Articles Posted in Ponzi Scams

Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls

Published on: June 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is suing investment adviser John Geringer for allegedly running a $60M investment fund that was actually a Ponzi scheme. Most of Geringer’s fraud victims are from the Santa Cruz, California area.

According to the Commission, Geringer used information in his marketing materials for GLR Growth Fund (including the promise of yearly returns in the double digits) that was allegedly “false and misleading” to draw in investors. He also implied that the fund had SEC approval.

While investors thought the fund was making these supposed returns by placing 75% of its assets in investments connected to major stock indices, per the SEC claims, Geringer’s trading actually resulted in regular losses and he eventually ceased to trade. To hide the fraud, Geringer allegedly paid investors “returns” in the millions of dollars that actually came from the money of new investors. Also, after he stopped trading in 2009, he is accused of having invested in two illiquid private startups and three entities under his control. The SEC is seeking disgorgement of ill-gotten gains, financial penalties, preliminary and permanent injunctions, and other relief.

In an unrelated securities case, this one resulting in criminal charges, Michigan investment club manager Alan James Watson has been sentenced to 12 years behind bars for fraudulently soliciting and accepting $40 million from over 900 investors. Watson, who pleaded guilty to the criminal charges, must also forfeit over $36 million.

Watson ran and funded Cash Flow Financial LLC. According to the US Justice Department, he lost all of the money on risky investments—even as he told investors that their money was going to work through an equity-trading system that would give them a 10% return every month. In truth, Watson only put $6 million in the system, while secretly investing the rest in the undisclosed investments. He would go on to also lose the $6 million when he moved this money into risky investments, too.

Watson ran the club as a Ponzi scam so investors wouldn’t know what he was doing. He is still facing related charges in a securities case brought by the Commodity Futures Trading Commission.

In other institutional investments securities news, the International Organization of Securities Commissions’ technical committee is asking for comments about a new consultation report describing credit rating agencies’ the internal controls over the rating process and the practices they employ to minimize conflicts of interest. The deadline for submitting comments is July 9.

The report was created following the financial crisis due to concerns about the rating process’s integrity. 9 credit rating agencies were surveyed about their internal controls, while 10 agencies were surveyed on how they managed conflict.

IOSCO’s CRA code guides credit raters on how to handle conflict and make sure that employees consistently use their methodologies. Two of the report’s primary goals were to find out how get a “comprehensive and practical understanding” of how these agencies deal with conflict when deciding ratings and find out whether credit ratings agencies have implemented IOSCO’s code and guiding principals.

Read the SEC’s complaint against Geringer (PDF)

Investment Club Manager Sentenced To 12 Years In Prison For $40 Million Fraud, Justice.gov, May 24, 2012

Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest, IOSCO (PDF)

More Blog Posts:
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

Leave The 2nd Circuit Ruling Upholding Madoff Trustee’s “Net Equity” Method for Investor Recovery Alone, Urges SEC to the US Supreme Court, Stockbroker Fraud Blog, June 5, 2012

Leave The 2nd Circuit Ruling Upholding Madoff Trustee’s “Net Equity” Method for Investor Recovery Alone, Urges SEC to the US Supreme Court

Published on: June 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants the US Supreme Court to leave standing the U.S. Court of Appeals for the Second Circuit’s decision upholding Irving Picard’s “net equity” approach to compensating victims of Bernard Madoff’s Ponzi scam. Picard is the Securities Investor Protection Act trustee of Bernard L. Madoff Investment Securities LLC. Madoff defrauded investors in a multibillion-dollar Ponzi scam.

SIPA lets investors get back their “net equity,” and Picard’s formula for compensation is to calculate a victim’s net losses-how much they put in, minus how much they got from the failed brokerage firm. He then gives these net losers a portion of the available money. Investors that have net gains-meaning they took out more funds than they invested-must wait until the net losers are fully paid. It is these clients with net gains that are appealing the Second Circuit’s decision and contending that their losses should instead be calculated from the last account statement issued by Madoff’s financial firm.

The SEC disagrees with them. In fact, the Commission doesn’t believe that these Madoff investors should be allowed to appeal a decision that won’t let them receive payment for bogus Ponzi profits that were noted on account statements. In its opposition brief to the nation’s highest court, the SEC said the Second Circuit ruling was “correct” and doesn’t conflict with past decisions. It also said that considering the circumstances and the “relevant statutory language,” the “net equity” approach “was legally sound.”

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme

Published on: May 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against fund manager Jason J. Konior and his Absolute Fund Management and Absolute Fund Advisors for running a Ponzi-like investment scheme that was supposed to maximize investors’ profits and instead allegedly funneled $2 million of clients’ money to pay for earlier investors’ redemption requests, as well as business and personal expenses. The SEC is charging Konior and his two firms with violating the Securities Exchange Act of 1934’s antifraud provisions. The Commission is seeking financial penalties, permanent injunctive relief, and disgorgement of ill-gotten gains.

According to SEC, beginning at least last November, Konior and the two firms raised about $11 million from investors by selling them Absolute Fund LP limited partnership interests. Konior allegedly touted this investment vehicle as having $220 million in trading capital. He and his two companies also allegedly made false claims that the fund would contribute millions of dollars as a promised match to clients’ investments (Konior had told investors that Absolute would put in up to nine times what they originally contributed), combine new investors’ money with its principal, and put their cash in brokerage accounts that investors could use to trade securities through. This “first loss” trading program investors was supposed to allow investors to significantly up their potential profits.

Per Absolute Fund Advisors’ marketing collateral, Absolute would give seed capital allocations to emerging and new hedge funds, which would then buy limited partnership interests in the fund. Absolute was supposed to match the investments by an up to 9:1 ratio. This means that if a hedge fund invested $1 million in Absolute then the fund would match it with $9 million, which means there would be $10 million in investment capital.

Absolute was to put this mix of funds in a brokerage firm sub-account to be managed by the hedge fund investor. Per the “first loss model” trading losses in the sub-account would be 100% allocated to the hedge fund investor up to the sum of its capital contribution. The hedge fund investor was then supposed to get 50-70% of trading profits.

Unfortunately, this trading program that was promised never went into operation. The investment fund not only neglected to match investors’ funds but also it failed to return their money when they asked to withdraw their investments.

Last week, the SEC secured an asset freeze order against Konior and his two companies. All three parties have consented to this order without denying or admitting to the securities charges. The Commission says that the current assets of Absolute are only a “fraction” of how much investors are still owed.

SEC Shuts Down $11M Ponzi Scam, May 25, 2012

Read the complaint (pdf)

More Blog Posts:
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012
Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA, Stockbroker Fraud Blog, March 28, 2012
Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012 Continue Reading ›

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man

Published on: May 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has charged David M. Connolly with running a Ponzi-like scam involving investment vehicles that bought and managed Pennsylvania and New Jersey apartment rental buildings. According to prosecutors in New Jersey, Connolly’s alleged victims were defrauded of $9 million. He also faces criminal charges.

None of Connolly’s securities offerings were registered with the SEC. (Since 1996, he had raised more $50 million from over 200 clients who invested in over two dozen investment vehicles.)

Per the Commission’s complaint, in 2006 Connolly allegedly started misrepresenting to clients that their funds were to be solely used for the property linked to the vehicle they had in invested in when (unbeknownst to them) he actually was mixing monies in bank accounts and using their funds for other purposes. Although clients were promised monthly dividends from cash-flow profits that were to come from apartment rentals and their principal’s growth from property appreciation, these projected funds did not materialize. Instead, Connolly allegedly ran a Ponzi-like scam that involved earlier investors getting their dividend payments from the money of newer investors.

He also allegedly made materially false and misleading omissions and statements about: investors’ money being placed in escrow until a purported real estate transaction closed, the financial independence and state of each property, the amount of equity victims had in properties, and the condition of each property. (Also containing allegedly false material misrepresentations and omissions was the “offering prospectus,” which provided information about how the investment vehicles would use the investor funds, the projected investment returns, prior vehicles performances, the mortgage financials for the real estate held in the investment vehicles, and the apartment buildings’ vacancy rates.)

Connolly is accused of improperly using proceeds from refinanced properties to keep his scheme running, and he even allegedly took $2 million of investors’ funds for himself. After he stopped giving dividend payments to investors in April 2009 (when money from new investors stopped coming in and the investment vehicles’ properties went into foreclosure), Connolly allegedly kept making sure he was getting dividends and a $250,000 income from the remaining client funds.

Meantime, a federal grand jury has charged him with one count of securities fraud, three counts of wire fraud, five counts of mail fraud, and seven counts of money laundering. A conviction for securities fraud comes with a 20-year maximum prison term and a $5 million fine. The other charges also come with hefty sentences and fines.

Read the SEC Complaint (PDF)

Multimillion-Dollar Real Estate Ponzi Schemer Indicted For Fraud And Money Laundering, Justice.gov, May 17, 2012

More Blog Posts:
Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI, Institutional Investor Securities Blog, May 15, 2012

Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A judge has sentenced Joseph Blimline to 20 years in prison over his involvement in two complex, oil and gas Ponzi scams that took place in Texas and Michigan. The Dallas man, who was sentenced to two counts of conspiracy, was actually sentenced to 240 months behind bars for each count, but U.S. District Judge Marcia A. Crone said the sentences could run concurrently. He also has to pay restitution to his Ponzi scheme victims.

Blimline is accused of working with others to run a Michigan Ponzi scam between November 2003 and December 2005. That financial fraud made more than $28 million before it fell part. The government says that fraudsters promised investors inflated return rates. Blimline would then use payments from newer investors to pay previous investors, while also diverting investor payments for his personal gain.

The scammers then moved the Ponzi scheme to Texas in 2006 where they started running Provident Royalties in Dallas. That fraud eventually made more than $400 million from about 7,700 investors. Blimline was accused of also making materially false representations to Texas and failing to disclose material facts to investors to get them to invest in Provident. Once again, investor money was used to pay other investors. Also, Blimline got millions of dollars in unsecured loans from the investors’ money and directed Provident’s purchase of worthless assets belonging to the Michigan venture.

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules

Published on: April 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Rep. John Larson (D-Conn.) and Rep. Chris Murphy (D-Conn.) are calling on the Commodities Futures Trading Commission to crack down on excessive energy market speculation. They believe that this type of speculation on oil that is “based on world events” is “abusive” and has been creating difficulties for Americans.

In their released statement, Murphy said that such speculation ups the price of a gallon of gas by 56 cents. The two lawmakers want the futures and option markets regulator to swiftly implement rules that have already been passed to curb excessive speculation.

In other commodities/futures trading news, last month the U.S. District Court for the Eastern District of Texas ordered two men and their company Total Call Group Inc. to pay over $4.8 million for allegedly producing false customer statements and making bogus solicitations related to an off-exchange foreign currency fraud. In CFTC v. Total Call Group Inc., Thomas Patrick Thurmond and Craig Poe will pay $1.62 million and $3.24 million, respectively. Per the agency, between 2006 through late 2008, the two men solicited about $808,000 from at least four clients for trading in foreign currency options.

Earlier this month, another company, registered futures commission merchant Rosenthal Collins Group LLC, consented to pay over $2.5 million over CFTC allegations that it did not adequately supervise the way the firm handled an account linked to a multibillion dollar Ponzi scam. The account, held in Money Market Alternative LP’s name, experienced “significant change” between April 2006 and April 2009 in how much money it took in. For instance, the CFTC says that even though the account at inception reported a $300,000 net worth and a $45,000 yearly income, deposits varied from $2 million to $14 million a year. RCG is also accused of failing to look into and report excessive wire activity involving the account. As part of the CFTC securities settlement, the financial firm consented to pay a $1.6 million fine and disgorge $921,260, which is how much RCT made in account fees.

Just three days before, the CFTC announced that its swaps customer clearing documentation rule packaging will expand open access to execution and clearing, enhance transparency, lower cost and risks, and generate competition. The rules will not allow arrangements involving swap dealers, designated clearing organizations, major swap participants, and futures commission merchants that would limit how many counterparties a customer can get into a trade with, impair a client’s ability to access a trade execution on terms reasonable to the best terms that already exist, limit the position size a customer can take with an individual counterparty, and not allow compliance for specified time frames for acceptance of trades into clearing. Also, the CFTC is thinking about adopting definitions for swap dealers, major security-based swap participant eligible contract participant, security-based swap dealer, and major swap participant. These entities were created under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Meantime, MF Global Inc. (MFGLQ.PK) liquidation trustee James Giddens reportedly believes that he can make claims against certain company employees. Possible claims again such persons could include allegations of customer funds segregation requirement violations and breach of fiduciary duty. Although MF Global had told regulators that it was unable to account for customer funds of up to $900 million when it filed for bankruptcy protection, investigators are now saying that this figure is closer to somewhere between $1.2 billion and $1.6 billion.

Commodities Futures Trading Commission

Trustee May Sue MF Officials, NY Times, April 12, 2011
CFTC Orders Rosenthal Collins Group, LLC, a Registered Futures Commission Merchant, to Pay More than $2.5 Million for Supervision and Record-Production Violations, CFTC, April 12, 2012
CFTC v. Total Call Group Inc.

More Blog Posts:
CFTC Says RBC Took Part in Massive Trading Scam to Avail of Tax Benefits, Stockbroker Fraud Blog, April 12, 2012
Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud, Stockbroker Fraud Blog, February 23, 2012
CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012 Continue Reading ›

Texas Securities Fraud: State Law Class Action in R. Allen Stanford’s Ponzi Scam Not Barred by SLUSA

Published on: March 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a reversal of a district court’s decision, the U.S. Court of Appeals for the Fifth Circuit ruled that the Securities Litigation Uniform Standards Act does not bar the investor state law class action lawsuit that was filed by victims of R. Allen Stanford’s Ponzi scheme. The case is Roland v. Green.

The appeals court said that the state court securities lawsuits, which are claiming common law and statutory violations, could go forward because the alleged fraud is only tangentially related to the buying and selling of covered securities under SLUSA. Four complaints are on appeal. In each case, investors submitted state court actions that charged a number of defendants with misleading them into using their individual retirement accounts to invest in Stanford International Bank-issued certificate of deposits that have since proved worthless. Investors have lost $7 billion in Stanford’s Ponzi scam.

The defendants had the lawsuits moved to the U.S. District Court for the Northern District of Texas, which found that SLUSA precluded the claims because of their connection to a covered security. Under SLUSA, state class actions claiming fraud related to the sale or purchase of a covered security are barred. The district court judge in Dallas had dismissed the cases because Stanford marketed the CDs as regulated and securities-backed and because certain investors had sold securities to finance their purchase of the CDs, this, placed the CD-related suits under SLUSA.

SEC and SIPC Clash Over Standard of Proof Necessary to Insure Investors For Stanford Ponzi Fraud Losses

Published on: March 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the Securities Investor Protection Corporation are at odds over what the standard of proof should be used for the SEC’s application to make SIPC start liquidation proceedings for Stanford Group Co. The SEC recently sued the non-profit corporation, which is supposed to provide coverage protection for investors in the event that the brokerage firm they are working with fails. The SIPC has so far refused to provide the defrauded investors of R. Allen Stanford’s $7 billion Ponzi scam with any compensation, contending that the Stanford bank involved in the scam was Stanford International Bank Ltd. in Antigua and not SIPC member Stanford Group. Stanford has been convicted on 13 criminal counts related to the financial fraud.

During a U.S. District Court for the District of Columbia hearing, SC chief litigation counsel Matthew Martens said the probable cause standard is sensible in light of the Securities Investor Protection Act’s structure. SIPC lawyer Eugene Frank Assaf Jr., however, contended that the preponderance of the evidence standard is the one that should be used. Assaf said this should be the standard because this is SIPC’s only chance to seriously challenge the “compulsion issue.”

The SEC and SIPC have been battling it out since June 2011 when the Commission asked the latter to start liquidation proceedings on the grounds that individuals who had invested in the Ponzi scam through SGC deserved protection under SIPA. SIPC, however, did not act on this request. So the SEC went to court to get an order compelling the nonprofit organization to begin liquidating. The Commission was granted a partial win last month when the court found that a summary proceeding would be enough to resolve the SEC’s application.

Some 21,000 clients who purchased CD’s through SGC would be able to file claims for reimbursement through SIPA if the SEC prevails in this case.

Earlier this month, SIPC CEO and President Stephen Harbeck stood by the entity’s decision to not provide loss coverage to the victims of R. Allen Stanford’s Ponzi scam. When giving testimony to the House Financial Services Capital Markets Subcommittee, Harbeck noted that Stanford’s investors made the choice to send their assets to an offshore bank that wasn’t protected by the US government.

He pointed to the SEC’s own statements regarding how the CDs these investors purchased paid return rates that were “excessive” and likely “impossible.” He said that SIPA has never been interpreted to “pay back the purchase price of a bad investment. ”

SEC Suit Pursues Payouts by SIPC, The Wall Street Journal, December 13, 2011

Securities Investor Protection Corporation

More Blog Posts:

SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Blog, February 10, 2012 Continue Reading ›

FINRA Fines AXA Advisors $100,000 For Allegedly Not Firing Broker who Ran Ponzi Scam Sooner

Published on: March 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

AXA Advisors LLC will pay a $100,000 fine to settle Financial Industry Regulatory Authority allegations that it delayed too long before firing a broker who was also the mastermind of a Ponzi scam. The financial firm turned in a Letter of Acceptance, Waiver, and Consent prior to there having to be a regulatory hearing, without denying or admitting to the findings, and without an adjudication of any issue. AXA Advisors is a subsidiary of AXA Financial, Inc., which is an AXA Group member.

Kenneth Neely, a former registered representative, started working with AXA in its Clayton, Missouri office in August 2007. FINRA contends that already by then, Neely had been the subject of four client complaints. Three of these were securities arbitrations over business practices he employed with previous employees. (Prior to working at AXA, he was registered with Stifel, Nicolaus & Co., Inc. and UBS PaineWebber, Inc.) The SRO believes that AXA also knew that Neely was having financial problems at the time.

Neely was permanently barred by FINRA in 2009 for running the Ponzi scam, which bilked its victims of $600,000. Many of the investors he defrauded belonged to his church. According to the SRO, Neely to conceal his financial scheme by having investors pay $2K to $3K to his wife. He also created fake invoices to make them appear as if they were actual ownership certificates. He did pay investors about $300,000. A lot of his investors’ money went toward supporting his extravagant lifestyle. Neely eventually pleaded guilty to the federal crime of mail fraud. He was sentenced to 37 months in months in prison and ordered to pay restitution in the amount of $618,270.

Per the AWC, Neely started running a Ponzi scam in 2001 while he was still working at UBS. He continued his fraud operation while at Stifel and when he went to go work with AXA. He persuaded AXA clients, Stifel customers, and others to take part in the St. Louis Investment Club, which was a fake club and put their money in the St. Charles REIT, which was a bogus real estate investment trust. After he admitted to converting and commingling funds. AXA fired him in July 2009.

However, it was as early as 2008, when AXA conducted its yearly audit of Neely, that a review of his computer brought up an Excel spreadsheet noting eight people’s payment schedules. Per the AWC, these people were investors in Neely’s fraud. An AXA examiner asked Neely to explain the spreadsheet and the broker claimed that the figures were for showing a potential client/friend, who wanted to start a business, how to handle his finances. The AWC alleges that this explanation was a false one.

FINRA found that AXA failed to properly supervise or investigate Neely by not responding appropriately to the spreadsheet, his excuses, or the fact that he had a questionable history. AXA has now been both sanctioned and fined.

AXA Fined $100,000 For Not Axing Ponzi Broker Sooner, Forbes, March 15, 2012

Ex-AXA Broker Barred by Finra After Ponzi Scheme, New York Times, July 28, 2009

More Blog Posts:
Stifel, Nicolaus & Co. and AXA Advisors Broker Charged in Ponzi Scheme Victimizing Church Members, Stockbroker Fraud Blog, November 5, 2009
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, February 10, 2011 Continue Reading ›

Texan R. Allen Stanford Convicted on 13 Criminal Counts Over $7.2B Ponzi Fraud

Published on: March 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Nearly three years after he was indicted for defrauding investors in a $7.2 billion Ponzi scam involving certificates of deposit that are now worthless, a Houston jury has convicted R. Allen Stanford of 13 of 14 criminal counts, including fraud, conspiracy to commit money laundering, conspiracy to commit wire or mail fraud, wire fraud (from April 24, 2006, December 24, 2008, January 5, 2009, and February 12, 2009), mail fraud, and obstructing investigators. The only count jury members found him not guilty of was wire fraud (from February 2, 2006). Collectively, the Texas financier’s convictions carry prison sentences totaling up to 230 years.

Prosecutors depicted Stanford, 61, as a con man that used investors’ money to get very rich and pay for his businesses. (At one point, his net worth was over $2 billion.) They also say he bribed regulators so he could get away with his scam.

During his criminal trial, financial statements e-mails that were presented as evidence and ex-employees who testified helped paint a picture of the Texan as someone who spent 20 years defrauding investors by selling CDs through his bank in Antigua. James M. Davis, who served as former CFO for Stanford’s different companies, also was a witness for the prosecution. He stated that he and Stanford together falsified annual reports, bank records, and other documents to hide the fraud. Prosecutors contended that Stanford lied to depositors from over 100 nations by claiming that their cash was being invested in bonds, stocks, and other securities.