Faith Sloan in a TelexFree promo. Source: YouTube.
UPDATED 8:55 P.M. EDT U.S.A. Veteran HYIP huckster Faith Sloan told a federal judge presiding over the SEC’s TelexFree case that she is a victim of the company and was duped by TelexFree executives James Merrill, Carlos Wanzeler and Steve Labriola.
And, the former Noobing, Zeek Rewards and Profitable Sunrise pitchwoman asserted, she also was duped by MLM attorney Gerald Nehra, a lawyer for TelexFree.
Sloan was among four TelexFree promoters charged with fraud by the SEC. Four executives also were charged.
“Sloan believed what Defendants Carlos Wanzeler, James Merrill, Steve Labriola and their attorney, Gerald Nehra, had told her, until TelexFree continued to miss the deadlines for the launch of its new products, which were to be the foundation of TelexFree’s growing business going forward into 2014,” Sloan said in court filings through her attorney.
Those new products, Sloan said, included “MyFinancialAdvantagePlan,” “Mobile App,” “TelexCommerce” and “TelexMobile.”
Taking a swipe at Nehra, Sloan contended that she and fellow promoters were “excited” about TelexFree after Nehra “had stood on the stage and publicly announced that TelexFree was ‘on a solid legal ground’, because they were selling a real product.”
Nehra made the remark at a TelexFree rah-rah fest in Newport Beach, Calif., in July 2013, according to YouTube videos. The remarks followed a June 2013 action in Brazil in which certain TelexFree assets were frozen and new registrations were suspended, amid pyramid-scheme allegations.
Sloan did not say why she continued to promote TelexFree with serious pyramid allegations on the table, except to suggest that Nehra’s remarks paved the way for her to continue with TelexFree. Nor did Sloan say whether her experience promoting Noobing, Zeek and Profitable Sunrise provided her any clues that something could be amiss at TelexFree.
MLM attorney Gerald Nehra offering remarks about TelexFree; Source: YouTube.
Sloan was not charged in the Noobing, Zeek and Profitable Sunrise cases. Regulators say Noobing, an HYIP that targeted people with hearing impairments, was attached to a government-grants swindle. It effectively was shut down by the FTC.
Zeek, meanwhile, was an $850 million pyramid- and Ponzi scheme, and Profitable Sunrise was a cross-border securities swindle effectively run by a ghost that potentially raked in tens of millions of dollars. Both “programs” collapsed after SEC actions.
In April 2014, the SEC described TelexFree as an epic, billion-dollar cross-border pyramid and Ponzi-swindle that engaged in securities fraud and the sale of unregistered securities. All four of the “programs” offered returns that bested Bernard Madoff on orders of between 20 and 70 to one on an annualized basis.
Regulators have been warning about HYIP schemes for years, saying they offer returns that are too good to be true and make cosmetic tweaks to dupe the masses.
Many such schemes proliferate because serial promoters turn blind eyes to obvious markers of fraud such as preposterous interest rates, a presence of a “program” on Ponzi-scheme forums, the presence of other serial fraud promoters and fractured relationships with payment vendors during the course of the fraud. The schemes pay commissions to unlicensed promoters to sell securities to recruits and typically have an illegal investment arm attached.
When a scheme collapses, serial promoters disingenuously point fingers of blame back at management. Though the blame is deserved, it ignores the promoters’ roles in driving dollars to scams.
Sloan also today accused Merrill and Labriola of threatening to boot her from the “program” after she made unflattering remarks about it — after she’d been in the “program” for a year or so and suddenly realized something was wrong at TelexFree.
“In response to her public complaints, Labriola, with the approval of the Defendant, Merrill, threatened to terminate Sloan’s relationship with TelexFree shortly before they filed for bankruptcy protection on April 13, 2014,” Sloan contended in a “verified” memorandum of law filed by her attorney. The document seeks to have the charges against Sloan dismissed.
From Sloan’s motion (italics added):
Sloan became a “promoter” of TelexFree early in 2013. Sloan attended public webinars (web-based seminars) along with thousands of other TelexFree “promoters”. During those webinars, Sloan was told by TelexFree leaders that they were growing a company based on remarkable new products such as the “MyFinancialAdvantagePlan” (MFA), “Mobile App” “TelexCommerce” and “TelexMobile”, which was built on the backbone of Sprint, Verizon, and T-Mobile. All these products were due to be launched during the last quarter of 2013. The Mobile App was touted as being on a par with “WhatsApp”, which had been purchased by Facebook for 19 billion dollars. Based on what she was told by her fellow Defendants, Sloan and her fellow “promoters” were excited about the future of TelexFree, especially after the companies’ lawyer, Gerald Nehra, had stood on the stage and publicly announced that TelexFree was “on a solid legal ground”, because they were selling a real product.
Sloan’s troubles aren’t limited to the SEC case. She’s also a defendant in at least three prospective class-action lawsuits that allege fraud and racketeering.
Nehra is accused in the class-action complaints of turning a blind eye to TelexFree’s fraud to line his own pockets and dupe the masses.
In the Legisi HYIP Ponzi case, HYIP figure Matthew John Gagnon tried a defense similar to Sloan’s defense in the SEC civil case. It didn’t work.
Gagnon was held civilly liable and eventually was charged criminally for making a secret deal with Legisi to promote its scam, which had payouts similar to TelexFree, Noobing, Zeek and Profitable Sunrise. He was sentenced to five years in federal prison.
Like the criminal side of the TelexFree case, the Legisi case was brought after an undercover investigation.
In a 29-page court order announced yesterday by the SEC, U.S. District Judge George Caram Steeh of the Eastern District of Michigan laid out the case of willful blindness against serial HYIP pitchman Matthew John Gagnon.
That case now has resulted in court-ordered judgments of more than $4.2 million against Gagnon, who also was named in a criminal complaint by the U.S. Secret Service in November 2011.
But in the HYIP sphere, which FINRA described in 2010 as a “bizarre substratum of the Internet,” not even the huge judgment against Gagnon announced yesterday appeared to unnerve the serial scammers on the TalkGold and MoneyMakerGroup Ponzi forums.
Posting as “DRdave” on TalkGold, huckster “Ken Russo” announced he’d received a new payment of $482.08 from JSS Tripler/JustBeenPaid, a “program” whose purported daily payout rate of 2 percent dwarfs the purported payout rate of Legisi, one of the “programs” that led to Gagnon’s demise.
In a March 15 conference call, Frederick Mann, the purported operator of JSS/JBP, told members that the company was making the payouts from money sent in by “new members.” Paying “old” members with money from “new” members is the central element of a Ponzi scheme.
Even as “Ken Russo” was making the announcement, the online security company McAfee was publishing a “Warning: Dangerous Site” message about the JustBeenPaid website.
“We tested this site and found it’s risky to visit,” McAfee’s Site Advisor reported.
In 2010, the SEC declared Gagnon a “danger to the investing public” for his serial promotion of scams. (See paragraph 11 of May 2010 SEC complaint.)
Assessing Gagnon more than $4.2 million in disgorgement, prejudgment interest and penalties, Steeh found that:
Gagnon promoted the Legisi HYIP online, through emails and through a forum.
Even though Gagnon promoted the program, he was not associated with a registered broker-dealer and had never been registered with the SEC in any capacity.
Gagnon understood HYIP frauds and Ponzi schemes, and yet gleaned about $3.6 million from Legisi operator Gregory McKnight and did not disclose details of his agreement with McKnight to solicit investors for Legisi.
Gagnon helped orchestrate the “massive” Legisi Ponzi scheme and initially had come into contact with McKnight after Gagnon had recruited McKnight into an MLM business that sold dietary supplements.
Legisi was selling unregistered securities.
Gagnon was selling unregistered securities.
Gagnon did not qualify investors in any way. (In essence, the only necessary qualification was to have money to send to Legisi.)
Gagnon performed no “due diligence” on the profitability of the Legisi program. He did not retain or review trading records, bank or brokerage accounts statements or e-currency account records.
Gagnon knew or “recklessly disregarded” warnings that Legisi was a scam, did not know where McKnight was keeping the money or how McKnight was calculating profits and losses.
Eventually Gagnon distanced himself from McKnight (after learning about an SEC probe, according to the agency), but proceeded to pitch other scams touting the illegal sale of securities. A twice-convicted felon was Gagnon’s alleged partner in one of the scams, but Gagnon performed no legwork up front.
Gagnon eventually learned that a man with the same name as his partner had been convicted of fraud, but “accepted” his partner’s “representation that it was not him.” Gagnon did not investigate his partner’s denials, which were false.
Gagnon then proceeded to another opportunity touting unregistered securities, effectively using the same blueprint he’d used when touting Legisi and the other scam in which his partner was a convicted felon. As in the other scams, Gagnon did no legwork and “recklessly ignored several warning signs.”
Even as he touted the third program, Gagnon had received “several” bad checks from the purported “successful” trader. Gagnon continued to tout the program.
Gagnon then touted a fourth program, apparently one operated by a Ugandan national Gagnon had met on the Internet. (Gagnon stopped promoting this program, according to the SEC, only after the agency subpoenaed his bank records.)
Gagnon has shown “no remorse” for his conduct “and has tried to downplay his culpability.”
Whether “Ken Russo” has conducted any “due diligence” on JSS/JBP is unknown. Whether “Ken Russo” has any qualifications to sell securities is unknown. Whether “Ken Russo” qualified investors in any way is unknown. Whether “Ken Russo” retained or reviewed JSS/JBP records, bank or brokerage accounts statements or e-currency account records is unknown.
What is known is that “Ken Russo” proceeds from scheme to scheme to scheme.
“I would caution everyone not to listen to anyone who is posting negative comments about this program,” “Ken Russo,” posting as “DRdave” on TalkGold, urged today. “JBP/JSSTripler has changed many lives during the past 13 months and it is one of the best programs I have seen since I first entered the industry back in 1996!”
Here, according to the SEC, is how Gagnon, who’d been pitching programs online “since at least 1997,” described Legisi:
“IN ALL OUR EXPERIENCE IF (sic) HIGH YIELD PROGRAMS THIS IS THE ONLY GENUINE PROGRAM THAT WE HAVE EVER FOUND!”
McKnight, like Gagnon, is facing millions of dollars in civil judgments. And McKnight pleaded guilty last month to a criminal charge of wire fraud.
It turned out that Legisi was not “GENUINE” at all.
Matthew J. Gagnon, an alleged web-based pitchman of Ponzi schemes and Forex frauds, has been hit with judgments totaling more than $2.5 million by the receiver in the Legisi Ponzi and fraud case. Gagnon also was charged separately by the SEC.
A web-based pitchman for the alleged Legisi Ponzi scheme has been hit with separate court judgments of $1.69 million and $810,000. Meanwhile, the court-appointed receiver in the Legisi case has hired local counsel in Oregon to pursue the judgments against Matthew J. Gagnon and Mazu Publishing Inc.
Legisi was alleged by the SEC in 2008 to have operated an international Ponzi and fraud scheme that gathered about $72 million from more than 3,000 investors. The scam was promoted on TalkGold, MoneyMakerGroup and other websites, including Gagnon’s Mazu.com.
MoneyMakerGroup’s name is referenced in federal court filings in the Legisi case — and records show that shills on TalkGold and MoneyMakerGroup sought to sanitize the scheme even as the U.S. Secret Service and the Michigan Office of Financial and Insurance Regulation were using undercover agents to gather evidence about the fraud.
The judgments against Gagnon and Mazu illustrate the legal and financial nightmares to which forums such as TalkGold and MoneyMakerGroup contribute. Meanwhile, the fact that Legisi was promoted at the forums even as it was under investigation exposes a myth advanced on such forums that investors would know in advance that a government probe of an “opportunity” was under way.
In this evidence exhibit given to a federal judge prior to the Legisi asset freeze, a Legisi prospect writes the name "Money Maker Group.com" in longhand. The prospect also wrote the name "Matt Gagnon" in longhand and a telephone number for Gagnon.
At the same time, the judgments against Gagnon destroy the myths that online promoters of securities schemes have no legal exposure and that offers positioned as “private” insulate promoters from prosecution.
Indeed, the judgments against Gagnon resulted from litigation brought by Robert D. Gordon, the court-appointed receiver in the Legisi case, in October 2009. The SEC sued Gagnon in May 2010, seven months after Gordon brought his actions.
Among the SEC’s allegations against Gagnon was that he continued to promote fraud schemes online — even after the Legisi scheme was exposed.
“Gagnon has been unrelenting in his efforts to raise money from the public through fraudulent, unregistered offerings,” the SEC said in May 2010. “He remains a danger to the investing public.”
Despite his sales pitches, “Gagnon has never been associated with a registered broker-dealer and has never been registered with the Commission as a broker or dealer or in any other capacity,” the SEC said.
After the Legisi HYIP fraud, Gagnon transitioned to pushing Forex frauds, the SEC said.
Gagnon was hit with an asset freeze after the SEC brought its action.
Records show that Legisi was among a number of “opportunities” that used E-Bullion, which was operated by James Fayed.
A jury in Los Angeles last week recommended the death penalty for Fayed for arranging the slaying of his estranged wife, Pamela Fayed.
Federal prosecutors said in December that AdSurfDaily, yet another alleged Ponzi scheme, had an E-Bullion tie. Records show that Gold Quest International, still another Ponzi scheme, also used E-Bullion.
UPDATED 12:04 P.M. ET (U.S.A.) In court filings this week in the AdSurfDaily autosurf Ponzi scheme case, federal prosecutors in the District of Columbia revealed a series of jaw-dropping numbers. The biggest of these is 500,000 — the number of pages of emails gleaned so far in the investigation, which began in July 2008.
Because prosecutors put the qualifier “at least” on the already-staggering number, it is clear the number actually could increase. Each of the pages is subject to the discovery process, meaning that attorneys from both sides and perhaps the court itself faces the monumental challenge of sifting through at least half a million pages of scheme-related correspondence.
Other big numbers in the alleged $110 million ASD Ponzi include 100,000, the number of pages of bank records, and 5,000, the number of pages of documents that emerged after the U.S. Secret Service searched ASD’s office in Quincy, Fla., and the home of company president Andy Bowdoin.
To date, investigators have identified 40,000 potential ASD victims. This number also could grow because there is reason to believe that “there may be members who provided funds to ASD but whose information ASD did not enter into its database,” according to prosecutors.
ASD’s database included information on 97,000 members. Some participants have claimed ASD actually had 120,000 members. Regardless of the final number that emerges, ASD created victims by the tens of thousands, including victims who do not live in the United States, prosecutors said.
The import — and the danger of these numbers — is that ASD is only one autosurf. There may be hundreds if not thousands of autosurfs operating in the world at any one time, along with hundreds or thousands of HYIPs. Like other autosurfs and HYIPs, ASD was promoted on Ponzi forums such as TalkGold, MoneyMakerGroup and ASA Monitor. The Ponzi pitchmen love American money, and commission-grubbing American salespeople and serial promoters who play dumb to line their pockets at the expense of their fellow countrymen specialize in spreading the misery globally.
In May, the PP Blog reported on criminal charges filed against Nicholas Smirnow, the alleged operator of the Pathway to Prosperity (P2P) Ponzi and HYIP scheme. The numbers that have emerged from that alleged scheme are equally stunning: $70 million fleeced from 40,000 victims in 120 countries from “all of the permanently inhabited continents of the world,” according to the U.S. Postal Inspection Service.
The criminal complaint filed against Smirnow specifically references the TalkGold, MoneyMakerGroup and ASA Monitor Ponzi forums — the same forums from which ASD and countless other schemes have been promoted.
Legisi, yet another alleged scheme pitched at the forums, also produced some big numbers. Among them are $72.6 million fleeced from at least 3,000 victims. Matthew Gagnon, one Legisi pitchman, netted $3.8 million alone from the scheme, according to the SEC.
So, in just the three alleged schemes referenced in this column — ASD, P2P and Legisi — the numbers shape up like this: at least $252.6 million gathered from at least 83,000 victims. If the P2P and Legisi cases are shaping up like the ASD case from the standpoint of paper production, investigators, attorneys from both sides and the courts may have to go through more than a million pages of documents and corresponding bank records to make sense of it all.
Meanwhile, the wink-nod, serial promoters continue to ply their trade on the Ponzi boards — all while the U.S. and world economies are trying to navigate the choppiest waters since the Great Depression. While the serial promoters are lining their pockets at the expense of Moms and Pops from virtually every corner of the earth, they are anticipating the danger signs consistent with the implosion of their currently favorite Ponzi — and they are preparing their next round of lies to protect their illicit profit pipeline and explain away the problems that inevitably will emerge.
Some of the professional criminals will tell their marks that it is their duty to be patient when Ponzi payments slow down. They’ll add that problems affect all enterprises regardless of size, and that it’s not unusual for payment bottlenecks to occur. They’ll explain that it likely is a problem with software or the need to acquire a new server to accommodate traffic. After all, they’ll say, “growing pains” are something to celebrate because they signal the success of the enterprise.
And the serial criminals also will talk about a doubting recruit’s duty to be loyal to the enterprise. After all, they’ll explain, the company is doing the right thing by acquiring the equipment and manpower needed to streamline operations and thus return to a normal payout schedule.
While the professional Ponzi criminals are explaining all of this, investors will become further separated from their money before the final round of excuse-making begins. Investors will be cautioned not to contact the authorities and told not to contact the payment processors. After all, the serial pitchmen will explain, if the authorities seize the cash or if the payment processors freeze the accounts, no one will get paid.
When the scheme ultimately collapses, some of the serial criminals will shrug their shoulders and feign surprise. They’ll explain why they had every reason to believe that this one was different, that they’d been assured by the Christian operator it was different. No matter, they’ll say, perhaps positioning themselves as people of faith. Recruits who invested more than they could afford to lose have only themselves to blame, they’ll claim. (This is if they call it “investing” at all; many serial criminals avoid that word like the plague. After all of these years and all of this Bible-thumping, they still apparently believe that it’s possible to skirt securities laws by avoiding the word “investment” and calling it something else.)
Then they’ll unapologetically move on to the next scam. After all, they’ll explain, they have a right to make a living. Some of them will explain that the government, which refuses to see the beauty of the autosurf and HYIP models, is to blame. Along the way they’ll create some clone promoters, and the clones will multiply. The clones will add to the purported, pro-Bible (and antigovernment chorus) — and before long, investigators trying to reverse-engineer a single case will be sifting through 500,000 pages of emails, 100,000 pages of bank records and 5,000 pages of records created as the result of the execution of a search warrant or as a result of actual documents seized.
Agents then will begin the mind-numbing and time-consuming process of identifying victims by the tens of thousands.
Some of the victims will lose their homes because they borrowed against their equity to take advantage of “bonus” ad packs and to maximize their “earnings” through “compounding.” Others will have lost savings set aside to educate their children. Still others will have lost their life savings and money set aside for retirement.
Many of the people who created all the pain will sprint back to the Ponzi forums — and the government will be left to clean up the colossal mess. The Ponzi pitchfest is in constant motion as property values decline in neighborhood after neighborhood, driven by the foreclosures glut. The Stepfords among the promoters will write their Congressman or Senator or perhaps the Inspector General at the Justice Department.
They’ll more or less say that it would be in the interests of America if the Congressman or Senator or Inspector General would see fit to fire all the prosecutors and agents who made these unseemly events occur.
And then they’ll gather up their lists of suckers and try to recruit them into yet-another MLM, autosurf or HYIP nightmare. This they will call “freedom.” Some of them will be angry. Some of them will write rambling diatribes on forums. Invective will be part of the diatribes. Some of them will call public officials “Nazis” and “Socialists,” perhaps even in the same fractured paragraph. Some of them even will try to sue the government or have the prosecutors and judges charged with crimes. They’ll talk about “treason” and high crimes against the Constitution.
What they will never do is make any sense.
It is impossible to imagine that any government agency has the resources to take down all of the corrupt MLMs, autosurfs and HYIPs. But one can imagine a systematic process by which the government identifies the serial promoters and plans a litigation strategy from which will emerge the “shot heard round the world” of corrupt online investment “opportunities.”
That day cannot come soon enough — and the numbers demand it: more than $250 million gathered from victims of just the three alleged schemes referenced on this page, perhaps 1 million or more emails and other documents produced by the investigations, at least 83,000 victims from virtually all corners of the earth, an untold number of agents/investigators from multiple government entities forced to sift though monumental piles of evidence.
It is clear that wealth is being drained by the billions. It is equally clear that vast sums of money have gone missing in the Age of Terrorism.
Clearest of all, however, is that the corrupt MLMs, autosurfs and HYIPs cannot thrive without their greedy and dangerous promoters — and that highly public lawsuits and early morning raids designed to hold the wink-nod Ponzi pitchmen accountable would send an unmistakable message that pain is in your future if you promote these criminally toxic businesses. Serial promoters deserve the same treatment as mid-level drug dealers.
No economy can thrive if a single case among thousands of potential cases is producing 500,000 pages of emails and creating 40,000 victims while consuming tens of millions of dollars — and if “shell companies,” the “shadow banking system” and wink-nod, serial promoters are driving the wanton criminality and letting the cancers metastasize globally.
Here’s hoping such an operation aimed specifically at corrupt MLMs, autosurfs and HYIPs already is under way.
Ponzi forum operator or moderator? Online HYIP aficionado? Think you’re safe pitching fraud schemes because you’re “only” a promoter or forum “expert” and not the operator of the programs?
Have a secret partnership deal with an HYIP fraudster? Using fancy, professional-sounding terms such as “due diligence” in your forum posts? Claiming you’ve done thorough research before recommending an “opportunity.”
Pitching programs that advertise unusually large returns — while at once showcasing your knowledge about investment scams and steering people away from certain programs because they sound too good to be true?
In an action that may send shockwaves across the Web world and Ponzi forums such as ASA Monitor, TalkGold and MoneyMakerGroup, the SEC has gone to federal court and filed an emergency action to halt “a series of fraudulent, unregistered securities offerings” made through Mazu.com.
U.S. District Judge George Caram Steeh of the the Eastern District of Michigan has frozen the assets of Matthew J. Gagnon, 41, of Weslaco, Texas, and Portland, Ore. Gagnon is Mazu.com’s operator.
“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.
The Legisi scheme raised about $72.6 million from more than 3,000 investors “by promising returns of upwards of 15% a month,” 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.”
Then, beginning in August 2007, “Gagnon fraudulently offered and sold securities representing interests in a new company that purportedly was to develop resort properties,” the SEC said.
In this scheme, Gagnon “falsely claimed that the investment was risk-free and ‘SEC compliant,’ and guaranteed a 200% return in 14 months. In reality, however, Gagnon sent the money to a twice-convicted felon, did not register the investment with the SEC, and knew such an outlandish return was impossible,” the SEC said.
Gagnon took in at least $361,865 from 21 investors, the SEC said.
Still unfinished, Gagnon — in April 2009 — began promoting “a fraudulent offering of interests in a purported Forex trading venture,” the SEC said. “Gagnon guaranteed that the venture would generate returns of 2% a month or 30% a year for his investors. Gagnon’s claims were false, and Gagnon had no basis for making the claims.”
Gagnon next turned to another Forex sceme, the SEC said.
From October 2009 to November 2009, Gagnon “offered another purported Forex trading venture in which he claimed to have a trader in Europe who would trade foreign currencies for investors in exchange for 40% of any profits he generated,” the SEC said. “Gagnon removed this offer from his website in November 2009 when he received notice that the SEC had subpoenaed his bank records.”
Despite his knowledge about Ponzi and fraud schemes, Gagnon repeatedly pitched such schemes, the SEC said.
“Gagnon has been unrelenting in his efforts to raise money from the public through
fraudulent, unregistered offerings,” the SEC said. “He remains a danger to the investing public.”
Despite his sales pitches, “Gagnon has never been associated with a registered broker-dealer and has never been registered with the Commission as a broker or dealer or in any other capacity,” the SEC said.
Among the people to whom Gagnon directed money was the late Bryan K. Foster, who was convicted in 1997 of five felony counts of wire fraud and sentenced to 41 months in prison. These convictions were recorded in U.S. District Court in Montana, according to records.
In 2000, Foster was convicted in Colorado of one felony count of wire fraud and sentenced to five years in prison, according to records.
Between July 13, 2007 and September 17, 2007, Gagnon sent at least $800,000 to accounts in the name of Trails Home LLC, which was controlled Foster, the SEC said. Money from the illegal Legisi program was included in the sum transferred to Foster for his purported investment program, the SEC said.
The Legisi Program
In 2005, McKnight was an underemployed General Motors worker living outside Flint, Mich., the SEC said, adding that he had financial problems.
“In December 2005, McKnight began offering and selling interests in a pooled investment program variously called Legisi.com or Legisi,” the SEC said. “McKnight promoted the offering around the globe through an Internet website at www.legisi.com,” promising monthly returns of up to 15 percent.
By February 2006, “McKnight incorporated a shell company called Legisi Holdings, LLC in the bank-secrecy haven of Nevis in the West Indies,” the SEC said.
“McKnight asserted on the Legisi website that the Legisi program was merely a ‘loan program’ through which investors would ‘loan’ money to Legisi and, in return, Legisi would pay investors high rates of interest.
But Legisi actually was “a classic pooled investment vehicle, in which investors invested money into a common venture with the expectation that the money would be used to generate profits, for McKnight and the investors, solely through the efforts of McKnight or others working on his behalf. The Legisi program was a security in the form of an investment contract,” the SEC said.
“The Legisi program was also a massive Ponzi scheme,” the SEC said.
In January 2006, McKnight and Gagnon discussed a deal by which Gagnon would promote Legisi on the Mazu.com website, the SEC said.
“McKnight and Gagnon had known each other for several years after Gagnon recruited McKnight into a multilevel marketing business called ‘Mannatech,’” the SEC said. “McKnight became part of Gagnon’s ‘down line,’ meaning that a portion of McKnight’s commissions from selling Mannatech products went to Gagnon.”
McKnight paid Gagnon “a total of approximately $4,532,512 between January 29, 2006 and April 14, 2008,” the SEC said. “All of the money Gagnon received from McKnight consisted of investor funds. There were no ‘profits’ generated by Legisi.”
Gagnon netted about $3.8 million in the scheme, the SEC said.
“On behalf of McKnight, Gagnon solicited investors around the world through the publicly available Mazu.com website,” the SEC said. “Gagnon wrote and/or reviewed and approved the content of the Mazu website. No valid registration statement was filed or was in effect with the Commission in connection with Gagnon’s offer and sale of Legisi program investment contracts.”
SEC: Forum Moderators Helped Push Ponzi Scheme
“Between approximately January 2006 and August 2007, Mazu employees working on Gagnon’s behalf and at his direction promoted the Legisi program in emails, in Mazu Business Packs and DVDs they sent to investors, and on the Legisi Forum,” the SEC charged.
“The Legisi Forum was an on-line chat room accessible through the Legisi.com website. Several Mazu employees served as ‘moderators’ on the Legisi Forum. Mazu’s support services also included answering questions over the telephone and email,” the SEC said.
Forum shills performed services for Legisi and deflected concerns when CNN carried a negative report on the company, the SEC said.
“The Mazu employees acting as moderators encouraged readers to invest in Legisi, assisted them in transferring money to Legisi, encouraged investors to bring in new investors, and offered investors personal assistance in bringing in referrals,” the SEC said. “They also encouraged investors to keep their monthly earnings with Legisi, rather than withdrawing them, in order to achieve purportedly higher returns. They made sure transfers of money between investors and Legisi went smoothly. The moderators updated investors on changes to the Legisi program like new minimum investment amounts and referral fee rules.
“The moderators made posts on the Legisi Forum to prevent and diffuse investor rumors and concerns,” the SEC continued. “After an article questioning Legisi’s legitimacy appeared on the CNN Money website on May 8, 2007, one moderator wrote, ‘I think it is worth mentioning that the Forum is probably being read by people who are not Legisi members. So let’s not raise red flags to any bulls out there shall we. . .. Of course so far as any discussion on the [CNN Money] article is concerned I’m sure that everyone is aware that Greg went into Legisi knowing the law and planning for this eventuality. So keep a cool head and stop worrying about what you should do.”
No Due Diligence
McKnight was operating a classic Ponzi scheme fueled in part by Gagnon’s cheerleading on Mazu.com, the SEC said.
Despite the relentless hype, Gagnon performed no due diligence and simply fabricated information or passed along claims as though they were factual, the SEC said.
“Gagnon did not obtain or review any of McKnight’s trading records, bank and brokerage account statements, or e-currency account records at any point prior to, or during, Gagnon’s promotion of Legisi,” the SEC charged.
“Throughout the time that Gagnon promoted Legisi, he simultaneously warned readers about a type of fraud referred to as a high yield investment program. High yield investment programs, commonly called ‘HYIPs,’ typically involve off-shore companies promising very high rates of interest generated by investment in foreign currencies and a variety of other vehicles, along with repeated hyping of the legitimacy of the program,” the SEC said.
Gagnon understood the HYIP fraud universe, but nevertheless pitched Legisi, which had promoted an unusually high rate of return and had other markers of the exact kind of scam Mazu.com warned about on its website, the SEC said.
“From at least April 2006 through at least May 2007 Gagnon provided on the Mazu website an accurate description of a HYIP by stating that they (emphasis added by PP Blog):
collect funds from lenders as investment capital or deposits and promise a return that is usually extremely high in exchange for ‘borrowing your money.’ The result? Generally after a period of time you are free to withdraw your capital and or your profits, or you can ‘reinvest’ them to earn additional profits. In theory, the compounding can create a crazy return on investment given time . . .
* * * * * *
Sadly, most HYIPs are offshore fronts that don’t lie within U.S. jurisdiction and you have no recourse when they steal your money. Most HYIPs realize this and they bank on it! They’ve got you right where they want you. Most also allude to making their profit in legitimate investment vehicles when in reality, you have no idea where they’re making their profit.
And Gagnon also warned readers about Ponzi schemes.
“On the Mazu website between at least April 2006 and May 2007, Gagnon accurately described a Ponzi scheme as an ‘investment program touting huge returns in a short period of time. Any returns someone sees are paid out of monies gathered from the investors. No real product, investment, or business takes place,’” the SEC said.
The Legisi Ponzi began to unravel by September 2007, its decay brought about in part by “the federal seizure of an e-currency provider that was holding $1.8 million for McKnight,” the SEC said.
Gagnon then “attempted to extort money from McKnight,” the SEC said.
“On September 9, 2007, Gagnon informed McKnight that he was ending the partnership between Legisi and Mazu,” the SEC said. “Gagnon offered McKnight a choice: send Gagnon and several of Gagnon’s associates approximately $2.5 million, tell the Legisi members that Gagnon was starting a real estate fund, and that Mazu and Legisi were parting amicably, or Gagnon would email the entire Legisi membership and tell them ‘the truth’ about McKnight’s fraud.”
