Texas Man Admits To $4.5 Million Bitcoin Ponzi Scheme

In what is widely believed to be the first Ponzi scheme involving virtual cryptocurrency Bitcoin, a Texas man pleaded guilty to one count of securities fraud in a scheme that raised nearly $5 million in Bitcoin from investors who were promised astronomical annual returns of over 3,500%.  Trendon Shavers, who turned 33 today, entered the plea before U.S. District Judge Lewis Kaplan.  Shavers is scheduled to be sentenced on February 3, 2016, and his plea agreement with prosecutors contains an agreement not to appeal any sentence of 41 months or less.  Shavers will remain free on bail until his sentencing.  

Bitcoin is a peer-to-peer payment system created in 2009 that is popular among certain groups due to its promises of security and anonymity. Shavers, known as Pirateat40 on popular Bitcoin Forum Bitcointalk.org, began soliciting investors to park their Bitcoins ("BTC") in Bitcoin Savings and Trust ("BST"), a digital hedge fund that promised weekly returns of up to 7%.  When asked how he was able to achieve such lucrative returns, Shavers told investors that he was involved in bitcoin arbitrage activity that included acting as a middleman for individuals who wished to purchase large quantities of BTC "off the radar."  Shavers later expanded on this explanation, saying

“If my business is illegal then anyone trading coins for cash and back to coins is doing something illegal. :)”  

When further asked about his profit margins, Shavers indicated that he achieved gross returns of nearly 11% per week.  As the operation progressed, the minimum investment amount was raised to 100 BTC, and investors were permitted to re-invest their profits.  

The scheme began to crumble when Shavers announced that the weekly interest rate would decrease to 3.9% beginning August 1, 2012, and he allegedly began making preferential payouts to friends and longtime investors with his remaining funds.  Later that month, Shavers declared default:

As much as I've tried to meet the deadlines within the community, there're conditions beyond my control which have escalated the process to the point it is today.  Bitcoin Savings & Trust has hereby given notice of default to its account holders.

The decision was based on the general size and overall time required to manage the transactions. As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately caused delays on withdraws and the inability to fund orders within my system. On the 14th I made a final attempt to relieve pressure off the system by reducing the rates I offered for deposits. In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.

However, according to authorities, Bitcoin Savings and Trust was nothing more than an elaborate scam that Shavers used to take in millions of dollars in BTC.  In total, Shavers took in more than 700,000 BTC - which at one point constituted approximately seven percent of all Bitcoin then in public circulation.  Through payments of purported interest, Shavers returned approximately 500,000 BTC to investors, and transferred the remainder - approximately 150,000 BTC then worth $1 million - to his personal account, which he used for a variety of unauthorized personal expenses, including rent and gambling.  Shavers also attempted his hand at arbitrage, selling the BTC's for dollars and vice-versa, but suffered losses.

According to authorities, at least 48 of approximately 100 investors lost part or all of their investment with Shavers.  Ironically, the Bitcoin raised by Shavers would have been worth over $150 million based on the current price of the commodity (the CFTC recently concluded that Bitcoin was a commodity).  

Shavers was initially the subject of a civil enforcement action filed in July 2013 by the Securities and Exchange Commission.  Shavers contested those charges, arguing that he was not subject to federal securities laws because Bitcoin could not be classified as a "security."  That argument was rejected and later affirmed by the District Court, which both found that Bitcoin investments satisfied the test espoused by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293 (1946).  Shavers was later criminally charged in November 2014.

The charges represented the first federal criminal securities fraud charges involving a Bitcoin-related scheme. 

North Carolina Bank Sued By Victims of $40 Million “Black Diamond” Ponzi Scheme

Four years after settling allegations by the U.S. Department of Justice that it turned “a blind eye to criminal conduct occurring under its nose,” a North Carolina bank is facing a lawsuit from victims of a $40 million Ponzi scheme who claim that the bank allowed the scheme to thrive.  CommunityOne Bank (“CommunityOne”), based in Asheboro, North Carolina, was named in a lawsuit filed by 30 victims of the “Black Diamond” Ponzi scheme which resulted in a 40-year federal prison term for its mastermind, Keith Simmons.  The lawsuit, which seeks recovery of the estimated $10 million in losses suffered by the 30 investors as well as punitive damages, alleges that CommunityOne failed to inform investors of Simmons’ fraudulent activity and conspired to violate the federal anti-racketeering law.  

Simmons operated Black Diamond, a foreign currency venture that touted potential investors with promises of extravagant returns and guaranteed results.  The scheme, which ran from 2007 to 2009, ultimately raised more than $35 million from hundreds of investors.  However, there were no lucrative foreign currency ventures, and Simmons instead simply used new investor funds to pay the outsized returns.  In addition, Simmons misappropriated millions of dollars for his own use, including the purchase of nearly $5 million in real estate, the formation of a real estate company, and the acquisition of an interest in an Extreme Fighting Championship venture.  Following Simmons’ arrest in 2009, nearly a dozen individuals - including Simmons - were subsequently sentenced for prison for varying terms for their role in the scheme.

From 2007 to 2009, Simmons conducted his scheme using a single bank account at CommunityOne, where he deposited approximately $35 million in investor funds.  During the same period, Simmons also caused withdrawals of roughly that same amount consisting of investor distributions and withdrawals for Simmons’ personal benefit.  While the bank’s systems flagged Simmons’ account on numerous occasions for potentially fraudulent or suspicious activity, the bank did not take any action or close Simmons’ accounts until his arrest in 2009.  Banks like CommunityOne were required to institute and enforce policies aimed at money laundering and potentially fraudulent activity pursuant to the Bank Secrecy Act, which includes a requirement mandating the filing of a Suspicious Activity Report (“SAR”) for certain potentially illegal activities.  

In 2011, the Department of Justice announced that CommunityOne had agreed to settle charges that it had failed to maintain an effective anti-money laundering program, which included allegations that the bank failed to file required SARs related to Simmons’ banking relationship.  The bank entered into a deferred prosecution agreement ("DPA") with the government, under which the bank, after paying $400,000 in restitution to the victims of Simmons' scheme, was able to have the criminal charges dismissed after two years.  According to Justice Department officials, CommunityOne failed to file a single SAR relating to Simmons’ banking relationship despite the fact that the bank’s computer software had continually flagged Simmons’ accounts for potential wrongdoing. Those same prosecutors noted that other banks had terminated the accounts of hedge fund managers who acted as “feeder funds” to Simmons’ scheme. The then-acting U.S. Attorney for the Western District of North Carolina, Anne Tompkins, remarked that

This bank’s failure to detect and report a ponzi scheme cost it 16 percent of its value.  Other financial institutions should heed this warning:  the Bank Secrecy Act applies to more than just drug and terrorist financing.”

While the investors bringing the suit against CommunityOne reportedly recouped a portion of their losses in the $400,000 settlement paid by CommunityOne, their attorney indicated that the vast majority of their losses remain outstanding.

Hollywood Filmmaker Charged With $21 Million Ponzi Scheme

A California man and woman were arrested by authorities on charges that they masterminded a $21 million Ponzi scheme that pitched large returns in exchange for financing movie productions.  Michelle Kenen Seward, 42, and Dror Soref, 75, were arrested by authorities with the California Department of Insurance last week.  According to arrest records, Soref is being held on $2.7 million bail pending a September 28th court appearance.

Soref is an award-winning Hollywood filmmaker who once directed videos for comedian Weird Al Yankovic. Seward was previously licensed to sell insurance, which she sold through her entities Protege Financial and Insurance Services Inc. ("Protege") and Saxe-Coburg Insurance Solutions LLC ("Saxe-Corburg").  According to authorities, Seward solicited clients and potential investors - most of whom were elderly retirees - with the promise of outsized annual returns purportedly realized from the financing of movies produced by Soref.  This included urging clients and potential investors to surrender annuities and other savings, as well as obtain home equity loans, in order to fund the investments.  Potential investors were told their investment was safe and guaranteed and that it “was not a Ponzi scheme.” 

Beginning in 2007, investors were solicited to finance production of the film "Not Forgotten," for which they were promised annual returns ranging from 10% to 18%.  However, "Not Forgotten" did not attain the success Soref envisioned, and ultimately netted approximately $50,000 from the box office.  Yet, despite the film's meager returns, Soref and Seward continued to solicit investors for a company they co-founded named Windsor Pictures, LLC ("Windsor").  While those making investments in Windsor were told that their funds would be used to finance future productions, authorities allege that those funds were instead diverted to pay the returns previously promised to "Not Forgotten" investors - a classic hallmark of a Ponzi scheme.  Ultimately, authorities estimate that at least 140 victims invested over $21 million with Soref and Steward.  

The California Commissioner of Business Oversight previously brought civil charges in 2012 against Soref, Steward, and their entities.  Following those defendants failure to answer or defend the allegations, a default judgment was entered in 2014 ordering the defendants to pay $23 million in restitution and $15 million in civil penalties.  

Perhaps surprisingly, this is not the first alleged Ponzi scheme centered around a filmmaking or production venture.  For example, Georgia authorities arrested several individuals in 2011 on charges that their animation studio was a $2.1 million Ponzi scheme.  More recently, a California man was sentenced to a 27-year prison term after being convicted of running a $11 million Ponzi scheme that promised exorbitant returns to investors from the production of independent movies.  

Three Charged With $54 Million "Green Energy" Ponzi Scheme

Nearly six years after the Securities and Exchange Commission brought civil fraud charges, federal authorities filed criminal charges against three people for operating a $54 million Ponzi scheme touting "green energy" and "carbon-negative" technologies.  Troy Wragg, 34, of Georgia, Amanda Knorr, 32, of Pennsylvania, and Wayde McKelvy, of Colorado, were charged in an unsealed indictment for their former role with Mantria Corp. ("Mantria").  Each of the three defendants was charged with one count of wire fraud conspiracy, seven counts of wire fraud, conspiracy to commit securities fraud, and securities fraud.  If convicted of all charges, each defendant could face dozens of years in prison.

Mantria was formed in mid-2005 by co-founders Tony Wragg and Amanda Knorr.  Mantria touted itself as a vast conglomerate comprised of 11 operating divisions, at least 32 wholly-owned or affiliated companies, and other related entities that, in total, brought in lucrative profits.  Wayde McKelvy operated Speed of Wealth, LLC ("SOW") and Retirement TRACS, LLC ("RT"), which heavily advertised to the public and hosted investor seminars in Colorado, Las Vegas, and other cities to solicit investors for Mantria.  Neither Wragg, Knorr, or McKelvy were licensed to sell securities.  Initially, Mantria began partial development of a Tennessee real estate development, building roads, a model home, and an entrance gateway to give the appearance of progress to investors.  After those plans fizzled out, Mantria turned to the manufacture of "biochar," a charcoal-like product made from organic waste.  In promotional materials distributed by Mantria's financial arm, potential investors were told they could expect 450% returns from Mantria's bio-char activities and eventual public offering. 

At events hosted by McKelvy, which included live, internet, and radio presentations that even once included a cameo from former NFL quarterback John Elway, investors were first told that McKelvy would teach them the secrets of wealth - which started with McKelvy urging investors to first liquidate their "traditional investments" that included their retirement accounts and 401(k) plans.  McKelvy then encouraged potential investors to borrow as much as possible against both their home equity and their parents' home equity, as well as to tap their business line of credit.  After doing so, McKelvy recommended that those investors entrust those funds to the consistent and safe investments offered by Mantria.  The following are statements made by McKelvy at a seminar in May 2009 as alleged in the complaint filed by the Securities and Exchange Commission:

''Number one,  you must quit following the herd and never, ever expect to build wealth by investing in mutual funds, CDs, money market, bonds, or qualified retirement accounts, such as a 401(k) plan, which is exactly where all you guys are investing. You will not get wealthy. You'll go straight to the poor house. I'll prove that to you in a moment."

"[w]hat do we always hear, students? It's too good to be true, right? All the time, it's too good to be true. It's a Ponzi scheme. No, guys, you need to understand the truth about guarantees and collateral. We'll go over that tonight."

"So here's what I'm telling you to do, guys. Gotake your equity out, because you're an A lender, you can borrow 6 percent or less today. Go loan it out at 17 percent. Create arbitrage. That's how you get rich. That's it. Troy [Wragg] is going to be talking to you about an opportunity to make phenomenal returns collateralized by real estate, in the second half."

Through various offerings, Mantria raised at least $54 million from over 300 investors.

However, the Department of Justice now alleges that Mantria was nothing more than a massive Ponzi scheme which "grossly overstat[ed] the financial success of Mantria and promis[ed] excessive returns."  Despite claims that Mantria was pulling in lucrative returns, authorities charge that Mantria had "virtually no earnings, no profits, and was merely using new investor money to repay earlier investors."  Similarly, Mantria's claims that they were producing large quantities of "biochar" and had significant pre-orders are also claimed to be false.  Authorities estimate that Mantria investors ultimately suffered at least $37 million in losses.

Knorr, Wragg, McKelvy, and McKelvy's wife, Donna McKelvy, were the subject of a 2009 emergency enforcement action filed by the Securities and Exchange Commission.  The Commission ultimately obtained judgments against the four totaling over $130 million and consisting of disgorgement, civil penalties, and prejudgment interest.  Lawyers representing Mantria victims reached a $6 million settlement last year with a lawyer and accountant who provided services to the scheme. 

A Mantria promotional video is still available on Youtube:

A copy of the indictment is below:

Indictment - Mantriaetal

Bar Owner Liable For Promoting $18 Million Ponzi Scheme

A Texas federal judge has ruled that a California bar owner who solicited investors for a suspected $18 million oil and gas Ponzi scheme is liable for nearly $400,000 in civil penalties, interest, and disgorgement stemming from the lucrative commissions he received.  Roland Barrera, the owner of a nightclub and speakeasy in Costa Mesa, California, was ordered to pay the amount after U.S. Magistrate Judge Mark Lane granted summary judgment to the Securities and Exchange Commission in an ongoing suit brought in December 2013 to halt the scheme allegedly perpetrated by Robert Helms and Janniece Kaelin.  The decision by the Commission to include promoters of the alleged scheme, while not unprecedented, is rare amid a flurry of enforcement actions brought to combat suspected oil-and-gas frauds.

According to the complaint filed by the Commission, Helms and Kaelin began soliciting investors in 2011 for Vendetta Royalty Partners ("VRP"), a limited partnership they controlled.  Formed in 2009, VRP initially acquired oil-and-gas royalty interests from another limited partnership the two men controlled.  However, beginning in 2011, VRP filed documents with the Commission seeking to raise $50 million through the sale of limited-partnership interests.  In offering documents, potential investors were told that (1) 99% of the raised proceeds would be used to purchase oil-and-gas royalty interests, (2) that Helms had extensive experience in the oil-and-gas industry, (3) that investors would receive periodic reports on VRP's progress, and (4) no legal proceedings were pending against the company.  Potential investors were told to expect a return ranging from 150% - 200% in just several months.  In total, approximately $18 million was raised from nearly 100 investors in a dozen states.  This included a $3 million investment solicited by Barrera and another defendant, Deven Sellers, from a California investor who was told that he could realize outsized returns and that Sellers and Barrera would only receive a small commission from his investment.  In reality, Sellers and Barrera pocketed nearly $400,000 in commissions off that investment. 

However, VRP did not achieve the profitable returns promised by Helms and Kaelin.  Indeed, rather than invest 99% of raised offering proceeds in oil-and-gas royalty interests, only 10% was in fact invested as advertised.  These investments generated de minimus returns.  The representations made to investors were also false.  Helms did not have 10 years of experience in the oil-and-gas industry; rather, his sole experience came from operating VRP.   Investors were never provided with periodic progress reports, and were not informed of significant pending litigation against VRP by an existing investor accusing the company of fraud.  Instead, nearly $6 million was paid to existing investors in the form of "income distributions" that was, in reality, funds from new investors in a classic example of a Ponzi scheme.  Millions of dollars were also allegedly misappropriated by Helms and Kaelin for their own personal benefit.

According to Bizjournals, summary judgment was also entered against the scheme principals Helms and Kaelin.

The SEC's Complaint is below:

comp-pr2013-256 by jmaglich1