Texas Man Arrested For $4.5 Million Bitcoin Ponzi Scheme

A Texas man has been arrested on wire fraud and securities fraud charges for his operation of what authorities allege was a Bitcoin-related Ponzi scheme that raised millions of dollars through a purported online digital hedge fund.  Trendon Shavers, known in Bitcoin forums as "Pirateat40," was arrested this morning on one count of securities fraud and one count of wire fraud.  Each charge carries a maximum sentence of 20 years in prison, as well as criminal fines.  The Securities and Exchange Commission filed civil fraud charges against Shavers in July 2013, which recently culminated in a federal judge ordering Shavers to pay $40 million in fines.

Bitcoin is a peer-to-peer payment system created in 2009 that is popular among certain groups due to its promises of security and anonymity. Shavers, known as Pirateat40 on popular Bitcoin Forum Bitcointalk.org, began soliciting investors to park their Bitcoins ("BTC") in Bitcoin Savings and Trust ("BST"), a digital hedge fund that promised weekly returns of up to 7%.  When asked how he was able to achieve such lucrative returns, Shavers told investors that he was involved in bitcoin arbitrage activity that included acting as a middleman for individuals who wished to purchase large quantities of BTC "off the radar."  Shavers later expanded on this explanation, saying

“If my business is illegal then anyone trading coins for cash and back to coins is doing something illegal. :)”  

When further asked about his profit margins, Shavers indicated that he achieved gross returns of nearly 11% per week.  As the operation progressed, the minimum investment amount was raised to 100 BTC, and investors were permitted to re-invest their profits.  

The scheme began to crumble when Shavers announced that the weekly interest rate would decrease to 3.9% beginning August 1, 2012, and he allegedly began making preferential payouts to friends and longtime investors with his remaining funds.  Later that month, Shavers declared default:

As much as I've tried to meet the deadlines within the community, there're conditions beyond my control which have escalated the process to the point it is today.  Bitcoin Savings & Trust has hereby given notice of default to its account holders.

The decision was based on the general size and overall time required to manage the transactions. As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system. On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits. In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.

However, according to authorities, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  In total, Shavers took in more than 700,000 BTC - which at one point constituted approximately seven percent of all Bitcoin then in public circulation.  Through payments of purported interest, Shavers returned approximately 500,000 BTC to investors, and transferred the remainder - approximately 150,000 BTC then worth $1 million - to his personal account, which he used for a variety of unauthorized personal expenses, including rent and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

According to authorities, at least 48 of approximately 100 investors lost part or all of their investment with Shavers.  

Shavers unsuccessfully contested the SEC's charges against him, arguing that he was not subject to the federal securities laws because Bitcoin could not be classified as a "security."  That argument was rejected and later affirmed by the District Court, which both found that Bitcoin investments satisfied the test espoused by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293 (1946).

Notably, the charges represent the first federal criminal securities fraud charges involving a Bitcoin-related scheme. 

The criminal complaint is below:

Shavers

FBI Investigating $50 Million Ohio Ponzi Scheme

Several Ohio citizens are reportedly under investigation by the Federal Bureau of Investigation for operating a massive Ponzi and pyramid scheme that is believed to have duped at least 213 victims out of tens of millions of dollars.  According to an affidavit submitted by an FBI agent in a federal forfeiture proceeding, authorities believe probably cause exists to suspect that William M. Apostelos, his wife Connie M. Apostelos a/k/a Connie Coleman, Scott Doak, and Rebekah Fairchild were "involved in a scheme to defraud investors and have committed wire fraud and/or money laundering."  One Ohio newspaper has since pegged potential losses at north of $50 million.

Allegations Surface In Involuntary Bankruptcy Filed By Spurned Investors

The allegations first surfaced after several doctors submitted an involuntary bankruptcy petition against William Apostelos.  According to declarations submitted by the doctors, each was solicited to invest with Apostelos as far back as 2011 with the promise of high returns in a short period of time.  While one investor was told that Apostelos could offer such lucrative rates of return through short-term loans and success in daytrading stocks, Apostelos also held himself out as a successful real estate investor and securities investor.  Investors were solicited through several companies operated by Apostelos, including:

• Apostelos Enterprises, Inc.;
• Coleman Capital, Inc.;
• Midwest Green Resources, LLC;
• WMA Enterprises, LLC;
• Silver Bridle Racing, LLC; and 
• OVO Wealth Management, LLC. 

According to the doctors that filed the involuntary bankruptcy petition, Apostelos would execute a promissory note in their favor that memorialized their investment.  These promissory notes carried varying rates of return, with one doctor submitting a declaration indicating that they held five promissory notes totaling nearly $1.5 million with annual rates of return ranging from 7% to 50%.  In total, the three doctors alone stated that they had invested more than $5 million with Apostelos.

Federal Forfeiture Action and FBI Allegation Make Similar Allegations

Several weeks after the involuntary bankruptcy was filed against William Apostelos, the United States filed an action seeking civil forfeiture of two Ohio properties on the basis that they are traceable to money laundering and wire fraud offenses.  One of the properties is owned by Coleman Capital, while the other is titled in the name of Steven C. Scudder, Trustee of the WMA Trust - a trust believed to be owned by William Apostelos.  

In support of the United States's forfeiture allegations, the affidavit of FBI Special Agent Michael Bush (the "Bush Affidavit") was submitted.  Concluding that the accused individuals and their business operations have been involved in operating a pyramid scheme over the past few years, the Bush Affidavit makes a detailed set of findings.

The Bush Affidavit states that Apostelos's entities have "reported very little income and more often significant losses" since 2010, and also that Apostelos and his wife have "had no legitimate source of income since 2010." Rather, the "sole source of income has been stolen from the funds investor unknowingly placed into the pyramid scheme."  Apostelos and his wife allegedly diverted investor funds to support a lavish lifestyle that included the purchase of luxury automobiles and spending of as much as $35,000 per month towards a horse racing hobby.  According to Bush's forensic analysis, more than $32 million was deposited into accounts controlled by Apostelos from November 2012 to May 2014, while an estimated $28 million was paid as returns to earlier investors.

The Bush Affidavit also detailed the pitches that were made to various investors.  For example, one investor was told that his $395,000 investment would be used to purchase an Ohio farm that would be quickly resold at a tidy profit.  While the investment came due in late 2013, the victim did not receive his investment back and instead received various excuses including that the bank made errors negotiating the funds.  In another example, a victim was told that his $100,000 investment would be used to invest in stocks through a TD Ameritrade account.  The victim was told that his account had incurred more than $150,000 in gains through timely investments in several stocks, and was provided a TD Ameritrade website where he could track his investment under the name "Mountaineer."  However, the Bush Affidavit indicated that the TD Ameritrade website provided to the victim was not a real trading account, but instead a training account program that did not trade real money.

Scheme Was On Verge Of Collapse

Both the bankruptcy and the Bush Affidavit reference multiple legal judgments that had been recently obtained against Apostelos and his entities for default on millions of dollars in various promissory notes.  Additionally, despite the filing of the involuntary bankruptcy in mid-October, the Bush Affidavit also details that Apostelos may have been continuing to solicit new investors.  For example, a majority of approximately $2.1 million in funds transferred into a Key Bank account in the past month "appears to be from investors."  An additional large wire transfer of nearly $900,000 was received in that account on October 23, 2014; its origin is unknown.

On October 29, 2014, agents from multiple federal and state agencies executed federal search warrants at multiple locations tied to Apostelos and his entities.  Authorities seized a number of bank accounts, cash, jewelry, and vehicles that included a 2008 BMW M3 Convertible, a 2012 Lincoln Navigator, a 2012 Ford F350 Pickup, and a 2012 Lexus LS 460.  Additionally, officers seized a six foot race horse named Baryshnikov owned by William and Connie Apostelos.  

The Bush Affidavit included this observation as well:

During the search, officers located many promissory notes executed between victims and APOSTELOS and/or the companies he controls. It appears that APOSTELOS would get money from victims, often out of their retirement account, and quickly after investing that money, or sometimes failing to invest that money, APOSTELOS would transfer the money to earlier investors as a return on their investments. During the investigation and search, it appears that APOSTELOS used most of the investors’ money to pay off earlier investments, or to fund his glamourous [sic] lifestyle.

Any victims are urged to contact the Ohio Department of Commerce Division of Securities at (800) 788-1194 or online at www.com.ohio.gov/secu. 

The Bush Affidavit is below:

Bush Affidavit

Two More Executives Charged In Alleged $300 Million Cay Clubs Ponzi Scheme

Nearly two months after federal authorities filed fraud charges against a husband and wife for allegedly masterminding a $300 million real estate Ponzi scheme, two more executives of the now-defunct company are now facing similar charges.  Barry J. Graham, 59, and Ricky Lynn Stokes, were each charged in recent days with a single count of conspiracy to commit bank fraud while employed as sales executives with Cay Clubs Resorts and Marinas ("Cay Clubs").  If convicted of the charges, Graham and Stokes could face up to twenty years in federal prison.  

Cay Clubs operated from 2004 to 2008, and marketed the offering and sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Graham was the director of sales for Cay Clubs from 2004 through late 2007, while Stokes was initially a sales agent and the director of investor relations before he took over the director of sales position upon Graham's departure in late 2007.  According to authorities, Graham and others participated in sales transactions with Cay Clubs at artificially inflated prices that were then used to convince investors of the purported profits their investment could yield.  Marketing materials distributed to investors touted the rapidly increasing sales price of the units without disclosing that the transactions were not typical arms-length sales.  

Fred and Cristal Clark are currently being held in a Key West detention facility after a judge determined that no bail conditions existed that could ensure the two would not flee before their March 2015 trial.  The two were initially arrested earlier this summer in Central America on fraud charges stemming from their operation of an unrelated company.  A subsequent indictment added fraud charges from the Clarks' operation of Cay Clubs.  

The superseding indictment is below:

Superseding Indictment by jmaglich1

Zeek Receiver Files Clawbacks Against Canadian Net Winners

The court-appointed receiver tasked with recovering funds for victims of the $600 million ZeekRewards Ponzi scheme has filed clawback lawsuits seeking the return of millions of dollars in "false profits" from Canadian investors fortunate enough to profit from the massive Ponzi scheme.  Receiver Kenneth D. Bell filed the lawsuit in the Western District of Carolina, where the receivership is pending, against twenty-four individuals and one entity, accusing each of profiting by at least $50,000 from their investment with Zeek.  Ten of the defendants profited by at least $100,000, with Defendant Xiaomei Wang allegedly netting more than $375,000 from the scheme.  The Receiver is seeking a judgment in the amount of each defendant's net winnings, as well as the entry of an injunction prohibiting the dissipation of each defendant's assets pending satisfaction of that judgment.  

Courts routinely favor the use of clawback litigation to recover false profits from investors under the Uniform Fraudulent Transfer Act (“UFTA”), which has been passed by nearly every state in substantially similar form. Under the UFTA, transfers made to a creditor are deemed fraudulent when, among other factors, no reasonably equivalent value was exchanged.  An investor is understood to give reasonably equivalent value, assuming they received the transfer in good faith, for any amount up to that investor’s total contribution.  Thus, an investor who received 100% of their total contribution usually cannot be compelled to return those funds absent actual knowledge of the fraud.  However, an investor who received funds in excess of their original investment is not as lucky, for in a Ponzi scheme, those purported “profits” are, in reality, simply the redistribution of other investor funds.  Allowing a fraudster’s arbitrary determinations as to who is enriched under the scheme would be highly inequitable.

The defendants sued by Bell and the corresponding amount of purported "false profits" are below:

• Catherine Parker, $179,656.05
• Xiaomei Wang, $376,808.09
• Beverly Dawn Trca-Kitchen, $314,228.43
• Bin Xu, $244,232.18
• Joel Broughton, $166,669.36
• Feng Guang Wu, $125,485.31
• Don Fitz-Ritson, $121,773.22
• Ruth Konig, $118,828.40
• Guan Jun Zhang, $115,061.48
• Leon Killam, $108,690.96
• Guo Hua Liang, $99,668.36
• Sandra Gavel, $89,906.62
• Yong Sheng Wang, $88,759.96
• Devey Dejong, $87,652.96
• Estate of Richard Bruce Foeller, $76,168
• Brian Fussey, $68,294.59
• Shao Zhang Huang, $67,833.78
• James Macelwain, $65,516.09
• Eugene Veinotte, $62,457.23
• Michael Gallup, $61,944.87
• Jia Yu Wang, $58,346.21
• Ying Liu, $57,421.31
• Jane Ferguson, $55,052.01
• Zahid Ali, $51,267.28
• Mei-Ping Liang, $50,863.61

In total, Bell is seeking approximately $3 million in false profits from the Canadian investors.

Given Bell's previous comments in interim reports, the lawsuit is likely the culmination of the defendants' refusal to entertain settlement overtures to avoid litigation.  Thus, it is likely that many of the defendants may resist Bell's efforts on multiple grounds, including that jurisdiction over the defendants may not be acquired due to their lack of connection with North Carolina.  However, Bell will likely overcome that argument by virtue of defendants' voluntary participation in the scheme, purposely directing actions and communications towards Zeek, as well as sending/receiving funds to/from Zeek.  

A copy of the operative complaint is below (h/t to ASDUpdates)

2 (1)

Banker Who Faked His Death Gets 30-Year Sentence For $50 Million Ponzi Scheme

A former minister-turned-bank-director who faked his own death and was even declared legally dead at one point was sentenced to a 30-year prison term for operating a Ponzi scheme that duped victims out of tens of millions of dollars and caused a federally insured bank to go out of business.  Aubrey Lee Price, 48, received the sentence after pleading guilty earlier this year to bank fraud, wire fraud, and securities fraud charges.  In addition to the prison sentence, Price was also ordered to forfeit $51 million - representing the proceeds from his criminal acts.

Price formed PFG, LLC, and Montgomery Asset Management, LLC f/k/a PFG Asset Management, LLC, in 2009. Potential investors were told that the fund sought "positive total returns with low volatility" through investing in low-risk securities such as equity securities traded on the U.S. markets.  Investor funds were kept in a Goldman Sachs bank account where, despite statements showing consistent trading gains, Price is alleged to have suffered massive trading losses of at least $20 million.  

Price also used investor funds to acquire Montgomery Bank & Trust ("MB&T"), a failing South Georgia bank, in order to gain control of millions of dollars of the bank's cash assets and reserves.  According to the Securities and Exchange Commission, Price transferred at least $10 million from the bank to a trading account at Goldman Sachs, and attempted to conceal the fraudulent nature of his activity by providing fictitious account statements and representation letters to bank regulators.  In total, Price is accused of embezzling at least $21 million from MB&T.

In June 2012, Price boarded a ferry terminal in Key West, Florida.  He left behind a rambling suicide note in which he indicated that he was "incapable of continuing in this life," and that he "created fales statements, covered up my losses and deceived and hurt the very people I was trying to help."  Price repeatedly alluded that he planned to kill himself, and he had not been seen since boarding the ferry. 

A routine traffic stop based on suspicion of illegally-tinted windows landed Price in jail after authorities became suspicious of his story.  Authorities discovered that Price fit the description of a "Jason" that rented a house in Ocala, Florida, and a subsequent raid of that house turned up more than 200 marijuana plants.  Price was returned to a Statesboro, Georgia jail to await trial on bank fraud charges filed by Georgia federal prosecutors.

After his capture, Price told wild stories about his life on the lam, claiming that he first spent time in an unnamed Latin American country where he was allegedly involved with a shadowy figure named "Pedro."  According to Price, "Pedro" on at least one occasion threatened Price that his children's lives were at stake if he did not cooperate.  "Pedro" then offered Price a job overseeing his cocaine operation, where Price claimed he became an expert "cocaine taster."  After he moved back to North Florida, he soon took over marijuana operations and purported to have spent time in more than twenty "grow houses."  

Price then assumed the identity of "Jason," recently-divorced man with a past drug addiction.  In return for doing gardening and other yard work, an elderly couple let him stay in a small shed on their land.  In that shed, Price began growing marijuana plans - and told acquaintances that his sick uncle lived in the shed and would shoot any intruders.  

A hearing will be held in the near future to determine the amount of restitution Price must pay to his victims.