Venezuelan Hedge Fund Manager Gets 13 Years For $723 Million Ponzi Scheme

A Venezuelan-American hedge fund manager's plea for leniency that he was "certainly not Bernie Madoff" backfired when a federal judge sentenced him to serve 13 years in federal prison.  Francisco Illarramendi received the sentence from U.S. District Judge Stefan R. Underhill after previously pleading guilty to two counts of wire fraud and one count each of securities fraud, investment advisor fraud, and conspiracy to obstruct justice.  While Illarramendi was initially released on bail following his guilty plea, Judge Underhill later revoked bail in January 2013 after it was discovered that Illarramendi had used a state tax refund to pay off his Mercedes-Benz car loan.  Prosecutors had sought a sentence of at least 12 years.

The Scheme

From 2005 to 2011, Illarramendi was associated with Highview Point Partners, LLC ("Highpoint") and Michael Kenwood Capital Management, LLC ("MKCM").  Both entities were investment advisers to several hedge funds.  Illarramendi made repeated false representations that one of the hedge funds, Short Term Liquidity Fund ("STLF") had at least $275 million in assets and had a history of attractive performance relative to the market.  Indeed, investors were advised that Illarramendi's funds had experienced 40 straight months of profits from 2005 to 2008.  Illarramendi also provided numerous fraudulent documents to investors.  Illarramendi's victims included not only individuals and other hedge funds, but also a large chunk of the pension fund of Venezuela’s state-owned oil company, Petroleos de Venezuela ("PVDSA").  Losses from the scheme were pegged in the hundreds of millions of dollars when Illarramendi was arrested in 2011.  

Illarramendi later admitted that he began his fraudulent scheme in 2006 in an effort to shield a multi-million dollar loss from investors.  Using a series of extraordinarily complex transactions between a series of entities he controlled, Illarramendi attempted to mask these transfers as purchases and sales of various corporate bonds and debt.  Illarramendi continued this shell game in 2010, and also diverted tens of millions of dollars for his own personal use - including the purchase of a $5 million private jet.  Illarramendi also faced a charge for conspiracy to obstruct justice after submitting a fictitious asset verification letter purporting to affirm the existence of $275 million in assets to the Securities and Exchange Commission during a 2010 investigation.

A Happier Outcome For Investors

A development that has gone somewhat unnoticed has been the multi-year campaign by the court-appointed receiver, John J. Carney, that recently culminated in court approval of an "ultimate distribution plan" that will result in the extraordinary recovery of 92% of each investor's losses.  Starting with approximately $11 million in assets after his appointment in February 2011, Carney's efforts have since spanned the globe and resulted in the expansion of the receivership to ultimately encompass 24 domestic and international entities.  Carney brought dozens of actions against individuals and entities accused of aiding the scheme or wrongfully receiving scheme proceeds, and to date has recovered more than $400 million.  While initially receiving more than $2.3 billion in claims, Carney and his team were able to negotiate those claims down to approximately $700 million.  Approved claimants initially received a distribution representing 82% of their approved losses, with subsequent distributions ultimately bringing the total to 92%.  Additionally, given the existence of additional pending litigation brought by Carney, there is the possibility that the total recovery could be even higher.  The 92% recovery places Carney's efforts among the highest ever.

The Receiver's website is here.

TelexFree Trustee Files Status Report; Alleges $1.8 Billion Pyramid Scheme

The court-appointed bankruptcy trustee overseeing the marshaling of assets for victims of TelexFree's alleged fraudulent scheme has filed a status report with the overseeing Massachusetts Bankruptcy Court detailing his investigation to date, including that:

• TelexFree and its affiliated company in Brazil, Ympactus Comercial Ltda., raised as much as $1.8 billion from over one million participants located throughout the world;

• Despite the Bankruptcy Court granting a motion to vacate a claim bar date, at least 25,000 claimants have filed proofs of claim with the claims agent, as well as approximately 10,000 victim notification forms with the Federal Bureau of Investigation and the Commonwealth of Massachusetts;

• TelexFree kept poor and incomplete internal records, and a database ultimately reconstructed contains "billions of records and perhaps over a trillion individual data points";

• "The primary business of [TelexFree]...was the recruitment of new Participants to generate revenues for [TelexFree] and existing Participants";

• "By the end of 2013 and early 2014, [TelexFree] was generating cash of as much as $50,000,000 per month...";

• "Although the Debtors were apprised in mid-2013 by counsel that the business plan was a pyramid scheme, they continued to operate using that plan until March 2014. At that time, the Debtors introduced a new business plan, even though the Debtors were apparently advised that the new plan did not rectify the problem. The new plan was unanimously rejected by the Participants, which appears to have precipitated a ‘run on the bank’ inasmuch as $58,000,000 or more was paid out to certain Participants in the several weeks leading up to the filing of the petitions."
• The Trustee has recovered over $17 million since his appointment;

• The Trustee is evaluating potential avoidance claims and causes of actions;

• The Trustee intends to seek court approval of a "modified proof of claim form uniquely tailored to the circumstances.  The Trustee also plans to seek court approval for a claims submission process, as well as the manner of submission of claims.  The Trustee expects that the claims process will need to be, "and should be," administered electronically.

• The Trustee intends to seek approval of the Court for a modified proof of claim form uniquely tailored to the circumstances of these cases. The Trustee and his advisors are currently working on the development of a prototype claim form for the Court’s consideration."

A copy of the Status Report is below.  Updates to this post will follow.

Telexfree Status Report

Authorities: Bankrupt Canadian Company Was $75 Million Ponzi Scheme

Five Canadian nationals have been charged with operating a massive Ponzi scheme through a now-bankrupt short-term lender and financier.  Founder David Burns Holden, 52, his wife Rosa Holden, 57, and executives Anthony Consentino, Andrew Gaudet, and Edmond Chin Ho were  charged with money laundering, fraud, and an offense of criminal organization. David and Rosa Holden also face three bankruptcy and insolvency act charges.  Each are scheduled to appear in court on March 2, 2015.

Holden founded and operated Seaquest Corp. and Seaquest Capital Corp. (collectively, "Seaquest"), which told prospective investors that they could realize lucrative returns of up to 36% annually through profitable short-term secured loans carrying high rates of interest to borrowers that could not qualify for traditional bank financing.  Operating under a slogan "Managing to Outperform," the companies touted Holden's experience in the financial industry, including studies at the prestigious Richard Ivey School of Business.  In total, hundreds invested at least $92 million with Seaquest.

However, Seaquest declared an intent to file bankruptcy in late 2011, indicating that its liabilities outstripped its assets by at least $50 million.  After efforts failed to secure a viable restructuring plan, the company was declared bankrupt in late 2011.  At that time, the Canadian government began investigating the circumstances behind Seaquest's demise.  It was discovered that Holden had previously served time in prison not once, but twice, for fraud-related offenses, including a six-year stint in 2000 for investment fraud.  

A chief restructuring officer appointed over Seaquest issued a dim view of the company in November 2011:

The investment portfolio is comprised of a large number of highly speculative and illiquid loans and shareholdings, the majority of which consist of loans and advances to non‐arm’s length companies, indirect subsidiaries and affiliated companies.  Most of the loans are unsecured.   The few secured loans are to companies that are themselves underperforming, inactive or insolvent.   None of the portfolio investments is being serviced at the present time.  In summary, there is little or no prospect for meaningful recovery in the short term, or over the long term of the investment portfolio, without additional funding.   

Additionally, it was observed that "Seaquest appears to have incurred substantial operating losses that have been funded, at least in part, by portfolio investors."  Ultimately, it was determined that Seaquest owed dozens of creditors more than $75 million.

A three-year investigation by the Royal Canadian Mounted Police culminated in the charges that Seaquest was operating a massive Ponzi scheme that ultimately collapsed over mounting liabilities.    

The chief restructuring officer's November 2011 summary of Seaquest is below:

Seaquest Report by jmaglich1

After Sentencing Delay Over Undisclosed Assets, Illinois Man Gets 25-Year Sentence For $34 Million Ponzi Scheme

A day after his original sentencing was postponed over revelations that as much as $1 million in undisclosed assets might be stashed in the Caribbean, an Illinois man was sentenced to serve twenty-five years in prison for a Ponzi scheme that took in more than $100 million from hundreds of investors and ultimately resulted in over $34 million in losses.  Daniel Spitzer, 55, received the sentence from U.S. District Judge James Zagel after previously pleading guilty to ten counts of mail fraud in July 2014 on the eve of trial.  While Spitzer expressed remorse for his actions, Judge Zagel was not swayed and handed down a sentence that he felt represented the "severe" damage inflicted on Spitzer's victims.  

Spitzer owned and operated multiple entities, including Kenzie Financial Management, Kenzie Services, LLC, Draseena Funds Group, Corp., DN Management Company, LLC, and Nerium Management Company.  Through these entities, he controlled twelve investment funds (the "Kenzie Funds") that purported to be engaged in various forms of foreign currency trading.  Beginning around 2004, Spitzer and Alfred Gerebizza, a sales agent for the Kenzie Funds, solicited investors based on representations that the Kenzie Funds were worth hundreds of millions of dollars, had never lost money, and in fact had achieved annual returns ranging from 4.5% to 13.54% from 2004 to 2009.  Spitzer told investors that he specialized in world currencies - which he claimed was the largest asset class in the world.  Investors were assured that Spitzer had numerous risk management mechanisms in place, and that their funds would be conservatively invested whilst providing lucrative returns. In total, more than $105 million was raised from over 400 investors.

However, Spitzer was not the forex trading whiz he professed to be.  Nor were investor funds used for their stated purpose.  Instead, Spitzer ran a classic Ponzi scheme whereby he raised funds under false pretenses and subsequently used those funds as his own personal piggy bank to support a lavish lifestyle that included residences in Illinois and the Caribbean and gambling trips to Las Vegas with expenses totaling nearly $1 million.  Spitzer also paid out approximately $71 million in Ponzi-style payments to investors that purportedly represented earned interest and principal redemptions, as well as millions of dollars in commissions to sales agents.  

Spitzer was charged both civilly and criminally in 2010, and subsequently pleaded guilty to the criminal charges in July 2011 while his co-conspirator, Gerebizza, was convicted of fraud in July 2014 and is currently awaiting sentencing.  

While Spitzer was originally scheduled to be sentenced yesterday, Judge Zagel ordered the sentencing postponed when Spitzer's lawyer informed the court that he had recently learned that as much as $1 million in undisclosed assets existed in the form of securities being held offshore in St. Vincent.  At Spitzer's sentencing, Judge Zagel indicated that those assets would be recovered and added to the pot of assets set aside for restitution to Spitzer's defrauded victims.  

The Superseding Indictment is below:

Spitzer Indictment

Extradited From Brazil, Florida Man Denied Bail For Alleged $300 Million Ponzi Scheme

Ten years after Billboard Magazine rated his concert promotion business the third largest in the world, a Florida man recently extradited from Brazil will remain jailed until he can face trial on charges that he operated a $300 million Ponzi scheme after being deemed a flight risk by a U.S. Magistrate Judge.  Jack Utsick, 72, appeared in a Miami federal courtroom earlier today in an effort to persuade U.S. Magistrate Judge Edwin Torres to allow him to remain free until he could face trial on multiple criminal charges filed after he fled to Brazil in 2007.  Accused of a $300 million Ponzi scheme, Utsick's attorney unsuccessfully attempted to secure his client's release by informing the Court that "even Bernie Madoff got bail." However, Madoff, unlike Utsick, confessed his scheme to authorities and did not flee to a country notorious for its lenient stance on extradition.  Utsick potentially faces decades in prison if convicted of the nine counts of mail fraud filed by prosecutors.

Utsick formed The Entertainment Group Fund, Inc. ("TEGFI") in 1994, which he used to produce concerts and other stage productions often using the trade name, "Jack Utsick Presents."  Utsick later formed Worldwide Entertainment, Inc. ("Worldwide") in 2003, which he operated in the same fashion as TEGFI and which later became his principal entity to conduct his business of promoting and producing tour-related concert and stage productions and other entertainment ventures.  These projects included theatrical productions and concerts for well-known artists such as Shania Twain, Elton John, Santana, The Pretenders and Aerosmith.  To finance the often-significant upfront costs of these entertainment ventures, Utsick often sought to raise funds from potential and existing investors.  

Beginning in 2003, Utsick and his entities would form separate limited liability companies ("LLCs") which represented one of his planned entertainment ventures.  Utsick provided various written materials to investors, including promissory notes and private placement memoranda, and promised investors eventual interest payments often ranging from 15% to 25% that purportedly would be derived from the revenues generated from the applicable entertainment venture.  These investments were usually for a term of a year or less, and Utsick often convinced investors to roll-over their principal and supposed "profits" into additional investments.     

However, despite Utsick's claims that these ventures would yield significant profits to investors, the reality was that nearly all of the shows produced by Utsick in fact lost money (and at least one project was never even produced).  While investors were told that their funds were invested in a certain project, Utsick commingled all investor funds in two operating accounts which he used for the payment of all personal and business expenses.  Utsick paid millions of dollars in commissions to Robert Yeager and Donna Yeager for their efforts to recruit potential investors, and also diverted investor funds to an options trading account where he suffered at least $17 million in trading losses.  Authorities estimate that over 3,000 investors may have suffered collective losses of at least $300 million.

The Securities and Exchange Commission charged Utsick with multiple violations of federal securities laws in April 2006, and a receiver was appointed over TEGFI, Worldwide, and two entities controlled by the Yeagers.  The receiver, Michael Goldberg, grappled with multiple unique issues including ownership and lease interests in theaters and entertainment venues nationwide, as well as the discovery that the receivership entities had pledged millions of dollars to finance a National Lampoons movie.  Goldberg even ended up suing Paris Hilton for her alleged failure to promote the movie in breach of her contractual obligations - ultimately winning a $160,000 judgment.  To date, Goldberg has returned approximately $35 million to eligible victims representing a pro rata return of 21.37% of allowed claims.  The receivership website is here.

After the filing of the Commission's enforcement action, Utsick fled to Brazil when it became apparent that criminal charges were imminent.  After criminal charges were filed, Utsick sought to obtain Brazilian citizenship in an effort to thwart extradition.  The United States and Brazil signed a treaty in 1964 that provides for the extradition of anyone accused of a crime with a maximum sentence of one year or more (the equivalent of a felony).  However, Brazil amended its constitution in 1988 to prohibit the extradition of Brazilian citizens to any country, leaving the possibility of extradition available only for those with proven involvement in the narcotics trade.  Nearly 30 years later, Brazil's official policy remains to prohibit the extradition of its citizens.  Utsick's attempt at citizenship was unsuccessful, and he was ultimately held in custody for 18 months before being extradited back to the U.S. in December 2014.  

Utsick's next court appearance is Monday, February 2, 2015 for his arraignment on nine counts of mail fraud.

The superseding criminal complaint against Utsick is below:

Jack Utsick Superseding Indictment