State Fund Will Pay $3.25 Million to Victims of Lawyer's Ponzi Scheme

A Pennsylvania state fund supported by attorney registration fees will pay $3.25 million to victims of an elaborate Ponzi scheme masterminded by a prominent Pennsylvania lawyer.  Anthony Lupas, a former long-time school district solicitor and father of a local judge, was arrested back in May 2012 and charged with bilking dozens of victims who thought their funds were being invested in tax-free trusts yielding 5% annually.  Criminal proceedings against Lupas remain on hold while his attorneys fight efforts to declare him competent for trial.

According to authorities, Lupas offered clients the ability to earn a steady 5% return through an investment in tax-free trusts.  This continued for years, until Lupas suffered injuries in a 2011 fall that allegedly diminished his mental faculties.  Lupas's injuries resulted in his inability to keep up with investor payouts, and his his son, Judge David Lupas, would later contact authorities after discovering certin suspicious circumstances surrounding his father's investment operations.  After an investigation, the elder Lupas was arrested and charged with 29 counts of mail fraud, one count of conspiracy to commit mail fraud and one count of conspiracy to commit money laundering.

The Pennsylvania Lawyers Fund for Client Security is a fund created by the Pennsylvania Supreme Court in 1982 to compensate clients whose funds were misappropriated by their attorneys.  The fund is wholly funded by state lawyers, who pay an annual fee towards upkeep of the fund, and each award is limited to a maximum of $100,000. A total of 47 of Lupas's victims will share in a $3.25 million award from the fund.

While Lupas's lawyers recently argued that he suffers from an advanced stage of Alzheimer's disease and suffers hallucinations, prosecutors argue that Lupas is likely faking his condition in an effort to continue to dupe others to win his freedom.  Both the government and Lupas's defense team called medical experts to support their cause, and U.S. District Judge Robert D. Mariani is expected to issue a decision shortly.  While a conviction on just one of the thirty-one charges he is facing would effectively be a life sentence for Lupas, he potentially faces hundreds of years in prison if convicted on all counts.

Gold, Kidney Dialysis at Center of Alleged $5.6 Million Ponzi Scheme

The Securities and Exchange Commission filed an emergency action alleging that several defendants raised nearly $6 million from investors worldwide based on an elaborate Ponzi scheme pitching gold and kidney dialysis clinics.   Christopher A.T. Pedras, of Turlock, California and Auckland, New Zealand, as well as Sylvester M. Gray, of Kaysville, Utah, and Alicia Bryan, of Bossier City, Louisiana, were charged with multiple violations of federal securities laws in connection with their roles in the purported scheme.  The Commission is seeking injunctive relief, an asset freeze, disgorgement of ill-gotten gains, and civil monetary penalties.

According to the complaint filed by the Commission, Pedras formed several companies, including Maxum Gold Bnk Holdings Limited, Maxum Gold Bnk Holdings, LLC, FMP Medical Services Limited, and FMP Medical Services, LLC.  With the assistance of Gray and Bryan, Pedras pitched two investment programs to potential investors: the Maxum Gold Trade Program ("Maxum Gold") and the FMP Renal Program ("FMP Renal")

Maxum Gold was portrayed as an intermediary that allowed banks to trade with one another and avoid legal restrictions.  Investors were offered several options to invest in Maxum Gold, ranging from a "starter" program that paid 4% monthly for a six-month term to a "standard" program that paid 8% monthly for twelve months.  Investments took the form of investment contracts, and investors were also solicited by Maxum Gold's team of sales agents.  Investors were told that the details of the operation were highly secretive:

Who is the Bank of Trade: you will never be given this information, if you did get it, why would you need the Trade Platform, operated by a skilled professional.

In total, more than 50 investors invested in the Maxum Gold program from July 2010 and mid-2012.  

After scheduled interest payments to Maxum Gold investors began facing delays in mid-2012, which Pedras blamed on New Zealand regulators, investors were first encouraged to invest more to lock in then-current rates.  Later, in early 2013, Pedras and his sales agent team began encouraging Maxum Gold investors to roll over their investment to FMP Renal, which purportedly operated kidney dialysis clinics in New Zealand.  In total, Pedras raised nearly $6 million from Maxum Gold and FMP Renal investors.  

However, neither the Maxum Gold nor the FMP Renal programs were real.  Instead, funds from new investors were used to make principal and profit payments to existing investors - a classic sign of a Ponzi scheme.  In addition to paying approximately $2.4 million in purported "profits" to investors, Pedras used investor funds for a variety of unauthorized uses, including (i) $1.4 million in cash withdrawals, (ii) $1.2 million in sales commissions to the sales team, and (iii) approximately $337,000 in retail expenditures that included car payments and travel.  

A copy of the complaint is below:

Maxum complaint.pdf

71-Year Old Florida Pastor Pleads Guilty To $5 Million Ponzi Scheme

A Florida pastor could face up to twenty years in prison after pleading guilty to orchestrating a Ponzi scheme that offered annual returns of up to 1,000% and took in more than $5 million from fellow pastors and congregants.  Charles L. Kennedy, Jr., of Tampa, Florida, agreed to plead guilty to a single count of wire fraud before a Denver federal court judge.  While wire fraud carries a potential maximum term of twenty years in prison, Kennedy will likely receive a lesser sentence under federal sentencing guidelines.

According to authorities, Kennedy owned and operated a Florida company known as Keys to Life Corp. ("Keys to Life").  Sometime on or before April 2005, Keys to Life partnered with Trinity International Enterprises, Inc. ("Trinity"), a Colorado company.  Through Keys to Life, Trinity, and another company, CFO-5, LLC, Kennedy and several other co-conspirators solicited potential investors by telling them that their funds would be used to trade in investment-grade European bank notes that carried potential annual returns ranging from 200% to 1,000%.  Kennedy also solicited fellow pastors and members of their congregations, telling them that for every $1,000 invested, the minimum return would be $1,000,000 which would be payable in 90 days.  On a non-compounding basis, this translates to an annual return of approximately 400,000%.  In total, approximately $5 million was raised from more than 100 investors nationwide.  

However, there was no European bank note program.  Instead, the men operated what is known as a "prime bank" scheme, and used incoming investor funds to pay interest and principal redemptions to existing investors.  Indeed, of the nearly-$500,000 raised from fellow pastors, Kennedy sent $145,000 to Trinity and misappropriated the remainder for his personal use.  Kennedy was charged by the Securities and Exchange Commission in July 2008, and was later indicted in March 2012 on seventeen criminal charges, including fifteen counts of wire fraud.

Kennedy is scheduled to be sentenced January 22, 2013, and has agreed to pay $315,000 in restitution to defrauded victims as part of his plea agreement.

A copy of the criminal indictment is below:

US-v.-Charles-Kennedy-Indictment.pdf by jmaglich1

 

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