Wife Of Fugitive Accused Of $1 Billion Ponzi Scheme Arrested Trying To Board Brazil-Bound Plane

With her husband thought to be hiding in Brazil after being indicted on charges he masterminded one of the largest Ponzi/pyramid schemes in history, a Massachusetts woman was arrested by federal authorities at a New York airport just before she was supposed to board a plane to Brazil.  Federal agents arrested Katia Wanzeler moments before her plane to Brazil was due tor take off, discovering that she was carrying 70 pounds of luggage and $3,000 in cash in addition to holding a one-way ticket.  Her husband, Carlos Wanzeler, is currently thought to be a fugitive after federal authorities issued a warrant for his arrest earlier this month.  A federal judge ordered that Katia Wanzeler be taken into custody to ensure that she appeared to testify before a grand jury this week.  

Carlos Wanzeler is the co-founder of TelexFree, a once wildly-popular venture that promised participants astronomical returns by simply recruiting new investors and placing advertisements for the company's voice-over-internet-protocol ("VoIP") business.  At its peak, It is estimated that the company had more than 700,000 "promoters."  However, both state and federal regulators accused the company of fraud in mid-April following the company's decision to file for bankruptcy in Nevada.  A Nevada bankruptcy judge dealt a blow to the company's self-professed desire to shed its obligations to "promoters" and emerge from bankruptcy as a legitimate and profitable venture when he granted the Securities and Exchange Commission's request to transfer the bankruptcy to Massachusetts where the Commission's civil enforcement action is pending. 

Shortly following the transfer of the bankruptcy case, federal authorities announced the filing of criminal charges against TelexFree founders James Merrill and Carlos Wanzeler, accusing the men of conspiring to commit wire fraud.  While Merrill was arrested that same day, Wanzeler was thought to have fled to Brazil, where his dual citizenship may present extradition problems for U.S. authorities.  Indeed, Wanzeler had not been seen or heard from since mid-April.

According to the Boston Globe, it appears that Wanzeler's plan to skip town went into action in mid-April as authorities closed in.  On the same day that federal agents executed a search warrant on TelexFree's Marlborough headquarters, Wanzeler allegedly drove his daughter north through the Canadian border, where they caught a plane two days later to Sao Paulo, Brazil.  Authorities later subpoenaed Katia Wanzeler as a material witness for testimony before a grand jury that is thought to be considering additional charges against her husband and Merrill.

After authorities unveiled criminal charges against Merrill and Wanzeler on May 9, prosecutors alleged that an unidentified person in Brazil purchased Katia Wanzeler's one-way ticket to Sao Paulo. Authorities then obtained a material witness warrant and arrested Wanzeler as she prepared to board the plane.  She was discovered to be carrying $3,000 in cash and over 70 pounds of luggage.  At a hearing before U.S. Magistrate Joan Azrack, her lawyer contended that Katia Wanzeler had planned to return (despite having a one-way ticket) and that the excessive luggage was simply clothes purchased for Wanzeler's relatives.  Magistrate Azrack rejected those arguments, remarking, 

"Seventy pounds of luggage?  Four suit cases?  There is no way I'm releasing her."

Ponzitracker recently outlined the difficulties authorities would face in extraditing Carlos Wanzeler, as Brazil's constitution was amended in 1988 to prevent the extradition of Brazilian citizens to any country,  with limited exceptions.  

Court Dismisses SEC's $300 Million Ponzi Case On Timeliness Grounds

A Florida federal judge ordered the dismissal of a lawsuit brought by the Securities and Exchange Commission accusing five former real estate executives of masterminding a $300 million Ponzi scheme on the basis that regulators waited too long to file the case.  U.S. District Judge James King granted a motion to dismiss brought by executives of the now-defunct Cay Clubs, agreeing that the SEC "failed to meet its serious duty to timely bring this enforcement action."  The Commission filed the lawsuit in January 2013, alleging that Cay Clubs ultimately raised more than $300 million from nearly 1,400 investors worldwide.  

According to the Commission's lawsuit, defendants Fred Davis Clark, David Schwarz, Cristal Coleman, Barry Graham and Ricky Lynn Stokes touted the above-average returns available by purchasing units at Cay Club resort locations, including a guaranteed 15% return and a future income stream from the rental of those units.  However, rather than use investor funds as promised, the Commission accused defendants of using investor deposits to pay returns to existing investors as well as diverting more than $30 million for the payment of salaries and bonuses and even the funding of a liquor distillery.  The scheme later collapsed and ceased operations.

In his ruling, King faulted the Commission for failing to timely bring claims against defendants pursuant to 28 U.S.C. 2462 ("Section 2462").  Section 2462 requires that an action for enforcement of any civil fine or forfeiture must be brought within five years from the date the claim first accrued.  Here, because the Commission filed its action on January 30, 2013, the last act committed by each defendant had to have occurred on January 30, 2008 or later.  However, Judge King found that "rather than expeditiously, or even promptly, bringing an enforcement action against the alleged fraudsters and peddlers of unregistered securities, the SEC waited."  

Despite beginning an investigation in late 2007, and alleging in its complaint that Cay Clubs' business activities continued until at least July 2008, Judge King found that the Commission had failed to point to any evidence that any act of offering or sale of alleged securities occurred after January 30, 2008.  Indeed, at least two of the defendants testified that their relationship with Cay Cliubs ended in October 2007.  

While orders of dismissal are typically done "without prejudice," meaning that the plaintiff is given another change to file an amended complaint seeking to rectify the deficiencies, Judge King entered his order "with prejudice" that will effectively end the case.  The Commission has not yet issued any comment, although it is likely an appeal will follow.  

The Order is below:

Final Order of Dismissal

Madoff Fund Receives 50,000 Claims Seeking $40 Billion In Losses

[I]t appears that at least twice as many investors as previously thought lost money in the Madoff fraud, with losses running many billions larger than previously documented. By far the greatest number of victims report that they have not recovered anything since the fraud. For many of those individuals, the forfeiture program can be a true lifeline.

-Special Master Richard C. Breeden

The special master administering the distribution of more than $4 billion in forfeited assets by the federal government in connection with Bernard Madoff's $65 billion Ponzi scheme announced that more than 50,000 claims had been submitted asserting losses of more than $40 billion.  Richard C. Breeden, the Special Master appointed by the Department of Justice, disclosed that investors from 119 countries had submitted approximately 51,700 claims to the Madoff Victim Fund ("MVF"), which currently holds more than $4 billion in funds forfeited to the government - including $1.7 billion from JP Morgan's $2.6 billion settlement with federal authorities.

The announcement highlighted the unexpected number and diversity of claims received, noting that the 51,700 claims represented more than three times the amount of claims submitted to the court-appointed bankruptcy trustee overseeing the liquidation of Madoff's brokerage firm - and approximately 20 times larger than the number of claims ultimately approved in the bankruptcy proceeding.  While victims from the United States submitted the largest number of claims and accounted for approximately 58% of claimed losses, the majority of persons filing claims came from outside the United States.  And at least 26 countries had 100 or more victims.  

The amount of claimed losses is also significant, in that the $40 billion amount significantly dwarfs the monetary value of the claims allowed by court-appointed trustee Irving Picard in the bankruptcy proceeding.  This includes claimants from 78 jurisdictions with average losses of $500,000 or more - including 28 jurisdictions with average losses per claimant of $1 million or more.  Further, while victims hailing from the United States had the greatest cumulative amount of losses, at least 24 jurisdictions featured victims with average losses exceeding the average loss of U.S. victims.  

Given that the number of claims received by the MVF is significantly higher than the number of claims filed in Madoff's bankruptcy proceeding, the announcement raises the prospect that the amount of losses attributable to Madoff's scheme could exceed those reported by trustee Irving Picard.  According to Breeden, more than 36,000 claimants - or approximately 70% - reported not having recouped any of their losses from any source, including the court-ordered claims process in the bankruptcy proceeding.  

One of the reasons for the increased number of claims is likely attributable to the expanded definition of a "victim" used by the MVF.   Indeed, rather than apply only to those who invested directly with Madoff, the MVF allowed the submission of claims from those ‘indirect’ victims whose exposure to Madoff came through ‘feeder’ funds, investment groups, or other pooled investment vehicles.  Notably, Picard successfully sought to deny claims from such 'indirect' investors on the basis that no customer relationship existed due to the fact that the investors lacked an account with Madoff, were not present on the firm’s books and records, lacked control over their investments, and did not receive statements or distributions from Madoff.  Judging from the number of claims reviewed by the MVF, it appears that the amount of "indirect" investors impacted by Madoff's scheme may have been higher than previously thought.  

The MVF will use a “net investment method” to calculate investor losses on a “cash in, cash out” basis.  Breeden cautioned that the number of claims and cumulative losses are subject to change pending a review of each claim, and indicated that he expected a "substantial" number of claims would be denied as ineligible, duplicated, or overstated.  Ultimately, a recommendation for each claim must be made to the Department of Justice, which retains final discretion.

Accused Ponzi Schemer Successfully Extradited From Germany

I didn't steal any money. If I had they would have arrested me and charged me long before my trip to Germany WHICH THEY COURT WAS AWARE OF. This isn't a spy novel. Anything that investigators are going to find has already been found. They aren't finding what they're looking for. Perhaps its time to recognize that maybe they can't find it while there is nothing to find!

- Joel Wilson, on newspaper comment board

A Michigan man who suddenly relocated to Germany as authorities closed in on his alleged $8.5 million Ponzi scheme has lost a bid to halt his extradition back to the United States to face criminal charges.  Joel Wilson, of Saginaw, Michigan, is due to arrive back in the United States later this week from Frankfurt, Germany, where he has lived since late 2012.  Wilson, whose wife was briefly jailed following accusations she lied to investigators, has been an active critic of authorities' investigation - even lashing out at authorities through the online comment section of a local newspaper. Wilson is set to be arraigned on Friday, May 16.

According to authorities, Joel Wilson operated Diversified Group Partnership Management, LLC and American Realty Funds Corporation.  Beginning in 2009, investors were solicited to invest with Wilson's companies, with Wilson allegedly promising annual returns of nearly 10% that were obtained through the purchase, renovation, and resale of real estate in Bay City, Michigan. Investors were told that they would be repaid with the payments made by the purchasers of the renovated houses.  In all, approximately 120 investors entrusted Wilson and Diversified Group with nearly $7 million.  

However, authorities allege that Wilson's real estate businesses simply did not raise enough money to pay the returns promised to investors.  Wilson did not disclose these facts to investors, and instead used new investor funds to pay these purported "profits".  Additionally, over $500,000 was used to support Wilson's lavish lifestyle, including:

• $75,000 to purchase a rival securities broker;
• $35,000 on his wife’s business, 
• $7,914 to buy Detroit Red Wings tickets, 
• $13,160 to purchase tickets and sponsor the Saginaw Sting, a professional indoor football team, and 
• $46,780 on travel.

In January 2013, Wilson was charged with multiple felonies, including racketeering, selling unregistered securities, larceny, fraudulent sale of securities, and conversion.  If convicted of all charges, Wilson could face decades in prison.  From Germany, Wilson allegedly made little effort to keep a low profile, making a variety of statements in the comment section of various articles published by his local newspaper.  While the majority of those comments have since been removed, one comments he allegedly left in response to a January 2013 article summed up his feelings towards the investigation:

I guess now is as good a time as any to let the world know I will not be returning from Germany.  I have developed an intense and irreconciable (sic) hatred for what America has become.  Fascists run rampant and unchecked.  An opiated populous continues to vote away more and more freedom.  Freedom will die in my lifetime.  I'm going to do what I can from here to try and wake  up as many people as I can and try and prepare as best as I can for the long dark night that is coming.  If my words hold weight, begin your own preparations.  A 30 year old man has just been turned into a slave.  Sure there are no chains, but I opened an account in Germany two weeks ago.  The US government knew about it.  They are not made of iron, but these chains are just as real.

A copy of the SEC's complaint is here.

Utah Man Gets 5-Year Sentence For $21 Million Ponzi Scheme

A Utah man will serve time in both federal and state prison for operating a Ponzi scheme that took in more than $21 million from at least 50 victims.  Arvin Lee Black II, known as Lee Black, received a 63-month sentence recommended by prosecutors from U.S. District Judge Robert Shelby after previously pleading guilty to one count each of wire fraud and money laundering.  Black could have faced up to 30 years in prison had he been sentenced to the maximum term for each charge. In addition to the federal prison sentence, Black also previously pleaded guilty to charges brought by Arizona authorities. Black was also ordered to pay approximately $13.8 million in restitution to victims.

Black owned and operated Sole Group LLC ("Sole Group"), which advertised itself as a highly-successful stock day trading company that could pay 5% monthly returns to potential investors.  In addition to the sky-high returns, investors were also assured that their funds had minimal risk exposure.   Based on these promises, Black and Sole Group raised at least $21 million from approximately 50 investors from 2007 to 2012.

However, authorities alleged that the extraordinary returns promised by Sole Group were possible only through the continuous flow of funds from new investors - a classic hallmark of a Ponzi scheme.  Indeed, Black was accused of using more than $7 million in investor monies to fund the promised interest payments.  Black also used a portion of investor funds for his own personal use.  He was charged by both state and federal authorities with various fraud charges, and later pleaded guilty to all charges in February 2014.  Arizona authorities also charged Black's wife, a Sole Group sales rep, and the Sole Group CFO.

Black will first serve a 30-day prison sentence related to the Arizona criminal charges before he is due to report on July 1 to begin serving his sentence.