THE BIZOP NEWS

Update on the, The Hockey Barn LLC and Jeffrey J. Coleman

The Securities and Exchange Commission announced that on July 12, 2007 the United States District Court for the Western District of New York entered a preliminary injunction order against defendants, The Hockey Barn LLC and Jeffrey J. Coleman, Hockey Barn's Chief Executive Officer. The Court's July 12 Order, among other things, preliminarily enjoins defendants from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder pending a final disposition of the action. Further, the July 12 Order freezes defendants' assets and requires defendants to provide accountings of, among other things, all of the funds received from investors.

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.

The defendants consented to the entry of the order without admitting or denying the Commission's allegations.

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AOB Commerce, Inc., AOB Asia Fund I, LLC, and Terchi Liao a/k/a Nelson Liao, et al.: Lit. Rel. No. 20196 / July 16, 2007 xx, 2007 SEC Halts $45 Million Ponzi-Like Promissory Note Scheme

The Securities and Exchange Commission, on July 12, filed an emergency action to halt an ongoing $45 million securities offering that the SEC alleges to be a Ponzi-like scheme. Named in the Commission's complaint are Terchi Liao (a.k.a. Nelson Liao), age 49 of Arcadia, California, and two entities he controls, also of Arcadia, AOB Commerce, Inc. and AOB Asia Fund I, LLC. The complaint also names four other Southern California entities controlled by Liao -- AOB Management, Inc., AOB Transportation, Inc., AOB Vacations, Inc., and AOB Media, Inc. -- as relief defendants based on their receipt of investor funds. The Honorable Christina A. Snyder, United State"

The Commission's complaint alleges that since mid-2004, the defendants have raised more than $45 million from hundreds of investors nationwide through their unregistered offering and sale of promissory notes that purportedly pay guaranteed interest of up to 5.5% per month.

The complaint further alleges that the defendants represent that they are in the business of making loans to companies in Asia, particularly China. Although the defendants have made some loans to Asian companies, they have principally used investor funds to pay the interest on the promissory notes they previously issued and to pay commissions to investors who solicit others to invest in the notes. For example, according to the complaint, in the six-month period from July 1, 2006 through December 31, 2006, the defendants:

Raised more than $13.7 million from investors through the sale of the notes;
Received less than $375,000 from legitimate business activities; but
Paid more than $6 million in interest and commissions to investors; and
Loaned or otherwise transferred almost $6 million to four related entities owned and/or controlled by Liao which are named in the complaint as relief defendants.
As alleged in the complaint, Liao has known since at least September 2006 that AOB Commerce and AOB Asia Fund were unable to pay the interest due investors from their business activities, and knew or was reckless in not knowing that they were unable to do so prior to that date. Nevertheless, the defendants have continued to raise substantial amounts from investors through the sale of notes and have continued to pay interest and commissions with new investor principal.

The court issued an order temporarily enjoining defendants from future violations of the securities registration and antifraud provisions of the federal securities laws, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The court also issued orders (1) freezing the assets of the defendants and relief defendants; (2) appointing a temporary receiver over the defendants and relief defendants; (3) requiring the defendants to provide accountings; (4) prohibiting the destruction of documents by the defendants; and (5) granting expedited discovery. The Commission also seeks preliminary and permanent injunctions, return of ill-gotten gains with prejudgment interest, and penalties against the defendants. The Commission's complaint also requests an order barring Liao from acting as an officer or director of any public company.

The complaint also alleges that the defendants loaned or otherwise transferred significant amounts of investor monies to the relief defendants and seeks the return of those monies.

A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for August 6, 2007.

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In all the news releases from AG's who are prosecuting Ponzi style frauds, there is a common emphasis on how high the promised rate of return was.

For example, in Global Online Direct, "depending on the amount invested, Global promised effective annual returns of more than 1,800%." , and in Your Money's Worth, "by promising annual returns of up to 96% in connection with the unregistered offer and sale of YMW securities."

Virtually every press release has the same implied theme: these investors were idiots to believe in such a high rate of return and in some sense deserve their financial fate.

However good this makes us feel, that we would never be such a sucker, let me pose a single question. When some one claps loudly at a music performance, do you feel any pressure to also clap? If the crowd rises on its feet, do you stubbornly sit seated? Can you resist because apparently, according to Valerie Scher

"there's a malady sweeping the nation that's highly contagious to concert goers. It doesn't have a name yet, so let's call it Excessive Ovation Syndrome (EOS for short). Those suffering from it stand and applaud at performances that aren't good enough to deserve such enthusiasm. In extreme cases, they shout "Bravo!" during events that are best forgotten.

The more people pay for tickets, the more susceptible they are to EOS, because ovations confirm that their money was well spent. Even those in bargain seats can easily catch it from their neighbors. The urge to stand and cheer may be irresistible if everyone around you is doing it."

If you have felt this pressure, a simple example of social proof, then you can begin to understand how a Ponzi fraud works its magic.

Here is a stylized version of the type of thinking that ensnares a Ponzi victim.

First, we start with extreme skepticism, it is too good to be true. But maybe, on the other hand, this fellow is a genius. It could be, so why don't I risk a small amount to invest. At worst, I will simply lose my money -confirming what I already knew, that it was too good to be true.

Second, disaster strikes: the Ponzi criminal doesn't take our meagre offering and vanishes -magically it is transformed to a new and higher "amount". Or least according to the spreadsheet printout that I received.

Everyone else is busy clapping, yelling "Bravo, bravo". I must be missing something, and after all I have seen the proof with my own eyes. Quick, quick invest more money and start clapping with everyone else. Hurry, hurry.

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Here is a massive ponzi scheme, alleged by the SEC. It has a couple of neat tricks in it. First, there is the quasi business purpose to the whole enterprise -lend us money and we will buy distressed inventory and resell it on eBay or other internet sites. Second, you have to like the fact that one of promoters was a disbarred lawyer - who lost his license for "dishonesty".

Global Online Direct, Inc., Bryant E. Behrmann, and Larry "Buck" E. Hunter: Lit. Rel. No. 20183 / July 6, 2007: "Home | Previous Page U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20183 / July 6, 2007

SEC v. Global Online Direct, Inc., Bryant E. Behrmann, and Larry 'Buck' E. Hunter, Civil Action No 1:07-CV-0767 (N.D. Ga., filed April 5, 2007).

The Commission announced today that it has amended its previously filed complaint in the United States District Court for the Northern District of Georgia to add fraud charges against Global Online Direct, Inc. (Global), a Nevada corporation headquartered in Union, Oregon, and its principals, Bryant E. Behrmann (Behrmann), of Las Vegas, Nevada, and Larry "Buck" E. Hunter (Hunter), of La Grande, Oregon.

The Commission's original complaint, filed on April 5, 2007, charged Global, Behrmann, and Hunter with conducting an unregistered offering of securities through the offer and sale of interests in Global's "Secured Profit Inventory Program" (SPIP), in violation of Sections 5(a) and 5(c) of the Securities Act of 1933. At the time the original complaint was filed, Global, Behrmann, and Hunter consented to, and the Court ordered, the appointment of Michael A. Grassmueck ("Grassmueck") as an independent corporate monitor for Global.

On June 4, 2007, the Court issued, also with Defendants' consent, an Order expanding Grassmueck's authority to that of a Receiver for Global, and freezing the assets of Global, Behrmann, and Hunter. The Order requires the Receiver to perform an accounting of the offering and sale of securities by Global, which it termed loans, including the names of all investors and/or lenders, the principal amount invested with and/or loaned to Global by all investors, and the amounts paid by Global to any investors.

The Amended Complaint, which was filed on July 3, 2007, charges that, since at least October 2005, Global, Behrmann and Hunter have orchestrated a massive Ponzi scheme and conducted an unregistered offering of securities through Global's SPIP. Global, Behrmann and Hunter solicited investors to "loan" Global funds for a term of one year in exchange for promised daily interest payments. Depending on the amount invested, Global promised effective annual returns of more than 1,800%. Global purported to generate revenue sufficient to pay investors their promised returns by pooling investor proceeds to purchase distressed inventory, which Global then claimed to resell through various online auction websites, including Ebay and Yahoo! Auctions, as well as through flea markets, street sales and retail storefronts. From October 2005 through March 2007, Global raised approximately $45 million from more than 9,000 investors.

The Amended Complaint further alleges that Global, Behrmann and Hunter failed to disclose to investors that Global's purported business model was wholly incapable of generating the returns promised to investors, and that the vast majority of the returns paid to existing investors were in fact the proceeds invested by later investors - the key hallmark of a Ponzi scheme. Global, Behrmann, and Hunter also failed to disclose other material information to investors, including that: (a) as of March 2007, Global was more than $30 million in arrears in honoring investor withdrawal requests and owed investors approximately $265 million - an amount more than $250 million in excess of all assets of Global; (b) even though they had promised investors that their investments were "secured and backed by actual product inventories," they had taken no steps to secure or tie any individual investment to any actual product inventory, and the total value of the inventory was only a tiny fraction of the investments purportedly secured; (c) Global maintained no effective bookkeeping or accounting systems, and thus were completely incapable of tracking or identifying the amounts invested by investors, the returns paid to investors, the cost of inventory purchased, and the proceeds generated through inventory sales; and (d) state cease-and-desist and injunctive orders for prior violations of securities laws had been entered against Global by the states of Pennsylvania and South Dakota, against Behrmann by the states of North Dakota, Pennsylvania and South Dakota, and against Hunter by the states of Idaho, Illinois, Minnesota, North Dakota, Oregon, Pennsylvania, South Dakota and Washington. Additionally, while representing to investors that Behrmann was an attorney and a former judge, Defendants failed to disclose that his law license had been suspended since 1999 for professional misconduct and that the Idaho Supreme Court had found Behrmann to have engaged in "conduct involving dishonesty, fraud, deceit or misrepresentation in course of his practice of law."

The Amended Complaint further alleges that Global, Behrmann and Hunter violated the securities registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 (the Securities Act) and the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Amended Complaint seeks preliminary and permanent injunctions, an accounting, an asset freeze, disgorgement of ill-gotten gains, prejudgment interest and civil penalties against Global, Behrmann and Hunter.

The litigation remains pending as to all parties.

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Earlier this month, Marc Andreessen, wrote a piece about economic bubbles entitled. "Bubbles on the brain":

"It has become commonplace in Silicon Valley and in the blogosphere to take the position that we are in another bubble -- a Web 2.0 bubble, or a dot com bubble redux.

I don't think this is true.

Let's examine the theory of a new bubble from a few different angles.

First, recall that economist Paul Samuelson once quipped, 'Economists have successfully predicted nine of the last five recessions.'

One might paraphrase this for our purposes as 'Technology industry experts have successfully predicted nine of the last five bubbles'... or perhaps more like five of the last one bubbles.

The human psyche seems to have a powerful underlying need to predict doom and gloom."

We can ignore the attempt to ground his conclusion in evolutionary pyschology, since predicting doom and gloom is largely irrelevant. We aren't interested whether the forecasters are correct or not, we want to know what are the elements that make up a speculative asset play; how to turn an unviting speculation in to an appealing investment.

And on this ground, Andreessen is completely misinformed. He starts with a misunderstanding of the rarity of asset bubbles.

"If you're going to listen to people who predict bubbles or crashes, you have to be ready to stay completely out of the market -- the stock market, and the technology industry -- almost every year of your life.

Second, historically, bubbles are very, very rare.

It's significant that in books and papers that talk about bubbles, there are simply not that many examples over the past 500 years of capitalism.

You've got the South Sea bubble, the Dutch tulip bulb bubble, the bubble in Japanese stocks in the 1980's, the dot com bubble, and a few others.

They just don't happen that often, at least in relatively developed economies."

Bubbles are common, which is what Andreessen should have predicted if he really thought that our attraction to them was rooted in our evolutionary past.

Andreessen is right when he says that "Third, in the technology industry, lots of startups being funded with some succeeding and many failing does not equal a bubble. It equals status quo. The whole structure of how the technology industry gets funded -- by venture capitalists, angel investors, and Wall Street -- is predicated on the baseball model. Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts. If you're going to call a bubble on the basis of lots of bad startups getting funded and failing, then you have to conclude that the industry is in a perpetual bubble, and has been for 40 years."

This is true, but it is not relevant. Yes, the technology portfolio has wide spread of returns -what does this have to do with a speculative asset play? A bubble occurs precisely when what is really a speculative gamble is made up to look like an investment, or at least in the eye of the marks.

It gets worse.

Andreessen goes and concludes "Fourth, getting more specific about Internet businesses -- things have changed a lot since the late 90's. It is far cheaper to start an Internet business today than it was in the late 90's."

Uh, that is a necessary condition for the creation of a bubble -cheap access to a what looks like, but aint', a capital generating opportunity. If the ticket price is too expensive, you cannot get enough of the rubes and marks in to generate the false enthuisasm, the swings of emotion and churn.

Finally, Andreessen states "And then there's Google. These companies aren't pulling in all that revenue via some kind of Ponzi scheme. This is money coming from real advertisers and real users for real services with real value."

If true, again this is irrelevant. Whether or not Google turns out to be a ponzi scheme, selling advertisers on the possibilty of future revenue, which increases the valuation of Google, which allows Google to increase the monopolist's price for its advertising, has nothing to do with whether some Web 2.0 applications, which are speculative gambles, are being dressed up legitimate investments.

I will make a prediction: when web 2.0 applications seek funding via essentially promissory notes, which are traded on a lightly regulated market, the we will see a bubble within 18 months. But the demise of this bubble will be unlikely to affect the credit markets -which is the only thing that policy makers should worry about.

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Mutual Benefits Corp., et al.: Lit. Rel. No. 20151 / June 13, 2007 U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20151 / June 13, 2007 SEC v. Mutual Benefits Corp., et al., Civil Action No. 04-60573-CIV-MORENO (S.D. Fla.). The Securities and Exchange Commission announced that on April 10, 2007, the Honorable Federico Moreno, United States District Judge for the Southern District of Florida entered Final Judgments of Permanent Injunction and Other Relief against Defendants, Mutual Benefits Corp. and Steven Steiner, and Relief Defendants Camden Consulting, Inc. and SKS Consulting, Inc., respectively. The Final Judgments, which were entered with the consents of Steiner and Mutual Benefits, enjoin them from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Final Judgment against Steiner, Camden and SKS finds them jointly and severally liable for disgorgement and prejudgment interest in the amount of $5,000,000, but orders them to pay $3,925,000 based on their financial statements and other information submitted to the Commission. The Final Judgment against Mutual Benefits dismisses the Commission's remaining claims for disgorgement, prejudgment interest and civil penalties. Additionally, on April 13, 2007, the Commission filed a notice of voluntary dismissal of its disgorgement claims against Relief Defendants Viatical Benefactors, LLC and Viatical Services, Inc. because these entities are under the control of the court-appointed receiver who will be distributing their assets to defrauded investors.

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C. Wesley Rhodes, Jr., Rhodes Econometrics, Inc., the Rhodes Company, and Resource Transactions, Inc.: Lit. Rel. No. 20144 / June 5, 2007
U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20144 / June 5, 2007

SEC v. C. Wesley Rhodes, Jr., Rhodes Econometrics, Inc., the Rhodes Company, and Resource Transactions, Inc., Civil Action No. CV06-1353-MO (D. Or.)

Oregon Investment Adviser and His Companies Consent to the Entry of Permanent Injunctions

The Securities and Exchange Commission today announced that C. Wesley Rhodes, age 55 and a resident of West Linn, Oregon, and three Oregon companies he controlled consented to be enjoined from future securities fraud.

The Commission's complaint alleges that Rhodes and his companies raised millions of dollars from individual investors, including many senior citizens, by representing that he would invest their money in stocks and bonds. The complaint further alleges that contrary to representations made to investors, Rhodes did not invest their funds in stocks and bonds. Instead, Rhodes took their money and used it for other purposes,"

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Harold S. Longs and Your Money Worth, Inc.: Lit. Rel. No. 20140 / June 4, 2007
On June 1, 2007, the Securities and Exchange Commission (SEC) filed an emergency action against Harold S. Longs (Longs) and Your Money Worth, Inc. (YMW), alleging that the defendants have raised at least $755,000 and defrauded over 60 investors by promising annual returns of up to 96% in connection with the unregistered offer and sale of YMW securities.

Here are some points from the SEC's complaint.

1. Since January 2006, YMW has offered prospective investors the opportunity to invest in at least eight separate investment programs, with a one-time minimum investment of as little as $1,000. The programs claim to offer retums from three-percent a month up to eight- percent a month (36%-96% annually), although none of the programs describe in any substantial detail what the investment program entails. For example, YMW Opportunity M states that investors can earn between 3%-5% a month, that the returns are paid monthly, and at the end of one year, investors have the option of re-investing their principal. At no point do any of the
YMW offering documents offer any meaningful explanation of how YMW achieves such returns.

2. Who are the players: Harold Stephen Longs, age 53, of Jacksonville, Arkansas, is registered as the owner of the YMW Internet domain name and opened the PayPal account to which YMW directs that investor funds be sent. On PayPal opening documents he listed YMW as his business name. From May 1999 to February 2000 Longs was a registered representative of Mony Securities Corporation. Before that, he was a registered representative of Conseco from 1992 to 1999, and Primerica Financial Services from 1988 to 1992. In 2001, Longs pled guilty to an Arkansas felony criminal charge of committing a fraudulent insurance act. Your Money Worth, Inc., was organized in the Republic of Panama in May 2006. Longs used and continues to use the company to solicit investors over the Internet from his residence in Arkansas. The company has not registered any offering of securities under the Securities Act or any class of securities under the Exchange Act.

I see, absolutely no good news and a heckuva a lot of black flags.

The website is still running, which always surprises me. Why doesn't the SEC shut these damn things down?

Next comes the lovely pitch,

3. In order to obtain more detailed information about the investment program, potential investors are required to register online and pay a "membership fee," and must certify that they are not employees of any law enforcement or government agency. The registration form does not seek any information wnmning the investor's level of investment experience, sophistication, or fmancial resources. Before participating, potential investors must also click on-screen buttons indicating that they agree with a list of disclaimers, including that "under no circumstances should anything found on this site be considered or construed as an offer to sell
securities or a solicitation to invest in any investment opportunity," that "Your Money Worth disclaims any liability for performance of any investment which comes to your attention here on this website.

You bear total responsibility for all decisions made. You also agree to invest money that you can afford to lose," and that "all information you receive or find on Your Money Worth is of private nature and not available to the general public and is, therefore, exempt from the US Securities Act of 1933 and all amendments or any equivalent laws of any jurisdictions." An additional disclaimer states that "Your Money Worth is an educational and financial training membership organization.. .Your Money Worth does not offer or attempt to sell any investment or registered securities. By virtue of membership, participating members are able to be introduced to qualified and registered practitioners of various disciplines who may be able to assist in specific cases." These purported disclaimers are inconsistent with the language on the site expressly offering investments with stated returns, which clearly constitute securities.

I also agree that you can whack me on my head until I am senseless, steal my household goods, and that these assaults would not be crimes. Good thing that we don't let people to freely contract.

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The criminal's "approach was always the same, according to the detectives. He would move in to town, join a church or temple with a large congregation... Newcomers always attract attention and stimulate curiosity, and Sam's seemingly endless energy, unwavering sincerity, and positive outlook led many parishioners to seek him out for friendship ... In so many words, Sam explained that he was once a high flying investment banker who realized the shallowness of his chosen career only after his young wife and infant daughter died in a horrible car accident. His resulting bout with depression, alcohol, and pills finally led him to understand that Creator had some thing more in store for his life. Sam quit his job and moved out of his family penthouse apartment to fulfill his newly found purpose. Because he continued to do well with his investments, he didn't have to work but could dedicate his life to helping others, and give back to community in the name and spirit of his lost family."

The story story had this type of ending. AHN | Federal Jury Convicts A Kansas City Man For Committing $1. 5 Million In Fraud Against A Church And Individuals | May 11, 2007

Why are churches and temples so prone to affinity fraud? And what can they do about it? There are three factors, or principles of decision making, which make it easy to concoct an affinity fraud. First, although the congregation has to be large to maximize the chances of finding the rich suckers, there are only a few individuals who typically have to be conned -those individuals who provide the leadership to the congregation. Although they provide spiritual leadership, they are unlikely also to have the necessary practical skepticism needed for the investment industry - a tankful of large sharks would be hard to find. Enough people in congregation will defer their decision making to what the "most spiritual" leader is recommending.

A painful reminder of this group myopia can be gleaned from reading the various books on Alan Eagleson's involvement with the NHL Hockey Player's association. Eagleson only had to obtain the friendship of several of the top NHL players in order to control the entire group. Mean spirited and vicious, Eagleson would challenge any attack on his authority by demanding to know what the "f**k you ever did in the league"?

What is the solution to this problem, the problem of affinity fraud? Again, as with any attack of a predator the goal must be to minimize losses --you will never eliminate the loss because psychopath predators are superior at using people solely as means to an end. Churches and temples remain at risk because after the predator strikes, they have no early warning system to alert other similarly placed churches or temples. Without such a system, churches and temples remain at risk.

I will also make a prediction - for the next ten years, the most unreported ponzi criminal frauds will take place in mosques across United States and Canada. The pitch will be for some brand new sharia approved investment vehicle, complete with vague references to empowering Muslims throughout the world. Most of these won't be reported, but many mosque leaders will end up driving brand new hummers."

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In a very interesting news article Melissa Mixon writes about how Sun City Texas residents cope with loss in investment scam.

The particular scam in question was Mobile Billboards of America. This was the classic securitization of a business opportunity fraud. The usual business opportunity fraud sells to distributors "turnkey" packages, for example the sale of ATMs and a location assistance. These business opportunities are frauds because if the seller had any real ability to locate ATMs, then they would not need your money.

The securitization of a business opportunity fraud takes the fraud to one more abstract level. Instead of selling ATMs and location assistance, the seller sells an "investment opportunity" -typically pitched as a high yield/low risk investment. The securitization of the ATM business opportunity fraud works by selling the investor on a stream of income from the ATMs that are located. In this case, there are no ATMs, not even third class machines, there is only a income stream which is funded by future investors.

The Mobile Billboards of America was the ultimate securitization of a business opportunity fraud - less than $10,000 of the money raised actually went to purchasing mobile billboards.

Melissa Mixon explodes a number of "known" myths about business opportunity frauds.

1. Business opportunity purchasers are not sophisticated. "They're an older group of people. If they haven't been scammed, they know someone who has, so these are cautious people out here," Culp said. "They haven't just fallen off the turnip truck."
   
2. The salesmen peddling the scams are always in the know. But "Ruark said he saw an advertisement for the billboard company in a professional publication that he and other insurance agents received. He said he responded to the ad and investigated the company before he started selling investments." Ruark eventually plead guilty to selling unregistered securities. "Ruark was sentenced to 45 days in the Williamson County Jail and 10 years of probation for each count and ordered to pay $138,100 in restitution. He's currently in jail."
   
3. Fraud is always "too good to be true". But Mobile Billboards "claimed to provide investors with the chance to buy advertising on semi trucks and get monthly payments for an annual return of 13.49 percent over seven years." While 13.5% is high, it is not an absurd rate of return for a novel scheme.

Of course, Mixon does report on the usual depressing news about fraud.

1. What can investors expect from a recovery? "Crawford said she doesn't know how much money Sun City investors will get from the restitution, but in cases of security fraud, "it's very rare that they get anything back."


2. And how forthcoming are the defrauded investors? "All but one of the victims would speak only on the condition of anonymity, saying they fear being targeted for other scams or losing their jobs."

All of this hardship could have been avoided if a single resident knew about the FTC requirement for business opportunity sellers to provide real disclosure to purchasers. Can you Google "business opportunity fraud"?

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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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Was Wellspring Capital a clever internet ponzi scheme?

The SEC announced " that on March 30, 2007, United States District Judge Janet Bond Arterton of the United States District Court for the District of Connecticut sentenced Connecticut resident Blake A. Prater to one hundred twenty months of imprisonment followed by three years of supervised release. On October 3, 2006, Prater had pleaded guilty to one count of securities fraud and one count of conspiracy to engage in certain monetary transactions involving proceeds of securities fraud. On August 16, 2004, in a related civil action, the Court had approved a settlement concerning similar allegations by the Commission against Prater and his now-defunct company, Wellspring Capital Group, Inc. The amounts collected from the defendants under the settlement have been distributed to victims of Prater's fraud", see Blake A. Prater and Wellspring Capital Group, for more details.

Although, Blake Prater pleaded guilty to the one count of securities fraud, his memorandum for sentencing denies that his company Wellspring Capital was insolvent, or that Wellspring Capital did not have enough assets to meet their liabilities.

Prater never contested "The Commission's complaint ... that Prater also failed to disclose his criminal history, which includes forgery and fraud convictions, to investors." Indeed his sentencing memorandum paints him as a successful businessman who was compelled by his previous clients to open Wellspring Capital.

Prater's entire drivel can be read here and here.

The Government sentencing memo goes through each of Prater's claims in meticulous fashion. The memo shows that the overall fraud was in the range of $4 million, that more than 50 victims were involved -approximately 1800 who filed proof of loss in the receivership.

It will come as no surprise that Prater never accepts any responsibility for his actions, blaming the Government for incurring the losses because they shut down his Ponzi scheme.

Prater is clearly a skillful manipulator of fantasy and fact; read his description of one his ventures, the Dealmaker Strategy. Too bad that he didn't see fit to disclose to his clients that was employ craps players and dressing them up as investment bankers.

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There is just something very humourous about this Department of Justice Press Release.

"An Orange County man has pleaded guilty to a federal wire fraud count, admitting that he ran a real estate investment scam that lured victims with bogus claims of large returns on investments in commercial real estate developments.

Barry Landreth, 37, formerly of Coto de Caza, pleaded guilty Monday afternoon to the felony charge that carries a penalty of up to 20 years in federal prison.

By pleading guilty, Landreth, a former adjunct professor of real estate finance at the University of Southern California, admitted that he ran two schemes involving purported real estate development projects in Chicago and Las Vegas. Through his company, Webster Realty Investors, Landreth offered short-term, high-yield real estate investments in two projects that he called Discovery Chicago LLC and Discovery Las Vegas LLC. Landreth induced victims, including wealthy investors and several USC students, to invest with promises that their money would be used in one of the two projects. In fact, Landreth did not use the victims' money for either project, but instead spent the money on business expenses for Webster Realty Investors and on personal expenses.

As part of the scheme, Landreth falsely represented to victims that the projects would provide 190 percent returns on investments within 30 days to 45 days."

Webster Realty Investors!! I didn't see a dime from Barry Landreth, the rotter! But there is just something very amusing about an adjunct professor of real estate finance scamming his own students. I wonder why the regulators did not say, "if it looks too good ...."?

Posted by michael webster at 11:10 AM | Permalink | Comments (0) | TrackBacks (0)

The US Department of Justice, Southern District of Florida issued a Press Release, regarding Mutual Benefit Corporation's insurance fraud, a $875 million ponzi scheme.

"Traina and Wiggins were employee-managers at Mutual Benefits Corp. ("MBC"), a viatical and life settlement company that was closed by federal regulators in May 2004. Traina and Wiggins each pled guilty to an Information charging one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. §371 in connection with MBC's billion dollar securities offering. Pursuant to the terms of their respective plea agreements, both defendants face up to five (5) years' imprisonment. Traina and Wiggins also agreed to be jointly responsible for approximately $830 million in restitution payable to MBC investors. Sentencing is scheduled for May 8, 2007."

There are several important observations about this fraud.

First, "according to the Information, MBC sold investment interests in viatical and life settlements through an international network of sales agents. A viatical or life settlement is a transaction in which an investor purchases an interest in a terminally ill or elderly person's life insurance policy death benefit in return for a lump-sum cash payment. An investor in a viatical or life settlement realizes a profit if, when the insured dies and the policy matures, the policy benefit is greater than the price paid for the policy. The longer an insured lives, the more premium payments must be made to prevent the policy from lapsing and becoming worthless."

There is no obvious something for nothing, or too good to be true about this set-up.

Only a very sophisticated investor would realize the inherent fraud in viatical insurance - a person with Aids or HIV could obtain a number of low payout insurance policies, and never have to take a medical test. Further, who could predict that new medical drugs would keep these individuals alive for a lot longer than they wre "worth" for insurance purposes.

Second, there is virtually no chance that $875 million is going to be repaid to the insurance investors.

Third, in this ponzi scheme, the regulators have failed to talk about how "it was too good to be true". Well, if this ponzi scheme doesn't have that as an essential characteristic, then maybe, just maybe no ponzi schemes self announce themselves as too good to be true!

Technorati Tags: mbc, ponzi scheme, mutual benefit corporation, traina, wiggins, us department of justice, viatical, plea agreements, pled, securities fraud, insurance fraud, southern district of florida, investment interests, billion dollar, restitution, imprisonment, department of justice, regulators

Posted by michael webster at 12:12 AM | Permalink | Comments (0) | TrackBacks (0)

Canada's award winning investigative journalism show, W5, has an excellent piece on affinity fraud.

The W5 summary of their investigation into affinity fraud can be read here. There is also a broadband connection to the actual television show, in which I am interviewed about affinity fraud.

According to W5, the four elements of an affinity fraud are:

"Affinity Fraud is a scheme that has four main ingredients. Which mixed together, can produce the perfect crime. Ingredient Number One - a trusting group of victims. Because church goers are trusting by nature this group had been particularly hard hit.

The front man is the second ingredient, someone who acts as a salesman within the group.

Which brings us to the third essential ingredient--the trusted insider. Someone within the church who will vouch for "the front man" Without the insider, the Affinity Fraud often could never occur. Not just anyone can walk into a church and win people over. Sometime he's an accomplice, sometimes just a patsy.

And the final ingredient -- the master mind. The person who orchestrates the scheme and after the money is collected, generally spirits it offshore where it can't be found by authorities."

This is a good description of the mechanics of the affinity fraud.

The picture can be made more clear by focussing on the first element. Why does a group who trust each other on one dimension, say religious beliefs, then come to trust each other on a another dimension, say investment advice?

On the surface, there is no connection. Yet, con criminals take advantage of this "halo effect" all of the time.

But there is also another logical confusion or illusion at work, something that we have talked about before, the confusion between "My friend is trustworthy and so is not lying to me" versus "My friend is trustworthy and could be mistaken".

Thomas Bayes was a 18th century philosopher who published small mathematical treatise on conditional probability. The practical import of his theorem was divined earlier by David Hume, who realized that when we are presented with testimonials that seem extraordinary we should focus on the possibility that the person testifying to this rare event is mistaken. That is, we should compare in our minds the chances that a "miracle" happened with the chances that the person was honestly mistaken about what they saw or reported.

Posted by michael webster at 9:45 AM | Permalink | Comments (0) | TrackBacks (1)

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?

Posted by michael webster at 9:37 AM | Permalink | Comments (0) | TrackBacks (2)

Avid readers of this blog will recall that Mr. Wright is being sued by the SEC regarding matters both civil and criminal, while at the same time he and his numerous companies are in bankruptcy.

Mr. Wright allegedly swindled investors out of $180 million, and the facts are now beginning to seep up through the mud.

Civil Action by SEC

In August, 2006 Wright asked for a stay of the civil proceedings, which were being conducted as Wright's criminal action proceeded. In the criminal proceeding, Mr. Wright need not testify, while in the civil proceeding the discovery process may require Wright's attendance.

On October 27th, 2006, Judge Charles Pannell Jr. denied Wright's request for a stay. As a result, the SEC's motion for default judgment will proceed. The evidence that the SEC will rely upon for default judgment is contained in the the affidavit of the receiver.

According to the receiver, Wright converted approximately $17 million of the investors' money to his own use. The rest of money, approximately $150 million, is described as either returned to investors, lost through trades, or converted for Wright's and other principals for their personal use.

I suspect that this means that the receiver has no clear idea where the money is.

Criminal Action by SEC

Wright has withdrawn his motions for the suppression of evidence and the matter is now certified ready for trial, see the following order.

Bankruptcy of Wright and his Companies

The receiver and legal fees are approximately $1.8 million; while the recovery for the estate is $1.6 million, with possibly another $4 million to come from the sale of some of IMA's real estate in California.

The rest of any recovery will have to come from lawsuits against third parties, apparently. The transcript from the fees hearing doesn't make it entirely clear what these causes of action are. Perhaps the legal theories for recovery are clearer in the receiver's mind?

I would simply follow the money: find out where each investors's cheque was cashed. Go to that bank and ask where that money went - continue until all $150 million accounted for. But then again, I am not clever enough to be in a position to bill and collect from the bankrupt estates $1.6 million.

Posted by michael webster at 6:53 AM | Permalink | Comments (0) | TrackBacks (0)

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

Posted by michael webster at 7:22 AM | Permalink | Comments (0) | TrackBacks (0)

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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The Securities and Exchange Commission ("Commission") announced that on October 17, 2006, Judge Polster of the United States District Court for the Northern District of Ohio entered a Final Judgment against Gregory Applegate ("Applegate") in which Applegate consented to the entry of an order of permanent injunction enjoining him from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Several months earlier, April 2006, the SEC announced, that Gregory Applegate had been sentenced to 5 years in prison and ordered to repay almost $3 million in restitution, in connection with his Ponzi scheme. According to the complaint,

"From about 2001 through August 2005, Applegate solicited at least 140 investors to invest at least $5.8 million in a supposed "hedge fund" and other investment vehicles. Applegate guaranteed an annual rate of return to these investors and promised to make up any losses out of his own pocket. The Complaint alleged that in reality, Applegate's "hedge fund" was a Ponzi scheme in which Applegate misappropriated investor funds, using them to finance an unrelated personal business, pay personal expenses, and reimburse or pay "investment returns" to earlier investors. To further this Ponzi scheme, Applegate mailed to investors false monthly client statements reflecting securities holdings and returns that did not exist."

How was Mr. Applegate able to "send false monthly client statements"?

Here is where the story turns more interesting than the SEC's dry recital of facts.

In a story Businessweek did last October, they state that the SEC claimed Applegate was:

"able to gain investors' trust, in part because he showed them business cards from Westerville, Ohio-based, Regis Securities, a brokerage where he had been working since January. Applegate told investors that he was running a hedge fund for Regis called Applegate Investments, and produced false monthly client statements for them, the SEC alleges". (my emphasis)

Business cards?! Jim Rockford had a fistful of business cards to establish his numerous false identities!

And what of the Regis Securities connection? Well according to the article,

"Regis Securities' president, Robert Cargin, said that Applegate's alleged scheme had been going on for years, beginning at another brokerage. "He had this program basically concealed when he joined our firm," Cargin said." (my emphasis)

So Regis Securities innocently facilitates a fraud by allowing their reputation to be used to gain trust, could this be a cause of action in tort? Should Regis have been more careful in checking what their broker was sending out? How did they supervise Mr. Applegate?

Technorati Tags: ponzi scheme, applegate, investors, personal expenses, personal business, hedge fund, investment vehicles, investment returns, investor funds, restitution, sentenced, invest

Posted by michael webster at 1:35 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC reported, October 24th, 2006, that Regald B. Smith "the Honorable Joseph M. Hood of the District Court for the Eastern District of Kentucky ordered former registered representative Regald B. Smith to pay disgorgement of $2,413,950.20 in connection with his scheme to defraud his brokerage customers out of funds through a fictitious bond scheme."

The complete story is a bit odd, as the SEC claimed in 2001 that "The Commission alleged that Smith, age 55, was, employed by Stifel as the Investment Executive in charge of the Firm's Pikeville, Kentucky office. Smith stole his clients' funds by luring them into believing he had a "special situation" he could offer them. He told them that other Stifel clients were interested, for one reason or another, in selling short-term bonds from their portfolio. The bonds were particularly attractive not only because they were short-term, but also because they were tax-free and promised high yields. After his victims gave him money to purchase the bonds, Smith simply diverted their funds to his own personal use, including the renovation of the Hotel Anthony in Pikeville. To conceal his deceit, Smith told at least one of his victims at or about the time the first bond he sold to them was about to mature, that he could reinvest the client's original investment, plus accrued interest, into another tax-free bond. Smith's repeated this ploy until the victim had written and given Smith checks totaling $3.8 million, all of which Smith misappropriated. Smith also admitted that he tried to cover-up his scheme by, among other things, attempting to convince a bank officer to issue him copies of legitimate bond certificates which he could pass off as the fictitious bonds he was selling."

I would hazard a guess that the Hotel Anthony in Pikeville is not a 5 Star establishment raking in the internet reservation crowd.

Technorati Tags: term bonds, ponzi, Pikeville

Posted by michael webster at 11:48 PM | Permalink | Comments (0) | TrackBacks (0)

Pinnacle Ads Escaped Vetting By Publications, according to the Wall Street Journal.

The Pinnacle advertisements appeared in four out five of the most widely read US publications, "USA Today, The Wall Street Journal, the Washington Post and the Los Angeles Times -- four of the five most widely read newspapers in the country."

Pinnacle advertised a 25% return in 60 days on your investment, but naturally had not registered with the SEC to sell securities.

The SEC alleges, in its complaint, "that, from October 2005 through the present, Pinnacle and O'Neal have operated a Ponzi scheme and raised at least $30 million from more than 2,000 investors located in thirty-three states and two foreign countries. Specifically, the complaint alleges that Pinnacle fraudulently offered and sold interests in real estate development partnerships through a nationwide advertising campaign. Pinnacle also sold notes to some investors. According to the complaint, Pinnacle promised investors a 25% return in 45 (or later 60) days and a second 25% return, and the return of investor capital, after 90 days."

Apparently the way to get rid of your money problems, in Pinnacle fashion, was simply to get rid of your money. No problem.

The SEC complaint, which alleges that the scheme was a Ponzi, can be read here.

Zachary Seward, the Wall Street Journal reporter, also interviewed Mitchell Zuckoff, who wrote on Charles Ponzi. Zuckoff argues that "There's a compact of trust between publications and their readers," says Mr. Zuckoff, who wrote a biography of Charles Ponzi, namesake of the scheme. "I trust the article that runs right next to the ads, right? I should be able to trust the ads as well."

Is it too much to expect that for the purchase of a $2,00 publication that the publication has vetted the investment ads? Does it matter that the publications made millions of dollars on these ads? Should the investor place no confidence with the publication?

The advertising law in the United States and Canada differ on this issue. In the United States, the FTC which could regulate publishers who make money from fraudulent ads has declined to do so.

The FTC's authority is grounded in Section 5 of the FTC Act, which regulates deceptive practices. Here is the FTC's advertising policy, which is aimed at advertisers and not publishers. Although, "FTC has taken action against both the manufacturer or marketer of a product and the company that produced the infomercial."

If the FTC will charge the company that produced a misleading infomercial, then shouldn't the advertising company who drafted Pinnacle's ads be a legitimate target?

In Canada, the appropriate regulatory body is the Competition Bureau. Misleading advertising is regulated both criminally, under section 52, and civilly under section 74 of the Competition Act.

The important difference between the United States and Canada is that section 74.07, civil remedies for misleading advertising, provides that publishers of misleading advertisements are not liable if: a) they obtained and recorded the name and address of other person, and b) accepted the representation in good faith for printing, publishing, or other dissemination in the ordinary course of that person's business. (This provision was formely known as 60(1) of the Competition Act)

What remains unclear is whether the Canadian distribution of USA Today, The Wall Street Journal, the Washington Post and the Los Angeles Times contained the Pinnacle ads and if so whether the Competition Bureau will take any action against those publications.

Technorati Tags: wall street journal, pinnacle, ponzi scheme, advertisements

Posted by michael webster at 2:45 PM | Permalink | Comments (0) | TrackBacks (0)

Salvatore Favata's $30 million Ponzi scheme admitted to according to SEC. Now this was a very clever mix of a legitimate business, mortgage brokerage, with the standard ponzi scheme based upon a real estate investment.

"The Commission's complaint alleges that from 2001 through 2006, Favata, acting through NCM, operated a massive Ponzi scheme, which raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals."

Presented in this stark light, the investors were surely mad with greed to invest looking for a 30-60 percent return. But, the whole story is more interesting because it explains how "Sal our Pal", who apparently has a criminal background, was able to steal $30 million from 200 investors.

According to this newspaper story, the investors were holding unsecured promissory notes with an interest component of 8 -12%. Hmm, not exactly too good to be true material.

Now, I can offer everyone a verified return of 30% on their money, but with an undisclosed risk of 50%+ chance of losing the entire investment and have this scheme run forever - play black consistently at the roulette table. Now if I could just find a way to get rid of that sub-tree of losing bets! It is never too good to be true, but it might be too risky to afford.

How did NCM gain the necessary trust of the investors, given that Fatava apparently had a criminal background? Well, the NCM's website is still up and running and promises to match up lenders with borrowers, which apparently they did for several year successfully. Home borrowers would then want to renew their mortgages, using the NCM. My guess is that NCM targeted primarily one year mortgages.

According to the court documents filed by the trustee of NCM, this is when the trouble began. In 2002, Fatava created a "Private Money" division of NCM. Fatava alleged in written documents that he was looking for investors money for residential homes and could offer between 30 -50% return, but with apparently no specified risk. (The documents are not filed on the Pacer system, so I cannot evaluate their effectiveness as influence scripts.) Homeowners, flush with new mortgage money, in a rising real estate market were easily persuaded to take out larger mortgages and "invest them in even more real estate deals".

There are some other interesting issues in this fraud. As reported in the White Collar Crime Blawg, Favata's own lawyer appears to have turned him in. And while "many states, and now the ABA, permit disclosure of client fraud, California appears to apply the older approach limiting disclosure only if there is a risk of death or serious harm by the client. It may be that the attorney represented the mortgage company rather than Favata personally, so it might have waived the privilege when the misconduct came to light. The release, however, states that it was "Favata's attorney" and not the company's counsel."

Finally, it would be very interesting to know how many of these individuals realized that the promissory notes that they were purchasing were unregistered investments.