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  • GO FINRA! Regulator Tackles Online HYIPs; Issues Warning On ‘Social Media-Linked Ponzi Schemes’; References P2P, Genius Funds, ‘Con Artists’ And ‘Bizarre Substratum’ Of Internet

    EDITOR’S NOTE: It has become increasingly clear that regulators and the law-enforcement community are rallying around a common theme that web-based promoters are using discussion forums and social-networking sites in bids to sanitize HYIP Ponzi schemes by positioning them as attractive investment opportunities and even a thrilling form of gambling that pays commissions.

    Today the Financial Industry Regulatory Authority (FINRA) launched an awareness campaign aimed at taking the lipstick off financial pigs and exposing them for the economy-killing, filthy hogs they are. FINRA did not mince words, calling the HYIP universe a “bizarre substratum of the Internet.”

    Here, now, the story . . .

    The Financial Industry Regulatory Authority (FINRA) has launched a public-awareness campaign and issued an investor alert on HYIP schemes that use social-media sites such as YouTube, Twitter, Facebook and online forums and “rating” sites to spread Ponzi misery globally.

    “HYIPs are old-fashioned Ponzi schemes dressed up for a Web 2.0 world,” said John Gannon, FINRA’s senior vice president. “Some of these schemes encourage people to bring in new victims, while others entice investors to ‘ride the Ponzi’ by attempting to get in and get out before the scheme collapses.”

    FINRA is supplementing its educational campaign with an advertising campaign.

    “By using Google AdWords, we are hoping to reach anyone searching the Internet for HYIPs before they fall into the hands of con artists,” Gannon said.

    FINRA’s campaign occurs against the backdrop of remarkable law-enforcement actions against the alleged Legisi Ponzi scheme pushed by Matt Gagnon of Mazu.com, the alleged Pathway To Prosperity (P2P) Ponzi scheme pushed on forums such as ASA Monitor, MoneyMakerGroup, Talk Gold and MyCashForums, and the collapse of an HYIP known as Genius Funds.

    It also occurs against the backdrop of “prelaunch” buzz surrounding a mysterious program known as WebsiteTester.biz, which is spreading virally on the Internet through electronic news releases, references on promoters’ websites and daily updates on Twitter.

    Promoters’ advertising is heavy for WebsiteTesterBiz, despite the fact the company’s domain name is registered behind a proxy, its purported parent company’s domain name is registered behind a proxy and there is a paucity of any verifiable information about either firm.

    FINRA specifically referenced the alleged P2P Ponzi in its educational materials. It also provided a link to information published about the collapsed Genius Funds HYIP by the British Columbia Securities Commission. Alarmingly, FINRA said the Genius Funds’ fraud costs investors a staggering $400 million.

    Federal prosecutors who filed criminal charges against P2P operator Nicholas Smirnow declared in May that “[a] large percentage, if not all, HYIPs, are Ponzi schemes.”

    In its resource material, FINRA is building on that theme.

    “[V]irtually every HYIP we have seen bears hallmarks of fraud,” FINRA said. “We are issuing this alert to warn investors worldwide to stay away from HYIPs.”

    P2P gathered more than $70 million. Legisi also gathered more than $70 million, according to court records.

    Separately, the alleged AdSurfDaily autosurf Ponzi scheme gathered at least $80 million and perhaps $100 million or more, according to records. Autosurfing is a form of HYIP fraud. The U.S. Secret Service acted against ASD in August 2008.

    In February 2010, an autosurf known as INetGlobal also came under investigation by the Secret Service. The SEC has acted against autosurfs known as 12DailyPro, PhoenixSurf and CEP, which gathered tens of millions of dollars combined — fueled by online promotions.

    Citing FBI statistics, FINRA said “the number of new HYIP investigations during fiscal year 2009 increased more than 100 percent over fiscal year 2008.”

    The regulator specifically warned about websites that “Rank the latest programs and provide details of ‘payout options.’” At the same time, it warned about sites that “Allow web designers to buy ready-made HYIP templates and set up an ‘instant’ HYIP.” Meanwhile, it warned about sites that “Blog, chat and ‘teach’ about HYIPs.”

    “Some HYIP ‘investors’ proffer strategies for maximizing profits and avoiding losses — everything from videos showing how to ‘make massive profits’ in HYIPs and ‘build a winning HYIP portfolio’ to an eBook on how to ‘ride the Ponzi’ and get in and out before a scheme collapses,” FINRA said.

    “Other HYIP forums discuss how to enter ‘test spends,’ how to identify new HYIPs to maximize one’s chances of being an early stage payee and even how to check when a HYIP’s domain name expires so you can guess how long it might pay returns before shutting down,” FINRA noted.

    One of the tips offered by FINRA was to be on the look out for “typos and poor grammar” in sales pitches.

    “This is often a tip-off that scammers are at work,” FINRA said.

    FINRA said HYIP scammers often don’t share critical information with investors.

    “HYIP operators cloak themselves in secrecy regarding who manages investor money, where the company is located or where to go to get additional information,” FINRA said.

    Claims about being “offshore” also are made, FINRA said.

    “Be aware that generally persons or firms offering securities to U.S. residents must be licensed by FINRA and registered with the SEC,” FINRA said.

    The sky often is positioned as the limit in the HYIP universe, which often relies on “online payment systems” — some of which “have been tied in recent years to criminal activity, including money laundering, identity theft and other scams,” FINRA warned.

    “High-yield investment programs (HYIPs) are unregistered investments created and touted by unlicensed individuals,” FINRA said. “Typically offered through slick (and sometimes not-so-slick) websites, HYIPs dangle the contradictory promises of safety coupled with high, unsustainable rates of return — 20, 30, 100 or more percent per day—through vague or murky trading strategies.”

    Read FINRA’s warning on HYIPs. (Make sure you click on the links in the body of the warning.)

    Read a PP Blog story about an alleged penny-stock scheme that was operated on Facebook and Twitter. Read a PP Blog story on P2P, and also one on Genius Funds and others.

    Read more about P2P. Read more about Legisi.

  • BULLETIN: Charges Upgraded Against Nevin Shapiro In Alleged $880 Million Ponzi Scheme; Prosecutors Say He Used Investors’ Money To Make Illegal Sports Bets And Enjoy Lavish Lifestyle

    Charges against a Florida man accused of running a Ponzi scheme through a bogus wholesale grocery business known as Capitol Investments USA Inc. have been upgraded, U.S. Attorney Paul J. Fishman of the District of New Jersey said.

    Nevin J. Shapiro, 41, of Miami Beach, originally was charged via criminal complaint in April with one count of securities fraud and one count of money-laundering. A grand jury now has returned an indictment charging Shapiro with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud, two counts of wire fraud and two counts of money-laundering.

    Three unindicted co-conspirators are identified in the indictment by numbers, as opposed to names. “UC 1” was described as Capitol’s chief financial officer; “UC 2” was described as a Capitol “accountant”; and “UC 3” was described as a Capitol “bookkeeper.”

    Unnamed “others” also are referenced in the indictment, which also seeks forfeiture of criminal proceeds.

    When the Ponzi was collapsing in 2009, Shapiro offered a series of explanations about why payments to investors were delayed, prosecutors said.

    “Shapiro told investors, among other things, that the payments were not being made because Capitol’s vendors were late in making payments, Capitol was suffering from cash flow problems, and that Shapiro’s accountant was on vacation,” prosecutors said.

    In reality, prosecutors said, “Shapiro misappropriated approximately $35 million in investor funds for his personal use, including paying millions of dollars in debts resulting from illegal gambling on sporting events.

    “Using investor money, he also spent, at various times, more than $400,000 for floor seats
    to watch the Miami Heat professional basketball team; approximately $26,000 per month for mortgage payments on his residence in Miami Beach, recently appraised at approximately $5.3 million; approximately $7,250 per month for payments on a $1.5 million dollar Riviera yacht; and approximately $4,700 per month for the lease of a Mercedes-Benz automobile.”

    And, prosecutors charged, “Shapiro also used stolen funds to purchase a pair of diamond-studded handcuffs, which he gave as a gift to a prominent professional athlete, as well as to make $150,000 in donations to the athletic program of a local university in the Miami area. As a result of a 10-year gift to the university, the Nevin Shapiro Student-Athlete Lounge at the university was named for the defendant. Shapiro and Capitol were forced into bankruptcy in November 2009. At that time, they owed more than $100 million to victim investors.”

    Shapiro has been jailed since his arrest in April. He potentially faces decades in prison and millions of dollars in fines if convicted on all counts.

    Court filings suggest the scheme gathered as much as $900 million.

  • BULLETIN: Pedro de Sousa, Guillermo Rosario Arrested By FBI; CFTC Lays Out Yet-Another Florida Fraud Case

    BULLETIN: Pedro de Sousa and Guillermo Rosario of FX Professional International Solutions Inc. (FXP) have been arrested by the FBI. The Commodity Futures Trading Commission (CFTC) said the men operated a Forex fraud that issued false account statements, falsely claimed no losing months between 2005 and 2008 when they had lost money in 31 of 40 months reviewed by investigators and claimed winning months through FXP dating back to 2002 — even though the company did not exist prior to 2004.

    “Rosario and de Sousa falsely represented to customers that since 2002 FXP had annual forex trading profits of 21 percent to 85 percent with no losing years,” the CFTC said.

    “However, FXP did not exist prior to 2004,” the agency said.

    Although de Sousa and Rosario sent customers false monthly account statements showing profits every month from 2005 through 2008, their forex trading “resulted in monthly losses in 31 of 40 months during this period,” the CFTC said.

    Rosario also is known as Guillermo Rosario-Colon. He lives in Coral Gables, Fla. Meanwhile, de Sousa also is known as Pedroiz J. Sanz. He lives in Orlando, according to the CFTC.

    Neither Rosario nor de Sousa was registered with the CFTC. Their company also was known as FX Professional Solutions LLC. Both entities were dissolved for failure to file an annual report, and FXP was never registered with the CFTC, the agency said.

    “Rosario asserted to one of the [c]ustomers that he had devised a system of trading forex that he was confident would, at a minimum, consistently return 20% in annual profits,” CFTC charged.

    “Beginning in May 2005 and continuing to February 2009, Defendants sent false monthly account statements to the Customers,” CFTC charged. “With very limited exceptions, these statements claimed profits of between 0.16% and 2.55% every month when, in fact, actual forex trading conducted by Defendants during this period (with or without the Customers’ funds) resulted in net monthly losses more than 75% of the time.”

    When the scheme was collapsing last year and customers were asking questions and demanding their money back, FXP acknowledged losses to customers, according to the CFTC.

    When a customer asked to see trading records, Rosario refused on the basis of “customer confidentiality,” the CFTC said.

    De Sousa, meanwhile, told customers that the company started sending out bogus account statements because it feared that acknowledging losses would lead to redemption requests it could not fund, the CFTC said.

    “In April 2009, one of the Customers asked de Sousa why FXP continued to send monthly statements indicating profitable trading during the latter half of 2008 if, in fact, FXP was losing money during this period,” CFTC said. “De Sousa replied that Rosario was afraid that if they told customers about the losses, customers would request to withdraw their money, and that Defendants would not have the funds to honor the withdrawal requests.

    “For this reason, according to de Sousa, beginning in or about September 2008,
    Defendants ‘started faking the statements’ that they sent to the Customers,” CFTC charged.

    Investigators determined that the company had been “issuing false statements from as far back as 2005,” CFTC said.

  • FIRST, TRUMP, OPRAH, APPLE: Now, PP Blog’s ‘Breaking News’ Graphic Used In Video Pitch For Data Network Affiliates’ MLM Program

    A rep for Data Network Affiliates, an MLM program, copied the PP Blog's "Breaking News" graphic and used it in a video pitch that claimed DNA offered "Branded" iPhones from Apple. Reps for the company also have claimed Oprah Winfrey and Donald Trump endorse the firm. It is common for some MLM purveyors to claim or imply business ties where none exisit as a means of disarming potential critics and of creating legitimacy by leeching off the brand names of well-known people and entities.

    A sales rep for Data Network Affiliates (DNA) used the “Breaking News” graphic from the PP Blog to supplement a sales pitch for a nonexistent cell-phone plan that  touted “unlimited” talk-and-text service for $10 a month, plus a free phone.

    The unauthorized use of the Blog’s intellectual property in a sales pitch raises troubling, new questions about the company and its purported army of multilevel-marketing (MLM) affiliates. DNA recently has claimed that churches have the “MORAL OBLIGATION” to pitch its products.

    DNA affiliates previously have implied that Donald Trump and Oprah Winfrey endorse the company. Their images appeared for 10 consecutive minutes in a YouTube video for DNA, and affiliates also have implied the company had a special “branding” deal with Steve Jobs-led Apple.

    DNA, which previously used a free Gmail address to conduct customer service, has removed the address from its website. It has been replaced by a prompt that reads in part, “All other question (sic) or issues must be submitted to Data Network Affiliates through our Customer Support area in your DNA Back office available via the Support Tab on the Main Menu in all Affiliate Back Offices.”

    There is no effective way for nonaffiliates to contact the company. Earlier this year DNA affiliates repeatedly spammed the PP Blog.

    In an undated video that promotes DNA, the Blog’s “Breaking News” graphic was used to introduce a pitch for DNA’s purported “See Through IPhone.”

    “It’s (sic) very own Branded Iphones,” the pitch crowed.

    Create your own video slideshow at animoto.com.

    Even as the PP Blog’s “Breaking News” logo is being misused in a video slideshow for DNA, the company is instructing members to “make believe” its March launch never occurred. The firm reinstalled a launch countdown timer on its website, saying it will launch July 26. DNA actually launched March 1 after missing two February launch dates. The firm asked existing members in March to reimagine the launch as a “beta test,” even though it was advertised for weeks as a full launch.

    Dean Blechman, DNA’s original chief executive officer, resigned Feb. 24. The company withheld the news of his resignation for nearly a week, and Blechman later complained about the company’s “bizarre” conduct.

    Because DNA now is advertising a July 26 launch date, incoming members may not know the company actually launched in March — after Blechman’s resignation and after he described the firm’s behavior as puzzling.

    It is not believed that DNA has any affiliation with Trump, Winfrey or Apple. It is clear, however, that a DNA pitchman in a February conference call planted the seed that the company was well-connected.

    “This is the guy,” the pitchman said of the former DNA chief.  “He rolls with the Donald Trumps; he rolls with the big boys. I mean, you know, he has [inaudible] certain people on speed dial that’s incredible.”

    Blechman resigned within two days of the pitchman’s conference-call claim.

    On March 4, in an interview with the PP Blog, Blechman complained about DNA “bull” from a “backdoor guy.”

    He also complained that the company misspelled his name after finally announcing his departure six days after he left and then mangled the facts surrounding his departure.

    Weeks after Blechman resigned, the company suddenly announced in early April that it was in the cell-phone business, declaring “GAME OVER — WE WIN” despite the fact it had no experience in the industry. DNA started out as a company that collected license-plate information for entry in a database that purportedly could help the AMBER Alert program rescue abducted children.

    DNA declared itself the world’s low-cost leader in cell phones, advertising a “free” phone with “unlimited” talk and text for $10 a month. By April’s close, the company announced that it had not even studied cell-phone pricing before releasing its plan, withdrawing the offer and blaming its inability to deliver on a vendor it apparently had not vetted.

    Meanwhile, the firm has done other odd things. An upgrade plan it initially named the Business Benefit Package — using the acronym BBP — later was dubbed the BBB. BBB is the acronym used by the Better Business Bureau.

    “6 OF THE 10 WILL BUY THE B.B.B. AND GET 1 OTHER TO BUY THE B.B.B. WITHIN 24 HOURS,” DNA declared last month.

    Since that time, DNA has repeatedly called the BBP package the BBB package.

  • BULLETIN: Trevor Cook To Be Given Lie-Detector Test; Sentencing In $190 Million Ponzi Case May Be Delayed

    BULLETIN: The FBI will administer a lie-detector test to Ponzi schemer Trevor Cook. Meanwhile, his July 26 sentencing date may be delayed, a source told the PP Blog.

    The date upon which the test will be administered was not immediately clear. The source, however, suggested that Cook could be subjected to the polygraph as early as tomorrow.

    Under the terms of Cook’s April agreement in which he pleaded guilty to mail fraud and tax evasion in a $190 million Ponzi scheme case involving more than 1,000 investors, Cook is required to take a polygraph exam “[i]f requested by the government.”

    Victims have expressed fears that Cook, 38, has hidden money from the scheme and could emerge from prison in his early sixties to reclaim the loot. The scheme was operated out of Minneapolis.

    R.J. Zayed, the court-appointed receiver in the case, has recommended that the government administer the lie-detector test, according to his website.

    Victims arranged a meeting with prosecutors, and the polygraph became a topic of conversation, according to a source who has knowledge about the meeting. Prosecutors have instructed the FBI to administer the test.

    The Cook case has turned into an international paper chase. Zayed has served court orders on more than 400 financial institutions.

    “We also have served subpoenas on approximately 250 individuals and institutions,” Zayed noted on his website. He added that he expects investor losses to top $139 million.

    FBI Director Robert Mueller has warned Congress at least twice this year about the increasing complexities of white-collar crime, including criminals’ reliance on shell companies and a “shadow” banking system to frustrate efforts to detect and unravel schemes.

    Cook was at the center of an international fraud scheme, part of which involved companies with confusingly similar names, according to court filings.

    Victims have said they fear he is incapable of telling the truth.

  • EDITORIAL: MLM’s Great Race To The Bottom? While FTC, SEC, CFTC Warn About Affinity Fraud, Data Network Affiliates Says Its Mortgage-Reduction Program Is A ‘Church Fundraisers DREAM Come True’

    Apparently tithing, bake sales, quilting bees, church-sponsored dinners, flea markets and car washes by Christian teens to raise money for projects have gone the way of the dinosaur.

    Building on an earlier claim that churches have a “MORAL OBLIGATION” to pitch its purported mortgage-reduction program, Data Network Affiliates (DNA) now says the program is a “Church Fundraisers (sic) DREAM Come True.”

    Some DNA members are describing the program as a “Crusade to Help American Families Keep their Homes.”

    Just when you think you’ve seen it all in MLM, the company also claims it has been asked to sell “Funeral Caskets MLM”-style. In a pitch to members, DNA compares itself favorably to “FACEBOOK, GOOGLE & WALMART…”

    The company says churches can benefit from its bid to rid the mortgage world of “toxic” assets, defining its “exciting DNA Mortgage Reduction System” as the “ONLY ONE OF IT’s (sic) KIND” — one that allows “DNA to pay out $300 on The Front End in a TEN LEVEL PAY PLAN and up to $1600 on The Back End in a TEN LEVEL PAY PLAN.”

    “The line for DNA introducing products and services will be just as long” as the lines at Walmart, the company says. “Yesterday we got a call to sell Funeral Caskets MLM…”

    We wonder if selling human body parts MLM-style will be next — and we wonder if livers, kidneys, hearts, lungs and skin will be positioned as a moral imperative for clergy to hawk and wonderful products for churches to sell after registering as “PRO” affiliates for an opportunity to pocket commissions 10 levels deep.

    Although DNA has been pitching the mortgage-reduction program for only days, two testimonials from customers who purport to be happy DNA campers suddenly have materialized on the company’s website.

    “I was lost, and thought I had no where to go,” writes “Trish” on the website. “I was out of options then my real estate broker referred me to your program DNA Mortgage Reduction.”

    “Trish” did not identify the purported broker. Nor did “Trish” explain the purported broker’s affiliation with DNA and how DNA apparently was able in just days to gather her information, get it in the proper hands for a legal review of her case, study it for potential “DEFECTS,” conduct a “Forensic Audit,” draft the paperwork to be mailed to the lender being petitioned to write down her mortgage, wait for the lender’s presumably favorable response after assessing the value of the property and its legal position after being slapped by DNA’s paperwork, arrange for new loan documents to be drafted and vetted by attorneys on both sides, attested to by a notary and formally signed by all parties.

    Regardless, “Trish” described her DNA experience as a “miracle,” claiming that “I now have a new mortgage and my home is $24,000.00 lower principal balance. I am saving over $300.00 a month.”

    Before concluding her testimonial Trish made sure she thanked “Principal Mortgage!” It is unclear if “Principal Mortgage” is the name of DNA’s vendor.

    Meanwhile, in a testimonial purportedly authored by “Nichole,” the “DNA Mortgage Reduction” program and a person named “Mike” were given credit for saving “Nichole’s” home after she “prayed” about the matter.

    “I owe a lot to DNA Mortgage Reduction,” wrote the purported “Nichole.”

    “I now am secure in my home with a affordable mortgage and my kids do not have to move,” Nichole offered.

    Things apparently happened quickly for “Nichole.”

    “When I had gotten letters from the attorney that was going to my bank and copies from the bank responding I knew I was going to all right,” Nichole wrote. “They did exactly what they promised and lowered my principal balance and interest rate.”

    DNA has been pushing the purported mortgage-relief program for only days, including over the long July 4 weekend into which a U.S. banking holiday was sandwiched — and yet both “Nichole” and “Trish” claim their reliance on DNA has resulted in new mortgages with favorable terms.

    Incongruously, DNA’s own website says the process “takes 90 to 120 days.

    “The Lender will have 20 business days per RESPA to respond to the written request and 60 business days to resolve/settle this matter,” DNA says.

  • WANTED: Feds Ask For Assist In Locating Accused Pyramid Schemer Jason P. Unangst; Missing Indictee Listed As ‘Fugitive’ After Hatching Plot To Sell Mobile Homes To Hurricane Victims

    A Pittsburgh-area man indicted in June 2009 is now listed as a fugitive in a pyramid-scheme and money-laundering case, federal prosecutors said.

    Jason P. Unangst, 34, formerly lived in the Pittsburgh suburbs of McCandless Township and Wexford. His last verifiable address was listed as Virginia Beach, Va., prosecutors said.

    He was indicted on charges of defrauding investors of “at least $1,987,060 by devising a scheme to persuade prospective investors to invest money into a purported mobile home venture, which was actually a pyramid scheme,” prosecutors said.

    Part of his sales pitch centered on his purported ability to sell mobile homes in areas of the United States ravaged by hurricanes, thus returning handsome profits to investors who provided cash for the deals, according to the Pittsburgh Tribune-Review.

    Unangst faces a prison term of up to 150 years if captured and convicted on all of the charges. The IRS Criminal Investigations Unit conducted the probe that resulted in the indictment.

    Unangst is a while male, listed as 6 feet tall with brown eyes. Anyone with knowledge of Unangst’s whereabouts is asked to contact IRS‑CI at 412‑395‑6748.

  • UPDATE: Delaware AG Beau Biden Says Credit USA Pyramid Scheme Cost Two State Residents More Than $100,000; Victims Asked To Contact Prosecutors

    The alleged Credit USA Inc. multilevel-marketing (MLM) pyramid scheme cost two Delaware residents more than $100,000, Attorney General Beau Biden said.

    Biden has asked other potential victims to contact his Investor Protection Unit at 302-577-8424.

    A state indictment announced two days ago charged Terrel Alexander, 41, Nicole Alexander, 41, and William Love III, 39, with Racketeering, Conspiracy to Commit Racketeering, Securities Fraud, Theft, Sale of Unregistered Securities and Acting as an Unregistered Broker/Agent.

    Terrel Alexander lists an address in Wilmington, Del. Nicole Alexander, his ex-wife, lists an address in Mount Lauel, N.J., as does Love III.  Although Credit USA was registered in Delaware, the scheme was conducted from headquarters in New Jersey and Pennsylvania, prosecutors said.

    “With [the] indictment we’re holding these defendants accountable for cheating Delawareans out of their money,” Biden said.

    Even as a grand jury in Kent County was handing up the criminal indictments, prosecutors in New Jersey were filing civil allegations against Credit USA for selling unregistered stock and transacting in securities without being registered.

    Delaware prosecutors described each of the defendants as a “principal” of Credit USA. In 2008, the company was named in franchising allegations in Wisconsin amid assertions it offered an investor rights to the entire state for $250,000, including a “non-refundable deposit” of $125,000.

    Credit USA was not authorized to sell franchises in Wisconsin, according to the state Department of Financial Institutions, Division of Securities.

    The Delaware indictment charges that Credit USA purported to offer “credit repair products,” but that the company operated as a “pyramid scheme designed to personally enrich the three defendants.”

    Read information from the FTC on credit-repair scams.

    Supplement your knowledge by reading information from the FTC on mortgage-relief, loan-modification and foreclosure-rescue scams, which sometimes accompany credit-repair schemes.

  • MLM Firm Credit USA Inc. Hammered By State Attorneys General Amid Pyramid Scheme, Securities Allegations; Terrel Alexander, Nicole Alexander, William Love III Indicted

    UPDATED 3:07 P.M. EDT (U.S.A.) State prosecutors in Delaware and New Jersey have lowered the boom on an alleged multilevel-marketing (MLM) pyramid scheme known as Credit USA Inc.

    Credit USA purportedly sold credit-repair and “identity protection” services, and operated the company to enrich three criminal defendants unjustly, prosecutors said.

    Criminal indictments were handed up in Delaware against Terrel Alexander, 41, of Wilmington, Nicole Alexander, 41, and William Love III, 39, of Mount Laurel, N.J. The criminal charges were brought by the office of Delaware Attorney General Beau Biden.

    Among the charges were racketeering, conspiracy to commit racketeering, securities fraud, theft, selling unregistered securities and conducing business as unregistered brokers or agents.

    Meanwhile, New Jersey Attorney General Paula T. Dow sued the company and Terrel and Nicole Alexander amid allegations of selling unregistered stock and transacting in securities without being registered. Nicole Alexander is the ex-wife of Terrel Alexander.

    “We’re taking action on behalf of the investors who suffered losses when these defendants allegedly broke our state securities laws,” Dow said.

    New Jersey officials estimated that “at least 100 investors” paid Credit USA for “shares” in the firm.

    Part of the scheme was to entice prospects to purchase shares priced between $7 and $15 “before the company goes public on the stock exchange,” prosecutors said.

    Credit USA sold at least 28,000 shares of unregistered stock to at least 100 investors who forked over more than $125,000, prosecutors said. The scheme was selling shares as recently as September 2009, according to court filings.

    Shares were sold in “lots” of 100 to members, associates and “proposed officers” of the MLM firm, prosecutors said.

    “The investors included people who had paid to become ‘members’ of Credit USA and ‘associates,’ members who had paid an additional fee that allowed them to sell Credit USA services to others,” New Jersey officials said.

    “I applaud the coordination among the states to thwart this operation,” said Marc B. Minor, chief of the N.J. Bureau of Securities. “Credit USA’s sale of unregistered stock highlights the public’s need to be more vigilant and to check with the Bureau before investing in order to avoid being victims.”

    Authorities said Credit USA was headquartered at Two Penn Center Plaza in Philadelphia from August 2005 to May 2007. Beginning in June 2007, Credit USA operated at One Cherry Hill, Suite 400, Cherry Hill, New Jersey. The company was registered in Delaware.

    Beau Biden, the Delaware attorney general, is the son of U.S. Vice President Joseph Biden. The younger Biden only recently returned to duty after suffering what was described in May as a minor stroke.

    One of Biden’s first official duties after returning to work was to announce the indictments against the Alexanders and Love III.

    If convicted of all counts in the criminal case, the defendants each face up to 76 years in prison.

  • DEVELOPING STORY: Douglas Ballard, Banker Accused Of Lending Money For Guy Mitchell’s Alleged ‘Private Island In The Bahamas,’ Pleads Guilty; Case Part Of $1 Billion Failure Of Integrity Bank

    A Georgia banker accused of lending a now-accused Florida real-estate fraudster money to buy a “private island” in the Caribbean has pleaded guilty to conspiracy to commit bank fraud and to receive bribes, and to a single count of tax evasion, federal prosecutors said.

    Douglas Ballard, 40, of Atlanta, formerly was the executive vice president in charge of lending at Integrity Bank, a $1 billion institution that collapsed in August 2008 and was taken over by the Federal Deposit Insurance Corp. (FDIC).

    “Among the roots of our nation’s financial crisis were criminal acts by bank insiders and major borrowers that contributed to the failures or bailouts of financial institutions previously believed to be secure,” said U.S. Attorney Sally Quillian Yates of the Nortern District of Georgia.

    Ballard, Mitchell and Joseph Todd Foster, another Integrity vice president, were indicted under seal in April.  Mitchell, 50, of Coral Gables, Fla., is a developer. Foster, 42, of Atlanta, was in charge of risk management at the bank.

    Prosecutors now say Ballard has admitted that he conspired with Mitchell “to receive bribes from Mitchell and to assist Mitchell in receiving millions in loan draws under false pretenses.”

    Ballard, prosecutors said, “admitted in court to receiving over $200,000 in cash and other corrupt payments from Mitchell in exchange for Ballard’s assistance in distributing millions of loan draws.

    “During this same time, Ballard caused Integrity Bank to distribute nearly $20 million in loan proceeds to Mitchell’s personal account, much of which was allegedly used for Mitchell’s personal consumption (including the purchase of a private island in the Bahamas),” prosecutors said.

    About $7 million of the sum was related to draws on a “construction loan relating specifically to supposed construction and renovation at the ‘Casa Madrona,’ a luxury hotel owned by Mitchell in Sausalito, Calif.

    “The indictment alleges that none of this money was used for construction, and in fact no renovations had occurred,” prosecutors said.

    “While Mitchell was spending much of the loan proceeds on himself, the indictment alleges that [he] paid little, if any, of his money back to Integrity to satisfy interest payments,” prosecutors said in May.

    Instead, prosecutors alleged, “Mitchell paid interest on existing loans by taking draws or disbursements from other loans, and continually borrowed more and more money to keep paying the ever-increasing interest payments.”

    For his part, Foster pleaded guilty to securities fraud amid allegations of insider trading.

    Prosecutors said Foster “dumped his shares of Integrity stock based on his knowledge that the bank was facing an increasingly substantial but undisclosed risk that its major customer, Mitchell, would default on over $80 million in outstanding loans.”

    “These officers of Integrity Bank sure weren’t living up to the bank’s name,” Yates said in May, after the April indictments were unsealed. “While the developer was living the good life, even buying a private island with Integrity’s money, and the bank’s senior loan officer was making huge commissions and taking payoffs from the developer, the bank was dying a slow death. The defendants were going to leave the bank’s shareholders and the FDIC holding the bag, but now they are being held accountable.”

    The case was brought as part of the undertakings of President Obama’s Financial Fraud Enforcement Task Force.

    Mitchell paid about $1.5 million for the private island in the Bahamas, prosecutors said.

    “Those who line their pockets with profits of bank fraud schemes should know they will not go undetected and they will be held accountable,” said Reginael McDaniel, special agent in charge of  the IRS Criminal Investigations unit.

    No sentencing dates have been set for Ballard and Foster. Ballard faces up to 10 years in prison and a fine of up to $500,000. Foster faces up to 20 years in prison and a fine of up to $5 million.

    Mitchell has entered a plea of not guilty.

  • Irving Stitsky Sentenced To 85 Years In Real-Estate Ponzi Case; Judge Agrees With Prosecution, Calls Stitsky ‘Inveterate Con Man’

    A federal judge has thrown the book at recidivist securities fraudster Irving Stitsky, agreeing with prosecutors that he is an “inveterate con-man” and sentencing him to 85 years in federal prison.

    Separately, a New York state appeals court — acting unanimously — reinstated portions of a civil lawsuit dismissed by a judge in 2008 that alleged a New Jersey law firm aided and abetted Stitsky and others associated with the so-called “Cobalt” family of companies in perpetrating a fraud. In a lawsuit filed in 2007, Avi and Ann Oster accused Lum, Danzis, Drasco & Positan of preparing private placement memoranda (PPM) that did not initially disclose the criminal histories of Stitsky and Mark Shapiro and then backdating a PPM to disclose their histories after the FBI entered the case.

    The firm countered by arguing the plaintiffs had not pleaded their case adequately — an argument the appeals panel now has rejected. The ruling does not mean the law firm has been determined to have engaged in wrongdoing. Rather, it means the state-court lawsuit against it can proceed.

    In the federal criminal case, Stitsky, 55, of Milan, N.Y., also was ordered by U.S. District Judge Kimba Wood to forfeit $23.1 million and make restitution in the amount of $22 million. He was convicted in November, as were Cobalt co-defendants Shapiro and William B. Foster. Shapiro and Foster are scheduled to be sentenced later this month. Shapiro has two previous felony convictions — bank fraud and conspiracy to commit tax fraud — according to records.

    Shapiro, 50, lives in Avon, Conn. Foster, 70, lives in East Hampton, Mass. The Cobalt scheme operated in part from what was described as a telemarketing boiler room in Great Neck, N.Y., that duped investors into believing Cobalt was a prominent investor in Florida real estate.

    “Irving Stitsky is a recidivist fraudster who stole millions of dollars from hundreds of investors through trickery and deceit,” said U.S. Attorney Preet Bharara. “He preyed on vulnerable victims, including widows and retirees, by falsely promising guaranteed returns on their investments in Cobalt’s South Beach, Florida-based real estate scam.”

    Wood said the harsh penalties against Stitsky were warranted because he operated a “vast securities fraud preying on individuals who were, for the most part, not particularly sophisticated in investing,” prosecutors said.

    Stitsky has an extensive criminal history dating back to 1999, according to court filings. The passage below is verbatim from the appeal panel’s decision authored by Justice Sallie Manzanet-Daniels that reinstated portions of the 2007 lawsuit filed against the law firm (italics added):

    In June 2000, Stitsky was indicted for his role in yet another securities manipulation scheme. In August 2001, Stitsky pleaded guilty to criminal charges including conspiracy to commit securities fraud and was sentenced in connection therewith to 21 months imprisonment and a 3-year period of supervised release. In the SEC administrative proceeding against him in that matter, Stitsky was again found to have violated the antifraud provisions of the federal securities laws, ordered to cease and desist from any future securities law violation, and barred from participating in a penny stock offering and associating with a broker or dealer. In August 1999, Stitsky was indicted for conspiracy to commit tax fraud, money laundering and tax fraud. In August 2001, Stitsky pleaded guilty to conspiracy to commit tax fraud. That same month, a criminal information was filed against Stitsky for making false statements, to which he pleaded guilty. In February 2002, Stitsky was sentenced to 33 months in prison and a 3-year period of probation for both matters. In November 2003, Stitsky was indicted yet again for securities fraud, money laundering and conspiracy to commit securities fraud, mail fraud and wire fraud. Stitsky was released from prison in the fall of 2004.

    Meanwhile, the SEC described Stitsky as a serial securities fraudster practiced in the art of operating “boiler rooms” designed to separate investors from their money. He was banned from the securities industry in 1998 for his conduct with New York-based Stratton Oakmont Inc., which the SEC described as “a notorious boiler-room.”

    In writing for the appeals panel that reinstated portions of the civil lawsuit against the attorneys, Manzanet-Daniels did not mince words.

    “To say that defendant attorneys merely furnished legal services to help solicit investments in the Cobalt Multifamily entities, and did not have knowledge of the fraud they helped perpetrate, is drawing distinctions based on gradations of knowledge that are simply not tenable,” she wrote. “This Court cannot and will not endorse what is essentially a ‘see no evil, hear no evil’ approach.

    “There is no principled distinction between this case and those involving auditors alleged to have falsely represented the financial health of companies and otherwise to be derelict in their duties as auditors,” Manzanet-Daniels wrote.

    The law firm previously argued that the plaintiffs had not adequately pleaded their claims. Manzanet-Daniels and the appeals panel disagreed.

    Read the opinion by Manzanet-Daniels.