Rothstein's "Independent Asset Verifier" Indicted On Wire Fraud Charges

A south Florida investment advisor who purportedly served as an "independent asset verifier" for investors in Scott Rothstein's massive $1.2 billion Ponzi scheme has been indicted on a dozen fraud charges. Michael Szafranski, 36, faces one count of wire fraud conspiracy and eleven counts of wire fraud in a newly-unsealed indictment that was returned by a grand jury several weeks ago.  The charges, which carry a potential sentence of up to decades in prison if Szafranski is convicted, are notable not only because of the sheer number of charges but also because they are the first to test prosecutors' theory that a ten-year, not five-year, statute of limitations applies.  

Scott Rothstein is currently serving a 50-year prison sentence in an undisclosed location after pleading guilty to the largest Ponzi scheme in Florida's history that ultimately took in more than $1 billion from investors.  Rothstein touted hefty returns from purported investments in confidential pre-suit settlements, using his position as chairman of one of the fastest growing law firms in south Florida to bolster his credibility while simultaneously flaunting his newfound wealth.  Rothstein fled to Morocco in late October 2009 when the scheme was on the verge of collapse - a country lacking an extradition treaty with the U.S. - only to later return to face the music.  His extensive cooperation with authorities ultimately led to his placement in the Witness Protection program, and his subsequent assistance has resulted in over two dozen additional arrests.

Szafranski, who once worked for the now-defunct brokerage Bear, Stearns & Co., Inc., was hired in or around 2008 by several New York hedge funds to act as an "independent asset verifier" to verify the authenticity of the deals Rothstein was peddling.  However, Szafranski soon allegedly switched from his position of impartiality to become close cohorts with Rothstein and actively began soliciting investors for the scheme.  Rothstein himself testified during 2011 depositions that he paid Szafranski handsomely, including several million dollars in post-dated checks, and extensively wined and dined him.  According to Rothstein,

"There was a point in time when he [Szafranski] had a pretty good idea. There was a point in time when he absolutely knew, and then there was a point in time when he was bringing in investors into something he knew didn't exist."

As an example, Rothstein recounted a time during 2008 when Szafranski questioned him about similarities between signatures in legal documents.  In another instance, Szafranski is said to have accompanied Rothstein and another familiar cohort, Stephen Caputi, to a TD Bank branch where Caputi masqueraded as a bank official.  The indictment alleges that Szafranski ultimately was responsible for bringing more than $200 million of new investments into Rothstein's scheme.  

First Test of Extended Statute of Limitations For Fraud "Affect[ing] a Financial Institution?"

Szafranski becomes the first person charged after the five-year anniversary of the collapse of Rothstein's scheme this past October - a noteworthy event not only because of the duration since Rothstein's scheme, but also because many had speculated that the five-year statute of limitations governing many of the likely criminal charges some of Rothstein's co-conspirators might face might also expire.  However, prosecutors indicated their intent to rely on 18 U.S.C. 3293, which provides for an extended 10-year statute of limitations for certain offenses, including wire fraud and mail fraud, that "affect a financial institution."  

The operative question thus becomes whether or not Szafranski's conduct "affects a financial institution."  Court decisions attempting to elucidate the meaning of this directive have largely done so in a boroad context; the test is not whether any actual loss resulted to a financial institution, but rather whether the conduct caused an "increased risk of loss."  As the 7th Circuit so eloquently observed, 

‘‘[j]ust as society punishes someone who recklessly fires a gun, whether or not he hits anyone, protection for financial institutions is much more effective if there’s a cost to putting those institutions at risk, whether or not there is actual harm.’’

United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir. 2003).  However, such breadth is not unlimited; the more attenuated or or remote one's conduct is in relation to the institution can have a corresponding effect on the viability of such a claim.  

Rothstein's scheme is unique in that a national banking institution, T.D. Bank, played a key role in the scheme.  Rothstein has testified that his relationship with a T.D. Bank Vice President, Frank Spinosa, was essential to perpetuating and legitimizing the scheme. Spinosa was charged in October 2014 with six fraud counts for his role in the scheme, and T.D. Bank has paid hundreds of millions of dollars in legal costs and settlements.  Given the integral role T.D. Bank played in Rothstein's scheme, it certainly may serve as the basis for prosecutors' argument that the fraud materially "affect[ed] a financial institution."

Szafranski's next court appearance is scheduled for February 17, 2015.  While Szafranski becomes the 29th person to be charged in the wake of Rothstein's scheme, some expect further arrests.  Chuck Malkus, author of a best-selling book chronicling Rothstein's rise and fall, has indicated his sources expect several more arrests in the coming months.  According to Malkus, "this Rothstein web could easily hit three dozen [arrests]."

A snippet of emails between Szafranski and Rothstein, excerpted from a lawsuit filed against Bank of America by certain of Rothstein's victims, is embedded below.

Emails by jmaglich1

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