SEC Wins Civil Fraud Case Against Rothstein Promoter

A Miami federal jury handed a victory to the Securities and Exchange Commission as it convicted a Fort Lauderdale investment manager of funneling more than $150 million from over 150 investors to ScottRothstein's massive $1.2 billion Ponzi scheme.  George G. Levin, 74, was convicted of five counts of securities fraud after less than three hours of jury deliberations.  The Commission is seeking disgorgement of ill-gotten gains, injunctive relief, and civil monetary penalties, which will be decided by U.S. District Judge UrsulaUngaro in the near future.

Levin began working with Frank Prevé to solicit investors for Rothstein's scheme in 2007, at first offering potential investors the ability to invest in promissory notes.  The promissory notes offered investors annual rates of return ranging from 12% to 30%, and typically carried a 180-day term, and the pair sought to profit by keeping any excess return paid by Rothstein on the investments. Through the issuance of the promissory notes, the pair raised nearly $60 million from 90 investors to invest in Rothstein's scheme. 

As Rothstein's scheme grew, he pressed Levin for additional funding and claimed that he was experiencing problems in his ability to keep the scheme going.  To convince Levin, Rothstein claimed that his clients, the alleged plaintiffs entering into the settlements, had filed complaints with the Florida Bar and that the scheme could grind to a halt if he was disbarred.  According to Rothstein, the only way he could continue the scheme was with $100 million in fresh financing from Levin and Prevé.  This was followed by the cessation of payments on the settlements that Levin and Prevé had already purchased - bringing Levin's investment strategy to a halt and threatening the returns he had promised to his investors.

In early 2009, Levin formed the Banyan Income Fund, L.P. ("Banyan") as a "feeder fund" with the stated purpose of investing solely with Rothstein.  Between May and October 2009, Banyan raised approximately $100 million from 83 investors to invest with Rothstein.  In the Private Placement Memorandum ("PPM") provided to investors, Banyan represented that a settlement would undergo a verification process that included an independent third-party verifier to review the unredacted settlement documents and bank account balances to ensure everything was in order.  As with the earlier investments, the documents represented in the PPMs were not obtained, and Rothstein again failed to make payments on a majority of the purchased settlements.  Several months later, Rothstein's scheme collapsed, and Banyan investors lost the majority of the $100 million they had invested.

Prevé was criminally charged last summer, and subsequently pleaded guilty to one count of conspiracy to commit wire fraud.  

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: