A Michigan man accused of operating a $1.5 million Ponzi scheme - which collapsed when he told victims that his account had been "hacked" - has been permitted to retain private counsel in lieu of continuing with his public defender using funds he had solicited in "donations" from friends that included several victims of the alleged scheme for which he faces charges. Jerry Stauffer, 66, was charged earlier this year by civil and criminal authorities with operating a $1.5 million Ponzi scheme that promised substantial profits from purported foreign currency trading. In addition to charges from the Commodity Futures Trading Commission alleging violations of the Currency Exchange Act, Stauffer was also indicted on wire fraud and money laundering charges. Stauffer has maintained his innocence.
The Alleged Scheme
According to authorities, Stauffer operated solicited potential investors beginning in 2009 by promising that he would use his foreign currency ("forex") trading expertise to generate significant returns of up to 10% monthly. Stauffer told potential investors that he was a highly successful forex trader, that he taught forex trading classes, and that he would conduct his forex trading at commodity broker Interactive Brokers. Stauffer also showed at least one investor past performance charts which were allegedly characteristic of the returns he promised. Based on these and other promises, Stauffer raised at least $1.5 million from victims.
However, authorities alleged that Stauffer was not the savvy trader he held himself out to be. According to the CFTC, Stauffer conducted minimal forex trading and ultimately incurred approximately $50,000 in trading losses. Despite conducting little trading, Stauffer made Ponzi payments to victims of approximately $1.2 million representing both returns of principal and the returns he had promised. However, in August 2013, Stauffer contacted his investors and claimed that his Interactive Brokers account had been hacked and that he had incurred significant losses as a result. In support, Stauffer provided a July 2013 account statement showing nearly $700,000 in purported losses. Stauffer told investors that he had contacted Interactive Brokers and been informed that the attack had occurred through his computer. Investors were also told that Stauffer hired a company called Cyber Investigation Services to look into the attack. According to the CFTC, this was all false.
In September, Stauffer sought court approval to hire private defense counsel in the place of his then-current public defender. While Stauffer was subject to an asset freeze order, he disclosed that he planned to fund his requested private counsel with more than $20,000 he had raised in donations through an email campaign to his "friends." However, further inquiry by the court revealed that at least four of those donors were, in fact, victims of Stauffer's alleged fraud who declared they were "firmly aligned" with Stauffer. Indeed, the government - which ultimately did not take any position with regard to Stauffer's request - revealed that these victims had actively resisted speaking with the government and had gone so far as to conceal their location to prevent the government from contacting them.
The court noted that a number of risks were presented in the unusual scenario where Stauffer's donors were also likely to be called as a witness, including the potential that Stauffer's counsel might "want to avoid questions suggesting that the donor witnesses themselves engaged in reckless or even potentially criminal wrongdoing." However, the court reasoned, these were risks that could - and would - be waived by Stauffer after full disclosure. Ultimately, in an order entered last week, the court sided with Stauffer and ruled that:
The Court is satisfied that there is good cause for the substitution; that the risk of conflict--though real--is not disqualifying; and that the risk of other distortion of the trial process can be managed through full disclosure of funding solicitations and sources, which defendant has agreed to provide. The defendant has been fully apprised of his rights and the risks, and has unequivocally recited his desire to proceed with prospective retained counsel, and his willingness to provide full disclosure to the government of his solicitations for funds, and the source of all funds provided for his defense.
A copy of the Order is below.