KABOOM! Affidavit In Pathway To Prosperity Case Paints Picture Of Wanton Criminality; Complaint References TalkGold, ASAMonitor, MoneyMakerGroup Posts; United States Throws Down Gauntlet

Federal prosecutors serving under U.S. Attorney A. Courtney Cox of the Southern District of Illinois have thrown down the gauntlet, declaring that “[a] large percentage, if not all, HYIPs, are Ponzi schemes.”

In a criminal complaint and accompanying affidavit that only can be described as remarkable, prosecutors and the U.S. Postal Inspection Service said the Pathway To Prosperity (PTP) HYIP was operated by a man with convictions for selling and cultivating drugs and driving the getaway car in a robbery.

Part of the strategy of the HYIP scheme was to tell investors it was not an HYIP scheme and to trade on the purported moral fiber of operator Nicholas A. Smirnow, investigators said.

Smirnow, 53, has a criminal past dating back to at least 1979, including convictions for breaking and entering and possession of stolen property, authorities said. Smirnow, who was charged Friday with operating an international Ponzi scheme from Canada and the Turks and Caicos Islands that gathered more than $70 million and fleeced more than 40,000 people, also told a colleague he was involved in a double homicide in Canada and claimed to have ties to organized crime in Ontario.

U.S. and Canadian authorities are working under a Mutual Legal Assistance Treaty (MLAT) between the countries “in which both parties agreed to provide evidence to the other in criminal investigations,” prosecutors said.  “An ‘MLAT’ request was submitted by the Office of International Affairs of the U.S. Department of Justice to the International Assistance Group of the Department of Justice Canada on January 13, 2010.

“While the Ontario Provincial Police has provided some materials to the United States Postal Inspection Service informally, as it is permitted to do under Section 3(2) of the Canadian Mutual Legal Assistance in Criminal Matters Act, the government is awaiting the production of the balance of the investigation materials by Canada,” U.S. authorities said.

Certain records of  the Canadian payment processors AlertPay and Solid Trust Pay (STP) have been obtained by the United States, U.S. officials said.

“STP was interviewed by the Anti Rackets Section of the Ontario Provincial Police (“OPP”),” the U.S. affidavit says. “The OPP advised [the investigating U.S. postal inspector] that STP also identified [Smirnow] as P-2-P’s principal, based upon identification documents submitted by Smirnow and communications between the two.”

Investigators also have acquired records from International Payout Solutions (IPS), a payment processor based in Florida, authorities said.

About 75 percent of payments made in the scheme flowed through STP, U.S. authorities said. The postal inspector said he had determined the identities of 11 people or entities that had received the most money from the scheme.

“The largest payee of the top eleven was Tru-Mar Holdings which received $2,117,752.50,” the complaint said. “Tru-Mar Invest and Tru-Mar Holdings were names under which TMI Group, SA (“Tru-Mar”) operated. According to documents submitted by Tru-Mar to IPS, the principal of TMI Group, SA was E.M.”

A second big winner was a company in Sweden referred to as “SV Holdings” and operated by “SV.”

“The third largest payee is a company owned by someone I will refer to as ‘K.B.,” the postal inspector said in the affidavit. “K.B. received over $500,000 from P-2-P. K.B. was the owner of a web site that touts high yield investment programs. From the nature of K.B.’s business, it does not appear likely that P-2-P funneled $500,000 to K.B. to make legitimate investments on P-2-P’s behalf.”

Other payees in the top 11 included “CWM from Oregon, JP from Florida, and CM of Washington State,” according to the complaint. Because the investigator could not contact some of the winners, they were not referred to either by names or initials in the complaint.

Although Smirnow claimed not to be operating an HYIP scheme, the claim was a lie. Posts on forums such as ASA Monitor, TalkGold and MoneyMakerGroup sought to sanitize the scheme, authorities said.

Not only was P2P an HYIP Ponzi scheme, it was operating in virtually every corner of earth, authorities said.

“[Smirnow,] a Canadian citizen, was a resident of the Greater Toronto Area in the Province of Ontario, Canada,” prosecutors said. “When his scheme was first hatched, it was operated out of a rented house in Baysville, Ontario, which served as both his office and personal residence. Sometime around September 2007 [Smirnow] diverted approximately $315,000 Canadian in investor funds to purchase a substantial personal residence. He later fled Canada for the Philippines when his scheme began to unravel and also transferred some of P-2-P’s money to the Philippines as well.”

The scheme was almost unimaginably widespread, the U.S. Postal Inspection Service said in an affidavit.

“Financial records of payment processors utilized by P-2-P to collect investment funds from investors show that approximately 40,000 investors in 120 countries established accounts with P-2-P,” a postal inspector said. “Despite the fact that the investment was supposedly ‘guaranteed, investors lost approximately $70 million as a result of [Smirnow’s] actions.”

The probe began when the U.S. government received a referral from the Illinois Securities Department “concerning an elderly Southern District of Illinois resident who had made a substantial investment in P-2-P,” the postal inspector said in the affidavit.

“In addition to P-2-P’s own website, I discovered that P-2-P’s investment scheme was marketed on other websites, including High Yield Investment Program forums, which I was able to access directly through the internet,” the inspector said.

Before long, the inspector determined that the scheme cost investors losses in 48 of the 50 U.S. states, and 18 of the 38 counties that comprise the Southern District of Illinois, prosecutors said.

Such penetration in Illinois may suggest Smirnow had a promotional arm in the state. The complaint spells out a case against conspirators “known and unknown,” and the complaint notes that family members told other family members about the scheme.

“When P-2-P’s funds were depleted and when investors did not receive a return of their funds as they had been promised, [Smirnow] caused a posting on P-2-P’s private forum warning investors not to complain to payment processors about P-2-P’s failure to return their money or they would find themselves ‘on the outside looking in,'” prosecutors charged.

The postal inspector has spoken to “hundreds of P-2-P investors” during the course of the investigation, according to court filings.

“Hundreds [of people] sent me copies of printouts they had made of P-2-P’s website, postings that had been made on the P-2-P’s members forum, and internet sites touting high yield investment programs which contained postings related to P-2-P,” the postal inspector said.

International Financial Experts Weigh In On Alleged Fraud

Prior to bringing the P2P case, prosecutors consulted with Professor James E. Byrne, an associate professor of law at George Mason University. Byrne has been an expert witness for both the Federal Reserve and the SEC in the area of High Yield Investment Programs, according to court filings. He also is an expert in international banking and served as chair of the Group of Experts on Commercial Fraud of the Secretariat of the United Nations Commission on International Trade Law (UNCITRAL), co-chair of the UNCITRAL Symposium on International Commercial Fraud, and co-chair of the North American and European Standing Committees on Combating Commercial Fraud.

“In my considered professional opinion, the investment scheme described in the materials that I have reviewed are not legitimate but resemble and are classic instances of so-called high yield frauds and fraudulent pyramid schemes,” Byrne said in an affidavit. “The proposed returns are excessive for even the most risky legitimate investments and are simply preposterous for investments whose principal is supposedly guaranteed.”

“It is apparent to me that the materials and the scheme which they describe were deliberately and artfully constructed, drawing on similar scams to deceive, confuse, entice and trap would-be investors,” Byrne said.

Another professor and financial expert, Todd T. Milbourne of the Olin Business School at Washington University in St. Louis, also consulted with the government in the case. Prior to joining Washington University, Professor Milbourne was on the full-time faculty at the London Business School from 1996 to 1999. In 1999-2000, he was a Visiting Assistant Professor of Finance at the University of Chicago.

Milbourne also described the alleged scheme as preposterous.

“According to Professor Milbourne, Warren Buffett, Chairman arid CEO of Berkshire Hathaway, is considered one of the best investment managers there is,” prosecutors said, referring to their consultation with Milbourne. “[Buffet’s] nickname is the ‘Oracle of Omaha.’ Between 1977 and 2009, the average return to stockholders of Berkshire Hathaway was 27.3%, more than double the average return of the S&P 500,” prosecutors said.

“However, Warren Buffet’s performance pales in comparison with the supposed financial acumen of [Smirnow], who claimed to be capable of achieving annual returns exceeding 500% in all four of his plans, more than twenty times better than the performance of one of the best performing money managers in the world,” prosecutors said.

Countries Affected

The scope of the alleged scheme was described as mind-boggling.

“In reviewing records submitted by P-2-P to payment processors, I have found accounts set up by P-2-P investors from all of the permanently inhabited continents of the world,” the postal inspector said. “P-2-P account holders, when they registered for a P-2-P account, gave addresses in the following countries . . . :  the United States, Canada, and Mexico in North America; Costa Rica, EI Salvador, Honduras and Panama in Central America;

“Argentina, Bolivia, Brazil, Chile, Columbia, Equador, Guyana, Peru, Uruguay and Venezuela in South America; The Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Dominican Republic, Grenada, Guadeloupe, Haiti, Jamaica, Martinique, Netherlands Antilles, Saint Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago in the Caribbean;

“Iceland, Norway, Sweden, Finland, Denmark, Iceland, the Faroe Islands, United Kingdom,
Ireland, France, Belgium, Netherlands, Germany, Switzerland, Liechtenstein, Luxembourg, Monaco, Andorra, Portugal, Spain, Malta, Italy, Austria, Hungary, Czech Republic, Slovakia,
“Slovenia, Romania, Bulgaria, Poland, Estonia, Latvia, Lithuania, Russian Federation, Belarus, Ukraine, Azerbaijan, Republic of Georgia, Greece, Macedonia, Croatia, Bosnia and Herzegovina, and Yugoslavia in Europe;

“Turkey, Cyprus, Armenia, Uzbekistan, Kazakhstan, Afghanistan, Pakistan, India, Republic of Maldives, Sri Lanka, Nepal, Cambodia, Thailand, Vietnam, Taiwan, South Korea, North Korea, Peoples Republic of China, Peoples Republic of China Hong Kong SAR, Singapore, Macau, Indonesia, Malaysia, Philippines, and Japan, in Asia.”

See story from earlier today that references another alleged Ponzi scheme known as Legisi, which involved more than $70 million, affected at least 3,000 investors and also was pitched on ASA Monitor, Talk Gold and MoneyMakerGroup.