ignoring numerous red flags that should have alerted them to the fraud.  The three-judge panel agreed that, under the theory of in pari delicto, because the bankruptcy trustee, Irving Picard, stood in the shoes of Madoff's former firm, he was precluded from bringing claims against third parties for their role in a fraud that Madoff's firm masterminded.  

Picard filed lawsuits against a multitude of financial institutions in 2009 and 2010, including the Financial Institutions.  Originally filed in bankruptcy court, the Financial Institutions sought to have the actions removed to federal district court based on Picard's standing to assert the claims, as well as whether the claims were precluded by the Securities Litigation Uniform Standards Act.  In late 2011, two different federal judges in the Southern District of New York granted motions to dismiss the trustee's common-law claims against the Financial Institutions, finding that Picard's claims were barred by the doctrine of in pari delicto.  Picard immediately appealed those decisions.

The doctrine of in pari delicto, translating to 'in equal fault,' is a compelling defense in the realm of bankruptcy jurisprudence, as "a debtor’s misconduct is imputed to the trustee because, innocent as he may be, he acts as the debtor’s representative." The Wagoner rule, drawn from the seminal case of Shearson Lehman Hutton, Inc. v. Wagoner, bars a trustee from suing to recover for a wrong that he himself essentially took part in. 944 F.2d 114, 118 (2d Cir. 1991).  Under this authority, the Second Circuit reasoned that

Picard alleges that the Defendants were complicit in Madoff’s fraud and facilitated his Ponzi scheme by providing (well-paid) financial services while ignoring obvious warning signs. These claims fall squarely within the rule of Wagoner and the ensuing cases: Picard stands in the shoes of BLMIS and may not assert claims against third parties for participating in a fraud that BLMIS orchestrated.

Dismissing Picard's claims that the doctrine did not apply or, in the event that it did, he was exempted as a trustee under the Securities Investor Protection Act, chief Judge Dennis Jacobs remarked that "Picard's scattershot responses are resourceful, but they all miss the mark."  

While Picard appealed to principles of equity in contending he should be permitted to bring the claims, the Court questioned the merits of this approach, remarking "it is not obvious why customers cannot bring their own suits against the Defendants."  As the Financial Institutions pointed out, indeed some victims have already done so.

While Picard still holds bankruptcy claims against the Financial Institutions totaling more than $4 billion, the Second Circuit's decision is a significant setback in the quest to recover funds for Madoff's victims, who to date have received three distributions of approximately 43% of approved losses.  To date, Picard has approved approximately $11 billion in claims, while he has recovered approximately $9.3 billion.

A copy of the Court's decision is here.

Arrests in Alleged $4 Billion Japanese Cow-Raising Ponzi Scheme

A former cattle farm manager and two other executives were arrested by Japanese authorities on Tuesday after they were accused of misleading participants in an investment venture that promised steady returns from a "wagyu beef ownership system."  Former president Kumiko Mikajiri, 69, and former managing senior directors Susumu Masubuchi, 59, and Katsuya Oishi, 74, were charged with soliciting investors based on misleading information relating to the actual number of breeding cows.  The company, Agura Bokujo, filed for bankruptcy in August 2011 with stated debts of approximately ¥420 billion - equating to approximately $4.2 billion - and ranks as the largest episode of consumer fraud in Japan's history.

Agura Bokujo was established in 1981, and was once Japan's second-largest beef producer.  Several decades ago, the company began offering a "wagyu beef ownership system" in which investors could purchase "wagyu" cows with an initial investment ranging from $35,000 to $58,000 per cow.  The cows would then be used for breeding, which would then yield proceeds from the sale of their calves.  Investors were promised steady returns of up to 8% annually, as well as the promise that Agura Bokujo would buy the cow back at the end of a period of several years.  Wagyu cows are a delicacy due to their enhanced diet, and their steaks can cost over several hundreds of dollars per pound.  Tens of thousands of investors took advantage of the program, no doubt drawn in by the promise of steady returns.  Agura Bokujo represented in business reports that it had 90,000 to 100,000 breeding cows on hand.

However, the massive earthquake that struck Tokyo in March 2011 wreaked havoc on the company, with fears that radiation from a Tokyo nuclear power plant had entered Japan's food chain.  These fears were well-founded after it was discovered that cattle had consumed severely-contaminated hay.  The discovery led to numerous requests by investors to cancel their contracts, and combined with a sharp decrease in demand for beef over radioactivity fears, the company was forced to file for bankruptcy protection in August 2011.  At the time of the bankruptcy, the company had approximately 71,000 investors in its cattle breeding program.  In a rehabilitation plan, the company proposed that it would buy back cattle for 10% of their principal value - a nearly total loss for investors.

After an investigation by Japanese authorities, it was discovered that company principals may have inflated the amount of cattle it purportedly owned.  According to authorities, approximately 100 investors received brochures containing incorrect information just before the company filed for bankruptcy.  Rather than a herd of 90,000 to 100,000 cows, authorities believe the amount of cows were closer to 60,000.  Thus, because the number of investors outnumbered the actual number of cows, it would appear that the same cow was sold multiple times to investors.  

According to a bankruptcy administrator, of the approximately $4.2 billion owed to investors, Agura Bokujo can currently repay only approximately $200 million.

Guilty Plea in $600 Million Prepaid-Funeral Ponzi Scheme

A St. Louis woman has pled guilty to her role in a massive Ponzi scheme that billed itself as a nationwide leader in the sale of prearranged funerals.  Sharon Nekol Province, 69, of Baldwin, Missouri, entered into a plea agreement with prosecutors in advance of a pending August trial date, pleading guilty to six federal charges, including wire fraud, mail fraud, and misappropriation of human premiums.  Province is scheduled to be sentenced on November 7, 2013, before United States District Judge Jean Hamilton, and prosecutors have agreed to recommend a maximum sentence of three years in prison, with the possibility that Province could avoid prison time through a sentence of probation.  

According to authorities, National Prearranged Services ("NPS") was created in 1979 and based in Clayton, Missouri.  Beginning in 1992, and through the use of its two subsidiaries, Lincoln Memorial Life Insurance ("LMIS") and Memorial Service Life Insurance ("MSLI"), it employed an aggressive sales strategy extolling the idea of pre-paying for funeral costs and playing on fears that family members could be footed with the bill.  Potential investors were told that the 'funeral contract' was essentially was an insurance policy ensuring that most, if not all, funeral costs would be taken care of upon an investor's death.  After agreeing on the amount of the policy, which often ranged from $5,000 to $10,000, investors were given the option to pay the entire policy in full or through periodic installments.  To ensure the safety of investor funds, NPS represented that it would deposit the majority of funds with a third-party trustee, often a financial institution, that would hold the funds until they were needed for funeral services. From 1992 to 2008, about 150,000 people purchased prearranged funeral policies through NPS.

However, many of these representations were untrue.  For example, the majority of investor funds were not deposited with neutral third-parties as promised, but instead were retained by NPS.  Additionally, NPS borrowed large amounts of the cash surrender value of the insurance policies taken out by investors, which in turn reduced the amount of death benefits that would be available to policy holders.  Funds were also used from new purchasers to pay policy premiums on the lives of previous purchasers, as well as for reimbursal of funeral services for earlier purchasers.

In 2008, authorities unsealed a 50-count indictment against six individuals that served as officers, directors, or advisers of NPS, including Province and several members of the Cassity family.  Province, who started as an administrative secretary, had risen to serve as secretary of NPS and vice-president of LMIS.  Her attorneys portrayed her as much less culpable than her co-defendants, who enjoyed immense wealth from their role in the scheme.  For example, James Cassity, who had previously served time for conspiracy and tax fraud violations, purchased several expensive homes - including a Nantucket home he sold to Google co-founder Eric Schmidt for $16 million in 2005.  Cassity, who is described by some as the "Bernard Madoff of Missouri," has maintained his innocence.  

A trial is scheduled for early August for the remaining defendants.