SEC Halts $150 Million California Ponzi Scheme

The Securities and Exchange Commission ("SEC") announced that it had obtained an emergency asset freeze and filed civil fraud charges against a consortium of California companies suspected of raising more than $150 million from over 2,000 investors in a massive Ponzi scheme.   In a complaint unsealed today, the SEC accused Yin Nan (Michael) Wang and Wendy Ko, through their company Velocity Investment Group ("Velocity Group"), of operating a "Ponzi-like scheme" that violated the anti-fraud provisions of the federal securities laws.  The SEC is seeking injunctive relief, the disgorgement of ill-gotten gains, civil monetary penalties, and the appointment of a receiver.  

Wang is the owner and manager of Velocity Group, which is a Delaware corporation with a principal place of business in Pasadena, California.  Velocity managed at least eight unregistered investment funds known as the Bio Profit Series (the "BPS Funds"), which purported to be in the business of making real-estate loans in California.  Beginning in 2005, the BPS Funds sold more than $150 million in unregistered promissory notes, telling potential investors that the funds bought and made secured residential and commercial loans.  The various funds contained several tranches of unsecured promissory notes, which contained various repayment options.  Some tranches offered promissory notes with repayment terms ranging from 10 years to 30 years that promised a repayment of between 150% - 300% of the original promissory note balance.  Other tranches offered unsecured notes paying an annual rate of return ranging from 8% to 12%.  In total, more than $150 million was raised from over 2,000 investors.

Despite raising considerable sums of money during the various offerings, a variety of management fees and expense commissions reduced the amount of offering proceeds available for investment by 14% to 18%.  Combined with the above-average rates of return promised by the BPS Funds, this meant that the funds' investments had to deliver extremely high returns.  However, Wang and Velocity Group failed to use all available offering proceeds for investment.  Instead, Wang even admitted to another individual that he was using new investor money to pay old investors - one of the classic hallmarks of a Ponzi scheme.  A review of the general ledge of the various BPS Funds confirmed that investor interest payments were being funded with money from other BPS Funds.  

Wang is also accused of using another company, Rockwell Realty Management, to enter into sham transactions with the BPS Funds to obfuscate the amount of transfers among the various funds and create the illusion that the transfers were for the purpose of legitimate business activities.  In turn, Rockwell transferred millions of dollars for unauthorized purposes, including to Velocity Group, directly to Wang, and to various entities either owned or co-owned by Wang.  

The SEC indicated that it moved to halt the scheme based upon the belief that the BPS Funds would be moving forward with a scheduled October 15, 2013 distribution.  

A copy of the SEC's complaint is below:

comp-pr2013-233 3.pdf

Zeek Rewards Update: Clawbacks "Imminent," Interim Distribution Likely in 2014

The court-appointed receiver overseeing the $600 million ZeekRewards Ponzi scheme has issued a quarterly update detailing efforts to recover assets on behalf of the estimated one million victims.  Kenneth Bell, the court-appointed receiver, disclosed that he currently has approximately $320 million under his control as of September 30, 2013.  The quarterly report also provided several notable updates, including the current status of "clawback" litigation, efforts to recover cashiers' checks with stop-payments initiated by victims, and plans for an interim distribution to claimants.

Cashiers' Checks

Immediately after the Receiver's appointment in August 2012, many victims that had recently sent their investment funds to ZeekRewards via cashier's checks, teller checks, and bank money orders sought to prevent those instruments from being cashed by having their financial institutions issue "stop payment" orders.  According to the Receiver, these investors were successful in having approximately $17 million of potential deposits reversed.  However, under well-established law, even those investors who had the ill fortune of being the very last to invest before the scheme's collapse cannot enjoy any special preference or ability to retrieve their funds.  

The Receiver indicated that he had identified more than 700 financial institutions that had improperly stopped payment on more than 7,500 cashier's checks and money orders under Section 3-411 of the Uniform Commercial Code - and in violation of the asset freeze entered by the Court immediately after the scheme was uncovered.  While the majority of financial institutions have cooperated with the Receiver's demand for payment, several financial institutions have informed the Receiver that they do not intend to cooperate.  The Receiver indicated in the quarterly update that he intends to pursue his claims against those uncooperative financial institutions through litigation if necessary.

Clawback Litigation

The Receiver also detailed his ongoing efforts to identify assets transferred to investors in excess of those investors' original investments.  As of September 30, 2013, the Receiver estimates that approximately $283 million in fraudulent transfers were made to the so-called "net winners."  As the Receiver has detailed in previous updates, challenges remain to recovering these transfers - including the fact that nearly 100,000 investors are estimated to have been fortunate enough to profit off their investment.  The Receiver disclosed that he continues to weigh the most efficient way to pursue these net winners, and indicated that these efforts are likely to be

"a combination of individual actions, group actions, defendant class actions, and other alternative dispute resolutions as approved by the Court.  "

The Receiver also disclosed that a large amount of net winners reside outside the United States. Many of these net winners reside in countries that are signatories to the Hague Convention, which is an international treaty that establishes international procedures for service of process.The Receiver indicated that he intends to pursue these foreign net winners so long as such efforts are cost-effective and do not delay clawback litigation against domestic net winners.  

Perhaps most notable, the Receiver disclosed that "the first clawback claims are now imminent," and that a lawsuit against "multiple named defendants along with a class of net winners will be filed during the fourth quarter of 2013."  This can likely be taken as an indication that settlement efforts have broken down between certain net winners. 

The Receiver also stated that he had reached settlement agreements with nearly 160 net winners.  These settlements resulted in total payments of $2.235 million on total false profits of $3.94 million - meaning that settling net winners returned an average of nearly 57% of their false profits.  It was disclosed that net winners paid anywhere from 45% to 100% of their net winnings, with the Receiver taking several factors, including financial means, into consideration in negotiating settlements.  The Receiver has historically sought to approve batches of settlements, and indicated he intends to move shortly for approval of the more recent settlements.

Claims Process

Finally, the Receiver provided an update on the claims process recently established for victims.  According to the Receiver, the claims process resulted in over 174,000 entities filing nearly $600 million in claims.  Approximately 99% of these claims were from "affiliate" investors, who accounted for 94% of the total dollar amount of claims.  The Receiver is working with his forensic accountants to fashion a cost-effective way to review the claims, and plans to soon file a motion with the court seeking to make an interim distribution.  This motion will include the establishment of procedures for objections, priority of payments among claimants, and the method for determining the amount of distributions to be made.  The Receiver anticipates filing this motion in November 2013, with a partial interim distribution happening sometime in 2014.  

A copy of the report is below:

Quarterly Status Report Q3 2013.pdf by jmaglich1

After Ponzi Schemer's Suicide, Wife Held Liable For $114 Million Judgment

A California woman whose husband committed suicide after being investigated for a massive Ponzi scheme can be held liable for the $114.5 million in damages owed to victims, a California appeals court ruled.  Kathleen Otto is the widow of deceased Fresno businessman John Otto, who committed suicide in May 2009 after authorities began investigating investor complaints about his equipment leasing business.  After an ensuing trial against several of Otto's companies and ex-employees resulted in a $114.5 million verdict, Kathleen Otto was found to have benefited from her husband's fraud and thus liable for his debts as a surviving spouse.  

John Otto, known as a pioneer in the equipment leasing industry, founded HL Leasing in 2001.  The company solicited potential investors by allowing them to invest in various equipment leases purportedly purchased by Otto from American Express.  Investors were told that the standard investment term was three years, and were promised annual returns of 9%.  In total, more than 1,000 investors entrusted over $100 million with Otto and HL Leasing.

When HL Leasing missed a scheduled interest payment in April 2009, many investors began asking questions.  After authorities began investigating, John Otto committed suicide in May 2009.  Several company employees, as well as Kathleen Otto, then faced civil charges that they knew about the fraud but failed to raise any alarm for fear it would disrupt their lavish lifestyles.  After a 2011 trial, the company employees were found liable by a jury, but Kathleen Otto was not.  After a $114 million judgment was entered against John Otto's former companies, the Court then found that, because John Otto was considered an alter ego of these companies, his surviving spouse, Kathleen Otto, could be held liable for the debts under California law.  

While victims now have another potential target to pursue for assets, Kathleen Otto's financial situation appears bleak.  She is reported to have recently filed for bankruptcy, and has liquidated a variety of expensive assets including a luxury car collection and fine jewelry.  

A copy of the Order is below:

otto-doc.pdf by jmaglich1

Indian Ponzi Scheme Raised At Least $335 Million From Investors

As Indian authorities continue to piece together the massive Saradha Ponzi scheme suspected of swindling thousands of investors out of their life savings, a new report has estimated that the scheme raised at least $335 million from investors.  The Saradha Ponzi scheme, as it is known, was exposed earlier this year after Indian authorities detained Sudipta Sen, who headed the Saradha Group conglomerate.  Besides a heavy financial toll, the scheme's aftermath has also seen at least ten people commit suicide, including investors and employees associated with the scheme.  

The Saradha Group operated a series of companies that dabbled in real estate, motor vehicles, and even bio gas.  Investors were solicited to make varying short-term investments that promised above-average returns.  One company, Saradha Realty, offered investors the ability to invest for a varying range of time, with the option to receive an allotment of land or a refund at the maturity of that investment along with the promised interest.  Depending on the amount invested, each investor was promised returns ranging from 12% to 24%.

The Saradha Group focused on attracting investors through numerous mediums, including a heavy presence in television and print media.  The editor and chief executive of the Saradha Group's media business also had significant ties to one of the leading Indian political parties, which also served to lend an air of legitimacy to the venture. In addition, an extensive network of agents was also used to solicit investors in return for commissions. Based on these efforts, it is believed that over $3 billion was raised from a large amount of investors - many of which were poor investors who entrusted their savings to the scheme. 

Since Sen's arrest, the Indian government has taken several measures, including the establishment of a fund to compensate Saradha investors.  When it became apparent that the fund would not be enough to compensate all of the investors, the government moved forward with commissioning the sale of Saradha Group assets, including properties throughout India and at least seventy-three automobiles.  

Guilty Plea In $30 Million Ponzi Scheme Targeting Haitian Community

A Florida man will plead guilty to operating a $30 million Ponzi scheme that targeted members of the south Florida Haitian-American community.  George Theodule, 52, agreed to plead guilty to a single count of wire fraud.  In return, prosecutors will drop the remaining thirty-nine charges Theodule faced when he was indicted in August.  While the wire fraud charge carries a potential maximum statutory sentence of twenty years in prison, Theodule is likely to face a lesser sentence under federal sentencing guidelines.  

Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC").  Using these companies, and a variety of other entities and investment clubs he formed, Theodule held himself out as a financial expert to the Haitian community, touting his 17+ years of experience trading stocks and options.  Theodule promised astronomical returns, guaranteeing potential investors 100% returns on their investment in just 90 days. As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone.  Based on these representations, Theodule is said to have raised more than $30 million from as many as 2,500 investors from July 2007 to December 2008.

However, authorities alleged that Theodule's claims of trading success were completely false, and that instead he was operating a massive Ponzi scheme.  Rather, Theodule supposedly suffered trading losses of at least $18 million, and spent the remainder of investor funds to sustain a lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas.

The Securities and Exchange Commission filed charges in December 2010, accusing Theodule of multiple violations of federal securities laws.  According to the court-appointed receiver, Theodule had spent early 100% of the money he took in, and little remained for victims.

A copy of the indictment is below:

Theodule Indictment.pdf