North Carolina Woman Gets 10-Year Sentence For $1.6 Million Ponzi Scheme

A North Carolina woman will serve at least ten years in state prison after pleading guilty to operating a Ponzi scheme that duped fellow churchgoers and art class acquaintances of at least $1.6 million.  Angela Dawn Campbell, 42, was sentenced by Special Superior Court Judge Richard Stone to two consecutive 60-to-81-month sentences, which translates into a minimum of ten years and a maximum term of 14.5 years.  Campbell currently owes more than $350,000 in restitution to her defrauded victims.

From 2009 to 2011, Campell befriended fellow churchgoers and members of art classes she attended, telling them she was operating an online brokerage and investment business.  Victims that Campbell approached at church later told investigators that Campbell asked them to keep their investment quiet because she "didn't want to get over her head and have too many people coming to her."  Investors were told that they could double or triple their investment, and Campbell also promised investors that they could request a withdrawal of their funds at any time.  

However, in reality Campbell did not use investor funds to open online trading accounts; rather, she used investor funds for a variety of unauthorized purposes, including the payment of fictitious returns to existing investors and the withdrawal of funds at Atlantic City casinos.  Campbell was arrested in February 2012 on twenty-two counts of obtaining property through false pretenses.  As part of her plea agreement, prosecutors agreed to drop twenty of the charges in exchange for Campbell's guilty plea to two charges.  As part of North Carolina's Structured Sentencing Act, parole was eliminated for crimes committed after October 1, 1984, and an offender must serve 100% of the minimum sentence and 85% of the maximum sentence. 

California Man Gets 14-Year Prison Sentence For $2.7 Million Ponzi Scheme

A federal judge sentenced a California man to a fourteen-year prison term for operating a real estate Ponzi scheme that duped family and friends of nearly $3 million.  James Berghuis, 42, received the sentence from U.S. District Judge William B. Shubb, who factored in Berghuis' lack of "conscience" in fashioning his sentence. Berghuis chose to stand trial on the charges last year, which resulted in a federal jury convicting him on four counts of mail fraud, four counts of wire fraud and one count of laundering money.  Berghuis could have potentially faced decades in prison.

From 2005 to 2007, Berghuis used his company, Berghuis National Lending Inc. ("BNLI") to solicit potential investors to take out home equity loans in order to invest in hard-money loans, real estate parcels, or the purchase of real estate franchises.  Investors were assured that the investment was safe, and some were offered a deed of trust purportedly giving them a second position on the asset underlying their particular investment.  In total, Berghuis raised millions of dollars from family members, friends, and acquaintances.

However, Berghuis did not use investor funds as promised; instead, he diverted funds for his own personal use and paid out fictitious returns to existing investors.  In one situation, Berghuis signed over a $200,000 check he had received from a new investor to a car dealership to take possession of a top-of-the-line Mercedes sports car.  Meanwhile, when funds began to run out, investors received various excuses as to why Berghuis could not make the promised payments; many investors ultimately lost their houses or were saddled with significant mortgages as a result of Berghuis' encouragement to use home equity money for the investment.

Madoff Recoveries Top $10 Billion After $497 Million Settlement

The court-appointed trustee tasked with recovering assets for victims of Bernard Madoff's massive Ponzi scheme announced a $497 million settlement with two Cayman Islands hedge funds that brings the total amount recovered to approximately $10.3 billion.  Irving Picard, the bankruptcy trustee for Madoff's now-defunct broker-dealer, filed a Motion to Approve Settlement (the "Motion") with Herald Fund SPC and Primeo Fund (the "Funds"), two "feeder" funds that had funnelled investor funds to Madoff.  With the settlement, Picard has now recovered approximately 59% of the estimated $17.5 billion in losses attributable to Madoff's fraud; with the inclusion of funds paid to victims from Madoff's membership in the Securities Investor Protection Corporation, all investors with losses of $925,000 or less have been fully paid back.

The Funds maintained various accounts with Madoff's firm, investing both directly and through other funds that also had exposure to Madoff.  In the six years preceding the collapse of Madoff's scheme, the Funds withdrew more than $700 million in invested principal from Madoff's firm.  Picard filed lawsuits against Herald and Primeo in July 2009, and subsequently filed an amended complaint on December 5, 2010.  As a protective measure, Picard also filed a proceeding against Primeo in the Cayman Islands.

Under New York law, transfers within six years of the filing of a bankruptcy petition may be recovered as proceeds of a fraudulent transfer.  Because Madoff admitted to running a Ponzi scheme, these transfers are considered to be made with the actual intent to hinder, delay, or defraud.

While settlement negotiations had been ongoing for several years, the Motion implied that a Cayman court's 2013 placement of Herald into official liquidation - which replaced the fund's board of directors with a court-ordered slate - may have been the turning point.  Picard entered into mediation with the Funds earlier this year, and recently reached an agreement.

The agreement calls for Herald to pay approximately $467 million to Picard, which includes a $100 million credit relating to an investment in Herald by JP Morgan that Herald had long maintained should be factored into any amount it purportedly owed.  In addition, Primeo would pay approximately $29 million, which brings the total settlement by the funds to approximately $497 million.

The settlement also includes the allowance of a customer claim filed by Herald of approximately $1.64 billion, which Picard indicated represents Herald's net equity of $1.172 billion and the $467 million paid into the estate as part of the settlement.  Notably, this claim amount would likely place Herald as among one of the largest investors in Madoff's scheme.  As part of the settlement, Picard will make a "catch-up" distribution to Herald, since it was not allowed to receive distributions made to victims over the past few years due to the pending litigation, representing 46.059% of its allowed losses of $755,320,133 - of which Herald will use a portion to contribute its settlement amount with Picard.

Interestingly, while Herald filed a claim with Madoff's bankruptcy estate claiming scheme-related losses, Primeo did not.  While the Motion for Approval of Settlement does not disclose the amount of Primeo's losses, it does disclose that all transfers made by Primeo during the six-year period preceding the bankruptcy filing were withdrawals of principal.  Thus, it is entirely possible that Primeo's failure to file a proof of claim may have prevented it from recovering a significant portion of its losses, as Herald was able to do.

A hearing is scheduled for December 17, 2014 to present the settlement for court approval.

A copy of the Motion is below:

Madoff Settlement

Florida Men Plead Guilty To $19 Million Ponzi Scheme

Two Florida men have entered guilty pleas to charges that they operated a Ponzi scheme that raised nearly $19 million by peddling "guaranteed" certificates of deposit to mostly elderly investors.  Donald Ray Babb, 58, of Merritt Island, Florida, and Ralph Ruth, of Melbourne, Florida, each pleaded guilty to a single charge of conspiracy to commit wire fraud.  Each man faces up to twenty years in federal prison at a sentencing likely to take place in early 2015.

Babb and Ruth operated several businesses, including Southeast Mutual Insurance and Investment LLC, Capstar Industries LLC, and First Merchant Capital LLC (the "Companies").  The men met while working in the automobile dealership industry, and beginning in 2006, began soliciting potential investors through word of mouth and newspaper advertisements on claims that the Companies were licensed financial institutions offering risk-free certificates of deposit with high rates of return.  The Companies would ultimately raise nearly $19 million from at least 150 investors, many of whom were elderly and who invested a significant portion (or all) of their life savings.

However, there were no certificates of deposit offering high rates of return; instead, Babb and Ruth used the Companies to orchestrate a classic Ponzi scheme whereby funds from new investors were used to pay interest and principal redemptions to existing investors.  The men used investor funds to live a life of luxury that included the purchase of high-end watercraft, three airplanes, and real estate in Florida and North Carolina.  The scheme collapsed in late 2013, and the pair were later arrested.  An investigation found that, of the approximately $18.5 million raised by the Companies, approximately $7.8 million was repaid to investors in the form of interest payments and return of principal.

In addition to criminal charges, the Florida Office of Financial Regulation brought civil fraud charges against the men and the Companies.  A court-appointed receiver has recovered approximately $1 million

Former Tennis Team Owner Gets 20 Years For $150 Million Latex Glove Ponzi Scheme

A California man who once owned a professional tennis team has been sentenced to a twenty-year prison term for orchestrating a massive Ponzi scheme that duped victims out of over $100 million.  Deepal Wannakuwatte, 63, received the sentence from U.S. District Judge Troy Nunley who, after hearing testimony from various victims defrauded by the scheme, branded Wannakuwatte a "liar" and "evil person" and delivered the maximum sentence under the law.  Wannakuwatte had previously agreed to plead guilty to a single count of wire fraud after facing charges that could have resulted in up to a 90-year sentence. 

Wannakuwatte operated International Manufacturing Group ("IMG") and RelyAid Global Healthcare Inc. ("RelyAid") (collectively, the "Companies"), telling potential investors that the Companies had lucrative contracts providing surgical gloves to various government agencies.  Investors were told that the Companies had annual sales exceeding $100 million, including more than $125 million in contracts from the U.S. Department of Veteran Affairs ("VA") alone.  Based on these representations, Wannakuwatte and the Companies took in more than $200 million from at least 100 victims.  

However, authorities allege that Wannakuwatte grossly overstated the extent of the Companies' dealings with the VA - indeed, rather than $100 million in sales from the supply of medical gloves, authorities claim that the actual amount of the contracts were $25,000, and the Companies; total 2013 sales were just $5 million.   The scheme began unraveling late last year when Wannakuwatte, his wife, and the Companies were sued by a creditor, General Electric Capital Corp. ("GE Capital"), who claimed that RelyAid had defaulted on a loan it had taken out to purportedly build a latex glove factory.  Wannakuwatte was ordered to turn over a $3 million King Air private plane that had been pledged as collateral on the loan, and multiple government agencies began investigating Wannakuwatte and the Companies shortly thereafter.

After being arrested in February on mail fraud, wire fraud, and bank fraud charges, Wannakuwatte pleaded guilty several months later to a single count of wire fraud.  As part of that plea agreement, prosecutors agreed to seek a 20-year sentence - the maximum allowed under a wire fraud charge.  After accounting for distributions received by victims, total losses were estimated at approximately $109 million.

However, Wannakuwatte's previous sentencing in August 2014 was delayed when, at the sentencing hearing, Wannakuwatte's lawyer presented Judge Nunley with a note claiming that his current lawyer, Donald Heller, had been "intimidating" towards him and that he had retained another attorney.  Heller, a well-regarded criminal defense attorney and former federal prosecutor, later denied the accusations to a reporter and stated that it was in Wannakuwatte's best interests to plead guilty given the "overwhelming" case against him.  Wannakuwatte's new counsel, Philip Cozens, appears to have convinced his client that he was facing a significant uphill battle in trying to revoke his plea agreement.

A hearing is scheduled in January 2015 to determine the exact amount of losses, as the figures advanced by the government and Wannakuwatte's defense differ by tens of millions of dollars.