EDITOR’S NOTE: The story of the Robert McLean Ponzi scheme is, indeed, a sad one. Litigation that has accompanied the Ponzi provides yet-another example of how fraud schemes can affect the lives of even innocent parties — charities on the receiving end of donations from Ponzi schemers and investors who receive payouts that can be considered “fraudulent conveyances” because they were dealing with a scammer who was taking money from some people and giving it to others to sustain the deception that “real” profits were being recorded.
McLean’s accountant, Mark S. Riddle, now has been arrested amid allegations that he defrauded investors by misleading them, prosecutors in Tennessee said.
On Sept. 25, 2007 — one day before he was scheduled to appear at a bankruptcy proceeding to explain how millions of dollars had disappeared from his investment company — Robert McLean’s body was found. He took his own life with a handgun.
McLean’s fraud scheme, which had operated for at least a dozen years, collapsed two months prior to his suicide, according to court filings.
The body was found behind the First Christian Church in the small, South Central Tennessee city of Shelbyville. The bankruptcy hearing had been scheduled for the nearby city of Murfreesboro, home of Middle Tennessee State University (MTSU).
McLean, 60, had given generously to MTSU, his alma mater. His reputation as a philanthropist further was boosted by gifts to the Country Music Hall of Fame, the Cystic Fibrosis Foundation and others, but McLean had a secret.
That secret, prosecutors said, was that he had been operating a Ponzi scheme that fleeced millions of dollars from investors through purportedly high-yield promissory notes while McLean spent lavishly on cars and homes. Federal agents raided McLean’s business two months prior to his suicide, and creditors and investors sought answers from McLean though the bankruptcy proceeding.
Bob Waldschmidt, the bankruptcy trustee, said in court filings that McLean had been operating a Ponzi scheme since “at least” 1995. After the Ponzi’s collapse, Waldschmidt went about the distressing business of reverse-engineering the scheme by identifying investors and charities unlucky enough to have received payments from McLean from suspected Ponzi proceeds.
The payments were treated as “fraudulent conveyances” because McLean was insolvent when making them and simply was relying on money received from later investors to pay earlier ones, according to court filings.
“From 2002, until the filing of the bankruptcy petition, the Debtor made gifts to various people and institutions . . . which were a conscious effort on the part of the Debtor to improve his image in the Nashville and Murfreesboro communities, such that he could entice new lenders/investors to loan him money in furtherance of his Ponzi scheme,” Waldschmidt said in court filings.
Dozens of lawsuits were filed. Among the parties sued were McLean family members, investors and nonprofits that had received tainted donations.
The trustee also sued McLean’s CPA, Mark S. Riddle.
Riddle now has been charged criminally. He was arrested Wednesday after an investigation by the Rutherford County District Attorney’s office and the office of Tennessee Attorney General Robert E. Cooper Jr.
“Riddle was indicted on seven separate counts of allegedly defrauding four investors of approximately $668,000 in May of 2007,” prosecutors said. “Among the charges was selling securities without registering with the State.”
Fresh from their third win in the AdSurfDaily civil-forfeiture litigation, federal prosecutors now say a restitution program for victims of the autosurf Ponzi scheme could be delayed “a year or longer” depending on appeals filed by ASD President Andy Bowdoin.
In an update to ASD members on the government’s website for victims, prosecutors did not address an appeal brief filed Monday by Bowdoin that cites a grand-jury investigation and suggests at least two attorneys involved in the defense of ASD-related property were ordered by a federal judge to testify in a case filed under seal.
The target or targets of the grand-jury probe were not revealed, and the names of the attorneys who provided counsel and were called to testify were not disclosed in Bowdoin’s filing.
Through a statement posted on the victims’ website, prosecutors said U.S. District Judge Rosemary Collyer had issued three orders of forfeiture that stemmed from the filing of two forfeiture complaints against ASD-connected assets.
In July 2009, prosecutors said, Collyer issued a forfeiture order of more than $14 million against assets tied to Golden Panda Ad Builder. Golden Panda’s assets were targeted in an August 2008 complaint that also targeted the lion’s share of ASD’s assets.
Collyer issued a second forfeiture order in January 2010. This one covered a lakefront home and more than $65 million seized from Bowdoin’s 10 bank accounts in the August 2008 complaint.
Last week, Collyer signed the third forfeiture order in the case. Last week’s order covered more than $634,000 surrendered by Golden Panda in a second case brought against ASD-connected assets in December 2008. The order also covered additional ASD-connected real estate (a building purchased with $800,000 cash and a home whose $157,000 mortgage was retired with ASD-connected cash) seized in the same complaint, along with a 2009 Lincoln automobile;Â a 2009 Acura automobile; a 2008 Honda automobile; a 2008 cabana boat (20-foot); a 2008 Mercury speed motor; a 2008 boat trailer; two 2007 Bombardier jet skis; and computers and related equipment.
Some ASD members derided the boat and jet skis as “water toys” after claims were made that the equipment was purchased to enable members who visited Bowdoin at the lakefront home in Quincy, Fla., to enjoy themselves.
One of the properties Collyer ordered forfeited last week belonged to George and Judy Harris. George Harris is Bowdoin’s stepson. Prosecutors said more than $157,000 in ASD-connected money was used to retire the mortgage on the Harris home.
The transaction that led to the retirement of the mortgage occurred within 11 days of the conclusion of a May 31, 2008, ASD “rally” in Las Vegas at which Bowdoin invoked God, saying he was pleased that God had made him a “money magnet.”
The U.S. Secret Service seized the bulk of Bowdoin’s immediately traceable assets two months after the Las Vegas rally concluded. The probe that led to the seizure began in the opening days of July 2008, a period during which Bowdoin was threatening to sue ASD critics while also collecting huge sums of money at “rallies” held in other cities, including Miami.
ASD members said some attendees showed up at the rallies with piles of cash and cashier’s checks.
Some ASD members joined Bowdoin in the threats to sue ASD’s detractors. One ASD member later said he imagined that the theme song from the television program “COPS” would be playing to herald Bowdoin’s court wins.
“WHATCHA GONNA DO WHEN ASD’S ATTORNEYS COME FOR YOU?” the ASD supporter chimed in all-caps on a Pro-ASD forum known as the Ad Surf Zone. “I think we should start collecting ALL the negative types in here so we can FORWARD their posts to the ASD Attorney’s Office after they WIN our case against the U.S. Att Gen!”
As a show of confidence in the strength of Bowdoin’s case and to rattle forum critics, the 76-word post included 14 exclamation points or question marks — an average of one every 5.4 words.
Three final orders of forfeiture now have been issued.
“An appeal from these rulings might affect how fast any of the forfeited funds can be released to fraud victims, which could take a year or longer,” prosecutors said in their update to ASD victims.
BULLETIN: (UPDATED 12:21 P.M. EDT (U.S.A.) Tom Petters, whom federal prosecutors said presided over a $3.65 billion Ponzi scheme, has been sentenced to 50 years in prison.
The fraud was one of the largest in U.S. history — though still significantly smaller than the Bernard Madoff scheme, estimated to have involved $65 billion.
Prosecutors had sought a sentence of more than 300 years. Petters’ attorneys countered with an argument that an appropriate sentence was in the range of four years.
U.S. District Judge Richard Kyle bridged the gap, sentencing Petters to 50 years — 100 years fewer than the sentence Madoff received, but more than 12 times the sentence sought by the defense.
Minnesota has been plagued by Ponzi schemes and rocked by allegations of Ponzi schemes.
Three links on the main page of the website of U.S. Attorney B. Todd Jones lead to information about major Ponzi scheme prosecutions or Ponzi investigations undertaken by the office, including the Petters’ case, the case against Trevor Cook and Pat Kiley, and the investigation into the business practices of Steve Renner, who is alleged by prosecutors to have operated an autosurf Ponzi scheme known as INetGlobal.
EDITOR’S NOTE: As is the case with other Ponzi schemes, the alleged Trevor Cook/Pat Kiley scheme in Minnesota is proving to be an incredible paper chase that is consuming hundreds of hours of manpower as attorneys, investigators and support staff work to reverse-engineer what authorities say was an epic, international fraud.
Want to be a Ponzi receiver? Expect to be criticized — and also expect to put in long hours, perhaps for months or even years. It simply is not an easy job, especially if a scheme has fleeced investors by the hundreds or thousands. Simply put, there is no way to make all parties happy. Perhaps all one can hope for is to contain the devastation of a Ponzi scheme.
This is part of the story of R.J. Zayed, as told through court filings and a statement before Chief U.S. District Judge Michael J. Davis March 29. Zayed is the receiver in the Cook/Kiley case . . .
Investor losses will be huge in the alleged Trevor Cook/Pat Kiley Ponzi scheme in Minnesota, the court-appointed receiver in the case said.
Painting a picture that deception was the rule and not the exception in the alleged $190 million fraud, receiver R.J. Zayed said that money was moved “all over the world” and that $139 million of investor funds was “spent or hid.”
Management of the scheme was so screwed up that Trevor Cook, whom Zayed described as the “architect,” reportedly paid $2.6 million from investors’ resources in 2008 for the historic Van Dusen mansion in Minneapolis — but then did not bother to maintain property insurance or even to maintain the property.
Zayed’s early findings are alarming, and his statement and reports to Chief U.S. District Judge Michael J. Davis cannot be ignored. Indeed, Zayed suggested, Cook used investors’ money to buy the mansion, but put the entire purchase price at risk and potentially invited catastrophic downstream liabilities by not insuring the property and letting it fall into a state of disrepair.
Welcome to the bitter world of the Ponzi. Easy come, easy go.
Although Cook purchased an island property in Canada for $250,000, a contractor who performed work for Cook has filed a “lien for unpaid work.” The filing of the lien added another layer of complexity to an already-complex case that involves multiple international jurisdictions.
“We are working to get that issue resolved and clear title to the land,” Zayed said, noting that he has hired lawyers in Canada to help navigate the jurisdictional issues. The receivership estate also is working to convert assets in Panama to cash.
Cook, 37, was charged criminally with mail fraud and tax evasion March 30. It is believed he may enter a guilty plea during a court appearance April 13.
The Van Dusen mansion, which was used as a headquarters for the alleged $190 million scheme, quickly became a white elephant to the receivership estate, Zayed said.
“Ongoing expenses, such as utilities and property maintenance, cost approximately $12,000 per month,” Zayed said. “In addition, we had to obtain property insurance (there was none under Mr. Cook’s management).”
Moreover, Zayed said, the mansion’s furnace was not working and its security system had been “dismembered.”
“Numerous individuals had ‘worked,’ lived, and socialized throughout the house,” Zayed said. “The property was littered with trash and paraphernalia from these activities. Evidence had to be preserved and the remainder had to be cleaned out — this was a tremendous task.”
Spectacular Sums Collected, But No Books Kept
Cook and Kiley both were charged civilly by the SEC and the CFTC in November. Kiley, 71, is a former host on Christian radio. Cook was a purported money manager.
“The damage that Trevor Cook and Pat Kiley have done is nothing short of devastating to each of over 1000 investors who trusted and invested their life savings with these individuals,” Zayed said.
In many cases, individual investors lost their life savings, Zayed said. Some of them had borrowed against the value of their homes.
“Many of these investors are so destitute that they cannot afford to hire private counsel to represent their interests,” Zayed said.
He described the scheme as an “incredible tragedy” that has been “nothing short of devastating” to investors, saying he is aware that some people believe the receivership estate has billed “extensive fees and costs.”
Zayed, though, said he had arranged for discounted billings with key personnel such as attorneys and professional investigators and, in some cases, was relying on recent law-school graduates and criminal-law students to perform work for the estate to contain costs.
WayPoint Inc., a professional investigations firm whose staff consists of former FBI and IRS agents and a former postal inspector, has performed some work at no charge because it recognizes the grave circumstances confronting Cook/Kiley investors, Zayed said.
“It is the right thing to do,” Zayed said, quoting Rick Ostrom, one of WayPoint’s principals. Ostrom is well-known in Greater Minneapolis. He spent 26 years with the FBI.
“WayPoint has been instrumental in cost containment,” Zayed said. “For example, to effectuate a proper distribution plan, the Receiver has to have as complete a list as possible of all investors who have lost money in this scam. Approximately 580 investors have registered claims with the Receiver — this is about half of the individuals who are believed to have invested with the Defendants.
“In an effort to identify the remaining individuals in the most cost-effective manner possible, WayPoint interviewed and engaged local criminal-law students to review Defendants’ investor files to create a list that is complete and as accurate as possible,” Zayed continued. “These students reviewed 75 boxes of investor files and are in the process of updating the investor database with the information they reviewed. This work was performed at no cost to the Receivership, except that we paid for these students to park downtown while they worked at the U.S. Attorney’s Office.”
Moreover, Zayed said his own firm, Carlson, Caspers, Vandenburgh & Lindquist (CCVL), cut its billing rate by 15 percent. The firm’s CFO has been working as a “de facto CFO” for the estate “without a single of her many hours billed.”
Meanwhile, Zayed said, the “entire administrative staff of CCVL has also worked on behalf of the Receivership, often with late hours at the expense to their family and home lives, without billing a single hour.”
At the same time, the firm’s technical staff also contributed to the Receivership, constructing a separate part of the firm computer infrastructure to handle the tremendous volume of electronic documentation that the Receivership has collected and created.”
‘Complicated Web’ Of Deceit
Management of the Cook/Kiley entities was an unqualified disaster, Zayed said.
“[T]he scope and depth of this fraud are so severe . . . that the recovery in this case will be nowhere near the loss,” Zayed said. “The Defendants’ construction of this Ponzi scheme and their maintenance of the fraud lured investors into a scheme that produced a complicated web through which assets were sent all over the world.”
Although investors filed lawsuits last summer and the SEC and the CFTC launched probes that resulted in the filing of the civil charges, the scheme continued to consume investors’ money even after the allegations were filed, Zayed said.
“Trevor Cook was spending tens of thousands of dollars to buy gift cards around the city for his own personal gain,” Zayed said. He added that the receivership estate, the SEC, the CFTC and federal prosecutors in Minnesota worked to preserve assets and that the consequence to Cook was that he was jailed in January for not cooperating.
“Suffice it to say that there was no legitimate book keeping of the Defendants and Relief Defendants,” Zayed said. “There were no accounting systems in place, or even a general ledger.”
UPDATED 11:57 A.M. EDT (U.S.A.) Federal prosecutors have won the second forfeiture case against assets tied to Florida-based AdSurfDaily, meaning the government now holds title to 100 percent of the money and assets seized in the autosurf Ponzi scheme, wire fraud and money-laundering investigation.
U.S. District Judge Rosemary Collyer issued a final order of forfeiture March 30 in a case brought in December 2008. On Jan. 4, Collyer issued a final order of forfeiture in a case brought in August 2008. The government now has control over more than $80 million seized in the cases, along with real estate, cars, marine equipment, computers and other property.
But that may not be the big news.
Grand Jury Probe
Indeed, the big news may be that a hidden legal drama is playing out behind the scenes. Appeal documents filed by attorneys for ASD President Andy Bowdoin in the August 2008 case reference two separate matters filed “under seal” and say that attorneys for unnamed “defendants” were called to testify before a grand jury.
The filings suggest — but do not state plainly — that prosecutors subpoenaed at least two attorneys involved in the defense of ASD-related property to testify and that a federal judge ordered the attorneys to comply.
Charles A. Murray, an attorney for ASD President Andy Bowdoin, referenced two sealed court cases when informing the appeals court about litigation “related” to ASD.
“Only one case related to this matter is currently pending before this Court, an interlocutory appeal alleging that the court below erred in ordering the defendant’s attorneys to testify before a grand jury,” Murray wrote.
Murray identified the case as “Grand Jury Subpoena, Case No. 09-3118 (Under Seal).”
“This related appeal arose from an ongoing grand jury investigation, In re: Possible Violations of Title 18, United States Code, Sections 1341, 1343, and 1349, Misc. No. 09-270 (Under Seal),” Murray wrote.
The sections of federal law cited in Murray’s appeal brief pertain to mail-fraud, wire-fraud and conspiracy statutes. The attorneys are not named, and the brief does not identify the targets of the grand-jury probe.
Details Unclear
Why the attorneys were called to testify is unclear. Also unclear are the identities of the attorneys’ clients, the nature of the information the government sought from the attorneys, whether the attorneys sought to invoke attorney-client privilege and whether they actually testified before the interlocutory appeal filed under seal was brought.
An interlocutory appeal is an appeal to a higher court of a ruling by a lower court that is made before the trial in the lower court has concluded.
Such appeals, which higher courts are reluctant to entertain, may be filed when a party believes a lower court’s ruling is severely prejudicial and turns to an appeals court to stop it in its tracks, instead of following the customary procedure of waiting for the case to conclude before filing an appeal.
Racketeering Case Cited
Murray also identified as a “related” matter a racketeering lawsuit filed against Bowdoin and ASD attorney Robert Garner by three ASD members in January 2009. The racketeering lawsuit, which alleges ASD was a criminal enterprise as defined under federal statutes, has been placed on hold until issues in the federal case are resolved.
In June 2009, attorneys for the parties suing Bowdoin and Garner referenced the AdViewGlobal (AVG) autosurf, an entity with close ties to ASD. In September 2009, federal prosecutors made a veiled reference to AVG in a filing that suggested that Bowdoin and family members initially planned to “move to another country and profit from a knock-off autosurf program that Bowdoin funded and helped to start.”
The assets seized in the December 2008 forfeiture case identified Bowdoin family members as beneficiaries of ASD’s illegal conduct. Members of AVG later identified George and Judy Harris as AVG’s owners, with Bowdoin as a silent partner.
George Harris is the son of Bowdoin’s wife, Edna Faye Bowdoin, who also was named in the December 2008 complaint as a beneficiary of ASD’s illegal conduct.
AVG crashed and burned in June 2009, taking an unknown sum of money paid by members with it by exercising its version of a “rebates aren’t guaranteed” clause. There were reports that $2.7 million was stolen from AVG, which purportedly operated from Uruguay.
Among AVG’s most noteworthy promoters were former ASD members, including some of the moderators of the now-defunct Pro-ASD Surf’s Up forum. Surf’s Up suddenly went missing in the earliest days of 2010.
Bowdoin, 75, has been portrayed by prosecutors as “delusional.” He pleaded guilty in Alabama during the 1990s to felony securities charges, according to court records. A decade later, he associated with Clarence Busby, the operator of Golden Panda Ad Builder, the so-called “Chinese” option for ASD members.
Bowdoin and Busby, according to court filings by Busby, talked about forming Golden Panda in April 2008 while on a “relaxing fishing trip” to a Georgia lake.
Busby, identified by the title “Rev.” at least 120 times in autosurf-related litigation, was implicated by the SEC in three prime-bank schemes in the 1990s, according to records. Golden Panda has ceded more than $14.6 million to the government in the ASD case, including $646,266.13 formally ordered forfeited by Collyer last week, and more than $14 million Collyer ordered forfeited in July 2009.
In his court filings, Busby said he didn’t know Bowdoin “had prior run ins with the law†and had been arrested in Alabama for defrauding investors.
Busby did not say if he told his fishing partner about his own run-ins with the law: The SEC said Busby defrauded investors in the 1990s “by offering and selling investment
contracts in connection with three different prime bank schemes.â€
“Using misrepresentations and omissions in each of the three schemes, Busby raised money for purported programs in ‘prime bank’ notes by fraudulently representing to investors that the investments were risk-free and that the ventures would pay returns ranging from 750% to 10,000%. In total, Busby raised nearly $1 million from more than 70 investors. None of the investors earned the exorbitant returns promised by Busby,†the SEC said.
Busby went on to operate an autosurf known as Biz Ad Splash, which also crashed and burned, reportedly taking members’ money with it. All of the notable autosurfs that dominated the stage in the aftermath of the ASD seizure — MegaLido, AdGateWorld, BAS, Ad-Ventures4U, Noobing and others — have now either died or are in a serious state of decay.
Last month, the U.S. Secret Service, which conducted the probes into ASD, Golden Panda and LaFuenteDinero, asserted that INetGlobal, a company operated by Steve Renner, was operating an autosurf Ponzi scheme and targeting Chinese participants.
The IRS is involved in both the ASD case and the INetGlobal case, according to court filings.
Steve Renner was convicted of income-tax evasion in December 2009. Federal prosecutors described the INetGlobal case last week as a “major fraud and money laundering investigation.”
Renner has denied the government’s allegations.
Bowdoin now says he is appealing the forfeiture order issued by Collyer last week in the December 2008 case. If Bowdoin does appeal the order, it will be his second appeal. He also is appealing the forfeiture order in the August 2008 case.
“Professor” Patrick Moriarty, a mainstay in the AdSurfDaily Ponzi scheme story, has been sentenced to a year in federal prison for filing a false tax return, according to KMOX.com.
Details about the sentencing were not immediately available.
Moriarty, 62, pleaded guilty in January to filing a false return for the year 2003. Prosecutors said he caused a tax loss of $135,697.
He initially was charged with filing false returns for the years 2002, 2003, 2004 and 2005, but pleaded guilty to a single count. Prosecutors alleged that he claimed a false deduction of $30,000 for “legal fees†for the tax year 2003 and claimed a false amount of $23,533 withheld for the tax year 2004 and a false amount of $23,433 withheld for the tax year 2005.
After the August 2008 federal seizure of tens of millions of dollars from the bank accounts of ASD President Andy Bowdoin amid wire-fraud and money-laundering allegations, Moriarty fashioned a theory that the government was interfering with commerce.
Moriarty also espoused the legal theories of Curtis Richmond, another mainstay in the ASD story. Richmond, a pro se litigant in the ASD case, was a member of a sham Utah “Indian” tribe known for filing vexatious litigation, including litigation that resulted in a successful counter-suit brought by Utah public officials under federal racketeering statutes.
The “tribe” derisively became known as the “Arby’s Indians” because it held a meeting in an Arby’s restaurant in Provo, Utah, in 2003. The “tribe” used the address of a Utah doughnut shop as the address of its “Supreme Court,” and once issued “bench warrants” for the arrests of sitting judges and litigation opponents in legitimate courts.
Although not a lawyer, Richmond holds the unusual distinction of having been banned from the practice of law in Colorado. In the ASD case, he accused a federal judge of “TREASON” and of operating a “Kangaroo Court,” accused another federal judge of operating a “Kangaroo Court” — and accused federal prosecutors of theft.
Moriarty, along with other ASD members and members of the Pro-ASD Surf’s Up forum, started a nonprofit entity dubbed ASD Members International (ASDMI). One of ASDMI’s claims was that it would litigate against the government in the ASD case — even if the government was acting lawfully.
ASDMI, which was formed in 2008 and collected contributions from at least 167 ASD members, never brought any litigation and quickly dissolved.
Moriarty and Surf’s Up later spearheaded an effort to get the U.S. Senate to investigate the ASD prosecutors. Moriarty and Surf’s Up members also participated in a certified-mail campaign in which — as Moriarty described it — more than 50 “individual and notarized DEMAND[S] FOR LEGAL EVIDENCE” were sent to two federal prosecutors and a U.S. Secret Service agent.
In 2006, Moriarty formed a nonprofit for a Missouri man accused (now convicted) of breaking into a woman’s home and shooting her to death in cold blood. Moments earlier, the man had shot a police officer four times. Moments later, he shot another man eight times.
Steve Renner has no standing to contest the seizure of “the vast majority” of the money and assets in the INetGlobal autosurf Ponzi case because the seized property was owned by corporations, not Renner, federal prosecutors said.
Only $151,100 of the $26 million seized in the case came from accounts in Renner’s name, prosecutors said, arguing that bids to release the money were premature and that only an attorney for Renner — and not the companies — has filed a notice of appearance in the case.
Meanwhile, in its response to Renner’s motion last week to challenge the seizure on Constitutional grounds and have $25 million returned, the prosecution said yesterday that his bid was a “thinly veiled attempt to force the government to reveal facts relating to an on-going criminal investigation.”
A “major fraud and money laundering investigation is under way bearing serious criminal consequences,” prosecutors said.
The government probe, which prosecutors now say includes the IRS, is in its early stages. Investigators to date have filed neither a civil forfeiture complaint nor criminal charges that seek the forfeiture of the funds, “and much of the evidence has only recently been seized and is needed for the investigation,” prosecutors said.
“If the seized evidence is returned, it will not be available for the ongoing investigation,” prosecutors argued.
Moreover, they argued, “If the Court orders the return of the seized funds, the money will be spent, and will be unavailable for future return to victims” should the government prevail.
Prosecutors made similar arguments in the AdSurfDaily autosurf prosecution — and the arguments prevailed. In filings yesterday, the government once again cited the successful ASD prosecution, along with the successful prosecutions of the 12DailyPro and PhoenixSurf autosurfs.
“iNetGlobal is not a one-of-a-kind scam, nor is it the first of its kind,” prosecutors said yesterday.
Steve Renner was convicted on four felony counts of income-tax evasion in December, and is awaiting sentencing in the tax case.
No ‘Leak’ Occurred: Gov’t Acknowledges Timing ‘Error’ In Posting Of Affidavit
Prosecutors denied an assertion by Renner last week that the government had leaked the search-warrant affidavit in the INetGlobal case to the media.
Under a bold subhead titled “The ‘Leak,’” prosecutors said the claim the document was leaked “is false, and has no bearing on the issues presented in this motion.”
They added that the posting of the document on the government website was intended as a means of informing victims and witnesses efficiently, while trying to avoid a circumstance that occurred in the AdSurfDaily case: switchboards in prosecutors’ offices becoming inundated with telephone calls from people seeking information.
Prosecutors said the government had explained its point of view to INetGlobal on Feb. 26, almost a month prior to Renner’s “leaking” claim filed last week. Renner’s claim specifically cited the PP Blog.
“[T]he U.S. Attorney’s Office had planned, once the search and seizure warrants in this case were filed with the clerk’s office, to post a link to the affidavit on the website of the U.S. Attorney’s Office,” prosecutors said. “The U.S. Attorney’s Office for the District of Columbia was inundated with calls following their execution of warrants in the AdSurf Daily case, and the U.S. Attorney’s Office in Minnesota hoped to avoid this by efficiently getting information to victims, witnesses, and other interested parties by referring them to the affidavit.”
“Through an error, an employee of the U.S. Attorney’s Office’s Community Relations Division mistakenly believed that the time had come to post the affidavit when it had not,” prosecutors said. “The affidavit was posted on the late afternoon or early evening of February 24th, and was taken down the following morning when the error came to light.
“During the night, apparently, a single blogger found the affidavit and wrote a story about it,” prosecutors continued. “That story is reprinted in Mr. Renner’s motion papers. As noted, all of this was explained to Counsel immediately after the fact, and Counsel did not raise the issue of the premature release of the affidavit again until this motion was filed.”
IRS Enters INetGlobal Probe
Filings by the prosecution yesterday confirmed that the IRS has entered the case. An affidavit by an IRS criminal investigator asserts that an entity known as VMedia Marketing LLC opened a checking account at Premier Bank Minnesota on March 1, six days after the Secret Service executed search warrants in the INetGlobal case.
“Steven M. Renner reserved sole signature authority on the account upon inception,” the IRS agent said. “On or about March 6, 2010, Matthew D. Renner was added to have signature authority on the account.”
Matthew Renner is Steve Renner’s son. He has not been accused of wrongdoing.
A total of $47,400 was deposited in the account, the IRS agent said. He listed the names of sources of the deposits. Two individuals with Chinese names wired individual deposits of $7,400 and $8,500 into the account.
“Official checks” drawn on Wells Fargo bank and totaling $16,500 also were deposited in the account. These checks were made out to “V-Media or U-Media,” the IRS agent said.
Meanwhile, the agent said, “a check made payable to Steve Renner in the amount of $15,000.00 from The Toronto-Dominion Bank was also deposited into the account.”
At least 23 withdrawals were made from the account, the IRS agent said. He noted that the majority of these checks have either ‘week 3/1 – 3/5″ or ‘3/1 – 3/5 written on the memo line. In addition, one check was made payable to MEDA (Metropolitan Economic Development Assoc.) in the amount of $2,000.00. The memo section of the check made payable to MEDA stated ‘250 SECOND AVE #106A RENT.’”
That address was one of the business addresses searched by the Secret Service Feb. 23.
Prosecutors, saying Renner made “sweeping” assertions last week that he had no cash to pay employees, argued that the investigation by the IRS agent into the Premier Bank Minnesota account opened after the raid suggested otherwise.
“Renner subsequently wrote 23 checks that appear to be payroll checks, plus a check for the rent on Suite 106A, 250 Second Avenue,” prosecutors said.
Because the $15,000 deposit drawn on Toronto-Dominion bank was held until March 19, “several” withdrawals by check initially were returned to Premier Bank Minnesota, the IRS agent said.
“Later on, Steven Renner came into Premier Bank Minnesota and had cashier’s checks issued to the same names indicated on the checks that had previously been returned to the bank,” the IRS agent said. “On or about March 23, 2010, the above indicated account was closed.”
INetGlobal disclosed “none of this” in its arguments last week to release funds, prosecutors said.
Moreover, prosecutors said the government “is attempting to work with the company” on the issue of payroll.
Prosecution: INetGlobal ‘Omitted’ Names Of Employees
“[T]here is concern that the company continues to have access to unseized funds with which to make payroll,” prosecutors said. “In addition, the first list of employees submitted to the government omitted several names of people the Secret Service had identified as employees of the company during the execution of the search warrants on February 23, 2010. A request that this issue be addressed elicited a response that was confusing; the government requested clarification and is awaiting a response.”
Meanwhile, prosecutors claimed that Renner had placed “factual inaccuracies” in the record of the case, arguing that Renner’s claim that the seizure was “unreasonable” and that the Secret Service allegedly told “intentional and reckless falsehoods” in securing the warrant could not stand up to judicial scrutiny.
“Such is the unsurprising reaction of a company accused of running a Ponzi scheme,” prosecutors said.
A grand jury has returned an indictment against a suburban Philadelphia man, accusing him of operating a Ponzi scheme that gathered at least $95 million and fleeced investors of more than $25 million.
Charged criminally with mail fraud and money-laundering was Donald Anthony Young, who also has been sued by the SEC.
Meanwhile, Matthew Pizzolato has pleaded guilty in a separate Ponzi case targeting senior citizens in Louisiana, prosecutors said.
Pizzolato, 26, of Tickfaw, pleaded guilty to 21 counts of mail fraud, three counts of money-laundering, and single counts of wire fraud, securities fraud and witness tampering. In all, Pizzolato pleaded guilty to 27 felonies. He also was sued by the CFTC.
At the same time, accused Ponzi schemer Jeffrey Lane Mowen has lost his monstrous collection of vehicles in Utah. The U.S. Marshals Service began selling the 210-vehicle collection at auction yesterday — April Fool’s Day.
Marshals were authorized to sell the cars because the bill to store them cost $21,000 a month. Mowen, 47, was arrested in Panama in 2009, extradited to the United States and jailed in Utah on Ponzi charges. He later was charged in an alleged murder-for-hire plot in which he was accused of trying to recruit a fellow prisoner to kill witnesses in the Ponzi case.
The auction had been delayed twice, but proceeded yesterday. It was billed by Erkelens & Olson Auctioneers as the “Largest collection of Muscle, Collector & Exotic vehicles ever [offered] in Utah!”
Elsewhere, NBC’s “Today” show this morning featured a daughter who turned in her mother in a Ponzi scheme. The mother ultimately was not charged because authorities came to view her as a victim who had been recruited to sell the scheme.
Authorities busted the California scheme, operated by Pastor Robert Jennings and Henry Uliomereyon Jones, a magnetic figure. The affinity-fraud scheme involved investments in coal and a bogus international gold deal.
Jones was arrested in Hong Kong and extradited to the United States. He and Jennings were convicted last year.
Kim Flanigan told Today that she reached her limit when she observed her mother, a widow, trying to recruit a widow with nine children into the Ponzi scheme. Both widows attended the same church.
“That was my breaking point,†Flanigan told Today. (See link to story below. NBC’s “Dateline” program will feature Flanigan tonight 9 EDT.)
In the Donald Anthony Young case in Pennsylvania, prosecutors said Young stole from investors so he could live in the lap of luxury.
“Ponzi schemes are usually a vehicle for an unscrupulous person to live high off of someone else’s wealth,†said U.S. Attorney Michael L. Levy. “According to the indictment, this defendant helped himself to others’ fortunes, living a life of luxury, with little or no regard for the damage to our financial markets, our economy, and the reputation of the investment advisors who follow the rules.â€
A veteran FBI agent said the agency was committed to destroying Ponzi fraud.
“The FBI views these types of financial investment Ponzi fraud schemes as significant criminal problems, because of the devastating effect they have not only on the individual victims who are preyed upon but also the effect they have on financial markets and on the overall economy,†said Janice K. Fedarcyk, special agent-in-charge of the Philadelphia Division of the FBI.
Prosecutors and agents involved in the Pizzolato case, meanwhile, also said Ponzi fraud will not stand in the United States.
“[Pizzolato’s] plea demonstrates our resolve, along with our partners in federal law enforcement, including the FBI, IRS and U.S. Postal Inspection Service, to aggressively investigate and pursue those economic predators who seek to take advantage and prey upon the most vulnerable among us, including our senior citizens who most desperately need our protection,” said U.S. Attorney Jim Letten.
Letten thanked the Office of the Louisiana Commissioner of Securities for its assistance in the Pizzolato case.
An FBI agent said the case sends a signal.
“This guilty plea represents once again, the FBI’s resolve to aggressively investigate financial crimes which victimize our most vulnerable citizens,” said David Welker, special agent in-charge. “It is reprehensible that Mr. Pizzalotto would target senior citizens and defraud them of their life’s savings. The FBI, along with our law enforcement partners, will continue to identify and investigate frauds such as this.â€
An IRS investigator said authorities would leave no stone unturned to expose financial fraudsters.
“This investigation shows that the appearance of success can be a mask for a tangled financial web of lies,” said Michael J. DePalma, special agent in-charge of the IRS New Orleans’ office.
“No matter what we call this type of crime, the bottom line is that Mr. Pizzolato robbed over a hundred investors of more than $19 million and spent just about all of it,” DePalma said. “Special Agents of IRS Criminal Investigation will continue to work with our federal and state law enforcement partners and the United States Attorney’s Office to pursue evidence of criminal activity wherever it leads, leaving no financial stone unturned.”
Visit the Today show site to read about Flanigan’s experience.
Search-engine and advertising giant Google has changed it name to “Topeka,” the company said today.
The company did so in tribute to the city of Topeka, Kan. Topeka’s mayor, Bill Bunten, wants to call the city “Google” for a spell.
Google’s announcement about its name change came one year to the day after it announced the debut of its Gmail Autopilot by Cadie. Cadie purportedly was designed to automatically send the “perfect” response to scammers who spam gmail accounts.
For two years now, Google has timed critical business announcements to coincide with Maddy’s birthday. Maddy’s second birthday is today.
She was born April 1, 2008. April 1, of course, always has been one of the most important dates on the calendar. Maddy’s birth only made the date more important.
Maddy became an international sensation and Google star on Christmas Eve 2008, when she rocketed to the top of search results for the phrase “Maddy Santa world debut” — without the quotes. People the world over clever enough to search under that precise string learned part of the story of Maddy’s first Christmas.
It was kind of Google — and now “Topeka” — to tie its key business decisions to Maddy’s birthday. Maddy also is known the world over as “The Wonder Puppy.” She owns an entire search category under the string, “Maddy The Wonder Puppy” — with the quotes.
Happy Birthday to Maddy — and we wish Google our best with its shift to Topeka!
A Florida man who spent time in prison for wire fraud and money-laundering in a previous Ponzi scheme embarked on a new scheme after his release, federal prosecutors said.
Within two years of being released from custody in 1996 — and while still on supervised probation — Michael Greenberg, 50, started a new Ponzi and fraud scheme.
The new scheme operated for more than a decade, gathered more than $53 million, fleeced investors and creditors out of more than $24 million and used the names of at least nine different companies, prosecutors said.
Just days ago FBI Director Robert Mueller III warned Congress that white-collar criminals in the United States increasingly were relying on shell corporations to commit crimes and avoid detection.
The U.S. Secret Service led the investigation, which is centered in Pinellas County, Fla. Greenberg has been charged with wire fraud.
One of his companies existed for “no other purpose than to defraud banks and the U.S. Small Business Administration,” the Secret Service said. The agency described several of the companies as operating “on paper.”
In 1992, Greenberg was sentenced to 46 months in federal prison after being convicted of operating a Ponzi scheme that fleeced his own father out of more than $1 million. Other investors also lost money in the scheme, according to records.
After being released from prison, Greenberg started a company named Pure Class Inc., according to the Secret Service complaint. The business involved the need for an automobile-dealer’s license, something that might be a tall order for a convicted felon to obtain.
Greenberg “hid behind a proxy in both forming the corporation and in obtaining the license,” the Secret Service said.
‘[A]ll business done with Pure Class from its inception was based on a fraud at its inception,” the Secret Service said.
Because of the corporate deception and the proxy, the Secret Service said, persons conducting due diligence on the company would have been shielded from discovering Greenberg’s felony conviction and facts to help them make informed investment and business decisions.
The agency painted a picture of an elaborate deception, alleging that Greenberg assumed the identity of a third person to trick at least one victim and created a bogus email account to correspond with the victim, as though Greenberg were a third party who could verify details about the business.
Greenberg also assumed the identities of his parents to get a loan and created “sham” corporations to keep investors from learning the truth about his business operations, the Secret Service said.
He is accused of creating false tax returns in his parents’ names, forging their signatures on a loan deal, stealing a notary stamp, affixing the stamp to the forged documents, and then forging the name of the notary.
Greenberg formed at least nine different corporations or business names to pull off the scheme, according to the Secret Service. He is accused of fleecing at least 30 investors and banks, and also is accused of swindling the U.S. Small Business Administration.
Among the victims were a real-estate developer and a law firm whose office manager invested the company’s line of credit of $119,000 in the scheme, according to the complaint.
Based on Greenberg’s fraud — and elaborate measures to cover it — he duped the Small Business Administration into backing $1.5 million in loans — loans that were acquired at least in part because Greenberg forged his wife’s signature on documents, according to the complaint.
Denying it was a Ponzi scheme, INetGlobal says a federal judge should release about $25 million, business records and computer equipment seized in an investigation by the U.S. Secret Service last month because the property was “unlawfully seized.”
Meanwhile, INetGlobal has accused its former chief executive officer — whom it describes as a “informant” who lied to the Secret Service — of hatching a plot to extort $500,000 from the company about seven weeks prior to the Feb. 23 raid.
Steven Keough, the former CEO, could not be reached for comment on this story.
INetGlobal also accused the Secret Service of lying.
At the same time, the company said it was part of a family of companies that are “clean, legitimate and profitable businesses,” and it accused the government of leaking the search-warrant affidavit in the case to the media, specifically citing the PP Blog.
INetGlobal and its operator, Steve Renner, are represented by Jon Hopeman. No criminal charges have been filed against Renner or the company.
A spokeswoman for U.S. Attorney B. Todd Jones declined to comment on INetGlobal’s court filings, saying that prosecutors would litigate the case in court and not in the media.
Also filing papers for INetGlobal in the case was attorney Mark J. Kallenbach.
Government Did Not Contact PP Blog; PP Blog Did Not Contact Government
“None of the information we published was obtained as a result of the government or an agent contacting the Blog and providing information for a story,” the PP Blog said. “Nor did the Blog contact the government or an agent to obtain the information.”
An exhibit the company produced for U.S. District Judge Donovan Frank reproduced a story the Blog published at 1:41 a.m. (ET) Feb. 25. The story was based on the Secret Service affidavit, which the Blog obtained from a government website open to any person with an Internet connection.
In its court filings, INetGlobal complained that its attorneys did not get a copy of the affidavit until Feb. 26.
“As of February 25, 2010, I had tried to get a copy of the affidavit,” Kallenbach wrote. “I was informed by the U.S. Attorney’s Office it was sealed. I was not provided a copy until February 26, 2010 at 1:57 p.m., 36 hours after the press had it. Someone leaked the affidavit to the press.”
The PP Blog was the first news outlet to publish information from the affidavit.
No member of government contacted the Blog though any means to arrange for access — exclusive or otherwise — to the material. Nor did the Blog contact any member of government to seek access — exclusive or otherwise — to the material. The Blog obtained the affidavit through the normal course of its reporting.
A Fiery Defense
Attorneys for Renner, INetGlobal and Inter-Mark Corp., the parent company of INetGlobal, appear ready to come out firing.
Among the documents the attorneys plan to present to Frank is a copy of an email dated Jan. 6 from Steven Keough, the former CEO, to attorney Aaron Hall of Minneapolis.
Keough, according to the email, said he was declining to accept a severance proposal offered by the company.
“If your client, Mr. Renner, is serious about resolving this quickly and amicably, then the minimum acceptable severance payment amount must be $500,000 — payable immediately,” the email read. “This reflects the promised signing bonus of $212,000 and promised one year salary of $288,000.”
The email suggested Keough was set on the amount of $500,000 and unwilling to negotiate. Keough proposed that Hall schedule a meeting at a place convenient for Hall on Jan. 8.
“Come with a check and signable documents to the meeting location,” the email read. “After noon on Friday all bets are off as to how this matter will be handled.”
The email was signed “Thank you,” followed by the word “Regards.” Keough’s name appeared below the closing.
INetGlobal argued that the email was evidence of an extortion plot.
“On January 6, 2010, Mr. Keough attempted to extort over $500,000 from iNetGlobal,” Kallenbach argued in a brief. “He demanded payment of the money by 5:00 p.m. that day or all bets are off. According to the Secret Service’s affidavit, Keough contacted the government in this matter for the first time on January 8, 2010.”
Why Kallenbach referenced the time of 5 p.m. — and not noon, as the email referenced — was not immediately clear. Also unclear was the amount INetGlobal offered in the severance package that Keough purportedly rejected.
Whether Keough could argue the amount was too small and did not reflect his understanding of how he would be compensated should be be terminated or choose to leave the company was unclear.
In the Secret Service affidavit, Keough, an attorney and former naval officer, was portrayed as having asserted he was fired for asking too many questions and had come to believe InetGlobal owner Steve Renner had hired him to be a “good face” for the company.
Kallenbach, whose brief said Keough had been fired Jan. 5 — the day before Keough sent the email to Hall — claimed Keough had been fired for cause.
“Mr. Keough was terminated because within a month or so after being hired in late October of 2009, Mr. Keough made no progress in understanding the business, did not fit in with IMC’s rank and file, was unwilling to work with IMC’s board of directors, and attempted to take over IMC’s business from Mr. Steven Renner,” the brief argued.
Secret Service Accused Of Lying
Hopeman asserted in his brief that the Secret Service affidavit contained “intentional and reckless falsehoods” that undermined the probable cause to search.
“In this case, the entire premise of the search warrant affidavit is that little advertising was sold, little was used, and there were no legitimate advertisers,” Hopeman argued. “The search warrant affidavit states that the advertisements ranged from other multi-level marketing sites to affiliate programs, non-English websites, and even iNetGlobal’s home page . . .
“It concluded, without support, that there were ‘few legitimate advertisers,’” Hopeman argued.
At the same time, Hopeman argued that the Secret Service also omitted facts from the affidavit that were favorable to Renner.
“Keough appeared on the company’s website as of January 5, 2010 stating that he intended to recruit new customers from all around the world,” Hopeman asserted. “These are not the same words that Keough spoke to the agents days later when he claimed that the entire business was fraudulent. The agents knew this fact because it is posted on the website, which they studied. This fact if included in the affidavit would have cast substantial doubt on the credibility of the informant, who provided the principal basis for probable cause.”
Hopeman also said the Secret Service painted an unfair picture of how Renner behaved at a January INetGlobal gathering in New York. The Secret Service, which had at least two undercover agents in the room, said Renner often spoke over an interpreter even though many of the attendees had little facility in English, started a pandemonium by handing out $20 bills in exchange for $10 bills, and told at least two different stories about INetGlobal’s revenue figures.
“A viewing of the tapes show that Mr. Renner was very candid about the nature of the business,” Hopeman argued. “During these same presentations, he informed those assembled that this was not an investment, and that one could not earn money by doing nothing. He also explained the internet services that he was selling and made it clear that web hosting, domain registration, and advertising, were his products.”
In previous autosurf prosecutions, the government has argued that surf operators attempt to mask investment programs by calling them something else. Prosecutors in the AdSurfDaily Ponzi case, for example, said that the ASD program was an investment program disguised as an “advertising” program.
It is not uncommon for autosurfs to instruct members to avoid using certain words, including the words “investment” or “investing.” Some autosurf members have scolded others for using the word “investment,” which prosecutors have painted as evidence of the wink-nod nature of autosurfs.
In the ASD case, which was filed in August 2008, the Secret Service described a member speaking to an undercover agent, instructing the agent to be careful not to use certain words.
“Don’t call it investing, you know what I mean, we can get in trouble if we say that, we have to be careful,” the agency quoted an ASD member as saying.
The agency, which asserted in its affidavit in the INetGlobal case that an ASD member tried to recruit an undercover agent to join Renner’s surf, said the ASD member demonstrated the wink-nod nature of the autosurf business.
“The [ASD] member said he had previously been a member of ASD . . . and said, ‘We know what happened there,’” the Secret Service alleged in the INetGlobal affidavit. “The member said he was reluctant to join iNetGlobal due to it being similar to ASD. The member said, ‘we all know what this program is.’ The member said his daughter and wife surfed the websites and the member did not care about the services provided. The member said he just wanted to put his money in and get it out.”
Hopeman, though, said the Secret Service was wrong.
“On February 23, 2010, the United States Secret Service strapped on its guns and raid jackets, searched the premises of Mr. Renner s business, took all of its documents and computers, seized over $25 million in cash belonging to the business and its customers, put 75 people out of work, and seized the money for their paychecks and their children s health insurance,” Hopeman argued. “The sealed affidavit was leaked to the press. This was not a cocaine cartel. It was not a mafia front. It was a legitimate business.”
In the ASD case, prosecutors argued that an ASD filing to counter the government’s Ponzi assertions was”full of sound and fury, [but] signifying nothing.â€
How the prosecution intends to respond to INetGlobal’s arguments is unclear.
Hopeman was the attorney for Tom Petters, implicated in a masssive Ponzi scheme in 2008. Petters was convicted in December.
EDITOR’S NOTE: The story of the Robert McLean Ponzi scheme is, indeed, a sad one. Litigation that has accompanied the Ponzi provides yet-another example of how fraud schemes can affect the lives of even innocent parties — charities on the receiving end of donations from Ponzi schemers and investors who receive payouts that can be considered “fraudulent conveyances” because they were dealing with a scammer who was taking money from some people and giving it to others to sustain the deception that “real” profits were being recorded.
