SEC Charges Wisconsin Man With $10.4 Million Ponzi Scheme

A Wisconsin man was charged by the Securities and Exchange Commission with operating a Ponzi scheme that took in more than $10 million from at least 122 investors.  Loren Holzhueter, 69, was the subject of an emergency enforcement action filed by the Commission last week alleging that Holzhueter used his connections in the local farming community and church to run a Ponzi scheme through his insurance brokerage, Insurance Service Center Inc. ("ISC").  Holzhueter and ISC are charged with multiple violations of federal securities laws, and the Commission is seeking injunctive relief, disgorgement of ill-gotten gains, civil monetary penalties, and prejudgment interest.  

According to the Commission, Holzhueter has owned a tax preparation business, Quality Tax and Accounting Services ("QTAS") since 1985.  In the 1990s, Holzhueter joined ISC, where he continued to sell his services through QTAS.  After purchasing ISC in 2004, Holzhueter attempted to rapidly expand ISC's business by acquiring other insurance agencies and taking on debt.  This expansion strategy also included raising money from family and friends, with some told that their investment would be used to open investment accounts with ISC while others were told that their funds would be used to expand ISC's operations or to buy out business partners.  Holzhueter promised these investors varying fixed annual rates of return ranging from 2% to 8%, and assured them that they could withdraw their investments at any time or that they could "reinvest" the interest by declining to withdraw the interest payments from their accounts.  Some investors were provided with a periodic "Summary Sheet" showing the terms of their investment and the balance at a given date.

However, the Commission alleged that Holzhueter was operating the classic Ponzi scheme by intermingling investor funds for a variety of undisclosed uses, including the funding of general operations, payroll for ISC's employees, personal expenses for Holzhueter, and the payment of Ponzi-style payments to existing investors purportedly representing interest payments and/or the return of invested principal.  Nor were investors advised that, as of November 2013, the Internal Revenue Service had executed a search warrant on ISC's business and was conducting an active investigation.  Indeed, Holzhueter is alleged to have not only concealed the IRS investigation, but also to have raised nearly $3 million from additional investors.

The Commission filed its complaint on Wednesday, January 21, 2015, and a hearing was held the following  day before U.S. District Judge James D. Peterson.  Holzhueter's counsel was provided notice of the hearing, where they were permitted to present argument.  While Holzhueter's lawyers denied liability, they did concede that the Commission had set forth a prima facie showing of violations of federal securities laws in their complaint.  The Court agreed and instructed the parties to confer on the terms of a temporary restraining order to maintain the status quo, with deference given to the inclusion of language allowing ISC to continue to operate based on the fact that any repayment to defrauded investors would come from ISC's continued operations.  The Commission and Holzhueter's counsel were subsequently unable to reach an agreement on the exact language of a temporary restraining order, and both parties recently filed motions submitting alternate versions of a proposed order for the Court's entry.  One of the primary sticking points appears to be Holzhueter's request for institution of a litigation bar that would effectively insulate Holzhueter and ISC from any litigation during the pendency of the Commission's action - a provision the Commission contended would "serve only to grant ISC blanket immunity from suit without any transparency or assurances that its assets are being safeguarded for defrauded investors."

The Complaint filed by the Commission is below, as well as the competing motions for entry of a temporary restratining order:

Sec Complaint

Dkt 18 - Sec Motion

Dkt. 19 - Defs Motion for Tro

Ohio CPA Gets 21 Years For Role In $40 Million Ponzi Scheme

An Ohio man was sentenced to serve twenty-one years in federal prison for his role in funnelling investors to the massive "Black Diamond" Ponzi scheme that ultimately duped over 400 investors out of at least $40 million.  Jonathan Davey, 50, of Newark, Ohio, received the sentence from U.S. District Judge Robert J. Conrad, Jr., who remarked that Davey's conduct "was driven by greed that the Court rarely sees."  In addition to the prison sentence, Davey was ordered to pay nearly $22 million in restitution to defrauded victims.  

Black Diamond was a foreign currency ("forex") trading operation masterminded by Keith Simmons.  Beginning in 2007, and using a network of co-conspirators and feeder funds, Simmons solicited investors under the guise that their funds would be used in the purportedly highly successful Black Diamond trading platform.  Simmons quoted Bible verses in pitching potential investors while also promising 4% monthly returns that were never at risk because no more than 20% of invested funds would be at risk at any time. 

Davey served as administrator for several of the hedge funds involved in the Black Diamond Ponzi scheme, and raised over $10 million from investors though his own hedge fund, "Divine Circulation Services'.  Davey told investors that he was operating a legitimate hedge fund, and that he had conducted due diligence on Black Diamond.  However, neither was true.  Additionally, when the Black Diamond scheme began to collapse, Davey orchestrated a separate Ponzi scheme in which he raised over $5 million to use to pay fictitious 'returns' to old investors.  While investors were told that Davey managed a total of over $120 million, in reality the amount on hand was less than $1 million.  

In addition to making Ponzi-style payments to investors of nearly $20 million that purportedly represented investing returns, Davey and others diverted investor funds for a variety of unauthorized personal expenses.  In one example, Davey used an offshore shell company in Belize to fund the construction of an Ohio mansion.  Additionally, Simmons was said to have paid women for sex and furnished "lavish love condominiums" with investor funds.  Simmons was recently sentenced to a fifty-year term.  

California Men Plead Guilty To $100 Million ATM Ponzi Scheme

Two California men have entered guilty pleas to operating a massive Ponzi scheme that allegedly caused losses of over $100 million to victims who thought they were investing in a profitable ATM leasing operation.  Joel Barry Gillis, 74, and Edward Wishner, 76, each entered a guilty plea to one count of conspiracy, two counts of mail fraud, and one count of wire fraud before U.S. District Judge S. James Otero.  Both men are scheduled to be sentenced by Judge Otero on March 30, and could potentially face decades in prison.  

Gillis and Wishner operated Nationwide Automated Solutions ("NAS").  According to authorities, NAS solicited investors since 1999 by promising that their funds would be used to place, operate, and maintain automated teller machines ("ATMs") throughout the country.  Investors were told that they could purchase ATMs for a price ranging from $12,000 to $19,800 from NAS, and could then lease those same ATMs back to NAS for a 10-year term in exchange for a "rent" of $.50 per ATM transaction.  A contract memorializing the investment purportedly contained the serial number and the location of the ATM, and investors were guaranteed an investment return of at least 20% annually.  Notably, each contract also included a "non-interference" clause prohibiting the investor from interfering with the operation of the ATM by contacting the locations where the ATM was installed or any ATM service provider.  An analysis of NAS' bank accounts from 2013 forward showed that more than $123 million was raised from investors in just that short period.

While the company's records showed that it had sold and was leasing back more than 31,000 ATMs to investors as of June 2014, third-party settlement reports provided by NAS's ATM servicers show that only 253 ATMs were serviced.  As the SEC previously alleged,  

Defendants have “sold” and “leased back” tens of thousands of ATMs to NASI investors that they never owned, that they never operated, and that may have never existed. 

For example, while NAS's internal records claimed ownership or operation of nearly 700 ATMs located at "Casey's Convenience Mart" locations in the Midwest, the Commission's investigation showed that neither NAS nor any of its investors owned or serviced any of those ATMs.  Rather, those ATMs were owned by an unrelated company with no affiliation with NAS.  The Commission also alleged that NAS often sold and leased back the same ATM to more than one investor.  Of the ATMs that NAS did service, those revenues were minimal and were dwarfed by the significant amount of new investor funds.  Those investor funds were used to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

Authorities alleged that NAS bounced over $3 million in checks to investors in August 2014, with investors told that a "glitch" in connection with retention of a new outside firm handling investor payments was to blame.

Authorities began investigating NAS shortly after the bounced checks, with court records in the SEC's case demonstrating that an application for a temporary injunction and other relief was filed on September 17, 2014.  Criminal charges were filed several months later.  

A receiver, William Hoffman, was appointed at the request of the SEC, and a website has been established at http://www.nasi-nationwideatm.com/ for interested parties.  

Oddly enough, multiple Ponzi schemes centered around promised riches from ATM leasing or rentals have popped up in the past few years, including here, here, and here.

In Depth: High Stakes As Stanford Clawback Suits Set To Begin In February

For the more than 20,000 investors who have thus far received little or nothing from their investment in Stanford CDs, money recovered from wherever it resides today is likely the largest portion of the money they will ever receive in restitution. CD Proceeds — comprising purported CD principal and interest payments to the Stanford Investors — are little more than stolen money and do not belong to the Stanford Investors who received such funds but belong, instead, to the Receivership Estate.

- Clawback complaint

Nearly six years after Allen Stanford was arrested and charged with masterminding the second largest Ponzi scheme in U.S. history, which caused billions of dollars in losses to thousands of victims worldwide, a court-appointed receiver is preparing to proceed with the first of dozens of trials seeking to "clawback" hundreds of millions of dollars from those lucky enough to profit from their investment with Stanford.  Ralph Janvey, the court-appointed receiver, filed so-called "clawback suits" against hundreds (if not thousands) of Stanford investors that received purported returns in excess of their original investment in Stanford's bogus certificates of deposit.  With victims having received approximately 4% of their losses to date, stakes are high in the suits - which Janvey has previously acknowledged as "the single largest potential source of funds which may be recovered for the benefit of Stanford’s victims."

Stanford's fraud involved the offering of CDs carrying guaranteed rates of return and likened to the safety and security of similar CDs issued by commercial banks.  The increased return, along with the promised safety of the investments, made the CDs enticing - a typical Stanford CD offered returns at least two to three percentage points higher than a bank-issued CD.  At least 18,000 victims in the U.S. alone suffered collective losses of billions of dollars when Stanford's empire finally collapsed in early 2009.

Clawback Suits

"Everybody who got money from Stanford has two things in common: One, they don't want to give it back. Two, they claim they're completely innocent and had no idea anything untoward was going on,"

- Janvey attorney Kevin M. Sadler

Following his appointment, Janvey filed numerous clawback lawsuits against victims and other third parties that he contended wrongfully received illicit scheme proceeds.  The suits, brought under the version of the Uniform Fraudulent Transfer Act adopted by Texas ("TUFTA"), claim that the transfers to the investors were made with the actual or constructive intent to hinder, delay, or defraud, and that equity requires that those profits be returned to the receivership where they may be distributed in a pro rata fashion to those less-fortunate investors. Proceeding under a theory of actual intent to hinder, delay, or defraud, which can be satisfied through the finding that the perpetrator operated a Ponzi scheme, shifts the burden to the clawback defendant to demonstrate both that they showed good faith and took the transfers for reasoanbly equivalent value.

In analyzing reasonably equivalent value, courts have been quite clear that, while returns to an investor up to the amount of that investor's invested principal can be made for reasonably equivalent value under the theory that such return extinguishes that victim's claim for return of their principal, returns exceeding an investor's invested principal can never be made for reasonably equivalent value.  Similar suits brought by court-appointed receivers and/or bankruptcy trustees have enjoyed a significant success rate.

However, Janvey has faced several significant obstacles in bringing clawback claims that have correspondingly delayed prosecution of the suits.  For example, Janvey initially sought to recover not only the profits realized by clawback defendants but also the underlying returned principal.  For example, an investor that realized $40,000 in profits on an investment of $100,000 would be targeted for the return of $140,000.  While Janvey took the position that such course was necessary to enlarge the size of potential returns to less-fortunate investors, the Securities and Exchange Commission took the rare step of opposing the strategy.  While the Commission has approved a receiver's ability to seek the return of principal from certain investors in other situations upon a demonstrated lack of good faith or other circumstances, it opposed a one-size-fits-all approach in seeking interest and principal from undisputed innocent investors.  This resulted in a 2009 court ruling holding that Janvey was limited to only seeking the return of interest from clawback defendants.  

Janvey has also been locked in a battle with hundreds of former sales brokers employed by Stanford who peddled the CDs to investors.  Janvey has sued the brokers for the return of hundreds of millions of dollars in commissions and other recruitment bonuses they were paid for selling the CDs; the brokers have refused to repay the monies and sought instead to force Janvey to abide by the arbitration clauses contained in their employment agreements with Stanford's entities - meaning that, if successful, Janvey could be forced to incur exponentially higher costs in individually arbitrating  each of the over-300 claims.

Dozen Trials Scheduled in 2015 and 2016

The clawback of hundreds of millions of dollars in false profits from Stanford investors likely represents the largest source of potential remuneration for thousands of Stanford's victims.  At least a dozen clawback trials are scheduled to occur in 2015 and 2016, with the receiver's case against Peter Romero scheduled to proceed first in February 2015.  

Romero is a former State Department official during the Clinton administration who subsequently signed on to work for Stanford as a consultant in the early 2000's.  According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford."  Janvey originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million.  Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with polticians by leveraging his reputation and government contacts.  Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communciate with Stanford in the days following the revelation of the scheme in 2009.  

Janvey's attorneys have recognized the significance of the Romero case as a "bellwether" for the significant number of clawback claims they have brought.  Indeed, the outcome - whether a victory or defeat for Janvey - will likely influence the potential for settlement in the cases set to go to trial later this year and next, as the victorious side will be able to further bolster their position.  

Romero's lawyers have denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."

In closing, the stakes are high for Janvey on the eve of commencement of these clawback suits, which present victims' best (and likely last remaining) chance to realize any significant remuneration for their losses.  While Janvey himself acknowledged to CNBC that victims would ultimately not realize more than "pennies on the dollar," every penny surely counts to thousands of victims whose hopes rest squarely on Janvey's efforts.

SEC Accuses South Florida Fund Manager Of Running $17 Million Ponzi Scheme

A South Florida man has been accused by the Securities and Exchange Commission of operating a $17 million Ponzi scheme through his investment advisory firm.  Frederic Elm, along with his advisory firm Elm Tree Investment Advisors LLC ("ETIA"), was named in a complaint filed by the Commission last Friday that alleged violations of federal securities laws.  Elm's wife, Amanda Elm f/k/a Amanda Elmaleh, was also named as a Relief Defendant based on the Commission's belief that she wrongfully received investor funds.  The Commission obtained an asset freeze from a Florida federal court, and is seeking injunctive relief, disgorgement of ill-gotten gains, civil monetary penalties, and prejudgment interest.  Additionally, the Court appointed Grisel Alonso as Receiver over ETIA and the funds purportedly managed by ETIA.

Elm, 45, resides in Fort Lauderdale, where he operated ETIA.  ETAI purportedly acted as fund manager for three funds: the Investment Fund, The 'e'Conomy Fund, and The Motion Opportunity Fund (collectively, the "Funds").  Beginning no later than November 2013, Elm and ETIA solicited investors both through phone and email based on promises that their funds would be invested based on various equity and options trading strategies and that they could expect guaranteed annual returns ranging from 2% to 11%.  Most investors purchased interests in limited partnerships through subscription agreements, while some investors received promissory notes evidencing their investment.  In just over one year, Elm and ETIA raised at least $17 million from over 50 investors.

Elm used roughly $7 million of investor funds for trading.  However, he did not achieve the returns he promised to investors; rather, his trading account suffered losses of nearly $4 million from January 2014 to November 2014.  Of the remaining funds, Elm used over $5 million to make Ponzi-like payments to investors purportedly representing interest and returns of principal.  Elm also used investor funds to support a lavish lifestyle that included the purchase of a $1.75 million home, nearly $300,000 in luxury cars, over $130,000 in jewelry, and even nearly $20,000 to pay his wife's student loans.

Grisel Alonso has been appointed as Receiver over ETAI and the Funds, and has established a website at www.elmtreereceivership.com.  A court hearing has been scheduled for January 29, 2015 at 1:15 PM in Courtroom 205B of the Federal Courthouse in Ft. Lauderdale, FL. A copy of the Commission's Complaint is below:

Elm Complaint