Judge Denies Charging Lien On Ponzi Victim Distributions

A federal judge has issued an order denying an attempt by lawyers for certain victims of the $600 million ZeekRewards Ponzi scheme to place a "charging lien" against hundreds of thousands of dollars in interim distributions due to those victims.  U.S. District Judge Graham C. Mullen issued the order nearly two months after Marc Michaud, a New Orleans lawyer with the firm of Patrick Miller LLC, filed a Notice of Attorney's Charging Liens asserting "attorney’s charging liens and other privileges for legal services performed and costs incurred by Attorney in connection with the representation of" approximately 400 claimants.  In the order, Michaud was also ordered to "immediately and without further delay" provide the contact information for his clients to allow the Receiver to make the first interim distribution directly to those clients.  

Michaud filed the Notice of Attorney's Charging Liens in late September, seeking to create a security interest entitling Michaud and his firm to a portion of distributions made by court-appointed Receiver Kenneth Bell to Michaud's clients.  The exhibit attached to the original Notice listed approximately 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with Michaud's law firm agreeing to turn over a portion of any funds recovered from the scheme.  However, it appears that the only assistance provided by Michaud's firm was the filling out of proof of claim forms for those victims as part of the court-approved claims process; indeed, each of the proof of claim forms filled out for those victims listed Michaud's law firm as the address to which distributions should be sent.

Kenneth D. Bell, the court-appointed receiver, opposed sending victim distributions to any third party, and filed a motion in December 2013 seeking court approval for distribution procedures that included a provision that payments would be made directly to victims.  Michaud's firm filed a pointed objection, claiming that the payments should be sent directly to their firm and characterizing the Receiver's decision as a refusal to consider their clients' claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Law Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form.  The Receiver also noted that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

Judge Mullen subsequently approved the Receiver's Motion in all aspects.

Following the filing of the Notice of Attorney's Charging Liens, the Receiver filed a sharply-worded objection contending that the Notice "appears to be an attempt by Mr. Michaud to circumvent the Court’s prior orders regarding this issue and insert himself as the recipient of money that belongs to victims."  The Receiver also noted that nearly all of Michaud's clients were included in the group of victims that had not yet received the first interim distribution made in late September 2014 due to the fact that Michaud's firm had failed to follow an earlier court order requiring the amendment of certain claimants' mailing information to reflect their actual address rather than that of the Law Firm.  The Receiver also insinuated that, in failing to comply with the order, the Law Firm may also have violated rules governing attorney conduct in both Louisiana and North Carolina by placing the financial interest of the Law Firm over that of their clients.  

The Receiver raised multiple issues with the entitlement to a charging lien for representation of Ponzi scheme victims, and concluded that 

Here, a charging lien is inappropriate given that Mr. Michaud continues to represent these victims in a matter which has not yet been resolved; there is no evidence of either an avoidance of payment or a dispute as to the amount of fees; and there is no indication that these victims have received notice that Mr. Michaud seeks to claim 25% of this first distribution. 

Under the terms of Judge Mullen's Order, Michaud's firm is directed to "immediately and without further delay" provide the direct contact information for his clients to the Receiver so that those victims may receive the first interim distribution.  While Michaud had apparently sought the use of a charging lien to prevent the scenario where he was forced to collect the contingency fee directly from his clients, it appears that he will have no other choice with the Court's ruling.  

A copy of Judge Mullen's Order is below (as always, thanks to ASD Updates)

Zeek Doc 283

Pastor Gets 10-Year Sentence For $7 Million Ponzi Scheme

A California pastor was sentenced to serve more than ten years in prison for duping more than 80 victims - many of them low-income families - in a $7 million Ponzi scheme.  Luis Serna, 62, was sentenced to 121 months in federal prison by U.S. District Judge Beverly Reid O'Connell, who also ordered Serna to pay $4.6 million in restitution to his victims.  Serna previously pleaded guilty to wire fraud charges.

Serna was a pastor at Zion Living Word Christian center in San Fernando.  When he was not directing his congregation, Serna was the owner and operator of Architects of the Future Investments ("AFI"), which solicited potential victims by promising annual returns of up to 20% from his prowess as a foreign currency trader. In total, investors entrusted more than $7 million with Serna - of which authorities estimated that $4.6 million was ultimately lost.  

However, according to authorities, Serna used very little of the funds raised from investors to trade foreign currency.  Rather, Serna admitted to operating a Ponzi scheme by using new investor funds to pay fictitious returns to existing investors.  The scheme collapsed when Serna was unable to satisfy monthly obligations to investors, many of whom came from low-income backgrounds.  In a statement to the sentencing judge, prosecutors indicated that:

This case involves an egregious fraud that targeted non-wealthy victims who believed in the defendant because he was a pastor.  The effects of this crime on the victims are truly devastating in every way.  In short (Serna) has caused not only financial loss, but the loss of homes, the loss of ability to pay for education for children, the need to declare bankruptcy, psychological damage, physical damage and endless suffering.

Serna's attorney claimed that Serna had accepted responsibility for his crimes, but sought leniency based on Serna's immigration from Mexico when he was 16 and a difficult upbringing.  

New York Woman Receives 3-Year Sentence For $6.9 Million Ponzi Scheme

A Long Island woman will spend the next three years in federal prison for orchestrating a Ponzi scheme that duped victims out of nearly $7 million.  Laurie Schneider, 39, received the sentence from U.S. District Judge Denis Hurley after previously pleading guilty to a single count of wire fraud earlier this spring.  In addition to the prison sentence, Schneider's plea agreement calls for her to forfeit $1 million to the government.  

Beginning in September 2006, Schneider began soliciting investors for Janitorial Close-Out City Corporation.  ("Janitorial Close-Out").  Investors were told that Janitorial Close-Out invested in industrial equipment and machinery produced by Chinese companies, and that the company was able to purchase and re-sell janitorial equipment and machinery at a profit margin of 15% to 60% over a short-time period.  It was these high profits margins, according to Schneider, that allowed her to pay annual interest payments to investors of up to 60%.  In total, authorities estimate that Schneider solicited investments in Janitorial Close-Out of over $4 million from over 25 individuals.  

In another venture, Schneider operated Eager Beaver Realty LLC ("Eager Beaver"), which purported to buy and re-sell real estate on Long Island at a discount or that were on the verge of foreclosure.  Potential investors were promised annual returns of up to 20%, and received written paperwork indicating that all of their investment would be used to buy and sell real estate.  Investors entrusted nearly $5 million to Schneider and Eager Beaver.

In reality, the healthy returns promised by Schneider were made possible through the operation of a classic Ponzi scheme in which incoming investor funds were used to pay returns to existing investors.  Schneider also formed the Eager Beaver scheme to establish a new source of funds to pay returns to investors in Janitorial Close-Out.  Investor funds were also diverted for Schneider's personal expenses, which included luxury car purchases and country club dues.

Schneider was indicted on three counts of wire fraud in February 2012.

Government To Appeal Dismissal Of Charges In Alleged $100 Million Ponzi Scheme

The Salt Lake Tribune is reporting that federal authorities intend to appeal a federal judge's permanent dismissal of charges against a Utah man accused of masterminding an alleged $100 million Ponzi scheme on the basis that government prosecutors failed to timely pursue the case.  Rick Koerber, a former real estate businessman who was indicted in 2009 on charges that he operated a massive Ponzi scheme, successfully argued to a California federal court earlier this year that government prosecutors failed to abide by the Speedy Trial Act in prosecuting him.  While the government conceded it may have technically violated the Speedy Trial Act, it has maintained that a dismissal with prejudice, which permanently foreclosed the re-filing of charges against Koerber, was improper.  Government prosecutors indicated that they intend to file their opening brief on or before December 5th.

Background

Koerber, who called himself a "Latter day capitalist," garnered a growing following for his purported real estate investing prowess and was well known in the community not only for his membership in the Latter Day Saints Church but also his hosting of a radio show and frequent real estate seminars.  Through his companies, Founders Capital and Franklin Squires, Koerber touted his "equity milling" program that promised lucrative returns through buying and selling residential real estate.  Investors came in droves, entrusting tens of millions to Koerber's operations.  Even Koerber's radio show changed its opening theme song to, "Money, Money, Money" by Abba.  Koerber also appealed to listeners' religious beliefs, even remarking to one listener who questioned his motives that "God is a capitalist."  In total, Koerber raised approximately $100 million from investors.  

However, the collapse of the real estate bubble in 2007 was catastrophic to Koerber's operations, as the majority of Franklin Squires's assets were in the form of real estate that quickly erased any equity as housing prices declined.  He was indicted in May 2009, and a superseding indictment handed down six months later included twenty-two charges including wire fraud, money laundering, and tax fraud.  

Koerber Obtains Dismissal With Prejudice

In April 2014, nearly five years after the first indictment was handed down, Koerber filed a Motion to Dismiss for Impermissible Delay citing multiple grounds, including the violation of Koerber's right to a speedy trial.  The Speedy Trial Act (the "Act"), codified at 18 U.S.C. § 3161, requires that the trial of a defendant entering a plea of not guilty was to start within 70 days of the later of the filing of the indictment or appearance by the defendant in front of a judicial officer.  While the Act also allows for certain exemptions, Koerber's motion argued that at least 125 non-exempt days had passed without a trial or other resolution.  

At a hearing, the Government conceded that while a "technical" violation of the Act had occurred, the Court should "cure" the violation by entering an Order pursuant to the Act essentially making a finding that the "ends of justice" warranted a retroactive continuance and outweighed the best interests of the public and Koerber.  However, the Court cited precedent standing for the proposition that such a retroactive mechanism was prohibited and that a violation of the Act would have occurred even of such actions were taken.  

In deciding whether or not to grant dismissal with prejudice, which would prevent prosecutors from re-filing the charges, the Court referenced the seriousness of the offenses and also the "Government's problematic conduct in prosecuting this case," including a "pattern of neglect," tactical delays, an inappropriate use of attorney-client privileged information, and ex parte interviews with Koerber that violated his due process rights.  Noting that prejudice to Koerber was presumed, the Court opined that re-prosecuting Koerber would be impossible and ordered that the case be dismissed with prejudice.

Koerber's Associates Have Also Managed To Escape Criminal Liability

The government's prosecution of Koerber and his associates has been unsuccessful by all accounts.  Charges against Gabriel Joseph, a former officer of several of Koerber's companies, were recently dismissed on the same violations of the Speedy Trial Act.  However, those charges were dismissed without prejudice, meaning that federal prosecutors have the ability to refile an indictment.  Another Koerber associate, Jason Vaughn, was cleared earlier this year of fraud charges after he took the stand and testified that he had completely relied on Koerber's assurances that the scheme was legitimate.  

In a statement, Koerber's attorney stated:

We welcome the chance to have the 10th Circuit review what Judge Waddoups described as the ‘sordid history’ of the government’s misconduct in this case. Hopefully, this appeal will finally put an end to the government’s overreach in pursuit of an unjust prosecution of Mr. Koerber.

The Order dismissing the charges is below:

California Man Pleads Guilty To $110 Million Ponzi Scheme

A California man will plead guilty to mail fraud charges in what prosecutors alleged was a massive $110 million Ponzi scheme that duped unsuspecting investors who thought their funds would be used to flip real estate.  John Packard, 64, pleaded guilty today to a single count of mail fraud before a California federal judge.  Packard faces up to twenty years in federal prison at a May 18, 2015 sentencing, although his ultimate sentence will likely be lower based on federal sentencing guidelines.

Packard and Michael J. Stewart owned and operated Pacific Property Assets ("PPA"), a company they formed in 1999.  The two used PPA to purchase, refurbish, and eventually resell apartment complexes in Southern California and Arizona, financing the acquisitions through mortgages and raising money from potential investors to fund property renovations.  While the operation generally was not profitable, PPA was able to benefit from a booming real estate market and skyrocketing property values to raise cash by constantly refinancing the properties.  From 1999 to 2009, PPA acquired more than 100 properties and raised tens of millions of dollars from investors. 

However, as property values began to stagnate in 2007 in what would eventually lead to the economic meltdown, PPA was facing large debt payments to its mortgage lenders and private investors.  The men allegedly misrepresented PPA's financial condition, and continued to raise tens of millions of dollars from investors that were used to make payments to lenders and investors, and even Steward and Packard themselves.  Eventually, PPA and several other related companies filed bankruptcy in June 2009, with court records showing that the companies owed approximately $90 million to hundreds of investors and approximately $100 million to various banks.  After going through the bankruptcy process, private investors received nothing, while banks lost at least $24 million.  

The men were arrested earlier this year after a grand jury indicted them on 11 counts of mail fraud, three counts of bank fraud, and two counts of bankruptcy fraud.  The bankruptcy charges stemmed from the pair's alleged transfer of hundreds of thousands of dollars in PPA funds to personal bank accounts for their use and to pay their personal attorneys, and thus out of the reach of their creditors.

While Packard has pleaded guilty, Stewart has pleaded not guilty and remains on schedule for an April 2015 trial date.

The indictment is below (h/t to Compliancebuilding.com)

Indictment of Stewart and Packard