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Tag: FINRA

  • MORE BAD NEWS FOR PONZI PURVEYORS: Upstart Ponzi Operator Sued By SEC After Assists From FINRA, Texas State Securities Board, Agency Says; Gregory Todd Froning Confronts Civil, Administrative Actions

    EDITOR’S NOTE: Online HYIP and autosurf purveyors and their fellow “mini-Madoffs” may find the brick-and-mortar case of Gregory Todd Froning at once unsettling and instructive. In yet-another development apt to create unease in the HYIP and autosurf Ponzi worlds, a new court action by the SEC demonstrates that even “small” operators in the universe of Ponzi fraud may find their names on a court docket or named respondents in an administrative action — or both.

    Here, now, the story about the allegations against Gregory Todd Froning.

    A Greater Dallas financial adviser has been accused by the SEC of misappropriating more than $800,000 from investors in an upstart Ponzi scheme.

    Gregory Todd Froning, 48, of Coppell, Texas, was accused yesterday of placing investors funds in a “personal bank account” and using them to make Ponzi payments, withdraw cash, make online purchases and buy groceries, meals and unspecified “adult entertainment.”

    The SEC filed a lawsuit against Froning that seeks the return of ill-gotten gains from the alleged scheme, which involved the sale of “promissory notes” for Wealth Planning Partners LLC. The agency said it was assisted in the probe by the Financial Industry Regulatory Authority (FINRA) and the the Texas State Securities Board.

    Froning also faces an administrative action by the SEC.

    Investigators said Wealth Planning Partners was a “now-defunct financial planning company” operated by Froning.

    “Froning never disclosed that he was using funds in this fashion and has never repaid a single promissory note,” the SEC said. “Further, Froning never disclosed to investors that Wealth Planning Partners had no significant business and was essentially worthless.”

    Investors were denied information critical to making an informed investment decision, the SEC alleged.

    Indeed, the agency alleged, Froning did not disclose that “his own financial condition was extremely precarious due, in part, to pending IRS liens.”

    Froning, who neither admitted nor denied the lawsuit allegations, has consented to a permanent injunction. He already has “agreed to an administrative order barring him from future association with any broker, dealer, or investment adviser,” the SEC said.

    Lack of disclosure is a common element in both brick-and-mortar and online fraud schemes that promise investors returns or interest payments. Froning’s case demonstrates that such schemes may attract the attention of multiple regulatory agencies and that operators may confront securities litigation on multiple fronts.

    Despite claims on Ponzi HYIP and autosurf forums that promoters have conducted “due diligence” on operators and that “payments” received from the operators are “proof” that no Ponzi scheme exists, it often is the case that the claims of “due diligence” are false and that “payments” participants received came from other investors and were designed to lull participants into a false sense of comfort to mask the nature of the scheme.

    It also often is the case that claims of “due diligence” can’t pass the giggle test because promoters have no access to legitimate financial statements, repeat lies told by other promoters or rely exclusively on false representations by Ponzi purveyors.

    Froning “diverted investors’ proceeds to a personal bank account and used them both to pay personal expenses and to make Ponzi payments to some investors,” the SEC alleged.

    Like Froning’s purported investment-advisory business, virtually all HYIP and autosurf companies can be viewed as “essentially worthless.” Not only are they insolvent out of the gate, their unfunded liabilities expand rapidly, and operators rely on a shell game to create the illusion of sustainability and legitimate commerce.

    HYIPs and autosurfs are infamous for changing rules on the fly, providing “training” that encourages participants not to withdraw money or withdraw it in small increments as a purported means of maximizing “earnings,” treating liabilities as assets and disappearing with vast sums of money.

    About 15 investors were affected by the alleged Froning brick-and-mortar Ponzi, according to the SEC. Some online Ponzis have mushroomed to gather tens of millions of dollars and have affected tens of thousands of investors, according to court filings.

    The Froning case also turns yet-another online myth on its head: that regulators never bother to investigate “small” Ponzi operators and that small operators don’t have to comply with regulations.

  • Judge Extends Asset Freeze In Matt Gagnon Fraud Case; Issues Order To Preserve Evidence And Require Weekly Financial Report To SEC

    Matt Gagnon of Mazu.com.

    A federal judge has extended the freeze on the assets of a website operator accused by the SEC of shilling for a Ponzi schemer and then trying to extort money from the schemer when the fraud was collapsing.

    Severe restrictions placed on Mazu.com operator Matt Gagnon by U.S. District Judge George Caram Steeh of the Eastern District of Michigan illustrate the financial and legal dangers of using the Internet to promote murky businesses. At the same time, orders issued by Steeh destroy myths advanced on Ponzi forums that website operators are insulated from prosecution and that their business contacts and customers cannot be sucked into a Ponzi probe.

    Demonstrating the life-altering nature of Ponzi schemes and the monumental legal entanglements and inconvenience that flow from such schemes, the judge also ordered Gagnon to submit a “sworn” statement “each Friday” to the SEC. The order requires Gagnon to account for “all funds received” during the week, including funds received “by others on his behalf.”

    Steeh also ordered Gagnon and his “officers, agents, servants, employees, attorneys, nominees, banks, brokers, dealers, financial institutions, and those persons in active concert or participation with any one or more of them” not to destroy evidence.

    Steeh’s order applies to “books, records, documents, correspondence, ledgers, accounts, statements, files, electronically stored information, and other property of or pertaining to the Defendant,” regardless of the location of the information.

    At the same time, the judge ordered expedited discovery in the case and freed up $2,000 for Gagnon “to pay living expenses.”

    Gagnon was accused in May of using his website to pitch the alleged Legisi HYIP Ponzi scheme, which the SEC described as a $72.6 million fraud. The judge’s orders followed on the heels of an awareness campaign by the Financial Industry Regulatory Authority (FINRA) to educate the public about HYIP schemes and the filing of criminal charges by the U.S. Postal Inspection Service against Nicholas Smirnow, accused of operating a $70 million Ponzi HYIP scheme known as Pathway to Prosperity (P2P).

    FINRA issued its HYIP warning on July 15, calling the HYIP universe a “bizarre substratum of the Internet” and saying “HYIPs are old-fashioned Ponzi schemes dressed up for a Web 2.0 world.”

    In May, federal prosecutors declared in court filings in the P2P case that “[a] large percentage, if not all, HYIPs, are Ponzi schemes.” In its HYIP alert, FINRA built on that theme, declaring that “[v]irtually every HYIP we have seen bears hallmarks of fraud” and noting that schemers were using websites, forums and social-media sites such as Twitter and Facebook to spread Ponzi misery globally.

    “From January 2006 through approximately August 2007, Gagnon helped orchestrate a massive Ponzi scheme conducted by Gregory N. McKnight . . . and his company, Legisi Holdings, LLC,” the SEC said.

    “Gagnon promoted Legisi but in doing so misled investors by claiming, among other things, that he had thoroughly researched McKnight and Legisi and had determined Legisi to be a legitimate and safe investment,” the SEC said.

    Among other things, the SEC alleged that Gagnon “had no basis for the claims he made about McKnight and Legisi.

    “Gagnon also failed to disclose to investors that he was to receive 50% of Legisi’s purported ‘profits’ under his agreement with McKnight,” the SEC said. “Gagnon received a net of approximately $3.8 million in Legisi investor funds from McKnight for his participation in the scheme.”

    In its complaint against Gagnon, the SEC alleged he moved from one fraud scheme to the next and even had promoted a scheme operated by the late Bryan K. Foster, a convicted felon. Some of the money from the alleged Legisi Ponzi scheme ended up in the control of Foster, who was running a purported investment program of his own.

    The allegation that proceeds from one fraud scheme ended up as proceeds of a second scheme demonstrates the interconnectivity of schemes in the age of the Internet.

    “Gagnon has been unrelenting in his efforts to raise money from the public through fraudulent, unregistered offerings,” the SEC said in May. “He remains a danger to the investing public.”

    See earlier story titled “Requiem For The Forum Pimps . . .”  The story discusses some of the history of the Legisi Ponzi case.

  • Clawback Actions Begin In Trevor Cook Case; Receiver Says Millions Of Dollars Of ‘Preferential Transfers’ To Investors Occurred After SEC Paid ‘Surprise’ Visit

    EDITOR’S NOTE: R.J. Zayed, the court-appointed receiver in the Ponzi and Forex fraud case brought by the SEC and CFTC against Trevor Cook and Pat Kiley, has said many investors were made destitute by the scheme. Not all investors lost their money, however. Yesterday Zayed filed petitions to claw back millions of dollars in “preferential transfers”  made to investors as the scheme allegedly was unraveling.

    Zayed, who is seeking to make victims as whole as possible, also filed actions against two banks to recover mortgage payments made by Cook on two Minnesota properties. All in all, the clawback actions are targeted at 22 individuals or entities on the legal theory they are not entitled to benefit from proceeds that flowed from Cook’s illegal scheme. The precise number entities or people who allegedly received tainted money is not known. One of the investors named in the clawback actions was the grandmother of a Cook employee, according to court filings.

    Chief U.S. District Judge Michael J. Davis has given Zayed the authority to pursue “any third party recipient of asset transfers from Cook or any named Receivership entity,” meaning more clawback actions could be in the offing as the probe by the receivership continues.

    Here, now, the clawback story . . .

    Acknowledged Ponzi swindler Trevor Cook knew in 2008 that Crown Forex S.A., a Swiss entity in which the CFTC alleged Cook held a majority ownership stake, “was insolvent and incapable of paying its investors,” according to new petitions filed by the court-appointed receiver in the case.

    And Cook also knew that the Financial Industry Regulatory Authority (FINRA) was asking questions as early as April 2009. “No later” than May 2009, according to receiver R.J. Zayed, Cook knew Swiss regulators had placed Crown Forex S.A. in “liquidation.”

    On June 22, 2009, according to Zayed, “the SEC conducted a surprise investigation of the scheme’s headquarters and personally served Cook with a subpoena.”

    Up to six SEC attorneys and accountants were poking around in Minneapolis for five days in June 2009. The clamor surrounding the scheme set in motion a series of events in which certain investors with links to Clifford Berg, a carpet salesman and Cook’s father-in-law, suddenly began to receive back their money, according to court filings.

    Neither Berg nor the investors has been accused of wrongdoing. Events in the case demonstrate the risks that confront both investors and individuals who drive business to Ponzi schemes and other forms of investment fraud. Neither Ponzi principal nor interest is safe because the money comes at the expense of other investors, not as a result of legitimate commerce. Zayed is seeking to force Berg, his wife and the investors to return money traced to the scheme. The Bergs already have agreed to return $948,848.36.

    Clifford Berg worked as a Cook recruiter and brought investors’ money into the scheme, according to court filings. The Bergs also were investors.

    One of Cook’s investors is believed to be the husband of Berg’s dental hygienist, who learned of the purportedly profitable trading program from Berg. Other investors are believed to have known Berg from the carpet business, according to Zayed.

    On June 29, seven days after the SEC appeared unannounced in Minneapolis, the investor married to the dental hygienist received two checks totaling $916,570 from the scheme, according to court filings. The investor had placed $785,162.44 in the program and did not complete paperwork for the withdrawal.

    Some of the investors received calls from Berg. One of the investors placed $147,233 in the program. Although he did not request a withdrawal, he received a check for $360,700 on June 29, 2009, a week after the SEC appeared, according to Zayed.

    Another investor believed to be an acquaintance of Berg placed $1,519,999.51 in the program. This investor called Cook “during the last week in June 2009” to inquire about investing money for his nephew, according to court filings.

    Cook told the investor that there were problems in “another part” of the company, according to Zayed.

    On the very next day, according to Zayed, the investor called Cook and requested withdrawal of his money, but did not complete paperwork for the withdrawal.

    Regardless, Berg “delivered” a check to the investor at his place of business “[s]everal days later,” according to Zayed. The investor’s wife also was an investor and also received a check. Together the couple had placed more than $1.62 million in the program. The total paid to the couple exceeded their outlay, according to Zayed.

    Another investor believed to be a Berg acquaintance from the carpet business placed $618,000 in the program. This investor — in late June 2009 — received a call from Berg during which Berg told him that there were “problems with the company,” according to Zayed.

    “Berg also mentioned a possible investigation,” Zayed said.

    The investor then went to Berg’s house to pick up a check for $747,500, according to Zayed. The check was dated June 29, a week after the SEC came to town. The investor then received three smaller checks, including a check for $2,200 drawn on a gold and bullion business, a check for $2,100 drawn on the bank account of Cook’s brother and a check for $2,100 drawn on the account of Oxford Global Partners LLC.

    Another married couple believed to be acquaintances of Berg invested $243,500 in the program, according to Zayed. Although the husband and wife requested no withdrawals, Berg contacted them in late June 2009, telling the husband that accounts had been closed and that checks were in the mail, according to Zayed.

    This couple received a total of $280,950 in three separate checks after the SEC came to Minneapolis, Zayed said.

    On June 28, another Berg acquaintance received a call from Berg. This person had placed $375,000 in the program and did not complete paperwork for a withdrawal.

    Berg told this investor that there was going to be “some sort of investigation,” according to Zayed. The investor later received a check for $413,600. The check was dated June 29, seven days after the SEC appeared in Minneapolis.

    Yet another investor believed to know Berg from the carpet business plowed $752,134 into the program, according to Zayed.

    This investor had “received a call from Berg” and was told  “that there was some kind of investigation” and that Berg had “cashed everyone out,” according to Zayed.

    Berg then “delivered” two checks totaling $795,911.53 to the investor, according to Zayed.

    It appears as though Berg’s supervisor also was an investor, and placed $250,000 in the program, according to Zayed. The grandmother of a Cook employee also was an investor, placing $102,000 in the program.

    When the grandmother “saw a newspaper article regarding the Receivership Entities and mentioning lawsuits filed against them,” she called her grandson  “and told him to get her money out,” according to Zayed.

    Each of the investors named clawback targets “received payments preferentially over hundreds of other investors who were defrauded by Cook and unable to withdraw the money they had invested in the Trading Program,” Zayed said in court filings.

    Read the clawback petition filed by Zayed against 20 investors. Read an earlier filing against the Bergs.

  • THE MODERN PONZI: Federal Judge Orders Parties Not To ‘Harass’ Receiver In Mantria/Speed Of Wealth Case; Dozens Of Companies Now Ensnared In Litigation

    Mantria CEO Troy Wragg in a music video by ICEBLOC.

    A federal judge has issued an order that effectively puts a court-appointed receiver in control of dozens of entities related to Mantria Corp. and Speed of Wealth LLC in a search for “recoverable assets.”

    One of the receiver’s duties is to determine if fraudulent transfers occurred between or among companies, according to the order.

    The order, which is designed to prevent the dissipation of assets and maneuvering to hide or transfer money, is breathtaking because it covers not only Mantria and Speed of Wealth, but also “all of their subsidiaries, parent companies, and. . .  interests in any affiliated entities of any kind.”

    All in all, the order applies to a staggering total of at least 55 entities, a figure that demonstrates the enormous task of unraveling a modern-day fraud amid a maze of corporations.

    The SEC sued Mantria and Speed of Wealth in November, amid allegations that Mantria was running a “green” Ponzi scheme that focused on biochar and a “carbon negative” housing community in rural Tennessee  that purported to be environmentally friendly. Speed of Wealth allegedly helped Mantria get investment clients.

    Appointed receiver in the case was John Paul Anderson of Alvarez & Marsal Dispute Analysis & Forensic Services LLC.

    U.S. District Judge Christine M. Arguello listed dozens of names, perhaps signaling that the order could become even broader by noting that it was “not limited to” the names on the initial list. She also ordered Anderson to come up with a liquidation plan and warned the entities and their agents not to meddle in receivership affairs.

    Anderson was granted the authority to seek the court’s permission to place the entities in bankruptcy if the circumstances warrant such an approach. Arguello minced no words when ordering parties not to meddle. She specifically warned them not to “harass” Anderson or interfere in his duties as receiver (italics/bold added).

    “The Receivership Defendants and all persons receiving notice of this Order by personal service, facsimile or otherwise, are hereby restrained and enjoined from directly or indirectly taking any action or causing any action to be taken, without the express written agreement of the Receiver, which would:

    A. Interfere with the Receiver’s efforts to take control, possession, or management of any Receivership Property; such prohibited actions include but are not limited to, using self-help or executing or issuing or causing the execution or issuance of any court attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with or creating or enforcing a lien upon any Receivership Property;

    B. Hinder, obstruct or otherwise interfere with the Receiver in the performance of his duties; such prohibited actions include but are not limited to, concealing, destroying or altering records or information;

    C. Dissipate or otherwise diminish the value of any Receivership Property; such prohibited actions include but are not limited to, releasing claims or disposing, transferring, exchanging, assigning or in any way conveying any Receivership Property, enforcing judgments, assessments or claims against any Receivership Property or any Receivership Defendant, attempting to modify, cancel, terminate, call, extinguish, revoke or accelerate (the due date), of any lease, loan, mortgage, indebtedness, security agreement or other agreement executed by any Receivership Defendant or which otherwise affects any Receivership Property; or

    D. Interfere with or harass the Receiver, or interfere in any manner with the exclusive jurisdiction of this Court over the Receivership Estates.

    Here is the initial list of entities covered under Arguello’s order:

    1. Mantria Realty LLC
    2. Mantria Communities Inc.
    3. Mantria Real Estate Opportunities Group LLC
    4. Mantria Investments LLC
    5. Mantria Financial LLC
    6. Mantria Capital Advisors LLC
    7. Mantria Industries LLC
    8. Carbon Diversion Inc.
    9. Mantria Records LLC
    10. The Mantria Foundation Inc.
    11. Mantria Realty FL LLC
    12. Mantria Communities LP
    13. Mantria Real Estate Opportunities Group I LP
    14. KITN Investments LLC
    15. The Mantria Renewable Energy Fund LP
    16. The Mantria Place Renewable Energy Site Development LP
    17. The Mantria Industries Hohenwald Tennessee Eco-Industrial Center Site Development L.P.
    18. Earth Mate Technologies LLC
    19. Clean Energy Components LLC
    20. EternaGreen Capital LLC
    21. The EternaGreen International Carbon Economy Network LLC
    22. EternaGreen University
    23. EternaGreen Global Corporation
    24. C&M Industrial Center LLC
    25. Mantria Industries II LLC
    26. Carbon Diversion Carlsbad New Mexico Manufacturing Plant LLC
    27. Indian Trail Estates LLC
    28. Mantria Village LLC
    29. Mantria Bluffs LLC
    30. IronBridge Properties LLC
    31. Legacy Ridge LLC
    32. Iris Village LLC
    33. Mantria Place LLC
    34. The Mantria Group LLC
    35. Mantria Indian Trail Development LLC
    36. Indian Trail Estates Phase I LLC
    37. Indian Trail Estates Phase II LLC
    38. Indian Trail Estates Phase III LLC
    39. Indian Trail Estates Homeowners Association Inc.
    40. Legacy Ridge Homeowners Association Inc.
    41. The Mantria Place Homeowners Association Inc.
    42. SOW Trust Deed LLC
    43. SOW Hard Money Loans Investment Club LLC
    44. SOW Hard Money Loans II LLC
    45. SOW Trust Deed Group II LLC
    46. Trust Deed Group I LLC
    47. SOW Hard Money 50 Economic Stimulus Investment Club LLC
    48. SOW Mantria Income LLC
    49. SOW Mantria Diversification LLC
    50. SOW Mantria 5% LLC
    51. SOW Mantria Place 25% LLC
    52. SOW Mantria 25% LLC
    53. Speed of Wealth Investments Gold Club LLC
    54. Trust Deed 3.0 LLC
    55. SOW MI 25% Sale of Systems LLC

    Arguello said she recognized “that not all of Speed of Wealth, LLC’s assets and/or business may be related, directly or indirectly, to the conduct alleged in the Commission’s Complaint.”

    Named individual defendants in the alleged $30 million fraud by the SEC in November were Mantria CEO Troy Wragg and Mantria COO Amanda Knorr, along with the company itself. Also named defendants were Speed of Wealth and its principals, Wayde and Donna McKelvy, formerly husband and wife.

    One of the companies under the Mantria umbrella was Mantria Records LLC, which purportedly promoted a hip-hop duo known as ICEBLOC.

    Two months after Troy Wragg accepted a kudo from former President Bill Clinton for environmentally friendly business practices, Wragg was implicated by the SEC in an alleged "green" Ponzi scheme. The Financial Industry Regulatory Authority (FINRA) later issued an Investment Alert warning the public about a relatively new form of fraud: “green energy investments” that trade on investors’ affinity for keeping the planet clean.

    The case became notable for reasons beyond its size and scope. Wragg, for instance, appeared alongside former President Bill Clinton at the 5th Annual Meeting of the Clinton Global Initiative (CGI) in New York Sept. 25.

    CGI had lauded Mantria in part for helping to “mitigate global warming” through its business practices. Just two months later Mantria and Speed of Wealth were accused of a colossal fraud.

    After the CGI event in New York, Mantria and Speed of Wealth seized on Clinton’s name and the names of prominent individuals who attended the event to produce marketing materials used to entice investors.

    Even after the SEC brought the charges, reporters who tried to contact Speed of Wealth received email pitches to join money-making opportunities.

    Video promotions by Mantria and Speed of Wealth were notable for dropping the names of President Obama, former U.N. Secretary General Kofi Annan, President Laurent Gbagbo of the Ivory Coast, Mike Duke, CEO of Wal-Mart, Muhtar Kent, CEO of the Coca-Cola Co. and actor Matt Damon.

    Leeching off the names of celebrities, famous businesspeople and politicians to sell fraudulent financial schemes is a common tactic among multilevel marketing (MLM) and Ponzi scammers. By implying that prominent people endorse a product or service, the fraudsters hope to turn skeptics into clients.

    Claims were made in the AdSurfDaily Ponzi scheme case, for example, that ASD President Andy Bowdoin had received an award from President George W. Bush for a lifetime of business achievement. The award proved to be the so-called Congressional “Medal of Distinction,” which is given for campaign contributions to the National Republican Congressional Committee and signifies only the ability to write a check for the purchase of banquet tickets.

    In an SEC case last month, the agency alleged that a Staten Island investment-advisory business known as Gryphon Holdings Inc. told clients that famed businessman George Soros backed the company. A purported “testimonial” from Soros was fraudulent, the SEC said.

  • FINRA/SEC Move Against New York Firm; Second Major Case In 24 Hours; Clients Suspect Colossal Ponzi Fraud At McGinn, Smith & Co.

    Another investigation into allegations of spectacular financial fraud is under way in New York. The case against McGinn, Smith & Co. of Albany is the second to rock the state in the past 24 hours.

    The Financial Industry Regulatory Authority (FINRA) filed a complaint against the company and its president David L. Smith yesterday. The SEC filed a complaint immediately on the heels of FINRA’s complaint, alleging a stunning fraud that may involve at least $120 million.

    “McGinn and Smith deceived investors about the true purpose behind these offerings,” said Andrew M. Calamari, associate director of the SEC’s New York Regional Office. “They falsely promised investors a profitable payday but secretly siphoned off money for their own payroll.”

    Multiple companies are involved, the regulators said. None of the offerings was registered, and the firm has been charged with selling unregistered securities. The SEC is seeking an emergency asset freeze.

    “[T]he debt offerings have been sold to hundreds of investors through four funds and at least 18 trusts created by MS & Co. affiliates,” the SEC said. “They made a host of representations about the extent of due diligence they had performed, among other things. Contrary to their representations to investors, McGinn and Smith used much of the money raised in these offerings to make prohibited investments in their other businesses or make unsecured loans to financially support them.

    “They also misused investor funds to pay exorbitant commission and transaction fees to their affiliated entities and make interest payments to investors in the other entities,” the SEC said.

    For its part, FINRA said “Smith and McGinn provided falsified documents, submitting backdated promissory notes for personal loans they and others previously received from two of the Related Entities.”

    The SEC added that “the full extent of the fraud is not yet known, [but] it appears that investors are currently owed at least $80 million.” Losses could total $84 million or more, according to court filings.

    Named defendants by the SEC were McGinn, Smith & Co. Inc.; McGinn, Smith Advisors LLC; McGinn, Smith Capital Holdings Corp.; First Advisory Income Notes LLC (FAIN); First Excelsior Income Notes LLC (FEIN); First Independent Income Notes LLC (FIIN); Third Albany Income Notes LLC (TAIN); Timothy M. McGinn and and David L. Smith.

    Clients became worried last year, the SEC said.

    “In 2009, Smith and McGinn received e-mails telling them the investors were wondering ‘if they’ve bought into a Ponzi Scheme,’ and a MS&Co. broker reported to McGinn and Smith that there are ‘many people who refer to our deals as a Ponzi Scheme,’” the SEC said.

    “As of September 2009, it appears that investors in the four Funds were owed at least $84 million, that the Four Funds had less than $500,000 in cash on hand, and that their remaining assets were worth only a small fraction of the amount owed to investors,” the SEC said.

    “Similarly, the Trusts have a negative equity of approximately $18 million, and have never had the ability to pay the interest rates promoted to investors and also pay back principal,” the SEC continued. “Nonetheless, McGinn and Smith have continued to raise money from investors, using similar misrepresentations, as recently as December 2009. During the first few months of 2010, contrary to representations to investors, McGinn and Smith have continued to drain what little cash remains through payment of ‘fees’ to themselves.”

    In the past 24 hours alone, investigators in New York have alleged that separate financial frauds involving multiple companies and individuals may have fleeced investors out of $101.5 million or more.

    Earlier today, federal prosecutors and the SEC moved against Gryphon Holdings Inc. and related entities of Staten Island. Five people were arrested in the case, which the SEC said involved the illicit collection of at least $17.5 million over the past three years.

  • SUNDAY NEWS AND NOTES: South Carolina Ponzi Victims Included Widows, Alzheimer’s Patients, Seniors And Amputee; ‘Shocks The Conscience,’ FINRA Says

    EDITOR’S NOTE: These briefs are based on information from recent Ponzi or fraud schemes. As noted yesterday and previously, the United States has formed a Financial Fraud Enforcement Task Force. Cases such as the ones below are part of the reason why.

    SOUTH CAROLINA AND TENNESSEE: Among the more than 30 victims in the Oren Eugene Sullivan Ponzi scheme case in South Carolina were five widows, two Alzheimer’s patients and an individual with developmental impairments, the Financial Industry Regulatory Authority (FINRA) reported.

    Separately, The Herald newspaper of Rock Hill, S.C., reported that one of the victims was a “woman in a wheelchair, legs amputated, who is retired from a Christmas ornament plant.

    “She gave Sullivan tens of thousands of dollars,” the newspaper reported.

    “At least eight of the affected clients were over 80 years old and another four were over 70 years of age,” FINRA reported. “Numerous victims considered Sullivan a close family friend.”

    Sullivan’s case “shocks the conscience,” said Susan L. Merrill, FINRA executive vice president and chief of enforcement.

    FINRA banned Sullivan, who pleaded guilty last week to mail fraud, in October. Authorities said he operated the Ponzi scheme for 20 years.

    At the same time FINRA banned Sullivan, it also banned William Walter Spencer Sr., of Franklin, Tenn.

    Over 11 years, Spencer “borrowed” nearly $2 million in a promissory notes Ponzi scheme from elderly members of his church and from customers of his employing broker-dealer, Wiley Bros.-Aintree Capital LLC, FINRA said.

    “All of the individuals from whom Spencer borrowed funds were of modest means,” FINRA said.

    Among his targets was a 62-year-old school bus driver for special-needs children who gave Spencer $60,000 after her husband’s death.

    “Spencer used the loan to repay other customers,” FINRA said. “Another customer faced the threat of foreclosure on his home due to Spencer’s failure to repay the $12,250 loan he made. To avert the pending foreclosure, Spencer used funds from another customer to make the payment owed. An 80-year-old customer loaned Spencer $20,500. She later needed to make repairs to her home, but was unable to do so because of Spencer’s failure to repay the principal and interest due.”

    Merrill did not mince words when describing the Spencer and Sullivan schemes.

    “The misconduct of these brokers was nothing short of egregious — and their financial exploitation of the elderly, the infirm and people who considered them trusted friends shocks the conscience,” she said.

    OKLAHOMA: On Nov. 25, we published an early report on an alleged financial and affinity-fraud scheme in Oklahoma that targeted ethnic Chinese. Named in litigation by the CFTC was Kenneth Lee, who was imprisoned between 1996 and 2001 after being convicted in Texas of two financial felonies.

    Lee also had a $3 million civil judgment placed against him in the 1990s in a fraud case, CFTC said. Also named in the complaint was Lee’s alleged business partner, Simon Yang, who was accused of hatching a new scheme with Lee in 2003 that targeted members of Yang’s church in Edmond, Okla.

    Information shown prospects to get them to join the scheme claimed Lee was an exceptional trader. But when investigators reverse-engineered literature about Lee’s alleged prowess, they discovered that Lee was in prison during a time in which Lee and Yang claimed Lee was “achieving great returns,” CFTC said.

    Investors were told accounts were “insured,” CFTC said. It’s a common claim in various fraud schemes, and sometimes the schemers claim or imply that banks, other lending institutions and even the government protects individual investment accounts against trading or investment losses.

    Or, put simply, the schemers say or imply there is no way an individual investor can lose because a lending institution or the government backs the program. Such claims were present in both the alleged Lee/Yang fraud scheme in Oklahoma and the alleged AdSurfDaily Ponzi scheme in Florida.

    In ASD’s case, an upline group implied that the FDIC insured individual members’ ASD accounts. The same upline group also claimed that ASD provided “shelter” from the FTC and the SEC.

    The Edmond Sun newspaper — as part of its reporting on the alleged Lee/Yang fraud — interviewed experts who said such claims should be viewed as a red flag.

    “There are never any kind of guaranteed investment returns associated with any investment account and no investment account of any kind is ever FDIC insured by the financial institution,”  Nick Massey told the newspaper.

    Massey is regional vice president of Edmond, Householder Group Financial Advisors.

    “If anyone ever suggests that, you should turn around and run, and then run to the authorities to report it,” Massey said.

    See this story to get a free PDF that compiles President Obama’s Executive Order forming the Financial Fraud Enforcement Task Force and a speech by Attorney General Eric Holder.

  • FINRA Issues Alert On ‘Green Energy’ Scams In Wake Of SEC’s Ponzi Allegations Against Mantria/Speed Of Wealth

    As the year of the Ponzi scheme comes to a close, the Financial Industry Regulatory Authority has issued an Investment Alert warning the public about a relatively new form of fraud: “green energy investments” that trade on investors’ affinity for keeping the planet clean.

    Such schemes “promise large gains from investing in companies purportedly involved in developing or producing alternative, renewable or waste energy products,” FINRA said.

    Among the companies it cited in its fraud alert was Philadelphia-based Mantria Corp., accused by the SEC last month of operating a Ponzi scheme pushed by Colorado-based Speed of Wealth LLC.

    “Right now there are a lot of legitimate stories in the news about green energy initiatives, and con artists want to leverage people’s interest in green energy to make a quick buck at investors’ expense,” said John Gannon, FINRA senior vice president for Investor Education. “There is a lot of interest in companies that claim to provide green energy, but we issued this Alert to remind investors to be vigilant about avoiding investment scams, no matter how they are packaged.”

    Citing the SEC’s Mantria case, FINRA said environmentally conscious investors should pay strict attention to how they’re approached in sales presentations. Language and hype used in pitches can provide important clues that a “fashionable hook” is being used to pick investors’ pockets.

    “[T]he Securities and Exchange Commission alleges that promoters of purported eco-friendly investment opportunities lured 300 investors into a $30 million Ponzi scheme, encouraging participants to finance such ‘green’ initiatives of Mantria Corporation as a supposed ‘carbon negative’ housing community in rural Tennessee and a ‘biochar’ charcoal substitute made from organic waste,” FINRA said.

    “Investors were falsely promised returns ranging from 17 percent to ‘hundreds of percent’ annually, FINRA continued, citing the SEC allegations. “The scammers encouraged investors attending seminars or online webinars to liquidate their traditional investments such as retirement plans, stocks, bonds, and mutual funds. Investors also were urged to borrow as much as possible against their home or business so that they could invest in Mantria. But, according the SEC’s complaint, Mantria did not generate any income from which such extraordinary returns could be paid.”

    FINRA also cited other examples of alleged “green” fraud.

    “One solar panel stock, for example, was touted as ‘set for a 200% gain,’” FINRA said. “A different stock in a China-based wind-power company was extolled as a ‘one in a million’ opportunity that could quickly climb to ’51X its current level.’

    “In another instance,” FINRA continued, “an investment-related blog praised a company with a hydrogen-based solution, claiming the stock ‘soared 500% in one week’ and suggesting a nexus between federal energy research and the company’s prospects for growth. Specifically, the blogger noted: ‘The U.S. Government has a hydrogen initiative. Billions are being spent on hydrogen technologies. [The company] is again at the right place at the right time.’”

    FINRA’s alert advises investors “to ignore unsolicited investment recommendations and to question the source of investment information. Investors should also be wary of investments that claim to be the next big thing and promise exponential returns.”

    Read the FINRA Investment Alert on “green” schemes.