Investigative Website Claims To Expose $16 Billion Ponzi Scheme

The scope of this fraud is breathtaking.  It’s astonishing.  There’s probably never been a fraud like this in the history of finance, just in terms of the complexity, the number of investors, the number of jurisdictions involved, and the number of shell companies involved.  It is truly staggering.

-David Marchant, founder of OffshoreAlert.com

An investigative website has sent shockwaves through the international financial community with recent allegations that a Mauritus-based financial services conglomerate is a massive $16 billion Ponzi scheme on the verge of collapse.  Offshore Alert, a U.S.-based website whose founder, David Marchant, claims to be able to "spot a fraud in 10 seconds," published a shocking article last week claiming that Mauritius-based Belvedere Management Group ("Belvedere"), which is controlled by David Cosgrove and Cobus Kellerman, was operating a massive Ponzi scheme through hundreds of hedge funds the group controlled throughout the world.  If Marchant's allegations that Belvedere is on the verge of collapse are true, the scheme could possibly eclipse Bernard Madoff's Ponzi scheme as the largest scheme in history. 

OffshoreAlert, which touts itself as a independent leading authority on Offshore Financial Centers and serious financial crime, published an article on March 17, 2015 entitled "Exposed: Belvedere Management's massive criminal enterprise."  The article, which is limited to paid subscribers of the website, painted a dire picture of Belvedere's massive global empire and alleged that the conglomerate used a network of offshore financial companies to siphon billions of dollars in investor funds.  According to OffshoreAlert, there was evidence linking Belvedere to a $130 million Ponzi scheme in the Cayman Islands as well as a $100 million Ponzi scheme currently under investigation by British police.  

In the wake of OffshoreAlert's expose, another investment firm has come forward claiming it provided evidence of Belvedere's wrongdoing to OffshoreAlert.  deVere, an independent financial consultant, told CNBC Africa that it had been approached by a Belvedere-controlled fund in 2011 to invest in the successful Strategic Growth Fund ("SGF").  After the fund's ensuing returns plummeted, deVere advised its clients to withdraw their funds from SGF in early 2013.  However, this proved impossible as the fund nearly immediately suspended withdrawals.  deVere has stated that "we suspect that this case could turn out to be one of the largest financial scams in history and we will do whatever is necessary to recover value lost by investors worldwide.”

According to Marchant, "substantial amounts" of investor funds have either disappeared or were used to invest in massively inflated assets.  As Marchant remarked in a recent interview with BizNews,

It’s gone the way of all frauds – a lot of it into the pockets of the people running it.  A lot of money was kicked up to Kellermann and Cosgrove.  They basically had a piece of every action and there was a lot of action here.  From every fund, money was kicked back up to them in the form of administration fees or investment management fees.  Any way they could get money out, they were getting money out.  There were a lot of related party activities that were basically insider dealing – the effect of which, was to transfer millions of Dollars from investors into the pockets of Cosgrove and Kellermann.

Perhaps unsurprisingly, Belvedere initially reacted by turning to high-powered lawyers.  However, the legal efforts were directed only to BizNews - not OffshoreAlert nor any of the other websites that republished the information including CNBC Africa - and sought an immediate retraction of the allegations lest the website face legal action.  That missive set forth a March 27th deadline to retract or face legal action; it has not been reported whether or not the law firm followed up on the threat.  The website also suffered a massive cyber attack in the days following its publication of the story - an attack that allegedly originated from South Africa.

Shortly after OffshoreAlert's publication of the expose, one of the men implicated sought to distance himself from Belvedere by depicting himself as an "absentee shareholder" of a parent company with a majority interest in Belvedere.  In an interview at his lawyer's office in South Africa, Cobus Kellerman claimed he "wouldn't know if it was a Ponzi scheme," and claimed that David Cosgrove was responsible for managing overseas companies and had assured him there was no Ponzi scheme involved.  In later written responses to interview questions with BizNews, Kellerman denied that Belvedere was a Ponzi scheme as "no incoming investors' funds are used to pay existing investors."  

One website is currently reporting that Belvedere and two of its funds, Lancelot Global PCC and Four Elements, have been placed under the conservatorship of accounting firm PriceWaterhouseCoopers.  Multiple regulatory agencies are reportedly looking into Belvedere, including the South African Revenue Service, the Mauritius Financial Services Commission, the South African Financial Services Board, and the Guernsey Financial Services Commission.

The allegations remain just that, allegations, and have not been proven to be true or otherwise found to be accurate.

Cay Clubs Sales Directors Get 5-Year Sentences In $300 Million Ponzi Scheme

The former sales directors of what authorities have alleged was a massive $300 million Ponzi scheme will each spend the next five years in federal prison for their role in the scheme.  Barry J. Graham, 59, and Ricky Lynn Stokes were sentenced by U.S. District Judge Jose E. Martinez after previously pleading guilty to conspiracy to commit bank fraud in December 2014.  Judge Martinez also ordered that the men serve a three-year term of supervised release following completion of the prison sentence.  A hearing has been scheduled for May 22, 2015 to determine the amount of restitution each will owe to the defrauded victims. Graham and Stokes could have faced up to twenty years in prison.

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Graham was the director of sales for Cay Clubs from 2004 through late 2007, while Stokes was initially a sales agent and the director of investor relations before he took over the director of sales position upon Graham's departure in late 2007.  According to authorities, Graham and others participated in sales transactions with Cay Clubs at artificially inflated prices that were then used to convince investors of the purported profits their investment could yield.  Marketing materials distributed to investors touted the rapidly increasing sales price of the units without disclosing that the transactions were not typical arms-length sales. 

Fred and Cristal Clark are currently being held in a Key West detention facility after a judge determined that no bail conditions existed that could ensure the two would not flee before their June 2015 trial.  The two were initially arrested earlier this summer in Central America on fraud charges stemming from their operation of an unrelated company.  A subsequent indictment added fraud charges from the Clarks' operation of Cay Clubs.  Stokes and Graham are expected to testify against the Clarks as a condition of their guilty pleas, while former Cay Clubs attorneys Scott Callahan and Charles Phoenix have been granted immunity by the government in exchange for their testimony.  

Previous Ponzitracker coverage of the Cay Clubs Ponzi scheme is here.

Alleged ZeekRewards Ponzi Mastermind Wins Trial Delay Over "Unprecedented" Discovery

Citing the "unprecedented" document discovery that has included millions of documents and multiple terabytes of electronic data, attorneys for a North Carolina man accused of masterminding the massive ZeekRewards Ponzi scheme recently successfully obtained yet another delay in the ongoing criminal trial schedule.  Paul Burks, who is currently facing charges of wire fraud, mail fraud, conspiracy, and tax fraud conspiracy relating to his role in ZeekRewards, asked the court in a recent unopposed motion to again delay the trial schedule  so that Burks' team could continue poring through the approximately 8 million documents produced to date by the government. Burks' team indicated in the motion that they hope to file a joint motion in mid-April 2015 seeking a "peremptory" trial date.  Burks has maintained his innocence.

Burks operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place bids on merchandise in one-cent increments.  Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions.  Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler.  Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix."  None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com.  According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits.  The daily "award" was usually 1.5% of the individual's 'investment'.  Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points numbered nearly $3 billion in August 2012 when the Securities and Exchange Commission filed an emergency action to halt the ongoing fraud.  Assuming a 1.5% daily "award", the outstanding Profit Points would have required daily cash outflows of $45 million should all investors seek to receive their "award" in cash.  

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix".  The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.  

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of a Ponzi scheme.  Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadily increased, reaching approximately $2.8 billion in August 2012 despite available cash reserves of less than 4300 million.  Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.

Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.  

Timing of Charges

Burks was the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing.  The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment.  The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty or is convicted of the fraud, which would allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.  

Tax Fraud Conspiracy

While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, Burks also faces a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme.  While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.

More Ponzitracker coverage of ZeekRewards is here.

A copy of the Motion to Continue is below.  Thanks to ASDUpdates.

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"Social Capitalist" Gets 19.5 Years For $16 Million Ponzi Scheme Targeting Churches

Credit: CNBCAn Atlanta man who ran a $16 million Ponzi scheme that targeted churchgoers through promises of annual returns of up to 300% was sentenced to serve nearly 20 years in federal prison.  Ephren Taylor, who once described himself as the "youngest African-American CEO of any publicly traded company ever," received the sentence after previously pleading guilty to conspiracy to commit mail and wire fraud.  In addition to the sentence, Taylor was also ordered to pay $15.5 million in restitution and serve three years of supervised release following completion of his sentence.

According to authorities, Taylor was the chief operating office of City Capital Corporation ("City Capital").  Touting himself as "the Social Capitalist" and that he was the youngest black CEO of a public company, Taylor sought to portray himself as a wildly successful entrepreneur in internet and radio advertisements.  At "wealth management seminars" he conducted at various churches, including mega churches run by well-known pastors Eddie Long and Joel Osteen, Taylor pitched church congregants on two investments through City Capital that promised enormous returns.  The first investment was the purchase of promissory notes that purportedly funded small businesses and offered annual returns ranging from 12% to 20%, while the second investment involved the purchase of interests in "sweepstakes machines" that could generate annual returns of up to 300%.  As many of the potential investors were elderly and saving for retirement, Taylor offered the ability to roll over retirement portfolio into self-directed IRA custodial accounts that could then be used to invest with City Capital.  In total, Taylor and City Capital raised approximately $16 million from investors.

However, the majority of funds raised from investors were not used as promised.  Rather, Taylor used investor funds to support his extravagant lifestyle and self-promotion, including expenses for Taylor's book promotion, consultants for Taylor's speaking engagements and public relations, his wife's music recording career, and rent for Taylor's New York apartment. Additionally, the funds that were used as promised did not generate the returns promised by Taylor.  Rather, the ability to pay returns to existing investors was possible only through the continuous flow of new investor funds - the hallmark of a Ponzi scheme.

Taylor was previously charged by the Securities and Exchange Commission with violating federal securities laws in April 2012.  Taylor did not contest the charges, and a judgment of nearly $15 million was later entered against him.  The scheme also spawned at least one lawsuit against a church pastor that had endorsed Taylor, leading to a recent undisclosed settlement.

Taylor previously made an appearance on CNBC back in 2007:

The 'Ponzi Scheme Presumption' Is Dead. Long Live The 'Ponzi Scheme Presumption'

By now, many who follow this site are likely aware of the Minnesota Supreme Court's recent ruling that denied a receiver's efforts to recover assets paid out to an investor on the basis that Minnesota's Uniform Fraudulent Transfer Act ("MUFTA") "does not contain a Ponzi-scheme presumption."  The ruling, which stands alone in contrast to significant state and federal jurisprudence explicitly recognizing a Ponzi scheme presumption, has spawned a growing chorus touting a new "balance of power" in clawback litigation.  However, a closer examination of the case at the middle of this controversy, as well as a primer on the application of fraudulent transfer precedent, demonstrates that this purported seismic shift in the fraudulent transfer landscape is likely nothing more than an isolated blip that will have little effect on a receiver's ability to claw back profits in a Ponzi scheme.

Background

The case at issue involved a clawback lawsuit brought by the court-appointed receiver of First United Funding, LLC ("First United"), which sold "participation interests" in loans it had made to third parties who were to receive a sizeable profit in the form of interest repaid on the loan.  Corey Johnston, who owned and operated First United, is currently serving a six-year prison sentence after pleading guilty to bank fraud and filing a false income tax return.  While some of First United's loans were legitimate in that no more than 100% of the loan was sold via a participation interest to one or more financial institutions, First United caused multiple loans to be oversold to multiple parties - meaning that those investors would not receive legitimate proceeds but rather the redistribution of money provided by other investors - a classic hallmark of a Ponzi scheme. 

In this instance, the receiver sought to recover several million dollars paid to several financial institutions as principal and interest on a $3.18 million loan made to an Arizona businessman.  While the lower court dismissed claims against several of the banks based on the statute of limitations, it entered judgment in favor of the receiver and against Alliance Bank in the amount of $1,235,388 - an amount which appears to be the profits received by Alliance Bank on its "participation interest."  In rendering judgment in favor of the receiver, the lower court referenced the 'Ponzi scheme presumption," which that court characterized as a rule holding that “the profits that good-faith investors enjoy in connection with a Ponzi scheme are recoverable as fraudulent transfers.”

In analyzing the relevant loan in which Alliance Bank and others purchased "participation interests," the Minnesota Supreme Court focused on the statutory interpretation of MUFTA in concluding that

MUFTA does not contain a provision allowing a court to presume anything based on the mere existence of a Ponzi scheme. 

Instead, the Court observed that "MUFTA requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer, rather than relying on a presumption related to the form or structure of the entity making the transfer."  Concluding that it was required to examine the transfer on a case-by-case basis, the Court found that the subject loan was not subject to the presumption nor had the receiver satisfied MUFTA's provisions as the loan was real, was not oversold, and was attacked solely on the basis that it was part of a greater Ponzi scheme. 

The Ponzi Scheme Presumption

The Uniform Fraudulent Transfer Act, which has been adopted by a majority of states including Minnesota, allows a creditor to recover a fraudulent transfer made by the debtor upon the demonstration of an actual or constructive intent to hinder, delay, or defraud the debtor's creditors.  A significant number of courts have found that the showing of the existence of a Ponzi scheme allows the court to presume that, due to the inherently fraudulent nature of a Ponzi scheme, all transactions were made with the intent to hinder, delay, or defraud a debtor's creditors.  See, generally, Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011); Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008).  A basic prerequisite for applying this 'Ponzi scheme presumption' involves a showing that the contested transfer was effected 'in furtherance' of the Ponzi scheme. Bear, Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 13 (S.D.N.Y. 2007).

In a nod to the difficulty of establishing a debtor's actual intent to hinder, delay, or defraud, state fraudulent transfer laws also allow the use of circumstantial evidence to demonstrate actual fraudulent intent through a non-exclusive list of eleven "badges of fraud."  These factors include, but are not limited to, that the transfer was concealed, the debtor removed or concealed assets, or that the transfer occurred shortly before or after a substantial debt was incurred.  Courts routinely recognize that a showing of multiple badges of fraud results in a presumption of fraudulent intent and a burden shift to the transferee to demonstrate a legitimate purpose for the transfers.

An Analysis Of Alliance Bank

A closer look into the Alliance Bank decision shows that the case involved a relatively unique factual situation that is likely to bear little precedential value going forward.  There, the court found (and the receiver did not argue) that the loan at issue was in fact real, not oversold, and was being attacked simply because it was part of a larger Ponzi scheme.  As referenced above, many courts refuse to invoke the Ponzi scheme presumption where the subject transfer was not made "in furtherance" of a Ponzi scheme.  While other relevant details remain unknown, such as the flow of the payments and whether funds used to pay Alliance Bank were commingled with other investor funds, the court concluded that the facts and circumstances known to it could not justify a showing of fraudulent intent. 

The factual backdrop of the First United Ponzi scheme is also illustrative of its uniqueness.  Unlike a majority of other Ponzi schemes, which solicit investors based on a promise that their collective funds will somehow be used to generate massive returns that they will later share, the First United Ponzi scheme essentially allocated participation in the scheme through the sale of "participation interests" in specific loans.  While some of those loans were fraudulent and used to further the Ponzi scheme, some were apparently legitimate.  In the Alliance Bank case, the financial institutions collectively purchased a 100% interest in the subject loan that entitled them to share in and resulting profits based on the loan's performance.  Thus, rather than a dollar-based investment in the schemer's hedge fund, company, or venture, an investment in First United was specifically tied to a distinguishable and distinct loan. As the court found, the loan's legitimacy and the fact that the proceeds from the loan were used to pay the returns were a critical factor in the court's ruling.

Decision's Precedential Effect Is Unlikely

While many are quick to hail the Alliance Bankdecision as a seismic shift in Ponzi scheme litigation, the reality is that the decision is likely to have little or no effect on future cases.  Indeed, while the Ponzi scheme presumption is often used to demonstrate actual intent as required to support a fraudulent transfer claim, it is not the sole avenue afforded to creditors.  Rather, state fraudulent transfer laws also allow a creditor to show actual intent by establishing the existence of badges of fraud.  It is likely that cases involving Ponzi schemes will likely feature a plethora of badges of fraud that can easily satisfy actual intent in the absence of a 'Ponzi scheme presumption.' 

This conviction is shared by Douglas Kelley, the court-appointed bankruptcy trustee tasked with recovering assets for victims of Thomas Petters' $3.65 billion Ponzi scheme, who dismissed the effect of the Alliance Bank decision in a recent interview with the Minneapolis Star Tribune, remarking:

Whether I prove the Ponzi presumtion or use badges of fraud, I can easily prove fraudulent intent.  We have no dearth of direct evidence of fraud in this case.

It is also worth noting that, even assuming the inability to invoke a 'Ponzi scheme presumption,' what further showing of fraud is necessary for an inherently deceptive scheme that by its nature depends on sustained and continuing fraud to perpetuate the scheme?  Whereas various factors can be used to establish "badges" of fraud, the showing that a debtor is operating a Ponzi scheme is itself indicative of fraud.  In other words, while the Minnesota Supreme Court recognized that the operation of a Ponzi scheme was not itself a badge of fraud, the showing that a debtor masterminded a Ponzi scheme is due to be afforded significant weight in determining the existence of the actual intent to hinder, delay, or defraud.

A copy of the Minnesota Supreme Court's decision is below: 

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