Five Years Later, Victims Of $25 Million Ponzi Scheme Recover 10%

More than five years after the Securities and Exchange Commission alleged that J.V. Huffman operated a massive Ponzi scheme that raised more than $25 million from at least 350 investors, the court-appointed receiver has announced that those victims will soon receive a first, and likely final, distribution check representing 10.5% of their losses.  Walt Pettit, the court-appointed receiver for Huffman and his company, Biltmore Financial Group, Inc. ("Biltmore"), indicated in a letter to victims that the check represented the fruits of a five-year effort to recover funds, and would likely be the only distribution absent any further recovery.

The SEC filed an emergency enforcement action against Huffman in November 2008, charging him with violations of the anti-fraud provisions of federal securities laws in connection with Huffman's operation of Biltmore.  While Huffman initially started Biltmore in the early 1990's as a mutual fund, he sought to placate investor fears after the terrorist attacks of 9/11 by repositioning the company as a buyer and seller of mortgages.  Many of Huffman's more-than 350 investors were members of the Lutheran community around his North Carolina home, and were drawn to the scheme by Huffman's guarantees of steady profits at market rates and the guarantee that the investment would not lose money and was insured by the FDIC, SIPC, and Thrivent Financial Services.  

After the scheme collapsed in November 2008, Huffman confessed to authorities that investor funds were not used to purchase mortgages, but rather were used in typical Ponzi fashion to pay returns to existing investors, as well as to sustain a lavish lifestyle that included the purchase of an Aston Martin luxury car, a $1 million recreational vehicle, and vacation and rental properties.  Huffman later pleaded guilty to criminal charges, and was sentenced to a thirty-year prison term in January 2010.

The Receiver's appointment was initially complicated by the seizure of both Huffman and Biltmore's books and records by criminal authorities, which apparently hindered the ability to gain an understanding of the scheme's inner-workings.  Additionally, while a significant amount of jewelry, real estate, and personal property were seized by the Receivership, their realizable value was depressed as the Receivership coincided with the financial crisis of 2008 - 2010.  According to the Receiver, many of the properties were not receiving high enough offers to pass muster with overseeing U.S. District Judge Richard Voorhees, who ultimately was tasked with approving the sale of Receivership property.  

In the Receiver's final report, Pettit reported recovering a total of $3.26 million.  Of that amount, approximately $750,000 was allotted to expenses due to the Receiver and his professionals, leaving $2.49 million available for distribution.  This distribution ultimately amounted to 10.567% of victims' approved losses.

Authorities Allege "Virtual Concierge Machine" Business Pitched On YouTube Was $40 Million Ponzi Scheme

Authorities instituted civil and criminal proceedings against two Florida companies and their principals, alleging that their YouTube videos advertising 80% - 120% annual returns from investments in "Virtual Concierge machines" were part of a massive Ponzi scheme that took in at least $40 million from hundreds of investors nationwide.  JCS Enterprises, Inc. ("JCS"), T.B.T.I. Inc. ("TBTI"), Joseph Signore, and Paul L. Schumack, II were named as defendants in an emergency civil enforcement action by the Securities and Exchange Commission.  In a parallel action, the U.S. Attorney's Office for the Southern District of Florida also announced criminal charges.

According to the SEC, Signore and Schumack solicited potential investors to participate in the Virtual Concierge program, which involved the purchase of a virtual concierge machines ("VCM") through a one-time fee ranging from $2,600 to $4,500 per VCM.   The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were told that the VCMs generated substantial returns, which in turn would allow the payment of annual returns to investors ranging from 80% to 120%. In addition, investors were provided with the location of the VCMs they had purportedly purchased, and even given the ability to track the VCM activity online.

Investors were solicited in several ways, including several websites controlled by the entities and through videos posted on popular video-sharing website Youtube:

The videos promised that the VCM would "generate income for years," and promised that a $3,500 investment could produce "huge returns."  Potential investors also received emails from Schumack, who touted his graduation from West Point Military Academy in 1979 and whose email signature also featured a Bible passage intended to create a false sense of security for investors.  

However, authorities allege that the outsized returns touted by the defendants were the result of a Ponzi scheme.  According to the SEC, the production of VCMs was not close to the amount of VCMs purportedly sold to investors, and the guaranteed returns were "a farce."  Instead, investor funds were commingled and used for a variety of unauthorized purposes, including the unauthorized transfer of more than $2 million to Signore and his family.  An additional $56,000 in investor funds were used for expenses including restaurants, stores, and a tanning salon.  Finally, approximately $4 million in investor funds were transferred to an unrelated account from which Schumack and others allegedly made more than 100 cash withdrawals of nearly $5 million.  

In addition to instituting an asset freeze, the Court also approved the appointment of a Receiver over JCS and TBTI.

A copy of the SEC's complaint is below:

comp-pr2014-70

Charles Ponzi's Former House Is For Sale

For the first time, ever, the public will have a chance to purchase the house that briefly belonged to the man whose last name came to epitomize the devastating financial weapon that has since become a household name.  The Lexington, Massachusetts house that once belonged to Charles Ponzi before his arrest on mail fraud charges is now publicly listed for sale to the public - at a price of $3.3 million.  Ironically, Ponzi's initial purchase of the property was conditioned on the requirement that the seller invest with Ponzi's Securities Exchange Company.  

Originally built in 1913, the House was styled as a colonial revival mansion, featuring 16 rooms, a carriage house, and even a sunlight-illuminated conservatory.  Its first owner, Richard Engstrom, was a prominent industrialist who spent an estimated $50,000 to build the house - an amount equal to nearly $1.2 million today when adjusted for inflation. 

The house soon went on the market, and Ponzi reportedly took a keen interest.  After originally offering $25,000 for the house, Ponzi ultimately agreed to pay $39,000, paying $9,000 in cash and supplying the remainder with a "postal reply coupon" that Ponzi assured the seller would soon be worth $30,000.  Ponzi's Securities Exchange Company had been wildly successful, taking in over $250,000 per day at its peak.

However, Ponzi's purchase of the House came at a time when suspicions were mounting by authorities and journalists.  Increasing skepticism ultimately culminated in a front-page expose by the Boston Post (a newspaper that had previously published a glowing review that prompted a mass of new investors) and Ponzi's surrender the following day to federal authorities on mail fraud charges.  Ultimately, Ponzi's investors lost nearly everything, ultimately recovering less than 30% of total losses, which amounted to $20 million in 1920 ($225 million today).

After Ponzi's company was placed into bankruptcy, the house was eventually sold.  

A photo gallery of the house is featured here.

Rothstein Partner Pleads Guilty To Violating Federal Election Laws

The former law partner of convicted Ponzi schemer Scott Rothstein has agreed to plead guilty to charges he violated federal election laws by making hundreds of thousands of dollars in illegal campaign contributions to prominent politicians such as former Florida Governor Charlie Crist and Senator John McCain.  Russell Adler, a former name partner in the now-defunct law firm Rothstein Rosenfeldt Adler, could face up to a five-year prison term after pleading guilty to conspiring to defraud the federal government.  Because the plea agreement calls for cooperation with the government's ongoing investigation, Adler's ultimate sentence will depend on the extent of his cooperation.  

Adler was a prominent trial attorney in Fort Lauderdale, and was a name partner in Rothstein's firm until Rothstein's scheme collapsed in 2009.  According to authorities, Adler assisted Rothstein in making hundreds of thousands of dollars in campaign contributions to John McCain and Charlie Crist in 2009, a tactic used by Rothstein to increase his influence in South Florida politics that later led to his appointment to a prestigious judicial nominating commission.  In an effort to funnel the maximum amount to his selected candidates, Rothstein enlisted various RRA employees, including administrative staff, lawyers, and Adler, to contribute to the McCain and Crist campaigns by promising to provide reimbursement for the contributions.  In total, Rothstein reimbursed Adler nearly $300,000 - including at least $239,000 in contributions to Crist's failed 2010 Senate campaign that placed RRA as the second-largest contributor.  

According to Adler's attorney, Fred Haddad, the recent convictions of former Rothstein lawyers Christina Kitterman and Douglas Bates played a role in the decision to approach the government and negotiate a plea agreement.  Importantly, Haddad expects that the campaign finance conspiracy will resolve all of Adler's potential criminal liability - meaning that no charges are expected for any allegations that Adler knew of or assisted Rothstein's fraud.  While Adler is currently serving a 91-day suspension from practicing law, his subsequent guilty plea to a felony could result in his permanent disbarment.

Adler's agreement to cooperate may indicate that authorities are not through with their criminal investigation of those connected to Rothstein.  This includes other employees and attorneys in Rothstein's office that have not yet been charged, including former name partner Stuart Rosenfeldt.  

Refusing Plea Agreement, Seattle Woman Pleads Guilty To All 110 Counts For $126 Million Payday Loan Ponzi Scheme

In a rare turn of events, a Seattle woman decided to accept responsibility for masterminding a $126 million payday loan Ponzi scheme on her own terms by rejecting a plea agreement offered by federal prosecutors and instead pleading guilty to each of the 110 criminal charges - a move that could effectively ensure she spends the rest of her life in prison.  Doris "Dee" Nelson was indicted in late 2011 and charged with 71 counts of wire fraud, 22 counts of mail fraud and 17 counts of international money laundering.  While the rejected plea agreement almost certainly called for Nelson to plead guilty to a significantly smaller number of charges, which would have likely resulted in a prison sentence that would likely allow Nelson to complete in her lifetime, the decision to plead guilty to all 110 counts will likely result in a significantly higher sentence, as well as the possibility Nelson could be deported to Canada.

Nelson was accused of using multiple different business entities to operate a payday/short-term lending business called the Little Loan Shoppe ("LLS").  Authorities alleged that the scheme began in or around May 2000, when Nelson began soliciting investors by promising high yields on investor funds which Nelson claimed would be paid from the profits of the short-term operations of LLS.  These purported returns ranged from forty to sixty percent annually, and were often paid to investors via post-dated interest checks mailed to the investor at the time of their investment.Originally centered in British Colombia, LLS moved its operations to Spokane in or around 2001.  Soon thereafter in 2003, LLS closed all physical operations and and began conducting the business solely over the internet.  When the operation began to encounter financial difficulties in October 2008, investors were offered reduced interest rate payments of ten percent.  However, the financial difficulties continued, and by March 2009, Nelson had ceased making any payments.

While Nelson represented to investors that LLS generated huge profits that were used to pay the exorbitant returns, in reality the entire operation was a massive Ponzi scheme, with nearly all investor funds being used to pay interest to existing investors and to sustain Nelson's lavish lifestyle.   Nelson alone received over $3 million in funds diverted from investor funds, which were used to purchase, among other things, a motor home, a Chevrolet Corvette, and a Mercedes Benz S550.  Additionally, Nelson used investor funds to gamble at Las Vegas casinos, losing nearly $500,000 between 2005 and 2008.  Nelson also paid commissions to several investors in return for directing further investment to Nelson's operation. 

Little Loan Shoppe filed for bankruptcy in 2009, and the trustee appointed to oversee the liquidation process has filed clawback lawsuits against LLS investors who received interest payments in excess of their original investment.  In addition to the criminal charges, Nelson was also charged by the Securities and Exchange Commission, and later faced charges by Canadian securities regulators.

While the decision to plead guilty to all 110 charges will likely result in a significantly higher recommended sentencing range under Federal Sentencing Guidelines, the court is not bound to hand down a sentence within the sentencing range as a result of the Supreme Court's decision in United States v. Booker.  Thus, Nelson's ultimate fate will rest in the hands of the district judge overseeing the case.

Nelson's sentencing is scheduled for July.

A copy of Nelson's indictment is below:

US v. Doris Nelson Indictment