Judge Extends Asset Freeze In Matt Gagnon Fraud Case; Issues Order To Preserve Evidence And Require Weekly Financial Report To SEC
A federal judge has extended the freeze on the assets of a website operator accused by the SEC of shilling for a Ponzi schemer and then trying to extort money from the schemer when the fraud was collapsing.
Severe restrictions placed on Mazu.com operator Matt Gagnon by U.S. District Judge George Caram Steeh of the Eastern District of Michigan illustrate the financial and legal dangers of using the Internet to promote murky businesses. At the same time, orders issued by Steeh destroy myths advanced on Ponzi forums that website operators are insulated from prosecution and that their business contacts and customers cannot be sucked into a Ponzi probe.
Demonstrating the life-altering nature of Ponzi schemes and the monumental legal entanglements and inconvenience that flow from such schemes, the judge also ordered Gagnon to submit a “sworn” statement “each Friday” to the SEC. The order requires Gagnon to account for “all funds received” during the week, including funds received “by others on his behalf.”
Steeh also ordered Gagnon and his “officers, agents, servants, employees, attorneys, nominees, banks, brokers, dealers, financial institutions, and those persons in active concert or participation with any one or more of them” not to destroy evidence.
Steeh’s order applies to “books, records, documents, correspondence, ledgers, accounts, statements, files, electronically stored information, and other property of or pertaining to the Defendant,” regardless of the location of the information.
At the same time, the judge ordered expedited discovery in the case and freed up $2,000 for Gagnon “to pay living expenses.”
Gagnon was accused in May of using his website to pitch the alleged Legisi HYIP Ponzi scheme, which the SEC described as a $72.6 million fraud. The judge’s orders followed on the heels of an awareness campaign by the Financial Industry Regulatory Authority (FINRA) to educate the public about HYIP schemes and the filing of criminal charges by the U.S. Postal Inspection Service against Nicholas Smirnow, accused of operating a $70 million Ponzi HYIP scheme known as Pathway to Prosperity (P2P).
FINRA issued its HYIP warning on July 15, calling the HYIP universe a â€œbizarre substratum of the Internetâ€ and saying â€œHYIPs are old-fashioned Ponzi schemes dressed up for a Web 2.0 world.â€
In May, federal prosecutors declared in court filings in the P2P case that â€œ[a] large percentage, if not all, HYIPs, are Ponzi schemes.â€ In its HYIP alert, FINRA built on that theme, declaring that â€œ[v]irtually every HYIP we have seen bears hallmarks of fraudâ€ and noting that schemers were using websites, forums and social-media sites such as Twitter and Facebook to spread Ponzi misery globally.
â€œFrom January 2006 through approximately August 2007, Gagnon helped orchestrate a massive Ponzi scheme conducted by Gregory N. McKnight . . . and his company, Legisi Holdings, LLC,â€ the SEC said.
â€œGagnon promoted Legisi but in doing so misled investors by claiming, among other things, that he had thoroughly researched McKnight and Legisi and had determined Legisi to be a legitimate and safe investment,â€ the SEC said.
Among other things, the SEC alleged that Gagnon â€œhad no basis for the claims he made about McKnight and Legisi.
â€œGagnon also failed to disclose to investors that he was to receive 50% of Legisiâ€™s purported â€˜profitsâ€™ under his agreement with McKnight,â€ the SEC said. â€œGagnon received a net of approximately $3.8 million in Legisi investor funds from McKnight for his participation in the scheme.â€
In its complaint against Gagnon, the SEC alleged he moved from one fraud scheme to the next and even had promoted a scheme operated by the late Bryan K. Foster, a convicted felon. Some of the money from the alleged Legisi Ponzi scheme ended up in the control of Foster, who was running a purported investment program of his own.
The allegation that proceeds from one fraud scheme ended up as proceeds of a second scheme demonstrates the interconnectivity of schemes in the age of the Internet.
â€œGagnon has been unrelenting in his efforts to raise money from the public through fraudulent, unregistered offerings,â€ the SEC said in May. â€œHe remains a danger to the investing public.â€
See earlier story titled “Requiem For The Forum Pimps . . .”Â The story discusses some of the history of the Legisi Ponzi case.