Feds Allege Family Insurance Business Was $40 Million Ponzi Scheme

Two Michigan brothers, along with one man's two daughters, were indicted on charges that their family-owned insurance business was a Ponzi scheme that defrauded hundreds of victims out of ten of millions of dollars.  Michael Holcomb and Gary Holcomb, along with Michael Holcomb's daughters Kristen Van Breemen and Jennifer Chalmers, were charged with one count of conspiracy to commit mail and wire fraud, nine counts of mail fraud, six counts of wire fraud, one count of conspiracy to commit money laundering, and six counts of money laundering.  In addition, Michael and Gary Holcomb were charged with one count of bank fraud and one additional count of money laundering.  If convicted of the charges, each of the defendants faces decades in prison.  

The Scheme

The Holcomb brothers operated Berjac of Portland and Berjac of Oregon (collectively, "Berjac"), which were family-owned insurance businesses originally established in the 1960s.  Berjac purported to operate an insurance premium financing business, which provided loans to small businesses for the purpose of paying those businesses' insurance premiums.  Those loans are considered low risk, as Berjac would retain an interest in the unused portion of the insurance premium if the business defaulted on its loan to finance the premium.  

Berjac solicited prospective investors with representations that they could earn safe and above-average returns through an investment in Berjac.  Investors were assured that Berjac was a safe and financially stable investment, and Berjac touted that it has never missed or otherwise defaulted on an interest payment or investor obligation.  Berjac provided investors with quarterly statements showing consistent appreciation on their investment, and investors were also told that they could add or withdraw funds from their investment at any time, and that they could do so without the inconvenience of filling new forms out.  Based on these representations, Berjac raised at least $43 million from investors.

The Scheme Collapses

However, authorities allege that Berjac operated a classic Ponzi scheme by commingling investor funds, using those funds to make "interest" payments and also diverting some funds for their own use, and failing to disclose that the operation was suffering significant losses.  Additionally, Berjac and its principals had been the subject of multiple regulatory actions.  One of the Berjac entities' previous managers, Peter Snook, previously served a 3.5-year sentence for operating one of the Berjac entities as a Ponzi scheme from 1987 to 1991.   And in 1996, the Oregon Division of Finance and Corporate Securities sanctioned Michael and Gary Holcomb for Berjac's unlawful sale of securities and the failure to disclose that investor funds were being used for unrelated real estate speculation projects.  

Another former Berjac entity, Berjac of Colorado, was sold in 2004 to Michael Turnock.  Turnock and another principal, William Sullivan, were arrested in 2012 and charged with operating that entity - then known as Bridge Premium Financing - as a Ponzi scheme masquerading as an insurance premium financing business.  Turnock is currently serving a 77-month prison sentence after pleading guilty to money laundering and mail fraud charges.

Bankruptcy

Berjac filed bankruptcy in 2012, disclosing $17 million in investor liabilities.  The FBI subsequently opened an investigation and an independent bankruptcy trustee was appointed to investigate Berjac's financial condition.  The trustee filed a lawsuit last year against four Oregon banks, accusing them of providing the "lines of credit that were an essential component to the continuation of the Ponzi scheme."  The suit also names an accounting firm that provided services to Berjac.  The suit seeks at least $50 million in damages, as well as $10 million in punitive damages.  

The Indictment is below:

US v Holcomb

California Men Sentenced For $134 Million ATM-Leasing Ponzi Scheme

Two California men received prison sentences for orchestrating a massive Ponzi scheme that caused losses exceeding $100 million in what victims thought was a highly successful ATM leasing venture.  Joel Barry Gillis, 75, and Edward Wishner, 77, were sentenced by U.S. District Judge S. James Otero to prison terms of 10 years and 9 years, respectively.  The men received sentences lower than the recommended federal sentencing guidelines, with Judge Otero indicating that he accounted for their age, early decision to plead guilty, and cooperation with a federal court-appointed receiver to recover assets for victims.  Each was ordered to report to prison on December 28, 2015.

Gillis and Wishner operated Nationwide Automated Solutions ("NAS").  According to authorities, NAS solicited investors since 1999 by promising that their funds would be used to place, operate, and maintain automated teller machines ("ATMs") throughout the country.  Investors were told that they could purchase ATMs for a price ranging from $12,000 to $19,800 from NAS, and could then lease those same ATMs back to NAS for a 10-year term in exchange for a "rent" of $.50 per ATM transaction.  A contract memorializing the investment purportedly contained the serial number and the location of the ATM, and investors were guaranteed an investment return of at least 20% annually.  Notably, each contract also included a "non-interference" clause prohibiting the investor from interfering with the operation of the ATM by contacting the locations where the ATM was installed or any ATM service provider.  An analysis of NAS' bank accounts from 2013 forward showed that more than $123 million was raised from investors in just that short period.

While the company's records showed that it had sold and was leasing back more than 31,000 ATMs to investors as of June 2014, third-party settlement reports provided by NAS's ATM servicers show that only 253 ATMs were serviced.  As the SEC previously alleged,  

Defendants have “sold” and “leased back” tens of thousands of ATMs to NASI investors that they never owned, that they never operated, and that may have never existed. 

For example, while NAS's internal records claimed ownership or operation of nearly 700 ATMs located at "Casey's Convenience Mart" locations in the Midwest, the Commission's investigation showed that neither NAS nor any of its investors owned or serviced any of those ATMs.  Rather, those ATMs were owned by an unrelated company with no affiliation with NAS.  The Commission also alleged that NAS often sold and leased back the same ATM to more than one investor.  Of the ATMs that NAS did service, those revenues were minimal and were dwarfed by the significant amount of new investor funds.  Those investor funds were used to pay returns to existing investors - a classic hallmark of a Ponzi scheme.  

Authorities alleged that NAS bounced over $3 million in checks to investors in August 2014, with investors told that a "glitch" in connection with retention of a new outside firm handling investor payments was to blame.

Authorities began investigating NAS shortly after the bounced checks, with court records in the SEC's case demonstrating that an application for a temporary injunction and other relief was filed on September 17, 2014.  Criminal charges were filed several months later, and the men pleaded guilty earlier this year to one count of conspiracy, two counts of mail fraud, and one count of wire fraud.  

A receiver, William Hoffman, was appointed at the request of the SEC, and a website has been established at http://www.nasi-nationwideatm.com/ for interested parties.  

Oddly enough, multiple Ponzi schemes centered around promised riches from ATM leasing or rentals have popped up in the past few years, including here, here, and here.

Jury Holds Ernst & Young Liable For Madoff Losses

A Washington jury has found accounting firm Ernst & Young ("E&Y") liable for at least $10 million of losses suffered by a Washington investment company that invested in Bernard Madoff's infamous Ponzi scheme through a "feeder fund" audited by the firm.  FutureSelect Portfolio Management ("FutureSelect"), a Washington-based financial firm, obtained a total verdict of $20 million resulting from what it alleged were more than $129 million in losses suffered from its exposure to Madoff's scheme through a Madoff feeder fund, Tremont Partners.  The verdict is significant not only because of the large amount of damages but also because such verdicts have been relatively rare against accounting or auditing firms in Ponzi scheme litigation.  It is expected that E&Y will appeal the verdict.

Background

FutureSelect managed several investment funds, and was approached by a representative of Tremont in 1997 regarding an investment in the Rye Funds.  Tremont served as the general partner of the Rye Funds, which was one of the prime feeder funds that funneled investor funds into Bernard L. Madoff Investment Securities ("BLMIS").  During those discussions, FutureSelect was told it was being given a "rare, and potentially fleeting" opportunity to invest with Madoff and was provided with audit opinions from auditing firm Goldstein Golub Kessler.  Based on these opinions and representations from Tremont about its oversight and constant monitoring of Madoff, FutureSelect invested nearly $200 million in the Rye Funds from 1998 to 2007.  E&Y audited several funds comprising the Rye Funds from 2000 to 2003, and also conducted "surprise" audits of Tremont from 2000 to 2008.  In 2008, Madoff's fraud came to light and estimated victim losses were pegged at nearly $20 billion.  FutureSelect's net loss was estimated at nearly $130 million.

Tremont reached a $1 billion settlement with Irving Picard, the bankruptcy trustee appointed to liquidate BLMIS, who had accused the firm of ignoring red flags associated with Madoff.  The settlement allowed claims asserted by several Tremont funds to proceed in the bankruptcy proceeding, providing an avenue for those funds to compensate their investors who were excluded from Picard's claim proceeding due to their status as "indirect" investors.  Claimants with allowed losses in the Madoff bankruptcy have recovered over 50% of their losses to date and are expected to recover most, if not all, of their losses when the bankruptcy proceeding concludes.  However, FutureSelect opted out of the settlement with the intent of pursuing other parties for its losses.  

FutureSelect filed the suit against E&Y, Goldstein, and others in 2010, asserting negligence claims and violations of Washington's State Securities Act.  A trial court dismissed the complaint, but an appeals court subsequently reinstated the suit in 2014.  FutureSelect settled its claims against Goldstein and was compelled to arbitrate its claims against another firm, KPMG, so E&Y was the only defendant left standing to face trial.

The Trial

Trial began in mid-October, with E&Y pinning its defense on the claim that it had done its job and that it was only one of many who failed to detect Madoff's fraud.  E&Y defended its actions, saying it had "scrupulously" followed generally accepted accounting principles in auditing one of the many funds that had used Madoff as its investment adviser.  Lawyers for FutureSelect scoffed at these claims, claiming that E&Y had simply relied and signed off on audits performed by a little-known firm, Friehling & Horowitz ("Friehling").  (editor's note: David Friehling, the principal of that firm, was referred to by Madoff as the "dumb auditor" and was the first to be charged criminally for his role in auditing Madoff's books.  He ultimately received a sentence of probation.)  

FutureSelect argued that E&Y blindly accepted and relied on Friehling's audits of BLMIS and that a simple review would have demonstrated that the firm's purported assets did not exist.  Indeed, if E&Y would have looked into Friehling, it would have discovered that the nondescript firm was not peer reviewed and was in violation of industry standards.  E&Y countered that the accusations were "all based on hindsight" andthat "no audit of a Madoff-advised fund could have detected this Ponzi scheme." 

FutureSelect ultimately sought approximately $200 million from E&Y.  The jury deliberated several days after closing arguments earlier this week and ultimately returned a verdict with mixed findings on the WSSA counts but finding against E&Y on the negligent misrepresentation claims.  The jury awarded damages of $20.3 million, with E&Y liable on half that amount.  Lawyers for FutureSelect estimate that E&Y could be on the hook for nearly $25 million when factoring in prejudgment interest.  

Rare Recovery

While rare, recoveries from  accounting firms for their role in failing to detect Ponzi schemes are on the rise.  Many liken the firms as gatekeepers between investors and fraud-feasors and argue that they should be held accountable along with other gatekeepers such as lawyers.  While the recovery against E&Y is noteworthy because it represents a jury finding against an auditing firm, the recovery is not unprecedented in Ponzi-related litigation against auditors.  A Florida CPA firm paid $3.5 million in 2007 to resolve claims of inadequate auditing relating to its work for a massive insurance Ponzi scheme. Another Florida-based accounting firm, Kaufman Rossin, paid nearly $10 million in 2010 to settle claims (without admitting liability) brought regarding the firm's work surrounding the Thomas Petters Ponzi scheme.  An Indiana firm, DeWitt & Schrader, paid $1.8 million last year over its accounting work for a $9 million Ponzi scheme.  And BDO USA LLP paid $40 million earlier this year to settle claims for its auditing of several entities connected to the massive Ponzi scheme masterminded by Allen Stanford.  

Madoff: Coming Soon To A Television Near You

Nearly seven years after his arrest on a cold December morning in 2008, the Madoff name has achieved a level of contempt usually reserved for violent killers and depraved criminals.  This is not particulary surprising, considering that the man masterminded the largest Ponzi scheme in history and directly disrupted the lives of thousands and thousands of victims who blindly trusted the Wall Street veteran to manage their wealth. Yet Madoff, unlike the vast majority of his brethren currently serving sentences for the same namesake crime, has not receded into darkness.  Rather, Madoff's current profile is arguably larger than ever - a situation the deeply-private Madoff very likely would have eschewed before his arrest - and the future is even brighter as the conman's story is set to play out in several high-profile television projects.

Madoff's arrest in December 2008 sent shockwaves worldwide and gave the first glimpse at just how extensive the scheme was.  His victim list read as a "Who's Who" of finance, sports, and entertainment circles, and a Spanish law firm estimated that there could be as many as 3 million direct and indirect victims worldwide.  A court-appointed bankruptcy trustee ultimately allowed approximately 2,500 claims out of nearly 17,000 claims received, rejecting the majority due to the indirect nature of their association with Madoff.  Through Madoff's membership in an industry-funded group and the efforts of the court-appointed trustee, it is likely that victims with approved claims will likely recoup most or all of their losses.

As the owner of Bernard L. Madoff Investment Securities, Madoff was intensely private.  While his reputation grew following several high-profile stints with regulatory agencies, including as non-executive chairman of the NASDAQ stock market, Madoff increasingly shunned taking new investors into his exclusive club.  Ironically, many were rebuffed and could never get Madoff to take their money.  Yet despite the size of his firm, which would have ranked him among the top money managers, Madoff enjoyed a life of relative secrecy outside of his devotion to his charitable causes.

Yet while many assumed that Madoff (and the resulting media coverage) would simply fade away with the passage of time, various factors ensured that Madoff remained a consistent news topic.  One was trustee Irving Picard's efforts to collect assets to be distributed to Madoff's victims, including largely-unsuccessful suits against big banks, largely successful suits to recover "false profits" from Madoff's more fortunate investors, and efforts to recoup the riches paid to the Madoff family.  Madoff himself also played a role, as he began to communicate with various journalists intermittently that invariably saw wide coverage.  Whether it was a Christmas letter decrying the pervasiveness of insider trading, an email touting his sons' innocence, or an email that his fraud wasn't so bad, Madoff remained a topic of conversation.

In addition to the constant news coverage, the sheer reach of Madoff's fraud has also inspired other more lasting works.  A 2010 play by playwright Deb Margolin called "Imaging Madoff" was well-received for its depiction of a fictional conversation between Madoff and an unfortunate victim.  At least thirteen books have been written about the scandal, including the well-reviewed book by veteran New York Times reporter Diana B. Henriques that featured the first in-person interview granted by Madoff.

Recently, both ABC and HBO announced plans to develop projects chronicling Madoff's rise and fall.  ABC has commissioned a two-part miniseries starring Richard Dreyfuss and Blythe Danner playing the role of the conman and his wife.  The series is based on The Madoff Chronices, written by Brian Ross, and will focus on Madoff's scheme and the impact and role of his family. 

Meanwhile, HBO has been at work at a film version based in part on Diana Henriques' Madoff book, with an impressive cast that includes Robert De Niro playing Madoff, Michaelle Pfeiffer cast as Ruth Madoff, and Hank Azaria as Madoff right-hand man Frank DiPasquali.  Henriques even lands a role as herself.  The film is being directed by Barry Levinson, who is perhaps best known for his Oscar-winning directing of Rain Man.  It appears that ABC's mini-series will be the first-to-tv, as ABC has scheduled the project to air on February 3 and 4, 2016.  While HBO has been mum on a release date, the film is expected to be released sometime in 2016.  The film will be released solely on HBO and will not be in theaters.

Madoff is not scheduled to be released until November 14, 2139.

Ex-Lawyer Accused Of $3.4 Million Ponzi Scheme

A disbarred lawyer was arrested in New York and charged with operating a Ponzi scheme that duped his victims out of at least $3 million.  James A. MacCallum was arrested after a federal grand jury returned an indictment charging him with mail fraud.  MacCallum was arraigned last week and released on bond, though Magistrate Judge Jeremiah J. McCarthy warned MacCallum against any attempt to flee to his native Canada.  If convicted, MacCallum could face up to twenty years in prison for each mail fraud count.

According to authorities, MacCallum devised a scheme while he was a practicing attorney to solicit investors with the promise of outsized returns that resulted from real estate and life insurance policies.  Through Andrew Mitchell Holdings, LLC ("AMH"), a company that he controlled, MacCallum issued promissory notes to investors bearing annual interest rates of at least 15%.  MacCallum allegedly encouraged potential investors to liquidate other investments so that they could invest with him.  In total, MacCallum raised over $3.4 million from investors.  However, prosecutors allege that MacCallum was running a classic Ponzi scheme in which he used new investor funds to pay fictitious returns to existing investors.  In addition, MacCallum is accused of misappropriating investor funds for his own personal use, including personal travel and office expenses.

MacCallum also entered into a settlement agreement with the New Brunswick Securities Commission ("NBSC") in February 2013 relating to the same allegations.  A settlement agreement evidencing that settlement includes a section indicating that:

MacCallum is remorseful of his inability to repay the investments and the resulting losses to the investors. This has had an extremely detrimental effect on his family relations and his financial well-being. MacCallum is presently insolvent, and has been suspended from the practice of law in the State of New York as a result of his capital raising activities. 

At his first appearance last week, a federal prosecutor warned that the estimated $3.4 million loss was preliminary and could ultimately be much higher.