PHOENIX—U.S. District Court Judge Mary H. Murguia today sentenced Christopher Livanos of New York City 20 years in prison for his role in an $8 million Ponzi scheme that sold fictitious “cashless ATM machines” to victims throughout the United States. Livanos, 50, pleaded guilty on March 2, 2010, to one count of Conspiracy to commit Mail Fraud and Wire Fraud, one count of Wire Fraud, and one count of Mail Fraud. Judge Murguia also ordered Livanos to pay $6,187,735 in restitution.
“This was a classic Ponzi scheme where the defendant preyed on and defrauded hundreds of victims with an enticing but utterly fictitious business opportunity,” said U.S. Attorney Dennis K. Burke. “Now he must pay a steep price for those actions. This conviction sends a strong message to others who would victimize and defraud their friends, neighbors and associates that this office will continue to aggressively pursue and prosecute scam artists.”
U.S. Postal Inspection Service Phoenix Division Inspector in Charge Pete Zegarac added, “Today's sentencing should serve as a strong deterrent to others who would misuse our nation's mail system to commit fraud. The scheme devised by the defendant cost victims more than $8 million, dashing their hopes for a profitable business opportunity. The U.S. Postal Inspection Service advises the public to investigate any investment opportunity before committing money to solicitors. Initial research efforts can save consumers a multitude of time and money in the long run."
>From about March, 2003, until about January, 2005, Livanos (a.k.a. Jim Roberts) and other co-defendants deceived approximately 300 victim investors into believing they were investing their money in a business opportunity pertaining to “cashless ATM machines.” The perpetrators established two Arizona corporations, Mac Investments, Inc. and MAC Investment Sales, Inc. of the same mailing address in Tempe in order to accomplish their goals.
The defendant and his co-conspirators promoted and purported to sell a “cashless ATM machine” known as the “MAC 8000.” Livanos falsely agreed to sell not only the machines but also the MAC business concept, which included installing the machines at undisclosed retail locations, managing and providing maintenance for the machines, and administering the payment of revenues supposedly generated by the machines to each victim investor. Livanos claimed that each cashless ATM transaction generated $1 to $2 in fees per transaction. No cashless ATM machines were ever purchased or installed, and there were never any contracts between MAC and the purported retail establishments.
The scheme operated as a typical Ponzi scheme. A small portion of the revenues generated by the fraudulent sale of the fictitious machines was used to pay investors a false “return” on their investment, when in fact this “return” was simply money obtained from more recent investors. Defendant and his co-conspirators stole more than $8 million from victim investors.
Friday, April 29, 2011
Christopher Livanos Garners 20-Year Sentence for ‘Cashless ATM’ Ponzi Scheme
Wednesday, April 27, 2011
Sandra Venetis Pleads Guilty to $13.6 Million Fictitious Investment Program Scam
TRENTON, NJ—The owner of Branchburg, New Jersey-based investment adviser Systematic Financial Associates, Inc., admitted today to defrauding over 50 investors of more than $7 million by soliciting investments in a fictitious investment program, U.S. Attorney Paul J. Fishman announced.
Sandra Venetis, 59, of Whitehouse Station, N.J., pleaded guilty to an Information charging her with one count of securities fraud and one count of transacting in criminal property. She entered her guilty plea before U.S. District Judge Joel A. Pisano in Trenton federal court.
According to documents filed in this case and statements made during Venetis’ guilty plea proceeding:
From 1997 through August 13, 2010, Venetis solicited clients of Systematic Financial Associates to invest in an alternative investment program she allegedly operated outside her registered investment advisory business. Venetis admitted that to induce victim investors, she falsely told them she would use their money to fund loans to doctors for their quarterly pension plans. At times, Venetis directed Systematic Financial Associates’ advisory clients to liquidate positions in securities to participate in the alternative investment program. As a result of her solicitations, approximately 127 investors sent approximately $13.6 million to Venetis.
Venetis admitted that she did not operate any legitimate investment program outside of Systematic Financial Associates’ advisory business, and created a corporation called Systematic Financial Services, Inc., solely for the purpose of operating her fraudulent scheme. Venetis never transferred any investment money to doctors, and concealed her fraudulent conduct by creating fictitious doctors or forging the names of real doctors on promissory notes that made it appear she was using investor funds as promised.
Venetis admitted to using investor funds to pay the operating expenses of Sytematic Financial Associates and using new investor funds to make principal and interest payments to existing investors in Ponzi-scheme fashion.
Venetis also admitted that she stole money to fund her own lavish lifestyle, using victims’ investments to pay for gambling debts in Las Vegas and elsewhere, as well as trips—including to Alaska, Italy, France, India and the Caribbean. She also misappropriated investments to pay her monthly mortgage, property taxes and other personal expenses. Investors lost at least $7 million as a result of the scam.
The securities fraud count carries a maximum potential penalty of 20 years in prison and a $5 million fine. The transacting in criminal property count carries a maximum potential penalty of 10 years in prison and a $250,000 fine, or twice the pecuniary gain to Venetis or the loss to the victims of the offense. Sentencing is scheduled for August 3, 2011.
Tuesday, April 26, 2011
Walter Netschi Sentenced in Manhattan Federal Court to 100 Months in Prison in Connection With his Operation of an $80 Million Ponzi Scheme
PREET BHARARA, United States Attorney for the Southern District of New York, announced today that WALTER NETSCHI was sentenced in Manhattan federal court to 100 months in prison in connection with his operation of an $80 million Ponzi scheme involving investments in Automated Teller Machines ("ATMs"). NETSCHI was found guilty of all ten counts against him—one count of conspiracy and nine counts of wire fraud—on November 12, 2010, following a three-week jury trial before U.S. District Judge THOMAS P. GRIESA. NETSCHI's co-defendant, VANCE MOORE II, previously pled guilty to the same ten wire fraud counts and was sentenced to 97 months in prison by Judge GRIESA.
Manhattan U.S. Attorney PREET BHARARA said: "Walter Netschi deliberately set out to swindle investors by designing and orchestrating an intricate Ponzi scheme that netted him and his co-conspirator Vance Moore tens of millions of dollars. Today’s sentence sends a clear message to individuals who may be tempted to make easy money by engaging in fraud that they will be punished with hard time."
According to the evidence introduced at trial and other documents and proceedings in this case:
From 2005 through January 2008, NETSCHI, assisted by MOORE, successfully solicited more than $80 million dollars' worth of investments in ATMs purportedly placed in various retail locations around the country, including convenience stores, gas stations, malls, and hotels. NETSCHI claimed that he bought the ATMs from third parties and that he used an independent entity, which was MOORE's company, to service them and conduct due diligence. He also represented that Moore’s company would ensure that the ATMs generated revenue streams for the investors based on fees the ATMs charged for cash withdrawals. In fact, 90 percent of the more than 4,500 ATMs that NETSCHI purportedly sold to the investors were actually owned by other people or companies, or did not exist at all. Additionally, the monthly revenue payments that investors received were not actual revenues from ATMs, but money invested by additional victims which was misappropriated by NETSCHI and MOORE in order to further conceal the fraudulent scheme from the dozens of victims in the case.
NETSCHI's deceit even involved engaging in sham purchase negotiations with other companies that owned ATMs, so that he and MOORE could acquire information about those ATMs. They then used the information and documents they obtained from these other companies to further deceive their investors, providing them with what looked like legitimate documents purporting to show that NETSCHI owned and MOORE serviced the machines. In reality, those machines were owned and operated by those other companies.
Monday, April 25, 2011
Manhattan U.S. Attorney Announces Guilty Plea of Jason Goldfarb to Insider Trading Charges
PREET BHARARA, the United States Attorney for the Southern District of New York, announced that JASON GOLDFARB, an attorney, pled guilty today to conspiracy and securities fraud charges arising from a scheme in which GOLDFARB gave material, non-public information misappropriated from the law firm of Ropes & Gray to ZVI GOFFER, who allegedly traded on that information. GOLDFARB received cash payments for his role in the insider trading scheme. He pled guilty before U.S. District Judge RICHARD J. SULLIVAN.
According to the indictment, a complaint previously filed in this case, and statements made during today’s guilty plea proceeding:
In 2007 and 2008, two Ropes & Gray attorneys, ARTHUR CUTILLO and BRIEN SANTARLAS, provided JASON GOLDFARB with material, non-public information (“Inside Information”) about several mergers and acquisitions of public companies for which Ropes & Gray served as legal advisor. GOLDFARB, in turn, delivered the Inside Information to ZVI GOFFER. The Inside Information included information regarding the potential acquisition of 3Com Corporation (“3Com”) and the potential acquisition of Axcan Pharma, Inc. (“Axcan”). GOFFER is alleged to have provided cash payments to GOLDFARB, CUTILLO, and SANTARLAS in exchange for the Inside Information.
GOLDFARB, 32, pled guilty to one count of conspiracy and one count of securities fraud. The conspiracy count carries a maximum sentence of five years in prison, and the securities fraud count carries a maximum sentence of 20 years in prison. He faces a maximum fine of $250,000, or twice the gross gain or loss from the offense on the conspiracy count and a maximum fine of $5 million on the securities fraud count.
GOLDFARB is scheduled to be sentenced by Judge SULLIVAN on August 19, 2011, at 10:00 a.m.
CUTILLO and SANTARLAS both previously pled guilty to conspiracy and securities fraud charges. Charges against GOFFER remain pending and are merely accusations. He is presumed innocent unless and until proven guilty.
Sunday, April 24, 2011
Joseph Mazella Arrested on Fraud Charges for Operating Multi-Million-Dollar Ponzi Scheme
A Staten Island man was arrested earlier this morning on charges arising out of his alleged operation of a $12 million Ponzi scheme from 2007 to 2010. Joseph Mazella, the founder and president of the Great Atlantic Group, Inc., a Staten Island-based real estate and financial consulting company, was charged with securities fraud, wire fraud, and money laundering in a federal indictment that was unsealed earlier today in federal court in Brooklyn. The case has been assigned to Chief United States District Court Judge Carol B. Amon. The defendant is scheduled to be arraigned later today before United States Magistrate Judge Lois Bloom at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York. The charges were announced by Loretta E. Lynch, United States Attorney for the Eastern District of New York, and Janice K. Fedarcyk, Assistant Director in Charge of the Federal Bureau of Investigation, New York Field Office.
As alleged in the indictment, Mazella solicited investments in Third Millennium Enterprises, Inc. and 150 West State Street Corp., both of which were associated with the Great Atlantic Group that supposedly invested in real estate projects and provided private mortgages. Mazella told prospective investors that he would invest their money in real estate projects, including projects in Trenton, New Jersey, a warehouse in Utica, New York, and a golf course development project. From approximately January 2007 until approximately December 2010, investors contributed a total of nearly $12 million to Third Millennium and 150 West State Street. As of December 2010, the combined closing balance of the bank accounts associated with the two companies was less than $15,000.
According to the indictment, Mazella described the investments as an opportunity to receive the returns of mutual funds and stocks, without any significant loss of liquidity, and at a fixed rate during the entire time period of investment. Solicitation materials distributed by Mazella characterized the investments as “geared toward individuals who are interested in earning more than traditional bank savings and CD rates but without the risk of the stock market.” Some investors were encouraged to obtain mortgages on their homes and to invest the mortgage proceeds with Third Millennium or 150 West State Street, and other investors, typically senior citizens, were encouraged to apply for reverse mortgages on their residences and to invest the proceeds with the two companies.
The indictment charges that, by as early as January 2007, Mazella had virtually stopped investing in real estate projects, and instead operated Third Millennium and 150 West State Street as a Ponzi scheme, in which he paid returns to investors from existing investors’ deposits or money paid by new investors. Many of the properties in which the companies held any mortgage or ownership interest were abandoned and in various states of disrepair, and the property taxes owed on several of those properties had fallen into arrears. Mazella also allegedly used investors’ money to pay his personal expenses, including payments for a Porsche, a mortgage on his personal residence, and family expenses.
Saturday, April 23, 2011
New York Broker Gregg M. S. Berger Pleads Guilty in International Stock Fraud Scheme
WASHINGTON - A New York stock broker has pleaded guilty in federal court in Detroit to conspiracy to commit securities fraud and wire fraud in connection with the Alan Ralsky spamming organization’s stock pump-and-dump scheme, announced Assistant Attorney General of the Criminal Division Lanny A. Breuer and U.S. Attorney Barbara McQuade for the Eastern District of Michigan.
Gregg M. S. Berger, 47, of New York City, pleaded guilty yesterday before U.S. District Judge Marianne O. Battani. A federal grand jury in the Eastern District of Michigan indicted Berger in December 2010, charging him in a wide-ranging fraud scheme to illegally pump-and-dump thinly traded Chinese and Israeli stocks.
“Like so many other financial fraudsters we have prosecuted, Gregg Berger knew better,” said Assistant Attorney General Breuer. “He traded on his position as a stockbroker to defraud hundreds of investors out of their hard-earned savings. Now that he has pleaded guilty for his crimes, he faces serious and deserved punishment.”
Under the terms of the plea agreement, Berger faces up to 51 months in prison, a possible fine of up to $75,000, as well as restitution and a five-year term of supervised release. Sentencing is scheduled for Aug. 23, 2011.
The charges arose after a multi-year investigation, led by agents from the FBI, with assistance from the U.S. Postal Inspection Service and the Internal Revenue Service, revealed a sophisticated and extensive operation that largely focused on running a pump-and-dump scheme, whereby the defendants sent spam touting thinly traded Chinese penny stocks, drove up their stock price, and reaped profits by selling the stock at artificially inflated prices.
In pleading guilty, Berger acknowledged that he established brokerage accounts at the direction of Hui and Tribble, and communicated with Ralsky and Bradley during the conspiracy. Berger’s roles in the scheme included trading the stocks that were illegally promoted by spam email campaigns; arranging for shares of the stocks to be transferred into the brokerage accounts he established; executing stock trades at the direction of Tribble rather than the direction of the named account holders; causing funds that resulted from the stock trades to be transferred to bank accounts beneficially controlled by Hui and other co-conspirators; and providing confidential account information, including trade amounts, prices, cash balances and wire transfer details to Tribble, Bradley and others involved in the scheme who were not entitled to such information, without authorization from the actual named account holders.
The stocks pumped-and-dumped by conspirators included China World Trade Corporation (CWTD), Pingchuan Pharmaceutical Inc. (PGCN), China Digital Media Corporation (CDGT), World Wide Biotech and Pharmaceutical Co. (WWBP), China Mobility Solutions (CHMS) and m-Wise (MWIS).
The indictment alleged that during the course of the scheme Berger caused the sale of approximately 30 million shares of stock, generating approximately $30 million for the co-conspirators and more than $600,000 in commissions for himself. The plea agreement stipulates that Berger may litigate at sentencing the amount he actually earned as a result of his participation in the conspiracy.
Friday, April 22, 2011
Michael Spillan and his wife Melissa Spillan Pleads Guilty to $20 Million Fraud Involving Stock-Based Loan Scheme
COLUMBUS—Michael Spillan, 43, of Gahanna, and his wife, Melissa Spillan, 41, pleaded guilty in U.S. District Court today to running a fraudulent stock-based loan scheme that caused at least 38 victims to lose $19,695,580.
Carter M. Stewart, United States Attorney for the Southern District of Ohio; Keith Bennett, Special Agent in Charge, Federal Bureau of Investigation (FBI); and Daniel M. McDermott, U.S. Trustee for Region 9, announced the pleas entered before U.S. District Judge Edmund A. Sargus, Jr.
Each defendant pleaded guilty to one count of conspiracy to commit securities fraud, mail fraud, and wire fraud. Michael Spillan also pleaded guilty to one count of securities fraud, one count of wire fraud, and one count of mail fraud.
The plea agreement includes a 140-month sentence followed by five years of supervised release for Michael Spillan and a 36-month sentence followed by three years of supervised release for Melissa Spillan. Judge Sargus will determine a final sentence following a pre-sentence investigation. No date for sentencing has been scheduled.
The plea agreement also calls for them to make full restitution to their victims.
According to a statement of facts read during their hearing, the Spillans owned several companies including One Equity Corporation, Triangle Equities Group, Inc., Victory Management Group, Inc., and Dafcan Finance, Inc.
The Spillans made low-interest loans to their victims who transferred shares of stock to the Spillans as collateral. The Spillans promised to return the stock to the borrowers once the loans were repaid. The Spillans sold the stock without the borrowers’ knowledge instead of holding the shares and used the proceeds to fund other loans or for their own personal gain.
Thursday, April 21, 2011
Frank E. Vennes, David W. Harrold and Bruce F. Prevost Indicted for Lying to Investors About Hedge Fund’s Investment with Petters
MINNEAPOLIS—Three Florida men—a business associate of Thomas J. Petters and two hedge fund managers—were indicted today in federal court in Minneapolis for fraudulently marketing a hedge fund’s investments in Petters Company, Inc. (“PCI”). Frank E. Vennes, age 53, of Stuart, Florida; David W. Harrold, age 51, of Del Ray Beach, Florida; and Bruce F. Prevost, age 51, of Palm Beach Gardens, Florida, were charged with four counts of securities fraud in relation to this alleged crime. In addition, Vennes was charged with one count of money laundering.
PCI was owned and operated by Petters, who represented that funds invested in PCI promissory notes would be used to finance the purchase of electronics and other consumer merchandise. Purportedly, PCI would then resell that merchandise, for a profit, to certain “big box” retailers, including Sam’s Club and Costco. In truth, however, no merchandise was bought or resold. Instead, Petters diverted for his own personal benefit hundreds of millions of dollars. His $3.65 billion Ponzi scheme unraveled in 2008, when federal agents executed search warrants at his business offices and other locations. He was subsequently prosecuted and, in April of 2010, sentenced to 50 years in federal prison. He is currently serving his sentence in the federal penitentiary in Leavenworth, Kansas.
Petters began the PCI Ponzi scheme in or before 1993. Starting in the late 1990s, he raised most of the proceeds of the fraud by selling PCI notes to large hedge funds, managed and operated by hedge fund managers. Hedge fund managers had a fiduciary duty to their investors. They made representations to their investors regarding the investments, the due diligence performed on the investments, and the financial mechanisms put in place to protect the hedge fund’s investments in PCI. In exchange for their efforts, the hedge fund managers obtained management fees from investor funds.
The indictment returned today charges Harrold and Prevost with defrauding hedge fund investors. The men co founded Palm Beach Capital Management, which served as the investment adviser for the four Palm Beach hedge funds. According to the indictment, Vennes directed Harold and Prevost to communicate with Petters and PCI only through him. In November of 2002, Harrold and Prevost purportedly first invested hedge fund money in PCI, and as of September 24, 2008, the hedge funds reportedly held PCI investments totaling approximately $1 billion. Between 2002 and 2008, Harrold and Prevost’s companies allegedly grossed more than $58 million in management fees. For his part, Vennes received more than $60 million in commissions based on the Palm Beach investments in PCI.
Allegedly, the defendants made material misrepresentations and concealed material information about the PCI investments in order to induce investors to purchase securities. For example, investors were told that when a retailer purchased consumer electronics or other goods from PCI, those products were paid for by the retailer with funds directly deposited into a bank account under the control of Harrold and Prevost’s management companies. As a result, investors were falsely assured that all PCI transactions were, in fact, occurring. However, the defendants knew the hedge funds received payments from PCI alone and never from retailers.
Moreover, by February of 2008, millions of dollars of PCI notes were on the verge of default. Between February and September of 2008, the defendants engaged in a scheme to swap more than $1 billion worth of PCI promissory notes to create the appearance that PCI could repay the notes held by the Palm Beach funds. All note swaps allegedly went through Vennes. During that same time period, Harrold and Prevost allegedly continued to report to investors that the hedge funds were generating steady profits and, encouraged and assisted by Vennes, solicited new investors and additional money from existing investors, raising more than $75 million in new money from more than 30 investors.
If convicted, the defendants face a potential maximum penalty of five years on each securities fraud count, while Vennes is subject to as much as ten additional years in federal prison for money laundering. All sentences will be determined by a federal district court judge.
Wednesday, April 20, 2011
Lee Bentley Farkas Convicted for $2.9 Billion Fraud Scheme That Contributed to the Failure of Colonial Bank
Source- http://www.justice.gov/opa/pr/2011/April/11-crm-490.html
WASHINGTON – Lee Bentley Farkas, the former chairman of a private mortgage lending company, Taylor, Bean & Whitaker (TBW), was convicted today for his role in a more than $2.9 billion fraud scheme that contributed to the failures of Colonial Bank, one of the 25 largest banks in the United States in 2009, and TBW, one of the largest privately held mortgage lending companies in the United States in 2009.
After a 10-day trial, a federal jury in the Eastern District of Virginia found Farkas guilty of one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. At sentencing, scheduled for July 1, 2011, Farkas faces a maximum prison term of 30 years for the conspiracy charge and for each count of bank fraud, 20 years for each count of wire fraud related to TARP, 30 years for each count of wire fraud affecting a financial institution and 25 years for each securities fraud count. Farkas was remanded into custody.
According to court documents and evidence presented at trial, Farkas and his co-conspirators engaged in a scheme that misappropriated more than $1.4 billion from Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Fla., and approximately $1.5 billion from Ocala Funding, a mortgage lending facility controlled by TBW. Farkas and his co-conspirators misappropriated this money to, among other things, cover TBW’s operating expenses. The fraud scheme contributed to the failures of Colonial Bank and TBW.
Six individuals have pleaded guilty for their roles in the fraud scheme, including: Paul Allen, former chief executive officer of TBW; Raymond Bowman, former president of TBW; Desiree Brown, former treasurer of TBW; Catherine Kissick, former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division (MWLD); Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD; and Sean Ragland, a former senior financial analyst at TBW.
“Lee Farkas, the former chairman of TBW, masterminded one of the largest bank fraud schemes in history,” said Assistant Attorney General Breuer. “His shockingly brazen scheme poured fuel on the fire of the financial crisis. It not only led to the downfall of TBW, one of the largest private mortgage lending companies in the United States, but also contributed to the failure of one of the country’s largest commercial banks. Mr. Farkas may have thought he could steal nearly $3 billion from investors and taxpayers and sail into the sunset. But now a jury has told him otherwise, and he must face the severe consequences.”
“Today a jury convicted Lee Farkas of orchestrating one of the longest and largest bank fraud schemes in the country,” said U.S. Attorney Neil H. MacBride. “In 2008, Lee Farkas boasted that he ‘could rob a bank with a pencil.’ And he did just that. His staggering greed led him to steal nearly $3 billion from Colonial Bank and other investors. Farkas’s mammoth fraud contributed to the toppling of a financial institution and the ripple effects were felt from Wall Street to Main Street. Now he’s being held responsible for the financial ruin he left in his wake.”
“This investigation required thousands of hours of work by investigators, forensic accountants and analysts to sort through complex mortgage and lending documents,” said Assistant Director in Charge McJunkin. “I’d like to thank the many other agencies who worked with FBI personnel to build a strong investigative team; a team still out there working today to protect federal funds and innocent victims.”
“Today’s verdict ensures that Farkas will pay for his crime – an unprecedented scheme to defraud regulators during the height of the financial crisis and to steal over $550 million from the American taxpayers through TARP,” said Acting Special Inspector General Romero for SIGTARP . “SIGTARP and its partners in the Financial Fraud Enforcement Task Force stopped the scheme dead in its tracks and will continue to bring to justice those criminals who seek to profit by exploiting TARP through fraud.”
According to court documents and evidence presented at trial, the fraud scheme began in 2002, when Farkas and his co-conspirators ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls. Farkas and his co-conspirators at TBW and Colonial Bank transferred money between accounts at Colonial Bank to hide the overdrafts. Evidence presented at trial showed that after the overdrafts grew to more than $100 million, Farkas and his co-conspirators covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW over time more than $1.5 billion in what amounted to worthless mortgage loan assets, including loans that TBW had already sold to other investors and fake pools of loans supposedly being formed into mortgage-backed securities. Farkas and his co-conspirators caused Colonial Bank to report these assets on its books at face value when in fact the mortgage loan assets were worthless. By August 2009, approximately $500 million in fake pools of loans remained on Colonial Bank’s books.
According to court documents and evidence presented at trial, Farkas and his co-conspirators at TBW also misappropriated more than $1.5 billion from Ocala Funding. Ocala Funding sold asset-backed commercial paper to financial institution investors, including Deutsche Bank and BNP Paribas Bank. Ocala Funding, in turn, was required to maintain collateral in the form of cash and/or mortgage loans at least equal to the value of outstanding commercial paper.
Evidence presented at trial established that Farkas and his co-conspirators diverted cash from Ocala Funding to TBW to cover its operating losses, and as a result, created significant deficits in the amount of collateral Ocala Funding possessed to back the outstanding commercial paper. To cover up the diversions, the conspirators sent false information to Deutsche Bank, BNP Paribas Bank and other financial institution investors and led them to falsely believe that they had sufficient collateral backing the commercial paper they had purchased. When TBW failed in August 2009, the banks were unable to redeem their commercial paper for full value. Farkas and his co-conspirators also caused approximately $900 million in loans to be held on Colonial Bank’s books when in fact the loans had already been sold to Freddie Mac and other investors.
According to court documents and evidence at trial, in the fall of 2008, Colonial Bank’s holding company, Colonial BancGroup Inc., applied for $570 million in taxpayer funding through the Capital Purchase Program (CPP), a sub-program of the U.S. Treasury Department’s Troubled Asset Relief Program (TARP). In connection with the application, Colonial BancGroup submitted financial data and filings that included materially false information related to mortgage loans and securities held by Colonial Bank as a result of the fraudulent scheme perpetrated by Farkas and his co-conspirators. Colonial BancGroup’s TARP application was conditionally approved for $553 million contingent on the bank raising $300 million in private capital.
Evidence at trial established that Farkas and his co-conspirators falsely informed Colonial BancGroup that they had identified sufficient investors to satisfy the TARP capital contingency. Farkas and his TBW co-conspirators diverted $25 million from Ocala Funding into an escrow account and falsely represented that the money was on behalf of capital raise investors. Farkas and his TBW co-conspirators caused Colonial BancGroup to issue a false and misleading financial statement to the Securities and Exchange Commission (SEC) and press release announcing the success of the capital raise. Ultimately, Colonial BancGroup did not receive any TARP funds.
Evidence at trial also established that Farkas and his co-conspirators caused Colonial BancGroup to file materially false financial data with the SEC regarding its assets in annual reports contained in Forms 10-K and quarterly filings contained in Forms 10-Q. Colonial BancGroup’s materially false financial data included overstated assets for mortgage loans that had little to no value that Farkas and his co-conspirators caused Colonial Bank to purchase. Farkas and his co-conspirators also caused TBW to submit materially false financial data to the Government National Mortgage Association (Ginnie Mae) in order to extend TBW’s authority to issue Ginnie Mae mortgage-backed securities.
According to court documents and evidence presented at trial, Farkas also personally misappropriated more than $20 million from TBW and Colonial Bank to finance his lifestyle, including purchasing multiple homes, scores of cars, a jet and sea plane, and restaurants and bars.
In August 2009, the Alabama State Banking Department, Colonial Bank’s regulator, seized the bank and appointed the FDIC as receiver. Colonial BancGroup also filed for bankruptcy in August 2009.
“The successful prosecution of Farkas and his associates highlights the commitment and combined efforts of DOJ and federal law enforcement to hold those responsible from all levels of a mortgage company,” said Acting Inspector General Stephens for HUD-OIG. “Efforts to protect FHA and Ginnie Mae are strengthened by this verdict.”
“Today’s verdict confirms that the former chairman of one of the leading mortgage lending firms in the Southeast engaged in criminal conduct during the mid-2000s,” said Inspector General Rymer of FDIC-OIG. “We are proud to work with our partners at the Justice Department’s Criminal Division and in the U.S. Attorney’s Office for the Eastern District of Virginia to bring to justice individuals whose fraud contributed significantly to the financial crisis and the failure of a major financial institution.”
“This conviction represents a victory for Freddie Mac and American taxpayers, who have invested $64.2 billion in Freddie Mac to date,” said Inspector General Linick of the FHFA-OIG. “ The fraud that Farkas perpetrated on Freddie Mac directly affected its bottom line and, in turn, American taxpayers. FHFA-OIG looks forward to future cooperative efforts with law enforcement partners to combat fraud against Freddie Mac, Fannie Mae, and the Federal Home Loan Banks.”
Tuesday, April 19, 2011
Ponzi Schemer Richard Elkinson Pleads Guilty
The Commission announced that on April 13, 2011, Richard Elkinson, age 77, of Framingham, Massachusetts, pled guilty to 18 counts of mail fraud in a case being prosecuted by the United States Attorney’s Office in Boston, Massachusetts. These charges resulted from Elkinson’s operation of a scheme by which he defrauded more than 100 victims of millions of dollars. Elkinson was indicted on Feb. 17, 2010. The indictment charged that Elkinson obtained funds from his victims by falsely representing that he would use the funds to finance the manufacture of uniforms and hats for state government agencies when in fact he used the funds for his own personal purposes and to repay amounts to other victims. He is currently scheduled to be sentenced before U.S. District Joseph L. Tauro on July 21, 2011.
The Commission previously filed a related civil enforcement action against Elkinson on Jan. 7, 2010 and obtained a default judgment against him on June 9, 2010. In the Commission’s action, the court permanently enjoined Elkinson from future violations of the antifraud and registration provisions of the federal securities laws and ordered him to pay over $29 million in disgorgement, prejudgment interest and civil penalties. On Jan. 7, 2010, at the Commission’s request, the court had issued an order freezing Elkinson’s assets.
The Commission alleged in its complaint that Elkinson operated a Ponzi scheme that defrauded at least 130 investors from multiple states of approximately $28 million. The complaint further alleged that since at least 1997, Elkinson offered and sold unregistered securities in the form of promissory notes. According to the complaint, Elkinson falsely told investors that he was in the business of brokering contracts on behalf of a Japanese firm that manufactured uniforms (such as police uniforms and prison uniforms) to be sold to large purchasers such as state and local governments (and even the U.S. Olympic Committee) and that investors’ money would be used to help finance specific uniform contracts. The investors received promissory notes signed by Elkinson, with terms that generally required payment within 300 to 330 days and with an interest rate that ranged from 9% to 13%. According to the complaint, however, Elkinson had no relationship with a Japanese uniform manufacturer, and there were no contracts to purchase uniforms. The Commission alleged that, while some investors did receive payments of principal and interest, those payments were made using funds obtained from other investors, and Elkinson was able to keep the scheme going as long as most of the investors kept rolling over their investments. In reality, according to the complaint, Elkinson used most of the investors’ money for his own personal purposes, including gambling.
Monday, April 18, 2011
Lisa Rodriguez Convicted of Embezzling Bank Funds
McALLEN, TX—The former supervisor of the electronic marketing department of a local bank has been convicted of embezzling bank funds, United States Attorney José Angel Moreno announced today.
Lisa Rodriguez, 41, of McAllen, pleaded guilty to one count of embezzlement by a bank employee before Chief U.S. District Judge Ricardo Hinojosa at a hearing this afternoon. Chief Judge Hinojosa scheduled sentencing for July 27, 2011, at 9:30 a.m. Rodriguez, who was indicted in December 2010, faces up to 30 years in federal prison without parole and a $1 million fine for the embezzlement conviction.
According to information presented in court, Rodriguez was formerly employed by First National Bank (FNB) as a supervisor in the electronic marketing department with duties that included, among other things, overseeing the collection and processing of customer debit cards that were returned in the mail to FNB as undeliverable. Rodriguez was similarly responsible for the corresponding Personal Identification Number (PIN) information returned as undeliverable. Upon receiving the returned debit cards and corresponding PINs, FNB protocol called for Rodriguez and other personnel in the electronic marketing department to log the debit cards and PINs into FNB's computer system.
At today's hearing, Rodriguez admitted that, in April 2010, she used debit cards and PINs that had been returned as undeliverable to conduct numerous unauthorized debit transactions including cash withdrawals at ATMs in McAllen, Edinburg, and San Antonio. Rodriguez attempted to conceal her embezzlement by failing to log the misappropriated debit cards and PINs into FNB's computer system upon receiving them at the bank. Following numerous customer complaints, FNB identified more than $50,000 in unauthorized transactions related to the undeliverable debit cards and PINs.
Rodriguez has been permitted to remain on bond pending her sentencing hearing.
Friday, April 15, 2011
SEC Charges Michael Cuomo, Kevin Mann and Melissa George with Fraud
Washington, D.C., April 14, 2011 — The Securities and Exchange Commission today charged Massachusetts-based subprime auto loan provider Inofin Inc. and three company executives with misleading investors about their lending activities and diverting millions of dollars in investor funds for their personal benefit. The SEC also charged two sales agents with illegally offering to sell company securities without being registered with the SEC as broker-dealers.
The SEC alleges that Inofin executives Michael Cuomo of Plymouth, Mass., Kevin Mann of Marshfield, Mass., and Melissa George of Duxbury, Mass., illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. Investors in the notes were told that Inofin would use the money for the sole purpose of funding subprime auto loans. As part of the pitch, Inofin and its executives told investors that they could expect to receive returns of 9 to 15 percent because Inofin loaned investor money to its subprime borrowers at an average rate of 20 percent. But unbeknownst to investors, starting in 2004 approximately one-third of investor money raised was instead used by Cuomo and Mann to open four used car dealerships and begin multiple real estate property developments for their own benefit.
Inofin is not registered with the SEC to offer securities to investors.
“Whether selling stock or notes, public and private companies alike must play it straight with investors or be held accountable for their misconduct,” said David Bergers, Director of the SEC’s Boston Regional Office. “Inofin and some top executives violated investors’ trust by misusing their funds to bankroll their personal business ventures.”
According to the SEC’s complaint filed in federal court in Boston, Inofin and the executives materially misrepresented Inofin’s financial performance beginning as early as 2006 and continuing to 2011. Inofin had a negative net worth and a progressively deteriorating financial condition caused not only by the failure of Inofin’s undisclosed business activities, but also by management’s decisions in 2007, 2008, and 2009 to sell some of its auto loan portfolio at a substantial discount to solve ever-increasing cash shortages that Inofin concealed from investors. Inofin and its principal officers continued to offer and sell Inofin securities while knowingly or recklessly misrepresenting to investors that Inofin was a profitable business and sound investment.
The SEC further alleges that beginning in 2006 and continuing to April 2010, Inofin’s executives defrauded investors while maintaining Inofin’s license to do business as a motor vehicle sales finance company by preparing and submitting materially false financial statements to its licensing authority, the Massachusetts Division of Banks. The SEC’s complaint charges Cuomo, Mann, and George with violating the antifraud and registration provisions of the federal securities laws, and seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties.
The SEC’s charges against the two sales agents — David Affeldt and Thomas K. (Kevin) Keough — allege that they promoted the offering and sale of Inofin’s unregistered securities. They were unjustly enriched with more than $500,000 in referral fees between 2004 and 2009. Affeldt and Keough are charged with selling the unregistered Inofin securities and failing to register with the SEC as a broker-dealer, and the SEC seeks civil injunctions, the return of ill-gotten gains plus prejudgment interest, and financial penalties. Keough’s wife Nancy Keough is named in the complaint as a relief defendant for the purposes of recovering proceeds she received as a result of the violations.
Thursday, April 14, 2011
SEC Charges Dr. Joseph F. “Chip” Skowron a Hedge Fund Portfolio Manager With Insider Trading
Washington, D.C., April 13, 2011 — The Securities and Exchange Commission today charged a former hedge fund portfolio manager with insider trading in a bio-pharmaceutical company based on confidential information about negative results of the company’s clinical drug trial.
The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least $30 million in losses.
The SEC previously charged the medical researcher – Dr. Yves M. Benhamou – who illegally tipped Skowron with the non-public information and received envelopes of cash in return according to the SEC’s amended complaint filed today in federal court in Manhattan to additionally charge Skowron. The hedge funds, which have been charged as relief defendants in the SEC’s amended complaint, have agreed to pay $33 million to settle the charges.
“It’s a prescription for an SEC enforcement action to illegally trade on confidential clinical trial information from doctors and other purported consultants,” said Lorin L. Reisner, Deputy Director of the SEC’s Enforcement Division.
Cheryl Scarboro, Chief of the Enforcement Division’s FCPA Unit, added, “Skowron attempted to game the markets and buy the silence of his tipper. His sale of his hedge funds’ entire position in HGSI stock before the announcement of negative news is precisely the sort of conduct that telegraphs insider trading.”
In a parallel action today, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Skowron.
According to the SEC’s amended complaint, Benhamou served on the Steering Committee overseeing HGSI’s trial for Albuferon, a potential drug to treat Hepatitis C. While serving on the Steering Committee, Benhamou provided consulting services to Skowron through an expert networking firm. But over time, he and Skowron developed a friendship. By April 2007, many of their communications were independent of the expert networking firm. Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred during Phase 3 of the trial.
The SEC alleges that Skowron acted on confidential information he received from Benhamou prior to the public announcement and ordered the sale of the entire position in HGSI stock – approximately six million shares held by the six health-care related funds that Skowron co-managed. These sales occurred during the six-week period prior to HGSI’s public announcement. Skowron caused the hedge funds to sell two million shares in a block trade just before the markets closed Jan. 22, 2008. Changes to the trial resulting from the negative developments were announced publicly on January 23. When HGSI’s share price dropped 44 percent by the end of that day, the hedge funds avoided losses of at least $30 million.
According to the SEC’s amended complaint, Skowron gave Benhamou an envelope of containing 5,000 Euros while they were attending a medical conference in Barcelona, Spain in April 2007. The cash was in appreciation for Benhamou’s work as a consultant. In February 2008, after the illegal HGSI trades were completed, Skowron asked Benhamou to lie about his communications with Skowron, which he did. In late February 2008, Skowron met Benhamou in Boston and attempted to hand him a bag containing cash in appreciation for his tips on the Albuferon trial and his continued silence. Benhamou refused the cash. However, while attending a medical conference in Milan, Italy in April 2008, Skowron gave Benhamou another envelope containing at least $10,000 in cash that Benhamou accepted.
The SEC is seeking permanent injunctions, disgorgement of any ill-gotten gains with prejudgment interest, and financial penalties against Skowron and Benhamou. Simultaneous with the filing of the SEC’s amended complaint, the six hedge funds named as relief defendants agreed to settle with the Commission and pay disgorgement of $29,017,156.00 plus prejudgment interest of $4,003,669.00 without admitting or denying the allegations. The proposed settlement is subject to court approval.
Wednesday, April 13, 2011
SEC Charges David C. Levine, Frederick O. Kraus and Marc A. Ellis With Failing to Protect Confidential Customer Information
Washington, D.C., April 7, 2011 – The Securities and Exchange Commission today charged three former brokerage executives for failing to protect confidential information about their customers.
The SEC’s investigation found that while Tampa-based GunnAllen Financial Inc. was winding down its business operations last year, former president Frederick O. Kraus and former national sales manager David C. Levine violated customer privacy rules by improperly transferring customer records to another firm. The SEC also found that former chief compliance officer Mark A. Ellis failed to ensure that the firm’s policies and procedures were reasonably designed to safeguard confidential customer information.
Kraus, Levine, and Ellis each agreed to settle the SEC’s charges against them. This is the first time that the SEC has assessed financial penalties against individuals charged solely with violations of Regulation S-P, an SEC rule that requires financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties.
“Brokerage customers should be able to trust that sufficient safeguards are in place to protect their private information from unauthorized access and misuse,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Protecting confidential customer information is particularly important when a broker-dealer is winding down operations.”
Glenn S. Gordon, Associate Director of the Miami Regional Office, added, “Kraus and Levine violated the law by transferring customers’ private information without giving them reasonable notice to opt out. GunnAllen did not have adequate policies or procedures in place to safeguard client information, ignoring several red flags from security breaches at the firm in prior years.”
According to the SEC’s orders instituting administrative proceedings, Kraus authorized Levine to take information from more than 16,000 GunnAllen accounts to his new employer as the firm wound down operations in April 2010. Levine downloaded customer names and addresses, account numbers, and asset values to a portable thumb drive, and provided the records to his new employer after resigning from GunnAllen. The SEC found that the record transfer violated Regulation S-P because account holders were only informed about it after the fact. The cases against Kraus and Levine mark the first time that the SEC has charged individuals with Regulation S-P violations arising when a departing representative takes customer information to a new employer without providing sufficient notice and opt-out procedures.
According to the SEC’s order against Ellis, GunnAllen’s policies and procedures to protect customer information were vague and did little more than recite a provision of Regulation S-P known as the Safeguard Rule. There were several serious security breaches at GunnAllen from July 2005 to February 2009, including the theft of three laptop computers belonging to GunnAllen’s registered representatives and the unlawful access of its e-mail system by a terminated employee using stolen password credentials. Despite the security breaches, Ellis failed to revise or supplement GunnAllen’s policies and procedures for safeguarding customer information.
The SEC’s orders found that Kraus, Levine, and Ellis willfully aided and abetted and caused GunnAllen’s violations of Rule 30(a) of Regulation S-P under the Securities Exchange Act of 1934, and that Kraus and Levine willfully aided and abetted the firm’s violations of Rules 7(a) and 10(a) of the same regulation.
Without admitting or denying the SEC’s findings, Kraus, Levine, and Ellis each consented to the entry of an SEC order that censures them and requires them to cease and desist from committing or causing any violations or future violations of the provisions charged. Kraus and Levine have been ordered to pay penalties of $20,000 each, and Ellis has been ordered to pay a $15,000 penalty.
