New York Fund Manager Pleads Guilty To $96 Million Ponzi Scheme

Authorities announced that a New York investment fund manager has agreed to plead guilty to charges he masterminded a $96 million Ponzi scheme that diverted investor funds to purchase a 117-room Montauk beachfront resort among other things.  Brian R. Callahan, 44, will plead guilty to one count of securities fraud and one count of wire fraud.  In exchange, prosecutors agreed to drop over twenty remaining charges originally brought in an August 2013.  Callahan could face up to a forty-year prison term if he receives the maximum sentence under the charges, 

Authorities indicted Callahan and his brother-in-law, Adam J. Manson in August 2013.  According to the indictment, Callahan managed multiple offshore investment funds organized in Nevis and the British Virgin Islands. Several of these funds operated as "fund-of-funds", meaning that they purportedly used investor funds to invest in other hedge funds.  Callahan told investors that their funds would be invested in various New York hedge funds, and required a $5 million minimum investment.  Another fund, the Fiduciary Select Income Fund, LP ("Fiduciary"), advertised itself as a short-term investment similar to a money market fund, but claimed above-average returns through investments in high-dividend stocks, bonds, and certificates of deposit.  Investors were provided with regular account statements purportedly showing consistent account growth.  In total, the funds raised nearly $120 million from at least 40 investors, including the Montauk, N.Y. volunteer fire department and a Maryland investor that alone lost $11 million.  

However, rather than using investor funds as promised, the men diverted tens of millions of dollars for a variety of unauthorized purposes and used new investor funds to make payments to existing investors in Ponzi-scheme fashion.  Investor funds were used for a myriad of personal expenses, including credit card bills, golfing club dues, down payments on multiple houses, and payments for luxury automobiles including a Range Rover and BMW.  The men also acquired a 10-acre property in Montauk, New York, that consisted of multiple buildings and beach-front cottages.  

A copy of the indictment is below:

Callahanmason Indictment

Tiger Woods Foundation Faces $500,000 Clawback Suit From Stanford Receiver

The court-appointed receiver overseeing recovery of assets for Allen Stanford's massive $7 billion Ponzi scheme has filed a lawsuit seeking the return of more than $500,000 donated by Stanford to charitable organizations headed by golfer Tiger Woods.  Ralph Janvey, the court-appointed receiver, filed suit against the Tiger Woods Foundation and the Tiger Woods Charity Event Corp. (the "Woods Entities") in a Texas federal court, alleging the entities received fraudulent transfers of $502,000.  

The "clawback" suit, as it is known, seeks the return of funds that were transferred to a third party.  Under state-specific fraudulent transfer laws patterned after the Uniform Fraudulent Transfer Act, a creditor can seek to avoid a transfer made by a debtor to a third-party under several theories, including that the transfer was made with the intent to hinder, delay, or defraud creditors, or the debtor did not receive reasonably equivalent value for the transfer.  While a showing of actual fraud is not required and can be demonstrated through other factors, transfers made from a Ponzi scheme are presumptively made with the intent to defraud due to established law that a Ponzi scheme is insolvent from inception as a matter of law.  

The suit against the Woods Entities alleges both actual and constructive fraudulent transfer theories, as well as theories of unjust enrichment and constructive trust.  Janvey has filed hundreds of clawback lawsuits against both investors that profited from the scheme and third parties that received investor funds, including political parties, 

A copy of the lawsuit is below:

Tiger Woods Complaint

Pearlman Victims To Receive Additional 2% Distribution

Victims of former boy band mogul Lou Pearlman's $300 million Ponzi scheme are set to receive a second distribution of approximately 2% of their total losses.  Nearly seven years after Pearlman was arrested in June 2007, the distribution by bankruptcy trustee Soneet Kapila comes after an initial distribution in June 2013, and brings the total recovery to date by Pearlman investors to approximately 6%.  Pearlman is currently serving a 25-year prison sentence in a Texas prison, and is scheduled to be released in 2029.

Pearlman operated a vast array of businesses from airlines to blimp companies to entertainment ventures.  While some of his businesses were legitimate enterprises, he used these profitable businesses to sustain other unprofitable businesses, including TransContinental Airlines ("TCA"). Investors were solicited to invest in TCA, drawn by the promise of above-market interest rates as well as the future possibility of an initial public offering (IPO) that would result in exponential returns for initial investors.  Pearlman also offered investments through TCA in an alleged "Employee Investment Savings Account," which was apparently designed to mimic the Employee Retirement Investment Savings Account (ERISA) established under federal law.  In total, investors contributed nearly $300 million to Pearlman's various ventures.

In addition to his legitimate ventures, Pearlman also used the massive cash horde generated by his creation of two wildly-popular boy bands, 'N Sync and the Backstreet Boys.  While under contract, the groups essentially financed Pearlman's other unprofitable ventures through a stead stream of cash.  However, after the groups successfully sued to escape their contract, Pearlman was faced with mounting investor obligations while cash inflows decreased.  As a last ditch effort, Pearlman even established his own fake accounting firm, Cohen & Siegel, which existed solely to forward phones and generate bogus accounting reports and audits. After an unsuccessful attempt to quickly liquidate assets to support the failing scheme, Pearlman fled to Thailand in 2007.  After he was spotted by a tourist, he was arrested, extradited back to the United States, and pled guilty in February 2008.

Kapila was appointed in early 2007 and  tasked with unraveling Pearlman's fraud and marshaling funds for defrauded investors.  Soon after his appointment, Kapila filed over 700 'clawback' lawsuits targeting investors who had received distributions in excess of their principal investment.  Notably, one of these clawback lawsuits was profiled on Discovery Channel's True Crime with Aphrodite Jones, in which the investor sued by Kapila hired a hitman to kill him in order to allow his family to collect on a generous life insurance policy.  The hired killer was later caught and sentenced to twenty years in prison.

Of the 700-plus clawback cases, Kapila and his team have recovered more than $30 million, and litigation remains ongoing.  However, administrative fees due to Kapila and other professionals reduced the amount of cash on hand to approximately half of this amount.  

According to the Orlando Sentinel, Kapila expects to make a third and final distribution later in 2014 as the remaining adversary proceedings are resolved.  

Report: Six Suicides Linked To TelexFree Collapse

Last week, both state and federal regulators alleged that TelexFree, Inc. and related entities were a massive Ponzi and pyramid scheme that may have raised hundreds of millions of dollars from victims worldwide.  In addition to the financial carnage inflicted on these victims, many of whom invested significant sums, one recent report claims that at least six people have committed suicide in the wake of the scheme's collapse.  According to Dominican Today, one well-known TelexFree promoter has claimed that at least six recent suicides in the town of El Seibo, Dominican Republic, are attributable to TelexFree.

Maria Cordones, originally from the Dominican Republic but currently residing in New York, indicated that she had recruited at least 40 people to invest in TelexFree, which promised exorbitant returns in exchange for several minutes of work daily that purportedly entailed approving computer advertisements.  For example, an investment of $1,375 resulted in a weekly payout of $100 - an annual return of over 200%.  Authorities have estimated that TelexFree raised at least $300 million from United States investors alone.

One reason for TelexFree's popularity was its practice of incentivizing investors to recruit new investors to the scheme.  This incentive-based system rapidly expanded the scheme's reach, and the promised returns were especially well-received in poorer countries such as the Dominican Republic and Brazil.  According to Cordones, the 40 people she recruited in the Dominican Republic - where the average annual wages pales in comparison to larger countries - collectively lost thousands of dollars.

A morbid topic that is not often discussed, suicides attributable to Ponzi schemes do occur.  In one particularly grim example, at least ten suicides were linked to the collapse of of a massive Indian Ponzi scheme last year.  Given that the suicides linked to TelexFree are isolated to one town in Dominican Republic, the possibility certainly exists that this number could increase.

Florida Cops Face Conspiracy Charges In Rothstein Ponzi Scheme

Federal authorities filed conspiracy charges against two suspended Ft. Lauderdale sheriff's deputies for allegedly abusing their law enforcement duties to assist convicted Ponzi schemer Scott Rothstein - including the illegal arrest of an ex-wife of a Rothstein acquaintance.  Lt. David Benjamin, 48, of Boca Raton, Florida, and Detective Jeff Poole, 47, of Weston, Florida, are each accused of accepting over $100,000 in cash and gifts from Rothstein in connection with their role in the allegedly illegal arrest of the ex-wife of one of Rothstein's legal acquaintances.  Benjamin was charged with conspiracy to commit extortion and violate civil rights, while Poole was charged with conspiracy to violate civil rights.  

Before his $1.2 billion Ponzi scheme collapsed, Rothstein regularly hired Broward county police officers for personal protection, including round-the-clock patrols at his residence.  Indeed, as the scheme unraveled in mid-October 2009, Rothstein solicited Benjamin to provide a police escort to a waiting plane bound for Morocco.  Before boarding the plane, Rothstein allegedly gave Benjamin a luxury watch from his extensive collection.  Benjamin ultimately returned the watch, along with $30,000 in compensation from Rothstein, to the court-appointed bankruptcy trustee.

According to authorities, the charges emanated from the June 2009 arrest of the ex-wife of Rothstein's legal acquaintance, Douglas Bates.  According to reports, Poole received a telephone call from Benjamin ordering him to arrest Bates' ex-wife on fictitious drug charges in an attempt to deal Bates the upper hand in child custody proceedings.  Investigators alleged that Benjamin was paid $1,000 by Rothstein for his assistance.   In total, Benjamin allegedly received $153,500 in cash and $30,000 in jewelry and tickets to sporting events.  Benjamin and Poole were suspended without pay in January 2013.

According to the Sun-Sentinel, both men were charged via criminal information, suggesting that a plea agreement is likely forthcoming.