ACCOUNTANTS CREATE A PONZI SCHEME: MORE BUSINESS AS USUSAL

Thanks to our complex tax and legal system, accounting is one of those few remaining fields in America in which there are still good paying jobs. To become an accountant it takes years of study at an accredited college plus years of on the job training not to mention the tests that must be passed to become a certified public accountant or CPA.

In the following release of information by the SEC two accountants developed a scheme to sell fake securities in a gas pipeline to the public. These investment securities paid a 10% rate of return which of course is generally not available during a recession. On the other hand, many pipelines do pay a dividend in excess of 5% to holders of securities in what are known as Master Limited Partnerships or MLP’s. I currently own a few shares in an MLP that pays about 6.5 %. An MLP is different than a regular company in that the MLP is set up to return much of the revenue to investors rather than to keep most of the revenue for retained earnings for future expansion and sales promotions. There are also differences in how taxes are paid on an MLP for which you must consult an accountant to learn such details.

In the following case the accountants allegedly used a gas pipeline that had not been used for years as the basis of setting up a Ponzi scheme to pay old investors a large dividend based upon selling more securities to new suckers (investors). Please read the following excerpt from the SEC online site if you wish to know the details of this scheme:

“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged two certified public accountants with fraud and is seeking an emergency court order to freeze their assets after they sold phony securities to investors and then stole the money for personal use.
The SEC alleges that Laurence M. Brown and Ronald Mangini, who reside in Westchester County, N.Y., took the name of an inoperative company owned by a client of their accounting firm and sold investors fake promissory notes and common stock in what they purported to be a profitable company operating a gas pipeline in Tennessee. They falsely touted themselves as senior officers of the company, which they proclaimed to have a captive market in its area and a stable minimum rate of production with quality gas that could be sold well above market prices. What Brown and Mangini concealed from investors was that the pipeline had been inoperative for more than a decade. Behind the scenes, Brown and Mangini were instead operating a Ponzi scheme and diverting investor funds into their personal bank accounts and those of family members.

"Brown and Mangini not only deceived investors into making investments in a pipeline that was not producing any gas at all, but they stole the identity of a company owned by a client in order to do it," said George Canellos, Director of the SEC's New York Regional Office. "Brown and Mangini also victimized and betrayed the trust of other accounting clients who invested in their scheme."

According to the SEC's complaint, filed in federal court in Manhattan, Brown and Mangini began selling common stock and promissory notes of a company called Infinity Reserves-Tennessee Inc. as early as April 2008. They peddled the phony securities to clients of their accounting practice and other investors. Without authorization from the client who solely owned Infinity Reserves, Brown and Mangini used the company name to sell the stock and notes. Brown and Mangini falsely represented themselves as senior officers of Infinity Reserves with authority to sell the securities, calling themselves "president" and "secretary-treasurer" respectively. The phony notes promised investors a 10 percent annual return that would be paid semiannually on the principal amount of the investment.

According to the SEC's complaint, Infinity Reserves owns one principal asset — a gas gathering and trunk pipeline system located in Tennessee that it has not operated for more than a decade. The offering document that Brown and Mangini provided investors falsely portrays the investment as interests in an active system with an interconnect into the Duke Energy main east-west trunk line. The offering document falsely explained supposed merits of the investment and made various untrue statements while assuring investors that Infinity Reserves enjoyed a captive market in its area, a stable minimum rate of production, and quality gas that could be sold at a 20 percent premium over market prices. The offering document did not tell investors that the pipeline had been inoperative for years and thus in reality had no market for its gas and no minimum rate of production.

The SEC alleges that Brown and Mangini illegally obtained more than $2.1 million from investors. In classic Ponzi scheme fashion, they returned approximately $136,000 to certain investors in the form of interest payments. At least $1.6 million of investor funds were transferred to personal bank accounts controlled by Brown, Mangini, or family members including Mangini's wife and Browns's wife and daughter. The family members are named as relief defendants in the SEC's complaint for the purposes of recovering investor funds in their possession.

The SEC's complaint charges Brown and Mangini with violations of the anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. In addition to the emergency relief, the SEC's complaint seeks permanent injunctions, disgorgement of the defendants' and relief defendants' ill-gotten gains plus prejudgment interest, and financial penalties from the defendants.

In addition to the SEC's charges, the U.S. Attorney's Office for the Southern District of New York today brought criminal charges against Laurence Brown concerning the same illegal activities alleged in the SEC's complaint.

Brown is a repeat securities law offender. In 1994, the SEC charged Brown with, among other things, violations of the antifraud provisions of the federal securities laws in connection with another offering fraud. Brown was enjoined from future violations of those provisions and barred from associating with any broker, dealer, government securities broker or dealer, investment company, investment adviser, or municipal securities dealer.”

I give two thumbs up to the SEC and to the U.S. Attorney’s office for the Southern District of New York. The SEC can only recover stolen money and implement fines but, there are others in government who can make stealing peoples life savings a real crime. But, of course there are many politicians who would disagree with what they call “making a business practice a crime” or “criminalizing business”.