Post-Madoff, SEC Successfully Partnering with Whistleblowers to Combat Ponzi Schemes
Wednesday, January 4, 2023
SEC Changes Since the Madoff Scandal

Today Netflix released a docuseries titled “Madoff: The Monster of Wall Street,” which is a stark reminder of the SEC’s failure to act on detailed and highly credible disclosures from Harry Markopolos about Madoff’s unprecedented $50 billion Ponzi scheme.  Indeed, an SEC Inspector General report found that the SEC received several detailed and substantive complaints about whether Madoff was actually trading securities yet never performed a thorough and competent investigation.

Spurred in part by the SEC’s failure to detect and halt Madoff’s fraud, Congress included in the Dodd-Frank Act an SEC Whistleblower Program, which provides awards to whistleblowers that voluntarily provide original information leading to successful enforcement actions with total monetary sanctions in excess of $1 million.  A whistleblower may receive an award of between 10% and 30% of the total collected monetary sanctions.  If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.  The SEC Whistleblower Program has proven to be highly successful in generating high-quality information regarding securities law violations that have enabled the SEC to halt fraud schemes (including Ponzi schemes) and protect investors.

According to the SEC Whistleblower Program’s report for FY 2022, “[e]nforcement actions brought using information from meritorious whistleblowers [since the inception of the program] have resulted in orders for more than $6.3 billion in total monetary sanctions, including more than $4.0 billion in disgorgement of ill-gotten gains and interest, of which more than $1.5 billion has been, or is scheduled to be, returned to harmed investors.”  The annual reports of the SEC Office of the Whistleblower indicate that the SEC receives a significant number of whistleblower tips related to offering frauds, such as Ponzi, or Ponzi-like, schemes.

In our experience helping whistleblowers disclose Ponzi schemes to the SEC, we have found that the SEC usually prioritizes tips about Ponzi schemes and in some cases, our courageous clients’ TCR submissions and assistance with SEC investigations have enabled the SEC to promptly halt Ponzi schemes, obtain emergency asset freezes, and appoint receivers to recover funds for harmed investors.  As there are significant risks entailed in reporting offering frauds, the prospect of potentially obtaining an SEC whistleblower award has been a significant impetus for our clients to come forward.

Subsequent to the Madoff fraud, the SEC has implemented many reforms to reduce the chances that similar frauds would be undetected in the future.  Recent enforcement data suggests that these reforms have proven successful and that whistleblowers are helping the SEC halt Ponzi schemes and return funds to harmed investors.  Indeed, 2022 appears to have been a record year for SEC enforcement actions combating Ponzi schemes, including the cases summarized below.

SEC Stops $910 Million Ponzi Scheme

On September 30, 2022, the SEC charged attorney Ari Lauer for his role in a massive Ponzi scheme that raised over $910 million from investors over a seven-year period from 2011 to 2018.  DC Solar, a privately held alternative energy company consisting of two companies (DC Solar Solutions, Inc. and DC Solar Distribution, Inc.) offered investment opportunities that would deliver profits in the form of guaranteed lease payments, tax benefits, and additional mobile solar generator leasing profits.

DC Solar claimed to have thousands of generators being leased by large customers with multi-year contracts.  But the solar generators were never even manufactured and typical of a Ponzi scheme, the majority of revenue paid to existing investors came from new investor funding.  As outside general counsel for DC Solar, Lauer allegedly participated in the fraud scheme by hiding the true nature of the revenue and providing false and misleading information about the amount of legitimate lease revenue over several years. He made millions of dollars from these fraudulent investments.

DC Solar co-owner Jeff Carpoff was sentenced to 30 years in prison and ordered to pay $790.6 million in restitution, and Paulette Carpoff was sentenced to 11 years in prison and ordered to pay $661 million in restitution.

SEC Halts $600 Million Ponzi Scheme

On October 13, 2022, the SEC charged National Realty Investment Advisors, LLC (NRIA) and four of its former executives for their roles in a $600 million Ponzi scheme with about 2,000 investors.  Among these investors were 382 retirees who contributed more than $94.8 million from their retirement accounts.  The four executives, Rey Grabato II, Daniel O’Brien, Thomas Salzano, and Arthur Scutaro, solicited investors through nationwide radio and television advertisements that promised returns of up to 20% for investing in real estate properties.

From 2018 to 2022, investors understood that their investment would be used to buy and develop real estate properties.  Instead, investor money was used to pay distributions to earlier investors in a typical Ponzi scheme fashion and to finance personal luxury purchases made by the executives.  The real estate fund’s financial statements and the financial information in marketing material distributed to investors were manipulated to show revenue that did not exist.  The fund filed for Chapter 11 bankruptcy protection on June 7, 2022.

SEC Obtains Asset Freeze in $450 Million Ponzi Scheme

On April 15, 2022, the SEC obtained an asset freeze and charged several individuals and companies in a $450 million dollar Ponzi scheme involving personal injury settlements.  Matthew Beasley, an attorney, and Jeffrey Judd created J&J Consulting Services which claimed to advance funds to tort plaintiffs who had reached settlements with insurance companies, as a litigation finance business.  Investors were told that funds were invested in contracts with personal injury clients who were willing to pay a premium to receive a portion of their insurance settlement in advance, rather than wait for a payment from an insurance company.  These clients would then repay the money to the J&J companies with interest and fees after receiving their insurance payout.

Hundreds of investors were told that the investment was risk-free and that they would receive guaranteed 12.5% quarterly returns on their investments.  Instead, the approximately $450 million raised from 2017-2022 was used to purchase personal luxury items, with some funds transferred to various trusts and entities.  The returns given to investors were in fact from earlier investments and none of the funds were used to actually enter into contracts with personal injury settlements.

SEC Halts $410 Million Ponzi Scheme

On May 13, 2022, the SEC obtained an emergency asset freeze to stop the sales of unregistered securities in investment vehicles that fraudulently claimed to possess shares of private companies that may later hold an initial public offering (IPO).  StraightPath Venture Partners, LLC and StraightPath Management, LLC, raised at least $410 million from more than 2,200 investors from around the world over a five-year period beginning in 2017.

According to the complaint, Brian Martinsen, Michael Castillero, Francine Lanaia, and Eric Lachow lied about holding pre-IPO shares in these private companies, paid themselves more than $75 million and their sales agents nearly $48 million from undisclosed transaction fees, and commingled investor funds.  Two of the company’s founders (Castillero and Lanaia) had been barred from the brokerage industry.

Potential investors were provided with materials that claimed their investments would be directed to a specific series that owned a specific number of shares of a specific private company.  Investors were led to believe that their investments were linked to a specific number of pre-IPO shares held by that series, giving them shares that could not yet be purchased on a public stock exchange.  None of this was true.  The emergency asset freeze will prevent the further dissolution of assets, as more than $200 million remains in the SP Funds.

SEC Halts $300 Million Ponzi Scheme

On August 1, 2022, the SEC charged 11 individuals who defrauded millions of worldwide investors in a more than $300 million online crypto pyramid and Ponzi scheme named Forsage.  Those individuals charged included the four creators of the website Forsage, three U.S.-based promotors who aggressively marketed Forsage on their websites and social media platforms, and four who worked for Crypto Crusaders, the largest promotional group operating in the U.S. across multiple states.  Forsage was a website that focused on smart contracts and blockchains, with millions of investors around the world entering into transactions that operated on three separate blockchains.

Forsage was launched in January 2020, and typical of a pyramid scheme, investors earned profits by recruiting others to the scheme and funds raised from new investors were used to pay earlier investors.  Forsage relied heavily on using social media platforms, particularly YouTube, to reach potential investors.  Two of the U.S.-based defendants (Samuel Ellis and Sarah Theissen) agreed to settle the charges.  All four founders are foreign defendants residing in Russia, Indonesia, and Republic of Georgia.

SEC Charges Top Sales Agent for Role in $196 Million Ponzi Scheme

On August 29, 2022, the SEC charged Pavel Ruiz, a former board member and top sales agent for MJ Capital Funding, LLC, for his role in an alleged $196 million fraud committed by the company.  In 2021, the SEC charged MJ Capital, MJ Taxes and More, Inc., and Johanna Garcia with engaging in a fraudulent securities offering and Ponzi scheme.

According to the SEC, Ruiz and his team of sales agents raised at least $46 million from over 5,100 investors between June 2020 and August 2021.  Ruiz told investors that their money would be used to make small business loans (merchant cash advances) and they would receive monthly returns of 10% to 15%.  Instead, MJ Capital used new investor funds to pay the existing investors.  Ruiz was also accused of misusing $6.5 million of investor funds.  MJ Capital also paid commissions of $292,000 to Ruiz and at least $5.3 million to his sales team for promoting these fraudulent investments.

Ruiz consented to a bifurcated settlement and the court will determine the amount of monetary relief upon future motion of the SEC.  The U.S. Attorney’s Office for the Southern District of Florida has also announced criminal charges against Ruiz.

SEC Secures Final Judgement in $35 Million Ponzi Scheme

On April 25, 2022, the SEC obtained a final judgment against Manuel Romero, former controller and Chief Financial Officer of Professional Investors, Inc (PFI), for his role in a Ponzi scheme that defrauded investors.  PFI’s founder (now-deceased) Kenneth Casey and former President Lewis Wallach misappropriated more than $35 million of the hundreds of millions of dollars raised from more than 1,300 investors.

According to the SEC, Romero falsified financial statements and made fraudulent cash transfers as CFO of a real estate investment and management company located in California.  Investors, many of them elderly and relying on their investment income for daily living expenses, were led to believe that these real estate investments were safe alternatives to investing in the stock market.  PFI and related entities falsely claimed that investor funds would be used to purchase property and make improvements to property already owned by PFI and its related entities.  Instead, a substantial portion of these funds was used to pay previous investors and to cover operating losses.  Romero’s role in the Ponzi scheme included commingling funds across PFI bank accounts with frequent cash transfers to pay earlier investors from new investor funds.  After the founder’s death, a review of PFI’s financial records revealed the fraud.

Without admitting or denying the SEC’s charges, Romero agreed to pay disgorgement of $91,819 with prejudgment interest of $6,655 and a civil penalty of $50,000.  He is also barred from serving as an officer or director of a public company.

SEC Halts $12 Million Ponzi Scheme

On September 19, 2022, the SEC halted a crypto asset-related fraud that had raised over $12 million from over 5,000 investors.  The two defendants, Mauricio Chavez and Giorgio Benvenuto used over $8 million of investor funds for their own personal use and distributed about $2.7 million to investors in Ponzi payments.  In February 2020, Chavez formed CryptoFX, LLC, claiming its purpose was to educate the Latino community about the crypto asset markets.  Chavez taught these paid classes as an industry expert, even though he had no background, education, or training in investments or crypto assets and was, in fact, an unregistered investment advisor.

Students of these classes were then encouraged to invest in CryptoFX, LLC.  A referral program was also created for existing investors, with seminars held around the country as a means for existing investors to recruit new investors.  An elite Founders Circle class was also offered for select CryptoFX investors, and Ponzi payments were used to deceive them into thinking Chavez’s lessons resulted in large profits.

According to the SEC, less than 10% of investor funds were ever used in crypto asset trading or foreign exchange transactions.  Instead, Chavez used over 90% of investor money to fund his unrelated real estate company, personal lifestyle spending, and payouts of fake returns.  Benvenuto also diverted investor funds to himself and another company that he and Chavez co-owned.

SEC Stops $3 million Ponzi Scheme

On July 1, 2022, the SEC charged Terry Nikopoulos and four entities he controlled (TKJ Investments Corp., TKJ Holdings Corp., Preeminent Trade Group Inc., and The Elyte Group Corp.), and Justin Kimbrough and an entity that he controlled (Prosperity Consultants, LLC), with operating a Ponzi scheme that raised more than $3 million from at least 31 investors through a series of fraudulent, unregistered securities offerings.

According to the SEC, beginning in 2020, Nikopoulos and Kimbrough operated a two-part Ponzi scheme through their entities.  Investors were told that TKJ Investments was a real estate wholesaler that bought and sold purchase options on residential properties and that Preeminent Trade Group sold medical equipment for resale in India.  Instead of using the funds to finance the two businesses as promised, Nikopoulos and Kimbrough misappropriated about $1.75 million for their personal use and paid about $1.05 million in Ponzi payments to TKJ Investments and Preeminent investors as fraudulent returns on their investments.  The payments from and to investors were facilitated by three additional entities, two controlled by Nikopoulos and one controlled by Kimbrough.

SEC Halts $2.3 Million Ponzi Scheme

On September 26, 2022, the SEC charged Judith Paris-Pinder for her role in a $2.3 million Ponzi scheme that affected over 280 investors, mostly from the Haitian and Haitian-American community in Florida.  Pinder owned and controlled both Pinder Associates and Pinder’s Multi-Services which claimed to provide advance loans to personal injury clients, mainly from a prominent Miami-based attorney.

Over a two-year period, Pinder offered loan agreements to investors promising interest returns of up to 50%.  She also claimed that the funds would be placed in an attorney’s escrow account, reassuring prospective investors that the funds would be safe.  Instead, these loans were never made and over $483,000 investor funds were used to make Ponzi payments to earlier investors and to enrich herself.

While some investors were initially paid fake returns from their investments, others were convinced to reinvest the returns into new loan agreements.  Around November 2021, Pinder stopped paying any returns and most investors have failed to recover either investment principal or any promised returns.  Pinder has consented to a bifurcated settlement and the court will determine whether it is appropriate to order her to pay disgorgement with prejudgment interest and a civil penalty.  Criminal charges against Pinder were also announced.

 

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