42-Year Sentence For Mastermind of $200 Million Ponzi Scheme

A California man that orchestrated a Ponzi scheme that took in more than $200 million from victims has been sentenced to a 42-year prison term.  Shasta County Superior Court Judge Bradley Boeckman handed down the sentence to James Koenig, 60, after a jury convicted Koenig of thirty-five criminal charges back in May 2013.  The scheme is one of the largest in California history, with estimated total losses to victims in excess of $90 million.

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, pitching the centers as secure and profitable vehicles 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, rather than reinvesting funds back into the centers, Koenig ran a massive Ponzi scheme that used investor funds to pay returns to existing investors, as well as financing a luxury lifestyle for himself and two co-conspirators.  This included the purchase of 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 based on Koenig's entry into investor homes to induce them to invest in his scheme.  

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. 

Please Nominate Ponzitracker For ABA Journal's Blawg 100 List

The ABA Journal is soliciting submissions for its seventh annual Blawg 100 - a collection of the 100 best legal blogs on the internet as determined through reader submissions.  If you've found Ponzitracker to be helpful over the past two years, whether as a resource or news source, it would be greatly appreciated if you could take a few minutes to submit a "friend-of-the-blawg brief" to ABA Journal nominating Ponzitracker.  That form is available here.

When Ponzitracker was formed just over two years ago, the mission was simple: to provide a free and comprehensive resource for those interested in tracking the (increasing) proliferation of Ponzi schemes, both nationally and worldwide.  The site is able to provide unique insight into the subject matter due to the editor's role as counsel to the Receiver in one of Florida's largest Ponzi schemes.  Since then, Ponzitracker has published over 600 articles, provided Ponzi scheme rankings and resources, and launched the most comprehensive and free database of legal briefing for those involved in Ponzi scheme litigation.  Best of all, these features have been offered free of charge since inception, as well as without any distracting advertising.  The site is usually updated daily, and serves as an authority on everything related to Ponzi schemes.  

With that said, Ponzitracker humbly requests that you consider nominating the site as one of ABA Journal's top 100 legal blogs.  To ensure unbiased submissions, ABA Journal prohibits any form of self-promotion and relies on reader submissions.  Ponzitracker will be filling out its own friend-of-the-blawg briefs for several of its favorite blogs, and invites you to do the same.  Just remember - submissions are due before August 9, 2013.

Thank you for your support!

Two NY Men Charged in $100 Million Ponzi Scheme

Two New York men have been arrested by the Federal Bureau of Investigation ("FBI") for masterminding a $100 million Ponzi scheme.  Brian R. Callahan, of Old Westbury, N.Y., and Adam J. Manson, of New York, N.Y., were indicted on three counts of conspiracy to commit wire fraud, two counts of securities fraud, seventeen counts of wire fraud, and two counts of aggravated identify theft.  If convicted of all charges, the men could face hundreds of years in potential jail time.  The government is also seeking forfeiture of any proceeds of the fraud, including several houses located in Montauk, Old Westbury, and Westhampton Beach.

According to the indictment, Callahan managed multiple offshore investment funds organized in Nevis and the British Virgin Islands. Several of these funds operated as "fund-of-funds", meaning that they purportedly used investor funds to invest in other hedge funds.  Callahan told investors that their funds would be invested in various New York hedge funds, and told investors that a $5 million minimum investment was required.  Another fund, the Fiduciary Select Income Fund, LP ("Fiduciary"), advertised itself as a short-term investment similar to a money market fund, but claiming above-average returns through investments in high-dividend stocks, bonds, and certificates of deposit.  In total, the funds raised nearly $120 million from at least 40 investors, and investors were provided with regular account statements purportedly showing consistent account growth.

However, rather than using investor funds as promised, the men diverted tens of millions of dollars for a variety of unauthorized purposes and used new investor funds to make payments to existing investors in Ponzi-scheme fashion.  Investor funds were used for a myriad of personal expenses, including credit card bills, golfing club dues, down payments on multiple houses, and payments for luxury automobiles including a Range Rover and BMW.  The men also acquired a 10-acre property in Montauk, New York, that consisted of multiple buildings and beach-front cottages.

In addition to the fraud charges, the indictment also charged Callahan with two counts of aggravated identity theft for his use of the identification of other individuals.  

A copy of the indictment is here.

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.