Prominent Law Firm Pays $4.25 Million To Settle Ponzi Claims

A white-shoe law firm ranking second largest in the world by revenue has agreed to pay $4.25 million to settle claims relating to its relationship with a New York investment manager suspected of running a massive Ponzi scheme through his now-defunct hedge fund.  Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), one of the world's most prestigious law firms, entered into the settlement with the bankruptcy trustee for a hedge fund previously operated by Alphonse "Buddy" Fletcher relating to Skadden's previous representation of Fletcher and his funds.  Skadden has denied any liability, and stated that it entered into the settlement to "avoid the expense and uncertainty" of litigation.

After graduating from Harvard University and working for storied Wall Street firms Bear Stearns and Kidder Peabody (the latter who he later sued for racial discrimination), Fletcher formed an investment firm, Fletcher Asset Management.  There, he operated several hedge funds, including 'master' fund Fletcher International Ltd. ("Fletcher International").  Fletcher gained prominence on Wall Street by securing consistent and outsized gains - at one point, one Fletcher fund went 11 years without a losing month.  In offering documents provided to potential investors, Fletcher promised investors that their funds would be used for investments that were "immediately, quantifiably worth more to the buyer than the seller."  In total, hundreds of of millions of dollars were raised from investors.

However, Fletcher's main fund, Fletcher International, later filed for bankruptcy protection in June 2012. A bankruptcy trustee, Richard J. Davis, was appointed and later issued a nearly-300 page report in late 2013 concluding that Fletcher's funds were inflated through "fraud," shared "many of the characteristics of a Ponzi scheme," and had likely been insolvent as far back as December 2008.  In a response to the trustee's report, Fletcher vehemently denied the Ponzi allegations, even submitting an affidavit to the Court in which he stated under oath that "I am not the Black Madoff."

The trustee's investigation also identified third parties against which could potentially face liability for their relationship with Fletcher's funds.  One of these third parties included Skadden, which faced liability "premised on advice Skadden allegedly provided or failed to provide to the funds, and Skadden’s alleged failure to protect adequately the interests of the Funds and their investors.”  According to the trustee, Skadden served as primary counsel to Fletcher and his companies, and was identified as counsel in offering documents distributed to investors.  Additionally, Skadden represented Fletcher and his investment firm in connection with an investigation by the Securities and Exchange Commission - which ultimately resulted in legal bills of over $3 million.  While Skadden had denied that it had any liability for its role in Fletcher's fraud, it indicated that it had entered into the settlement to avoid the cost and uncertainty of litigation.  The settlement remains subject to the approval of the bankruptcy court.

The trustee's report is available here.

Rothstein Ponzi Victims Sue Bank of America For $385 Million, Punitive Damages

Victims of Scott Rothstein's massive $1.2 billion Ponzi scheme have sued banking juggernaut Bank of America (the "Bank"), claiming that, despite knowing of the fraud, the Bank and its executives shepherded investors to Rothstein's scheme with the hopes of landing Rothstein as a banking client.  In two lawsuits filed in Fort Lauderdale state court totaling more than 200 pages (the "Lawsuits"), nearly 100 investors that entrusted nearly $400 million with Rothstein asserted a variety of claims against the Bank and executives Frederick Perry, Mark R. Maller, Brian Mormile, and Douglas DiVirgillio, including aiding and abetting fraud, conspiracy, and violations of Florida's Securities and Investors Protection Act. In addition to seeking compensatory damages in the amount of their investments, the victims are also seeking punitive damages based on their claims that "the Bank....[has] concealed, covered up, and possibly destroyed documents for obvious reasons: to avoid massive liability and a public relations nightmare."

According to the lawsuits, the Bank first became aware of Rothstein's fraudulent investment scheme in 2007, when a client, Frank Preve, sought to have the Bank provide $6.5 million in credit financing collateralized on an Interest in Trust Account ("IOTA") account maintained by Rothstein's law firm that purportedly was used to hold settlements from secret sexual-harassment settlements.  After performing extensive due diligence on the credit request, including an analysis of the legal aspects of Rothstein's purported business and a spreadsheet showing Rothstein's account balances and alleged rates of return, the Bank allegedly concluded that Rothstein's investment scheme was likely fraudulent and certainly illegal.  The complaint contains numerous communications from and between Bank executives, in quotations from a sworn statement provided by a Bank employee, including that:

• The Rothstein investments "seem too good to be true," Para. 154;
• The Rothstein investments "couldn't get past the sniff test," Para. 155;
• "[I]t was never believed to be 'if' but rather 'when' he would be caught doing something illegal," Para. 157;
• Rothstein was "dirty," a "crook," a "bad guy," and his firm RRA was a "known bad entity," Para. 157; and
• Rothstein's scheme offered returns that "were too good to be true," and colleagues were warned to "[s]tay away from these guys."

Following the denial of the credit request in 2007, the complaints allege that this information was logged in the Bank's internal "pipeline report" - thus becoming available to all relevant bank employees.  

The Bank again was faced with conducting due diligence on Rothstein's scheme in December 2008, when it was approached by another client for a personal loan to purchase a Gulfstream G550 jet.  The client proposed using as collateral his Banyon Fund investments, which were fully invested with Rothstein.  The Bank again conducted an exhaustive due diligence review, which included an email sent from a Bank Senior Vice President to a number of Bank executives, including Perry and Maller, asking if anyone was familiar with Rothstein's law firm.  In a reply that day, Frederick Perry responded to all executives with a one sentence reply: "Stay away from these guys".  Another executive, Maller, emailed Perry and another employee included on the email chain, asking them to "discuss face to face rather than via email on this," presumably to avoid creation of an email chain.  As a result of these conversations and the Bank's due diligence review, the request for the personal loan was ultimately denied.  

The Complaints allege that the Bank and its executives failed to ever voice their opinions concerning their suspicions of Rothstein to the Plaintiffs.  Indeed, instead of warning the Plaintiffs, the Bank and its executives are accused of leveraging their ability to induce the Plaintiffs to invest in Rothstein's scheme to convince Rothstein to keep some of his funds on deposit with the Bank.  When a large client sought to invest nearly $86 million with Rothstein, several Bank executives are accused of "going along" with the investment decision, despite their previous concerns about Rothstein's scheme.  Indeed, another employee later provided a sworn statement that he reminded one of the Defendants, Perry, about his fiduciary duty to apprise the client of the previous decision to decline a loan based on suspicions about Rothstein, and that that statement was "shrugged off."  Perry then stated that "We've [Perry and the Bank] done a full background on Scott and he's super clean, squeaky clean."  The employee was later pressured to quit in July 2009, while Perry is alleged to have later enlisted the investor that made the $86 million investment to inquire about "the potential for there being some business Scott & I could do together."  Rothstein later testified at his deposition that Perry's pursuit of his business was persistent, and that Perry "tried to shake me down right to the end."  Ultimately, Rothstein ended up opening depository accounts in late 2009 - days before the scheme collapsed.

According to the lawsuits, the Bank's failure to adequately warn clients resulted in an additional $565 million being invested with Rothstein between May 2009 and October 2009 - a significant portion of which was comprised of investments by the Plaintiffs.  

The Lawsuits are brought by William Scherer, a prominent South Florida lawyer who previously successfully represented a group of investors in obtaining significant settlements against two other banks that called Rothstein a client.  This included a $170 million settlement with TD Bank Group and a $10 million settlement against Gibraltar Private Bank & Trust.  

A copy of each lawsuit is below:

Beverly Complaint - Bank of America

Von Allmen Complaint - Bank of America

Judge Approves ZeekRewards Claims Procedures, Denies Objection

A North Carolina federal judge issued an order approving the claims procedures proposed by the court-appointed receiver to, among other things, begin making distributions to victims of the $600 million Zeek Rewards Ponzi scheme.  In an Order entered March 26, 2014, United States District Judge Graham C. Mullen granted receiver Kenneth D. Bell's Motion for an Order Approving Distribution Procedures and Certain Other Related Relief ("Motion").   Notably, the Order also specifically rejected the objection lodged by a subset of ZeekRewards victims seeking to allow third parties - namely, their lawyers - to "process" any distributions (and presumably apply a 25% contingency fee pursuant to their retainer agreements).

The Receiver sought Court approval for a claims process in March 2013, approximately seven months after the Securities and Exchange Commission alleged that ZeekRewards was a massive $600 million Ponzi scheme.  After the Court approved commencement of a claims process in May 2013, victims were given a September 2013 deadline to submit claims.  Ultimately, over 174,000 claims were received asserting total losses of nearly $600 million.

Claim Objection Procedures

Following close of the claims process, the Receiver proposed certain procedures to efficiently and effectively deal with claim determinations, methodology, delivery, and objections.  For example, of the approximately 174,000 claims received, a portion of those claims will inevitably be denied and/or result in a different claim determination by the Receiver  When those determinations result in an objection by the claim holder, the Receiver proposed the appointment of a special master, retired Federal Judge Frank W. Bullock, Jr., to decide disputed claims through a hearing process.  In evaluating the request, the Court found that an exceptional condition existed warranting the appointment of a special master.  The Order also approved the priority procedures proposed by the Receiver, which included priority afforded to claims submitted by the receiver and holders of secured claims, followed by pro-rata distributions to investors to be paid out of the Receivership Estate.

Claim Determination Procedures

The Order also approved the Receiver's request to use a rising tide methodology to make claim determinations.  The request to use a rising tide method is notable, as another method, the net investment method, is typically the predominant method used to determine and calculate claims in Ponzi scheme proceedings.  The differences between the two methods are significant: while the net investment method uses a pro rata distribution tied to the ratio of each victim's net losses to their total investment, the rising tide method factors withdrawals made by the investor in an attempt to equalize distributions.  Essentially, under the rising tide method, withdrawals made by an investor during the course of the scheme are considered as distributions, and are therefore deducted from the amount distributed by the receiver or bankruptcy trustee. Only when the distributions equal the pro rata amount withdrawn by the investor does that investor become entitled to participate in the distribution process. The rationale behind the rising tide method is that, due to the Ponzi nature of the scheme, those withdrawals made by investors were nothing more than fictitious profits comprised of other investor's funds.  

In his last update, the Receiver indicated that he was continuing to make claim determinations.  While the next step would typically be the filing of a motion seeking approval of claim determinations, the Order includes a portion allowing the Receiver to stipulate to allowance of a claim without Court approval as long as the approved claim did not exceed the amount originally maintained in the ZeekRewards database by $10,000.  Additionally, the Order allows the Receiver discretion to make interim distributions.

Other Ponzitracker coverage of ZeekRewards is here.

The Order is below:

Zeek Doc 199

Former Prosecutor Due For Release After Serving Four Years For $45 Million Ponzi Scheme

A former prosecutor and part-time magistrate judge who encouraged his investors to call him "judge" is scheduled to be released next week after serving over four years in federal prison for a massive Ponzi scheme that raised more than $45 million from nearly 10,000 victims.  Bryant E. "Bry" Behrmann, 67, is set to be released from a halfway house after being sentenced to a six-year term in September 2009.  

Behrmann, along with business partner Larry "Buck Hunter," operated Global Online Direct ("GID"), which held itself out to investors as a buyer of distressed inventory.  GID told investors that, through its "Secured Profit Inventory Program," it could promise the payment of daily interest rates of as much as 1.00% through the "Big Dawgs Club."  These returns translated into annual returns ranging from 65% to 1,800%, which were purportedly made possible through the purchase and subsequent resale of excess inventory at flea markets, retail storefronts, and online actions such as eBay and Yahoo.  Investors were recruited primarily through the internet, and were advised of Behrmann's previous background as a county prosecutor and later part-time magistrate judge as a sign of the scheme's legitimacy.  In total, approximately 9,400 investors entrusted nearly $46 million with the men.

However, investors were not told that Behrmann's law license was suspended in 1999 after the Idaho Supreme Court found that he had engaged in "conduct involving dishonesty, fraud, deceit or misrepresentation."  Civil and criminal authorities soon alleged that GID was nothing more than a Ponzi scheme that used incoming investor funds to pay returns to existing investors.  After several states issued cease and desist orders, Hunter and Behrmann were charged with securities fraud in 2007, and GID was subsequently placed in receivership.  Hunter and Behrmann later pleaded guilty to money laundering charges resulting from the purchase of personal homes for their family members using shceme funds, and in September 2009 were handed down six-year prison sentences.

According to the Idaho Stateman, Hunter is scheduled to be released from a halfway house in June.

SEC Alleges "Cloud Computing" Company Was $65 Million Pyramid, Ponzi Scheme

The Securities and Exchange Commission ("Commission") announced that it had initiated an emergency enforcement action and obtained an asset freeze against a California company that purportedly specialized in cloud computing but was, according to the Commission, a massive Pyramid and Ponzi scheme that targeted members of the Asian and Latino community.  Defendants World Capital Market Inc., WCM 777 Inc., WCM777 Ltd. d/b/a WCM777 Enterprises, Inc. (the 'WCM Entities"), and Phil Ming Xu were charged with multiple violations of federal securities laws in a complaint filed yesterday and unsealed today in a California district court.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties. In addition, the Commission is seeking appointment of a Receiver over the WCm Entities.

According to the Commission, Xu formed the WCM Entities in March 2012, identifying himself as the founder, chairman, and president in documents distributed to investors.  WCM was described as a "global merchant investment bank," and represented that it was in partnership with over 700 investment organizations including Siemens, Denny's, and Goldman Sachs.  WCM777 Inc. was a wholly-owned subsidiary of WCM, opening and maintaining bank accounts in the name of WCM777.  

Beginning in March 2013, the WCM Entities began soliciting investors to purchase purported service packages and membership units in various cloud-based computing services.  In addition to computing services, each "package" offered investors returns in the form of cash and "points."  Investors could earn cash and "points" through referring new members, and were then able to redeem the "points" by either exchanging the "points" for goods and services offered by the WCM Entities or by converting the "points" into equity for the upcoming initial public offering of various companies the WCM Entities planned to bring public, including WCM7.com.  

Investors purchasing cloud-based computing packages were given the choice of five different membership levels, which in turn allowed members to purchase even more "World Cloud Media Products."  Each of the five service packages promised investors returns of at least 100% in 100 days, with the fifth, or highest, level promising returns of 160% within 100 days.  The various levels carried descriptions ranging from "junior distributor" to "director."  In order to keep the scheme going and to control the possibility of massive cash withdrawals, investors were encouraged to accumulate point balances, with Defendant Xu allegedly posting on WCM777's online forum that those who took cash withdrawals were required to pay income tax in their respective countries.  

To reassure potential investors, the WCM Entities featured a section on their website that included the question whether "WCM777 is a Ponzi game," responding that "we are not a Ponzi game company.  We are creating a new business model."T

The WCM Entities have increasingly been the subject of state securities regulators for engaging in unregistered securities offerings, and have since consented to orders in California and Colorado relating to these offerings.  Additionally, according to the Commission, the WCM Entities had no source of revenues other than money received from new investors through the sale of service packages.  Thus, the success of the WCM Entities depended almost entirely on the recruitment of new investors to sustain operations - which inevitably will lead to the situation where incoming funds dry up and existing obligations will dwarf cash on hand.  According to the Commission,the WCM Entities operated a classic Pyramid scheme that had no source of revenue other than soliciting new investors. Additionally, the WCM Entities made Ponzi-style payments to investors by using investor funds as the source of over $4 million of payments of purported "returns" to investors.

Nor did the WCM Entities have the purported extensive connections with numerous multi-national companies.  For example, despite claiming to have a partnership with well known companies including Denny's, Goldman Sachs, and Siemens, the WCM Entities did not have any relationship with any of the entities, and in several cases were using the respective company's logo without permission.  

Defendants raised more than $65 million from investors worldwide, including nearly $30 million from investors in the United States.  However, rather than being used for cloud-based services, investor funds were used for a variety of unauthorized purposes, including (i) the purchase of nearly $14 million in real estate in the United States, including two golf courses; (ii) "playing" the stock market; (iii) various unrelated investments in an oil and gas company and a rough diamond merchant.  

According to Patrickpretty.com, a Twitter account belonging to Xu contained an entry on March 14, 2014, that an employee known as "Liu," or "Tiger," had taken more than $30 million in "ecash."  The veracity of that claim remains unknown.

A copy of the Commission's complaint is below:

comp-pr2014-60