SEC Seeks Deceased Alleged Ponzi Schemer's Life Insurance Proceeds To Pay Victims

The recent death of a Wisconsin insurance agent accused by the Securities and Exchange Commission of operating a multi-million dollar Ponzi scheme has taken a new twist as authorities seek to use millions of dollars in life insurance policy proceeds to pay back the accused's defrauded victims.  Loren Holzhueter was charged by the Commission in January with using his insurance brokerage firm to operate a Ponzi scheme that may have duped victims of over $10 million.  Following his death in late April, authorities discovered that Holzhueter had apparently purchased a significant amount of life insurance that is now the subject of negotiations between authorities and Holzhueter's lawyer and could potentially result in a significant return to the alleged con man's victims.

The Scheme

According to the Commission, Holzhueter owned a tax preparation business, Quality Tax and Accounting Services ("QTAS") since 1985.  In the 1990s, Holzhueter joined Insurance Service Center ("ISC"), where he continued to sell his services through QTAS.  After purchasing ISC in 2004, Holzhueter attempted to rapidly expand ISC's business by acquiring other insurance agencies and taking on debt.  This expansion strategy also included raising money from family and friends, with some told that their investment would be used to open investment accounts with ISC while others were told that their funds would be used to expand ISC'soperations or to buy out business partners.  Holzhueter promised these investors varying fixed annual rates of return ranging from 2% to 8%, and assured them that they could withdraw their investments at any time or that they could "reinvest" the interest by declining to withdraw the interest payments from their accounts.  Some investors were provided with a periodic "Summary Sheet" showing the terms of their investment and the balance at a given date.

However, the Commission alleged that Holzhueter was operating the classic Ponzi scheme by intermingling investor funds for a variety of undisclosed uses, including the funding of general operations, payroll for ISC's employees, personal expenses for Holzhueter, and the payment of Ponzi-style payments to existing investors purportedly representing interest payments and/or the return of invested principal.  Nor were investors advised that, as of November 2013, the Internal Revenue Service had executed a search warrant on ISC's business and was conducting an active investigation.  Indeed, Holzhueter is alleged to have not only concealed the IRS investigation, but also to have raised nearly $3 million from additional investors.

Life Insurance Policies

Following Holzhueter's death in late April, it was discovered that Holzhueter had apparently taken out life insurance policies that were set to pay out millions of dollars to Holzhueter's wife and son.  Indeed, a news report recounts a conversation between Holzhueter and a victim back in 2014 in which Holzhueter insinuated that he was "worth more dead than I am alive."   The policies are reportedly set to pay out approximately $9 million to Holzhueter's family - a significant sum that, given the roughly $10 million taken in by Holzhueter in the alleged scheme, could serve to partially or fully repay all victims.  Holzhueter's counsel has confirmed that he is in talks with the Commission to "apply most of the insurance settlements to the note holders," while apparently insinuating that a portion of the proceeds would remain with Holzhueter's widow and son.  Given that Holzhueter is accused of operating a Ponzi scheme and using investor funds to pay fictitious "returns" to existing investors, it is likely that the total net losses attributable to the scheme would be less than the total funds taken in when accounting for interest payments.  

Holzhueter's son, who has been CEO of ISC for the past three months and has been on ISC's payroll for several years, is also reportedly under investigation by authorities and has been linked to efforts to solicit funds from investors.  

A news article recounts a conversation between a victim and Holzhueter back in 2014, 

The Commission's original complaint against Holzhueter is below.

Sec Complaint by jmaglich1

Man Who Claimed Holy Spirit Guided Investing Accused of $3.5 Million Ponzi Scheme

A former Massachusetts church elder is accused of defrauding dozens of investors out of at least $3.5 million with the promise of exorbitant returns through a proprietary day-trading system allegedly revealed to him by the Holy Spirit.  Charles Erickson, of Uxbridge, Massachusetts, was charged by the Massachusetts Securities Division with multiple violations of the Massachusetts Securities Act through the offer and sale of fraudulent and unregistered securities.  The Complaint seeks injunctive relief, compensation for defrauded investors, disgorgement of ill-gotten gains, administrative fines, and other relief.  

According to the Complaint, Erickson allegedly began looking in 2008 for a way to supplement his retirement income, settling on trading volatile E-Mini Russell 2000 futures contracts (the "E-Minis").  Despite having limited investing experience and no day-trading experience, Erickson developed a proprietary system for trading the E-Minis that he claimed had been provided to him by the Holy Spirit.  Indeed, in testimony provided to the Massachusetts Securities Division, he stated:

It's going to sound a little strange to you, but ... I believe the Holy Spirit showed me this system.

When asked by authorities how he determined whether to enter buy or sell orders, he testified:

That's proprietary...I don't want to give my system away.  I don't want to be rude, but this thing flat-out works.

After initially trading with his own money, Erickson began soliciting investors - most of whom he found at his church - with the promise that he could deliver much higher returns than the less-than-one percent returns they were currently earning from their bank.  Erickson, who previously served as a church elder at his local church, told potential investors that they could earn a 4% monthly return, which translated to an annual return of nearly 50%.  Investors were shown a spreadsheet which they understood to be Erickson's actual trading results, and understood that they would receive the promised monthly returns for a period of two years before Erickson would return their invested principal.  In total, Erickson received at least $3.5 million from over 25 investors.

However, despite representing that his system was quite profitable and continuing to accept new investments, authorities allege that Erickson failed to disclose that he began suffering significant trading losses in 2013.  Erickson ceased making interest payments to investors in September 2014, and disclosed in a December 2014 letter to investors that he had "zero capital and almost zero assets."  In a subsequent letter, Erickson claimed that while his system worked, "I did not work the system!"  In questioning from authorities as to why Erickson did not "work the system," Erickson testified "that's a good question."  Erickson later disclosed that the "system" did not generate returns every month, and that he would use "reserves" - investor funds - to pay the guaranteed returns to investors during those situations.  

According to authorities, Erickson's use of new investor funds to pay guaranteed returns to existing investors was a Ponzi scheme that ultimately resulted in the scheme's collapse when available funds were depleted.  While a significant portion of investor funds were ultimately used to pay returns, authorities estimate that investors suffered hundreds of thousands of dollars in losses.  

A copy of the complaint is below.

Complaint

Insurance Company and Law Firms To Pay $45 Million To Settle Stanford Lawsuits

A national accounting firm and two law firms will pay $45 million in separate settlements over claims that they knowingly participated and assisted in the massive $7 billion Ponzi scheme perpetrated by Allen Stanford.  The settlements mark a much-needed boost for Stanford's victims, who to date have received just pennies on the dollar as recovery efforts have proven difficult.  Accounting giant BDO USA, LLP ("BDO") will pay $40 million in a lawsuit brought by a committee of Stanford investors, while several defendants including law firms Adams & Reese ("A&R") and Breazeale Sachse & Wilson ("BSW") will pay $5 million to court-appointed receiver Ralph Janvey.  Each of the firms has maintained their innocence.

Stanford ran a massive Ponzi scheme through a banking empire that spanned several continents.  Purportedly selling certificates of deposit bearing higher-than-average returns, Stanford's entities ultimately raised billions of dollars from investors.  However, Stanford used investor funds to pay the advertised returns - a classic Ponzi scheme.  In addition to paying fictitious returns, Stanford used investor funds to support a lavish lifestyle of a billionaire that included fleets of private jets, luxurious mansions, yachts, and even the creation of an international cricket tournament.  He was arrested in 2009, convicted by a federal jury, and sentenced to a 110-year prison term in 2012. 

Following the appointment of Ralph Janvey as receiver, scrutiny turned to third parties that provided legal and accounting services to Stanford.  According to the lawsuit filed against BDO, the firm allegedly issued unqualified opinions on various Stanford entities' financial statements, including the broker-dealer that sold CDs to investors and the company that purportedly served as the custodian for the CDs.  Additionally, BDO's employees allegedly conspired with Stanford to weaken Antigua's banking laws through participation in a task force formed by Stanford to rewrite the laws.  According to the lawsuit, one of the key initiatives of the task force was to ensure that "fraud" and "false accounting" were omitted as violations of Antigua's Money Laundering Act.  

Janvey sued A&R, BSW, and several related individuals in February 2012, claiming that the firms were responsible for nearly $2 billion in investor losses through assistance provided to Stanford.  Janvey alleged that the law firms steered many of their clients to Stanford's operations, and that this relationship resulted in the referral of lucrative Stanford legal work to A&R and BSW.  BSW was accused of delivering a letter, forged to appear from Antigua's Minister of Finance, attesting to the integrity of Stanford's operations so that Louisiana authorities would approve Stanford's acquisition of a trust company.  The ruse apparently worked, as the acquisition was approved, and Stanford used the trust company to solicit investors with IRAs.  

Under the terms of the settlements, BDO will pay $40 million to the investor committee.  A&R and BSW will pay $1 million and $1.53 million, respectively, while the remaining defendants will pay $2.175 million.  BSW will also agree to the release of nearly $200,000 being held in escrow.  

The motion to approve the A&R and BSW settlement is below:

Motion to Approve

California Man Extradited To Face Charges For Alleged $13.5 Million Ponzi Scheme

A California man has been extradited from Texas to face charges that he masterminded a Ponzi scheme that duped investors, including his grandfather, of nearly $14 million.  Brandon Walter Stewart, 30, had been contesting extradition after he was arrested in Texas last October.  After a Texas appellate court ruled that extradition was proper, Stewart was returned to Orange County, California late last week.  Stewart faces nearly 200 felony charges, including 24 counts of using untrue statements in the purchase or sale of a security, 126 counts of money laundering, 38 counts of writing bad checks, four counts of failure to file a California state tax return, three counts of residential burglary, and two counts of financial elder abuse.  If convicted of all charges, Stewart could be sentenced to over 100 years in prison and face substantial fines.

According to authorities, Stewart began soliciting investors in April 2009, including his grandfather, with the promise that they could receive substantial short-term returns from an investment fund operated by Stewart that purportedly had more than $100 million invested in equities such as Facebook and foreign investments.  However, instead of using investor funds for their promised purpose, Stewart is accused of living a lavish lifestyle that included gambling trips to Las Vegas on a private jet.  Authorities allege that Stewart used investor funds to pay alleged returns to investors - a hallmark of a Ponzi scheme.

Beginning in 2012, Stewart also allegedly wrote millions of dollars in bad checks from bank accounts that were either closed or that had insufficient funds.  This led to losses to nearly $3 million to financial institutions.  Stewart was arrested in Texas in October 2014, and had vigorously fought extradition back to California to face the charges.

The case is yet another where a California defendant faces residential burglary charges in connection with an alleged Ponzi scheme.  Prosecutors have recently levied burglary charges against accused Ponzi schemes due to the California Penal Code's definition of burglary as the entry into a structure with the intent to commit a felony - in this case, theft. While novel, the theory has been used several times in recent memory against California defendants.  For example, a California man faced burglary charges in March 2014 for operating an alleged ATM Ponzi scheme, while another California man faced 37 counts of residential burglary in 2009 in connection with what prosecutors alleged was a $200 million Ponzi scheme. The choice by California authorities to levy burglary charges in white collar crimes may also be partially due to its categorization as a serious "strike" crime under California's Three Strikes Law, which may allow for a stricter sentence.

Wells Fargo Settles Florida Ponzi Case For $3.175 Million

Just before a jury was set to deliberate following a 16-day trial, Wells Fargo agreed to pay $4 million to settl claims it aided and abetted a Florida Ponzi scheme that caused tens of millions of dollars in losses to thousands of victims.  Jonathan Perlman, the receiver appointed over companies previously operated by George Theodule, reached the settlement with Wells Fargo over claims that Wachovia, a bank purchased by Wells Fargo, turned a blind eye to a massive Ponzi scheme conducted by George Theodule that targeted the Haitian community and caused tens of millions of dollars in losses.  The settlement is notable not only because of the historic difficulty in holding financial institutions liable for their involvement in Ponzi schemes, but also because it will allow Perlman to begin distributing funds to Theodule's defrauded investors.  

The Scheme

Theodule owned and operated several companies, including Creative Capital Concept$, LLC ("Creative Capital") and Creative Capital Consortium, LLC ("CCC").  Using these companies, and a variety of other entities and investment clubs he formed, Theodule told potential investors in the Haitian community that he was a financial expert and could double their money in just 90 days.  As if these exorbitant returns were not enough, Theodule also told potential investors that part of his trading profits were used for a variety of humanitarian purposes, including the funding of start-up businesses in the Haitian community as well as contributing to business projects in Haiti and Sierra Leone.  Based on these representations, Theodule is said to have raised more than $30 million from as many as 2,500 investors from July 2007 to December 2008.

However, authorities alleged that Theodule's claims of trading success were completely false, and that in reality, Theodule was operating a massive Ponzi scheme.  Theodule's trading records showed trading losses of at least $18 million, and the remainder of investor funds were diverted to support Theodule's lavish lifestyle that included exotic car collections, motorcycles, rings, and even trips to Vegas. Theodule wasarrested in August 2013 and was later sentenced to a 12-year prison sentence after pleading guilty to a single count of wire fraud.

Wells Fargo's Involvement

Theodule initially maintained a banking relationship with Washington Mutual ("WaMa"), but began looking for a new bank after WaMu informed Theodule his accounts would be closed due to suspicious banking activity.  Thereafter, Theodule moved his accounts to Wachovia (which was later acquired by Wells Fargo) where he proceeded to open thirty-six accounts in the ensuing five weeks.  Significant investor funds began pouring into the accounts, which Wachovia classified as "investment business" accounts, and Theodule also began making large withdrawals of investor funds.  Perlman alleged that Wachovia ignored obvious red flags, failed to conduct the requisite due diligence, and even made special accommodations for Theodule's benefit including the delivery of large amounts of cash through the drive-through window.  Perlman alleged that internal bank documents showed the bank's knowledge of suspicious activity, including a decision to freeze one of the accounts that essentially acted as a funnel for investor deposits to Theodule's main account.  This freeze was subsequently removed four days later after a Creative Capital employee faxed the bank a business plan.

From May 9, 2008 to July 31, 2008, Theodule deposited over $10 million while simultaneously withdrawing a similar sum.  On July 24, 2008, Wachovia informed Theodule's wife, who was President of one of Theodule'scompanies, that it was closing several accounts on the basis that there was:

“no evidence of any investing going on and that funds were merely washing through the account from hand to hand.” 

Most of the accounts were closed in the ensuing weeks.

Litigation

Perlman sued the bank in December 2010, later amending the complaint to assert various causes of action including aiding and abetting breach of fiduciary duty, aiding and abetting conversion, negligence, wire transfer liability, and recovery of fraudulent transfers.  The court later dismissed the negligence, wire transfer liability, and aiding and abetting fraudulent transfer claims, but allowed the remaining counts to survive.  However, the court later granted Wells Fargo's motion for reconsideration on the basis of several decisions finding no liability on the part of financial institutions in similar scenarios, and dismissed all claims.  

Perlman successfully appealed this decision to the Eleventh Circuit Court of Appeals, which found thatPerlman had adequately alleged a "plausible inference of actual knowledge by Wells Fargo of the Ponzischeme which it then aided and abetted by permitting the fraud to continue through the use of its accounts after it had actual knowledge of the scheme.”  A trial took place on April 20, 2015, lasting for over two weeks before the parties reached a settlement on the eve of jury deliberations.

The settlement comes on the heels of similar settlements reached by Perlman with other financial institutions tied to Theodule's scheme, including a $2.75 million settlement with Bank of America and a $1.25 million settlement with TD Ameritrade.  Perlman also has a pending lawsuit against OptionsXpress in which he is seeking $13.9 million.  

The settlement is noteworthy as it marks one of the largest recoveries from banks in Ponzi litigation. Additionally, an attorney representing Perlman announced that the funds realized from the settlement would allow the receiver to begin returning funds to victims through a claims process.  

The Receiver's website is here. 

A copy of the Receiver's amended complaint is below:

DKT. 6 Amended Complaint Efiled 2-28-14 (00306138xBCD72)