Petters Trustee Prepares Clawback Suits Against International Investors

The court-appointed bankruptcy trustee for the third-largest Ponzi scheme in history has assembled a legal team hailing from all over the globe as the quest to recover assets for victims will now target foreign investors that were fortunate enough to profit from their investment.  Doug Kelley, the trustee tasked with returning funds to victims of Thomas Petters' $3.65 billion Ponzi scheme, has secured legal representation in countries from Germany to Bermuda to the British Virgin Islands as he prepares to launch a series of "clawback" lawsuits.  At stake in the lawsuits: more than $100 million of "false profits" paid to Petters' investors, including offshore hedge funds.  

Clawback lawsuits, as they are known in the landscape of Ponzi scheme litigation, seek to "claw back" fictitious profits paid to scheme investors in excess of those investors' initial investments.  The suits have enjoyed nearly-universal approval from overseeing courts, who justify the suits on the basis that the returns paid were not derived from legitimate business activities but rather simply the re=distribution of funds from incoming investors.  The suits have also played a significant role in the recovery of funds for victims that were not as fortunate to recoup their investment.  As most schemes are discovered only after their collapse, clawback lawsuits and third-party lawsuits often represent victims' best hope for any recovery. Indeed, Kelley previously stated that the "big money" to be recovered would be through clawback lawsuits.

Thomas Petters was arrested in late 2008 after authorities alleged that his electronics factoring business was, in reality, a massive Ponzi scheme.  Petters would later plead guilty (although he would later unsuccessfully attempt to have his sentence reduced) and is currently serving a 50-year prison term in a Kansas federal prison. In addition to Petters, authorities obtained ten other convictions of individuals tied to the scheme.

To date, Kelley has recovered approximately $110 million for the benefit of victims, while related bankruptcy and receivership proceedings have pulled in another $300 million.  Considering that total losses from the scheme are estimated at approximately $2 billion after factoring in payments made to investors, the $410 million recovered to date represents approximately 20% of total losses.  By Kelley's own estimate, potential recoveries through the use of clawback lawsuits could be more than $500 million - including more than $323 million sought from hedge funds Epsilon Investment Management and Arrowhead Capital Management.  

Kelley's legal team was recently able to obtain the lists of investors in the two above hedge funds, which will allow them to perhaps identify further clawback suit targets.  But while U.S. laws are quite clear on recovering funds in these situations, the laws of other jurisdictions where suits may be brought are not nearly as clear.  Nor is it clear whether Kelley will have the option to bring such suits in a U.S. bankruptcy court.  Kelley has indicated that, before proceeding in each jurisdiction, a cost-benefit analysis will be employed to gauge the likelihood of success.

California Man Convicted Of $3 Million Ponzi Scheme That Targeted Iranian Jews

A federal jury convicted a California man of running a $3 million Ponzi scheme that targeted Iranian Jews.  Shervin Naman, 32, was found guilty on two charges of wire fraud and one charge of mail fraud.  Each of those charges carries a maximum twenty-year prison sentence.  Neman's new lawyer has since filed a motion for a new trial on several grounds, including that Neman currently had enough funds to repay back his victims.  

Neman told investors that his hedge fund, Neman Financial L.P., could deliver outsized returns through both investments in foreclosed residential properties and access to highly-touted stock offerings such as Facebook, Groupon, LinkedIn, and Angie's List.  Through Neman's purported connections to a broker with access to these pre-IPO shares, potential investors were told that Neman could flip the shares after their IPO debut.  Investors were promised returns of 11% to 18% paid within 30 to 180 days and evidenced by promissory notes signed by Neman.  In total, Neman raised more than $7.5 million from investors.  

However, Neman's touted IPO connections and investing prowess were false.  Indeed, of the nearly $8 million raised from investors, less than 1% was used for its advertised purpose.  Indeed, other than a single $66,000 investment in General Motors' IPO in November 2010, the remainder of investor funds were used to either make Ponzi-style payments to investors or to sustain Neman's lavish lifestyle.  Specifically, more than $5.4 million was used to make Ponzi payments to investors, while while nearly $1.6 million was spent on, among other things, jewelry and high-end cars; Neman's wedding, honeymoon, and other vacations; and VIP tickets to sporting events.

Court Appoints Independent Trustee For TelexFree

A Massachusetts federal Bankruptcy judge approved a request by the Department of Justice to appoint an independent trustee over TelexFree, LLC and related entities ("TelexFree"), after the U.S. Trustee argued that "compelling evidence of fraud...[and] criminal conduct" warranted such relief "forthwith."  U.S. Bankruptcy Judge Melvin S. Hoffman entered the Order several days after a status hearing marking the first appearance of the parties in a Massachusetts bankruptcy court after the cases were transferred from a Nevada bankruptcy court.  With the appointment of the independent trustee (who has yet to be named), TelexFree's vision of emerging from bankruptcy with new products and revenue streams appears dismal at best.

Several days after TelexFree's late-night bankruptcy filing in a Nevada bankruptcy court, U.S. Trustee Tracy Hope Davis filed a motion seeking appointing of a Chapter 11 Trustee pursuant to §1104 (a) (the "Motion").  In the Motion, Ms. Davis argued that appointment of a trustee was warranted based on the "compelling evidence of fraud," as well as for the interests of investors and creditors seeking financial accountability.  While appointment of an independent trustee is common in bankruptcy filings under Chapters 7 and 13, an entity's desire to reorganize under Chapter 11 and later emerge as a stronger entity often results in the entity's original management continuing to oversee operations during the entity's time in bankruptcy.  However, Section 1104(a) specifically contemplates appointment of an independent trustee in a Chapter 11 case in several situations, including

for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

The Motion specifically cites Section 1104, noting that "the appointment of a Chapter 11 trustee would clearly be in the interests of the creditors of this estate" in light of the pending civil actions by the Securities and Exchange Commission and the Massachusetts Securities Division ("MSD").  The Motion notes that "the pyramid has collapsed," and also recounts the discovery of nearly $38 million in cashier's checks in the possession of TelexFree's interim CFO during a raid of the company's Massachusetts headquarters.  The Motion also thoroughly summarizes the pertinent facts alleged in the complaints filed by the Commission and the MSD.

The Motion argues that cause for the appointment of a Chapter 11 trustee is clearly established by the "fraudulent and dishonest acts committed by the principals and the officers of [TelexFree]."  Fraud is also evident by the very nature of Ponzi schemes, which are "fraudulent by definition." Donell v. Kowell, 533 F.3d 762, 767 n2 (9th Cir. 2008).  Under the definition of a Ponzi scheme as set forth by a recent Ohio Bankruptcy Court, the Motion concludes that:

Given the facts alleged in the SEC case, TelexFree appears to be engaged in a classic Ponzi scheme.

Now that an independent trustee will be appointed, he/she will follow Section 1106, which includes the filing of a statement of investigation, as soon as practicable, that includes "any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor..."  Additionally, the trustee may recommend the conversion of the case to another Chapter under the Bankruptcy Code, including a liquidation under Chapter 7.  

Order

Chicago Fund Manager Charged With $11 Million Ponzi Scheme

Civil and criminal authorities filed charges against a Chicago fund manager alleging that he ran a Ponzi scheme that took in more than $11 million from investors.  Neal V. Goyal, 33, was the subject of an emergency civil enforcement action filed yesterday brought by the Securities and Exchange Commission.  In a parallel criminal action, federal authorities charged Goyal with a single count of wire fraud.  The Commission's action is seeking injunctive relief, disgorgement of ill-gotten gains, and civil penalties, while Goyal could face up to twenty years in prison on the criminal charge.

Goyal owned and managed two investment advisors: Blue Horizon Asset Management ("Blue Horizon") and Caldera Advisors, LLC ("Caldera").  Blue Horizon and Caldera, neither of which is registered with the Commission, act as investment advisers to four investment funds created by Goyal (collectively, the "Funds").  Beginning in 2006,  while he was attending law school at the Thomas Jefferson School of Law, Goyal began raising funds from friends and family members.  Potential investors were told that the Funds primarily invested in equities, and employed a "long-short" strategy that involved holding both long and short positions.  According to account statements provided to investors from 2011 to 2013, the Funds returned at least 17% per year.  In total, Goyal raised more than $11 million from at least 35 investors.

However, Goyal was not the savvy trader investors were led to believe.  Indeed, his initial trading resulted in substantial losses, and he ceased trading completely by January 2009.  Instead, Goyal used investor funds to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  Additionally, Goyal misappropriated investor funds to sustain his lavish lifestyle, including more than $1 million for two homes, more than $200,000 in investments in a Chicago tavern, luxury vacations and custom-tailored suits, and $100,000 for a children's clothing boutique operated by his wife.  Indeed, despite the fact that his wife's children's clothing boutique was losing money, Goyal used investor funds to help the business expand to a second location.  

The Commission's complaint is below:

Comp 23008

Zeek Receiver Seeks Approval For 40% Distribution

Nearly two years after his appointment, the court-appointed receiver for the $600 million Zeek Rewards Ponzi scheme has asked a North Carolina federal court for approval to make an initial 40% distribution to over 100,000 victims.  The Receiver, Kenneth D. Bell, filed his Motion to Authorize First Interim Distribution, Establish Record Dates, and Set First Interim Distribution Date (the "Distribution Motion") yesterday.  In the Distribution Motion, the Receiver seeks to begin making distributions to victims as soon as September 30, 2014.

The Securities and Exchange Commission filed an emergency enforcement action against Zeek Rewards in August 2012, alleging that the wildly popular online penny-auction site was, in reality, a massive pyramid and Ponzi scheme that was on the verge of collapse.  After a claims process was initiated last year, Bell ultimately received approximately 175,000 claims asserting cumulative losses of over $650 million.  

Given the sheer number of claims received, which is believed to be (by far) the largest number ever involved in a Ponzi scheme receivership, Bell's team was forced to adopt several unique procedures to timely and efficiently process each claim.  This included the appointment of a special master to resolve disputes between claimants and Bell, as well as the discretion to utilize Bell's discretion to approve claim discrepancies that did not exceed the amount contained in the company's database by more than $10,000.

As of the filing of the Distribution Motion, Bell's team had issued more than 150,000 Claim Determinations to victims.  Claimants that subsequently returned the required Release and OFAC Certification had their claim converted to an Allowed Claim - and thus eligible for a distribution.  To date, more than 80,000 claims are considered Allowed Claims by Bell's team.  According to the Distribution Motion, those approximately 67,000 claimants that have received a claim determination but have not yet returned the required Release will have until August 15, 2014 to do so to be considered eligible to receive a distribution on September 30, 2014.  

Previous Ponzitracker coverage of ZeekRewards is here.

The Distribution Motion is below:

Zeek Receiver's Motion