“The obligations to investors drastically exceed the company’s cash on hand, which is why we need to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors. ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing. In reality, their cash was just going to the earlier investor.” — Stephen L. Cohen, Associate Director, SEC Division of Enforcement, Aug. 17, 2012
Our best wishes to Stephen L. Cohen, who delivered the words above nearly four years ago. Cohen is leaving the U. S. Securities and Exchange Commission after nearly 12 years of service.
“Throughout his career at the SEC, Steve has made substantial and long-lasting contributions to the Commission’s mission,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division. “He has supervised significant cases involving a wide variety of misconduct and has been closely involved in the implementation of various enhancements to the enforcement program. His keen intellect and enthusiasm will be missed.”
One of the cases he supervised — as the SEC noted today — was Zeek Rewards.
“The staff also has recently seen what appears to be an increase in pyramid schemes . . . under the guise of ‘multi-level marketing’ and ‘network marketing’ opportunities . . . These schemes often target the most vulnerable investors, and social media has expanded their reach. The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education. We are also using new analytic techniques to identify patterns and common threads, thereby permitting earlier detection of potential fraudulent schemes.” — Andrew Ceresney, SEC Enforcement Division director, March 19, 2015
3RD UPDATE 6:09 P.M. EDT U.S.A. Bad news for “program” scammers and their willfully blind enablers: Andrew Ceresney, the director of the SEC’s Divison of Enforcement, told lawmakers on Capitol Hill today that scams using an MLM or network-marketing business model are on the radar.
In fact, according to written testimony Ceresney delivered to the House Capital Markets and Government Sponsored Enterprises subcommittee, they are enforcement “priorities” — right up there with insider trading, microcap fraud and other forms of securities fraud.
“The Division is deploying resources to disrupt these schemes through a coordinated effort of timely, aggressive enforcement actions along with community outreach and investor education,” Ceresney told the panel.
New Jersey Republican Rep. Scott Garrett chairs the panel. Rep. Carolyn B. Maloney, a New York Democrat, is ranking member.
Ceresney didn’t reference the task force in his prepared remarks today. However, the agency already has filed two actions against MLM or network-marketing schemes this year. In February, the agency sued the “Achieve Community,” alleging it was a Ponzi- and pyramid scheme that had gathered about $3.8 million and had spread on social media. One or more criminal probes related to the SEC’s Achieve investigation are believed to be under way, amid concerns Achieve was funneling scam proceeds offshore.
Also in February, the SEC sued a “program” known as Wings Network, alleging it was targeting Latino communities and that its promoters “used Facebook to publicize ‘business meetings’ that took place at hotels and other locations in Connecticut, California, Florida, Massachusetts, Pennsylvania, Texas, Georgia, and Utah.
“The promoters also set up storefronts or ‘training centers’ to lure investors into attending Wings Network presentations,” the agency charged. “For example, one promoter used a storefront in downtown Philadelphia to make presentations to prospective investors, and another promoter rented office space in Pompano Beach, Fla., and spread the word in the local Latino community to attract prospective investors to come in and hear presentations.”
Wings appears to have gathered at least $23.5 million.
In addition to targeting vulnerable population groups, Wings Network tried to sanitize itself by falsely trading on the name of the Direct Selling Association, the SEC said in court filings. Wings has been tied to two companies that used the name Tropikgadget.
Both ostensibly operated from Portugal through business entities set up in Madeira, a Portuguese island in the North Atlantic, and through Sharjah, a city in the United Arab Emirates, the SEC alleged.
Court records suggest Wings had a strong presence in Marlborough, Mass., the town from which the TelexFree MLM scheme was based. In April 2014, the SEC described TelexFree as a massive Ponzi- and pyramid scheme largely targeting immigrant populations. A court-appointed trustee says TelexFree may have gathered $1.8 billion through its pyramid scheme in about two years.
Participants hailed from dozen of countries. A partial list of U.S. participants shows many names that appear to be Latino. Trustee Stephen B. Darr said in court filings that the full list of worldwide participants “contains 1,894,940” names and spans “35,110 pages.”
A list of alleged “winners” in the 2012 Zeek Rewards scheme broken up the SEC and the U.S. Secret Service also appears to include a disproportionate share of Latino names or names from other vulnerable population groups. Zeek is estimated to have rounded up $897 million in less than two years and to have affected on the order of 800,000 victims.
Zeek’s name (through parent Rex Venture Group LLC) was referenced in a footnote and related link in today’s written testimony by Ceresney.
So was the name of CKB168, a “program” that allegedly targeted members of Asian-American communities in New York and California and was taken down by the SEC in 2013. The alleged haul was pegged at at least $20 million.
The footnote pointed to an SEC investor alert dated Oct. 1, 2013, and titled, “Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.” The alert, which has been translated into Chinese, Spanish, Portuguese, Vietnamese and Creole, has been updated to include information on “programs” such as TelexFree and Wings Network.
Though not referenced specifically in the October 2013 alert, “programs” such as eAdGear, Zhunrize and WCM777 also have encountered SEC actions. All three appear to have affected Asian population groups. WCM777 also clearly affected Latino groups and has emerged as one of the strangest MLM schemes of all time.
Some WCM777 promoters had claimed that $14,000 sent to the California-based “program” returned $500,000 in 52 weeks. WCM777 appears to have gathered more than $80 million in about a year, with the proceeds from the MLM “program” diverted to purchase golf courses, real estate and more. Tens of millions of dollars appear to have been diverted to Hong Kong.
Today’s Congressional testimony took place against the backdrop of continuing clashes between Herbalife and activist investor Bill Ackman, an Herbalife short-seller who has accused the MLM program of being a pyramid scheme that targets Latinos.
Herbalife, which was not referenced in today’s testimony, denies it is a pyramid scheme and says it is proud of its appeal to Latinos and serves the community honorably. (Ackman also isn’t mentioned in the testimony.)
Responding on web forums such as Seeking Alpha, fans of Herbalife have accused Ackman of pandering to enforcement agencies, members of Congress and Latino groups as part of a scheme to inspire investigations that would line his pockets by driving down Herbalife’s stock price.
In media accounts, Ackman has said he won’t keep personal profits if his Herbalife short pays off. At the same time, he asserts he is pursuing profit for his hedge-fund investors through a strategy that also delivers social justice.
Perhaps the only thing clear right now is that MLM, no stranger to controversy, never before has been under a light this intense.
The Capital Markets and Government Sponsored Enterprises subcommittee is under the House Financial Services Committee. The committee is chaired by Rep. Jeb Hensarling, a Texas Republican. Rep. Maxine Waters, a California Democrat, is ranking member.
EDITOR’S NOTE: The personnel information in the first section below is gleaned from public records in the SEC’s pyramid- and Ponzi case against the “Achieve Community” and alleged principals Kristi Johnson and Troy Barnes. Some of the numbered points include additional notes by the PP Blog. These notes are based on public records or information in the public domain, including a Feb. 18 statement by the SEC.
**___________________**
The U.S. Securities and Exchange Commission announced on Feb. 18 it had filed a pyramid- and Ponzi complaint that alleged securities fraud against “Achieve Community” and that a federal judge had granted an emergency asset freeze.
Supporting documents filed by the SEC paint a picture of significant legwork that took place at the agency as it studied how Achieve had evolved from its alleged start in April 2014 through the days immediately prior to the freeze. This column focuses on human assets, the public servants who played a role in stopping the harm caused by Achieve by applying their individual specialties.
The SEC assigned (at least) the following individuals to the case prior to filing a complaint under seal against Achieve and requesting an emergency asset freeze on Feb. 12:
1.)An IT specialist assigned to the Division of Enforcement in Washington, D.C. This person performed website/video-capture duties involving public sections of two Achieve sites (TheAchieveCommunity.com and ReadyToAchieve.com) and at least one YouTube video. (Longtime readers will recall the 2012 Zeek Rewards probe that led to spectacular allegations of pyramid-and Ponzi fraud also involved website capture.)
2.)A senior paralegal employed by the Division of Enforcement and assigned to the SEC’s Denver Regional Office. This person reviewed and transcribed 11 Achieve-related public video files and one public audio file. Some of the video files were on the Achieve sites. Others were on YouTube. The audio file was on the Achieve site. (A segment of a transcript shown a federal judge from the audio file shows “Rodney” serving up softball questions to Kristi Johnson and Troy Barnes, Achieve’s accused operators. The segment was on the topic of Achieve’s purported “triple algorithm.” It is referenced in “Exhibit D.” The screen shot that introduces this column is from a pdf of Exhibit D. More from Exhibit D appears in the form of a screen shot below.)
3.)An attorney/investigator employed by the Division of Enforcement at the SEC’s Denver Regional Office. This attorney reviewed web sources of information on Achieve, bank statements and source material provided by Achieve vendors, including FirstBank and Payoneer. He filed a 28-page declaration in advance of the asset freeze. This document distilled key pieces of evidence from Achieve sales pitches and financial records, calculating that investors had directed at least $3.829 million to Achieve and that Johnson and Barnes had taken “a minimum” of $336,975 “of investor funds.” (That’s roughly 9 percent, a circumstance that suggests Achieve’s Ponzi was digging a deeper and deeper hole.)
4.Two other SEC attorneys assigned to the Denver office. These attorneys brought the 17-page complaint against Achieve that alleged Achieve had “no legitimate business operations” and that “the sole source of repayments to earlier investors is funds contributed by newer investors.” (Though not referenced on the court docket of the Achieve case, the SEC, in a Feb. 18 public statement, confirmed a fourth agency attorney is involved in the probe.)
5.An SEC staff accountant employed by the Division of Enforcement and assigned to the Denver office. This person has been with the SEC for 20 years and examined and summarized records from at least five Achieve-related bank accounts, including “underlying detail” such as account-opening forms, statements, checks, wire transfers and deposit slips. (No criminal wrongdoing has been alleged and it is unclear if a criminal investigation is under way, but this information shows that the SEC, in part, halted Achieve the same way Internal Revenue halted Al Capone: with an accountant’s skill and experience in understanding numbers and tracking money flow. The same SEC accountant was involved in the memorable prosecution of recidivist con man Larry Michael Parrish, accused in 2011 of going to a Colorado hospital room to swindle a man dying of cancer.)
6.An SEC financial economist who holds a Ph.D in economics from the Massachusetts Institute of Technology. (This individual also studied in Chile and the Dominican Republic. She is a native speaker of Spanish, is fluent in English and also understands French. Based on her CV, I wouldn’t describe her as a secret weapon. But I do note that her international experience in areas that know poverty is a bonus, given that so many HYIP/Ponzi-board scams are targeted at people of limited means or people desperate for a positive economic result. Her MIT dissertation was titled, “Essays on Entrepreneurship” and was based in part on “survey data on the portfolios of U.S. families to study the tightness of borrowing constraints for entrepreneurs.” This may be important in context, because some Achievers already are making the absurd claim the SEC stands in opposition to entrepreneurship. One Achiever has claimed the agency’s Achieve action was a “systemic destroy tactic.” The same person has suggested the 9/11 terrorist attacks were a “false flag set up,” repeating a conspiracy theory that bizarrely accompanies just about any action that U.S. government takes against an HYIP scheme.)
Friends, Ponzi schemes are fraud per se — that is, they exist for no other reason than to commit fraud by theft. In the Internet Age in the network-marketing sphere, they have become organized schemes to defraud that are capable of involving thousands, hundreds of thousands or even millions of people. There is no such thing as a benevolent Ponzi scheme or a Ponzi scheme with “good intentions.”
Creating legions of victim-investors is only part of the problem.
The SEC’s supporting documentation suggests Achieve itself polluted the commerce stream at at least nine points of contact: three banks, one credit union, four payment processors and one brokerage firm. This number does not take into account the fact that some Achieve participants were issued debit cards onto which their “earnings” were loaded, thus putting any number of financial institutions in the position of becoming either dispensaries or warehouses for fraud proceeds.
At least one Achieve promoter recorded a video of himself offloading Achieve money at an ATM in Hawaii. The SEC says bank records indicate Johnson gave $10,000 to a church, a circumstance that suggests the church came into possession of tainted funds.
Prior to filing the Achieve action, the SEC says in supporting filings, the agency did not contact “any” Achieve investors. Nor did it subpoena Achieve for information or personally view information in the private areas of Achieve’s websites.
Why not?
Because there was a “need to not alert Defendants of the investigation,” the SEC said in supporting materials. Beyond that, the agency said, “if investors were alerted to the SEC’s investigation, they would quickly disseminate that information to other TAC investors, as well as Defendants, which could risk additional dissipation or misappropriation of investor funds.”
An Outtake From The Paralegal’s Transcription
Image source: pdf from U.S. court filings by the SEC.
The next section of the PP Blog’s Special Report seeks to anticipate and then answer questions Achieve members may have. The answers are gleaned from supporting documents the SEC provided a federal judge as part of the process of bringing the Achieve complaint and seeking an emergency asset freeze. This section includes some commentary/analysis by the PP Blog.
Q: When did the SEC open its investigation into Achieve?
A: At least by January 2015. The specific date is unclear.
Q: Did the SEC receive tips about the operations of Achieve?
A: Yes. The number of tips and the identities of persons who provided them are not disclosed.
Q: Prior to the Feb. 12 asset freeze, did Achieve know it was under investigation by the SEC?
A: The agency said it did not advise Achieve of the probe. However, Kristi Johnson knew at least by Jan. 13 that the Colorado Division of Securities, the state-level regulator, was asking questions about Achieve, according to the SEC. On that date, the Division learned in an “interview” with Johnson that Achieve did its banking at FirstBank. The Division shared this information with the SEC. By Feb. 2, the SEC had obtained Achieve’s banking records. The SEC accountant then began to examine the records, sharing information with the SEC attorney/investigator.
Moreover, the SEC has alleged Johnson is a former “registered representative.” With experience in the securities industry and with Achieve already under investigation by a state regulator, Johnson must have contemplated that the SEC was hot on the Achieve trail. The SEC alleges she lives in Aurora, Colo. That’s only about 25 minutes away from the agency’s regional headquarters in Denver. It goes without saying that the SEC is particularly unfriendly to Ponzi schemes, perhaps particularly ones operating in its own back yard.
Q: Why the asset freeze?
A: Direct quote from SEC filings: “In light of the egregiousness of Defendants’ conduct, the ongoing and active Ponzi scheme, Defendants’ increasingly desperate attempts to make Ponzi payments and misappropriate investor funds, and the concern that Defendants will dissipate or misappropriate the remaining investor funds if they become aware of this action prior to the entry of the requested order, the Commission respectfully requests that the Court grant ex parte relief freezing the assets of Defendants and Relief Defendant, prohibiting them from soliciting additional investors or otherwise continuing their fraudulent scheme, and ordering other relief to ensure a prompt, fulsome, and fair hearing on Plaintiff’s motion for a preliminary injunction.
“Absent an order granting such emergency ex parte relief, there is no reason to think Defendants’ fraudulent scheme, and their misappropriation and dissipation of the remaining investor funds, will cease, or that there will be any funds available to compensate investor victims at the conclusion of this litigation.”
Q: What did the SEC accountant discover?
A: Plenty, including banking records pertaining to this Achieve International LLC check for $90,000 made payable to “Cash” on Jan. 8, 2015. (Note: The check is dated Jan. 8, 2014, but that’s a new-year mistake. The banking records themselves note the correct date. The black redactions appear in a pdf of an SEC evidence exhibit. The PP Blog added the red redaction in this screen shot from the pdf. The $90,000 allegedly ended up in Kristi Johnson’s personal account at the Credit Union of Colorado.)
An SEC attorney/investigator who reviewed the accountant’s work across multiple Achieve-related bank accounts alleged in a declaration to the court that the “bank records indicate that on at least thirteen occasions, Johnson went to a FirstBank branch and withdrew cash in the form of currency, or cash in the form of a check written to ‘cash.’ Virtually all of thee funds ended up in an account at the Credit Union of Colorado . . . that is Johnson’s personal account.” Such transactions involved $153,300.
Q: Will I get my money back or a percentage of it from Achieve?
A: Possibly. How that would occur is unclear. No receiver has been appointed. The SEC investigation is ongoing.
A: Too soon to tell. The SEC investigation is ongoing. An ongoing investigation sometimes means an amended complaint or additional complaints will be filed that names additional defendants or “relief defendants” — those in alleged possession of ill-gotten gains.
Q: I’ve read online that the best practice with these programs is to throw in my stake with affiliates promoting them on YouTube and Facebook. These purported experts also say not to risk more than I can afford to lose and to quickly remove my “seed money” to create a situation that I’m only playing with “house money” — “profits” from the scheme. What am I to believe?
From an SEC exhibit in the Profits Paradise complaint.
URGENT >> BULLETIN >> MOVING: (Updated 9:33 p.m. ET U.S.A.) The SEC has charged two Indian nationals with running an HYIP scheme known as “Profits Paradise” that reached into the United States and offered “extraordinary” returns of up to 480 percent in 240 days, plus “compounding.”
As is typical in HYIP schemes, the “program” gained a head of steam on social media, the SEC charged. (A quick Google search shows that ProfitsParadise also had a presence on well-known Ponzi forums such as TalkGold and MoneyMakerGroup.)
ProfitsParadise operated between April 2013 and early February of 2014 and offered “guaranteed” payouts, the SEC alleged.
The scam “invited investors to deposit funds that supposedly would be pooled with money from other investors and traded on foreign exchanges as well as in stocks and commodities,” the SEC alleged.
Pitches on Facebook, YouTube and Twitter were “pervasive” and resulted in investors being exploited, the SEC charged.
The named respondents are Pankaj Srivastava of Mumbai and Nataraj Kavuri of Hyderabad. They also are accused of promoting the scam through Google Plus.
Srivastava “used the pseudonym “Paul Allen,” the SEC charged. Kavuri called himself “Nathan Jones.”
It was not immediately clear from the complaint whether the HYIP scammers intended to trade on the name of Microsoft co-founder Paul Allen. HYIP schemes, however, are infamous for trading on the names of prominent individuals.
“Srivastava and Kavuri used excessive secrecy in their effort to swindle investors through social media outreach and a website that attracted as many as 4,000 visitors per day,” said Stephen Cohen, associate director of the SEC’s Division of Enforcement. “Our investigation stopped the constant solicitations once the website disappeared, and successfully tracked down the identities of the perpetrators behind those fraudulent solicitations.”
Bogus names also were used to register websites, the SEC charged.
Srivastava caused the Profits Paradise website to be registered through GoDaddy in the name of “Jane Roe” of Seattle, the SEC charged.
“Jane Roe is a fictitious name, and there is no connection between Profits Paradise and the dwelling at 300 Boylston Ave E., in Seattle, Washington, or its residents,” the SEC charged. “The telephone number provided to GoDaddy is a toll-free number for a conference call center that is unrelated to Profits Paradise,” the SEC charged.
Meanwhile, a Gmail email address linked to the supposed Seattle street address was associated with IPs “located in India, not Seattle,” the SEC charged.
At the same time, the agency charged, “Kavuri disguised Profits Paradise’s physical location by providing the false ‘whois’ data, indicating that Profit Paradise’s operations were within the United States when they were not.”
From the SEC’s civil administrative complaint (italics added):
“The phony name and address served a dual purpose. In addition to concealing the fact that Srivastava and Kavuri were behind the Website, the domain name registration to Jane Roe at a Seattle address was meant to attract American investors. Additionally, to create the illusion that mainly American investors were visiting the Profits Paradise Website, Srivastava instructed the web designer to ensure that the ‘Alexa detail’ showed the Website’s ‘rank in the United States’ rather than its ‘rank in India.’ “Alexa” refers to a website (www.alexa.com) that ranks other websites, by country, based on the amount of Internet traffic directed to the website.”
Also typical of HYIP scams, payment processors such as Liberty Reserve, PerfectMoney and EgoPay were used. Dates cited in the SEC complaint suggest Profits Paradise opened its Liberty Reserve account just prior to federal prosecutors bringing criminal charges against Liberty Reserve in May 2013.
Srivastava, in 2005, worked for Quixtar.com in Minneapolis, but returned to India in 2007, the SEC said.
Read the SEC complaint, which alleges the Profits Paradise scheme also was “structured so that under certain conditions investors could never recover their principal investments.”
A website styled MutualWealth.com is fraudulent and is part of an international pyramid scheme, the SEC says.
BULLETIN: (7th Update 8:51 p.m. ET U.S.A.) Entities known as Fleet Mutual Wealth Limited, MWF Financial Limited and Mutual Wealth are frauds that filed invalid forms with the SEC to dupe the masses, the SEC said.
An associated web domain styled MutualWealth.com also is a fraud, the SEC said in a statement and emergency court filing that alleges a pyramid scheme in which promoters become referral agents or purported “accredited advisors” to earn recruitment commissions.
“Mutual Wealth used Facebook and Twitter as well as a team of recruiters to spread a steady stream of lies that tricked investors out of their money,” said Gerald W. Hodgkins, an associate director in the SEC’s Division of Enforcement.
Some recent scams have purported to operate out of Hong Kong, something that appears also to be the case with Mutual Wealth.
“[A]lmost nothing that Mutual Wealth represents to investors is true,” the SEC said. “The company does not purchase or sell securities on behalf of investors, and instead merely diverts investor money to offshore bank accounts held by shell companies. Mutual Wealth’s purported headquarters in Hong Kong does not exist, nor does its purported ‘data-centre’ in New York. Mutual Wealth also lists make-believe ‘executives’ on its website, and falsely claims in e-mails to investors that it is ‘registered’ or ‘duly registered’ with the SEC.
And, the SEC said, Mutual Wealth may operate through entities in Panama and the United Kingdom “and through Russian or Belarussian nationals.”
From the SEC complaint (italics added):
Investors who complete an account application are instructed to transfer money to Mutual Wealth either by wire transfer to banks located in Latvia and Cyprus or through third-party payment processors such as SolidTrust Pay, EgoPay, or Perfect Money.
Like other fraud schemes, Mutual Wealth has a presence on the MoneyMakerGroup and TalkGold Ponzi forums.
U.S. District Judge Dolly M. Gee of the Central District of California has ordered an asset freeze on all accounts “at any bank, financial institution, brokerage firm, or third-payment payment processor (including those commercially known as SolidTrust Pay, EgoPay, and Perfect Money) maintained for the benefit of Mutual Wealth,” the SEC said.
Assisting in the probe are the FBI, the Financial and Capital Market Commission of Latvia, the Ontario Securities Commission and the Cyprus Securities and Exchange Commission, the SEC said.
According to the SEC’s complaint, Mutual Wealth operates through entities in Panama and the United Kingdom and uses offshore bank accounts in Cyprus and Latvia and offshore “payment processors” to divert money from investors. Mutual Wealth’s sole director and shareholder presented forged and stolen passports and a bogus address to foreign government authorities and payment processors.
As in previous scams, the Mutual Wealth fraud spread on social media, the SEC said.
“Mutual Wealth maintains Facebook and Twitter accounts that link to its website and serve as platforms through which it lures new investors,” the SEC said. “Some of Mutual Wealth’s ‘accredited advisors’ then use social media channels ranging from Facebook and Twitter to YouTube and Skype to recruit additional investors and earn referral fees and commissions.
“Mutual Wealth’s Facebook page spreads such misrepresentations as ‘HFT portfolios with ROI of up to 250% per annum. Income yield up to 8% per week,'” the SEC said. “A Facebook post on Aug. 12, 2013, boasted ‘$1000 investment into the Growth and Income Portfolio made on April 8th, 2013 is now worth $2,112.77.’ Mutual Wealth regularly posts status updates for investors on its Facebook page, and the comment sections beneath the posts are often filled with solicitations by the accredited advisors. Mutual Wealth also tweets announcements posted on its Facebook page.”
Scammers recently have been purporting they are conducting IPOs or pre-IPOs or are registered with the SEC.
“Mutual Wealth has filed three Securities Act Forms D with the Commission,” the SEC said. “Each Form D purports to give notice of offerings of securities that are exempt from registration with the Commission under Regulation D of the Securities Act.
“But Mutual Wealth’s offers and sales of securities do not qualify for the exemptions cited in the Forms D or any exemption under from registration under Regulation D of the Securities Act. Consequently, the Forms D are invalid and of no legal effect,” the SEC said.
About 150 U.S. investors opened Mutual Wealth accounts, plowing “at least” $300,000 into the scheme, the SEC said.
Dawn Wright-Olivares. Source: Cropped section of 2012 online promo for Zeek.
URGENT >> BULLETIN >> MOVING: (21st update 5:49 p.m.) Zeek Rewards figures Dawn Wright-Olivares and Daniel Olivares of Clarksville, Ark., have been charged criminally by federal prosecutors in the Western District of North Carolina and sued civilly by the SEC.
Among the criminal allegations are tax-fraud conspiracy and investment-fraud conspiracy, according to a charging document. Wire fraud also is alleged. Zeek’s Zeekler arm is called a “sham internet based penny auction company” in the charging documents. Zeek’s Zeek Rewards arm is called a “purported advertising division.”
Wright-Olivares has agreed to plead guilty to investment-fraud conspiracy and to tax-fraud conspiracy, federal prosecutors said this afternoon. Daniel Olivares has agreed to plead guilty to investment-fraud conspiracy.
Daniel Olivares is the 31-year-old stepson of Wright-Olivares, 45. Zeek operated from Lexington, N.C., with Wright-Olivares at one time serving as its COO. The court docket in the criminal case notes a plea agreement.
Information published by the government suggests Daniel Olivares had been in plea negotiations with prosecutors since at least July 29, 2013, before finalizing a deal yesterday. Wright-Olivares, meanwhile, appears to have finalized a deal on Nov. 22, 2013.
The deals suggest that Wright-Olivares could be sentenced to a maximum of 10 years in federal prison and Olivares five years. Both deals contemplate cooperation from the defendants. Wright-Olivares, according to plea papers, is represented by Brian S. Cromwell and Sarah F. Hutchins. Olivares is represented by S. Frederick Winiker III. All three attorneys are specialists in white-collar defense.
Zeek operated through Paul R. Burks and Rex Venture Group LLC. A “P.B.” is referenced in the Wright-Olivares/Olivares charging documents as an “Un-indicted co-conspirator.”
Wright-Olivares allegedly received Zeek and Rex payouts through an entity known as Wandering Phoenix LLC, according to the charging documents.
“Wright-Olivares was a marketing and operational mastermind behind the scheme and Olivares was the chief architect of the computer databases they used,” said Stephen Cohen, an associate director in the SEC’s Division of Enforcement. “After they learned ZeekRewards was under investigation by law enforcement, they accepted substantial sums of money from the scheme while keeping investors in the dark about its imminent collapse.”
Wright-Olivares has settled the civil action by agreeing to “pay at least $8,184,064.94,” the SEC said.
Olivares settled by agreeing “to pay at least $3,272,934.58,” the SEC said.
The settlement amounts, the SEC said, “represent the entirety of their ill-gotten gains plus prejudgment interest.”
Meanwhile, the SEC said that the Zeek fraud “raised more than $850 million from approximately one million investors worldwide.”
The dollar sum is about $250 million higher than the SEC’s original estimate in August 2012.
From the SEC complaint (italics/bolding added):
[Zeek operator Paul] Burks provided the daily dividend rate to Olivares, who then entered it into the ZeekRewards databases to establish each affiliate investor’s daily award (communicated to affiliates through the ZeekRewards website). Wright-Olivares and Olivares learned that the daily dividend rate was fabricated by Burks and not actually calculated based on “daily net profits” or any actual company earnings, as represented to investors. In fact, in several instances when Burks was unavailable, Wright-Olivares instructed Olivares to enter daily dividend rates to mimic the payout from a prior week, without any regard for the company’s actual earnings.
Precisely when Wright-Olivares and Olivares allegedly learned that Burks had fabricated the daily payout rate is unclear. In a bizarre radio interview in June 2012, Wright-Olivares maintained that Burks “manages all that.”
In the criminal charging document, prosecutors say that Zeek employed a so-called “80/20 VIP Bid Strategy” to keep adequate cash on hand to “make the daily Ponzi payments to victim-investors.” Under such 80/20 plans, investors are encouraged to keep 80 percent of their money in an enterprise and to withdraw no more than 20 percent in cash.
Zeek’s 80/20 program, prosecutors said, caused liabilities to mushroom in August 2012 to approximately $2.8 billion. Zeek, however, had only about 11 percent of that sum on hand. The SEC said in an emergency enforcement action in August 2012 that Zeek was teetering on collapse because of ever-accumulating, unfunded liabilities.
Meanwhile, according to the criminal charging documents, Rex, Zeek Rewards and Zeekler failed to file any corporate tax returns or any corporate tax payments to the IRS.
And for the 2011 tax year, according to the charging documents, “P.B.,” Wright-Olivares and others reported to the IRS that Zeek investors had received more than $108 million from the scheme when Zeek had paid out only about $13 million.
This caused Zeek victims to file “false tax returns with the IRS reporting phantom income that they never actually received,” according to the charging documents.
Zeek used the “false tax notices to perpetuate the Ponzi scheme,” according to the charging document.
“This case shows that the appearance of success can be a mask for a tangled financial web of lies” said Richard Weber, chief of IRS Criminal Investigation. “The underlying structure can fall apart at any time and leave many investors in financial ruin.”
Added Paul Morrissey, assistant director of investigations for the U.S. Secret Service: “As today’s technology continues to evolve, cybercriminals use these advances and enhancements to perpetrate an expanding range of crimes. As we have seen with this case, even with the increasing complexity of online Ponzi schemes, it remains difficult for criminals to remain anonymous. The Secret Service continues to seek new and innovative ways to combat emerging cyber threats.”
U.S. Attorney Anne M. Tompkins is supervising the criminal prosecution. The Zeek investigation is ongoing, her office said in a statement.
As part of the criminal case, prosecutors are seeking the forfeiture of $850 million.
URGENT >> BULLETIN >> MOVING: 3RD UPDATE 5:46 P.M. EDT (U.S.A.) The SEC says it has gained an asset freeze and charged three executives and eight promoters of a worldwide pyramid scheme operating through five entities from Hong Kong, Canada and the British Virgin Islands.
Promoters of the scheme, which “purportedly” sells Internet-based children’s educational courses, gathered at least $20 million “from U.S. investors, and millions of dollars more from investors in Canada, Taiwan, Hong Kong, and other countries in Asia, the agency charged.
Entities known as CKB and CKB168 are “at the center of the scheme,” the SEC said. The complaint, which was brought on an emergency basis and initially filed under seal, is filed in U.S. District Court for the Eastern District of New York. U.S. District Judge Roslynn Mauskopf has granted an asset freeze. The seal has been lifted in the case.
“CKB has little or no real-world retail consumer sales to generate the extraordinary returns promised to investors,” the SEC said. “In fact, CKB has no apparent source of revenue other than money received from new investors. Bank records show that the bulk of the money raised has been paid out to accounts controlled by CKB executives and as commissions to promoters of the pyramid scheme.”
Various investment schemes with apparent footprints in Hong Kong have been pushed by online hucksters since the SEC moved against U.S. based Zeek Rewards in 2012. On Oct. 14, BehindMLM.com reported that a scheme known as WCM777 operating from Hong Kong through an entity in the British Virgin Islands suddenly announced it was closing its U.S. operations.
Whether WCM777 had promoters in common with the CKB entities was not immediately clear. What is clear is that the SEC has taken action against three MLM or MLM-like “programs” that promised outsize returns since August of last year, amid allegations that were selling unregistered securities as investment contracts. (These are Zeek Rewards in August 2012; Profitable Sunrise in April 2013; and the “CKB” entities through an emergency action filed Oct. 9 and announced today, after the seal was lifted yesterday.)
Accompanying the CKB actions was the issuance today by the SEC of an Investor Alert “about the dangers of potential investment scams involving pyramid schemes posing as multi-level marketing programs,” the SEC said. The Zeek and CKB cases are referenced in the Alert.
“CKB’s operators and promoters profited by abusing relationships of trust within the Asian-American community and promising investors they can earn more money by recruiting other investors instead of selling actual products,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement. “What CKB really sells is the false promise of easy wealth.”
Here is how the SEC described the eight U.S. promoters charged:
Daliang (David) Guo is a China native and a resident of Coram, N.Y., who was among CKB’s first U.S. promoters. He currently sits atop an investment pyramid, and claims in a testimonial on the CKB website to have earned more than $1 million within eight months.
Yao Lin is a resident of Fresh Meadows, N.Y., who was among CKB’s first U.S. promoters. He currently sits atop an investment pyramid, and claims in a CKB website testimonial to have earned more than $300,000. The SEC’s complaint alleges that bank and credit card accounts he controls have received approximately $450,000 from CKB investors.
Chih Hsuan (“Kiki”) Lin is a Taiwanese native and resident of Las Vegas who claims in a CKB website testimonial to have earned “one million USD” in her first two months of investing. She operates a website through which “CKB members” can log in to a password-protected area. She is within David Guo’s pyramid. The SEC’s complaint alleges that bank accounts she controls have received approximately $1.8 million from CKB investors.
Wen Chen Hwang (“Wendy Lee”) is a Taiwanese native and resident of Rowland Heights, Calif., who claims in a CKB website testimonial to have made $53,000 within four months. She is within Yao Lin’s pyramid. The SEC’s complaint alleges that bank accounts she controls have received approximately $2.2 million from CKB investors.
Toni Tong Chen is a resident of Hacienda Heights, Calif., and a certified public accountant who was formerly associated with a registered broker-dealer and held securities licenses. She and her husband claim to have earned six-digit commissions and in excess of a 100 percent return on their investment. They are connected to Wendy Lee and have made presentations at her weekly seminars in Los Angeles.
Cheongwha (“Heywood”) Chang is a Chinese native and the husband of Toni Tong Chen. He was formerly associated with a registered broker-dealer and held securities licenses. The SEC’s complaint alleges that bank accounts that he and his wife control have received approximately $2.1 million from CKB investors.
Joan Congyi Ma is a resident of Arcadia, Calif., who was formerly associated with a broker-dealer and held securities licenses. She is connected to Wendy Lee and has helped her organize seminars and other events in Los Angeles. In her CKB website testimonial, she references the day she met Yao Lin as her “lucky day.” The SEC’s complaint alleges that bank accounts she controls have received approximately $200,000 from CKB investors.
Heidi Mao Liu is a resident of Diamond Bar, Calif., who was formerly associated with a broker-dealer and held securities licenses. She is connected to Wendy Lee and has provided testimonials at her seminars in Los Angeles. She also operates her own website that promotes the CKB scheme. The SEC’s complaint alleges that bank accounts she controls have received approximately $1.2 million from CKB investors.
YouTube video pitches and a claim that at least one promoter had acquired five properties in Las Vegas through the scheme were used to dupe the masses, the SEC said.
“Kiki Lin,” the SEC said, “exemplified the pitch in a videotaped recording posted to the Internet, telling potential investors that in the ‘pyramid triangle system, we spread it from one to ten, and ten to hundred, and hundred to thousand, thousand to ten thousand.’ Kiki Lin later added, ‘And for those who really want to make money, who are really hard working, in a short time you would all be like John,’ who she claimed ‘made money to buy five houses in Las Vegas.'”
The charged executives include:
Rayla Melchor Santos, whom the SEC said is a Philippines national “who is featured on the CKB website as its founder. Santos is known as “Teacher Sam” and “has traveled to New York and other areas of the U.S. to participate in meetings and seminars to promote CKB.”
Hung Wai (“Howard”) Shern, whom the SEC said is a Canadian citizen and resident of Hong Kong “who is featured on the CKB website as the director of CKB168 International Marketing.” And Shern “is one of the signatories to bank accounts used to receive and transfer funds from CKB investors, and has traveled to New York and other areas of the U.S. to participate in meetings and seminars to promote CKB.”
Rui Ling (“Florence”) Leung, whom the SEC said is a Hong Kong national “who is described on the CKB website as its chief financial officer. And Leung “is one of the signatories to bank accounts used to receive and transfer funds from CKB investors, and approximately $4.6 million has been transferred from CKB bank accounts to bank accounts in her name and the names of entities she controls. Leung portrays herself as a professional investment adviser who will assist CKB in its supposed future public offering.”
From the SEC complaint (italics added):
2. Through publicly available websites, promotional materials, seminars, and videos posted to the internet, as well as through other efforts intended to create the appearance of a legitimate enterprise, Defendants have falsely portrayed CKB as a profitable multi-level marketing company that sells web-based children’s educational courses.
3. What CKB really sells, however, is the false promise of easy wealth. Potential purchasers of CKB products must invest in CKB to get one of its courses. Defendants promise that those investors will earn exponential, risk-free returns. In addition to the course, each purchaser/investor receives “Profit Reward Points” (“Prpts”) with a purported value of $750.
Investors are told that they will eam “passive” returns in the form of Prpt dividends and 2-for-1 splits, and that they will be able to buy and sell their Prpts in an online exchange accessible through the CKB website. Investors also are promised that they will earn massive retums by converting their Prpts into shares of CKB stock when the company conducts an initial public offering (“IPO”) on the Hong Kong Stock Exchange sometime during 2014. Some Defendants allege that these returns can be achieved without any risk of loss.
4. Despite Defendants’ representations to the contrary, the Prpts are worthless and cannot be meaningfully traded, sold or exchanged. Nor has CKB taken required steps to prepare for the promised IPO and, in fact, does not meet the Hong Kong Exchange’s current listing requirements. Even if the IPO were to occur, CKB would have to go public as one of the world’s largest companies in order to honor conversions of the ever-expanding universe of Prpts.
Still, while essential to the scheme, Prpts are not its only incentive. The scheme’s ultimate goal is to tum investors into recruiters. CKB lures investors with the promise of even greater “active” returns, in the form of commissions and bonuses, for recruiting new, “downline” participants into the program. In contrast to Prpts, active recruitment is the only way to make actual significant money.
The CKB defendant entities include:
WIN168 Biz Solutions Limited (WIN168), which the SEC described as a “private Hong Kong company” that “maintained bank accounts at HSBC in Hong Kong that were used to receive and transfer funds from CKB investors located in the United States and elsewhere. Those accounts received wire transfers from banks located in New York.”
CKB168 Biz Solution Inc., which the SEC described as a Canadian company in Toronto that “has maintained bank accounts at TD Bank in Canada that have been used to receive and transfer funds from CKB investors.”
CKB 168 Limited, which the SEC said shares a business address with WIN168 and operated from Hong Kong. Its alleged “sole director is CKB168 Biz Solution Limited (“CKB168 Biz Ltd.”), a British Virgin Islands corporation with its office in Tortola,” the SEC said, further alleging that “CKB168 Ltd. maintained a bank account at HSBC in Hong Kong that was used to receive and transfer funds from CKB investors, including wires coming from New York.”
CKB 168 Holdings Limited, which the SEC described as sharing a business address with WIN168 and CKB168 Ltd. “Sample stock certificates shown to prospective investors indicate that CKB 168 Holdings is the entity whose shares have been offered to the public,” the SEC said.
Cyber Kids Best Education Limited, which the SEC described as the controller of “five bank accounts at Shanghai Commercial Bank Ltd. in Hong Kong, at least two of which were used to receive and transfer funds from CKB investors located in the United States.”
“WIN168, CKB168 Biz, CKB168 Holdings, CKB168 Ltd., and CyberKids Best have never been registered with the Commission in any capacity and have never registered any offering of securities under the Securities Act or any class of securities under the Exchange Act,” the SEC charged.
URGENT >> BULLETIN >> MOVING: (SECOND UPDATE 4:28 P.M. EDT (U.S.A.) The SEC says Edwin Fujinaga and his company MRI International Inc. were operating a Ponzi scheme from 1998 onward that gathered at least $800 million and targeted Japanese and other investors.
After MRI received a letter in March 2013 from the SEC instructing it not to destroy evidence, the SEC said, “a truck from a “document shredding company . . . picked up boxes of documents from MRI.”
An MRI executive assistant “made several telephone calls to prevent the pickup,” the SEC charged, alleging that “Fujinaga called her and said, ‘Why are you concerned about this?'”
“MRI fired the executive assistant because of her efforts to prevent the document destruction,” the SEC charged.
Fujinaga is 66. He resides in Las Vegas, the SEC said. Part of the scam featured “tours” of MRI’s offices in Las Vegas. The alleged scam is evoking images of Bernard Madoff’s colossal Ponzi scheme, in the sense it appears to have gone undetected for years.
At the same time, the alleged Fujinaga/MRI fraud is reminiscent of the epic Trevor Cook Ponzi scheme in Minnesota, in the sense that investors appear to have been lulled into a false sense of security because the company had a physical presence. It is somewhat common for fraudsters to tout a brick-and-mortar presence as “proof” no fraud scheme is occurring, even though case after case has demonstrated that the frauds may be buried deep inside an enterprise that at first glance appears to be legitimate.
MRI investors “were told that their money would be used to buy accounts from U.S. medical providers with outstanding balances to collect from insurance companies,” the SEC said. “Fujinaga and MRI falsely represented that they purchased the accounts at a discount so they could recover the full amount and turn a profit for investors. They purchased no such accounts in reality, and merely used investor money to pay the principal and interest due to earlier investors in typical Ponzi fashion.”
Similar to other Ponzi schemers whose operations are on the verge of collapse, Fujinaga appeared in 2012 to be preparing to double-down on his fraud, the SEC complaint suggests.
In a memo, the SEC charged, Fujinaga “proposed to resolve the delinquencies by doubling the amount of money raised from new investors.”
The SEC alleged that Fujinaga wrote: “I propose that we reinstate our consultants to fund raise for MRI to secure a larger base of consultants soliciting funds and possibly double the amount off funds raised on a monthly basis.”
Cooperation between the United States and Japan was instrumental in exposing the massive international swindle, the SEC said, noting that the “Financial Services Agency of Japan (JFSA) and the Japanese Securities and Exchange Surveillance Commission (SESC)” exchanged “documents and other evidence critical to the case.”
“Cross-border cooperation can successfully halt fraudsters who attempt to use international boundaries to avoid prosecution,” said Gerald W. Hodgkins, associate director in the SEC’s Division of Enforcement. “The close coordination between the SEC and Japanese regulators was critical to freezing Fujinaga’s assets and foiling his scheme.”
From a statement by the SEC (italics added):
According to the SEC’s complaint, the Ponzi scheme began in October 1998. Fujinaga, who lives in Las Vegas, operated from there but also had a sales office in Tokyo. MRI and Fujinaga hosted Japanese investors in the U.S. for solicitation presentations and tours of MRI’s Las Vegas offices. They told investors they could invest in either U.S. dollars or Japanese yen, and promised returns ranging from 6 to 10.32 percent depending on the size and duration of the investment. Fujinaga and MRI falsely represented that they used investor money solely and exclusively to buy medical accounts receivable. Besides misappropriating money between investors, Fujinaga illicitly transferred investor money to MRI’s operating accounts, where it was used to pay for general operating expenses instead of medical accounts. He also transferred money to other entities he owned that were not in the business of collecting medical account receivables. Investor funds also were siphoned to another company owned by Fujinaga called The Factoring Company, which bought Fujinaga’s cars and paid his bills.
Here is a section from the SEC’s complaint, which was filed under seal two weeks ago (italics added):
As all Ponzi schemes eventually do, the fraudulent enterprise perpetrated by Fujinaga and MRI collapsed. Since at least 2011, MRI has been in default on the payments it is obligated to pay investors. More than 8,000 people invested in MRI and, as of 2012, MRI’s investments totaled approximately $813 million. Notwithstanding MRI’s defaults to investors, this is an ongoing Ponzi scheme, in which Fujinaga and MRI have planned to make up their losses by enlisting new investors for the same treatment suffered by existing investors.
Investors in places other than Japan also were targeted, the SEC said. Those countries included Canada, Malaysia and New Zealand.
The FBI has a photo of Scott London, left, accepting cash in an insider-trading sting. Source: “Exhibit A” from FBI criminal complaint filed today against London.
BULLETIN: (UPDATED 4:44 P.M. EDT U.S.A.) The SEC has gone to federal court in the Central District of California, accusing a former KPMG “lead partner” and auditor of KPMG’s Herbalife account of insider trading by providing nonpublic information on Herbalife and other companies to a golfing buddy.
Scott London, 50, of Agoura Hills, Calif., was fired last week by KPMG. He now stands formally accused of passing information unlawfully to Bryan Shaw, who also has been charged. Shaw, 52, lives in Lake Sherwood, Calif., and operates a jewelry business in Encino, the SEC said.
The men met at a country club and became close friends, the SEC charged.
London has claimed he wanted to help Shaw because Shaw’s business was struggling, the SEC said.
At a minimum, however, London’s alleged misdeeds have resulted in civil and criminal liability for himself, while creating a PR crisis for KPMG. At the same time, it put KPMG client Herbalife in the awkward position of having to explain why its stock stopped trading briefly Tuesday morning while its auditor was handling fallout from London’s actions and why it suddenly had no auditor.
At 2:58 p.m. EDT today, Herbalife’s stock was showing a gain of 3.68 percent. The company said on Tuesday that KPMG had resigned its account after “it had concluded it was not independent because of alleged insider trading in Herbalife’s securities by one of KPMG’s former partners.”
Among the SEC’s alarming allegations is that Shaw paid London “at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store.”
For good measure, the SEC alleged, Shaw also provided London “an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.”
“London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex,” said George S. Canellos, acting director of the SEC’s Division of Enforcement.
Using information provided by London, Shaw made more “more than $1.2 million in illicit profits trading ahead of earnings or merger announcements,” the SEC said.
And, the SEC said, London has been charged criminally. (See photo above from FBI criminal complaint filed today against London, who is charged with criminal conspiracy to commit securities fraud through insider trading. Link to the complaint is in the Comments thread below.)
On at least one occasion, “London disclosed nonpublic information in the presence of others during a golf outing,” the SEC charged.
“Prior to public announcements, Shaw received material non-public information from London about numerous earnings announcements and releases of financial results for Herbalife, Skechers [USA Inc.] and Deckers [Outdoor Corp.],” the SEC charged.
Shaw “grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers,” the SEC alleged.
But the abuse didn’t stop there, the SEC alleged.
London “also gained access to inside information about impending mergers involving two former KPMG clients – RSC Holdings [Inc.] and Pacific Capital [Bancorp],” the SEC alleged. “London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.”
“As a leader at a major accounting firm, London’s conduct was an egregious violation of his ethical and professional duties,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.
“KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason,” Herbalife said on Tuesday.
Herbalife has been the subject of a battle between titans Carl Icahn, who is bullish on the company, and Bill Ackman, who claims Herbalife is a pyramid scheme. On its website, Herbalife denies it is either a pyramid scheme or a Ponzi scheme.
UPDATED 9:46 A.M. ET (JAN. 13, U.S.A.) New court filings by the SEC in the Zeek Ponzi scheme case in the Western District of North Carolina strongly suggest that the Zeek probe was under way at least by April 17, 2012. On that date, according to the filings, an IT specialist for the SEC was tasked by the agency’s Division of Enforcement to “conduct Website/video capture” of ZeekRewards.com.
Four months to the day later — on Aug. 17, 2012 — the SEC alleged in federal court that Zeek was a $600 million Ponzi- and pyramid fraud operating from Lexington, N.C. Left unanswered in today’s filing is the question about precisely when Zeek operator Paul R. Burks first was contacted by the agency and when he began to cooperate by providing records.
Burks consented to judgment in the case, without admitting or denying wrongdoing.
Separately, the SEC and court-appointed receiver Kenneth D. Bell both argued today that petitions to intervene and to dissolve the receivership by alleged Zeek “winners” Trudy Gilmond and Kellie King should be denied by Senior U.S. District Judge Graham C. Mullen.
Court filings suggest that Gilmond has clawback exposure of more than $1.364 million. King’s potential exposure may exceed $205,000.
“Gilmond and King seek to improperly interfere with a settled SEC enforcement action against defendants Rex Venture Group and Paul Burks to deny the Receiver the ability, as directed by the Court, to marshal the estate’s assets for the benefit of all aggrieved ZeekRewards investors,” the SEC argued. “The Motion to Intervene is a transparent attempt to obtain prospective relief in an improper forum with respect to clawback litigation the Receiver has yet to initiate.”
For his part, Bell said Gilmond and King were engaging in “delaying tactics.”
EDITOR’S NOTE: Scams undermine faith in legitimate markets. This is a case in which a purportedly legitimate asset manager allegedly is using the sort of explanations/excuses commonly used by Ponzi-forum hucksters.
BULLETIN:The SEC has gone to federal court in the Northern District of Illinois, alleging that asset manager Nikolai Battoo duped investors by hiding losses in the Bernard Madoff Ponzi scheme, recruited new investors and boasted about “benchmark-beating returns.”
But Battoo, who claimed to have $1.5 billion under management, has not met redemption requests — and now claims his inability is due to the collapse of MF Global, the SEC said.
Also charged was Tracy Lee Sunderlage, “an unregistered broker-dealer who was banned from the industry in a previous SEC enforcement action,” the SEC said.
From the SEC complaint:
In 2008, Battoo and his company-defendants lost tens-of-millions of dollars investing in Madoff “feeder funds.” That same year they lost more than $100 million when an international bank terminated Battoo’s access to its credit and platform of funds. Yet Battoo-has not been forthcoming with his investors about the extent of — or in some cases even the fact of — these losses. His statements to clients omit his staggering losses. In the wake of such deception, existing clients have invested fresh investment proceeds. Battoo’sfalsified track record of benchmark-beating returns has also won him new investors.
The jig appears to be up. Clients are now clamoring for redemptions, so Battoo has doubled-down on his deception. He’s blamed theMF Global calamity for his inability to repay investors. But when the SEC sought support for such claims, he declined to provide further information. At other times Battoo has blamed unnamed counterparties for freezing his assets because of unspecified government investigations. He told one investor that his attorneys were negotiating a “release” with the SEC. These statements are lies.
A federal judge, the SEC said, has granted an emergency freeze of assets belonging to Battoo and two of his companies: BC Capital Group S.A. of Panama Panama and BC Capital Group Ltd. of Hong Kong.
The SEC action is designed to protect U.S. investors, the agency said.
Battoo claims to manage $100 million for U.S. investors, the agency said.
“Battoo attracted quite a following of investors by proclaiming his investments withstood the test of the financial crisis, but reality seems to have finally caught up with him,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Now, Battoo is offering investors one excuse after another for holding their money hostage.”
