Colorado Ponzi Schemer Receives Eight Year Prison Sentence

A federal judge sentenced a Colorado man to eight years in federal prison for his role in a Ponzi scheme that bilked investors out of over $30 million.  Philip Lochmiller Jr. faced up to fifteen years in prison after he pled guilty in November 2010 to one count of conspiracy to commit wire and securities fraud and one count of money laundering.  Lochmiller's father, Philp R. Lochmiller Sr., who chose to go to trial rather than to plead guilty, was convicted by a federal jury in July of thirty-one counts, including money laundering, mail fraud, conspiracy, and conspiracy.  He currently is awaiting sentencing.

The Lochmillers operated Valley Investments, which purported to originate mortgages for as a licesned Colorado mortgage broker.  Along with assistant Shawnee Carver, the company acquired several parcels of land to develop affordable housing communities.  Newspaper advertisements solicited potential investors to finance the acquisition, promising annual returns of ten to eighteen percent in return.  Investors were given promissory notes that were purportedly secured by lots of land in the communities.  In total, over $30 million was raised from investors.  However, instead of using the funds for business purposes, the defendants paid expenses, personal bills, and made payments to existing investors in the form of interest and principal repayments.  The scheme came to an end in 2008 when the three were indicted.

Shawnee Carver was sentenced alongside Lochmiller Jr., and received a two-year sentence.  The elder Lochmiller faces a sentence of up to 415 years in federal prison, although federal sentencing guidelines will likely recommend a lower amount.  

A copy of the criminal complaint is here.

A link to the website established by the Receiver appointed to distribute assets to victims is here.

Secondary Market for Investor Claims Gaining in Popularity

Investors in now-infamous Ponzi Schemes run by those such as Bernard Madoff are now seeing renewed interest by financial institutions interested in buying any rights to proceeds eventually recovered and distributed by the court-appointed receiver or trustee.  These offers essentially represent both an opportunity for an investor to immediately receive a mutually-agreed amount for any future claim to proceeds in the Ponzi scheme and also a bet by the buying financial institution that the recovered proceeds will return an amount greater than for what the investor is willing to part with their claim.

The financial institutions rumored to be bidding for investor claims include Goldman Sachs, Deutsche Bank, UBS, and Royal Bank of Scotland.  Particularly noteworthy is the fact that the latter two are currently embroiled in litigation with the Madoff Trustee, Irving Picard, as a result of their alleged connections with Bernard Madoff Investment Securities, the broker-dealer utilized by Madoff to perpetrate the scheme.  As one commenter has noted, those banks facing litigation from Picard may be seeking to hedge any potential litigation losses by buying claims.  

The prospect of receiving a lump-sum payment in return for relinquishing any legal claim to future proceeds may entice investors who lost a substantial portion of their assets and may not have the financial stability to wait out the lengthy legal process of unraveling the scheme.  Interestingly enough, when the practice first began in early 2010, investors were offered an average of around 20-25 cents on the dollar for their claim to whatever Picard finally recovered.  However, when the estate of Jeffrey Picower settled with Picard in December 2010 for $7 billion and bringing Picard's then-total recovery to $10 billion, the offer to investors shot up to a range of 70% - 75% per allowed claim.  Of course, it goes without saying that those institutions now offering that amount have even more faith that Picard can continue to negotiate hefty settlements.

Additionally, the dynamics of distributions from recovered Ponzi assets may also favor banks in enticing investors to accept these offers.  Because the process of recovering funds is an ongoing procedure and is dependent on the conclusion of pending litigation, distributions are often made on a yearly or bi-yearly basis depending on the availability of funds.  Thus, it is not at all uncommon to have 3-5 distributions over the course of a Receivership, with a final distribution often coinciding with the official conclusion of the process.  The prospect of receiving an up-front payment will particularly appeal to those who are unable to wait out the lengthy process.