Category: Fraud

False Credentials, Fraud and Fund-Raising

With graduation season upon us we are lauding those students who have excelled in academic achievement, or at least did just enough to earn their degrees. It is all too easy for a fraudster to concoct false degrees, titles and awards to lure in unwary investors. With two recent fraud cases, the Securities and Exchange Commission issued a new Investor Alert: Beware of False or Exaggerated Credentials.

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“Do not trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a ‘buzz of success.’”

The SEC Enforcement Division announced two fraud cases against investment advisers who made false claims about their experience and industry accolades.

The SEC charged Todd M. Schoenberger of Lewes, Delaware, with misrepresenting that he had a college degree from the University of Maryland.  Also for defrauding investors. He was raising a fund and also raising money for his fund management company: LandColt Capital LP.  Schoenberger told prospective investors that LandColt would repay the notes through fees earned from managing the fund. Schoenberger never actually launched the fund, never had the commitments of capital to the fund that he claimed, and never paid investors in the management company the returns he promised. The SEC made a show of him because he had been a guest commentator on financial television shows.

I found the fake degree to be the least interesting part. The double-fraud is far more interesting. He was committing fraud in raising the fund and in raising capital for the management company at the same time.

An SEC investigation found that Michael G. Thomas of Oil City, Penn, claimed that he was named a “Top 25 Rising Business Star” by Fortune Magazine. He used that false badge in general solicitation for his private fund.  No such distinction actually exists at Fortune Magazine. As you might expect, Thomas also greatly exaggerated his own past investment performance and inflated the fund’s projected performance.  He claimed to have turned $600 in to $6 million, when he actually started with more than $600 and turned it into less.

I think the older Hicks case is a better example of false credentials. The SEC alleges that Hicks falsely represented in the offering memorandum for his Locust Offshore Management hedge fund that he had undergraduate and graduate degrees at Harvard University and that the fund’s quantitative strategies were based on mathematical models that Hicks developed while at Harvard earning those degrees. However, that is far form the truth. Hicks only attended Harvard for three semesters, was twice required to withdraw for failing to perform academically, and never graduated. Hicks only took one mathematics course during his time at Harvard, receiving a D- for a grade.

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Sure Fire Way To Spot a Fraud: Look for the SEC Seal

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The Securities and Exchange Commission does not “approve” or “endorse” any particular securities, issuers, products, loans, services, professional credentials, firms or individuals. The SEC does not allow private entities to use its government seal. Yes, the staff of the SEC regularly meets with public companies, regulated entities, and others. Some of these investments and entities are required to be registered with the SEC.

But, the SEC never endorses an investment. Registration of a security does not imply its a good investment. Registration as an investment adviser does not mean you give good advice.

Investment advisers are required to include this statement on their Form ADV:

The information in this Brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Registration as an investment adviser does not imply any level of skill or training.

Any claim – stated or implied – that the SEC has endorsed an investment is completely false. You are likely looking at part of a fraudulent scheme.

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Train Fares, Integrity, and Financial Services

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On Monday Britain’s financial regulator banned a senior financial services professional from the industry for life. His transgression was the failure to pay his train fare. BlackRock director Jonathan Paul Burrows was caught by inspectors at Cannon Street station last year.

Mr Burrows has admitted that, on a number of occasions, he deliberately and knowingly failed to purchase a valid ticket to cover his entire journey whilst traveling on he Southeastern train service between Stonegate Railway Station, East Sussex, and Cannon Street Station, London.

Based on Mr Burrows’ admission, the Authority considers that Mr Burrows is not fit and proper to conduct any function in relation to any regulated activity carried on by any authorised or exempt persons … because he lacks honesty and integrity.

That means his has failed to meet the FCA’s Fit and Proper Test for Approved Persons.

The fare he failed to pay was £21.50. That’s an expensive train ticket. Mr. Burrows avoided paying the fare by boarding the London-bound train at Stonegate, a rural station with no turnstiles. Without the turnstiles, there is no control to make sure passengers have a ticket.

But it was not just the one time. He was alleged to have failed to pay for his ticket on almost 2,000 occasions. He settled with the transit authority for £42,550.

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Stonegate Railway Station photograph is by Simon Carey
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When Fundraising Becomes More Lucrative Than Running the Business

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Erick Mathe had a vision of creating a media empire. Well, maybe not an empire, more of a small keep. His plan was to broadcast over Low Power Television Service. Those are locally-oriented television broadcasts in small communities. Mr. Mathe had a line up of streaming music and infomercials. He just needed capital to get the business going.

It won’t surprise you that Mathe has been charged with fraud. There is an SEC complaint in Florida and a criminal indictment in Pennsylvania. Mathe has not responded to the charges so I have to rely on the government’s view of the facts. It looks like Mathe saw that raising the capital and taking a commission was more lucrative than running the television business.

Vision Broadcast Network had four stations lined up for delivery of its content and said that it had licenses for 70 more. It’s “Ask the Specialist” subsidiary was lined up to provide medical educational resources. That subsidiary was particularly useful because it put Mathe in contact with wealthy doctors who were potential investors.

What caught my eye was a registration filing that Vision Broadcast Network made in 2009 with the Securities and Exchange Commission. It looks like it had the good intention at that time to be a legitimate business.

In the filing, there is a Code of Ethics as an exhibit.

“Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgment to be subordinated. “

Mathe met Ashif Jiwa who persuaded him that he could help raise additional investment funds because he operated a hedge fund and acted as a financial adviser to the Prince of Dubai. Mathe paid Jiwa a commission on capital raised. At some point Mathe decided that he should also pay himself a commission for capital raised.

Perhaps that was the turning point. Mathe became more focused on raising capital than operating his business. According to the SEC complaint Mathe was misleading investors about revenue, capital commitments, and the success of the business.

He was ignoring his own code of ethics.

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Not Securities Fraud By Reason of Insanity

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Some investment fraud schemes sound crazy, but leave just a enough truthful-sounding bits to catch people. But Thomas Lawler’s scheme sounds completely bonkers. He established the Freedom Foundation to offer investors the chance to erase their debts and collect lucrative profits through the purchase of “administrative remedies”.

Never heard of profit-making “administrative remedies”? Lawler can sell you the secret.

Lawler investigated the banking system and discovered the startling “truth.” At birth, we each have an account established in our name. When you borrow from the bank, you are actually borrowing your own money that resides in your account. For a mere $1000, Lawler will prepare notices to the creditors, using the Uniform Commercial Code, international admiralty law, and papal decree to cancel the debt.

At least that is according to the SEC’s complaint. I checked out the Freedom Club USA website to find more information. The website is a big collection of crazy.

Here is a snippet:

The Vatican created a world trust using the birth certificate to capture the value of each individual’s future productive energy. Each state, province and country in the fiat monetary system, contributes their people’s value to this world trust identified by the SS, SIN or EIN numbers (for example) maintained in the Vatican registry. Corporations worldwide (individuals became corporate fictions through their birth certificate) are connected to the Vatican through law (Vatican to Crown to BAR to laws to judge to people) and through money (Vatican birth accounts value to IMF to Treasury (Federal Reserve) to banks to people (loans) to judges (administration) and sheriffs (confiscation)

The website includes ramblings about a lost 13th amendment to the Constitution, the illegality of the 1040, the Cosmic Time Plan, and an audio recording from the Prime Creator.

In sorting through the crazy, it’s hard to tell if it’s a securities fraud issue. It’s certainly a fraud. Anyone giving money to this kind of full-blown crazy is throwing their cash away. It sounds like Lawler may be selling a service and not an investment. There is too much crazy on the website for me to discern what Lawler is actually selling.

You can look to the Howey four-part definition of an investment contract. There is certainly an investment of money and the reliance on others. There is a reasonable expectation of profits. Cancelling debt is income, so the SEC can probably get over that hurdle.

But I’m not sure there is a “common enterprise.” Lawler’s scheme seems more like fraudulent credit reduction scheme than a securities investment.

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Image of Insanity by Albert Einstein by Marla Elvin
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The SEC is Late to a Real Estate Fraud

Company Theft

The Securities and Exchange Commission charged M. “Shi” Shailendra with making false representations to investors, misappropriating money, and acting as an unregistered broker. Shailendra was selling interests in his Interstate North 5 Acres fund known as Shi Six. He was purportedly using the money to acquire distressed real estate. Instead, he was pocketing most of the capital.

Shailendra had plans to create a massive real estate empire built with capital from the Indian community. His plans got derailed by the 2008 financial crisis and his own misdeeds.

According to news reports, the unraveling of his misdeeds has been happening for several years. Shi Investments One sued the Shailendra Group back in early 2011 for the diversion of investor funds to personal accounts and other self-dealing.

It’s good that the SEC caught him, but it seems that his investors had already grabbed him. Among the SEC’s penalties, Shailendra was ordered to disgorge over $2 million in ill-gotten gains and penalties. But the SEC waived that amount based on his inability to pay.

The fund is handed over to investors to try and regain whatever capital may remain. From the accusation in the complaint it sounds like most of the investors’ capital went to Shailendra for personal use or to fund affiliate transactions.

At a minimum, Shailendra is permanently barred from association with any broker-dealer, investment adviser or other firm under the jurisdiction of the SEC. However, lots of real estate investment operates outside that jurisdiction.

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How Do You Exit a Ponzi Scheme?

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It looks like Bernie Madoff was $45 billion short of funds in his “investment strategy.” How was he ever going to get out of this?

The original Ponzi schemer, Charles Ponzi, seems to think he could get out of his situation, at least according to Mitchell Zukoff, author of Ponzi’s Scheme: The True Story of a Financial Legend.

It sounds like Madoff and Ponzi fell into the same trap. At some point early on they did not realize their promised investment goals. Instead of being honest with their investors, they posted a fake return. The hope was that they could make up for the miss later on.

The central characteristic of a Ponzi scheme is that current returns to investors are paid from new investments instead of a return on the invested capital.

The duration of a Ponzi scheme is dependent on a few factors.

The first factor is the promised return rate. The higher the promised return the shorter the duration. One of the reasons Madoff continued for so long is that his promised return was typically low. He was generally in the 15% range. Since Ponzi was promising returns of 50% in three months, he had a short fuse on the length of his scheme.

The second factor is the redemption rate. The promised return is only meaningful when you have to pay out cash. The better the schemer is at getting investors to keep rolling over returns, the longer the duration. Madoff was undone by the 2008 financial crisis, crushed by a wave of redemptions as people were desperate for cash.

The third factor is the investment rate. The better Ponzi schemers can keep the cash flowing in. As long as the investment rate of cash flowing is in excess of the redemption rate, the scheme will not collapse unless discovered. Once the redemption rate exceeds the investment rate, the schemer will not have the cash to make payouts and the scheme will likely be discovered.

The fourth factor is discovery. This is a wild card. Once an accusation of fraud is made, there will likely be an sharp increase in the redemption rate and a reduction in the investment rate. Ponzi has high profile and attracted attention. Madoff was very secretive. If you can’t stand up to scrutiny, the less scrutiny the better.

The fifth factor is actual returns. I would theorize that many Ponzi schemes start as a legitimate investment proposals. So there may be some actual investment returns that could offset the need for a higher investment rate. Ponzi never made a legitimate investment so this factor was zero for his scheme. Madoff was apparently investing legitimately at some point, but ended up at zero for many years leading up to the collapse. Stanford was generating returns in his banking empire. Just not enough.

The obvious exit is to increase the actual returns to meet the promised return rate before the redemption rate exceeds the investment rate. You can look at Sam Israel who seemed to think he was always just a few trades way from making back all of the promised money.

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Lawyers and Prime Bank Investments

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If someone approaches you about investing in a Prime Bank investment program, walk away. Do not give them your time or money. It’s a scam.

The Securities and Exchange Commission shut down another one of these scams. Unfortunately, the investors lost at least $1.2 million before the SEC could step in.

According to the complaint, attorney Allen Ross Smith leveraged his title and position as an attorney to convince investors. The scheme was orchestrated by Switzerland-based MALOM Group AG, a company named with an acronym for “Make A Lot Of Money,” through individuals in Zurich and Las Vegas. Smith acted as MALOM’s attorney as well as its escrow agent and “paymaster.”

The SEC previously charged Malom Group AG, its principals, and agents in SEC v. Malom Group AG, et al, 2:13-cv-2280 (D. Nev. Dec. 16, 2013) and SEC v. Erwin et al., 2:14-cv-623 (D. Nev. Apr. 23, 2014). The principals of MALOM, Martin U. Schläpfer and Hans-Jurg Lips, are incarcerated in Switzerland.

The facts of the case are a mess, with various promises of funds coming from many different sources. At one point there was the lure of H-series Brazilian Letras do Tesouro Nacional (“LTNs”) – bonds issued by the Brazilian government in 1972 that were purportedly worth in excess of $200 million.

It looks like Smith was scammed into using his attorney escrow account to funnel investor money into the scam and out to MALOM’s principals. According to the complaint, Smith was making easy money, taking 1% of the incoming funds, by acting as the paymaster.

But then he stepped further over the line when he began taking a more active role in selling MALOM’s securities. Lawyer gone bad.

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The Fall of Fredrick Douglas Scott

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Fredrick Douglas Scott was named one of Ebony magazine’s “Top 30 under 30”, claiming to be the youngest African-American to found a hedge fund. In April 23, 2012, his company, ACI Capital Group, filed a Form ADV showing $3.7 billion in assets under management.

It was a lie and Mr. Scott is a thief.

Perhaps the SEC should have noticed the red flag when ACI’s AUM increased dramatically to $3.7 billion. One month earlier, ACI had filed a Form ADV with $100 million in assets under management.

According to the SEC complaint, the $3.7 billion consisted of  illiquid foreign bonds, rights to real property in the Republic of Cameroon and Guadalajara, Mexico, and a Honduran mine. The complaint, among many charges, contains a charge of violation of Section 203A of the Investment Advisers Act for registering with the SEC instead of the state regulators since he actually had less than $25 million in assets under management.

Of course it is up to the SEC to prove the charges. However, Mr. Scott already plead guilty to wire fraud conspiracy to steal over $1 million from investors and lying to official from the SEC.

“Fredrick Douglas Scott admitted that he used ACI Capital to steal his clients’ investments and fund his own lavish lifestyle. Rather than the historic figure he presented to the media, Scott stands revealed as a common thief who lied his way into his investors’ pockets and then continued his web of lies when confronted by the SEC. Scott has now been brought to justice for lying, cheating, and stealing for his own personal financial gain.”
United States Attorney Loretta E. Lynch.

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There Is No Secret International Market for Prime Bank Investments

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If someone approaches you about investing in a Prime Bank investment program, walk away. Do not give them your time or money. It’s a scam.

There is an undercurrent of distrust in the financial markets, thinking that the big players have some secret way to make massive amounts of money with no risk. What better way to prey on this distrust that to hook a gullible target into investing alongside these players in this dark, international market.

The fraudsters have an air of secrecy and promise extraordinary returns to leverage the acquisition of prime bank instruments. For some reason, these prime banks sell notes at greatly reduced prices to quickly and secretly raise capital.

The SEC recently shut down one of this scams. Unfortunately, the fraudsters managed to lure in 45 investors and $3.6 million of their cash. The fraudsters added a new wrinkle to the scam by promising to keep the investors’ cash in an attorney’s escrow account until the attorney received proof that the bank had received a stand-by letter of credit which the investors were leasing from a European banking group.

“Leasing” a standby letter of credit?!?

Even after falling for that, there was the lure of a respectable attorney holding their cash. Unfortunately, the Securities and Exchange Commission claims that the attorney, Bernard H. Butts, was in on the scam. (It’s up to the SEC to prove his guilt.)

Interestingly, Butts himself had apparently fallen for an investment scam. According to news report, he had apparently “invested” with Jason Meyer who held out no-risk investments in Mexican historic bonds, tropical timber and fantasy Ecuadorean gold mines. Meyer had claimed that Butts’ initial investment was performing well and arranged to have $1 million of profit wired back. Instead, Butts doubled down and reinvested that cash. Then he sent another $1 million for more investments. Meyer was fraudster. Butts lost nearly all of that cash.

What motivated Butts to get involved in the prime bank scam? Maybe he had learned techniques from Meyer. Maybe he was desperately trying to get back some of the cash he had lost. Maybe he was duped into acting as escrow agent and didn’t realize there was a scam going on again.

But we can learn from this. There is no such thing as a lucrative market for prime bank investments.

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