Guilty Pleas For Fired Cops Tied To Rothstein

"I think his exact words were 'Make sure you arrest that bitch..."

- Lt. Jeff Poole

Two terminated Broward County sheriff's deputies have agreed to plead guilty to charges they abandoned their responsibilities in favor of carrying out favors for convicted Ponzi schemer Scott Rothstein - including the illegal arrest of the ex-wife of one of Rothstein's colleagues on trumped up drug charges. Former detective Jeff Poole, 47, entered a guilty plea today to a charge of conspiracy to violate civil rights.  And former Lt. David Benjamin, 48, is scheduled to enter a guilty plea on May 13, 2014 to a single charge of a conspiracy to violate civil rights and commit extortion as a law enforcement officer.  Poole and Benjamin face maximum jail terms of 10 years and 5 years, respectively.

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 addition, the deputies were accused of using force and threats of force against the boyfriend of an escort threatening to disclose a relationship between the escort and Rothstein's law partner.  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.

Both men were arrested several weeks ago.  Guilty pleas were expected given that each was charged via a criminal information.

Four Indicted In $70 Million "Virtual Concierge" Ponzi Scheme

A grand jury indicted four Florida citizens - including a husband and wife - on multiple fraud counts in what authorities allege was a $70 million Ponzi scheme that peddled "virtual concierge" machines to unsuspecting investors.  Joseph Signore, his wife Laura Signore, Paul Schumack, and Craig Allen Hipp were indicted today - approximately one month after civil and criminal authorities alleged that JCS Enterprises was a massive Ponzi scheme.  Joseph Signore and Paul Schumack, accused by the Securities and Exchange Commission of being the masterminds behind the scheme, face the majority of criminal charges, with Signore facing 31 counts of bank fraud, conspiracy to commit mail and wire fraud, mail fraud, wire fraud, and money laundering charges.  Laura Signore was indicted on eight fraud charges, while Hipp is facing one count each of conspiracy to commit mail and wire fraud, mail fraud and wire fraud.

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises' ("JCS") 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. 

While the SEC named Joseph Signore and Paul Schumack in their civil enforcement action filed in early April, some had questioned why Laura Signore had not been named.  The indictment alleges that Laura Signore served as executive vice president of JCS Enterprises, where she signed checks to investors and vendors as well as investor contracts with JCS.  It appears that the decision to sign investor contracts on behalf of JCS may have factored into the charging decisions, as Hipp also signed investor contracts.  

In addition to the criminal charges, the indictment also seeks forfeiture of the Signores' and Schumack's real and personal property - including their homes.  Each of the defendants potentially faces decades in federal prison.

Convicted Ponzi Schemer Faces Federal Charges For Violating SEC Asset Freeze

A Massachusetts man currently serving a 10-year sentence in state prison for operating a multi-million dollar Ponzi scheme was recently indicted on twenty-five federal charges of criminal contempt relating to allegations he willfully violated a court-ordered asset freeze during a Securities and Exchange Commission enforcement proceeding.  Steve Palladino, 57, was recently sentenced to serve 10 years in a Massachusetts state prison after he agreed to plead guilty to masterminding a $10 million Ponzi scheme along with his wife and son.  Palladino could face additional prison time if he is convicted of the new contempt charges.

According to the U.S. Attorney's Office, Palladino and his company, Viking Financial Group, were the subject of an emergency enforcement action brought by the Commission in April 2013.  The Massachusetts District Court granted the Commission's request for an asset freeze, and subsequently modified the asset freeze to require that all funds from Viking be deposited into an escrow account.  Palladino was repeatedly accused by the Commission of violating the asset freeze, which resulted in four motions to hold Palladino in civil contempt.  This included allegations that Palladino transferred vehicles to his wife who subsequently obtained loans on the vehicles, failed to deposit funds from the loans in an escrow account, obtained a loan from an investor, sold his truck for $9,500, and opened credit cards under false pretenses.  

While it is a rarity for criminal charges to result from alleged violations of a Commission asset freeze, the allegations here were particularly egregious - as well as verifiable.  For example, Palladino was able to obtain more than $200,000 in bank loans after his wife offered their 2012 Mercedes CLS 63 AMG, 2013 Audi A5 Quattro, and Range Rover Sport up as collateral.  

While the form of charging document is one typically used where a plea agreement is likely, there has been no indication that one is forthcoming.

A copy of the criminal information is below:

Palladino Information

Court Suspends TelexFree Bankruptcy, Grants Motion To Transfer Venue To Massachusetts

In a ruling earlier today, a Nevada Bankruptcy court dealt a severe blow to efforts by a consortium of companies accused of operating a massive Ponzi and pyramid scheme by ruling that the pending bankruptcy cases would be suspended and ultimately transferred to Massachusetts, where pending state and federal regulatory actions are pending.  U.S. Bankruptcy Judge August Landis ruled that he would grant the Securities and Exchange Commissions's request for abstention and suspend the current bankruptcy proceedings of TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree") Judge Landis indicated that, in the event the debtors planned to move forward with bankruptcy, the proceedings would be transferred to the District of Massachusetts, where the Commission's emergency enforcement action is pending against TelexFree.

The ruling is a severe setback to TelexFree, which filed bankruptcy on the eve of the filings by the Commission and the Massachusetts Securities Division.  TelexFree had strenuously argued against abstention or transfer, maintaining its position that the company had a viable product that it predicted could result in "significant" revenue once it emerged from bankruptcy.  However, the company also sought to "reject" debts of hundreds of millions of dollars to "promoters" that were compensated on selling TelexFree products and recruiting others as part of the process.  

The Motion to Transfer Venue

In evaluating the Motion to Transfer venue, the Court analyzed first whether transfer was in the "convenience of parties," which involved a weighing of six common factors:

• proximity of creditors;
• proximity of the debtor;
• proximity of witnesses;
• location of assets;
• economic administration of the estate; and 
• necessary for ancillary administration if liquidation should result.

Of the factors, the Court noted that the fifth was the most important while the sixth was the least important.  The Court found that all six factors weighed in favor of a transfer to Massachusetts.  Based on these findings, the Court concluded that transfer TelexFree, LLC and TelexFree Financial, Inc. bankruptcy proceedings to Massachusetts was warranted.  The Court also analyzed whether transfer of the TelexFree Inc. bankruptcy was warranted under an "interests of justice factor," which involves an analysis of the following six factors:

• the promotion of economic and efficient administration of the estate;
• the interests of judicial economy would be served;
• the parties would receive a fair hearing in each venue;
• either forum has an interest in having the controversy decided within its borders;
• the enforcement of any judgment would be affected; and
• whether the plaintiff's original choice of forum should be disturbed.

While noting that the third factor was a "push," the Court concluded the remaining factors warranted transfer of venue to Massachusetts.

Abstention

Following its ruling on the Motion to Transfer Venue, the Court also pondered whether abstention was appropriate - an issue that was initially raised by the Court immediately following the bankruptcy filings.  While noting that abstention is used sparingly and in unusual circumstances, the court concluded such a situation was present.  After weighing several factors, the Court concluded that abstention - in the form of suspending all proceedings - was warranted until and when venue could be transferred to Massachusetts.

While TelexFree's chances for success were slim, their strategy was certainly noteworthy.  A continual theme present in TelexFree's papers before the bankruptcy court was the notion that the company, accused by U.S. and foreign interests of malfeasance, could simply do away with the past troubles in favor of starting anew.  This included cleaning house of the previous officers and directors (one agreed to resign while another refused and had to be terminated), as well as extolling the future revenue possibilities of a phone service that, on its face, was overpriced compared to competitors such as Skype and Vonage.  Such a strategy ignored the company's troubled history in favor of a unproven and theoretical future.  While certainly a novel attempt, the Court delivered a resounding rebuke to this strategy.  

According to attorney Timothy J. Durken, who is monitoring the case on behalf of TelexFree promoters, “It was clear under the factors considered by Bankruptcy Judge Landis that the TelexFree bankruptcy cases belong in Massachusetts. TelexFree was headquartered in Massachusetts and that is the where the investigations and SEC and MSD actions are ongoing."

A detailed recap of the hearing is available here.  There exists the possibility that TelexFree could appeal the ruling.  

Previous Ponzitracker coverage of TelexFree is here.

Live Coverage Of The TelexFree Ruling

Ponzitracker will be providing live coverage at 1:30 P.M. EST of the rulings handed down today in the pending TelexFree bankruptcy proceedings in Las Vegas, Nevada.  The ruling is the culmination of an eight-hour hearing held last Friday, May 2, 2014, on various motions brought by the Securities and Exchange Commission, the United States Trustee, and counsel for TelexFree.  A detailed summary of the hearing on May 2, 2014 is here, with the potential outcomes of today's hearing discussed here.  If you would like to donate to help defray the cost of covering the hearing, please click the Donate button below.  Coverage will begin at 1:30 P.M. EST.

In the meantime, cast your vote in the Poll as to your predicted outcome:

1:29 PM: On silent hold until Judge takes the bench.

1:31 PM: Appearances being made - most by telephone.

1:34 PM: Court now in session.

1:35 PM: Purpose of today's hearing is to simply recite ruling from May 2, 2014 hearing, and no argument will be entertained.

1:37 PM: Motion to transfer venue to be addressed first. 

1:37 PM: Court making findings of fact as to debtors TelexFree LLC ("LLC"), TelexFree Inc. ("Inc."), and TelexFree Financial, Inc. ("Financial").  Domicile, ownership structure, etc.  LLC and Inc. owned 50-50 by Merrill and Wanzeler, while Financial is a wholly-owned subsidiary.

1:41 PM: Only members of debtors' boards prior to petition date were Merrill and Wanzeler.  Board composition changed on April 13, 2014.  Board composition changed against after filing (unsealing) of SEC Complaint when Merrill and Wanzeler asked to resign.  

1:43 PM: Similarly, Merrill and Wanzeler were only officers clear from the record before April 13, 2014.

1:44 PM: Court notes discrepancy between board meeting minutes of April 13, 2014 indicating that Merrill remained President, while MacMillan signed agreement as President.

1:47 PM: As of May 2, 2014 hearing, Debtors' stock and membership units owned by Wanzeler and Merrill, while only remaining officers were MacMillan and Runge.

1:48 PM: Addressing business model.  Evidence at hearing established that debtor used MLM Progam to distribute VoIP telephone services.  Prior to filing, Debtor had amassed over 700,000 promoters/associates worldwide.  Promoters signed contracts with LLC governed by Nevada law.  Prior to filing, promoters were compensated for recruiting other promoters and selling 99 TelexFree VoIP product.

1:49 PM: Record evidence and MacMillan testimony showed commissions paid were unsustainable.  After regulatory inquiries, revisions to compensation paid to members resulted in "disappointing" revenues that didn't allow company to meet obligations.  Recognition that revised comp plan, while better suited to require promoters to sell VoIP product, will produce sufficient revenues to sustain company's telecom business.

1:51 PM: Court is mindful that debtors have developed apps and hopeful that technology  could generate additional income going forward.

1:52 PM: During May 2, 2014 hearing, record developed concerning execution of search warrant and cashier's checks.  Checks located in what Craft told authorities was a personal item.  Checks collected at direction of MacMillan and Runge prior to execution of search warrant.  Debtor stated intention was to collect checks to safeguard assets.  While evidence was conflicting, evidence uniform that debtors intended to deposit checks into safe deposit box - NOT properly collateralized account under bankruptcy rules. 

1:59 PM: Discussing SEC case. In addition to complaint, SEC also filed motion for TRO.  TRO signed on April 16, 2014.

2:00 PM: On hearing on April 17, 2014, SEC's TRO came to attention of court.  Bulk of first day motions were continued.

2:01 PM: Preparing to make ruling.  

2:02 PM: Making conclusions of law re motion for change of venue.  Court must first ask whether original venue is proper.  Starting with LLC's case.  No party has challenged that LLC's venue in Nevada is proper.  Court concludes that venue is originally proper for LLC.  Because LLC owns more than 20% of Financial's shares, Financial is an affiliate, and thus venue of Financial is proper.  Inc. is Massachusetts corporation, and is not domiciled or resident in Nevada.  Court concludes that venue of Inc. is not proper in Nevada.  

2:07 PM: Question becomes what to do with cases: do they stay or are they transferred. Reviewing grounds for transferring venue.  Analyzing "convenience of parties" ground, which includes six factors.  Also analyzing "interest of justice" ground.  Movant seeking transfer carries burden by preponderance of evidence.

2:13 PM: Application of "convenience of parties" factor to LLC and Financial.  Neither schedules nor statements of affairs have been filed.  Evidence developed at hearing that there are no known secured creditors of debtor, bulk of creditors are promoters owed money due to original failed comp plan, approximately 90% of debtor's creditors reside outside of Nevada and Massachusetts, approx. 75% of customers and promoters reside outside U.S.  While less than 5% live in MA, there are fewer customers and promoters in Nevada and Massachusetts, and 10 of largest unsecured creditors reside in MA.  Court concludes proximity of creditors weighs in favor of transfer.

2:14 PM: Next, proximity of debtors.  LLC shares headquarters with Inc. in MA.  Chief restructuring officer stated he would have performed restructuring duties in MA headquarters before search warrant execution; thereafter, he would perform his duties from Georgia.  Neither Financial nor LLC has office presence or employees in Nevada.  Proximity of debtors weighs in favor of transfer to Massachusetts.

2:16 PM: While credentials of MacMillan and Runge not subject to question, court finds they have little knowledge related to business administration of LLC and Financial - couldn't identify competitors.  Proximity of witnesses weighs in favor of transfer.

2:18 PM: Proximity of assets.  Substantially all of IT and office equipment located in MA.  Weigh in favor of transfer to MA.

2:19 PM: Access to books and records most readily available in Massachusetts. Judicial economy weighs in favor of conducting both proceedings in Massachusetts.  Economical administration weighs in favor of transfer to Massachusetts.

2:20 PM: Necessity of ancillary administration in case of liquidation.  Typically not given much weight, favors transfer to Massachusetts.

2:20 PM: Venue must be transferred to Massachusetts for LLC and Financial.  If Inc. case is to continue, must be transferred to district or division where it could have been brought.  Court considering whether transfer is in interest of justice.

2:22 PM: Access to books and records in MA, no business presence or employees in Nevada.  Judicial economy would also be better served.  Debtors have national law firm.  Nothing in record to suggest that any party would be divided fair trial in either Nevada or Massachusetts - neutral factor.  Fewer customers and promoters in Nevada than Massachusetts.

2:25 PM: Transfer to Massachusetts would also aid in enforcement of judgments.  Enforceability of judgment in SEC's enforcement action would be aided by transfer.  As to original choice of forum, court exercises its discretion to conclude venue is properly in Massachusetts.  

2:27 PM: In summary, careful review and analysis of applicable factors demonstrates that venue for all cases must be transferred to Massachusetts.

2:27 PM: Next is the question of abstention.  Court asked parties to weigh in on propriety of abstention given proceedings and TRO already transpiring in Massachusetts.  

2:28 PM: Court may dismiss or suspend proceedings based upon satisfaction of factors.  Court is mindful that abstention is used sparingly and in unusual circumstances.  Court thinks that is the case here.

2:31 PM: First, suspension would avoid potential for confusion and delay.  Second, another forum is available to protect interests of parties.  Third, federal proceedings are necessary.  Next, there is no equitable procedure available.  Next, debtors and creditors will not be able to reach out-of-court agreement.  No non-federal bankruptcy proceeding pending.  Bankruptcy filed commensurate with SEC's commencement of civil action in Massachusetts.  

2:33 PM: Debtors made point that their intent was to reorganize sale of VoIP packages to customers and to develop app and technology.

2:34 PM: On balance, Court finds that abstention in form of suspension of all proceedings is warranted until such time as transfer to District of Massachusetts is completed.  Court will enter order of absention suspending all proceedings, including motion to determine portions of SEC's TRO are invalid and U.S. Trustee's motion for appointment of trustee.

ADJOURNED.