Ohio Man Gets 15 Years For $100 Million Ponzi Scheme

“These offenses and their devastation cannot be tolerated.  The court must inflict a punishment that emphasizes this kind of financial chicanery cannot and does not exist. It’s necessary for this court to send a loud message, an emphatic message, that this kind of conduct cannot be tolerated.”

- U.S. District Judge Herman Weber

A Cincinnati man will spend the next 15 years in federal prison for orchestrating a devastating Ponzi scheme that took at least $100 million from over 140 investors.  Glen Galemmo received the maximum possible sentence from U.S. District Judge Herman Weber pursuant to a plea agreement with prosecutors in which he pleaded guilty to one count of money laundering and one count of wire fraud.  Galemmo will also be ordered to forfeit his assets.  With credit for time served, Galemmo will serve at least 13 years of his sentence.

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities.  Touting himself as an experienced trader, Galemmo promised lucrative returns to potential investors through investments in stocks, bonds, futures, and commodities.  Investors were provided with promotional materials indicating Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Potential investors were assured that Galemmo obtained annual audits of Queen City, and were provided with monthly statements showing steady returns.  In total, Galemmo raised at least $100 million from individuals, trusts, and even charitable organizations.

However, Galemmo's touted prowess as a savvy trader was pure fiction.  Galemmo was able to pay the promised outsized rates of return not through trading stocks and bonds, but from using incoming investor funds to pay existing investors - a classic sign of a Ponzi scheme.  Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003.  Galemmo also created fictitious trading and account statements that were distributed to investors.  Investor funds were diverted by Galemmo for a variety of unauthorized uses, including the purchase of real estate, the payment of fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes. 

The scheme came to a sudden halt in July 2013 when investors received an email from Galemmo stating that the funds were shutting down and directing all further inquiries to an IRS agent.  Galemmo was later arrested, and agreed to plead guilty shortly thereafter.  The prospect of recovery for victims appears bleak, with one source reporting that the Department of Justice has estimated that victims could recoup 10% to 20% of their investment.  One group of investors has commenced litigation against several national banks, seeking to hold the banks liable for their assisting Galemmo's scheme.  

Galemmo was allowed to remain free on bond while the Bureau of Prisons determines where he will serve his sentence, which could take as long as two months. 

Ponzi Schemes Remain Prevalent In 2014; Over $1 Billion In New Schemes Uncovered

Nearly six years after the word "Ponzi scheme" became a household name thanks to Bernard Madoff, Ponzi schemes continue to proliferate and leave a trail of financial destruction in their wake as demonstrated by newly-compiled data showing more than $1 billion of newly-uncovered schemes and over 600 years in prison sentences handed down in the first half of 2014.  In the first six months of 2014, at least 37 Ponzi schemes were uncovered, with a total of more than $1 billion in potential losses.  This equated to the discovery of a Ponzi scheme (1) more than once per week, (2) every 4.9 days, or (3) every 118 hours. Included in this list are at least three Ponzi schemes with estimated losses of at least $100 million or more, with the estimated $300 million in losses in the alleged TelexFree Ponzi scheme ranking as the largest Ponzi scheme exposed in the first half of 2014.

The data, permanently housed in this database and also displayed below, is presented as a reminder that Ponzi schemes remain rampant in the United States and worldwide despite mounting government and regulatory efforts.  Indeed, the 37 schemes discovered during the first half of 2014 suggest that at least 74 schemes will be discovered in 2014 - approximately 10% more than the 67 schemes unearthed in 2013. 

A full list of Ponzi schemes uncovered in the first half of 2014, arranged by the estimated size of the scheme, is below:

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 Ponzi Scheme Sentencing

In terms of sentencing, at least 66 prison sentences were handed down for those convicted for their role in Ponzi schemes in the first half of 2014, with over 600 years in cumulative sentences.  These figures are ahead of the pace for 2013, which saw 117 prison sentences for more than 1,000 years in total. These sentences ranged from mere months to decades in prison, with Hendrix Montecastro's 81 year sentence ranking as the highest Ponzi sentence handed down in the first half of 2014.  The total dollar amount of the Ponzi schemes for which sentences were levied: nearly $3 billion. 

A full database of the sentences handed down in the first half of 2014 is below:

A special thanks to Alison K. Jimenez from Dynamic Securities Analytics for her assistance in compiling the data.

Former Attorney Gets 10-Year Sentence For $4 Million Ponzi Scheme

A now-disbarred Minnesota attorney who swindled victims out of more than $4 million in an elaborate Ponzi scheme was sentenced to serve 10 years in federal prison.  Mark Holt, 45, received the sentence from U.S. District Judge Susan Richard Nelson as more than a dozen of his victims looked on, some of whom addressed both Holt and the Court in arguing for the maximum sentence.  Holt had previously pleaded guilty to a single count of wire fraud, which carries a maximum potential 20-year prison sentence.

Beginning in 2005, Holt used his affiliation with a Minnesota registered broker-dealer, Harbor Planning Investment Group ("Harbor Planning"), to solicit potential investors with the promise of steady returns through safe long-term investments.  Investors, many of whom were retired, were provided with periodic payments that purportedly represented returns on their investment, as well as investment statements showing increases in their accounts.  In total, Holt raised at least $4 million from dozens of investors.  

However, Holt failed to invest a majority of the funds he received from investors, instead using investor funds to make Ponzi-like payments and to sustain his lavish lifestyle.  Authorities alleged that Holt misappropriated at least $2 million through the formation of various entities each containing "Harbor" in their business name so as to facilitate the siphoning of investor funds from Harbor Planning.  Holt allegedly spent investor funds on a variety of personal expenses, including $14,000 on travel, $25,000 in gym and club dues, $16,000 on designer clothes, and $5,000 at an exotic dance club.  

Holt was also recently fined $300,000 by the Minnesota Department of Commerce.  

California Men Sentenced For $5 Million Real Estate Ponzi Scheme

Two California men will each serve at least a decade in prison for operating a real estate Ponzi scheme that duped victims out of nearly $5 million.  Terrance Brown, of San Jose, California, and Antranik Kabajouzian, of Morgan City, California, received a 15-year and 10-year sentence, respectively, from California Judge Shelyna Brown.  The men had previously pleaded guilty to multiple felonies, including financial elder fraud, grand theft, securities fraud and forgery.  Because the charges were brought by the State of California, the men will be eligible for parole after serving a minimum portion of their respective sentence.

Brown and Kabajouzian operated Bay Area Equity Group ("Bay Area Group"), telling potential investors that they could earn consistent 15% annual returns through the purchase and refurbishment of local rental houses.  Brown knew many of the victims through his occupation as a tax preparer, and used that relationship to convince many of his clients to invest with Bay Area Group. The men also used a well-designed website and made local presentations to potential investors in soliciting investments.  In total, at least 40 investors entrusted approximately $4.5 million to Bay Area Group.

However, the houses purchased with investor funds were not refurbished and filled with paying tenants, but rather were dilapidated and abandoned houses in Detroit that in some cases were condemned and torn down by the city.  Authorities learned of the scheme after a former Bay Area Group employee came forward voicing their suspicions, and the pair were later arrested - with Brown being arrested at a Las Vegas casino where he was gambling.  Victims suffered near total losses, with the 40 victims sharing in the $40,000 proceeds of an Aston Martin formerly owned by Kabajouizan and auctioned off.  

Zeek Receiver: Distributions To Start September 30; Foreign Clawbacks Coming In "Near Future"

The court-appointed receiver tasked with recovering assets for victims of the $600 million ZeekRewards Ponzi scheme announced that he had obtained court approval to move forward with a preliminary distribution of up to 40% of each investor's approved loss.  Kenneth D. Bell, the receiver, announced that the first distribution would be made on September 30, 2014, to eligible victims that had satisfied certain requirements.  Indicating he was "confident" that additional distributions would take place, Bell also indicated that he planned to commence "clawback" suits against foreign investors in the near future.  

Claims Process

The Securities and Exchange Commission filed an emergency enforcement action against ZeekRewards approximately two years ago, alleging that the company's promise of exorbitant returns through online auctions was the result of a massive Ponzi and pyramid scheme that had taken in hundreds of millions of dollars from hundreds of thousands of victims.  Following his appointment soon thereafter, Bell has worked to reconstruct the complex operations and recover funds for victims, and over $300 million has been secured to date.

In March 2013, the Receiver sought Court approval to commence a claims process.  Due to the sheer number of potential victims, Bell sought approval to deviate from typical claims procedures that were primarily done through written submissions in favor of an online portal that would not only save significant amounts but would also allow a more efficient review of the hundreds of thousands of claims expected. The Court approved the claims process and procedures in May 2013, and victims were given a September 2013 deadline to submit claims.  Ultimately, over 174,000 claims were received asserting total losses of nearly $600 million.

To date, Bell's team had sent out approximately 160,000 claim determinations to victims, who were then required to accept the determination and provide a release and OFAC certification before August 15, 2014 to be eligible to receive a distribution.  To date, more than 80,000 claimants have satisfied these requirements and are eligible to receive distributions beginning on September 30, 2014.  Those who have not completed the requirements by August 15, 2014 will be forced to wait longer to receive their distribution.

Foreign Clawbacks

In his announcement, Bell expressed confidence that ongoing and future efforts would allow him to make additional distributions.  These efforts include lawsuits against more than 9,000 "net winners" that were fortunate enough to profit from their ZeekRewards investment, as well as ongoing efforts to recover receivership assets currently in the possession of financial institutions.  Additionally, Bell also confirmed that he planned to soon initiate "clawback" lawsuits against foreign net winners.

In a motion filed August 15, 2014, Bell requested Court approval for:

leave to file one or more actions in this Court and in foreign courts to pursue claims for the return of fraudulently transferred money and disgorgement of net funds received against significant “net winners” who reside outside the United States. The foreign “net winners” to be pursued all won at least $1000, the threshold previously approved by this Court. With due regard for the interests of efficiency, cost and judicial economy, the Receiver intends to consolidate cases against net winners from each foreign country and from more than one country when possible and appropriate. 

While Bell did not expand on the specific procedures for pursuing foreign clawback victims, previous guidance provided in an earlier quarterly status report may shed some light on his strategy.  In a Quarterly Status Report from late 2013, Bell stated that:

The group of net winners identified to date includes numerous individuals residing outside of the United States, with the largest foreign winners living mainly in countries with established legal systems which are signatories to the Hague Convention for international service of process. While the pursuit of “clawback” claims against these foreign net winners raises various challenges, the Receiver intends to include these winners as parties to domestic litigation based on their contacts with the ZeekRewards Program in the United States so long as doing so will not delay the litigation against domestic winners. The Receiver will also pursue cost-effective foreign litigation to establish the repayment obligation and/or to collect judgments where necessary and appropriate.

Thus, it appears that Bell plans to initiate some or a majority of litigation against foreign net winners that profited by at least $1,000 in the Western District of North Carolina, which has exclusive authority over claims and property relating to ZeekRewards, based on those net winners' minimum contacts with Zeek by virtue of their investment and related transactions.  Upon securing a judgment against any net winner(s), the absence of any assets in the United States available to execute on to satisfy the judgment will likely necessitate the filing of foreign actions to enforce and collect on the judgments.  

Previous Ponzitracker coverage of ZeekRewards is here.

The Motion to Institute Actions Against International Net Winners is below. Thanks as always to ASDUpdates:

Zeek Doc 234