Update From Zeek Receiver Provides Insights Into Recovery, Clawbacks

The court-appointed receiver overseeing tbe recovery of funds for the $600 million ZeekRewards Ponzi scheme has filed his quarterly update (the "Update") with the court, providing interesting insight into asset recovery, litigation against so-called "net winners," and the recently-approved claims process.  The Update is the first public communication from Receiver Kenneth Bell since the approval of the claims process back in early May, and contains a comprehensive summary of the receivership team's recent efforts to recover assets for scheme victims, which are estimated to number nearly 1 million.  With approximately one month remaining for victims to file claims, the Receiver has already received potential claims exceeding $355 million.

Asset Recovery

To date, the Receiver has marshaled approximately $325.1 million to date for the benefit of investors.  This includes more than $222 million seized from financial institutions, as well as $85 million in cashiers' checks and other investor payments.  This figure also includes approximately $10 million seized by the U.S. Secret Service and currently in possession of the U.S Treasury, primarily from various e-wallet and payment processors used in the scheme.   The Receiver has also enlisted the services of a third-party data analysis vendor to determine whether there exist additional sources of funds that have not been pursued.  This includes the identification of several previously-undiscovered foreign bank accounts - including one account holding nearly $10 million. 

The Receiver has also worked to identify other non-cash assets previously owned by Rex Venture Group, including various parcels of real estate previously used by RVG to operate the scheme.  Additionally, the Receiver disclosed that he had obtained the contents of three climate-controlled storage units to eventually be auctioned off.  The Update indicated that auctions of this real and personal property were likely to take place by the end of 2013.  

Clawback Litigation

The Update contained a wealth of information concerning the Receiver's efforts to "claw back" funds from investors that had been fortunate enough to profit from their Zeek investment.  According to the Receiver, these "net winners" are believed to have received nearly $300 million in false profits, and represent a significant source of potentially recoverable funds for victims.

While the Receiver previously issued an ultimatum in April imploring net winners to come forward or face litigation, the Update indicates that this demand was limited to those net winners who had received $1,000 or more in excess of their principal investment.  According to the Receiver, this demand resulted in settlements with more than 135 net winners, and consisted of settlements payments of approximately $1,800,000 based on $3.2 million in net winnings.  While these aggregate settlements equate to an approximate recovery of 56%, the Receiver indicated that the individual settlements ranged from 45% to 100% based on a variety of factors including the investor's financial status and their efforts to recruit others.  Approval of these settlements remains under consideration by the Court.

The wide range of the proposed settlements is noteworthy in several aspects.  First, it appears that the "floor" - or the minimum settlement percentage that the Receiver would consider accepting - is just under 50% of an investor's false profits.  It also shows that some (albeit apparently very few) investors have chosen to come forward and repay all of their net profits without incurring litigation costs.  Finally, it may also have unwittingly provided those net winners who have thus far declined to settle with a blueprint for approaching any potential settlement negotiations.  However, while it is certainly not uncommon to accept a lower settlement amount in Receivership proceedings based on circumstances such as financial considerations, often this will be accompanied by a financial affidavit attesting to these facts under penalty of perjury.

Claims Process

The Court approved the Receiver's proposed claims process on May 8, 2013, giving investors until September 5, 2013 to submit claims for review and approval by the Receiver. According to the Update, significant effort was required just to provide the required notice to potentially interested parties.  Due to the sheer amount of potential claimants (the Receiver estimated there were approximately 2.2 million unique User IDs), the Receiver attempted to send 1.7 million emails notifying individuals of their rights under the claims process.  Of these 1.7 million emails, approximately 1.3 million were successfully delivered.  Of the approximately 420,000 emails that were not delivered, the Receiver ended up sending more than 330,000 postcards to physical mailing addresses, as well as over 7,000 postcards to financial institutions that could feasibly hold claims.  

The Receiver opened an online claims portal on May 15, 2013, which was to serve as the central mechanism by which investors could submit claims.  According to the Update, the Receiver has received nearly 54,000 claims to date.  Including claims marked as "in progress" on the Claims Portal, the aggregate amount of potential claims submitted thus far is approximately $355 million.  This amount slightly exceeds the total amount of funds recovered to date by the Receiver, which is currently approximately $325.1 million.

Upon finalization of a cost-efficient way to analyze each of the claims, which is estimated to be completed next month, the Receiver anticipates that he will soon begin conducting a claims reconciliation process.  Following completion of the claims reconciliation process, the Receiver will then issue a claim determination letter to claimants.  Soon after the Claims Portal closes, the Receiver also anticipates filing a motion seeking determination of, among other things, an objection procedure, a claim determination method, and how to treat de minimus claim amounts.  

The next communication from the Receiver is likely to come at or around the close of the claim submission period on September 5, 2013.

A copy of the Update is here.

More Ponzitracker coverage of the Zeek scheme is here.

Lawsuit Accuses Cincinnati Money Manager of Massive Ponzi Scheme

A Cincinnati money manager who once claimed to have more than $200 million in assets under management is now the target of a lawsuit charging that he masterminded an elaborate Ponzi scheme that caused "tens if not hundreds of millions of dollars" in losses.  Glen Galemmo, of Hamilton County, Ohio, was sued by dozens of former investors after they received an email last week from Galemmo stating that his funds were shutting down and directing all further inquiries to an IRS agent.  The suit, which also alleges Galemmo may have fled the jurisdiction, also names Galemmo's wife, the investment funds operated by Galemmo, and an accounting firm employed by Galemmo.  

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities.  In a 2001 newspaper article touting his successes, Galemmo claimed that he focused on identifying "severely-undervalued" stocks that were poised for a potential runup.  Likening the strategy to a search for "diamonds in the rough that can soar," investors were told of hefty profits.  Indeed, from 2006 to 2011, Galemmo and his funds claimed a 432% increase - including a 9.84% increase in 2008 when the S&P 500 index was down nearly 39%.  At Queen City's peak, Galemmo claimed that he had total assets under management of $200 million.  Based on these figures, Galemmo would have collected over $60 million in management fees.

However, according to the investors' lawsuit, Galemmo was not a prodigy with a knack for picking severely-undervalued stocks; rather, Galemmo used fund inflows to pay returns to existing investors in classic Ponzi scheme fashion.  Despite collecting over $60 million in management fees based on the claimed assets under management, the lawsuit alleged that Galemmo had run out of money and could not even satisfy minor tax bills.  In a July 17, 2013 email to investors, Galemmo announced that the fund would no longer be in existence, and that the office would be closed.  Investors were directed to an IRS Special Agent, and informed that Galemmo's legal counsel had instructed him to make no further comments. 

The lawsuit seeks a temporary restraining order freezing Galemmo's assets, alleging that Galemmo has fled the jurisdiction and had recently traveled to overseas countries - possibly to conceal investor funds.  

A copy of the lawsuit is here.

A copy of the July 17, 2013 email is here.  

SEC Alleges Texas Man Ran $4.5 Million Bitcoin Ponzi Scheme

The Securities and Exchange Commission has filed civil fraud charges against a Texas man, accusing him of masterminding a Ponzi scheme using the virtual currency known as Bitcoin that promised annual returns exceeding 300%.  Trendon T. Shavers, 30, was charged with violations of federal securities laws for operating a digital hedge fund that offered and sold Bitcoin-denominated investments to thousands of investors.  Bitcoin is a peer-to-peer payment system created in 2009 that is popular among certain groups due to its promises of security and anonymity.  The Commission is seeking injunctive relief, disgorgement of illicit profits, and civil penalties.

According to the Commission, Shavers, known as Pirateat40 on popular Bitcoin Forum Bitcointalk.org, began soliciting investors to park their Bitcoins ("BTC") in a digital hedge fund named Bitcoin Savings & Trust ("BTCST") in 2011.  Investors were required to "park" at least 50 BTC with BTCST, and in return were promised exorbitant returns of 1% daily with no minimum holding requirements.  When asked how he was able to achieve such lucrative returns, Shavers intimated that he was acting as a middleman for individuals who wished to purchase large quantities of BTC "off the radar."  Shavers later expanded on this explanation, saying

“If my business is illegal then anyone trading coins for cash and back to coins is doing something illegal. :)”  

When further asked about his profit margins, Shavers indicated that he achieved gross returns of nearly 11% per week, while paying out approximately 6%.  As the operation progressed, the minimum investment amount was raised to 100 BTC, and investors were permitted to re-invest their profits.  

In July 2012, the scheme was estimated to have raised hundreds of thousands of BTC, which then had an average price of approximately $7 per BTC.  However, Shavers announced in a post that the interest rate would decrease to 3.9% weekly beginning August 1, 2012, and began making preferential payouts to friends and longtime investors.  Later that month, Shavers declared default:

As much as I've tried to meet the deadlines within the community, there're conditions beyond my control which have escalated the process to the point it is today.  Bitcoin Savings & Trust has hereby given notice of default to its account holders.

The decision was based on the general size and overall time required to manage the transactions. As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system. On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits. In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.

However, according to the Commission, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  Shavers took in more than 700,000 BTC, returning approximately 500,000 BTC to investors through purported returns of interest or principal.  Of the remainder, Shavers transferred approximately 150,000 BTC - approximately $1 million based on the average price during that time period - to his personal account, which he used for a variety of unauthorized personal expenses including rent, car-related purchases, and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

To date, the Commission has identified at least 66 "investors" that contributed BTC's to BTCST.  That number is almost certain to rise, perhaps exponentially, based on both the enormity of the scheme and the attention the operation attracted in Bitcoin Talk (see here).  While the total amount of losses have not been identified, it is assumed that those who received profits in excess of their original investment could face "clawback" lawsuits designed to recoup those excess profits to be distributed to investors who were not as fortunate.  

A copy of the Commission's Complaint is here.

College Dropout Pleads Guilty in $30 Million Ponzi Scheme

A college dropout that swindled investors out of $30 million through an elaborate Ponzi scheme has pleaded guilty to wire fraud and money laundering charges.  Jose L. Nino Guzman, 30, of Seattle, Washington, entered the plea last week, approximately two years after he was arrested and charged with five counts of wire fraud.  While each count of wire fraud carries a statutory maximum term of twenty years, prosecutors are recommending a 151-month sentence, or roughly 12.5 years.  Guzman is scheduled to learn his fate at a November sentencing.  

Guzman attended the University of Washington, where he also worked as a bank teller for U.S. Bank.  He did not finish his schooling, instead choosing to drop out and form an investment company known as NDG Investment Group ("NDG").  Beginning in 2006, potential investors were told that Guzman had an extensive background in real estate, having served as a business and commercial lending officer.  Guzman told investors he would use their funds to develop real estate in Peru, which he had previously done quite successfully.  These investments carried little risk, as Guzman represented that each investment was secured by Peruvian real estate, and also would generate an above-average rate of return.  To convince investors of the legitimacy of the investment, Guzman provided periodic "updates" showing progress in the projects. Based on these representations, Guzman collected more than $30 million from over 200 investors - including family members, friends, and co-workers.

While several pieces of land were purchased in Peru, neither Guzman nor NDG successfully completed any of the projects, and there were no lucrative profits.  Rather, Guzman operated the classic Ponzi scheme, using incoming investor funds to satisfy obligations to existing investors.  Additionally, Guzman used investor funds to support a lavish lifestyle that included a $365,000 diamond ring, a $600,000 yacht, a $250,000 suite to watch Seattle Seahawks football games, and a $200,000 Bentley automobile. 

The Washington State Department of Financial Institutions issued a cease-and-desist order against Guzman and NDG in 2009 after an NDG employee became aware of the scheme.  

Madoff Investors Close To Settlement With Connecticut Bank

On the eve of closing arguments in one of the first lawsuits to proceed to trial stemming from Bernard Madoff's $65 billion Ponzi scheme, a group of investors suffering collective losses of approximately $60 million have reportedly reached a settlement with a Connecticut bank they claim should have discovered the fraud.  Westport National Bank, in Westport, Connecticut, was accused by over 200 investors of negligence in failing to exercise adequate caution in its role as custodian overseeing more than $60 million of Madoff investments.  The trial, which began last month, was scheduled to begin closing arguments last week before the sides reached a tentative settlement that could potentially return a fraction of investor losses.  The recovery, even if fractional, could be a welcomed event by those investors since their status as indirect investors has prevented any recovery from the bankruptcy trustee overseeing the liquidation of Madoff's brokerage firm.  

Westport National Bank ("Westport") is a small regional bank with branches scattered throughout Connecticut. Beginning in 1999, many investors began moving their Madoff accounts to Westport, which agreed to serve as custodian of the accounts.  Investors contended that they were under the impression that the bank would take possession, as well as verify the existence, of their assets by virtue of its custodial position.  This apparently was not done, as the accounts maintained by the bank were among those lost when Madoff's scheme was revealed in December 2008.

At trial, it was revealed that Westport's custodial department consisted of a single individual, who testified that "thick envelopes" containing trade confirmations were reviewed from time to time only "out of curiosity," and were usually placed directly in a filing cabinet.  Testimony from other bank officials was equally damaging, with Westport's former president unable to answer questions about how the bank maintained accurate records for its investors and even confessing he was unsure as to what due diligence was conducted to confirm that customer assets on account with Madoff did in fact exist.  

A reported settlement will not end the bank's exposure to Madoff, though.  The trustee for Madoff's broker-dealer, Irving Picard, has also filed a lawsuit against Westport seeking $28 million, and the Office of the Comptroller of the Currency previously settled allegations with the bank that unsafe and unsound banking practices existed.  The bank has lost over $20 million since 2009, and the Wall Street Journal reports that Westport's liability insurance was cancelled due to an exemption covering bankruptcies like that in the Madoff case.  

More Ponzitracker coverage of the Madoff case is here.