Canadian Securities Regulator Tries Public Shaming To Increase Fine Collections

A Canadian securities regulator frustrated with unpaid fines for financial crimes has tried a new tactic: publishing the names of individuals and entities that have been fined for financial-related crimes but have failed to pay.  The Alberta Securities Commission has published a list of individuals or entities with unpaid administrative penalties, disgorgement orders and/or costs that were ordered after enforcement proceedings in Alberta.  The list, which comes on the heels of similar efforts by regulators in other Canadian provinces, contains over 100 names that have collectively failed to pay over $100 million.

In proceedings brought by a civil regulator such as ASC, a prison sentence is not an available penalty.  Instead, the convicted fraudster can be ordered to pay a hefty sum in disgorgement and/or penalties.  Unfortunately, oftentimes any available funds have long since been squandered by the fraudster, and the orders to pay have little effect other than a hollow victory.  These sums can be significant; the ASC handed down nearly $7 million in penalties in 2014 and nearly $6 million in 2013.  However, the ASC collected less than $250,000 in 2013 and approximately $2 million in 2014 - amounting to an average annual collection of less than 20% of the levied fines.  While the agency operated at a budget deficit in 2013 and 2014, a stronger recovery could have possibly vaulted the agency to a surplus.  

In a Recovery of Unpaid Orders page available on the ASC's website here, an alphabetical list denotes 136 individuals and entities - some listed twice - with unpaid or partially-paid violations.  The list does not include the actual amount owing - perhaps due to the potential upkeep required to constantly update the amounts as funds come in - but instead links to the decision imposing the fines.  The list is updated quarterly, with the incentive that the ASC will remove the names of those who fully satisfy their obligations.  According to the Financial Post, the list's collective obligations total over $100 million while regulators have collected less than $23 million.  

The move comes on the heels of a recent passage of legislation by Utah legislators creating a White Collar Crime Registry consisting of a database of individuals convicted of various white collar crimes.  Utah's database, modeled loosely off of the well-known registry used to identify convicted sex offenders, was conceived in an effort to combat an unusually high incidence of financial fraud occurring in Utah in what some attribute to the state's high Mormon population.  Under that law, a first-time offender would have their information included in the registry for ten years.  

SEC Busts Gold-Mining Ponzi/Pyramid Scheme Targeting Spanish-Speaking Victims

The Securities and Exchange Commission filed civil fraud charges against a Massachusetts company and its principals and promoters, arguing the company was a massive Ponzi and Pyramid scheme that raised at least $15 million from primarily Spanish and Portuguese-speaking victims.  DFRF Enterprises LLC, a Florida company, and DFRF Enterprises, LLC, a Florida company, along with Daniel Fernandes Rojo Filho, Wanderley M. Dalman, Gaspar C. Jesus, Eduardo N. Da Silva, Heriberto C. Perez Valdes, Jeffrey A. Feldman, and Romildo Da Cunha were charged with multiple violations of federal securities laws in a complaint that was filed today in Massachusetts federal court.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains along with prejudgment interest, and civil monetary penalties.

According to the Commission's complaint, Daniel Fernandes Rojo Filho ("Filho") began pitching memberships in DFRF to victims in the Spanish and Portuguese-speaking communities in Massachusetts, Florida, and other areas throughout the world.  In a sales pitch primarily made through internet videos, victims were told that DFRF owned more than 50 gold mines throughout Brazil and Africa (including reserves in Brazil alone valued at over $4 billion) that collectively produced 13-16 tons of gold monthly and realized a return of over 100% on each kilogram it produced.  The sales pitch also claimed that DFRF used a credit line with a Swiss bank to triple its available funds, that DFRF donated 25% of its profits to African charities, and that investors could realize a 15% monthly return - an annual return of nearly 200%.  Recently, the defendants claimed that DFRF was registered with the Commission.

DFRF used multiple methods to attract potential investors, including hosting a public event on a cruise ship in the Boston Harbor in October 2014.  DFRF also provided incentives to investors and promoters that attracted additional investors to DFRF, including promised 10% referral bonuses as well as additional bonuses for investors that invested more than $10,000.  Potential investors were promised that their investments were fully insured.  

In early 2015, a newspaper published an article detailing a recent class action lawsuit filed against DFRF and Filho in a Massachusetts court.  Ironically, Filho denied the allegations that DFRF was a fraudulent scheme and instead suggested that the plaintiffs had confused DFRF with TelexFree - a massive alleged Pyramid and Ponzi scheme that was also based in Massachusetts and which is the subject of multiple criminal and civil regulatory actions.  

DFRF has also sought to attract investors with promises that its stock was set to become publicly-traded and that current investors would have the ability to covert their membership interests into stock options at approximately $15.00 per share.  Filho later claimed that DFRF was already public, but that it would not begin trading until the conversion process was finished.  Last month, Filho claimed that, while he was withholding the stock symbol for DFRF for investors' "protection," the "value" of its stock had already surpassed $64 per share.  

However, according to the Commission, 

There are no gold mines, no gold reserves, or no gold operations. DFRF bank documents indicate that none of the investors' money has been used to conduct gold mining, and DFRF has received no proceeds from gold mining operations.

Moreover, DFRF's claims about its gold production and reserves are easily disproven by referencing the U.S. Geological Survey.  At the current market price of $3.77 million per metric ton, the combined gold reserves of Brazil and Mali are worth approximately $39 billion - much lower than the $1.4 trillion in reserves that DFRF claims to have.  Nor has the Commission been able to find any evidence that DFRF spent any money on charitable activities in Africa or elsewhere.  Instead, the Commission alleges that DFRF was able to pay the outsized returns it advertised through orchestrating a massive Ponzi and pyramid scheme that attracted significant attention after it began using internet videos to solicit investors.  In addition to using investor funds for the payment of purported "returns," Filho is also accused of siphoning more than $6 million out of DFRF for a lavish lifestyle that included a fleet of luxury automobiles such as a 2014 Rolls Royce, a 2014 and 2014 Lamborghini, and a 2006 and 2012 Ferrari.  

The Commission also alleges that DFRF paid more than $300,000 to Sanderley Rodrigues de Vasconcelos, who is also a defendant in the TelexFree enforcement action brought by the Commission last year.  

A copy of the Commission's complaint is below:

comp-pr2015-139

Financial Adviser Gets 25-Year Sentence For $10 Million Ponzi Scheme

A chorus of clapping and cheering erupted after a Minnesota former financial adviser was sentenced to serve the next twenty-five years in federal prison for using his registered investment advisory business to defraud dozens of his clients out of more than $10 million in an elaborate Ponzi scheme.  Sean Meadows, 42, received the sentence from U.S. District Judge Susan Richard Nelson after previously pleading guilty to seven counts of wire fraud, three counts of mail fraud, and one count of money laundering.  Prosecutors had been seeking a 30-year sentence, while Meadows' lawyer sought a 10-year term.

Meadows operated Meadows Financial Group ("MFG"), which provided financial management and asset planning services to clients and also sold various insurance and investment products. Beginning sometime in 2007, Meadows began soliciting clients to invest in an MFG investment vehicle - typically a bond - that would provide an annual return of up to 10%.  Investors were told that their funds would be used to purchase bonds, real estate, or other legitimate investments, and Meadows represented that the investment would be both safe and liquid.  In total, Meadows raised more than $13 million from over 50 MFG clients.

However, the investment touted by Meadows was neither safe nor liquid, and the promised returns were possible only by using funds invested by new investors - a classic hallmark of a Ponzi scheme.  In addition to using investor funds to pay returns to existing investors, Meadows lived a life of luxury that included the payment of personal expenses including credit card bills, the purchase of vehicles, gambling trips to Las Vegas, and over $100,000 in payments to various adult entertainment businesses in Minnesota and Las Vegas.  Authorities peg total losses to victims at approximately $10 million.  A court-appointed receiver has returned approximately $3 million to victims.  

A copy of the indictment is below:

080514-Meadows

Convicted Ponzi Promoter Arrested For Drowning Pet Rabbit

A Florida man who previously served prison time for soliciting investors for Lou Pearlman's massive $300 million Ponzi scheme has found himself again in trouble with the law after surveillance video showed him drowning a rabbit in a hotel pool.  Steven B. Rodd, 49, was arrested by Tampa police after he was observed tossing a rabbit into a hotel pool and watching it drown.  If convicted, Rodd could face up to five years in state prison as well as a fine of up to $10,000.

Rodd has a long history of being implicated in Florida Ponzi schemes.  During 1999, Rodd and others solicited investors for LinkTel Communications, Inc. ("LinkTel"), which promised investors annual returns ranging from 12% to 14% through a payphone leaseback venture.  The Securities and Exchange Commission later accused LinkTel of being a large Ponzi scheme that raised over $6 million from several hundred investors.  Rodd was later charged by the Commission with violating securities laws in connection with his role with LinkTel and agreed to be permanently barred from the securities industry.  According to the St. Petersburg times, Rodd was associated with at least six fraudulent schemes.

However, LinkTel paled in comparison to the massive $300 million Ponzi scheme run by former boy band mogul Lou Pearlman that unraveled in early 2007.  Rodd, along with others, solicited investors for the Employee Investment Savings Account (EISA), which was represented as an investment by Pearlman-owned Transcontinental Airlines.  An EISA investment promised annual returns exceeding 6% and targeted retirees and elderly investors by falsely claiming that the investment was FDIC-insured and that he did not receive sales commissions.   In total, Rodd sold over $32 million in EISA investments to hundreds of Florida investors.  The investments later turned out to be worthless when Pearlman's scheme collapsed, and a court-appointed bankruptcy trustee has returned just pennies on the dollar to scammed victims.

Rodd was indicted for his role in Pearlman's fraud in 2011 and was later sentenced to a 36-month prison term.  

NY Financial Advisor Gets 4.5 Years For $1.9 Million Ponzi Scheme

A Long Island financial advisor was sentenced to serve the next 55 months in federal prison after previously pleading guilty to operating a Ponzi scheme that caused nearly $2 million in losses to clients and friends.  Paul Sullivan, 50, received the sentence from U.S. District Judge Leonard D. Wexler after pleading guilty to wire fraud.  In addition to the prison sentence, Judge Wexler ordered Sullivan to pay $1.9 million in restitution and serve three years of supervised release after completion of his sentence.

Sullivan, a previously-licensed financial advisor, used funds entrusted to him by his clients for various unauthorized investments that later resulted in significant losses.  When confronted by those clients, Sullivan attempted to avoid any potential ramifications by promising those investors that he would completely reimburse their losses.  Instead, Sullivan pitched a different group of clients to invest in what he characterized as "private investment opportunities" that, in reality, were simply the transfer of those client funds to the previously defrauded investors. 

During a subsequent client meeting that was recorded by a hidden camera, Sullivan admitted to using client funds to repay other client investment losses and stated that "what I did was completely illegal, completely wrong...everything I've done was wrong, was illegal, I have nothing to say."

Sullivan was arrested in July 2012 and subsequently pleaded guilty in July 2013.