A California man who previously hosted a financial radio talk-show was indicted on charges that he masterminded a $20 million Ponzi scheme whose victims included his listeners. John Farahi, 54, was charged in a 40-count indictment that included a wide array of offenses including wire fraud,mail fraud, loan fraud, alteration of documents, and witness tampering. The charges carry a maximum of 717 years in federal prison. Also indicted was Farahi's attorney, David Tamman, whose representation of Farahi's brokerage firm in a number of corporate transactional matters included the preparation of various offering documents. Tamman, 44, once an attorney at prominent national law firm Greenberg Traurig, faces one count of conspiracy, three counts of obstruction of justice, five counts of alteration of records, and one count of being an accessory after the fact to the charged mail fraud and securities violations. Both have also been the target of previous civil enforcement actions by the Securities and Exchange Commission ("SEC").
According to authorities, Farahi operated NewPoint Financial Services ("NewPoint") since at least 2003 and represented to investors that their funds would be used to invest in low-risk investments like certificates of deposit, corporate bonds backed by the Troubled Asset Relief Program ("TARP"), and deeds of trust backed by substantial amounts of borrower equity. Many investors, like Farahi, were Iranian-American, and learned of NewPoint by word of Farahi's Los Angeles daily finance radio program hosted in Farsi. Farahi also previously hosted a satellite radio finance show, and was a frequent public speaker on the topic of finance. Potential investors who expressed interest were invited to make an appointment at NewPoint's office, where they were solicited to purchase debentures issued by NewPoint. Only a portion of the investors received a private placement memorandum ("PPM") explaining the investment and its risks.
Additionally, while the PPM was only provided to select investors, it also included disclosures stating the high-risk nature of the investments. In addition, with the alleged help of attorney Tamman, language was later added - after the offering had concluded - disclosing that roughly one-third of the money raised would be loaned to Farahi. In total, more than $20 million was raised through the debenture offering. The vast majority of the funds were transferred to a brokerage account overseen by Farahi that engaged in risky options trading. That account alone suffered more than $18 million in trading losses. Other investor funds were used to construct a multi-million dollar residence for Farahi and to make interest and principal payments to existing investors in Ponzi-fashion.
In April 2009, the SEC initiated an investigation into NewPoint and its debenture offerings. In an un-announced examination of NewPoint's office, the SEC discovered information that NewPoint might be engaged in offering fraud. After learning of the SEC's investigation, Tamman then quickly sought to add disclosure language regarding the loans to Farahi in various PPM's that were provided to investors in the 2003 and 2008 offerings.
In connection with the SEC's investigation, formal document requests were issued to NewPoint and Tamman seeking various documents provided to NewPoint investors. After NewPoint retained separate counsel, Tamman then provided the altered versions of the PPMs including the disclosures that Farahi was taking significant loans out of investor funds. These documents were produced to the SEC. However, the SEC soon became suspicious after noting discrepancies in the metadata saved in those offering documents, and requested the native copies of the documents. (Metadata is information saved by the word-processing program which can often be used to show revisions and other characteristics of the document.) Shortly after, Tamman then instructed his firm's IT department to remove the metadata from the documents, and provided those altered documents to outside counsel for production to the SEC. The unaltered documents were eventually provided to the SEC, who later initiated administrative proceedings against Tamman for improper professional conduct.
Radio and television shows are becoming more enticing to fraudsters as a conduit to solicit investments from listeners. A Florida man pled guilty in July to running a $1 million Ponzi scheme after hosting a regular Sunday morning television program entitled "Talk About Mortgages and Real Estate." Additionally, two former radio hosts were indicted in July for operating a $3 million real-estate Ponzi scheme that solicited investors through weekend radio infomercial shows called "Academy of Real Estate," "Money Intelligence" and "The Ken & Katie Show". And in 2009, authorities charged a Minnesota radio host with soliciting investors for a $190 million Ponzi scheme run by money manager Trevor Cook through the radio show, "Follow the Money," which was broadcast in more than 200 markets and on Christian shortwave radio.
A copy of the Complaint filed by the SEC is here.