Authorities Charge Cay Clubs Principals With Fraud In Alleged $300 Million Ponzi Scheme

The principals of the now-defunct Cay Clubs Resorts and Marinas ("Cay Clubs") were indicted on multiple bank fraud and conspiracy counts in what authorities alleged was a massive $300 million Ponzi scheme.  Fred Davis Clark, Jr., a/k/a Dave Clark, 56, and Cristal R. Clark, a/k/a Cristal R. Coleman, face the charges after originally being arrested and charged earlier this summer with obstruction and fraud charges in connection with their operation of other businesses not directly related to Cay Clubs.  The new charges stem from their operation of Cay Clubs, which bilked investors out of hundreds of millions of dollars over the purported refurbishing of luxury condos.  The Clarks face charges of bank fraud and conspiracy to commit bank fraud, with the bank fraud charges carrying a maximum 30-year prison sentence.  


Cay Clubs raised more than $300 million from over 1,000 investors through the sale of interests in luxury resorts to be developed nationwide.  Fred Clark served as Cay Clubs' chief executive officer, while Cristal Clark was a managing member and served as the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxuxy resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% TO 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs used incoming investor funds to pay leaseback" payments to existing investors in what authorities alleged was a classic example of an ongoing Ponzi scheme.  After an investigation that spanned several years, the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Cay Clubs and five of its executives, alleging that the company was nothing more than a giant Ponzi scheme.  However, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Criminal Investigation Continued

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Fred and Cristal Clark and coordinated their arrest and expulsion from Honduras and Panama where they had previously been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  The pair are currently being held without bond.

Even while the Commission's case foundered, it was apparent that criminal authorities continued to move forward with their investigation.  In April 2014, it was reported that immunity had been granted to two Florida attorneys who were previously involved in day-to-day Cay Clubs operations, including the concealment of the true nature of the company's operations from its lenders.  Attorneys Scott Callahan and Charles Phoenix reportedly testified that they helped conceal the existence of the "leaseback" payments from lenders to give the appearance that the sales to investors were that of real estate - and not securities. Indeed, Phoenix's immunity statement read, in part, that

"In Phoenix's view, there came a time during the course of the operation of Cay Clubs where it could fairly be described as a 'Ponzi scheme' due to its inability to pay existing leaseback obligations without new investor money..."

In a motion filed by one of Clark's attorneys in the Commission's case, it was alleged that Phoenix and Callahan gave the statements under the threat of criminal prosecution. 

Getting Around The Five-Year Statute of Limitations

While the Clarks were able to evade civil prosecution by the Commission by successfully contesting the Commission's adherence to the applicable statute of limitations, it appears that the government will not have the same problem in proceeding with the criminal charges.  Of note, the criminal charges emanate from the Clarks' interactions with their lenders, rather than investors.  The significance of this becomes apparent when reviewing the applicable criminal statutes and recent legislation.  For example, the criminal statute governing statutes of limitation provides:

Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.

18 U.S.C. 3282 (emphasis added).  Further, as part of the Fraud Enforcement and Recovery Act of 2009, Congress authorized the the government to prosecute cases against financial institutions, including mortgage lending businesses, using bank fraud, mail fraud, and wire fraud statutes, and extended the applicable statute of limitations from five years to ten years.  This exact scenario was recently outlined by Preet Bharara, the Assistant U.S. Attorney for the Southern District of New York:

“A lot of people thought the statute of limitations is five years in particular cases, but a bank fraud statute has a statute of limitations of 10 years.  If you’re talking about wire fraud and mail fraud, which is specifically five years, but if it affects a financial institution, it’s 10 years.”

By focusing on the Clarks' interactions with lenders, including their omission of certain information such as the "leaseback" arrangement with investors when obtaining lender financing, the government's plan to utilize the longer statute of limitations becomes very apparent.  However, it would not be surprising to see this position attacked by the Clarks.

Update 9/19: The superseding indictment is below:

Superseding Indictment