TelexFree Trustee Provides Update On Claims, Losses, And Clawbacks

The bankruptcy trustee tasked with recovering funds to compensate hundreds of thouands investors worldwide who were duped in the massive TelexFree fraud appeared at a Bankruptcy court hearing today where he provided an update on the complexity of the scheme, the estimated losses, and the next steps moving forward.  Stephen B. Darr, the court-appointed trustee, was in court today for a hearing on the approval of nearly $3 million in fees incurred by his financial and legal professionals.  While the fees were ultimately approved, Darr also provided an update on the progress of the monumental task he has undertaken in attempting to understand and reconstruct the inner workings of what may be the largest and most complex financial fraud in history.

Background

TelexFree raised billions of dollars from hundreds of thousands of investors through the sale of a voice over internet protocol (“VoIP”) program and a separate passive income program.  The latter was TelexFree's primary business, offering annual returns exceeding 200% through the purchase of "advertisement kits" and "VoIP programs" for various investment amounts.  Not surprisingly, these large returns attracted hundreds of thousands of investors worldwide, and participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses.  Ultimately, while the sale of the VoIP program brought in negligible revenue, TelexFree's obligations to its "promoters" quickly skyrocketed to over $1 billion.

In April 2014, after multiple attempts to modify the passive income program both to rectify regulatory deficiencies and to curb increasing obligations, TelexFree quietly filed for bankruptcy in a Nevada bankruptcy court.  While it appeared that TelexFree had hoped to use the bankruptcy proceeding to eliminate its obligations to its "promoters" and extinguish any ensuing liabilities, the filing immediately attracted scrutiny and was followed shortly by enforcement actions filed by the Securities and Exchange Commission (the "Commission") and Massachusetts regulators.  The Commission then moved to transfer the bankruptcy proceeding to Massachusetts, where the company was headquartered and where the Commission had filed its enforcement proceeding.  Despite vehement objections by TelexFree, that effort was ultimately successful, and the appointment of an independent trustee, Mr. Darr, shortly followed.

TelexFree's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges, with Wanzeler currently a fugitive and believed to be in Brazil.  

Update

In the bankruptcy hearing, Darr disclosed that he had identified over 900,000 unique email accounts that were registered with TelexFree's program - of which over 90% were determined to have suffered an average loss of nearly $2,000.  The remaining approximately-68,000 email accounts were fortunate enough to profit from the scheme, although those profits were simply the redistribution of new investor funds as the VoIP business made little actual money.  Those "net winners," as they are commonly known in Ponzi parlance, made an average profit of over $20,000 - meaning that there is the possibility of over $1 billion in potential future clawback/avoidance actions. To put that figure in context, the number of Ponzi schemes in which losses surpassed $1 billion can likely be counted on one hand.  

Going forward, Darr indicated that he planned to schedule a meeting in the next few months to update TelexFree investors.  A creditors meeting, known as a 341 Meeting in bankruptcy parlance in reference to the specific section of the U.S. Bankruptcy code, is mandatory in bankruptcies and allows creditors to obtain testimony from a debtor under oath.  

To date, Darr disclosed that he had recovered approximately $16 million that would ultimately be returned to creditors.  One of the largest sources of recoveries in similar fraud cases is often through the institution of "clawback" or "avoidance" actions filed to recover funds from net winners or those who received transfers on the eve of an entity's collapse.  In this scenario, it is very likely that Darr will pursue those TelexFree net winners who profited most from the scheme, as well as the third-party entities that provided services to TelexFree or who may have facilitated or exacerbated the fraud.  It is expected that further details will emerge in the coming months.

Further Ponzitracker coverage of TelexFree is here.

Authorities Bust Craigslist Ponzi Scheme

Massachusetts securities regulators filed charges against an Alabama company and its principals alleging that the company targeted investors through the popular online classified website Craigslist and promised extraordinary returns of 100% in as little as 48 hours.  The Massachusetts Securities Division ("MSD") filed an administrative complaint against Premiere Asset Management, Inc. ("PAM"), as well as PAM principals and/or employees Gerald Lawler, Nicola Lawler, Mariam Williams, Claude L. Collins, Sr., and Patrik Granec, accusing the defendants of violating the Massachusetts Uniform Securities Act through the fraudulent and unregistered sale of securities.  The MSD is seeking a cease-and-desist order, a bar from future employment in the securities industry, restitution, and administrative fines.

According to the MSD, at least one Massachusetts resident - a public school teacher - responded to an advertisement on Craigslist.org in March 2014 which offered an investment opportunity with a return of 100% in as little as 48 hours.  After some back-and-forth, the investor wired $100,000 to an Alabama on the promise that PAM would provide a "tender cash credit and leverage of $200,000 USD..."  PAM represented that investor funds would be used for "purchase, sell and/or loan of banking instruments or securities and/or etc."  Several weeks later, the investor contacted PAM to inquire about the investment. PAM informed the investor that the investment had increased to $200,000, and the investor agreed to reinvest $145,000 of the amount while withdrawing the remaining $55,000.  PAM subsequently ceased contact with the investor.

An investigation by authorities revealed that PAM principals and associated individuals opened up several accounts at Regions Bank, including two bank accounts in the name of Premiere Asset Management that were subsequently closed by the bank.  An examination of pertinent banking activity showed that at least one other similar deposit of $100,000 was made - presumably representing an additional unidentified investor lured by the Craigslist advertisement.  The Complaint further discloses that PAM's website should have triggered warning bells given its generic and plagiarized language and representations.  

Red Flags Were Readily Apparent

A review of the communications between the investor and the unidentified PAM agent(s) offers a sobering lesson that despite the presence of numerous red flags - including at least one recognized by the identified investor - these concerns were ultimately dismissed.  These red flags included not only the exorbitant promised returns, but also the exchanges between the investor and purported PAM representatives.  For example, the first response received by the investor after responding to the Craigslist advertisement included the following description of the investment opportunity by a PAM agent:

The program is totally 100% secure under your sub accout (under your client) with most reputable bank in NY, bank of Melon [sic].  This is privilege not a need to be part of it."

The multiple spelling and grammatical errors should have raised concerns over the individual to whom the investor was contemplating handing over a significant portion of their wealth, and should have at least prompted further investigation.  These deficiencies were also apparent in an overview provided to investors describing the program, a portion of which provided that:

It appears the investor may have noticed these red flags, as a subsequent email to the unidentified PAM agent stated that:

My brother is my financial consultant...[h]e thinks [the money] will be gone if I give you the bank info...he said it looks like another scam from Craigslist.

Yet, despite taking the affirmative step of seeking advice from a knowledgeable and impartial third party, the investor decided to move forward with the investment and confided that the sum represented "all [of] my retirement money."  In response, the PAM agent reassured the investor that:

There is NO risk and you are with TRILLION dollar asset holding bank.  You don't need to be worry about anything!

Unfortunately, it appears that the investor's brother's concerns were well-founded.

A copy of the MSD's Complaint is below:

E 2014 0092 Administrative Complaint

July Trial Date For Cay Clubs Principals In Alleged $300 Million Ponzi Scheme

A July 2015 trial has been scheduled for a husband and wife accused of masterminding a massive $300 million real estate Ponzi scheme and facing multiple fraud and conspiracy counts.  Dave and Fred Davis Clark, Jr., a/k/a Dave Clark, 56, and Cristal R. Clark, a/k/a Cristal R. Coleman, face charges of bank fraud and conspiracy to commit bank fraud in connection with their operation of Cay Clubs, a Florida company that was accused by the Securities and Exchange Commission of operating a $300 million Ponzi scheme based on the sale of luxury timeshares.  If convicted, the Clarks could face up to thirty years in prison for each bank fraud charge. 

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 luxury 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.  

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and extradition from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

In the wake of the charges against the Clarks related to their operation of Cay Clubs, authorities targeted former sales directors Barry Graham and Ricky Lynn Stokes and charged the pair with conspiracy to commit bank fraud.  The charges resulted in guilty pleas and identical five-year sentences, and each of the men could be called to testify at the Clarks' trial.  

A forensic analysis conducted by the government alleges that Cay Clubs evolved into a Ponzi scheme as early as April 2005, with $2 out of every $3 paid to investors allegedly coming from existing investors.  The forensic analysis also showed that the Clarks lived lavishly, including nearly $20 million in boat purchases and expenses, $5 million in aircraft expenses, and $3 million in personal credit card bills.  Fred Clark also allegedly spent over $3 million at a Bradenton golf and country club.

Indonesian Man Arrested For Alleged Tissue Paper Ponzi Scheme

An Indonesian man has been arrested and charged with fraud in connection with a suspected Ponzi scheme that promised exponential returns purportedly derived from the sale of advertisements on the back of tissue paper packets.  Kamal Tarachand, of North Jarkarta, Indonesia, was arrested after several dozen victims - including some Indonesian celebrities hired to promote the scheme - came forward to authorities.  Authorities are actively investigating the scheme and are also considering filing money laundering charges.

Beginning sometime in 2013, Tarachand began recruiting victims with the promise of huge returns from the sale of advertisements on the back of tissue paper packets manufactured by his company.  Potential victims were provided with samples of the tissue paper packets featuring advertisements for restaurants and cosmetic companies.  The promised returns were staggering.  According to authorities, Tarachand promised that for every $75 invested in the tissue paper business, victims would receive a daily return of $3 to $15 - an annualized return of up to 6,000%.  Tarachand hired well-known Indonesian celebrities to promote his business and lend an air of legitimacy, including a soap opera actress and an actor.  Some victims were also lured with the prospect of free advertisements in exchange for an investment.  It is speculated that the scheme may have attracted thousands of investors across Indonesia.

But authorities allege that Tarachand was running a classic Ponzi scheme by using new investor funds to pay returns to existing investors.  One lawyer for some of Tarachand's victims has stated that the tissue paper business never went into production.  Authorities raided the tissue paper business earlier this week, and have also confiscated some of Tarachand's assets while they continue their investigation. 

Ponzi Schemer Who Robbed Bank With Fake Bomb Gets 79-Month Sentence

A New York man who attempted to rob a Florida bank with a fake bomb after being arrested for a $20 million Ponzi scheme has been sentenced to a 79-month prison sentence for his scheme.  Louis J. Spina, who once had a successful career as one of the youngest members of the New York Stock Exchange, pleaded guilty to wire fraud late last year to settle charges he masterminded a $20 million Ponzi scheme.  The sentence will be served on top of the 41-month sentence Spina previously received after pleading guilty to robbing a Florida bank brandishing a fake bomb.  U.S. District Judge Anne E. Thompson ordered Spina to forfeit over $800,000 and to pay approximately $12.7 million in restitution to his victims.  

The Scheme

Spina's story reads like a gripping Hollywood thriller.  With only a high school diploma, Spina started working for the New York Stock Exchange at the age of 19.  Spina apparently had a penchant for Wall Street, becoming an NYSE member at age 27 and taking home at least $800,000 in annual pay during an 18-year period beginning in 1983.  Spina, who apparently had a knack for being captured by media outlets on the trading floor (see here, here, and here), ultimately spent over 25 years on Wall Street.

In 2010, Spina left Wall Street and formed LJS Trading, LLC ("LJS").  Potential investors were told that Spina could deliver annual returns ranging from 9% to 14% through trading in various stocks and equities, wit the understanding that Spina would be entitled to keep any surplus profits.  Spina would ultimately raise approximately $20 million from dozens of investors.

However, Spina ultimately used less than 50% of investor funds for their stated purpose, and indeed lost the entirety of the $9.5 million he invested.  He spent the remainder of investor funds to sustain a lavish lifestyle that included expensive cars, luxury real estate, and even a $400,000 donation to a private university.

When investors began questioning Spina about the safety of their funds, Spina provided them with "screenshots" of his trading account displaying a large balance.  According to the FBI, this balance was not the accurate balance, but simply a display of the 100-to-1 margin purchasing power used by Spina.  In late 2013, Spina told investors that he was in talks to sell the company to an unnamed wealthy individual that could offer even higher annual returns of 14% to 30% - and succeeded in raising an additional nearly $2 million.  

"Rock bottom"

However, there was no wealthy benefactor waiting in the wings, and Spina was arrested in November 2013 on federal charges that he was operating a Ponzi scheme.  Several months after his arrest, Spina entered a Wells Fargo branch in Coral Gables, Florida, wearing a black ski mask over his head and carrying a bag which he claimed contained a live bomb that he had crudely assembled using a Pyrex bowl and a strainer.  Spina made off with approximately $16,000 from the heist, but a witness observed his getaway and reported his plates to authorities.  Spina was arrested without incident the following day, where he confessed to authorities that he had robbed the bank, used a key fob to simulate a detonator, and used most of the robbery proceeds to pay bills.  

As federal prison does not have a parole system, Spina must serve at least 85% of his sentence.