"Bamboo Cyclist" Pleads Guilty To $2.5 Million Ponzi Scheme

A Utah man who once billed himself as the "Bamboo Cyclist" as he cycled across the country has entered a guilty plea to federal charges that he operated a Ponzi scheme that caused at least $2.5 million in losses to victims.  James Ronald Donahoo, II, 36, pleaded guilty to wire fraud, money laundering, and failure to file a tax return in a Utah federal court last week.  According to the plea agreement, Donahoo and prosecutors stipulated to a 48-month prison sentence, which must still be approved by U.S. District Judge Dee Benson.  The agreement also calls for a three-year period of supervised release following completion of the sentence, as well as payment of approximately $2.8 million in restitution to victims.

Donahoo exercised control over Paradigm, Inc. ("Paradigm"), a Utah corporation that Donahoo represented was in the business of making bridge loans or "hard money loans" to small businesses. Donahoo told potential investors that they could earn monthly returns ranging from 1% to 3%. The safety of the investment was touted by Donahoo, who told investors that each dollar invested was secured by a corresponding amount in the bank.  Investors were also shown monthly bank statements for Paradigm that purportedly reflected their investment growth.  In total, Donahoo raised at least $2.5 million.

However, while Paradigm did invest approximately $1.5 million in various businesses, none of investors' funds were used as represented.  Further, the various businesses that received investments from Paradigm were operated by various family, friends, and acquaintances of Donahoo. Approximately $267,000 was used to make Ponzi-style payments to existing investors, while Donahoo also misappropriated funds to sustain a lavish lifestyle that included the purchase of more than $11,000 in fur coats, trips to Hawaii, jewelry, and a Mercedez Benz.

After several investors obtained judgments against Donahoo following the scheme's collapse, he reportedly began traveling the country by bicycle billing himself as the "Bamboo Cyclist" as he promoted various philanthropic causes.  Donahoo promoted his cause through various social media sites, including YouTube.  One website apparently formed by one of Donahoo's victims suggested that these efforts, including Donahoo's claim that he was soliciting "micro loans" for 3rd world countries, were simply a continuation of Donahoo's deceit.  One of the YouTube videos is embedded below:

Sentencing is scheduled for October 7, 2014 at 2:00 P.M.

New York Man Faces Criminal Charges For $17 Million Ponzi Scheme

A New York investment advisor is facing criminal charges over allegations that his investment fund was, in reality, a massive Ponzi scheme that raised more than $17 million from dozens of investors.  James M. Peister, 62, was indicted on five charges of securities fraud, mail fraud, and wire fraud.  Each of the charges carries a maximum 20-year prison term, as well as varying criminal monetary penalties.  Peister was scheduled to be arraigned this afternoon on the charges.

Peister owned and operated several commodity pools, including Northstar International Group, Inc. ("Northstar"), North American Globex Fund, L.P. ("Globex"), and North American Globex Group, Inc. ("Globex Group") (collectively, the "Funds").  Beginning in 2000, Peister solicited potential investors by representing, among other things, that the Funds had achieved positive monthly returns in all but four months over a seven-year period, and that their funds would be invested in a variety of safe securities, including stocks, commodity futures contracts, and fixed income instruments. Investors were provided with regular monthly statements showing purported consistent gains in their accounts.  In total, at least 74 investors entrusted more than $17 million with Peister and the Funds.

However, according to authorities, a majority of investor funds were transferred to the Globex Group, which was not audited and did not issue regular statements.  Authorities allege that Peister and the Funds began experiencing trading losses immediately, which were not disclosed to investors.  Additionally, Peister allegedly misappropriated investor funds for a variety of unauthorized purposes, including to sustain a lavish lifestyle that included expensive real estate and a Hummer vehicle.  In June 2009, after making redemptions to investors that totaled more than $10 million despite concealing the underlying trading losses, Peister announced that the Funds were dissolving and that financial statements previously provided to investors likely contained material inaccuracies.

Following Peister's announcement, both the Securities and Exchange Commission ("Commission") and the Commodity Futures Trading Commission ("CFTC") filed civil enforcement actions in 2011 accusing Peister of violating federal securities and commodities laws.  Peister resolved both of those cases, including a settlement with the CFTC that called for an $11 million payment.

The Commission's 2011 Complaint is below:

SEC Complaint

Ponzi Schemer's Lawyer: Pay Me Out Of Funds Earmarked For Victims

A Pennsylvania lawyer is drawing fire from prosecutors after his request that a portion of funds seized from his client, who pleaded guilty to a $10 million Ponzi scheme, be used to pay legal bills instead of being distributed to victims.  George Heitczman, a Bethlehem, Pennsylvania lawyer, served as counsel to Richard A. Freer, who pleaded guilty to 181 counts of theft on charges he operated a Ponzi scheme that duped victims out of at least $10 million.  Freer was sentenced last month to serve at least 12 years in prison.

During the investigation that ultimately led to Freer's arrest, authorities seized approximately $54,430.  While Freer's prison sentence also included an order that he pay $7.5 million in restitution to his victims, the funds seized by authorities are widely thought to represent all that was left of Freer's scheme.  

In a filing with the court, Heitczman proposed that Judge Jennifer Sletvold award him $20,480 - or approximately 40% of the money seized from authorities by Freer - for repayment of Heitczman's legal fees incurred in representing Freer.  According to Heitczman,

My thought is, I'd like to get paid for my services. At this point, it is his money. They haven't moved to forfeit it or anything else.  If it's my client's money...he can spend it anyway he wants.

That proposal did not sit well with prosecutors, who have openly indicated their opposition.  That skepticism appeared to be shared by Judge Sletvold, whose order scheduling a hearing on Heitczman's request included an instruction that prosecutors notify each of Freer's victims so that they may be able to attend the hearing.  

Additionally, Judge Sletvold's order included a series of questions posed to Heitczman, including whether Freer's contract for legal representation entitles Heitczman to funds that are criminal proceeds, as well as whether allowing the payment of the legal fees will not affect Freer's ability to pay restitution to victims. According to Assistant District Attorney William Blake, ""I can almost guarantee you [that victims'] reaction is going to be anger, outrage [and] shock."

The hearing on Heitczman's request is scheduled for next week.

Maryland Man's Second Ponzi Scheme In 25 Years Nets 20-Year Prison Term

A Maryland man who duped dozens of investors out of more than $1 million was sentenced to spend the next twenty years in prison - approximately two decades after he served jail time for a similar scheme.  Henry M. Fisher Jr., 60, received the sentence for conducting what Montgomery County prosecutors called an elaborate Ponzi scheme that duped victims by promising quick and outsized returns through the purchase and resale of real estate.  In total, Fisher's scheme is said to have caused more than $1 million in losses to approximately 23 victims.

Perhaps not surprisingly, Fisher's prison sentence comes nearly two decades after Montgomery County authorities accused Fisher of defrauding nearly 400 investors out of more than $8 million in a similar real estate Ponzi scheme.  Fisher was arrested in 1992 and charged with ten counts of theft in connection with his investment operation which promised significant returns through " an elaborate series of phony real estate deals" from December 1990 to February 1992.  

In the most recent Ponzi scheme, Fisher faced a burglary charge in addition to other counts after authorities alleged that he broke into a home to give a potential investor a "tour" of the home.  While Fisher is not the first accused schemer to face a burglary charge (see here and here), such a charge is quite rare.

Stephen Darr Appointed As TelexFree Trustee

An independent trustee has been appointed to manage the business operations of TelexFree Financial, LLC; TelexFree, LLC; and TelexFree, Inc. (collectively, "TelexFree"), the consortium of entities currently accused by state and federal regulators of operating a massive pyramid/Ponzi scheme that raised hundreds of millions of dollars from victims.  Stephen B. Darr's appointment as Chapter 11 Trustee was made public in a filing by the Assistant U.S. Trustee in a Massachusetts bankruptcy where the TelexFree bankruptcy is currently pending.  In connection with his appointment, Darr's bond was set at $1 million.

Darr is a principal of Mesirow Financial Consulting, LLC, an independent financial services firm that provides a wide array of corporate services, including restructuring, management, and consulting. Darr currently works out of Mesirow's Boston office, where he serves as the Senior Managing Director. Darr has significant experience in providing financial advisory services to complex restructuring matters, including past engagements with well-known failed companies RefCo and WorldCom.

Darr will have his work cut out for him as he assumes the duties of a Chapter 11 Trustee set forth in 11 U.S.C. 1106.  Pursuant to Section 1106, the Chapter 11 Trustee must, as soon as practicable,

(A) file a statement of any investigation conducted under paragraph (3) of this subsection, including any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate; and

(B) transmit a copy or a summary of any such statement to any creditors’ committee or equity security holders’ committee, to any indenture trustee, and to such other entity as the court designates.

Additionally, the Trustee must also, as soon as practicable, either (1) file a Plan of Reorganization pursuant to Chapter 11; (2) indicate which a Plan of Reorganization will not be filed; or (3) recommend conversion of the case to a case under other chapters of the Bankruptcy Code, including Chapter 7 which provides for liquidation.

Darr's first steps under Section 1106 will be closely watched.  TelexFree is currently embroiled in multiple civil suits brought by state and federal regulators on  accusations that the company's business model was nothing more than a pyramid and/or Ponzi scheme. Further, the Securities and Exchange Commission and the U.S. Trustee in Nevada (where TelexFree originally filed for bankruptcy) have characterized the company's decision to file for bankruptcy as ill-fated and undertaken solely to subvert regulators.  Indeed, before a Nevada Bankruptcy court granted the Commission's request to transfer venue to Massachusetts, TelexFree's lawyers had consistently sought to show that the company had shed its wrongful ways and was seeking to emerge as a legitimate and profitable company.  

As suggested back in an April article, an independent examination of TelexFree could ultimately result in the decision to convert the case to a Chapter 7 bankruptcy and liquidate the company.  Such a decision would spell the end of the company's hopes to emerge from bankruptcy as a legitimate company.

Previous Ponzitracker coverage of TelexFree is here.

A copy of the Certificate of Appointment is below:

Cert