SEC SAYS "FINANCIER" CHARGED IN ALLEGED PONZI SCHEME INVOLVING PROMISSORY NOTES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Thursday, February 26, 2015

California Financier Charged in Alleged Ponzi Scheme

Former CEO and Corporate Counsel of Financial Services Marketing Company Previously Pleaded Guilty

A California man and purported billionaire financier was taken into federal custody today for his role in an alleged Ponzi scheme in which investors lost $2.5 million, announced Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and Inspector in Charge Gary Barksdale of the U.S. Postal Inspection Service’s Criminal Investigations Group.

Kenneth Brewington, 50, of Corona, California, was indicted on Feb. 24, 2015, by a federal grand jury in the District of Colorado for conspiracy to commit wire and mail fraud, mail fraud and six counts of wire fraud.

According to allegations in the indictment, from September 2009 until 2011, Brewington and his co-conspirators sold promissory notes to investors through a financial services marketing company based in Denver called Compass Financial Solutions (CFS).  The indictment alleges that Brewington and his co-conspirators falsely represented to investors that Brewington held millions of Euros in overseas bank accounts, and that the proceeds raised from investors would be used to obtain the release of his overseas funds.  To conceal the scheme, Brewington and his co-conspirators allegedly had investors wire their funds to an attorney trust account.  The funds from that account, however, were then allegedly sent to Brewington and his co-conspirators.  Brewington and his co-conspirators allegedly used the investors’ money for their own personal benefit.

The former corporate counsel for CFS, William E. Dawn, 77, of Denver, and the former CEO of CFS, Brian G. Elrod, 58, of Lakewood, Colorado, previously pleaded guilty for their roles in the scheme.  Sentencing hearings are scheduled for May 29, 2015, and May 22, 2015, respectively.

The charges contained in an indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

The case was investigated by the U.S. Postal Inspection Service, and is being prosecuted by Trial Attorneys Henry P. Van Dyck and Jennifer G. Ballantyne of the Criminal Division’s Fraud Section.  The Securities and Exchange Commission has provided substantial assistance in this matter.

FORMER ARTHROCARE CORPORATION CEO, CFO CONVICTED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, June 2, 2014

Former CEO and CFO of Arthrocare Corporation Convicted for Orchestrating $400 Million Securities Fraud Scheme

A federal jury convicted the former chief executive officer and the former chief financial officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for orchestrating a fraud scheme that resulted in shareholder losses of over $400 million.

Principal Deputy Assistant Attorney General Marshall L. Miller and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field Office made the announcement.

“These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million,” said Principal Deputy Assistant Attorney General Miller.   “Today’s convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain.”

“This case demonstrates the FBI’s commitment to unraveling elaborate and complex fraud schemes leaving no financial stone unturned,” said FBI SAC Combs. “Those who abuse their position of trust to illegally enrich themselves, at the expense of shareholders and members of the investing public, will be held accountable for their actions.”

After a four-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 55, guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.   Michael Gluk, 56, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.   Baker and Gluk were charged in a superseding indictment returned on April 1, 2014.

Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009.   Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.   Baker, Gluk and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.   ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.   Evidence at trial showed that, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

Baker, Gluk and others lied to investors and analysts about ArthroCare's relationships with its distributors, including DiscoCare.   Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.

Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about the DiscoCare relationship.

Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.   The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Following today’s verdict, U.S. District Judge Sam Sparks remanded Baker into custody.    A sentencing date for Baker and Gluk has not yet been scheduled.

This case was investigated by the FBI’s San Antonio Field Office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section.   The Department appreciates the substantial assistance of the U.S. Securities and Exchange Commission.

FORMER BROKER SENT TO PRISON FOR FOGUE TRADES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Former Rochdale Securities Broker Sentenced to 30 Months' Imprisonment for Rogue Trades

The Securities and Exchange Commission announced today that on November 19, 2013, the Honorable Robert N. Chatigny of the United States District Court for the District of Connecticut sentenced David Miller, 41, of Rockville Center, New York, to 30 months imprisonment, followed by three years of supervised release, for his role in a fraudulent scheme to place a series of unauthorized purchases of more than 1.6 million shares of Apple, Inc. stock on October 25, 2012 while employed as an institutional sales trader for Rochdale Securities LLC ("Rochdale") of Stamford, Connecticut. Judge Chatigny also ordered Miller to make full restitution to Rochdale, which suffered a loss of $5,292,202.50 and ceased all business operations as a result of Miller's actions. Miller was arrested on December 4, 2012, and on April 15, 2013 he pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud, and one count of wire fraud.

On April 15, 2013, the Commission filed a partially settled civil injunctive action against Miller in federal court in Connecticut arising out of the same conduct. To settle the Commission's charges, Miller consented to be enjoined from future violations of the antifraud provisions of the federal securities laws. The amount of a civil monetary penalty will be determined at a later date. In related administrative proceedings that the Commission separately instituted on April 25, 2013, Miller consented to a Commission Order barring him from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and barring him from participating in any offering of penny stock.

MAN INDICTED IN $20 MILLION PROMISSORY NOTE FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Joseph Paul Zada Indicted for Fraud

The Securities and Exchange Commission announced today that on September 4, 2013, a Grand Jury sitting in the United States District Court for the Southern District of Florida returned an Indictment charging Joseph Paul Zada with 21 counts of mail fraud, two counts of wire fraud, two counts of money laundering, and two counts of interstate transportation of stolen property. The Indictment also seeks forfeiture of properties obtained as a result of the alleged criminal violations.

The Indictment alleges that from at least January 1998 through August 2009, Zada caused over twenty investors to invest over $20 million based on materially false statements and omissions. According to the Indictment, Zada attracted investors by projecting an image of great wealth, portraying himself as a successful businessman and investor with connections to Saudi Arabian oil ventures. He also hosted extravagant parties, drove expensive luxury vehicles, and maintained expensive homes in Wellington, Florida and Grosse Pointe, Michigan. The investors sent money to Zada with the understanding that he would use the funds to invest in various oil ventures on their behalf. The investors usually received promissory notes reflecting the principal amount of their investment. Zada deposited investors' funds into bank accounts he controlled. Instead of investing the funds in oil ventures, Zada used the money to support his lavish lifestyle and to make purported returns on investments to prior investors.

The Indictment's allegations are based on the same conduct underlying the Commission's November 10, 2010 Complaint against Zada in the United States District Court for the Eastern District of Michigan. The Commission charged Zada with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On July 31, 2013, the Court granted the Commission's motion for summary judgment against Zada, finding that Zada had violated the provisions alleged by the Commission in its Complaint. The Court set a hearing for October 9, 2013 on the Commission's claims for disgorgement and civil penalties against Zada.

MAN WHO ORCHESTRATED $72 MILLION PONZI SCHEME RECEIVES 15 YEAR PRISON TERM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

15 Year Prison Term for Gregory Mcknight, Orchestrator of $72 Million Ponzi Scheme

The Securities and Exchange Commission announced that on August 6, 2013, the Honorable Mark A. Goldsmith of the United States District Court for the Eastern District of Michigan sentenced Gregory N. McKnight to 188 months (15 years and 8 months) in prison, followed by supervised release of 3 years, and ordered McKnight to pay $48,969,560 in restitution to his victims. McKnight, 53, of Swartz Creek, Michigan, had previously pled guilty to one count of wire fraud for his role in orchestrating a $72 million Ponzi scheme involving at least 3,000 investors. The U.S. Attorney’s Office for the Eastern District of Michigan filed criminal charges against McKnight on February 14, 2012. McKnight was taken into custody immediately after the sentencing hearing.

The criminal charges arose out of the same facts that were the subject of an emergency action that the Commission filed against McKnight and others on May 5, 2008. On that same day, the Court issued orders freezing McKnight’s assets and those of several companies he controlled, and appointed a Receiver. The Commission’s complaint alleged that, from December 2005 through November 2007, McKnight, through his company Legisi Holdings, conducted a fraudulent, unregistered offering of securities in which he raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries. According to the Commission's complaint, McKnight represented that he would invest the offering proceeds in various investment vehicles and pay interest of as much as 15 percent per month from the resulting profits. The complaint charged that McKnight invested less than half of the offering proceeds and that these investments resulted in millions of dollars in losses. The Commission's complaint further charged that McKnight used investor funds to make Ponzi payments to investors and for his own use. The Commission’s complaint charged McKnight with violating 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.

On July 6, 2011, the Court entered a final judgment against McKnight in the Commission’s action, and ordered McKnight to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties totaling approximately $6.5 million. The court also issued orders permanently enjoining McKnight from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. On July 9, 2013, McKnight's associate Matthew J. Gagnon was sentenced to five years in prison for his role in promoting Legisi.

INVESTMENT FRAUDSTER GETS 20 YEARS IN PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Minneapolis-Based Fraudster Patrick Joseph Kiley Sentenced to 20 Years in Priso
The Securities and Exchange Commission announced that on July 15, 2013, the Honorable Chief Judge Michael J. Davis of the United States District Court for the District of Minnesota sentenced Patrick J. Kiley to 20 years in prison and ordered him to pay $155 million in restitution.  The sentence was based on Kiley’s conviction on 15 criminal counts including mail and wire fraud, conspiracy to commit mail and wire fraud, and money laundering for his role in a $194 million foreign currency trading scheme that defrauded approximately 1,000 investors.  Kiley was charged on July 19, 2011, and a jury found him guilty on June 12, 2012.

Kiley is one of the defendants in a pending civil injunctive action filed by the Commission on November 23, 2009 in the United States District Court for the District of Minnesota.  The Commission’s action against Kiley arose out of the same facts that are the subject of the criminal case against him.

The Commission’s complaint alleges that from at least July 2006 through at least July 2009, Kiley and co-defendant Trevor G. Cook of Minneapolis, Minnesota, raised at least $190 million (later determined to be $194 million) from 1,000 investors through the unregistered offer and sale of investments in a purported foreign currency trading venture.  According to the Commission’s complaint, Cook and Kiley pooled investors’ funds in bank and trading accounts in the names of entities they controlled.  The Commission’s complaint alleges that the foreign currency trading they conducted resulted in millions of dollars in losses, and they misused approximately one half of the investor funds to make Ponzi-like payments to earlier investors and pay for, among other things, Cook's gambling losses and the purchase of the historic Van Dusen Mansion in Minneapolis.

The Commission’s complaint charges Cook and Kiley with violating Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  On November 23, 2009, the Court entered a preliminary injunction order against Cook and Kiley and froze all of their assets.  On March 7, 2011, the Commission also filed a civil complaint in the U.S. District Court in Minneapolis against Jason Bo-Alan Beckman and his registered investment advisory firm Oxford Private Client Group, LLC, for their roles in this scheme.  On August 27, 2010, the Court entered an order of permanent injunction against Cook.  The Court also appointed a receiver to marshal and preserve all of the Defendants’ assets

HEDGE FUND MANAGER FOUND GUILTY OF SECURITIES FRAUD

FROM: SECURITIES AND EXCHANGE COMMISSION

Hedge Fund Manager James Fry, Previously Sued by the SEC for Fraud, Found Guilty of Securities Fraud, Wire Fraud, and Making False Statements to the SEC


The Securities and Exchange Commission announced that on June 12, 2013 a jury found Minneapolis-area hedge fund manager James Fry guilty of five counts of securities fraud, four counts of wire fraud, and three counts of making false statements to the SEC during investigative testimony. Sentencing on these charges will be held on a later date. The U.S. Attorney's Office for the District of Minnesota had filed criminal charges against Fry on July 19, 2011.


Fry is a defendant in a pending civil injunctive action filed by the SEC on November 9, 2011 in the United States District Court for the District of Minnesota. The charges leveled by the SEC stem from the same set of facts alleged by the U.S. Attorney's Office. The SEC's complaint alleged that Fry fraudulently funneled more than $600 million of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters. During the period in which he invested with Petters, Fry and his hedge fund management company collected more than $42 million in fees. The SEC's complaint further alleged that Fry falsely assured investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds he managed, Fry concealed it from investors by secretly executing note extensions with Petters.

On February 14, 2012, the Hon. Richard H. Kyle, U.S. District Judge for the District of Minnesota, stayed the SEC's action against Fry pending the resolution of his criminal case.



 

RANDY M. CHO SENTENCED TO PRISON TERM OF 12 YEARS IN CRIMINAL ACTION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
 
The Securities and Exchange Commission (SEC) announced that on January 18, 2013, in a criminal action brought by the U.S. Attorney’s Office for the Northern District of Illinois, the Honorable James B. Zagel, U.S. District Judge of the Northern District of Illinois, sentenced Randy M. Cho to 12 years in federal prison on charges of wire fraud and tax fraud. Cho was charged for perpetrating an investment scheme between 2001 and October 2009, which resulted in almost $8 million in losses from 57 investors. Cho was also ordered to pay restitution of $7,995,707. Cho’s sentence was lengthened, in part, because Cho lied to the SEC during its investigation into his scheme. [USA v. Randy M. Cho, Case No. 1:10 cr 01099, USDC, N.D. Ill.]

In October 2009, the SEC filed an emergency district court action against Cho for his fraudulent scheme, and obtained orders that froze Cho’s assets and permanently enjoined Cho from violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In August 2010, the SEC obtained a final judgment against Cho in which Cho was ordered to pay approximately $7.78 million in disgorgement, prejudgment interest, and a $150,000 statutory civil penalty.

THREE FORMER EXECUTIVES CONVICTED FOR FRAUDS INVOLVING CONTRACTS RELATED TO THE INVESTMENT OF MUNICIPAL BOND PROCEEDS

FROM: U.S. DEPARTMENT OF JUSTICE,
FRIDAY, AUGUST 31, 2012
WASHINGTON — A federal jury in New York City today convicted three former financial services executives for their participation in frauds related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.

Peter Ghavami, Gary Heinz and Michael Welty, all former UBS AG executives, were found guilty on conspiracy and fraud charges in the U.S. District Court in New York City. Ghavami was found guilty on two counts of conspiracy to commit wire fraud and one count of substantive wire fraud. Heinz was found guilty on three counts of conspiracy to commit wire fraud and two counts of substantive wire fraud. Welty was found guilty on three counts of conspiracy to commit wire fraud. Heinz was found not guilty on one count of witness tampering and Welty was found not guilty on one count of substantive wire fraud.

The trial began on July 30, 2012. Ghavami, Heinz and Welty were initially indicted on Dec. 9, 2010.

"For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects," said Scott D. Hammond, Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program. "Today’s convictions demonstrate that the division is committed to holding accountable those who seek to unfairly and illegally undermine competitive markets."

According to evidence presented at trial, while employed at UBS, Ghavami, Heinz and Welty participated in separate fraud conspiracies and schemes with various financial institutions and with a broker, at various time periods from as early as March 2001 until at least November 2006. These financial institutions, or providers, offered a type of contract—known as an investment agreement— to state, county and local governments and agencies, and not-for-profit entities, throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

According to evidence presented at trial, while acting as providers, Ghavami, Heinz and Welty, with their provider and broker co-conspirators, corrupted the bidding process for more than a dozen investment agreements to increase the number and profitability of the agreements awarded to UBS. At other times, while acting as brokers, Ghavami, Heinz, Welty and their co-conspirators arranged for UBS to receive kickbacks in exchange for manipulating the bidding process and steering investment agreements to certain providers.

Ghavami, Heinz and Welty deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities to refinance outstanding debt and for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country and the U.S. Treasury millions of dollars.

During the trial, the government presented specific evidence relating to approximately 26 corrupted bids and approximately 76 recorded conversations made by the co-conspirator financial institutions. Among the issuers and not-for-profit entities whose agreements or contracts were subject to the defendants' schemes were the Commonwealth of Massachusetts, the New Mexico Educational Assistance Foundation, the Tobacco Settlement Financing Corporation of Rhode Island and the RWJ Health Care Corp at Hamilton.

"Corrupt bidding schemes serve to weaken the public’s trust in the municipal bond market and prevent public entities from enjoying the benefits of a true competitive bidding process," said Mary E. Galligan, Acting Assistant Director in Charge of the FBI in New York. "Today’s conviction is further proof of our efforts to weed out these corrupt criminals and ensure justice is served."

Today's verdict is important because it confirms that these complex, seemingly uninteresting backroom deals have a real impact on taxpayers, who should benefit from a municipal bond issue and are ultimately responsible for paying it off," said Richard Weber, Chief, Internal Revenue Service-Criminal Investigation (IRS-CI). "Today’s convictions send a strong message to the municipal bond industry and demonstrates the commitment of the Internal Revenue Service and the Justice Department to rid the industry of corrupt practices."

A total of 20 individuals have been charged as a result of the department’s ongoing municipal bonds investigation. Including today’s convictions, a total of 19 individuals have been convicted or pleaded guilty, and one awaits trial. Additionally, one company has pleaded guilty.

Two of charged fraud conspiracies carry a maximum penalty per count of 30 years in prison and a $1 million fine. A third fraud conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. The two wire fraud charges carry a maximum penalty per count of 30 years in prison and a $1 million fine. These maximum fines per count may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either amount is greater than the statutory maximum fine.

The verdict announced today resulted from an ongoing investigation conducted by the Antitrust Division’s New York and Chicago Offices, the FBI and the IRS-CI. The division is coordinating its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

FORMER EXECS FAIR FINANCIAL COMPANY CONVICTED IN $200 MILLION FRAUD SCHEME

FROM:  U.S. DEPARTMENT OF JUSTICE 
Thursday, June 21, 2012
Three Former Executives Convicted for Roles in $200 Million Fraud Scheme Involving Fair Financial Company Investors
Three former executives of Fair Financial Company, an Ohio financial services business, were found guilty for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; Joseph H. Hogsett, U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Robert Holley of the FBI in Indiana announced today.

Following an eight-day trial, a federal jury in the Southern District of Indiana returned its verdict late yesterday.   Timothy S. Durham, 49, the former chief executive officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud.   James F. Cochran, 56, the former chairman of the board of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and six counts of wire fraud.   Rick D. Snow, 48, the former chief financial officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and three counts of wire fraud.

“Mr. Durham and his co-conspirators used lies and deceit as their business model,” said Assistant Attorney General Breuer.   “They duped investors into thinking they were running a legitimate financial services company and misled regulators and others about the health of their failing firm.   But all along, they were lining their pockets with other people’s money.   The jury held them accountable for their crimes, and they each now face the prospect of significant prison time.”

“No matter who you are, no matter how much money you have, no matter how powerful your friends are, no one is above the law,” U.S. Attorney Hogsett said. “The Office of the United States Attorney will not stand idly by and allow a culture of corruption to exist in this community, this state, or this country.   The decision made in this courtroom sends a powerful warning that if you sacrifice the truth in the name of greed, if you steal from another’s American dream to try and make your own, you will be caught.”

“This verdict represents a victory in the pursuit of justice,” said FBI Special Agent in Charge Holley.   “I would like to commend the hard work and dedication of the prosecution team and the FBI investigative team, however, we must remember that the victims of this fraud are still suffering.  I would also like to thank Indiana State Police Superintendent Paul Whitesell for the contributions of his task force officer in this investigation.”

Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002.  According to the evidence presented at trial, between approximately February 2005 through the end of November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money.   The evidence also established that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.

When Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million.   By November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.  

After Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds.   Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.

Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral.   After firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009.   With independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.
         
The evidence presented at trial established that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the State of Ohio Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates.   The defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.

The defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates.   Even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.

This case was prosecuted by Assistant U.S. Attorneys Winfield D. Ong and NicholasE. Surmacz of the Southern District of Indiana, Trial Attorney Henry P. Van Dyck and Senior Deputy Chief for Litigation Kathleen McGovern of the Fraud Section in the Justice Department’s Criminal Division.  The investigation was led by the FBI in Indianapolis.

Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count.   Additionally, each defendant could be fined $250,000 for each count of conviction.
         
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

OWNER, EXECUTIVES AND BCI AIRCRAFT LEASING INC., ALL CONVICTED OF FRAUD

The following excerpt is from the Securities and Exchange Commission website:
March 20, 2012
The Securities and Exchange Commission (“Commission”) announced that on March 14, 2012, a federal jury convicted Brian Hollnagel and BCI Aircraft Leasing Inc. on seven criminal counts, including fraud and obstruction charges for engaging in a fraudulent financing scheme that raised more than $50 million from investors and lenders. Brian Hollnagel, 38, of Chicago, the owner, president, and chief executive officer of BCI Aircraft Leasing Inc., and the corporation itself were each convicted of six counts of wire fraud and one count of obstruction of justice for obstructing the Commission’s 2007 lawsuit against them. As part of this verdict, Hollnagel and BCI were convicted of committing fraud and obstruction in connection with the provision of fraudulent court-ordered accountings of investor LLCs to the SEC during that litigation. U.S. v. Brian Hollnagel et al., Criminal Action No. 1:10-cr-0195 (N.D. Ill.) (St. Eve., J.).

On August 13, 2007, the Commission filed a civil injunctive complaint alleging that Defendants Hollnagel and BCI, from approximately 1998 through 2007, raised at least $82 million from approximately 120 investors as part of a fraudulent scheme in which the Defendants commingled investor funds, used investor funds to pay other investors, and failed to use investor funds as represented. The Complaint alleged that, as a result of their conduct, the Defendants violated 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. The Commission’s action remains pending.

CANOPY FINANCIAL , INC., CO-FOUNDERS GO TO PRISON FOR STEALING

The following excerpt is from the Securities and Exchange Commission website:

February 27, 2012
“United States v. Jeremy Blackburn and Anthony Banas, Criminal Action No. 09 CR 976 (N.D. Ill. March 1, 2010)
The U.S. Securities and Exchange Commission (Commission) announced that on February 15, 2012, co-founders of the bankrupt Canopy Financial, Inc., a health care transaction-software company based in Chicago, were sentenced to 15 and 13 years in prison for defrauding investors and clients of more than $93 million. Anthony Banas, Canopy’s chief technology officer, was sentenced to 160 months in prison, while Jeremy Blackburn, Canopy’s former president and chief operating officer, was sentenced to 180 months in prison. Both men pleaded guilty in late 2010 to one count of wire fraud, admitting they engaged in a fraud scheme that cheated investors of approximately $75 million and also misappropriated more than $18 million from customer accounts intended for health care savings and expenses. In imposing sentence, United States District Judge Ruben Castillo of the Northern District of Illinois noted that this case was the most aggravated financial fraud he had seen in his 18 years on the federal bench. The judge ordered both men to pay mandatory restitution and forfeiture totaling $93,125,918.

According to their plea agreements, Blackburn and Banas used false information about Canopy’s financial condition, including a bogus auditor’s report and falsified bank statements, to fraudulently obtain approximately $75 million from several private equity investors in 2009. Approximately $39 million of that money was used to redeem shares of other Canopy investors, including approximately $1.6 million that went to Blackburn and $975,000 that went to Banas, while another $29 million obtained from investors was deposited into Canopy operating accounts.

Also according to their plea agreements, Blackburn and Banas misappropriated Canopy operating funds for their own benefit. Blackburn took approximately $6 million in unauthorized withdrawals and transfers from Canopy bank accounts during 2009. Blackburn typically directed a Canopy employee, or occasionally Banas, to transfer Canopy funds to his bank accounts or to pay for his personal expenses, including credit card balances, luxury car purchases, and travel on a private jet. Blackburn also paid for personal home renovations, bought sports tickets and purchased jewelry and watches using misappropriated Canopy funds. Banas used misappropriated Canopy money to invest $300,000 in a nightclub. Banas also spent $400,000 between 2007 and 2009 on other personal expenses.

Blackburn admitted that he created phony bank statements during 2009 to conceal the transfer of more than $18 million from special health care accounts in which Canopy held funds as custodian for the benefit of more than 1,600 clients and customers to make payments to medical providers. The funds were transferred to Canopy’s own operating accounts, as well as to benefit Blackburn and Banas personally.

The Commission’s cases against Blackburn (SEC v. Canopy Financial, Inc., et al., Case No. 09-CV-7429, USDC, N.D.IL (LR-21324) and Banas (SEC v. Anthony T. Banas, Case No. 10- CV 3877 USDC N.D. IL) (LR-21566) resulted in permanent injunctions against both individuals, by consent, for violating the antifraud provisions of the Securities Act of 1933 [Section 17(a)] and the Securities Exchange Act of 1934 [Section 10(b) and Rule 10b-5 thereunder], ordered disgorgement of $1,779,759.83 and prejudgment interest of $71,182.03 against Blackburn in April 2011 and disgorgement of $975,548.25 and prejudgment interest of $32,910.45 against Banas in June 2010.
The Commission acknowledges the assistance of the U.S. Attorney’s Office of the Northern District of Illinois and the Chicago Regional Office of the U.S. Department of Labor in this matter.”

INVESTMENT ADVISOR CHARGED WITH COMMITTING WIRE FRAUD

The following excerpt comes from the SEC website: “The Securities and Exchange Commission today announced that the U.S. Attorney for the District of Massachusetts has charged Andrey C. Hicks of Boston, Mass., in a criminal complaint unsealed on Friday, October 28, 2011. Hicks was charged with committing wire fraud, attempting to commit wire fraud, and aiding and abetting wire fraud, in violation of 18 U.S.C. Sections 1343, 1349, and 2. On October 26, 2011, the SEC filed an emergency enforcement action charging Hicks and Locust Offshore Management, LLC, his investment advisory firm, with fraud in connection with misleading prospective investors about their supposed quantitative hedge fund and diverting investor money to the money manager’s personal bank account. The SEC alleges in its complaint that Hicks and his advisory firm made misrepresentations about his education, work experience, and the hedge fund’s auditor, prime broker/custodian, and corporate status when soliciting individuals to invest in the purported hedge fund, called Locust Offshore Fund, Ltd. By making these representations and creating other indicia of legitimacy, the SEC alleged that Hicks may have obtained at least $1.7 million from 10 investors and may have misappropriated at least a portion of these funds for personal expenses. In the Commission’s action, the U.S. District Court in Massachusetts issued a temporary restraining order on October 26 that, among other things, freezes the assets of the money manager, his advisory firm, and the hedge fund. On October 28, 2011, the Court converted the temporary restraining order into a preliminary injunction that will continue the asset freeze and other relief until further order of the Court.”

STOCK PROMOTER CHARGED WITH WIRE FRAUD

The following is an excerpt from the SEC website:

"July 11, 2011
Securities and Exchange Commission v. Presto Telecommunications, Inc. and Alfred Louis Vassallo, Jr., United States District Court, Southern District of California, Case No. 04CV00162IEG (filed Jan. 24, 2004).
TELECOMMUNICATIONS STOCK PROMOTER ALFRED LOUIS “BOBBY” VASSALLO, JR. INDICTED FOR WIRE FRAUD
The Securities and Exchange Commission announced today that, at the request of the United States Attorney’s Office for the Central District of California, a federal grand jury in Santa Ana, California, returned an indictment against Alfred Louis “Bobby” Vassallo, Jr. on July 6, 2011 charging him with three felony counts of wire fraud. Vassallo, age 61, is a resident of La Jolla, California.

The indictment charges Vassallo with making false representations to an investor in connection with an investment in a wireless communication venture including failing to disclose that he had been sued by the Commission and that a permanent injunction and monetary judgment had been entered against him in the Commission’s action. United States of America v. Alfred Louis Vassallo, Jr. aka “Bobby Vassallo,” U. S. District Court, Central District of California, case no. 8:11-CR-00150 (filed July 6, 2011).

The Commission filed a civil complaint against Vassallo and his former company, Presto Telecommunications, Inc., in the U. S. District Court, Southern District of California, on January 27, 2004 that charged Vassallo with violating the securities registration and antifraud provisions of the federal securities laws for his role in perpetrating a fraudulent scheme through Presto, which raised approximately $26 million from more than 500 investors. The Court entered a Final Judgment of Permanent Injunction and Other Relief against Vassallo on August 24, 2005 that permanently enjoined him from violating the securities registration and antifraud provisions and ordered him to pay a total of $2,009,082 in disgorgement plus prejudgment interest, civil penalties, and the costs and expenses of the permanent receiver for Presto.

The Commission filed an application for an order to show cause re civil contempt against Vassallo on September 21, 2010 which alleged that Vassallo violated the Final Judgment by offering and selling unregistered securities of wireless ventures and telecommunications companies, by committing fraud in connection with the offer and sale of those securities, and by failing to pay any of the monetary relief he was ordered to pay. The Court issued an order to show cause on September 24, 2010 why Vassallo should not be held in civil contempt of the Final Judgment. The Court issued an order on October 26, 2011 referring Vassallo’s alleged violations of the permanent injunction to the United States Attorney for the Southern District of California for prosecution for criminal contempt. The Court subsequently stayed the civil contempt proceeding. "

CHARGES BROUGHT IN ALLEGED REVERSE MORTGAGE/LOAN MODIFICATION FRAUD SCHEME

The following is an excerpt from the Department of Justice website:

"Department of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE Wednesday, July 6, 2011
Coinciding with One-Year Anniversary of “Operation Stolen Dreams,” Three Loan Officers and a Title Agent Charged in $2.5 Million Reverse Mortgage and Loan Modification Scheme
WASHINGTON – The Justice Department announced today the unsealing of a criminal information earlier today, charging four defendants – Louis Gendason, 42, of Delray Beach, Fla.; Kimberly Mackey, 46, of Pittsburgh; John Incandela, 24, and Marcos Echevarria, 29, both of Palm Beach, Fla. – with conspiracy to commit wire fraud involving a nation-wide reverse mortgage scam that defrauded elderly borrowers, financial institutions and the Department of Housing and Urban Development (HUD). A reverse mortgage allows borrowers, who are at least 62 years of age, to convert the equity in their homes into a monthly stream of income, or a line of credit. Three of the defendants made their initial appearances at the federal courthouse in Fort Lauderdale, Fla., earlier today. If convicted, the defendants each face a statutory maximum term of up to 30 years in prison and a fine of up to $1 million. These charges coincide with the one-year anniversary of “Operation Stolen Dreams,” the department’s anti-mortgage fraud enforcement initiative announced by Attorney General Eric Holder last June.

These latest charges demonstrate the department’s continued commitment to the identification and eradication of mortgage fraud. The scheme charged today contains many of the characteristics common to mortgage fraud around the country. The information charges Louis Gendason, John Incandela and Marcos Echevarria with using a Florida-based loan modification business known as Lower My Debts.com L.L.C. as a front to identify elderly borrowers who were financially-vulnerable. They are alleged to have in their capacity as loan officers at 1st Continental Mortgage LLC. solicited borrowers to refinance their existing mortgages with a reverse mortgage loan financed by Genworth Financial Home Equity Access Inc. To induce Genworth and HUD to fund and insure the reverse mortgage loans, the defendants allegedly changed the unwitting borrowers’ real estate appraisal reports to fraudulently represent equity in the properties. The information alleges that Gendason, Incandela and Echevarria originated fraudulent loans on properties located in seven different states between May 2009 and November 2010 exceeding $2.5 million.

As a further part of the charged conspiracy, a fourth defendant, Kimberly Mackey, a licensed title agent and proprietor of the Pittsburgh title agency Real Estate One Land Services Inc., fraudulently closed the Genworth loans by failing to pay off the seniors’ existing liens. Instead, Mackey wired nearly $1 million in Genworth loan proceeds to the business checking account for Lower My Debts.com. She conspired to conceal the fraudulent loan closings from financial institutions by preparing written settlement documents which falsely represented that the borrowers’ existing mortgages had, in fact, been paid off. In some instances, after Mackey wired the loan proceeds to bank accounts in Florida controlled by her co-conspirators, she is alleged to have assisted them with defrauding the banks holding the borrowers’ first mortgages by negotiating fake short sales. This was designed to induce these banks to release their valid liens on the seniors’ properties at a fraction of their existing loan balance. All of the defendants are accused of pocketing the illegally-obtained loan proceeds.

“Protecting Americans from financial fraud is one of our top priorities,” said Tony West, Assistant Attorney General of the Justice Department’s Civil Division. “With these charges, we are taking another important step in the effort we began with Operation Stolen Dreams by holding accountable those whom we believe lined their own pockets with money that should have gone to help vulnerable seniors.”

“These defendants preyed on senior citizens on fixed and modest incomes. While legitimate loan modifications and reverse mortgages are useful tools to help those who need it, we will remain vigilant to make sure these tools are not misused by those who seek to line their own pockets,” said Wifredo Ferrer, U.S. Attorney for the Southern District of Florida. “We urge potential borrowers to use caution when entrusting their homes and savings to those offering financial alternatives, including loan modifications and reverse mortgages.”

This case was investigated by agents from the HUD-Office of Inspector General; the Internal Revenue Service-Criminal Investigation; the U.S. Postal Inspection Service; the FBI Miami Field Office; and the state of Florida’s Office of Financial Regulation. The case was prosecuted by Trial Attorney Kevin J. Larsen from the Civil Division’s Office of Consumer Protection Litigation, along with Assistant U.S. Attorneys Jeffrey H. Kay and Thomas P. Lanigan from the U.S. Attorney’s Office for the Southern District of Florida.

Initiated in June 2010, Operation Stolen Dreams targeted mortgage fraudsters throughout the country and was the largest collective enforcement effort ever brought to bear in confronting mortgage fraud. The operation was organized by the Mortgage Fraud Working Group of President Obama’s interagency Financial Fraud Enforcement Task Force, which was established to lead an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The President’s Financial Fraud Enforcement Task Force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. Operation Stolen Dreams targeted 1,517 criminal defendants nationwide, included 525 arrests, and involved an estimated loss of more than $3 billion.

The operation also resulted in 191 civil enforcement actions and the recovery of more than $196 million. Combating mortgage fraud continues to be a primary focus of the Civil Division. Since the end of Operation Stolen Dreams last June, Civil Division attorneys have continued to vigorously pursue mortgage fraud cases throughout the country, working with our partners in the U.S. Attorneys’ Offices and various federal agencies, specifically including HUD."

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