Former NFL Punter Gets 7.5 Year Prison Sentence For $2 Million Ponzi Scheme

A former first round draft choice for the New Orleans Saints learned he will spend the next 90 months in federal prison for masterminding a $2 million Ponzi scheme.  Russell Erxleben, 57 - the current NCAA record-holder for the longest field goal in history - received the sentence after pleading guilty to a single count of wire fraud and money laundering in December 2013.  The prison term will not be Erxleben's first foray in federal prison - he previously served a 10-year sentence for a $30 million foreign currency trading scheme in 1999.

Erxleben was a college All-American while attending the University of Texas in the late 1970s, and later had the distinction of being only one of three kickers drafted in the first round of the NFL draft.  However, after playing six seasons in the NFL, Erxleben turned to investing.  He was later arrested and charged with securities fraud after authorities accused him of masterminding a foreign currency trading scheme in which investors lost tens of millions of dollars.  In 1999, he received a ten-year prison sentence and was ordered to pay $28 million in restitution to defrauded investors.

However, after being released from federal prison in 2005, Erxleben again became involved in the investment business, forming several companies under a main entity Erxleben Entities that promoted various investment opportunities including the ability to profit from post-World War I German government gold bearer bonds.  Investors were solicited to purchase the bonds for $1,000 apiece, after which Erxleben would place the bonds in trust and create securities that would then purportedly be in high demand by outside investors.  While the scheme lasted several years, investors ultimately never received the bonds or any associated returns.

After the German bond venture fizzled out, Erxleben began soliciting investors in 2009 for another venture, Gauguin Partners LLC ("Gauguin").  According to Erxleben, he had in his possession a rare painting commissioned by Paul Gauguin, a 1800's French artist.  Investors were told that if the painting could be certified as authentic - a process that cost $75,000 - the painting could then be sold for nearly $60 million.  Again, investors saw no returns, and instead their funds were diverted by Erxleben for the payment of personal expenses.

Erxleben was arrested in January 2013 and charged with five counts of wire fraud, two counts of money laundering and one count of securities fraud.  Prosecutors then successfully argued for Erxleben to remain in custody pending trial on the basis that he was a flight risk.  A federal magistrate judge later issued an order concluding the absence of any conditions for Erxleben's pre-trial release, citing Erxleben's propensity for posing a financial danger to others, as well as testimony by a former inmate that Erxleben had attempted to hire him to intimidate a key witness.  

A copy of the indictment is below:

US v. Russell Erxleben Indictment by jmaglich1

Supreme Court Allows Stanford Victims To Sue Law Firms, Insurance Companies

“The basic purpose of the 1934 and 1933 regulatory statutes is to protect investor confidence in the securities markets. Nothing in those statutes, or in the Litigation Act, suggests their object is to protect persons whose connection with the statutorily defined securities is more remote than buying or selling.”

Justice Stephen Breyer

In a highly-anticipated decision, the Supreme Court issued a ruling Wednesday finding that victims of Allen Stanford's $7 billion Ponzi scheme could proceed with lawsuits against two prominent law firms and other financial services companies accused of playing a role in Stanford's scheme.  The decision, written by Justice Stephen Breyer, affirmed the Fifth Circuit Court of Appeal's finding that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") did not bar pending class action lawsuits against law firms Charbourne & Parke LLP and Proskauer Rose, financial services companies SEI Investments Co. and subsidiaries of Willis Group Holdings PLC, and insurance company Bowen, Miclette & Britt.  

SLUSA was enacted in 1998 in an effort to curb state-law securities claims against those who "advise, counsel, and otherwise assist investors" by limiting damages, enforcing heightened pleading standards, and prohibiting claims based on the purchase or sale of a "covered security" - defined as a security listed or traded on a national exchange.  While securities such as stocks were indisputably encompassed by this definition, the issue in the Stanford cases was whether a certificate of deposit ("CD"), the investment product hawked by Stanford's companies that duped victims out of billions of dollars, was similarly included.  The law firms and other entities pointed to the statutory language "misrepresentation or omission of a material fact in connection with the purchase of sale of a covered security," arguing that, while the CDs were not covered securities, the fact that Stanford and his companies represented that investment proceeds would be invested in liquid securities satisfied the required "connection." 

Writing for the majority, Justice Breyer disagreed with that explanation.  Reasoning that the connection to covered securities was too attenuated to satisfy SLUSA and questioning why "federal securities laws would be - or should be - concerned with shielding such entities from lawsuits, Justice Breyer stated that "a fraudulent misrepresentation or omission is not made 'in connection with' such a 'purchase or sale of a covered security' unless it is material to a decision by one or more individuals (other than the fraudster) to buy or sell a 'covered security.'"  Noting that there were no allegations that the alleged misrepresentations led anyone to buy or sell covered securities, Justice Breyer held that 

the “someone” making that decision to purchase or sell must be a party other than the fraudster. If the only party who decides to buy or sell a covered security as a result of a lie is the liar, that is not a “connection” that matters.

In a dissent, Justice Kennedy, joined by Justice Alito, argued that the case was consistent with prior precedent and centered on victims' decision to invest their money based on a fraudster's promise to invest it on their behalf through purchases and sales in the securities markets.  According to Stanford, the investments in CDs were a liquid investment that could be freely liquidated and subsequently invested in national securities markets.  Indeed, Justice Kenned makes the point that Stanford's entity did in fact purchase covered securities as promised - albeit only about 10% of its portfolio while the remainder largely went towards Caribbean real estate.

Justice Kennedy also worried that the decision would result in an increased focus on third parties that provide assistance and counsel to investors in securities markets, cautioning that the Court's decision would have drastic effects on similar suits going forward:

The Court’s narrow reading of the statute will permit proliferation of state-law class actions, forcing defendants to defend against multiple suits in various state fora. This state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers, and advisers...a serious burden...[that] will make the national securities markets more costly and difficult to enter.

While the ruling made no determination on the merits, it certainly bolsters the victims' cases moving forward as what had previously been thought to be a difficult hurdle had been cleared. 

A copy of the Supreme Court's decision is below:

12-79_h3ci

California Man Charged With $125 Million Latex Glove Ponzi Scheme

A California man has been arrested and charged with operating a massive Ponzi scheme that took in more than $125 million from investors that thought they were financing a highly profitable business of supplying gloves to the government.  Deepal Wannakuwatte, 63, was charged with multiple offenses, including mail fraud, wire fraud, and bank fraud.  Each of the charges carries a maximum 20-year prison sentence, as well as criminal monetary penalties of up to $250,000.  

Wannakuwatte operated International Manufacturing Group ("IMG") and RelyAid Global Healthcare Inc. ("RelyAid") (collectively, the "Companies"), California entities that solicited investors based on purported dealings with the U.S. Department of Veterans Affairs ("USVA").  Potential investors were told that the Companies had annual sales exceeding $100 million from lucrative contracts with the USVA.  Based on these representations, Wannakuwatte and the Companies raised at least $125 million from an unknown amount of investors.

However, authorities allege that Wannakuwatte grossly overstated the extent of the Companies' dealings with the USVA - indeed, rather than $100 million in sales from the supply of medical gloves, authorities claim that actual sales were just $25,000 per year.  In an example of these significant discrepancies, CBS 13 Sacramento reports that last month, Wannakuwatte altered paperwork orders to modify a $257 invoice to instead show a $12 million invoice. Further details remain scarce about the scheme and the whereabouts of investor funds.  

The scheme appears to have began unraveling last August when Wannakuwatte, his wife, and the Companies were sued by a creditor, General Electric Capital Corp. ("GE Capital"), who claimed that RelyAid had defaulted on a loan it had taken out to purportedly build a latex glove factory.  A federal judge recently ordered Wannakuwatte to turnover a $3 million King Air private plane that had been pledged as collateral on the loan.  An FBI arrest warrant indicates that multiple government agencies began investigating Wannakuwatte and the Companies in September, shortly after the filing of the GE Capital lawsuit.  

According to Ponzi Clawbacks, a detention hearing is scheduled for tomorrow to assess whether bail will be granted to Wannakuwatte.

The scheme is the largest Ponzi scheme uncovered in 2014.  To view statistics about Ponzi schemes uncovered and prosecuted over the past six years, visit Ponzitracker's Ponzi Database here.

Female Radio Host Convicted Of Running $4 Million Ponzi Scheme

A California woman who once hosted a financial talk radio show was convicted by a federal jury of operating a $4 million real estate Ponzi scheme.  Barbra Alexander, 66, was convicted of twenty-eight fraud counts in connection with the scheme, and is the third co-conspirator to be convicted.  Alexander was indicted back in October 2010 along with Michael Swanson and Beth Pina on forty-three counts of mail fraud, securities fraud, money laundering and conspiracy.

Alexander previously served as producer of the syndicated radio show "Money Dots," which aired locally in Monterey, California.  She and her partner, Swanson, also owned and operated APS Funding, Inc. ("APS Funding"), which held itself out as a real estate investment company that specialized in short-term hard-money loans.  The trio recruited investors through personal referrals and word-of-mouth campaigns, promising 12% annual returns from short-term loans on real estate that would be secured by recorded deeds of trust.  In total, nearly $7 million was raised from investors.

However, of the approximately $6.7 million raised, at least $2.5 million was diverted to Alexander, Swanson, and Pina.  These funds were used to support the trio's radio show, and also to provide monthly salaries of $10,000 - $15,000 to each co-conspirator.  Ironically, at least $200,000 of investor funds were used by Alexander for an extensive kitchen remodel - after which a house party was held that was attended by investors unaware that their principal had funded the remodel.  

Nor were the actual returns realized by APS Funding commensurate with the returns promised to investors.  For example, in 2009 the various entities each paid out higher amounts than their actual income - funding the difference with new investor contributions in a classic hallmark of a Ponzi scheme.  Indeed, when the scheme began to unravel in late 2009, the funds' records showed total investor balances of nearly $7 million despite the fact that each of the various bank accounts held by the funds held negative balances.

Swanson was previously convicted in a September 2013 trial, while Pina pleaded guilty to to conspiracy to commit mail fraud and conspiracy to commit wire fraud in December 2012.  With Alexander's conviction, sentencing for Swanson and Pina has been scheduled for May 14, 2014.

A copy of the October 2010 indictment is below:

Alexander, Pina & Swanson Indictment

Florida Man Receives 12.5 Year Sentence For $30 Million Ponzi Scheme Targeting Haitians

A south Florida man who promised members of the Haitian community that he could double their money in 90 days will serve the next 12.5 years in federal prison after pleading guilty to a $30 million Ponzi scheme.  George Theodule, 52, received the sentence after previously pleading guilty to a single count of wire fraud in October 2013.  Theodule's prison sentence will also be filed by three years of supervised release.  

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 in reality, Theodule was operating a massive Ponzi scheme.  Theodule's trading records showed trading losses of at least $18 million, and the remainder of investor funds were diverted to support Theodule's lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas.

The Securities and Exchange Commission filed an emergency enforcement action in December 2008, 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

Theodule Indictment.pdf by jmaglich1