Banker Tied To Rothstein's Massive Ponzi Scheme Will Plead Guilty

Just before his trial was scheduled to begin next month, a former TD Bank vice president will plead guilty to a wire fraud conspiracy charge related to his relationship with convicted Ponzi schemer Scott Rothstein.  Frank Spinosa, 54, is scheduled to plead guilty to a single count of wire fraud conspiracy on October 8, 2015.  Spinosa had been scheduled to stand trial next month, where he could have been sentenced to dozens of years in prison if convicted on all charges.  Instead, Spinosa faces a maximum five year sentence for wire fraud conspiracy.   

Rothstein's relationship with Spinosa began after he opened over 20 attorney trust accounts and law firm operating accounts in late 2007 at TD Bank and another bank later acquired by TD Bank.  Spinosa was Rothstein's point of contact beginning in 2008, and communicated often with Rothstein regarding the accounts and various documents that were provided to investors.  As Spinosa's compensation was tied to the size and volume of accounts he managed, the fact that Rothstein's accounts were among TD Bank's largest accounts in South Florida meant increased compensation and bonuses for Spinosa.  

Spinosa was implicated in the massive scheme by Rothstein himself, who claimed during a 2011 deposition that he had recruited Spinosa to assist in the preparation of false "lock letters" used to show investors that their investments were safe and that Rothstein could not remove funds from the account holdings the funds. According to the Securities and Exchange Commission, which filed civil fraud charges against Spinosa last year, Spinosa also made oral assurances to at least two investors that certain trust accounts at TD Bank holding investor funds contained hundreds of millions of dollars when in reality the "locked" accounts typically held less than $100.  In one instance during August 2009, months before the scheme eventually collapsed, Spinosa participated in a conference call with Rothstein and an investor in which he told the investor that an account had a balance of $22 million when, in reality, the account had a balance of less than $100.  The investor subsequently made four more investments with Rothstein in the ensuing months.

Spinosa is the last remaining defendant to not be sentenced, and his sentencing will mark the culmination of an extraordinary series of prosecutions that ultimately put over two dozen individuals in prison for their role in Rothstein's fraud.  With no remaining prosecutions on the horizon, it is widely believed that Rothstein will press his sentencing judge for a reduction in his 50-year term based on his extensive cooperation.  Ponzitracker recently covered this issue in depth here. 

Other Ponzitracker coverage of the Rothstein scandal is here.

Victims of $200 Million Ponzi Scheme Set To Recover 9% Of Losses

Nearly six years after a raid by the Federal Bureau of Investigation uncovered a $200 million Ponzi scheme masterminded by Tim Durham, a bankruptcy trustee tasked with recovering funds for scheme victims has announced his intention to make a first distribution representing 8% - 9% of victim losses.  Victims of Fair Finance Company ("Fair Finance") will share a collective $18 million distribution, the bankruptcy trustee recently announced, which would represent just pennies on the dollar compared to the over $200 million in claims submitted by scheme victims.  Durham received a 50-year prison term for the scheme, while co-conspirators Jim Cochran and Rick Snow were sentenced to terms of 25 years and 10 years, respectively. It does appear that victims stand in line to receive at least one more distribution based on current funds in the bankruptcy estate.

The Scheme

Durham ran Fair Finance from 2005 through November 2009, with Cochran serving as Chairman and Snow serving as chief financial officer.  Durham and Cochran purchased Fair Finance for $23 million in 2002, which had successfully operated for decades as a legitimate finance company that purchased finance contracts between businesses and their customers that carried annual interest rates ranging from 18% to 24%.  Fair Finance would then profit off the difference between the purchase price and the money collected from the arrangement.  Purporting to continue the historically profitable business, Durham and Fair Finance raised approximately $230 million from the sale of investment certificates to over 5,000 investors.  

However, rather than continuing Fair Finance's business, Durham modified the business structure and began using a steadily increasing amount of investor proceeds to make "loans" for a number of unauthorized purposes, including financing Durham and Cochran's unprofitable businesses, paying fictitious interest to investors, and enriching themselves and those close to them.  By 2009, these 'loans' totaled more than $200 million and constituted more than 90% of Fair Finance's supposed investments.  Essentially looting the company, Durham and Cochran saddled Fair Finance with hundreds of millions of dollars in subordinated debts, while at the same time funneling money out of the company to themselves, to struggling companies they had an ownership interest in, and to pay their daily living expenses and sustain their lavish lifestyles.  These living expenses included more than 40 classic and exotic cars worth over $7 million, a $3 million private jet, and a $6 million yacht in Miami. 

The company was eventually forced into involuntary bankruptcy, and a grand jury indicted Durham, Cochran and Snow in March 2011.  Maintaining their innocence, the men were later convicted at trial, and prosecutors sought a 225-year sentence for Durham who they labeled the "greediest, most selfish, and remorseless" Ponzi schemer.  At sentencing, U.S. District Judge Jane Magnus-Stinson handed down a 50-year sentence to Durham, remarking that she considered the punishment an "effective" life sentence.  While Durham achieved a small victory when a federal appeals court threw out two of his wire fraud convictions, he was subsequently resentenced to the same 50-year term this summer.

Claims Process

Scheme victims initially submitted over 5,000 claims with collective losses pegged at nearly $230 million.  The trustee, Brian Bash, indicated that over 1,000 of those claims had overstated victim net losses, and last week's court filing puts the total amount of claims at approximately $208 million.  According to the filing, there is approximately $43 million currently in the bankruptcy estate.  This comes after the court recently approved a $35 million settlement with Fortress Credit, which had provided financing to Fair Finance and which was accused by Bash of ignoring warning signs that Fair Finance was operating a massive fraud.  If the proposed settlement is approved, roughly $24.2 million will remain in the bankruptcy estate.  

Interestingly, the initial bankruptcy judge presiding over the case invoked what is known in her district as the "White Rule."  That informal rule, named after former bankruptcy judge Harold White, required that at least half of funds recovered in a bankruptcy estate should be returned to the victims.  In other words, this served to cap the amount of funds used by the estate to maintain or liquidate the businesses as well as compensate professionals involved in the case.  U.S. Bankruptcy Judge Marilyn Shea-Stonum, who is now retired, announced in late 2013 that it was her intention to invoke the "White Rule" with respect to whatever funds the Fair Finance trustee was able to recover.  Judge Shea-Stonum retired in late 2013, so it remains to be seen whether the current judge will follow a similar path.

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.