THE BIZOP NEWS

Here is how the the International Fiduciary scam ended

International Fiduciary Corp Prime Bank Fraud

The Securities and Exchange Commission ("Commission") announced today that the Honorable Gerald Bruce Lee, United States District Judge for the Eastern District of Virginia, has entered Final Judgments as to Defendants International Fiduciary Corporation, S.A. ("IFC"), and its chairman and CEO, Preston David Pinkett, II ("Pinkett"), restraining and enjoining them from future violations of Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. (The judgment against IFC was entered on July 20, 2007 and the judgment against Pinkett was entered on July 3, 2007.) Pinkett and IFC consented to the entry of the judgments without admitting or denying any of the allegations of the Commission's First Amended Complaint. The Court ordered disgorgement against Pinkett in the amount of $5,101,000, plus prejudgment interest of $153,061. Pinkett was also ordered to pay a civil penalty of $100,000. With respect to IFC, the Court ordered disgorgement against it in the amount of $24,037,362.95 plus prejudgment interest of $971,109.46. The Court, however, did not impose a payment obligation on IFC based on the fact that Roy M. Terry, Jr., the Court-Appointed Receiver for IFC, will instead prepare a plan (subject to the SEC's consent) to distribute all those funds — and all other funds paid by Defendants and Relief Defendants in this case — to investor victims in the United States, Canada, and any other locations.

The Commission filed its complaint against IFC, Pinkett, and two other defendants — Daniel Eric Byer ("Byer") and Malcolm Cameron Boyd Stevenson ("Stevenson") — on December 4, 2006, alleging that they defrauded investors through a fraudulent "asset growth program" purportedly involving risk-free participation in the trading of "1st tier medium-term bank notes." On that same date, the Court issued an order that, among other things, temporarily restrained IFC, Pinkett, Byer, and Stevenson from violating the antifraud provisions of the federal securities laws, and freezing investor funds wherever located and all assets of the defendants. On December 11, 2006, the Court entered a preliminary injunction which extended the temporary restraining order and asset freeze. On January 19, 2007, on the Commission's motion, the Court appointed Roy M. Terry, Jr., Esq. as Receiver over IFC. On April 19, 2007, the Commission filed an amended complaint that alleged, among other things, that the defendants raised at least $40 million from at least 140 investors, and added two individuals and four Washington State-based companies as relief defendants. On June 19, 2007, the Court entered default judgments against Byer and Stevenson.

Again, what this fraud demonstrates is the effectiveness of using the word "guarantee".

It is striking that the last survey on investment fraud showed that the victims were more intelligent than the ordinary investor about investment terms, but were completely lacking in understanding the risk reward formula: more reward means more risk, no guarantees about it.

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I confess to not understanding how the prime bank fraud con is played, since on its surface there appears to be no attraction.

But the SEC has brought an action against Global Finance & Investments, Inc., Charles R. Davis, Lucre Fund, LLC, JTA Enterprises, William H. Clark, Level Par Investments, LLC, Kelly G. Rogers, Sterling Meridian LLC, Ronald J. Linn Glenn Maske and William F. Dippolito, Defendants, and USAssets & Funding Corp., Nevada Sentry Service Corp., Wells Ventures LLC, Triquestra Management Corp., and CMR Mngt. Group, LLC, Relief Defendants: Lit. Rel. No. 20200 / July 18, 2007

On July 18, 2007, the Securities and Exchange Commission ("Commission") filed a civil injunctive action in United States District Court in Sherman, Texas against Global Finance & Investments, Inc., ("Global Finance"), Charles R. Davis ("Davis"), Lucre Fund, LLC ("Lucre Fund"), JTA Enterprises, Inc. ("JTA Enterprises"), William H. Clark ("Clark"), Level Par Investments, LLC ("Level Par"), Kelly G. Rogers ("Rogers"), Sterling Meridian LLC ("Sterling Meridian"), Ronald J. Linn ("Linn"), Glenn Maske ("Maske") and William F. Dippolito ("Dippolito"). In its complaint, the Commission alleges that the defendants engaged in fraudulent conduct in connection with three related "high-yield investment" securities offerings. Between September 2005 and April 2006, Davis through his Atlanta-based company, Global Finance, raised a total of $9.9 million from over 100 investors located throughout the United States. As part of Davis's offering, two of his facilitators, Clark and Rogers, conducted separate fraudulent offerings and forwarded the proceeds of their offerings to Davis.

According to the complaint, Davis falsely represented that Global Finance's investment program would earn returns ranging from 25 percent per month to 90 percent per week. Davis also claimed that the funds were safe because they would be deposited into an escrow account maintained by Dippolito, an attorney. Based on Davis's claims, Global Finance received a total of $9.9 million from Clark ($4 million), Rogers ($4.7 million) and another investor ($1.2 million). The Commission also alleges that JTA Enterprises and Lucre Fund, which are controlled by Clark (Denville, New Jersey), received investment proceeds from at least 65 investors raised by Linn and Maske through their entity, Sterling Meridian (Yorba Linda, California); Linn and Maske told the investors that they had access to legitimate high yield investments paying monthly returns of 18 to 20 percent.

The complaint also alleges that Rogers, through Level Par (Frisco, Texas), solicited 35 investors by representing that his investment, purportedly involving the trading of bank debentures, was totally secure and paid weekly returns of 25 percent. According to the Commission's complaint, the investment programs were shams and the investors' funds were used for purposes other than "investments," including the personal use of the promoters.

Finally, the Commission alleges that Dippolito, a Tacoma, Washington lawyer, acting as escrow agent and using the title "paymaster," promised he would secure the funds until Davis notified him that Global Finance would purchase an investment. Instead, Dippolito disbursed the funds to persons he knew were prior investors, for which he received a percentage-based fee.

The Commission also names in its complaint, as relief defendants, USAssets & Funding Corp. (Littleton, Colorado), Nevada Sentry Service Corp. (Milwaukee, Wisconsin), Wells Ventures LLC (Tucson, Arizona), Triquestra Management Corp. (Dallas, Texas) and CMR Mngt. Group, LLC (West Trenton, New Jersey).

The Commission alleges in its complaint that defendants Global Finance, Davis, JTA Enterprises, Lucre Fund, Clark, Level Par, Rogers, Sterling Meridian, Linn and Maske each violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission also alleges that Dippolito aided and abetted Davis's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Commission further alleges that Clark, Linn and Maske violated Section 15(a) of the Exchange Act for acting as a securities broker without having been registered with the Commission.

The Commission is seeking against each of the defendants a permanent injunction and an accounting. The Commission is also seeking against each of the defendants, with the exception of Level Par, disgorgement plus prejudgment interest and a civil money penalty. Rogers consented to the entry of an injunction against him without admitting or denying the Commission's allegations. Rogers also agreed to pay disgorgement of $100,000 and a $50,000 civil penalty.

From the SEC complaint;

This matter involves three related fraudulent “high-yield” investment, or “prime bank," schemes uncovered by the Commission and the court-appointed receiver during discovery in the Commission’s civil injunctive action filed against Travis Correll and others (Correll civil action) for violations of the federal securities laws in a similar and related fraudulent high-yield investment scheme. SEC v. Travis Correll, et al. Case No.: 4:05-CV-472-RAS [EDTX/Sherman Division (December 7, 2005)] As Correll’s massive nation-wide Ponzi scheme was collapsing and facing inquiries from the Commission, Charles R. Davis through his company Global Finance & Investments, Inc. began conducting a new fraudulent scheme eventually raising a total of $9.9 million from over 100 investors located throughout the United States between September 2005 and April 2006.

Nice work, but isn't double dipping both illegal and fattening?

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The Hockey Barn LLC and Jeffrey J. Coleman: Fraudulent Roll Program

SEC v. The Hockey Barn LLC and Jeffrey J. Coleman, Civ. Action No. 07-CV-438-C (W.D.N.Y.)

The Securities and Exchange Commission announced that today it filed an expedited enforcement action against The Hockey Barn LLC and Jeffrey J. Coleman, Hockey Barn's Chief Executive Officer, in the United States District Court for the Western District of New York. In the complaint, the Commission alleged that from approximately October 2006 through the present, Coleman and the Hockey Barn defrauded investors through an offering of promissory notes and other investment contracts. Among other things, Coleman falsely told investors that they could obtain a return of at least 400% within 60 days from an investment in a purported bond trading program.

In November 2006, Coleman solicited a 70-year old man ("Investor 2") to invest in "The Barn." Coleman told Investor 2 that the minimum investment in the Hockey Barn was $100,000, and that it would provide a 50% return within 60 days. Coleman described his purported plans for the Hockey Barn to Investor 2. Coleman also falsely told Investor 2 that the Buffalo Sabres professional hockey club was interested in using the Hockey Bam as a practice facility. Further, Coleman falsely told Investor 2 that the Coca-Cola Company was interested in buying the facility in three to four years to compete with the Pepsi Center (an ice facility in the Buffalo area). Although Investor 2 responded that he only could invest $40,000, Coleman agreed to accept the investment.

I like this lie because it has the veneer of truth -why wouldn't the Coca-Cola company want to compete with Pepsi?

Investor 2 invested a total of $40,000 by two separate investments of $20,000 each (one in November and the second in early December 2006), and he received purported promissory notes from Coleman in return (one in Coleman's name and one in the name Coleman/Hockey Barn.

There is something about the promissory note which functions as a type of guarantee, many frauds use them as way of closing the deal even though they provide nothing in the way of security.

After Investor 3 made his investments, Coleman provided Investor 3 with two documents entitled "Memorandum of Understanding regarding Paper Purchase" that purportedly memorialized a group of investors' (including Investor 3's) respective "ownership"units of the paper purchase. For example, one undated Memorandum of Understanding sets out an allocation of ownership in units of the paper purchase to six investors, including Coleman and Investor 3. The Memorandum of Understanding states that this group owns 70% of the paper purchase.

The Memorandum of Understanding further falsely states that "each Unit holder
will receive $550,000 of total monies returned per unit for the first roll of the paper purchase," and that "monies will be wired into each particular individuals (sic) selected bank account by February 23, 2007."

Finally, the Memorandum of Understanding regarding the first roll falsely states
that "[a] total profit was made of $7,865,000" and that the investment group "controls 70% of that profit totaling $6,050,000."

Coleman's statements concerning the returns on an investment in the "paper
purchase" or bond trading program would generate were completely unfounded and otherwise false.

Coleman's representations to the Investors were similar to those made in
investment schemes that the Commission, the Federal Reserve Bank of New York, and theFederal Bureau of Investigations have wamed the public about. For example, all three agencies have highlighted that fraudulent scams promising extremely high returns are often called "roll programs." Similarly, Coleman described the "paper purchase" as "rolls" to certain investors.

This highlights a very simple skepticism trick that is available to anyone online. If you are interested in X, then do a search for "X scam" or "X fraud". In this case, I did a search on "sec roll program fraud" The SEC warning page about prime bank fraud was the first page.

In addition, Coleman's statements to the Investors regarding Hockey Barn's purported plans to build hockey facilities were without any reasonable basis in fact and otherwise false. Coleman has not taken any significant steps to build or develop any hockey facilities. Further, contrary to Coleman's representations, the Buffalo Sabres never committed to using a Hockey Barn facility.

Really? How odd. And that Coleman chap seemed like such a nice gentleman.

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In another prime bank scheme,

Eric E. Resteiner's fraud scheme came apart.

The Securities and Exchange Commission announced today that the federal court for the District of Massachusetts sentenced Eric E. Resteiner for criminal charges based on his operation of a fraudulent investment scheme through which he raised more than $30 million. Resteiner was a defendant in a previously filed SEC fraud action based on the same conduct. The sentence, handed down on May 16, 2007, ordered Resteiner to serve 87 months of incarceration, followed by two years of supervised release, and to pay restitution in the amount of $33.9 million. Resteiner renounced his U.S. citizenship in 1995, and will be deported from the United States following his term of imprisonment.

The criminal indictment alleged that Resteiner created and executed a scheme by which he defrauded approximately 50 investors, many of whom were members of the Church of Christ Scientist (Christian Science Church), out of more than $30 million through a purported high-yield, international bank trading program. As part of this scheme, Resteiner, assisted by others, made false representations to prospective investors, including that he was one of only a few people in the world permitted to conduct "off-balance sheet" trading, that his trading program would pay annual returns of no less than 50 percent, and that investors' principal would never be at risk. The indictment further alleged that Resteiner knew that he was not a trader and had no way to generate the promised investment returns, that investors' principal was not safe, and was in fact being used to pay purported "interest" payments to investors to lure more investors into the scheme, and to support his lavish lifestyle. The indictment alleged Resteiner maintained homes in the Bahamas and in Switzerland, a yacht, an airplane, a helicopter, two Rolls Royce motor cars, two Hummer vehicles, a Porsche Carerra sports car, and other assorted vehicles.

On April 16, 2001, the Commission filed a complaint in the Massachusetts federal district court against Resteiner and others charging them each with participating in the same investment scheme alleged in the indictment. On August 19, 2002, the Massachusetts federal district court entered default judgments against Resteiner and another defendant, Voldemar A. VonStrasdas, in the Commission's action. The Court ordered Resteiner and VonStrasdas jointly and severally to pay disgorgement plus prejudgment interest of $25,930,895.26. In addition, the Court ordered Resteiner and VonStrasdas each to pay civil penalties of $4.4 million, and permanently enjoined each of them from violating the antifraud and other provisions of the federal securities laws. The court also entered judgments by consent against two other individuals involved in Resteiner's fraudulent investment scheme, Charles G. Dyer and Miles M. Harbur, and against two entities controlled by Dyer, Resource F, LLC and Bunker Hill Aviation, LLC.

These prime bank schemes puzzle me. They are clearly irrational -but this is not what puzzles me.

I am unclear about the attraction to a secret trading program -what emotional need is being met by participating in a secret trading program?

What is odd about the prime bank fraud is that generally when we don't understand something, we leave it alone.

But reading any of the documents in a prime bank fraud will leave your head spinning -none of it makes any sense.

Somehow the gibberish masking as complexity serves as a compliance technique, but I haven't quite figured it out.

There are a couple of possibilities. First, we expect financial transactions to be complex and therefore don't believe that we should understand them. But if this is so, why wouldn't we invest in all sorts of complex derivatives?

Second, perhaps the documents are designed to be impenetrable to foreclose questioning. Maybe, I am not that convinced.

The right answer, I think, must involve the usual suspect: the guarantee. Somehow the guarantee of never risking capital works with the complexity of the prime bank documents to engage the mark.

It would be interesting to hear what needs that the 50 investors, many of whom were members of the Church of Christ Scientist (Christian Science Church) thought were being met by this investment.

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The United States Securities and Exchange Commission (Commission) announced that on April 26, 2007 and May 9, 2007, the United States District Court for the District of Maryland entered final judgments against defendants Larry Michael Parrish ("Parrish"), Michael Edward Zimmerman ("Zimmerman"), Z-Par Holdings, Inc. ("Z-Par Holdings") and Z-Par Investment Fund II, LLC ("Z-Par Investment Fund II") arising from charges that they conducted a fraudulent high-yield investment scheme that raised approximately $8.2 million from eleven investors in Florida and others elsewhere throughout the United States from at least April 2004 to April 2005.

Without admitting or denying the allegations of the Commission's complaint, the defendants consented to the entry of final judgments permanently enjoining them from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Pursuant to Section 15(b)(6) of the Exchange Act, Parrish and Zimmerman have also consented to the entry of administrative orders barring them from associating with any broker or dealer for at least five years.

On April 14, 2005, the Commission obtained a temporary restraining order and asset freeze against defendants Parrish, Zimmerman, and their wholly-owned entities Z-Par Holdings and Z-Par Investment Fund II. The Commission's complaint alleged that Parrish and Zimmerman marketed the fraudulent prime bank investment scheme by falsely representing to investors that their funds would be pooled with those of other investors in $1 million lots for the purchase of "debt obligations of the top 50 banks in the world," which would be safe and secure investments yielding high rates of return. The complaint alleged that Parrish and Zimmerman fraudulently sold interests in fictitious prime bank debt instruments and payment obligations, claiming that they carried a financial insurance guarantee to further enhance the value and lower the risk of default. The complaint further alleged that in furtherance of the fraudulent scheme, Parrish and Zimmerman sent investor funds to relief defendants, Eduard Akopian, and his wholly-owned entity Capital Bancorp, who unbeknownst to Parrish and Zimmerman, used the funds to purchase precious metals on margin.

On May 4, 2005, the defendants and relief defendants consented to a preliminary injunction and an order maintaining the asset freeze. In December 2005, $7.5 million was returned to investors."

The one undeniable fact in all frauds is the investors have an unshakeable belief in finding a safe and high return investment. But without any special skill, and absent winning a lottery, there is no such investment.

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The SEC has added two new defendants in the International Fiduciary Corp., Prime Bank Ponzi scheme. According to the amended agreement, the

"defendant IFC, at the direction of defendants Pinkett, Byer, and Stevenson, paid these relief defendants, collectively, at least $1.9 million. The complaint does not allege that these relief defendants engaged in any violations of the federal securities laws, but rather that they hold or control funds that represent fruits of violations committed by the other defendants."

Prime Bank scams are unusual in that they are a simple fiction - the documents which evince a trading program are simply made up.

According to the initial complaint,

"Defendants offered and sold minimum $100,000 investment contracts .to share in returns from an "asset growth program" that promised to trade in first tier medium-term bank notes." Investors were told that their money would be deposited into one of three banks, either United Bank, in Arlington, Virginia, Banco Bilbao Vizcaya Argentaria ("BBVA") or Great Florida Bank ("GFB"), both located in Miami, Florida. The defendants told investors that their money would remain in a segregated account, controlled by the investor, and that said account would "remain in full equity value or greater than full equity value." Investors were promised a rate of return that varied between 4% and 6% per month."

There is no such thing as a "1st tier medium-term bank note", here is the google search for the terms.

But there are 1st tier lenders, and medium-term bank notes. There are segregated accounts. But not much else is true.

According to the SEC's complaint:

"From at least July 2003, the defendants have been marketing investments in an "asset-growth program" in which individuals or entities invest funds with the defendants in order to participate in returns from a prime bank trading program. Investors were falsely told their money would be pooled and used as collateral to finance the purchase of "1" tier medium-term bank notes."

Investors have been falsely told, orally and through written offering documents that their investments with the defendants would remain owned by the investors in segregated accounts under their control. Investors were also led to believe that their investments in defendant IFC would be used only as collateral for trades and therefore would remain in insured bank accounts."

Collateral for trades and therefore remain in "insured bank accounts"?

Like all Ponzi schemes this one maintains and gains traction because our initial skepticism about make 4% a month rapidly gives way on the receipt of several months of paper statements "showing" a 4% monthly return. A fact which Charles Ponzi understood very well.

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Currently, the laws in North America which protect investors in securities and franchises are disclosure laws. These laws, very roughly, make it illegal to mislead the public and require the seller to provide information to the purchaser in a disclosure document.

However, there are exemptions to the mandatory disclosure. Again, very roughly, if you are a sophisticated investors, that is you have sufficient wealth, the seller need not provide you with the disclosure document owed to lesser mortals.

The theory behind this exemption is that wealthy people have sufficient resources to do their own due diligence.

However, the flip side of this exemption is never explored. If the wealthy have enough resources to do their own due diligence, why don't they shoulder the entire litigation burden when their due diligence fails? That would be a good way to regulate the hedge fund industry, wouldn't it?

Here is an example from THE DAILY CAVEAT and a hedge manager Sharon Vaughan, the mother of the actor Vince Vaughan.

The SEC accused Vaughn of defrauded clients in the by investing in a fraudulent prime-bank trading scheme, noting that Vaughn failed to perform adequate due diligence and neglected to disclose her trading strategy to investors. She followed this up by withholding and then submitting fraudulent documents to the SEC.

Terrific background on the fraud is over at the Naked Shorts. Spotlight News has a nice story on the fraud, as does the New York Daily News.

But let's look at what happened. According to the SEC complaint about Sharon Vaughan, Ms. Vaughan involved her clients in a classic Prime Bank scheme. The complaint is nicely summarized at Securities Prof Law Blog.

Now the particulars of the scheme are depressingly familiar, but Ms. Vaughan's background is not. According to this Forbes article on the hedge fund fraud, Ms. Vaughan "Vaughn, 64, has long experience in real estate, insurance and investments". Just the type that doesn't need protection from fraud and con criminals, eh?

How did the story play out for the the sophisticated investors? Well, remarkably well -after the SEC sued the promoters for the return of the $25 million invested with Ms. Vaughan, according to the New York Daily News, "ábout $21 million has been recovered and returned to 27 investors - Sharon's own $2 million will be the last to be paid back should all the money be found. But without the SEC's involvement, it is very unlikely that the investors could have recovered this money so swiftly, as the money which was repatriated came from several sources in Europe.

But the wealthy investors didn't have to pay a dime for their legal costs. Why - if they truly want to be exempt, then shouldn't they pay the entire freight charge for being lax in their due diligence?

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In the early 1920's, the Yellow Kid and his associates devised a clever racing bookmaker fraud. The Yellow Kid set up, what today would be called, an "offshore" horse racing bookmaker. They solicited money through the mail, an interesting exception to most of the Kid's criminal schemes, but every winning bet was paid off. (Otherwise the scheme would have collapsed in a matter of weeks, and involved the Feds with the mail fraud charge. Always to be avoided.)

Nonetheless, the venture was extremely profitable for the criminals. How could this be if every winner was paid out?

At that time, the race results were posted appeared in the newspaper the next day. But the winning odds were not posted. It became a simple thing for the Yellow Kid to skim off the from the winning results a portion for his syndicate's "profits". For example, if a winning bet return $3, the Yellow Kid would send $2. There was of course no actual bets laid, the losing bets were kept and the winning bets returned less than a fair return.

It would take some bookmaking skill to make this fraud run, as the race odds are determined by the betting population at the track and the money coming in by mail would not likely reflect those odds. For example, the track might post horse 1 in race 3 as 3-1, but the mail betting might have him running at 1-1, half the money coming in by mail being on horse 1. If horse 1 does win, then the Yellow Kid would only enough money to pay off, at a maximum odds of 2-1, and that with no profit. (The easier way to run this fraud is to skim before, lay all the bets off at the race track, and return a diminished pay-off. Call the difference "advanced breakage")

This scheme was one of the few that didn't rely upon the Yellow Kid's understanding of the something for nothing impulse, that he cultivated in marks.

In a very interesting article about Second Life, Randall Harrison in Capitalism 2.0: SecondLife: Revolutionary Virtual Market or Ponzi Scheme? discovers a similar fraud in the Second Life exchange system, the story about Second Life being a Ponzi was also picked up by ValleyWag. Second Life is essentially a online version of the Sim's Game, with a twist. In a Sim game, you try to expand your virtual budget by actions taken in the game; in Second Life, you can expand your budget by purchasing Linden Dollars for play in the game with US Dollars. This represents a happy medium between tedious game play and using the cheat codes in a Sim game. If you want to "advance" faster in Second Life, you purchase Linden dollars.

Naturally, any system of exchange presents arbitrage opportunities. Can you purchase Y Linden dollars for X US dollars, engage in some commercial transactions in Second Life, emerge with more Linden Dollars and cash them out into more US dollars than you started with?

Well, as Randall Harrison discovered, in Second Life, you don't know what the rate of return is, viz. the value of an arbitrage bet, in advance. The posted rate of exchange between Linden Dollars and US Dollars may be 280-1, for example, but if you try to cash out a large amount of Linden Dollars, the rate zooms up to something like 800-1. Talk about a harsh currency control system!

But the scheme is not a Ponzi, Pyramid, or a HYIP. Which doesn't make the currency exchange manipulation any less of a scam.

Randall Harrison's article had types of responses or comments that appeared on his blog. One category of response was: you don't know anything because I actually make money selling goods to other Second Life participants. The other category of response was: making money off of a currency exchange is fundamentally different from selling goods to other Second Life participants, and is plain wrong.

Harrison did a good job of pointing out that the first response is true, but irrelevant, and the second response is just plain false. However, there is a better observation: the second type of response is false, which makes the first type of response now very relevant. How come those selling goods, which include Linden dollars, cannot succeed above a certain size?

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They cheat. They steal the investors's money and use it to pay their own personal expenses

In an ironic twist on cross border scams, the SEC filed "an emergency action against Daniel Eric Byer, Malcolm Cameron Boyd Stevenson, Preston David Pinkett II, and International Fiduciary Corp., S.A. ("IFC"), alleging that the defendants defrauded over 180 investors in a fraudulent "Prime Bank" scheme which appears to have raised at least $18.2 million to date. IFC is a Virginia corporation with offices in Arlington, Virginia. Pinkett, who also lists an Arlington, Virginia address, is IFC's chairman and CEO. Byer and Stevenson are Canadians."

On November 1st, 2006 the British Columbia Securities Commission issued a temporary order against Byer, Stevenson, Pinkett and International Fiduciary for their prime bank investment scheme. A full hearing is scheduled for December 14th, 2006.

According to the British Columbia Securities Commission,

"10. The IFC Investment advertises numerous characteristics often attributed to Prime Bank investment schemes to make them appear legitimate, including:

(a) the opportunity to become part of a select group involved in an investment program that is normally only available to the rich and/or financial institutions;

(b) investor funds are purportedly invested in "an asset growth program by buying and selling 1st Tier medium term bank notes";

(c) the promise of an inordinately high interest rate;

(d) the guarantee that investor capital is not put at risk, rather remaining "in full equity value or greater than full equity value";

(e) investor funds are used to leverage offshore trading in the "medium term bank notes" at ten times the amount invested;

(f) IFC provides investors materials stating that Pinkett has had a "5 year affiliation with the International Monetary Fund"; and

(g) investor funds are directed first to the United Bank NA in Arlington, Virginia, and then to either the Banco Bilboao Vizcaya Argentaria or Great Florida Bank, at the discretion of IFC.

11. Prime Bank investments are fictional. Secret, exclusive overseas markets for discounted financial instruments do not exist. In promoting and selling the IFC Investment to residents of British Columbia, the Respondents acted contrary to section 57(b) of the Act." (my emphasis)

Stripped to its bare, dry and financial details prime bank scams appear impossible to pull off, but even the SEC is amazed that these frauds continue to work. In this case, 182 investors for three years, at $100,000 a pop.

There are a number of influence factors at work in a prime bank scam, but what caught my attention is contained in a).

The prime bank fraud works for the same reason "Limited Special Engagement, Ends Soon" packs them in at theatre. Scarcity when it triggers a potential loss, according to Cialdini, makes information or goods much more attractive.

Who wouldn't want to be part of a select group, getting an invitation normally quite out of your reach? Like being invited to Augusta for the Masters for the average duffer.

In Donald Dunn's book on Ponzi, there is charming description about how Charles Ponzi achieved this illusion. During the Christmas holidays, he walked into one of the favourite watering holes holding a number of impressive but quite fake promissory notes from the Securities Exchange Company to equally mythical investors. While chatting up the locals, Ponzi accidently dropped a number of these promissory notes on floor. The denizens of the club were suitably awed -not awed enough to invest there and then on the spot, but primed for the next event.

For they had seen the invitations to the 50% club. Invitations which could be theirs. Only Ponzi hadn't offered it to them, yet.

Technorati Tags: british columbia securities commission, byer, arlington virginia, prime bank, fiduciary, investors, ifc, virginia corporation, investment scheme, ironic twist, malcolm cameron, emergency action, personal expenses, cross border

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So stories just leave you shaking your head in wonder about the difficulties that the regulators faces in clamping down on fraud. Tri Energy is one of those stories. While facing a charge of ponzi scheme, Jones and Tri Energy simply engaged in a new transaction, involving gold.

According to press release, "The SEC's complaint alleges that the gold transaction was a fraud that Jones and others used to defraud hundreds of investors of over $50 million by promising returns of 100% or more within 60 days. The SEC's complaint alleges that Jones and other have been telling investors that these extraordinary profits were to be generated in part by helping an unnamed Saudi Arabian prince move gold from Israel through Luxembourg to the United Arab Emirates."

Stated boldy like is, in stark relief, the SEC is denying that any reasonable person could believe in the Tri Energy scheme. The subtheme is that only a fool could believe that they would obtain a 100% return in 60 days. And ofcourse, we don't really have to protect fools do we?

But how on earth could have Jones and Tri Energy, while under the scrutiny of the SEC, simply committed another massive fraud?

Technorati Tags: saudi arabian prince, ponzi scheme, united arab emirates, gold, investors

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Ponzi Fraud

"The Commission announced that on July 28, 2006, a Rhode Island federal court entered a final judgment by consent against Farouk A. Khan, a defendant in a fraud action filed by the Commission in April 2002. The Commission alleged in its complaint that Khan and others participated in a fraudulent offering scheme that raised at least $52 million from investors.

The Commission filed its action against Khan and eight other defendants and a relief defendant on April 1, 2002, alleging that Khan and others participated in a scheme that made fraudulent representations to investors about a purported high yield trading program operated through entities formerly known as Brite Business Corporation and Seaview Development & Holdings Ltd. Among other things, the Commission alleged in its complaint that in an attempt to convince an investor to invest additional funds, Khan made fraudulent misrepresentations to the investor by promising him a 107% annual return on investment."

The consent judgment means that there will be little to return to the victims, but the Commission will later trumpet its success in obtaining a restitution judgment.

Technorati Tags: khan, fraudulent, defendant, fraud, investors, action, final judgment, business corporation, ponzi, farouk, seaview, return on investment

Posted by michael webster at 10:40 AM | Permalink | Comments (0) | TrackBacks (0)

For almost four years, Steven E. Thorne and Derrick N. McKinney and others ran a prime bank ponzi scheme, in which the salesmen were recruited by multi-level marketing techniques, according to the indictment against them, filed in the U.S. District Court in Northern Ohio, December, 2005.

On July 20, 2006, the US District Attorney for Northern Ohio announced that "that the Honorable John R. Adams, United States District Judge, in Akron, Ohio, sentenced Derrick N. McKinney to 36 months incarceration, supervised release of 3 years, and ordered restitution of approximately $1 million to victims of the securities fraud scheme, $107,636 to a mortgage company in connection with the mail fraud charge, and $444,437 to the Internal Revenue Service for tax violations.

McKinney had entered guilty pleas to one count of conspiracy, and three counts of securities fraud in connection with his involvement in a securities fraud scheme with co-defendant Steven Thorn, and others. McKinney also entered guilty pleas to an information charging him with one count of mail fraud for defrauding a mortgage company, and one count of income tax evasion in failing to disclose over $1 million in taxable income, resulting in tax due and owing of over $440,000."

What can we learn about due diligence for these types of business opportunities, by reviewing the indictment?

Technorati Tags: mail fraud, securities fraud, fraud scheme, fraud charge, northern ohio, ponzi scheme, akron ohio, internal revenue service, multi level marketing, prime bank

Continue reading "How to run a Ponzi Scheme for 4 years and scam $75 million?" »

Posted by michael webster at 11:42 AM | Permalink | Comments (0) | TrackBacks (0)

The Department of Justice announced, on July 17th, 2006 that "two guilty pleas by two defendants in an international investment fraud scam. Last week, ROBERT J. SKIRVING and today, RITA L. REGALE, each pled guilty to one count of Conspiracy to Commit Money Laundering relative to the fraud scheme.

"It is my sincere hope that someday those who commit white-collar fraud will realize that the IRS-CI, the FBI, the U. S. Attorney's Office and others will always be there to hold them accountable for their actions," said Sherree W. Preston, IRS special agent in charge for Oregon.

Both defendants and three others were charged in a fraud scheme involving the First International Bank of Grenada (FIBG), and various subsidiaries of FIBG. The indictment alleged that defendants persuaded individuals to deposit money and otherwise invest in the "banks" by promising annual returns of up to 300%. The defendants claimed the "banks" had assets worth up to $74 billion, and that their deposits were 100% guaranteed against loss by the International Depositors' Insurance Corporation (IDIC). In fact, the indictment alleges, the bank had no investment income and simply used new depositors money to make purported interest" payments to earlier investors. In August, 2000, the First International Bank of Grenada was taken over by the Government of Grenada, resulting in losses to depositors in excess of $100 million."

First Internantional Bank of Grenada was a well known scam and a large embarrassment for the Government of Grenada.

Posted by michael webster at 9:05 AM | Permalink | Comments (0) | TrackBacks (0)

On May 17th, the SEC announced that it had taken action against Geoffrey Gish and Weston Rutledge Financial Services, among others. It is alleged that between February, 2004 and May, 2006 Mr. Gish had stolen at least $8.8 million from at least 100 individuals. The method Mr. Gish used was a prime bank scheme, which was operated as a ponzi scheme. This scheme last less than 2 years, which is reflected by the unusally high payouts, 60% in a year.

The SEC alleges that Mr. Gish enriched himself by diverting $100,000 from the corporate bank accounts. The entire complaint can be read here. According to the complanint, Mr. Gish simply directed his staff to create the various returns on spreadsheet. How would the Yellow Kid have covered his tracks for this sort of scheme?

Technorati Tags: gish, ponzi scheme, stealing money, yellow kid, sec, prime bank, bank accounts, horse race, rutledge, enriched, weston, spreadsheet, convince, financial services

Technorati Tags: ponzi scheme, gish, technorati, sec, prime bank, bank accounts, rutledge, stealing money, enriched, weston, spreadsheet, yellow kid, financial services, horse race, convince

Continue reading "New Prime Bank Fraud - Geoffrey A. Gish; Weston Rutledge Financial Services, Inc" »

Posted by michael webster at 2:42 PM | Permalink | Comments (0) | TrackBacks (0)

In what must be a classic case of shutting the barn door after every animal has been stolen, the SEC announced that both Samuel Israel III and David E. Marino have consented to order barring them "from future violations of the general antifraud provisions of the federal securities laws". It will be recalled that in 2005, the SEC "filed an civil injunctive action against Samuel Israel III of New York and Daniel E. Marino of Connecticut, the managers of a group of hedge funds known as the Bayou Funds (Funds), based in Stamford, Conn. The SEC's complaint alleges that, beginning in 1996 and continuing through the present, Israel and Marino have defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use."

According to this story, "Bayou sent out quarterly reports, annual reports and weekly newsletters to mislead investors about the funds, which drew $450 million in investor money between 1996 and the collapse this summer [in 2005]." (my emphasis).

How is it possible that $450 million can be stolen from sophisticated investors over a period of approximately 10 years? How did their due diligence fail? Why was this scam allowed to run for almost ten years?

Technorati Tags: collapse, marino, defrauded investors, sec, israel, investor funds, hedge funds, investor money, annual reports, weekly newsletters, mislead, stamford, conn

Continue reading "Prime Bank Fraud- Bayou Funds" »

Posted by michael webster at 8:55 PM | Permalink | Comments (0) | TrackBacks (1)

Mr. Midkiff has presented the SEC with a "foreign bill of exchange" which purportedly allows the SEC to draw up to $100,000,000.00 to settle the charges against him. Hmm, woudln't a certified cheque and plea bargain been a little easier?

Why is Midkiff engaging in this further chicanery?

Continue reading "Neulan D. Midkiff - Cooling off the Marks" »

Posted by michael webster at 9:38 AM | Permalink | Comments (0) | TrackBacks (0)

"Importantly, it appears that many investors were advised and shown a document that they believed indicated that this investment was insured by a $1 billion bond issued by Nationwide Deposit Trust Insurance Company (Nationwide). The Receiver has recovered a copy of a one-page redacted document from the records in his possession that appears to indicate that a policy was issued by Nationwide to an unknown insured providing insurance coverage for Emergency/Catastrophe. However, this document has been redacted so that critical information is missing. In addition, it may have been modified. The Receiver is currently in communication with Nationwide, but it is highly unlikely that such a bond actually exists to protect any investor funds."

An insurance bond works on the imagination in much the same way as the guarantee does in a business opportunties scam or fraud - it dulls due diligence. After all, Nationwide Deposit Trust Insurance Company is real, isn't it? Who can understand insurance policies anyways?

Continue reading "Horizon Prime Bank Fraud and Insurance" »

Posted by michael webster at 7:11 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC appointed receiver in this action is Hays Financial Consulting and the relevant court documents, along with other newspaper stories are here.

Consider the analysis of why this scheme worked, by the SEC and the Receiver:

"The SEC assistant director said it is such scams that continue to keep officials busy.

"I am amazed pretty regularly by the number of fraudulent schemes and the number of investors they are able to entice,' Addleman said.

She said when it comes to making investments, investors should keep this old adage in mind: “If it sounds too go to be true, it may well be,” she said.

Hays, the Atlanta-based receiver, agrees.

He said investors should seriously question the validity of an investment plan that offers 10 percent a month in risk free income. 'Even seven percent,' Hays said.

In the Correll case, Hays says he is finding that many of the investors are middle-aged folks with respectable incomes. He believes their reason for investing is simple.

'It is just greed,' Hays said. 'People wanting a higher return.'

Well, here is another thing that is too good to be true: I am from the SEC and I am here to help.

Continue reading "Neulan D. Midkiff Charged with Contempt" »

Posted by michael webster at 6:28 PM | Permalink | Comments (1) | TrackBacks (0)

According to the SEC:

"During the initial stages of the fraud, investors received monthly payments that the Defendants represented were "profits" on their investment. However, monthly payments to Resource F investors ceased around May 2000. To date, although requested, no investors are known to have received the return of their investment, as promised by the Defendants. Furthermore, since the cessation of monthly payments, VonStrasdas has regularly sent lulling letters to investors making excuses for the cessation of payments, and making the falsestatements that he expected trading and monthly payments to investors to resume soon. More recently, VonStrasdas and Dyer have each solicited investors to contribute money to purported legal efforts to obtain the return of investors' funds."

In a very interesting twist, Eric E. Resteiner donated $2.3 million to the defendants, who he was defrauding. Why is this interesting?

Continue reading "Prime Bank Restitution" »

Posted by michael webster at 8:50 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC is continuing to press contempt charges against Randall T. Treadwell in connection with the alleged Prime Bank Ponzi scheme known as "Learn Waterhouse".

The SEC does have a web-page which identifies the logical elements of a Prime Bank fraud, which optimistically describes "how a prime bank fraud works".

The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers. Investors are also told that profits of 100% or more are possible with little risk.

On the face of this, it sounds absurd. What elements are in play here?

Continue reading "SEC's ongoing prosecution of a Prime Bank fraud" »

Posted by michael webster at 4:53 PM | Permalink | Comments (0) | TrackBacks (0)

"In its complaint, the Commission alleges that the defendants are offering and selling interests in purported foreign and international bank deposit programs (collectively "Bank Deposit programs") promising four to 12 percent monthly returns without risk to their investment principal. The Commission also alleges that investors send or wire their money to TNT or to one of Correll's entities -- Net Worth Group or TC&Co, and that all of the funds are then transferred to a Horizon Establishment bank account controlled by Correll. According to the complaint, investors are told that Correll, the "money manager," forwards investor funds to Cardno, who deposits them in an offshore reserve account; Cardno, identified as the "trader," with exclusive contracts with international banks, supposedly uses the monies in the reserve account to participate in trading programs and loan programs. In reality, according to the complaint, the Bank Deposit program does not exist and none of the investors' funds are sent to Cardno, his entities or to any offshore account for investment. Instead, as set forth in the complaint, all of the investor funds are commingled among various Correll-controlled accounts, and the "investment returns" paid to investors are Ponzi payments, i.e., they derive from the proceeds of more recent investors."

Posted by michael webster at 7:20 AM | Permalink