Utah Will Create Online White Collar Crime Registry

 “[Outside of budget], this is the Attorney General’s top priority for this legislative session because of the high level of affinity fraud we prosecute in our office and are aware of throughout the state. This registry is a tool to help empower and inform Utah citizens before investing with those who have illegal pasts and unsavory business practices that have led to second degree felony convictions.”

- Utah Attorney General Sean Reyes

Utah legislators have passed legislation making Utah the first state to publish an online database - complete with an offender's name, physical description, and recent photograph - identifying individuals convicted of specified white collar crimes including securities fraud, money laundering, and theft by deception.  HB378 (the "Bill"), which was sponsored by Representative Mike McKell, was passed by the Utah legislature this week, and Governor Gary Herbert has indicated he intends to sign the bill into law when it reaches his desk.  The database, modeled on the well-known registry used to identify convicted sex offenders, is proposed as a solution to combat an unusually high rate of financial crimes emanating from Utah, including "affinity fraud" targeting particular groups such as the large Mormon contingent that makes up 62% of the state's population.  Indeed, despite ranking in the lower 20% of all 50 states based on population, Ponzitracker's Ponzi Database showed that Utah ranked sixth in both the number of Ponzi schemes over $1 million and the losses attributed to Ponzi schemes since 2008 - surpassed only by New York, Florida, Texas, California, and Illinois.   

The White Collar Crime Registry (the "Registry"), as it is named, will modify the Utah Code of Criminal Procedure to establish a registry to compile a public database of all individuals convicted of the following second-degree felonies after December 31, 2005:

• Section 61-1-1 or Section 61-1-2, securities fraud;
• Section 76-6-405, theft by deception;
• Section 76-6-513, unlawful dealing of property by fiduciary;
• Section 76-6-521, fraudulent insurance;
• Section 76-6-1203, mortgage fraud;
• Section 76-10-1801, communications fraud; and
• Section 76-10-1903, money laundering.

If convicted of one of the specified offenses, the following information of the offender will be listed on the Registry:

• Name and alias(es);
• Physical description, including date of birth, height, weight, and eye color;
• recent photograph; and
• convicted offenses.

A conviction for a qualifying second-degree felony will result in the offender's inclusion in the Registry for a period of ten years.  A subsequent offense will result in another ten-year inclusion, and a third conviction will result in a lifetime listing in the Registry.

However, an offender's conviction for a second-degree felony after December 31, 2005 does not automatically mandate their inclusion in the Registry.  For example, the Bill provides that individuals will not have to register for the Registry if they (1) have complied with all court orders since their conviction; (2) have fully satisfied all restitution imposed by the court; and (3) have not been convicted of any other offense for which registration would be required.  Additionally, the Bill sets forth a procedure for an individual to petition for their removal from the Registry after a period of five years from the completion of that individual's sentence, which includes providing notice to victims, obtaining a certificate of eligibility from a state agency, and ultimately a decision by the sentencing court that removal would not be contrary to the public's interests.

While the success of this initiative is far from guaranteed, it is hoped that the public shaming of fraud offenders in a "scarlet letter" fashion will serve not only as a deterrent to potential fraudsters but also as a resource to potential victims.  For example, while a significant portion of fraudsters often have multiple convictions for fraud, that information is not always necessarily available to the public or is difficult to locate in court dockets.  The hope is that the Registry will show up in an internet search for an individual's name by a potential victim attempting to do some form of due diligence.  

The Bill enjoyed widespread bi-partisan support, passing Utah's House by a 65 to 7 vote and receiving unanimous support in the Utah Senate.  A copy of the Bill is below:

utah bill

Appeals Court Revives Receiver's Suit Against Bank For Role In $190 Million Ponzi Scheme

A federal appellate court revived a lawsuit brought by the court-appointed receiver in Trevor Cook's $190 million Ponzi scheme against Associated Bank (the ""Bank"), ruling that the Receiver had stated a "plausible claim" that the bank had actual knowledge that it was providing "substantial assistance" to Cook's massive fraud.  The Eighth Circuit Court of Appeals reversed a lower court's order granting the Bank's motion to dismiss after finding that the Receiver had failed to adequately allege the Bank's actual knowledge of the fraud.  The decision will return the suit to the lower court for further proceedings.  

The Scheme

Cook's scheme, only second in Minnesota history to Thomas Petters' $3.65 billion Ponzi scheme, purported to achieve above-average returns through trading in commodities and futures.  Partnering with two firms, Crown Forex SA and JDFX Technologies, Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out.  Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million of that amount was used to trade currency, of which $68 million was lost.  The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.

The Bank Lawsuit

The Receiver sued the Bank back in early 2013, asserting claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions.  According to the Receiver, the Bank's substantial assistance allowed Cook's scheme to take in over $79 million.  The Complaint alleged, among other things, that Cook contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds. Following this, the Complaint described a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme.  This included:

• Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
• Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
• Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
• Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.

The Complaint also disclosed that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.  

However, a Minnesota federal court later dismissed the action, agreeing with the Bank that the complaint failed to adequately plead both that the Bank had actual knowledge of Cook's fraud and that the Bank rendered substantial assistance to the scheme.  

The Appeal

On appeal to the Eighth Circuit Court of Appeals, a three-judge panel heard the Receiver's claims that the lower court's dismissal was in error.  The court first addressed the aiding and abetting claim, acknowledging that "an aider and abettor’s knowledge of the wrongful purpose is a ‘crucial element in aiding or abetting’ cases."  The court reviewed the numerous allegations set forth in the complaint, which included particular emphasis on the actions of a vice-president at the Bank named Lien Sarles.  Among these allegations were claims that (i) Sarles knowingly permitted the opening of Crown Forex accounts despite lacking proper documentation, (ii) Sarles knew that none of the nearly-$80 million deposited into the Crown Forex account by investors was ever transferred to the entity supposedly engaged in trading but rather to other accounts, (iii) Sarles personally approved several transfers requested by Cook - including transfers to Cook's personal account - even though Cook was not a signatory on the account, (iv) Sarles continued to approve transfers out of Crown Forex's account even after a Swiss financial regulator announced it had frozen Crown Forex's accounts and was investigating the company.

Based on these facts, the 8th Circuit remarked that

The receiver’s “complaint details the Ponzi transactions, including dates and amounts of deposits and withdrawals, spanning over a period of several years. Given [Associated Bank’s] vigorous denial of having known of the Ponzi scheme, it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it.

Next, the court addressed whether the Bank provided "substantial assistance" in furthering the fraud - which it recognized must be "something more than the provision of routine professional services." Again, the court cited Sarles' presence and participation in the scheme's interactions with the Bank, including the acts of knowingly allowing Crown Forex to open an account despite not being registered with the state of Minnesota and later approving Cook's transfers out of the account despite his status as a non-signatory.  As the court concluded,

We cannot predict whether a jury, surveying the evidence supplemented by discovery, will find Associated Bank either had actual knowledge of or substantially assisted in the asserted torts. But the facts alleged in the complaint give the receiver’s claims “facial plausibility”—the receiver has pled “factual content that allows the court [and a jury] to draw the reasonable inference that the defendant is liable for the misconduct alleged.

Of note, the court declined to address the Bank's defense that the Receiver was barred from asserting the claims based on the in pari delicto doctrine - a defense often invoked in bankruptcy proceedings which operates to prevent wrongdoers at equal fault to recover from one another.  That issue, the court decided, was more appropriately decided by the lower court.

The 8th Circuit's Order is below:

8th Circuit Cook Order

10-Year Prison Sentence Is Longest Ever For British Ponzi Scheme

A British man was sentenced to serve a ten-year prison sentence for operating a currency trading Ponzi scheme - the longest sentence ever handed down to a Ponzi schemer by the U.K. Financial Conduct Authority ("FCA").  Phillip Boakes pleaded guilty last week to two counts of fraudulent trading and three counts of using a forged instrument after having previously entered a guilty plea to charges of accepting deposits without authorization.  A British judge imposed sentences of varying length for each of the charges, and Boakes will ultimately serve a ten-year term given that some of the sentences will run concurrently.  The judge also disclosed that Boakes' sentence would have been 13-14 years had there been no early guilty pleas.

Boakes operated CurrencyTrader Ltd. ("CurrencyTrader"), which held itself out as a highly profitable and experienced in foreign exchange spread betting.  Potential investors were guaranteed annual returns of 20% or more, and many were led to believe that Boakes continued to hold his licensure as an FCA-approved Independent Financial Advisor.  In total, Boakes raised several millions of dollars from dozens of investors.  

However, according to the FCA and as later admitted by Boakes, CurrencyTrader's outsized returns were simply too good to be true.  Boakes was not the skilled currency trader he held himself out to be; rather, Boakes ultimately suffered trading losses of narly 50% of his total investments.  In order to generate the promised returns, Boakes depended on a constant stream of incoming investor funds - a classic hallmark of a Ponzi scheme.  In addition, Boakes used investor funds to support a lavish lifestyle that included luxury automobiles and foreign travel.  

The sentence, while ranking as the longest handed down by the U.K. Financial Conduct Authority, pales in comparison to the significant sentences that have been imposed by American courts.  For example, the longest sentence handed down to an American Ponzi schemer is the 150-year sentence appropriately handed down for the massive Ponzi scheme operated by Bernard Madoff that ranks as the largest in history.  Coupled with tougher penalties for common fraud offenses and greater discretion afforded sentencing judges, American courts typically hand down significant penalties.  Indeed, the average sentence handed down to Ponzi schemers in 2012 and 2013 exceeded ten years.  

California Man Ordered To Pay $108 Million In Restitution For Latex Glove Ponzi Scheme

A California businessman currently serving a 20-year federal prison sentence for masterminding a $230 million Ponzi scheme was ordered to pay $108 million in restitution to victims defrauded by the scheme.  Deepal Wannakuwatte, 64, pleaded guilty last year to operating the scheme, which ultimately took in more than $230 million from nearly 200 victims based on false promises of lucrative contracts with latex glove manufacturers.  While the government and Wannakuwatte's lawyers fought vigorously as to the correct amount of restitution, the number will ultimately have little meaning beyond a symbolic figure -Wannakuwatte declared bankruptcy last year.  

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 while 2013 sales for the Companies were just $5 million.   The scheme began unraveling in late 2013 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 2014 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 up to a 20-year sentence - the maximum term allowed under a wire fraud charge.  After accounting for distributions received by victims, total losses were estimated at approximately $109 million.

Wannakuwatte's  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 had been "intimidating" towards him and that he had retained another attorney.  That lawyer 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 subsequent counsel was apparently successful in conveying this message, and Wannakuwatte was sentenced late last year.

While Wannakuwatte was ordered to forfeit certain assets totaling approxiamtely $3.5 million as a result of his conviction, recovery prospects for victims appear to be bleak given Wannakuwatte's bankruptcy and the lack of a court-appointed receiver or bankruptcy trustee for Wannakuwatte's companies.  It remains unknown whether efforts will be made to pursue clawback or third party claims to benefit victims. 

Government Blasts Stanford's Appeal Of 110-Year Sentence

Because Stanford’s businesses constantly hemorrhaged money, he routinely stole from SIB in the form of undisclosed 'loans...'  By 2008, Stanford infused approximately $1 million dollars a day in depositor funds to keep his businesses afloat...by the end of 2008, over $2 billion in depositor funds had gone to Stanford-affiliated companies...Stanford spent millions of dollars...on private planes and mansions around the world. He regularly used private planes to fly dry cleaning to Texas or Florida from the Caribbean; bottled artesian water to his St. Croix home; fish to his koi pond in St. Croix; and an IT employee to Antigua to bring him replacement laptops after Stanford repeatedly destroyed his by throwing it against the wall.

- Response brief, p. 40

The Department of Justice (the "Department") has responded to Allen Stanford's request to overturn his 110-year sentence for operating the second largest Ponzi scheme in history, providing an in-depth recitation of the massive fraud that Stanford was convicted of operating and arguing that "overwhelming evidence in the form of testimony and supporting documentary evidence support his convictions."  After Stanford filed a 299-page handwritten brief filed by Stanford back in October 2014, the Department responded with a 196-page brief that expounds on Stanford's fraud in excruciating detail and summarily disproves Stanford's numerous alleged grounds meriting the vacatur of his convictions.  For a fraud that spanned nearly twenty years and defrauded thousands of investors out of billions of dollars, the Department rejected any notion that Stanford was somehow entitled to any relief from his current term - one which carries a current prospective release date of April 17, 2105.

The factual overview of Stanford's scheme was provided in painstaking detail in the Response brief, and included the following notable disclosures:

After the SEC investigation surged in December 2008 and again after subpoenas issued in 2009, Kelly Taylor, the manager of Stanford’s St. Croix estate, complied with Stanford’s instructions to fill empty barrels with his bank records and personal financial information and burn the documents (USCA5 Supp. 6 8138-8144; GX 726C, 735). Taylor had never been asked by Stanford to burn documents prior to December 2008 (USCA5 Supp. 6 8139). 

- Response brief, p.28

Leroy King became the head of the [Antiguan securities regulator Financial Services Regulatory Commission] and regularly accepted cash bribes from Stanford to overlook the false financial reports submitted by SIB to the FSRC (USCA5 Supp. 6 6871-6872, 7091). Stanford and King sealed the deal by cutting themselves in a blood-oath ceremony 

- Response brief, p. 26

Stanford advised Davis that the bank never had a profitable year after 1986, but he needed to show a profit nonetheless to ensure CD sales 

- Response brief, p. 11

Beginning on Montserrat, Stanford hired only one auditor, C.A.S. Hewlett, a one-man independent auditor from Antigua (USCA5 Supp. 6 4487). Hewlett rubber-stamped the bank’s false financial statements without performing any audits (USCA5 Supp. 6 7140)...Stanford commented to Davis, “God led me to Hewlett” 

- Response brief, p. 25

When Green suggested that Stanford also solicit wealthy friends to contribute, Stanford responded “I’ll go to the Libyans. They love me” (USCA5 Supp. 6 5014-5015, 5026-5027). Stanford’s trip to Libya proved unsuccessful 

- Response brief, p. 29

By the end of 2008, over $2 billion in CD monies went to over 50 of Stanford’s failing businesses in the Caribbean and elsewhere, including, among others: restaurants, two airlines, a newspaper, and a group of companies that existed exclusively for tax purposes for Stanford’s fleet of jets and boats, including a 112-foot yacht that he spent $13 million renovating

- Response brief, p. 14

Stanford's appeal included a number of grounds which he contended should warrant the reversal of his 2012 conviction.  For example, Stanford argued that the U.S. lacked jurisdiction to bring charges against him since his bank, Stanford International Bank, was located in Antigua and thus not subject to U.S. laws.  Additionally, Stanford argued that the certificates of deposit issued by Stanford International Bank could not be considered "securities" under federal securities laws.  As Stanford contended, "simply put, Stanford International Bank was regulated by—and only by—Financial Services Regulatory Commission of Antigua and Barbuda."

Stanford also argues that he was deprived of his right to a fair trial after he was found competent to stand trial despite his claims that a prison beating had irreparably impaired his memory functions and affected his ability to confer with defense lawyers.  A federal judge overseeing his criminal trial found Stanford fit to stand trial after a three-day competency hearing.  Stanford claimed that his injuries "profoundly affected [my] ability to communicate with [my] attorneys and prepare [my] defense.”

The Department addresses each of Stanford's arguments in detail, which frequently included assertions that Stanford was misrepresenting or taking certain portions of the record out of context. For example, Stanford claimed that the Department's decision to remove certain counts from the original indictment was compelled by Stanford's argument that the certificates of deposit sold by Stanford International Bank were not "securities," and that the inclusion of the securities fraud charge was simply a precursor to use evidence gathered by the Securities and Exchange Commission in his criminal case.  To this, the Department explained that those counts were simply renumbered in the subsequent indictment.

In another argument, Stanford argued that the trial judge's definition of the word "scheme," in response to a question submitted by jurors during deliberations, contributed to a poisonous atmosphere that had been prejudiced by the inflammatory connotation of the word "scheme."  According to Stanford, the word appeared dozens of times in the indictment, area newspapers, and even by the trial judge.  However, the Department responded that the word "scheme" was used in the statutory language of both mail fraud and wire fraud as well as the pattern jury instructions in the Fifth Circuit.  Additionally, the Department pointed to an explicit instruction from the trial judge that the jury was to ignore all publicity surrounding the case.  In short, the Department characterized Stanford's argument as "frivolous."

While Stanford argues that oral argument is necessary, the Department's response maintains that oral argument would be unnecessary.  Stanford will now have the opportunity to file a reply brief in response of his original brief.

The Department's Response brief is below:

USA Response to Stanford Appeal