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

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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.

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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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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.

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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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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

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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

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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

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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.

Posted by michael webster at 9:50 AM | Permalink | Comments (0) | TrackBacks (0)

"According to the [Maryland] indictment, Poteat and Bellamy recruited individuals from throughout the United States to join CEP, making misleading representations to the investors as to how their investment in JLR would work and the amount of return guaranteed on their investment. Poteat and Bellamy would send the investors monthly and quarterly statements containing false information about the returns the investors were earning. The defendants also encouraged investors to become "mentors" in JLR's program and recruit others to become investors in CEP and JLR. As a mentor, an investor was supposedly entitled to receive a percentage of the earnings of the investors they recruited. In this way, Poteat and Bellamy collected over $17 million from investors."

Unfortunately, this file is still sealed and not documents are available. As they become available, I will be able to comment on the case.

Technorati Tags: investors, unfortunately, bellamy, cep, united states, indictment, mentors, recruit, mentor, earning, earnings, maryland

Posted by michael webster at 9:08 AM | Permalink | Comments (2) | TrackBacks (0)

Paul Thorpe was sentenced to 41 months and ordered to repay his victims, according to a press release from US Department of Justice.

This ponzi scheme ran for approximately 10 years, but strangely only attracted "more" than 20 victims for a total of $1.7 million. Mr. Thorpe apparently promised to invest the money in various offshore entities, but simply repaid early victims.

Ten years is a very long time for a ponzi scheme to run, especially one that apparently attracted not a great deal of investments monies.

It is also interesting that Mr. Thorpe only pleaded guilty to one count of mail fraud. It sounds like there was only one large investors and several smaller investors who did not think that it was worthwhile to complain about their losses. It is the absence of effective collective action which is necessary for spread of fraud. In this case, it is unlikely that many of the victims knew each other.

Technorati Tags: mail fraud, ponzi scheme, offshore entities, us department of justice, investors, apparently, department of justice, monies, sentenced, worthwhile, complain, invest, press release, absence, investments

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The SEC has taken legal action against "an ongoing fraudulent offering of stock in a company called One Wall Street, Inc. in which the defendants have obtained over $1.6 million from at least 64 investors, most of them senior citizens."

According to the Securities Exchange Commission:

Rather than apply the proceeds collected from the investors towards legitimate business expenses, the complaint alleges that Jarvis used, and continues to use, investor funds to pay his personal expenses, including jewelry purchases, gambling and "adult entertainment" services, and payments for child day care, car loans and mortgages. He has also given investor funds to his wife and fellow defendants."

The SEC's complaint can be read here. What is interesting about this case, is that the defendants' are alleged to have used their company's bank account as their own "piggy bank". This by itself is a fraud, and one of the more easier frauds to uncover. But since the individuals being defrauded, the investors, are not client's of the fraud criminal's bank, the bank has no duty to monitor and report on these fraudulent transactions. Pity that.

Technorati Tags: wall street stock, securities exchange commission, senior citizens, initial public offering, investors, misleading statements, business purposes, fraudulent, merge, ipo, proceeds

Posted by michael webster at 9:27 AM | Permalink | Comments (0) | TrackBacks (0)

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)

From 2000 through to 2003, some 600 investors all over the United States gave $28 million to "Missouri-based Branson City Limits, Inc. and Nevada-based Resort Hotels, Inc. through defendants Patrick L. Ballinger ("Ballinger"), 55, Dennis R. Weaver ("Weaver"), 54, of Jackson, Tennessee, Kosta S. Kovachev ("Kovachev"), 51, of Lake Worth, Florida, Lee E. Larscheid ("Larscheid"), 54, of Branson, Missouri, Benny G. Morris ("Morris"), 46, of Palm Harbor, Florida, Darin W. Roberts ("Roberts"), 29, of Branson, Missouri, Linda M. Sears ("Sears"), 50, of Seminole, Florida, Todd R. Walker ("Walker"), 44, of Tampa, Florida, Missouri-based Ozark Ticket and Travel, Inc. ("Ozark Ticket") and Nevada-based Universal Financial Leasing, Inc. ("Universal Leasing")" to invest in a fraudulent business opportunity structured as a rental time share.

According the SEC, "Branson City and Resort Hotels' main principals, Ballinger and Weaver, prepared fraudulent promotional materials. With the assistance of Kovachev, Roberts, Sears, and Walker, who are all Branson City or Resort Hotels principals or agents, Ballinger and Weaver distributed these fraudulent promotional materials to sales agents and otherwise promoted Branson City and Resort Hotels to an extensive sales network. This sales network was recruited and trained primarily by Morris, through Morris' company, Universal Leasing, both of whom acted as unregistered broker-dealers. Among other things, Morris and Universal Leasing distributed these fraudulent offering materials to the sales network for use in the solicitation of investors. Morris, at times through Universal Leasing, was paid a commission on every sale, and Roberts was paid a commission on sales by sales agents he recruited. Morris (at times, through Universal Leasing) and Sears processed new investor documentation, and handled new investors' funds. From at least September 2000 to the present, through this sales network, Branson City and Resort Hotels have collectively raised at least $28 million from at least 600 investors in 30 states." (my emphasis) The complaint can be read here.

Today, almost six years later, the SEC announced that (2) of the defendants had consented to an order requiring "the payment of disgorgement and, in the case of Kovachev, a civil financial penalty. The final judgment against Kovachev: (1) orders him to pay disgorgement in the amount of $217,527.21 and prejudgment interest in the amount of $20,621.15; (2) orders him to pay civil penalties in the amount of $120,000; and (3) permanently enjoins him from future violations of 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 final judgment against Roberts: (1) orders him to pay disgorgement in the amount of $125,097.08 and prejudgment interest in the amount of $8,145.22"

What are the chances that if paid, any of the elderly investors who wre scammed by this business opportunity will see any money? Do I hear a bid for zero?

Technorati Tags: branson missouri, branson city, missouri based, palm harbor florida, seminole florida, ozark ticket, morris morris, nevada based, resort hotels, ballinger, fraudulent business, weaver, financial leasing, sears, walker, universal

Posted by michael webster at 10:54 PM | Permalink | Comments (2) | TrackBacks (0)

On March 7, 2006 the United States Attorney for the Northern District of Ohio announced that "an information was filed charging Richard A. Daniels with one count of securities fraud.

Daniels, age 57, resides at 17604 Eastbrook Trails, Chagrin Falls, Ohio.

According to the information, from in or about 1997, through in or about December 2005, Daniels, promoted and sold securities in the form of promissory notes, through his company, First Capital Group, Inc. ("FCG"), to investors, resulting in an overall investor and client loss of approximately $2,254,138. During this same time period, Daniels also worked as a securities representative at Lincoln Financial Advisors Corp. ("Lincoln").

The information alleges that the securities were not registered with the SEC or the State of Ohio-Division of Securities. While Daniels sold securities and investments in the form of promissory notes, the investments did not have the represented purpose of generating a fixed return from between 4 percent to 7 percent, but rather had the purpose of promoting an illegal "Ponzi" scheme and supporting Daniels' personal debts and expenses.

The information states that Daniels was the subject of previous enforcement action brought by the United States Securities and Exchange Commission ("SEC") for his role in defrauding investors in Ohio and three other states when he and others sold investment contracts in the form of furniture and office equipment lease agreements; Daniels also sustained felony convictions in 1983 for two counts of mail fraud due to conduct relating to the SEC action." (my emphasis)

This is not the typical ponzi scheme since the rate promised to individuals is not too good to be true, it ran for over eight years, and the person allegedly selling the notes was a registered securities representative. How would you like the job of compliance officer at Lincoln Financial Advisors? I understand that it is now available.

Technorati Tags: lincoln financial advisors, daniels, chagrin falls ohio, state of ohio, ohio division, securities fraud, promissory notes

Posted by michael webster at 10:59 AM | Permalink | Comments (0) | TrackBacks (0)

The SEC is reporting a new ponzi scheme, which started in 1999 and was directed at senior citizens.

The SEC "filed an action charging Renaissance Asset Fund, Inc., Ronald J. Nadel, and Joseph M. Malone with fraudulently raising over $16 million from more than 190 investors nationwide. The Commission's complaint, filed in the United States District Court for the Central District of California in Orange County, alleges that Renaissance and its principals operated a Ponzi scheme and used investor funds to pay lavish personal expenses. Many of their victims were elderly and were solicited through Jehovah's Witnesses congregations." (my emphasis) The full complaint can be read here.

This is an interesting fraud involving solicitations made to Jehovah Witnesses, which I suppose may strike some agnostics as a proof for the existence of a deity who has a mean sense of humour. Perhaps the God from the Old Testament.

This ponzi scheme lasted about 5 years, with promise of 17% - 24% yearly returns. So the five year period is entirely predictable.

It appears that only $2.3 million of the $16 million is readily identifiable as assets to return the "investors". But the SEC complaint only identifies $1 - $2 million that was repaid to "investors". This will be interesting to follow.

Technorati Tags: ponzi scheme, jehovah witnesses, renaissance, sec, seniors fraud

Posted by michael webster at 10:45 PM | Permalink | Comments (1) | TrackBacks (0)

The Law Firm of "Motley Rice LLC, one of the nation's largest all plaintiffs litigation firms, today announced that it has filed suit against the National Football League (NFL) and the NFL Players Association for its endorsement and recommendation of the financial advisory services of Kirk Wright and his firm, International Management Associates (IMA). The suit, filed in United States District Court, Northern District of Georgia, is on behalf of several current and former NFL football players, including NFL Pro-Bowl players Steve Atwater and Blaine Bishop, who utilized the NFL's security department services and the NFL Players Association's Registered Financial Advisor Program". Here is a current list of news stories about Kirk Wright, the Cleveland story is very interesting.

This lawsuit is an interesting development, and when both the complaint and answer are finalized I look forward to review them. Now what is the relevance of this lawsuit for purchasers of franchises or business opportunities?

Technorati Tags: nfl players association, motley rice, national football league, steve atwater, litigation firms, cleveland story, blaine bishop, kirk wright

Continue reading "New Defendants in Kirk Wright Lawsuit" »

Posted by michael webster at 9:45 PM | Permalink | Comments (3) | TrackBacks (0)

On May 17th, the Alberta Securities Commision, in a wonderful dry and understated manner, one in which is not generally associated with Alberta around the Stanley Cup time, shut down a scheme aimed at soliciting funds for an unregistered security promising returns of between 2% and 8.5% a month with minimum of $100,000 "investment".

And to top it off, the investment was "risk-free". No where in the document nor the press release is the word "Ponzi" used. Just the lovely phrase that the "individuals and companies traded and distributed securities without registration or prospectus." It reminds of the British manner of describing criminal suspects as "assisting Her Majesty with the investigation."

The schedule of the hearings and orders can be found here.

Technorati Tags: stanley cup, alberta, risk free, ponzi, prospectus, majesty, promising, press release

Posted by michael webster at 8:17 AM | Permalink | Comments (0) | TrackBacks (0)

James Walsh wrote this book in 1998, which is a pity since I would have liked to hear his views on the recent big market ponzi schemes and their meltdown. The book is organized into four sections: how the schemes work, why the schemes work, contemporary extensions, and what to do if you have been scammed.

It is an ambitious book, departing from the usual fare by attending to what specific legal remedies may be available to the individuals who find themselves a part of a ponzi scam. The list of remedies, regulatory action, recevierships, and suing the third party enablers is a good checklist. There are specific jurisdictional remedies that Mr. Walsh overlooks - for example, in Canada one might argue that the ponzi corporation is being run in a fashion by the directors so as to oppress it investors/shareholders. Sometimes, you need to use the legal difference between the corporation and its directors -that they are two different legal entities- as a way of creating legal obligations.

For example, in a nice discussion on third person liablity for receiving money from a ponzi scheme, Walsh points out that a number of courts have found that the players who take out or get paid out from a ponzi scheme are not liable to the rest of the group on theory of negligence, but they may be liable on a theory of restitution. Should the "investors" in a failed ponzi scheme have to repay their "profits"?

Many courts dealing with these issues cite the 1985 federal court decision Johnson v. Studholme as a standard of basic fairness. In the wake of a failed Ponzi scheme, the receiver filed lawsuits against those investors who had received amounts in excess of their contibutions (not just "within" the previous year).

The Johnson court ruled that the investors had given value for the profits they'd received and, so, had not received fraudulant conveyances. The court held that the capital contributions made by the investors and the risk that they could lose all or part of it had been the value provided.

The payment of illusory profits is not a fraudulant conveyance because the capital payment might have been lost, but the operation of a ponzi scheme is always an oppression by a minority of investors on the majority of investors - it is designed to transfer a large amount of wealth from the many to the few. As such, in Canada, it might be recognized as an act of oppression under the Corporation laws, both federally and provincially.

In conclusion, this is a very interesting book on ponzi fraud which will no doubt repay interested readers.

Technorati Tags: ponzi schemes, legal entities, ambitious book, james walsh, enablers, meltdown, suing, legal remedies

Posted by michael webster at 11:03 AM | Permalink | Comments (0) | TrackBacks (0)

The SEC announced on June 13th that "United States District Judge Virginia A. Phillips issued a final judgment against Daniel Berardi, Jr., Thomas Hawkesworth and Randall W. Harding ordering disgorgement, prejudgment interest, and civil penalties for their roles in perpetrating a Ponzi scheme based in Southern California. The judgment orders Berardi and Hawkesworth, managing members of BBH Resources, LLC, to pay over $11 million in disgorgement, prejudgment interest, and civil penalties. The judgment orders Harding, managing member of JTL Financial Group, LLC, to pay over $17 million in disgorgement, prejudgment interest, and civil penalties"

This ponzi fraud first came to the attention of the SEC in March, 2004. According to the original complaint "filed on February 26, 2004 in federal court in Riverside, alleges that the defendants fraudulently induced at least 247 investors nationwide and in Mexico to invest in Mx Factors' notes, which purportedly pay a "guaranteed" return of 12% in 60 or 90 days. Mx Factors claims that it will use the investor funds to provide its clients - construction contractors, wholesalers, and manufacturers - with accounts receivable financing, secured by the client's assignment of its accounts receivable. The defendants also represent that investor funds are safe because at least 70% of the receivables are backed or funded by the government.

According to the complaint, these representations are false. Mx Factors has actually been operating a Ponzi scheme, and at least $19.9 million in new investor funds has been used to pay existing investors. At least $5.64 million has been misappropriated (1) to finance a crab fishing business, (2) to pay the personal expenses of Harkless, Berardi, and Hawkesworth, including mortgage payments and credit card bills, and (3) to fund overseas bank accounts. Additionally, the complaint alleges that BBH, Berardi, and Hawkesworth have skimmed $1.3 million in investor funds by failing to turn them over to Mx Factors. The complaint further alleges that BBH Resources and JTL Financial have each received undisclosed sales commissions of at least 12%."

Mx Factor notes? Nice name. Any bets as to the fees of the receiver?

Technorati Tags: ponzi scheme, final judgment, resources llc, group llc, berardi, harding, sec, bbh, united states district, jtl, district judge, financial group, randall, riverside, southern california, phillips, fraud, prejudgment interest, civil penalties

Posted by michael webster at 8:24 PM | Permalink | Comments (0) | TrackBacks (0)

OneSource Financial presents in a interesting picture as we can compare their FTC Disclosure document to what various state corporate documents show about the company. Remember that the FTC or State Disclosure document is not checked for its accuracy by any government official. It is up to you to conduct the background check using the document and other sources of information.

What are the warning signs with this document?

1. Item 16 is supposed to tell you the number of biz ops sold, repurchased, and/or cancelled. This is to give you an idea about the chances of success of the biz op. This Item 16, while technically correct as of January 2005, says nothing about how many biz ops have been sold. The disclosure is completely deficient.
2. Item 2 is supposed to provide details on the owners of the biz op seller. None of the details about corporate management match up with corporate filings from the California and Nevada.
3. Item 14 is completely contrary to the representations made to the investors in Colorado.
4. Finally, the financial documents are deficient because there is no income statement, which you tell you if the seller was making more money from selling biz ops than from selling ATMs.

Technorati Tags: biz ops, biz op, state disclosure, disclosure document, ftc, warning signs, background check, onesource, corporate documents, documents show, government official, contrary, nevada

Posted by michael webster at 7:16 PM | Permalink | Comments (0) | TrackBacks (0)

The curious part of the SEC's allegations against Frank Russo is the failure to name the "California Company" which Mr. Russo alleged transferred assets to. According to the complaint, Mr. Russo and an friend of this opened this company in 1993. Well, it is fairly straight forward to do a google cache search and find that Mr. Russo was the CFO for a California company, Veritasiti, and that the CEO is Mr. David G. Kinney. Veritasiti also is the registrant of two websites, mediadata.com and familymediaguide.com. Both of these companies do have active websites. There is another interesting fact, or rather strange fact. Mr. Russo has been granted access to approximately 9,000 a month for living expenses and up to $75,000 in legal fees, according to the SEC order.

(At least one newspaper commentator has referred to the 10% return as too good to be true. I don't see this, the alleged representation was a 10% return with no fees, and anything over 10% split 50/50. There doesn't seem to be an allegation of a guaranteed return of 10%.)

But what would I be suspicious of?

Technorati Tags: google cache, frank russo, california company, sec, straight forward, curious part, kinney, registrant, cfo, allegations, ceo, split, strange

Continue reading "Russo Partnership" »

Posted by michael webster at 11:14 AM | Permalink | Comments (3) | TrackBacks (1)

The other day, Peter Lattman, at the WSJ Blog, declared himself amazed at the amount of fees lawyers pull out of a bankrupt company, for example in "the Chapter 11 case of Delta Airlines. As debtor counsel, Marshall Huebner and his team at Davis Polk & Wardwell have rung up a healthy bill themselves. A bankruptcy judge yesterday approved Davis Polk's $10.3 million fee application for 4 1/2 months of work on the case."

Not bad, but what about those ponzi cases that we keep reading about, the big ones with over $150 million of coin of the realm to locate? How are those receivers and lawyer doing with Neulan Midkiff, now that he has lost his $1 million dollar home?

Technorati Tags: davis polk wardwell, delta airlines, bankruptcy case, bankruptcy judge, receiver fees, neulan midkiff

Continue reading "Receiver Fees: Something for Not Much?" »

Posted by michael webster at 11:50 AM | Permalink | Comments (0) | TrackBacks (0)

The SEC obtained an order freezing 16 Bank of America Bank accounts related to Universo Foneclub, on June 8th 2006. Interestingly, the order included several companies and individuals who are not named in the complaint, including Bravoice Inc., and Davi W. Silva, the director of Universo Gospel USA Inc. Bravoice Inc was recently renamed from FoneClub.com, according to corporate documents from Massuchusetts. The website is registered to one of the defendants in the complaint.

Technorati Tags: bank of america, universo foneclub, bank accounts, corporate documents, davi, silva, gospel, sec, america bank

Posted by michael webster at 8:39 AM | Permalink | Comments (0) | TrackBacks (0)

Last February, 2005 the SEC announced that it had obtained a temporary restraining order against Marion Sherrill alleging that "that, from approximately May 2003 through as recently as January 26, 2005, Marion D. Sherrill, a recidivist securities law violator, perpetrated a Ponzi scheme, selling over $400,000 of promissory notes to at least nineteen investors. While engaging in this Ponzi scheme, Sherrill was a registered representative of an Atlanta-based broker-dealer. The investors who purchased promissory notes were all brokerage customers of Sherrill and many were retired. Under the terms of these notes, Sherrill "borrowed" from his investors principal amounts ranging from $4,400 to $41,000, in exchange for a promise that he would pay monthly interest of 10% per annum and return to them the note's principal at the end of the note's term-a period of either twelve or twenty-four months. Sherrill told some of these investors that he would invest their money in his brokerage business in order to expand its operations. Sherrill told at least one customer that he would invest her money in a "tax-free mutual fund", from which she would get monthly tax-free income. Contrary to his representations, Sherrill did not use investor funds to expand his business operations or to purchase mutual funds. Instead, he deposited most, if not all, of the note proceeds in his personal bank account, commingled those proceeds with his own money, and paid his living expenses and various operating expenses of his business from the balance. Sherrill did not disclose to the investors that he paid their monthly interest by using money from new investors and that lacked the capacity to repay the principal without raising new investments." (my emphasis)

Yesterday, the SEC announced that Mr. Sherrill was ordered by the court "to pay disgorgement, prejudgment interest and a civil penalty in the amounts of $381,400, $17,183 and $25,000, respectively, provided that the amounts ordered as disgorgement and interest will be reduced by any amount ordered as restitution in Sherrill's related criminal case."

Note than none of the standard detection tricks, promulgated by regulators and others, is in play here. The return of 10% was not too good to be true, on its face. The con criminal made it look like a brokerage was actually offering the promissory notes. The only fly in the ontiment was Mr. Sherrill's previous run in with the SEC, which is summarized here. I wonder why the brokerage didn't know abou this?

Technorati Tags: ponzi scheme, sherrill, investors, brokerage customers, principal amounts, recidivist, promissory notes, law violator, marion, atlanta based, broker dealer, registered representative, restraining order, invest, promise

Posted by michael webster at 4:05 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC is reporting that "that it filed an emergency enforcement action today in federal district court in Massachusetts and obtained, by consent, preliminary injunctions, asset freezes and other relief against Frank J. Russo, a Massachusetts-based investment adviser and three affiliated entities in connection with a scheme to defraud investors through investments in limited partnerships. The Commission's complaint alleges that Russo, of Wakefield, Massachusetts, and his investment advisory corporation, FJR Corporation ("FJR"), raised at least $15 million from at least 160 investors in 12 states to invest in two limited partnerships controlled by Russo: Russo Associates Limited Partnership ("Russo Associates") and Eliot Partners ("Eliot Partners")." (my emphasis)

From the allegations, this would appear to be a gradual Ponzi scheme, a business model gone wrong. According to the complaint, Russo was offering investors a 10% return, and foregoing fees if the 10% return was not achieved. The offer to forgo fees works much the same way the offer of a guarantee does. Again, any forms of guarantees indicate that the investment is much riskier than being advertised. Just how much does it cost to fund the guarantee, how is funding it, and how will it be paid?

According to the complaint "Russo told some investors that their funds were being invested in bonds and other investment securities, and that the investments were safe and conservative. However, according to the complaint, Russo diverted at least $11.5 million in investor funds to a private California corporation which Russo co-founded with a college friend. The complaint further alleges that Russo is the California corporation's chief financial officer and that he is one of two directors. According to the complaint, the defendants did not disclose the purported investment in the California corporation to investors in the limited partnerships. To the contrary, the complaint alleges that the defendants sent false and misleading account statements to investors reporting fictional returns in excess of 10% and making false statements concerning the investment strategies of the limited partnerships. The complaint further alleges that, when the purported investment in the California corporation proved unprofitable and illiquid, Russo began paying dividends and investor redemptions with money raised from new investors." (my emphasis.)

The complaint contains other more spectacular claims, claims about returns as large as 66%. Hmm. Oddly, the complaint alleges that the funds were transferred to a California corporation, but does not include said corporation in the complaint. It is simply referred to as the "California Entity."

Technorati Tags: limited partnerships, russo, ponzi scheme, wakefield massachusetts, massachusetts based, limited partnership, associates limited, investors, fjr, investment adviser, investment advisory, injunctions, business model

Posted by michael webster at 3:36 PM | Permalink | Comments (2) | TrackBacks (1)

Was Steve Atwater a shill for Kirk S. Wright? I don't know the answer to this, but Mike Tierney's revealing article a few days ago would have me concerned for several reasons. As reported by Mike Tierney, Atwater received compensation of 1.5% per referral. Let us work some numbers here. If I gave Wright $1,000, expecting a the historical IMA return of 20%, then after Atwater took his take, Wright would have only had $985 to work with. If Wright could actually produce in one year a return of 20%, ie $1200, then Wright would have had to make $215, or roughly 43/197 or 22.3% return.

Is the difference between 20% and 22.3% significant enough to alert someone performing due diligence? Should have Steve Atwater known he was enabling, even innocently, scam?

Well, the master of this scam was Charles Ponzi., and he cut his sales force in for 10% - and with a 50% payout in 3 months. So Mr. Atwater's referral commission is not out of line, but was it disclosed to the investors? If so, did they realize the significance of how much more return and therefore risk IMA funds had?

Technorati Tags: steve atwater, charles ponzi, mike tierney, due diligence, received compensation, shill, ima, enabling, investors

Posted by michael webster at 10:44 PM | Permalink | Comments (2) | TrackBacks (0)

According to Court documents, the trial for individuals associated with Pantheon Holdings is as follows:

"ORDER Setting Criminal Trial Date And Pretrial Schedule as to Jay Mayne, Blake Ladenheim, Mark Pelle, Kathy

Eidelstein, Michael Press, Sanford Gold, Jeffrey Kuba, DePierre, Eric Bridges Reset Calendar Call for 1:30 p.m.

on 7/6/06 for Jay Mayne, for Blake Ladenheim, for Mark Pelle, for Kathy Eidelstein, for Press, for Sanford Gold,

for Jeffrey Kuba, for Frank DePierre, for Eric Bridges ; Jury Trial for 7/10/06 for Jay Mayne, for Blake Ladenheim,

for Mark Pelle, for Kathy Eidelstein, for Michael Press, for Sanford Gold, for Kuba, for Frank DePierre, for Eric Bridges.

Posted by michael webster at 9:56 AM | Permalink | Comments (0) | TrackBacks (0)

According to documents filed in the bankrucptcy of IMA and its affiliates, "Funds from IMA accounts totaling $6,050,000 were invested by Kirk Wright in these [real estate] projects[in Los Angeles]. Negotiations are near completion and due diligence activities are underway between a potential purchaser of this Debtor's interests, GTO and the Trustee. The Trustee's intent is to present the offer to the Court in a motion and hearing for a section 363 sale as soon as the "stalking horse" purchaser's due diligence is complete. The Trustee has been contacted by other entities who have expressed an interest in acquiring the Debtor's interests in these projects."

The Trustee is also the federal receiver for the assets of Mr. Kirk S. Wright and reports "Assets recovered in the Receivership estate as of April 30, 2006 include the following: House, Marietta, GA. Loft Condo, Atlanta, GA, Duplex house, Fairburn, Ga, 2005 Bentley Continental GT, 2000 Jaguar XK8, Aston Martin, 1967 BMW 2000CS,Furniture, fixtures, artwork.These assets and others are being marketed and sold in the Receivership estate. The estimated liquidation proceeds of these items may be in the range of $1.5 million to $2.2 million."

So for those who are counting, $7.5 to $8.2 million found, and only another mere $172 or 173 million to go.

Technorati Tags: due diligence, trustee, kirk wright

Posted by michael webster at 9:41 AM | Permalink | Comments (1) | TrackBacks (0)

A number of individuals have either commented or emailed me to ask about the value of their ETS payphone shares. The company still exists, but does not trade on any stock exchange. It does file with the SEC and you can read about some of their filings here. Although there is a receiver in place, there is no point in contacting the receiver as they will not answer specific questions about the value of your shares.

The receiver recently suffered a legal set back when it tried to sue the banks and trust companies which lent money to the purchasers of the ETS stock. The Appellate Court ruled that the receiver lacked standing to pursue this action. "The Trustee has the right to petition the United States Supreme Court for review of the Eleventh Circuit's decision and intends to do so."

In February, 2006 the company voted to wind down its operations and sell its asset to Empire Payphones and rename ítself "Payphone Wind Down Corporation." This is from their SEC filings: "Pursuant to the Asset Sale Agreement, the Company has agreed to sell substantially all of its assets used in its payphone business to Empire. Under the Asset Sale Agreement, the purchase price aggregates $4.5 million and will be paid in installments, some prior to the consummation of the transaction, as follows: (i) $250,000 in cash on November 1, 2005, (ii) payment of certain commissions under assigned contracts not to exceed $2.4 million in the aggregate and (iii) $1.85 million in cash, payable in monthly installments of $132,143 commencing December 1, 2005, with any remaining balance being paid at the closing of the transaction." However the monthly payments will be offset by payments to Empire: "In order to provide for the funding of operational losses of our payphone business pending consummation of the Asset Sale Agreement, the Company and Empire entered into the Management Services Agreement. Under the Management Services Agreement, Empire has agreed to provide to the Company management services and fund operational losses of our payphone business, subject to the oversight of our Board of Directors. In consideration for its management services and the use by us of Empire's affiliates' resources, Empire shall be entitled to receive a management fee calculated at the end of the initial term of the Management Services Agreement and at the end of any renewal term in the amount of the first $400,000 of excess revenue, after repayment of, among other amounts, all expenses of operation and any advances made by Empire to fund operational losses plus 50% of any excess revenue above $400,000. We shall receive the remaining 50% of excess revenue above $400,000. For use of Empire's affiliates' resources during the term of the Management Agreement, the affiliates shall receive a monthly resource fee of $92,000."

Any money left in the company will be distributed to the shareholders upon the final wind up date. It does not look very promising, I am afraid.

Technorati Tags: sec filings, stock exchange, payphone, lent money, ets, shares

Posted by michael webster at 8:18 AM | Permalink | Comments (7) | TrackBacks (1)

On May 22nd, 2006 the SEC announced that "the Honorable K. Michael Moore, United States District Judge for the Southern District of Florida entered a default judgment of permanent injunction against Jean Fritz Montinard (Montinard) for his involvement in an affinity fraud that targeted members of the Haitian-American community in Miami through local radio programs and presentations to Haitian-American church congregations." The default judgment means that Mr. Montinard likely chose not to defend the SEC action.

The SEC started their action against Focus Financial Associates Inc and some of its directors in June, 2005. The SEC alleged that "from February 2002 to July 2004, the Focus Companies and their principals raised approximately $6 million from about 600 Haitian-American investors living in South Florida. The Defendants offered twelve-month term notes that purportedly generated "guaranteed" annual returns of 15 to 20%. The Defendants told prospective investors that the funds they invested would be distributed to companies operating under a related "Focus" name, including an airline providing direct flights between Miami and Haiti, a tax return preparation service, a chiropractic center, a landscaping service, an auto dealership, and two auto repair shops, among others."

What are the chances that any of these business existed?

Technorati Tags: haitian american community, sec action, default judgment, american investors, prospective investors, american church, radio programs, district judge, injunction

Continue reading "Affinity Ponzi Scheme Limps to an End" »

Posted by michael webster at 8:40 PM | Permalink | Comments (0) | TrackBacks (1)

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)

The SEC announced yesterday that three of the top salesmen in the Mobile Billboards business opportunity fraud had been ordered to pay approximately $1.8 million in restitution. The Mobile Billboards scam ran for approximately three years, from 2001 and 2004. The scam was uncovered as a ponzi scheme by several securities regulators including: the Attorney General for Washington State, the Pennsylvania Securities Commission, the Department of the Secretary of State, North Carolina and ultimately the SEC, and that complaint can be accessed here.

This scheme had all the hallmarks of a business opportunities fraud, trademark violations, unrealistic earnings projections, false guarantees, and high pressure salesmen. It was the securitization of the standard business opportunities fraud. How did it work? In brief, individuals bought "units" in Mobile Billboards, which represented to the investors that it would pay them 13.49% yearly and then repurchase their units at par in seven years. Mobile Billboards claimed that they were placing "mobile billboards" on numerous fleets and generating ad revenue. Unfortunately, all they were doing is using the investor's money to pay back the investor 13.49% yearly; at the same time these three salesmen earned commissions of between 15% and 27%. So assume that after commissions, they only had $80 and were paying 13.5% a year to the investor. The scheme could have theoretically lasted about six years, even without new money coming in.

What were the warning signs regarding Mobile Billboards?

Technorati Tags: mobile billboards, business opportunity fraud, ponzi scheme, pressure salesmen, business opportunities, pennsylvania securities commission, sec, state north, trademark violations, securitization, hallmarks, restitution, regulators, uncovered

Continue reading "Mobile Billboards - Business Opportunities Fraud" »

Posted by michael webster at 12:59 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC announced that, yet another "hedge fund", Capital Management Group Holdings has been charged with misappropriating funds and misleading investors. The scheme had all the hallmarks of a typical hedge fund ponzi scam: there was false documentation about risk and reward, there were massive trading losses to the fund, kickbacks from trading commissions for those losses which went to the managers and not the fund, and regulatory defaults were not disclosed.

Over a space of 5 years, it is alleged that Capital Management Group Holdings defrauded some 38 investors of $14 million, or approximately $350,000 per investor.

How does someone with $350,000 to invest not spend enough money to perform the necessary due diligence to avoid this scam? How can you have $350,000 in real hard coin of the realm to invest in a flimsy, talking about dollars scam? Could a simple due diligence model have protected the investors here?

Technorati Tags: due diligence, misleading investors, hedge fund, management group, invest, trading commissions, false documentation, ponzi, kickbacks, hallmarks

Continue reading "Hedge Fund Ponzi Scheme-Capital Mangagement Group Holdings" »

Posted by michael webster at 6:21 PM | Permalink | Comments (0) | TrackBacks (0)

According to Court documents, Applegate:

"Promised investors their return would be 8 percent and that he would take no commission. Instead, his payment would come from any profit above 8 percent. If the investment did not reach 8 percent, he promised to refund their money. "

What is wrong with this deal?

Technorati Tags: risk free investment, treasury bond, treasury rate, money making machine, adage, applegate, court documents, borrow, legitimate, fraud, invest, investors, tests

Continue reading "Gregory Applegate Scam II" »

Posted by michael webster at 9:09 PM | Permalink | Comments (0) | TrackBacks (0)

The Fraud Discovery Institute has an interesting approach to detecting white collar fraud: combine the practical skills of a former fraudster with professionals who specialize in fraud detection, lawyers and examiners. The underlying premise behind Mr. Barry Minkow's enterprise is that the existing educational materials have not and will not prevent corporate fraud, but his checklist program will. He states that there are always three elements to a fraud: a) failure to disclose material facts, b) diversion, and c) drawing big conclusions from little evidence. Apparently, his checklist program is designed to identify these features in an interactive method.

I have not reviewed the checklist program, but I did listen to Mr. Minkow's introduction to it, you can listen to it here. As an example, Mr. Minkow suggests that his checklist program would have prevented the auditors from signing off on the New Era Philanthropy Ponzi scheme, a scheme masterminded by John G. Bennett.

The New Era scheme, as discussed by Stephen Pressman saw:

"In the early 1990s, hundreds of nonprofits gave large sums of money to Bennett. Some were prominent nonprofit organizations such as the American Red Cross, the Salvation Army, and elite academic institutions such as Harvard, Princeton, and Brown Universities. When New Era folded, these institutions all lost the money they had on deposit. John Brown University in Siloan Springs, AK, lost $2 million, close to 4 percent of its endowment. The big loser, however, appears to be Lancaster Bible College in Lancaster, PA, which had $16.9 million deposited with New Era."

How did this scheme work? In the early 80's Bennett set up a corporation which advised which non-profits or charitable organizations corporations should give donations to. It was called the "Center for New Era Philanthropy". By the late 80's, Bennett had turned to "fund raising" for the non-profits; he promised them returns of 100% within six months. Bennett claimed that he had access to a group of secret investors who would match the non-profits "investment" with the Center. The group of investors was secret because they wanted to donate anonymously - efforts to contact them would lead to them to withdraw their support for the Center.

Very bright, knowledgable and serious individuals accepted Bennett's explanation at face value. Mr. Minkow argues that this "diversion" or wall of secrecy is a huge red flag and must be investigated further or real due diligence cannot proceed.

Is Mr. Minkow right or is this just a case of reasoning after the facts, having acquired that wonderful hindsight vision which comes to all investors when they discover they have been defrauded?

Technorati Tags: white collar fraud, corporate fraud, fraud detection, ponzi scheme, barry minkow, era philanthropy, apparently, discovery institute, new era, diversion, premise, disclose, conclusions

Continue reading "Fraud Discovery Institute's Checklist Program" »

Posted by michael webster at 8:53 AM | Permalink | Comments (0) | TrackBacks (1)

According to the SEC, Capital First Fund, an unregistered security purchasing distressed debt, "solved" the first problem. How did the do it?

Technorati Tags: ponzi schemes, business opportunity, fraud artist, distressed debt, scammer, bankrupt, naive, induction, legitimate, fisher, themes, sec

Continue reading "Capital First Fund - Almost a Ponzi Scheme?" »

Posted by michael webster at 9:29 PM | Permalink | Comments (0) | TrackBacks (0)

Jeffrey Skilling has testified that he did nothing wrong at Enron and committed no criminal acts.  A number of commentators have suggested that this will come down to a credibility test: who do you believe Mr. Fastow or Mr. Skilling?

If I were prosecuting this case, I would not want the jury to decide the trial by deciding that question.  I would try to establish with the the jury the following facts:

1.  a) Skilling and Lay pushed the SEC to allow Enron use "make to market" accounting for its trade deals.  I would explain this concept with simple examples.  If I have a contract with you which calls for you to buy an apple a day from me for a year, at the price of $1.00, then what are my earnings and what is my cash?  Make to market accounting means I record earnings of $365, on day 1, but I only have $1 cash.  On day 2, if I have no more contracts, I have no earnings, but $2 in cash.  In order to just maintain the earnings, I have to find another contract and I have to husband my cash because I don't have any.

1. b) Skilling and Lay did not want Enron to be valued on cash flow basis, but on a earnings basis. 

2.  Skilling and Lay knew that Enron was bleeding cash.

3.  Skilling and Lay knew that money losing ventures could not be reported to the public because the disparity between cash and reported earnings would push the company to be traded on cash flow basis, like any other trading company.

4.   Skilling and Lay decided not to tell the public that Enron was bleeding cash.  End of story.  How the retained earnings fiction was maintained, using the limited partnerships,  is interesting but it is not the story.  The story is that much like those vaunted illiquid postal coupons Mr. Charles Ponzi had in small quantities, Enron had no cash and only "believers" in its securities.  Religion ran out in both cases.

Technorati Tags: record earnings, jeffrey skilling, apple a day, enron, criminal acts, accounting, trade deals, credibility, contracts, sec

Posted by michael webster at 7:36 AM | Permalink | Comments (0) | TrackBacks (1)

The RCMP shut down an alleged pyramid scheme on Februrary 14th, 2006. The MLM scheme was called Platinum Choice Inc.

According to the allegations,

"While the offer of online games and puzzles is certainly tantalizing, PCI's primary action was a lottery ticket pool. PCI claimed that it purchased lottery tickets and then would assign them to "qualifying associates in the form of bonuses."

Associates also earned money recruiting new associates and enrolling magazine subscribers who did not participate in the lottery pool. Magazine subscribers paid a $24.95 subscription fee every fourth week, plus an annual registration fee of $25.

Associates also earned an override on subscribers recruited by "downline associates." As well, for every magazine subscriber enrolled, associates received "pooled mega million lottery tickets, as a bonus."
Further sweetening the pot, PCI claimed to utilize a "sophisticated system that ranks groups and number combinations - increasing the odds of winning substantially."

To get in on the action, associates paid nothing for the first year. After one year they were required to pay a $50 annual registration fee and $19.95 every fourth week."

The company's rebutal to the charges can be read here.

The best advice given by the lawyers to the MLM company?

Technorati Tags: lottery tickets, lottery pool, mega million lottery, lottery ticket, pci, pyramid scheme, number combinations, online games, rcmp, magazine subscriber, mlm scheme, earned money, registration fee, sophisticated system, downline, allegations

Continue reading "MLM Scam Shut Down by the RCMP" »

Posted by michael webster at 9:04 PM | Permalink | Comments (0) | TrackBacks (0)

"On April 4, 2006, the Securities and Exchange Commission filed securities fraud charges in Dallas federal court, against three individuals and their companies for conducting a fraudulent and unregistered offering of investment contracts involving 'Ad Toppers', computer monitors purportedly used to display advertisements in public locations."

This ponzi scheme again is the securitization of the classic business opportunities scam or fraud. Much like the ETS Payphone ponzi scheme, investors "bought" Ad Toppers to place over vending machines, ATM, and other kiosks and then leased them back to the same company that they bought them from, for a promised or guaranteed 16% return. Each unit apparently cost and investor $4,000, primarily from retired individuals.

According to the SEC complaint:

"Using sales agents around the country, including defendants Clifton Curtis Sneed, Jr. and his company Sneed Financial Service, LLC ('SFS') (together, the 'Sneed Defendants'), the UCI Defendants lured investors into the Ad Topper program through material misrepresentations and omissions. The UCI Defendants described the Ad Topper program as a lucrative and safe investment that would generate at least 16% annual returns, and characterized DNE and UCI as strong companies with successful track records. They also claimed that returns would come from revenue generated by sales of advertising that would be displayed on the Ad Toppers. They further represented that, after three years, investors could recover their original investment in the Ad Toppers by selling the machines back to DNE for the original purchase price.

These claims were false. Most importantly, virtually all 'returns' paid to investors came from new investor funds, not from advertising sales. The UCI Defendants failed to disclose to investors that many Ad Toppers never were placed in their promised locations; that a single machine was often sold to multiple investors; that UCI had filed for bankruptcy protection during the offering; and that UCI paid sales agents undisclosed commissions ranging from 16% to 23%."

This ponzi scheme ran approximately the amount of time it took to return an investor's $4,000 at $56/month, five years.

What was the appropriate due diligence, for the average investor who paid $4,000 and expected a 16% return?

Technorati Tags: ponzi scheme, securities fraud, fraud charges, securities and exchange commission, business opportunities, toppers, sec, classic business, investment contracts, computer monitors, vending machines, securitization, sneed, payphone, kiosks, ets, apparently

Continue reading "Unlimited Cash Ends After 5 Years" »

Posted by michael webster at 8:30 PM | Permalink | Comments (1) | TrackBacks (0)

One detail this is very interesting is the nature of boiler room cold calls:

"Phone records for the company's office in Great Neck, N.Y., show that tens of thousands of long-distance calls -most less than one minute- were made to locations across the country, according to an affidavit by FBI Agent Jennifer May.

'Based on my experience and training, the calling patterns reflected in the telephone records are consistent with those of a "boiler room" operation,'May wrote."

Posted by michael webster at 1:20 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC alleges in its complaint that Cobalt's Offering Memorandum, which were apparently not registered, concealed the fact that the investment scheme was Ponzi, that Shapiro and Stitsky had criminal backgrounds, and that the company was only 2 years old and not 20 years, among other misrepresentations. In further detail, the SEC alleges:

"The Commission's complaint, filed on March 27, alleges that since approximately July 2004, the Company has raised over $16 million from at least 150 investors on the basis of false and misleading offering and marketing materials and through boiler room sales tactics overseen by defendant Stitsky, another convicted felon and a multiple recidivist. According to the Complaint, the defendants: (a) misrepresented Cobalt's track record and ongoing operations; (b) concealed Shapiro's and Stitsky's roles and criminal backgrounds and promoted the false impression that Foster runs the Cobalt; (c) misappropriated at least $2.6 million of investor funds; and (d) operated the Company as a Ponzi scheme, using funds of later investors to pay earlier investors a promised 8% annual return. The Complaint further alleges that the offering is ongoing -- Cobalt has continued to raise funds from investors, even after the execution of search warrants at its offices in December 2005."

I have viewed the Cobalt website, nothing spectacular jumps about it, in either direction. Are there are any simple due diligence steps when reviewing this business opportunities fraud?

Continue reading "SEC Moves Against Cobalt Multifamily LLC" »

Posted by michael webster at 1:51 PM | Permalink | Comments (0) | TrackBacks (0)

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)

"The evidence showed that from 1996 through September 2000, EDWARDS, the founder of ETS Payphones, Inc. (ETS), raised capital to grow his coin-operated payphone business by using a network of independent insurance agents to sell payphones to investors throughout the United States for $5,000 to $7,000 per phone. EDWARDS convinced investors to buy payphones and lease them back to ETS for what EDWARDS claimed would be a recession-proof, guaranteed profit of approximately 14% per year. EDWARDS promised he would buy back their phones upon request, when, in fact, the company did not have the financial ability to do so. The scheme defrauded approximately 12,000 nationwide investors out of more than $400 million." (my emphasis)

"United States Attorney David E. Nahmias said of [the September 2005] verdict, "As the witnesses and the evidence proved at trial, this was a tragic case of fraud that victimized over 12,000 people, most of whom were retired and living on fixed incomes. The victims thought they were investing in a legitimate business, but it was in fact a Ponzi scheme, that netted EDWARDS over $21 million. We hope that the jury's verdict has brought some measure of justice to the many victims of this fraud."

How could anyone of the investors have determined that this was a Ponzi scheme? What simple due diligence could they had done which may have detected this scam or fraud? (Which apparently although too good to be true, didn't sound too good to be true. Thankfully.)

Continue reading "Criminal Sentencing in ETS Payphones Business Opportunities Fraud" »

Posted by michael webster at 8:45 AM | Permalink | Comments (5) | TrackBacks (1)

"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)

This picture showing the relative importance of the 12dailypro.com website versus the importance of the sec.gov, the regulator's website for all US securities tells you all you really need to know about 12dailypro's due diligence. Interesting how the site had more reach at even the beginning of its ill fated life than the SEC's site - very interesting story here I am sure.

Posted by michael webster at 3:26 PM | Permalink | Comments (1) | TrackBacks (0)

Due Diligence should be thought of as checklist, or audit, or series of steps to verify facts about business opportunities for sale. Fraud can be avoided with by using serious due dilgence, or fraud can be courted using a parody of due diligence. As an example of the latter, I offer the following example:

There is a little outfit on the net purporting to perform due diligence on "program", high yield, autosurf, and like "programs". This forum, in September of 2005, announced their results of their "due dilgence" on 12daily Pro. The results are fascinating.

The announcement that 12daily Pro has passed OIC's first due diligence is here. The post runs for some 32 pages, as of March 8, 2006.

The actual due diligence is here. In effect, the gentlemen at OIC have determined someone answers the phone at 12daily Pro's landline, there are addresses on file from the whois directory, lifeclicks is an incorporated company, and there is some information on the net about Charis Johnson. Why is any of this at all convincing - given that on its face, the information is trivial?

Continue reading "Due Diligence and Parody of Reasoning II" »

Posted by michael webster at 1:48 PM | Permalink | Comments (1) | TrackBacks (0)

The receiver is developing a website "devoted to providing investors with information relating to the receivership". The order can be found on the website or here.

In an apparent nod to Ms. Johnson's professionalism, the SEC acknowledged that:

"that the defendants defrauded investors by operating 12daily Pro as almost a pure Ponzi scheme -- using new investor monies to pay the promised returns to existing investors -- in violation of the federal securities laws" (my emphasis)

Almost pure is good.

However, I can find no truth to the rumour that the website will pay to be included in the other legitimate autosurf programs. Nor can it be confirmed that none of the 12daily Pro autosurfers will be allowed to access the website since their contract with 12daily Pro specified and confirmed that "the 12daily Pro program was not an investment". More to come.

Posted by michael webster at 12:21 PM | Permalink | Comments (1) | TrackBacks (0)

Here is the court order that the SEC obtained recently against 12DailyPro, LIfeClicks and Charis Johnson, for updates on Ms. Johnson click here

The order is interesting. The Receiver is given the usual powers to wind-up the scheme, including the power to run the 12DailyPro website. But there doesn't seem to be a term in the order allowing the Receiver to "protect" the trademarks of 12DailyPro - in any successful Ponzi scheme, as it grows in popularity clones appear at the tail end of the scheme. But the Receiver may not have the requisite power to shut the clones down. The scheme may morph over the internet, roaches fleeing from the light.

In a related story, ABC is reporting that apparently 8000 individuals from Utah were involved with 12DailyPro. This is an angle worth following - how did these 8000 individuals know of eahc other? It is unlikely that they were simply surfing the web and found this autosurfer "program".

Posted by michael webster at 9:40 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC's "alert" in my opinion is pointless, and in some cases will do more harm than good. Business opportunities frauds will use the alert as "proof" the that SEC has said that autosurf programs are legal. This will become common knowledge around net: "first there were bad programs, but now the SEC regulates autosurf programs and they are all legal."

It is also pointless in its generality. Here is the SEC's advice:

* If it sounds too good to be true, it probably is. Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you'll get substantially more could be highly risky --- and that means you might lose money.

* Check out the company before you invest. Contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing. Also call your state securities regulator to see whether the company, its officers, or the promoters of the opportunity have a history of complaints or fraud. If a supposedly upright business lists only a P.O. box, you'll want to do a lot of work before sending your money!

* Steer Clear of Testimonials. Watch out if the company's promotional materials, contain "testimonials" from supposedly satisfied customers, especially if all the "testimonials" are full of praise.

* "Guaranteed returns" aren't. Every investment carries some degree of risk, and the level of risk typically correlates with the return you can expect to receive. Low risk generally means low yields, and high yields typically involve high risk. If your money is perfectly safe, you'll most likely get a low return. High returns represent potential rewards for folks who are willing to take big risks. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are "guaranteed" or "can't miss." Don't believe it.

As academic philosophers like to say, everything the SEC says which is true doesn't matter, and what does matter the SEC is wrong about.

Continue reading "12Daily Investigation V and the SEC Warning" »

Posted by michael webster at 7:36 AM | Permalink | Comments (0) | TrackBacks (1)

"accounting trickery is used to cover up problems that are there or to inflate earnings and make it look like the company is making more money than it really is. And greed comes in of course-accountants put a positive spin on things to impress investors and keep the stock price up."

Continue reading "Financial Shenanigans and Fraud" »

Posted by michael webster at 8:51 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC

filed a settled action against NetEase.com, Inc., an internet company based in China, alleging that NetEase materially overstated its revenues and understated its net loss by improperly recognizing revenue.

Apparently, NetEase raised $65 million on the public markets by misleading investors about how much money it was really making. What is interesting about this lawsuit is that from a formal level NetEase is operating like a ponzi scheme - early investors make money at the expense of those investors who came in later and suffered when NetEase's accounting fraud was discovered.

Posted by michael webster at 9:49 PM | Permalink | Comments (0) | TrackBacks (0)

The SEC announced

the filing of securities fraud charges against the operators of www.12dailypro.com, a "paid autosurf program" that in fact was a massive Ponzi scheme which raised more than $50 million from over 300,000 investors worldwide by offering a 44% return on investment in just 12 days. As a result of the Commission's charges, the defendants, Charis Johnson, age 33, of Charlotte, N.C., and her companies, 12daily Pro and LifeClicks, LLC ("LifeClicks"), ceased their solicitation of investors and agreed to a freeze of all their assets and the appointment of a receiver who will take control of the companies' operations.

The SEC's complaint can be read here. In their complaint, the SEC alleges that 12Daily Pro has "raised" over $50 million from over 300,000 "investors" worldwide.

Why is it that there remain shrill defenders of this scheme? Are the defenders the big time winners, small winners, or big time losers?

Continue reading "12DailyPro Investigation IV" »

Posted by michael webster at 4:01 PM | Permalink | Comments (1) | TrackBacks (0)

The history of failed Ponzi schemes is similar to the failure of business opportunities frauds. After the fraud is discovered, or there is an announcement of an official nvestigation, investors all of a sudden become super slueths in their due diligence. I have seen this phenomena time and time again: after a investor say in USA Beverages becomes convinced that the business oportunity is a fraud or scam, they find it very easy to do the proper due diligence! They know all about the FTC and the franchise rule, and have even learned how to google "vending fraud".

Why do people know how to research and discover that a business opportunity is a scam or fraud after they have been defrauded but not before? When investing $20,000 or more, why would a person who obviously can perform due diligence not do so? If you know how to perform due diligence after the fact, what prevents you from accessing that knowledge when it is most needed?

Continue reading "The Discovery of a Fraud or Scam and Post Facto Due Diligence" »

Posted by michael webster at 9:49 AM | Permalink | Comments (0) | TrackBacks (0)

A review of the 12DailyPro search results for "12DailyPro Investigation" is revealing.

Many people appear to be angry with Stormpay, whom it is said contributed to 12DailyPro's inability to pay out its members. Some individuals claim that Stormpay is bankrupt.

I do not know whether this is factual or not, but it is worthwhile to recall what Mr. Ponzi's banking arrangements were in the early 1900's. His company, Securities Exchange, a delightful bit of ironic foreshadowing, took and deposited its "investors" funds at three or four local banks. The local American banks at the time often faced credit runs.

Here is a highly simplified examaple: If a Bank's deposits are $100, and it has a reserve of $10, then it can lend up to $90 - generally for long term and less liquid loans, which provide the Bank with more interest than they have to pay out on the $100. A credit run occurs when people believe, rightly or wrongly, that the Bank is not solvent. The bank's creditors, ie those who have bank accounts, start demanding their money back. The Bank can pay them by using its reserves, but if the demand is too great, the Bank will have to liquidate its loans to obtain cash. If it has to liquidate too many of its assets quickly, then like any firesale the price the Bank gets may be less than $100. The account holders sense this desperation and demand even more money, quicker.

What has a Bank run got to do with a Ponzi Scheme?

Continue reading "12DailyPro Investigation III" »

Posted by michael webster at 11:35 AM | Permalink | Comments (0) | TrackBacks (0)

The Arizona Republic has an interesting story on 12DailyPro. The author writes about the defenders of 12DailyPro and observes that

in the center of it all are lots of investors who are doggedly defending 12DailyPro. I've read their comments on both the company's online forum and other Web sites. They're either early investors who made money and want to make more, or they're sure that first payout is just around the corner. All they need is those stupid investigators to get out of the way and the media to stop its negative reporting.

Are these defenders really just greedy for another payout?

Continue reading "12DailyPro Investigation - Part II" »

Posted by michael webster at 7:57 PM | Permalink | Comments (0) | TrackBacks (0)

The press release was short on details about the representations made to potential recruits. But now there is a story in the Boston Globe which sheds more light on the alleged scam. The news story states that Seng Tam said "Don't tell anyone, she warned them. People grow jealous. We have suffered long enough. Now it is our people's time to be rich." (my emphasis added)

Why was this effective? Especially judged in light of the implausibility of the scheme.

Continue reading "Cambodian Scam - One Universe Online" »

Posted by michael webster at 12:54 PM | Permalink | Comments (1) | TrackBacks (0)

One of the more interesting facets of fraud is how the promoters of business opportunities appear to use the language of economic rationality in justifying their fraud or scam. The explanations are either completely convoluted or a parody of reason.

Consider this example regarding 12dailypro, an autosurf program being investigated by the FBI.

Let's say a company called ABCD Investments (a make believe company) wants to get more traffic to their web site. They contact an autosurf company such as 12 Daily Pro and pay them money to increase their web traffic. ABCD Investments believes that a certain percentage of people visiting their web site will buy what they are selling. So they are willing to pay to get potential buyers to their site.

In exchange for this payment 12 Daily Pro turns around and pays internet users like you and me to view ABCD Investments' web site for a few seconds. This way ABCD Investments gets the traffic they want while the web site surfers like you and me get paid to view their web site.

There are thousands of companies that will pay to get additional traffic to their sites. Auto surf companies such as 12 Daily Pro have thousands of web sites that they are supposed to get traffic for and thousands of people that they pay to view those sites. Web surfers just like you can "auto surf" those web sites for just a few minutes a day with the possibility of making a huge return on their investment.

What is wrong with this reasoning, such as it is?

Continue reading "Fraud - Parody of Reasoning" »

Posted by michael webster at 4:43 PM | Permalink | Comments (0) | TrackBacks (0)

I have written before about the FTC shutting down two Internet Vending or Kiosk business opportunities frauds, Transnet Wireless et. al. and Bikini Vending et. al.. In the Bikini Vending fraud "consumers learned about the business opportunity through telephone, mail, or in-person solicitations from local insurance agents and financial planners the defendants recruited and trained as sales agents. Using promotional materials received from the defendants, the sales agents promised consumers secured profitable locations, a guaranteed monthly income." In the Transnet Wireless case, "the defendants ran television and radio ads selling the terminals, making claims lilke "You simply receive a monthly check for all the wireless revenue generated at your location. . . There is unlimited income potential. . . Prime locations are available now". (my emphasis added)

Clearly the promoters of these business opportunties scams knew, like all realtors, that location is key. At least key in the mind of the potential distributor.

Why should ads like this raise alarm bells? What is the law's response?

Continue reading "Internet Vending or Kiosks" »

Posted by michael webster at 12:49 PM | Permalink | Comments (0) | TrackBacks (0)

One law-enforcement official involved in the probe said "a significant number of people" likely lost millions of dollars in the aggregate. The site recently claimed it had 300,000 members from around the world, some putting in $6,000 at a time. The Web site of 12dailyPro still was operating as of yesterday.

Based in Charlotte, N.C., 12dailyPro is run by a woman named Charis Johnson, who managed the site through a North Carolina-registered company she also operated called LifeClicks LLC.

In a statement issued yesterday through her attorney, Ms. Johnson blamed a commercial dispute with StormPay for the unavailability of funds owed to 12dailyPro members. Ms. Johnson said StormPay demanded it be the exclusive provider of payment services for 12dailyPro, then soon after froze the accounts and funds after "falsely accusing us of misrepresenting our business model."

She said 12dailyPro had never missed a payment to members until the problems with StormPay arose. LifeClick's lawyers are "evaluating our legal options," she said, adding that the company is "cooperating fully with all investigations."

StormPay officials said they cut off payments after being alerted to possible fraud at 12dailyPro. In a recent interview, StormPay Chief Executive Steve Girsky said, "We have done nothing wrong." Asked if he believed 12dailyPro was a legitimate operation, he said his company initially had no reason to question it, but "upon further investigation we had a hard time making these returns work."

Today the FBI officially announced its investigation.

A story which we will watch with interest. To follow this story, please click here

Posted by michael webster at 3:54 PM | Permalink | Comments (0) | TrackBacks (0)

Donald Dunn's book on Charles Ponzi is a terrific read! A terrific read several times over, as I am now finishing it for the fourth time. The work repays careful re-reading, and it is almost a shame that it reads so engagingly on first impression, because one may not re-read it. I savoured the psychological insights into how Ponzi made this classic fraud work.

What was also intriguing was the explanation of Ponzi's understanding of how to manipulate credit reputation and the psychology of bank runs combined with his understanding of how to use the bankruptcy laws, as described in the early chapters. I had not realized the extent to which Ponzi had attempted to undermine the banking industry, both in Montreal and Boston. (This is why I hold that there is no significant difference between Enron and Ponzi, except as a matter of scale. Although with Enron there was a real company; but the cheat remains the same: lie to your creditors about the extent of the viability of your business scheme.)

What can we learn today from Donald Dunn's book?

Continue reading "Donald Dunn's Book on Charles Ponzi" »

Posted by michael webster at 8:50 PM | Permalink | Comments (0) | TrackBacks (3)

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

"The Securities and Exchange Commissionhttp://www.sec.gov/litigation/complaints/comp19464.pdf announced that on November 15, 2005, it filed an emergency enforcement action in federal district court in Massachusetts and obtained a temporary restraining order, asset freezes, and other relief against three individuals and two corporate entities in connection with a fraudulent investment scheme targeting Cambodian immigrants. The Commission alleged in its complaint that the defendants falsely promised members of the Cambodian immigrant community guaranteed monthly returns that would pass on to future generations."

Continue reading "World Market Direct Selling and Others" »

Posted by michael webster at 6:54 AM | Permalink

A new internet mall scheme was grounded by the FTC.

"Operators of online malls that disguised themselves as legitimate business opportunities have settled Federal Trade Commission charges that they were actually illegal pyramid schemes, in violation of federal law. Seven individuals and four businesses will be barred from making false or misleading statements about earnings or income and engaging in illegal pyramid operations. Four also will be barred from participating in any multilevel marketing businesses. The defendants are subject to suspended judgments totaling $12 million.

The Internet mall businesses operated independently, but they shared attributes: both operations promised substantial incomes; both touted products, but investors didn’t really earn money by selling them, but by bringing in other investors; and most investors lost money."
http://www.ftc.gov/opa/2003/03/skybiz.htm

Continue reading "New Internet Mall Scheme" »

Posted by michael webster at 4:37 PM | Permalink

Disbtributors of an internet kiosk ran into some problems with their scheme. "The FTC alleged that the venture was like a Ponzi scam since some purchasers received monthly payments not from the revenue generated by the kiosk usage, but paid to the first purchasers by using the initial payments from new purchasers, leaving the majority of buyers holding worthless interests in nonexistent kiosks."

Posted by michael webster at 5:15 PM | Permalink

The Ponzi scheme can be described very simply. An investor pays $x in return for getting a large "yield" or return on his money, but the return comes from later "investors" buying the same opportunity.

Virtually every news story on ponzi schemes fail to explain why the schemes are so attractive- greed is the only explanation.

But greed is not a complete answer. There is at least one more complete explanation: our naive induction schemes are bad, incorrectly generalizing from a past series of events.

Here is a little test to take. If I said that I could manage $100.00 for you and give you a 10% return on your money, how months of getting this return would you need to believe me? Call that number "N".

Now, suppose I said that I didn't even need the $100.00, I would give you your 10% return, if you would contract with me to pay the $100.00 after N months? Is this a better or more sure idea?

Technorati Tags: ponzi schemes, ponzi scheme, greed, money, correct answer, naive induction

Continue reading "One allure of the Ponzi Scheme" »

Posted by michael webster at 4:55 PM | Permalink