Boston Family Weighs Plea Deal For $10 Million Ponzi Scheme

A Boston family accused of masterminding a Ponzi scheme that bilked investors out of at least $10 million has a one-week deadline to strike a plea deal with prosecutors or else face trial.  Steven Palladino, 55, his wife Lori Palladino, 52, and son Gregory Palladino, 28, learned from a Massachusetts judge at a hearing on Tuesday the expected sentencing should the trio decide to enter into a plea agreement.  According to Suffolk Superior Court Judge Janet Sanders, the elder Palladino can expect a 10-to-12 year sentence, while his son can expect a sentence of up to two years.  Lori Palladino would not serve any prison time, and instead would receive a suspended sentence.  The family has until by January 21, 2014 to decide whether they will accept the plea agreement or take their chances at trial.  

The trio were the sole principals of Viking Financial Group ("Viking"), which advertised itself to investors as a high-yield, low-risk investment strategy carrying above-average returns by making secured loans to borrowers at high interest rates.  These purportedly profitable loans allowed Viking to pay an above-average return to investors while still pocketing the difference for a healthy profit.  Based on these representations, Viking took in more than $10 million from at least 40 victims.  

However, in reality Viking made very few loans, and of these loans, many were made in violation of a state statute prohibiting loan interest rates exceeding 20%.  Indeed, three of the loans extended in 2007 and 2008 carried interest rates exceeding 60% - which would later serve as the basis for three usury charges against Steven Palladino.  The majority of investor funds served only to support a lavish lifestyle for the Palladinos that included Bahamas trips, rent for Steven Palladino's mistress, and hundreds of thousands of dollars in gambling losses.  Additionally, nearly $400,000 in investor funds were used to satisfy a condition of Steven Palladino's probation stemming from a 2007 conviction for, ironically enough, defrauding an elderly relative.  

The family was indicted back in September on charges that they carried out one of the largest investment scams in Boston since Charles Ponzi's infamous scheme nearly 100 years ago. Each of the three was charged with one count of larceny over $250 and larceny over $250 from a person over 60.  The three were also charged with conspiracy to commit larceny, with Gregory Palladino facing an additional three counts of usury and one count of tampering with evidence. 

Following the indictment, Steven Palladino was recently arrested on loan-sharking charges after prosecutors accused him of seeking out an investor for repayment of a Viking-made loan.  

Previous Ponzitracker coverage is here.

North Carolina Bank To Pay $1.2 Million Penalty For Role in Ponzi Scheme, Payday Loans

A North Carolina bank will pay a $1.2 million fine after authorities accused it of failing to maintain proper controls to prevent a payday lender and massive Ponzi scheme from defrauding thousands of customers.  Four Oaks Fincorp, Inc., and Four Oaks Bank & Trust Company (“Four Oaks Bank” or the “Bank”), agreed to pay the penalty in connection with civil charges unveiled by the Department of Justice, which accused the bank of violations of the Anti-Fraud Injunction Act and the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA").  In addition to the fine, the Bank, which neither admitted nor denied wrongdoing, agreed to assist authorities in any ensuing criminal investigations.

According to authorities, Four Oaks Bank began a relationship with a privately-owned Texas third-party payment processor the ("3rd Party Processor") in 2009.  As part of the relationship, the Bank gave the 3rd Party Processor direct access to the Federal Reserve Bank in Atlanta, which allowed the 3rd Party Processor to directly submit Automated Clearinghouse ("ACH") requests for payment to the Federal Reserve.  This differed from the typical scenario where the Bank would serve as the intermediary between the 3rd Party Processor and the Federal Reserve, allowing the Bank to employ a variety of controls to ensure that the transactions are not suspicious or potentially fraudulent.  Indeed, these controls are required under the Bank Secrecy Act to ensure that the Bank has a customer identification program ("CIP") that sufficiently allows the Bank to verify the identity of each customer.  By providing the 3rd Party Processor direct access to the Federal Reserve, the DOJ alleged that the Bank failed to satisfy its "know-your-customer" obligations.  

Under the arrangement with the Bank, the 3rd Party Processor was able to originate nearly 10 million ACH transactions on behalf of its merchants for a total dollar value of nearly $2.5 billion.  This resulted in the generation of nearly $1 million of fees for the Bank.  While the majority of ACH transactions were connected to the 3rd Party Processor's relationship with various payday lenders, authorities also discovered that, in Spring 2012, 3rd Party Processor began allowing direct ACH access to a client named Rex Venture Group, LLC ("RVG").  RVG was the parent company of ZeekRewards, a massive Ponzi scheme that was shut down in August 2012 and which is estimated to have caused over $500 million in losses.  According to authorities, the Bank allowed direct ACH access to RVG despite the inability to verify (1) the identity of RVG's principals; and (2) the nature of RVG's business.  As a result, RVG was able to use the Bank to raise more than $60 million in just a short span before the Ponzi scheme was discovered. 

The settlement comes as authorities are increasingly scrutinizing the compliance of banking institutions with federal laws.  These laws, including federal anti-money laundering statutes, require banks to institute sufficient controls to identify and report suspicious activity to authorities.  The settlement by Four Oaks Bank comes days after financial juggernaut JP Morgan Chase agreed to a record-$2.6 billion fine for its role in the massive Ponzi scheme perpetrated by Bernard Madoff.   Other recent and notable settlements by high-profile banks include a $55 million fine by American Express Bank, a $1.256 billion fine by HSBC, and a $160 million fine by Wells Fargo/Wachovia.  Such cases make it clear that authorities are devoting increasing resources to policing banks, and it appears certain that the Bank's settlement is indicative of additional action.

A copy of the DOJ's complaint is below (thanks to ASDUpdates):

Doc 1 (1)

Petters Enlists "Jailhouse Lawyer" For Latest Attempt To Reduce 50-Year Sentence

A former Minnesota businessman currently serving a fifty-year prison term for masterminding the third-largest Ponzi scheme in history has filed yet another motion seeking a reduction in his sentence - this time enlisting the assistance of a "jailhouse lawyer" currently serving time for drug-related charges.  The latest motion filed by Thomas Petters, who was convicted of a $3.65 billion Ponzi scheme back in December 2009, seeks to renew his recently-denied attempt to have his sentence reduced and to recuse the presiding judge.  However, the fate of Petters' latest effort may be in jeopardy - the very lawyer that represented Petters in his previous attempt has observed that the subsequent order was not appealable.

Petters claimed that, after his arrest in October 2008, his former attorney failed to convey a plea bargain from the government that would include Petters serving a 30-year prison sentence.  Arguing that this failure to communicate the plea offer constituted ineffective assistance of counsel, Petters sought judicial modification of his sentence from a 50-year term to the 30-year term previously offered  on the basis that Petters would have readily accepted that sentence if he had been aware.  

At an evidentiary hearing in October, Petters was grilled on the witness stand by prosecutors, who claimed Petters would say anything in order to win a sentence reduction.  For the first time, Petters admitted his guilt in the scheme, but countenanced that with the claim that he was not the mastermind and that the scheme was simply a "culmination of ideas that got messed up."  Petters' former attorney also testified that he did communicate the plea offer to Petters, and that Petters had deemed the offer "ridiculous" at the time.  The former attorney, Jon Hopeman, also testified that Petters had instructed him not to settle for anything less than a 15-year term.  

In a ruling issued last month, Judge Kyle rejected Petters' claims in ruling that he received "constitutionally effective counsel and his sentence was not unlawful."  Judge Kyle discounted Petters' version of events, calling it his "final con," and denied the motion.

The latest motion regurgitates the argument that Petters was not provided with the formal plea offer made by federal authorities.  The motion also claims Petters was not allowed to submit a plea of "nolo contendere," also known as a no contest plea, which does not admit guilt but which allegedly would still have allowed Petters to enter into a plea agreement.  

Ponzi Victim Lawyers Fight Over Right To Deduct 25% Contingency Fees From Claim Distributions

Efforts by the court-appointed receiver for the $600 million ZeekRewards Ponzi scheme for court approval of a process to distribute assets to victims are currently on hold as a group of lawyers representing a small subset of victims has objected on the basis that the proposed process, which seeks to make distributions directly to victims, will prevent the lawyers from first deducting their 25% fee from each claim.  Claiming that the receiver's decision "would violate said Claimants’ Constitutional rights to Due Process," a Louisiana lawyer wants future distributions to over 700 victims made payable solely to his law firm - a position characterized by the receiver, Kenneth Bell, as "at least questionable." 

Authorities sued ZeekRewards back in August 2012, alleging the penny auction venture was nothing more than a massive Ponzi scheme that had drawn in hundreds of thousands of victims and was on the verge of collapse.  After Mr. Bell's appointment, his subsequent investigation revealed that hundreds of millions of dollars remained in Zeek bank accounts for eventual distribution to victims.  Bell later obtained court approval to conduct a claims process for investors to be implemented through an online claims portal, citing the inherent difficulties and financial strain of coordinating a typical claims process by U.S. mail because of the hundreds of thousands of victims.  The Receiver characterized the online claims process as "user-friendly," provided a "frequently asked questions" section, and assured victims that they were only expected to supply information they remembered or had access to.  In total, nearly 200,000 individuals ended up submitting claims.

However, a small subset - approximately 740 - of victims had originally entered into contingency fee agreements with a Louisiana law firm (the "Louisiana Firm") that filed a class action lawsuit against ZeekRewards that was later halted by the court, which deemed the lawsuit "ill-timed" and noted it was filed in violation of the stay provision of the order appointing Mr. Bell as Receiver.  Pursuant to that fee agreement presumably, the Louisiana Firm later "filed individual Claims on behalf of each and every one of the 740" victims.  

In December 2013, the Receiver sought court approval for distribution procedures, which included, among other things, a provision that payments would be made directly to victims.  The Louisiana Firm filed a sharply-worded objection (the "Objection"), characterizing the Receiver's decision as a refusal to consider their client's claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Louisiana Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form:

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

The Objection characterized the dispute as a constitutional rights issue, and unsurprisingly made little reference to the fact that making the payments directly to the Louisiana Firm would allow the deduction of the 25% contingency fee rather than being forced to contact each client to obtain that amount.  Considering that the average claim amount was approximately $3,100, and the fact that the Louisiana Firm claimed 740 clients, this would represent a average per-claim fee of $775, and cumulative average total fee of over half a million dollars for simply assisting victims in filling out a claim form.  (Obviously, the number could fluctuate based on the actual dollar amounts of the claims of the 740 victims.)

In his response, the Receiver enclosed a representative fee agreement, which not only put victims on the hook for 25% of any claim recovery and 33% of any lawsuit recovery, but also included an agreement that victims would be responsible for all costs and expenses incurred in prosecuting the class action, including

 long distance telephone charges, photocopying ($0.10 per page), postage, facsimile costs, Federal Express or other delivery charges, Westlaw or other legal research charges, deposition fees, expert fees, subpoena costs, court costs and filing fees, sheriff’s and service fees, travel expenses and investigation fees. 

Thus, it is quite likely that victims could be subject to even more than a 25% deduction from any claim distribution based on any incurred costs and expenses.  In summary, the Receiver stated that it is "outside the scope of and inconsistent with his duties to facilitate or enforce any attorneys’ fee agreements between claimants and their counsel."

Because of the Objection, the Court must decide how it wants to proceed, including whether a hearing is necessary.  In the spirit of allowing distributions to go forward with the unaffected 99% of submitted claims, it is also possible the Court could proceed with approving distribution procedures for those claims while reserving ruling on the affected claims.

A copy of the Louisiana Firm's motion is below (h/t to ASDUpdates):

Zeek Doc 177

Receiver's Response:

ZeekDoc183 Main (1)

JP Morgan To Pay $2.6 Billion Over Role As Madoff's "Primary Banker"

“It took until after the arrest of Madoff, one of the worst crooks this office has ever seen, for J.P. Morgan to alert authorities to what the world already knew.”

George Venizelos, FBI  

Financial juggernaut J.P. Morgan agreed to pay over $2.5 billion in criminal and civil penalties after it "failed miserably" in its duties by missing telltale signs that its customer, Bernard Madoff, was perpetrating a massive Ponzi schemes that would rank as the largest fraud in history.  In an announcement that had been expected for several weeks, the bank agreed to a series of settlements with federal authorities, civil regulators, and the bankruptcy trustee appointed to recover funds for Madoff's victims to resolve claims it was "willfully blind" to Madoff's $65 billion fraud.  In addition to forfeiting $1.7 billion and entering into a Deferred Prosecution Agreement with the Department of Justice, the bank will also pay $350 million to the Office of the Comptroller of the Currency and approximately $550 million to trustee Irving Picard.  

Madoff's "Primary Banker"

Madoff shifted the majority of his banking to JP Morgan back in 1986, which involved the frequent transfers of billions of dollars through Madoff's accounts.  Despite these significant transfers, virtually none of the funds were used to purchase securities.  However, as Madoff's success continued, JP Morgan began to sell structured products based on Madoff feeder funds, and even became an investor.  Despite the massive flow of money, virtually none of those funds were used to trade securities - an event that may have triggered obligations under the Bank Secrecy Act ("BSA") to file a suspicious activity report ("SAR") with federal regulators.  

Even while JP Morgan became more and more intertwined with Madoff's business, which reaped it an estimated $500 million in fees and commissions, bank employees increasingly voiced their skepticism as to Madoff's ability to generate such consistent returns. This included concerns by JP Morgan's internal due diligence team, as well as employees.  Some of these concerns, made by email internally, included:

“The Private Bank chose not to invest with any BLMIS feeder funds because it had never been able to reverse engineer how they made money”; and 

"For whatever it[']s worth, I am sitting at lunch with [JPMC Employee 1] who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme." 

While these concerns were voiced internally, no steps were taken by the bank to alert auditors until October 2008 when it submitted a "filing of suspicious activity" with the U.K. Serious Organized Crime Agency indicating it knew Madoff was "too good to be true."  Indeed, authorities alleged that JP Morgan's computer system raised red flags surrounding Madoff's conduct in both 2007 and 2008.  However, bank employees "closed the alerts" on both occasions.  At about the same time, the bank redeemed its $276 million investment in a Madoff feeder fund, and Madoff's fraud was exposed just weeks later.

According to Irving Picard, the bankruptcy trustee appointed to oversee asset recovery efforts for Madoff victims, Madoff's use of his JP Morgan accounts to "wash" investor funds violated the bank's anti-money laundering guidelines.  In addition to providing banking services to Madoff's firm, Bernard L. Madoff Investment Securities, JP Morgan also sold structured products tied to various BLMIS "feeder funds."  In total, JP Morgan's profits from its relationship with Madoff were nearly $500 million.

Deferred Prosecution Agreement, No Criminal Charges for JP Morgan Employees

A key aspect of the settlement involved JP Morgan's ability to avoid pleading guilty to criminal charges, a move that would have had serious implications for the bank's national charter.  Instead, authorities agreed to let the bank enter into what is known as a deferred prosecution agreement ("DPA").  Pursuant to the DPA, authorities charged the bank with two violations of the Bank Secrecy Act, but agreed that the charges would be dismissed after two years upon the bank's compliance with certain conditions.  DPA's have become increasingly popular in recent years, with their use skyrocketing from 2 in 2002 to at least 35 in 2012 alone.  While authorities pointed to suspicions raised by employees as an example of the bank's failure to spot Madoff's scheme, none of the bank's employees were indicted or named in the allegations.  

Majority of Penalties Will Go To Madoff's Victims

Authorities announced that the entirety of the $1.7 billion in funds forfeited by JP Morgan will go into the fund established by the DOJ to return funds to Madoff victims that were obtained through criminal and civil forfeiture actions.  The Madoff Victim Fund ("MVF"), overseen by former Securities and Exchange chairman Richard Breeden, had previously amassed over $2.3 billion largely as the result of the settlement of clawback charges against Madoff's largest investor, Jeffrey Picower.  The addition of the $1.7 billion will bring the total amount of assets in the MVF to over $4 billion - in addition to the approximately $10 billion separately amassed by Picard.  

While those holding claims approved by Picard will be eligible to apply for distributions from the MVF, so will thousands of other so-called "indirect" victims whose claims had previously been denied by Picard because their exposure to Madoff came through "feeder" funds, investment groups, and other investment vehicles.

Latest Bank to Acknowledge Deficiencies in Anti-Money Laundering Program

While JP Morgan may be the first bank to pay penalties based on providing assistance to a Ponzi scheme, the settlement is the latest in several recent settlements by other high-profile banks over deficiencies in anti-money laundering programs.  This includes a $55 million fine by American Express Bank, a $1.256 billion fine by HSBC, and a $160 million fine by Wells Fargo/Wachovia.  

A copy of the Deferred Prosecution Agreement is below:

196938999 JPMorgan Settlement Documents