UPDATED 2:18 P.M. EDT (U.S.A.) John S. Lipton, an alleged founding member and principal manager of the Genesis Fund Forex Ponzi scheme, has been sentenced to 70 months in federal prison for conspiracy to defraud the United States and tax evasion.
The Genesis Fund scheme traces its roots at least to 1994 and presaged Forex, HYIP, and autosurf fraud investigations to come. Indictments were handed up more than five years ago — in May 2005 — and the United States worked with the government of Costa Rica to arrest and extradite some of the defendants.
Prosecutors said the offshore arrests were coordinated by State Department’s Bureau of Diplomatic Security at the U.S. Embassy in San Jose, Costa Rica, which worked with the IRS attache in Mexico City, the Costa Rican Judicial Police and Interpol.
Lipton’s prosecution — and the guilty pleas of some codefendants and continuing litigation against others — lay to waste various theories on HYIP Ponzi boards that the U.S. government is powerless to act against offshore schemes and that purveyors of “private” investment opportunities cannot be prosecuted. Part of the scheme featured instructions to participants “to create nominee offshore corporations and bank accounts to receive distributions from the fund,” prosecutors said.
Nine people were indicted in the scheme, including Richard B. Leonard. Leonard, who was 71 when arrested in 2005 along with Lipton in Costa Rica, was described as a “promoter” and early investor in the scheme.
Leonard has pleaded guility to his role in the scheme, as has Teresa R. Vogt, who was 51 when indicted. Vogt was an “administrator” for the scheme and worked out of her California home, prosecutors said.
Prosecutors said the scheme started in the United States before morphing into an offshore fraud. Genesis Fund allegedly gathered more than $80 million.
“[T]o obscure the operations of the fund and to limit scrutiny of its operations by investors and the government, the defendants caused the Genesis Fund to maintain no financial statements or other statements of operation,” prosecutors said.
In April 2000, “Genesis Fund’s administrative operations were relocated from Anaheim, Calif., to Costa Rica,” prosecutors said. “At about the same time, paper records were moved to Costa Rica and electronic data on computers was destroyed.”
Genesis Fund purported to have “no reporting obligations to the IRS,” prosecutors said. “Bank accounts in the names of trusts and offshore bank accounts were allegedly used to receive distributions from the Genesis Fund that were not reported to the IRS.”
Prosecutors said “Lipton admitted that he used, and conspired with others to use, foreign trusts, corporations, and bank accounts, to receive distributions from the Genesis Fund and did not report these distributions to the IRS.
He also “admitted that he directed the transfer of approximately 19 boxes of Genesis Fund documents to Costa Rica, rather than turn them over in response to a grand jury subpoena,” prosecutors said.
It is common for HYIP and autosurf fraud schemes to claim the ventures are “offshore” and therefore “safe” from prosecution. Some purported HYIP “experts” have repeatedly urged domestic operators to move schemes offshore for the presumptive safety blanket such schemes enjoy.
Genesis Fund promised investors a return of 4 percent per month, prosecutors said.
As part of his sentence, Lipton was ordered to pay the IRS nearly $3 million in restitution.
Trials for four defendants who pleaded not guilty are set for next year. Investigators said they followed the money trail all over the world. Separate trials for the Ponzi aspect of the case also are set for next year.
“The Genesis fund, [which] operated as a Ponzi scheme, led IRS agents on a financial trail from the Caribbean to Hong Kong to Costa Rica and numerous other offshore locations around the world,” Victor S O. Song, chief of the IRS Criminal Investigation Unit, said in April.
“This signals the new era of solving global financial fraud — the veil of offshore secrecy has been lifted and the IRS will do what is necessary to expand international cooperation to obtain financial evidence,” Song said.
Genesis ceased paying investors in June 2002, just weeks after claiming the fund was worth $1.3 billion. Investors then “were allegedly lulled into believing that their investments would be recovered through a new investment plan,” prosecutors said.
It is common for investment fraud schemes to suspend payouts and then claim a new program will emerge to replace a failed one.
In August 2009, Victor Preston, another defendant in the case, pleaded guilty. Preston, 64 at the time of the indictment in 2005, is an attorney.
Read more on the indictments in the Genesis Fund case.