Here is the LATimes’ take on Judge Carney’s dismissal of criminal charges against former Broadcom execs William Ruehle and Henry T. Nicholas III, due to prosecutorial misconduct. It is safe to assume that the government will be appealing at least some of Carney’s rulings.
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Judge Cormac Carney has just dismissed the criminal stock option backdating cases, against former Broadcom CFO William Ruehle and former CEO Henry T. Nicholas III, based on government misconduct. The Orange County Register story is here. Nicholas had not yet gone to trial. In Ruehle’s case, the prosecution and defense had closed, and jury arguments were set for Thursday. Needless to say, dismissals based on prosecutorial misconduct are exceedingly rare. AUSA Andrew Stolper was at the center of the misconduct allegations and findings.
Here is more legal analysis on Judge Cormac Carney’s stunning and unprecedented dismissal of the felony charge against Broadcom co-founder Henry Samueli in the middle of William Ruehle’s trial. The Orange County Register story is by Andrew Galvin and Rachanee Srisavasdi.
So far, all of the articles I have seen on Judge Carney’s dismissal order fail to discuss whether it can be appealed. It can. It is one thing to throw out a guilty plea for an insufficient factual basis. It is quite another to throw out a felony charge brought by the government, particularly when the order of dismissal is based on evidence developed in a separate trial. On the other hand, the felony charge here was contained in a felony information. Felony informations are only valid when the defendant waives indictment. Defendants typically waive indictment when they enter a guilty plea, and that is what Samueli did when he originally entered his guilty plea. If the factual basis for the plea is insufficient, the felony information would have to be dismissed, absent a new waiver by Samueli. But Samueli no longer has any motivation to waive the information.
It isn’t at all clear to me what the Ninth Circuit will do if the government appeals. Generally, district courts are given broad discretion to decide whether to let defendants withdraw guilty pleas, and that is essentially what happened here.
Perhaps the more interesting question is what the courts will do if the government now indicts Samueli for lying to the SEC or for engaging in securities fraud. Before even thinking about the double jeopardy implications of indicting Samueli for lying to the SEC, the government would have to analyze the likelihood of meeting its Kastigar obligations in the wake of Samueli’s immunized testimony in the Ruehle trial. Not a pretty picture. I’m guessing that the Samueli prosecution is totally over.
So said Judge Cormac Carney to Broadcom co-founder Henry Samueli, after Samueli left the witness stand on Wednesday in U.S. v. William Ruehle. Here is the Orange County Register’s coverage of the dramatic events, which culminated in Judge Carney’s dismissal of Samueli’s guilty plea and federal felony charge.
Central District of California AUSA Andrew Stolper admitted yesterday that he leaked Broadcom co-founder Henry Samueli’s Fifth Amendment grand jury invocation to the news media. According to this Orange County Register story by Rachanee Srisavasdi, Stolper called it “the stupidest thing I’ve done in my career.” That’s saying quite a lot, since Judge Cormac Carney has already ruled that Stolper engaged in wholly separate misconduct during the ongoing trial of former Broadcom CFO William Ruehle. Stolper claimed that he did not know such leaks were against DOJ policy when he made them. Actually, the intentional leaking of federal grand jury information by a court reporter, grand juror, or prosecutor is a crime.
According to Srisavasdi’s piece, Judge Carney also “dismissed” Samueli’s prior guilty plea. Samueli had pled guilty to a violation of 18 U.S.C. Section 1001 for lying to the SEC. It is unclear from the story whether Judge Carney dismissed Samueli’s felony information or simply allowed him to withdraw his guilty plea. [Update: Judge Carney threw out the guilty plea and the felony conviction. See Samueli Dismissal.] Nothing relating to this has been posted on PACER, which is not surprising given the overall efficiency of the U.S. District Clerk’s Office in the Central District.
Stolper’s misconduct in the Ruehle case involved his phone call to lawyers for former Broadcom general counsel David Dull, right after Judge Carney granted Dull derivative use immunity so that Dull could testify as a defense witness for Ruehle. Stolper, who was no doubt unhappy with the the Court’s ruling, told Dull’s lawyers that if Dull testified consistent with his prior SEC testimony, Dull could face perjury charges.
Two Srisavasdi stories from Monday and Tuesday of this week, here and here, detail Stolper’s earlier misconduct, Judge Carney’s reaction to it, and Samueli’s testimony in Ruehle’s trial. Judge Carney has set a hearing for Tuesday at 9:00 to consider Ruehle’s Motion to Dismiss the case for prosecutorial misconduct.
Meanwhile, who the hell is minding the store here? We are talking about one of the premier U.S. Attorney Offices in the country. How could somebody like Stolper be put in a position of prominence in an investigation of this magnitude?
Amazing things have been happening in the stock option backdating criminal trial of former Broadcom CFO William Ruehle. First, U.S. District Judge Cormac Carney did something that federal judges almost never do. He granted immunity to two witnesses who the defense wanted to call, but who had declined to testify on Fifth Amendment grounds. The government had designated the witnesses as co-conspirators, so their reluctance to testify was understandable. The government plays this game all the time; telling potential defense witnesses that they are targets, which effectively terrorizes them into silence. Well, Judge Carney decided not to put up with it and granted “limited immunity” to former Broadcom General Counsel David Dull and Broadcom co-founder Henry Samueli. Presumably this “limited immunity” was derivative-use immunity which in fact is quite broad.
After Carney issued the immunity ruling, Assistant U.S. Attorney Andrew Stolper called Dull’s attorney and told him that if Dull repeated the essentials of his prior SEC testimony on the witness stand, Dull could face perjury charges. Judge Carney rightfully found this to be prosecutorial misconduct and so informed the jury. The government, aware of its massive screw-up, agreed to give Dull ”full immunity” (presumably transactional) in order to avoid outright dismissal of the case. Dull testified last week and Stolper was prevented from cross-examining him. (Another AUSA took over that task.) All in all, a very bad week for the government. Stolper’s threat is the kind of conduct that has long been condemned by federal courts. For some AUSAs Brady refresher courses may not be enough. The Orange County Register has the story here.
We are delighted to come out of hibernation and report the acquittal of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin by a federal jury in Brooklyn. The New York Post has the story here. It was obvious from the start that the case was weak and that the government was essentially trying to criminalize puffery. The Post takes the away the lesson that proving guilt in cover-up cases, as opposed to outright fraud cases, will now involve a “high hurdle” because of the verdicts. I wouldn’t be so quick to draw this conclusion. As a general matter, proving a cover-up is easier than proving a fraud. Every case is unique. One of the differentiating factors is the trial judge. Here, the defense was aided by, among other things, Judge Block’s key evidentiary ruling excluding a potentially damaging email written months before the hedge funds at issue collapsed. Sounds like the ruling was correct.
Yesterday the Ninth Circuit reversed former Brocade CEO Gregory Reyes’ securities fraud convictions, related to stock option backdating, due to prosecutorial misconduct. Here is the opinion, which I have not had time to read in full and analyze. More to come.
The Washington Post editorializes here for a compromise in the U.S.-Switzerland cold war over UBS’ reluctance to release more names of purported American tax cheats to IRS and DOJ. I understand the Swiss position. It’s tough to be a grown up nation in the 21st Century when a key segment of your economy is devoted to facilitating tax fraud…..Andrew Cuomo is talking to Chuck but in a nasty way, according to this WSJ article. In a Friday letter, the New York AG threatened to sue Charles Schwab & Co. for fraud in connection with its marketing of auction-rate securities. Cuomo is open to a settlement, however, if Schwab buys back the securities from its investor clients. Schwab adamantly denies wrongdoing. Cuomo’s letter provides examples, allegedly supporting his fraud theory. They look pretty weak to me. Let’s see if Andy is as tough on recently departed Auto Task force Chief, and Democratic Party mega-money raiser, Steven Rattner. Fox News reported on his departure, here, last week…..Meanwhile, in the surprise of the century, Neil Barofsky, “the special inspector general overseeing the government’s financial rescue program,” reports that many of the banks receiving TARP money have used those funds for things other than lending! The uses include, investing, repaying debt, and buying other banks. About 80% of the banks spent at least some of their TARP funds in connection with new lending. Barofsky’s report comes out today, according to this Washington Post article. I have an idea to increase employment and reduce waste and fraud. Every company should be required to hire its own special inspector general at inception. Then, after the first special inspector general’s report is issued, the company should be forced to fire the special inspector general on trumped-up charges. We can keep a lot of people employed this way, and generate plenty of news stories about waste and abuse. We should also make every person hire a special inspector general at birth. Then we can ignore virtually every warning the special inspector general gives us and later suffer the consequences. Oh wait–I’ve already done that with Mom and Dad.
Marc Dreier was sentenced to 20 years imprisonment yesterday by U.S. District Judge (SDNY) Jed Rakoff. The government had asked for 145 years. Dreier’s attorney, Gerald Shargel, requested 10 to 12 years for his client. With good time, Dreier should do about 17 years and be released at the age of 76. His children, now teenagers, will then be in their mid-thirties. Sobering numbers for those caught up in securities fraud and securities fraud investigations. When the SDNY prosecutors threaten you with life imprisonment if you don’t plead guilty and cooperate, you’d better believe they mean business. Dreier’s case is different since he pled guilty early on and had no higher-ups to implicate. It is unclear from the Wall Street Journal story here whether Judge Rakoff granted a downward variance, but I assume that he did. It is impossible to imagine such a “light” sentence under the old mandatory Sentencing Guidelines regime. This is not meant as a criticism of the sentence. Just a reminder that, even in the age of Booker-Gall-Kimbrough, the odds of receiving a substantial term of imprisonment are high for those who roll the dice, go to trial, and lose.
Here is disgraced attorney Marc Dreier’s letter to the Court, attached as an exhibit to his lawyer Gerald Shargel’s outstanding Sentencing Memorandum. Dreier concedes that he deserves and will receive a substantial term of imprisonment. He tries to explain what led him into a life of white collar crime. Hat tip to Tom Kirkendall at Houston’s Clear Thinkers for posting on this.
The Washington Post’s Zachary A. Goldfarb reports here that Lori A. Richards, longtime Director of the SEC’s Office of Compliance Inspections and Examinations, is resigning after 14 years on the job. Richards’ Office reviewed Madoff’s operations in 1999, 2004, and 2005, without uncovering his Ponzi scheme.
Last week’s Post carried this outstanding piece by Goldfarb on former Office of Compliance Inspections and Examinations attorney Genevievette Walker-Lightfoot. Walker-Lightfoot was hot on Madoff’s trail in 2004, raising and/or trying to ask several pertinent questions about Madoff’s activities, before she was re-assigned to other duties. Walker-Lightfoot’s supervisors at the time were Mark Donohue and his boss Eric Swanson. Swanson later married Madoff’s niece. The SEC’s Inspector General, H. David Kotz, claims to be currently looking at ”all the circumstances surrounding the SEC’s various examinations of Mr. Madoff, including the 2004 examination.” Stay tuned.
Here, courtesy of the WSJ, is the SEC’s civil complaint filed today in the Central District of California against Angelo Mozilo, David Sambol, and Eric Sieracki.
The SEC has filed a securities fraud complaint against Danny Pang and Private Equity Management Group in the Central District of California. Henry Blodget has the story here in businessinsider.com. This is another case containing allegations of a classic Ponzi scheme.
Here are the criminal complaint and supporting affidavit filed by the government in U.S. v. Pendergest-Holt, courtesy of the Houston Chronicle’s chron.com. And here is Monica Rhor and Devlin Barrett’s AP story, also on chron.com, detailing Pendergest-Holt’s release from jail (on a $300,000.00, 10% cash, bond), facilitated by a loan from Pendergest-Holt’s criminal defense attorney Dan Cogdell.
Certain things stand out right away.
First, there was no good reason for the feds to arrrest and perp-walk Pendergest-Holt late on a Thursday, thereby forcing her to spend a night in jail, instead of allowing her to turn herself in for the arrest. It was chicken-shit. She is innocent until proven guilty. She hasn’t even been indicted by a grand jury. There was no way in hell that she was going to be detained, as evidenced by the Government’s failure to exercise its automatic right to a three-day continuance in order to prepare for a detention hearing. Yes, the prosecutors and FBI agents were within their rights in arresting and perp-walking Pendergest-Holt on Thursday afternoon. But it still stinks.
Second, FBI Special Agent Vanessa Walther’s affidavit is underwhelming. I would wait to see the complete transcript of Pendergest-Holt’s testimony before rushing to judgment. The government will have to prove that Pendergest-Holt intentionally gave false testimony. It is clear, even from the affidavit, that Pendergest-Holt gave at least some truthful, damaging testimony about R. Allen Stanford and James M. Davis. Moreover, Pendergest-Holt is accused, among other things, of failing to testify about all of the testimony preparation sessions she attended. But she was instructed by the SEC, in at least one instance, not to include, in her answer, testimony about any meetings with her attorney. SFG’s attorney, Attorney A, was present in several of these preparation sessions. If Pendergest-Holt did not think she had to mention all of the sessions, because Attorney A was present and representing her interests as well as SFG’s, she may have an excellent defense. So, let’s just wait and see.
Third, Attorney A is in a heap of trouble. The feds allege that Pendergest-Holt lied under oath and obstructed justice. Attorney A sat through the entire deposition and attended virtually every prep session. Need I say more?
Fourth, at least one attorney-commentator has predicted with great certainty that Pendergest-Holt will cooperate against Stanford and Davis. But that will only happen if she pleads to a felony–and it isn’t at all clear that Pendergest-Holt is prepeared to do that. A close reading of the affidavit suggests that Pendergest-Holt may not have known about the alleged fraud until earlier this year. If that is correct, and if the entire case against her hinges on whether she obstructed jutice in Febraury 2009, Pendergest-Holt may well decide to fight.
Former Qwest CEO Joe Nacchio’s insider trading convictions were reinstated by the Tenth Circuit sitting En Banc. The Court reversed, by a 5-4 vote, the ealier panel decision which had overturned Nacchio’s multiple insider trading convictions based on trial judge Edward Nottingham’s refusal to allow Nacchio’s expert to testify. The full Court held that Nottingham did not abuse his discretion. The NYTimes story is here.
Apparently Laura Pendergest-Holt, the number three executive at Stanford Fiancial Group, has testified and/or is cooperating with the SEC, at least according to the background piece here in the Northest Mississippi Daily Journal. Pendergest-Holt is a Mississippi native.
Here is a detailed piece from Charles Paikert at InvestmentNews.com, analyzing the SEC complaint against Sir Allen and sampling the views of multiple experts.
The New York Post reports here on how the Stanford fallout has affected some Yankee outfielders and other athletes.
Today’s New York Times has a lengthy background piece here on Sir Allen. Buried within it is this interesting tidbit: “In 2006, the agency [SEC] opened an investigation, but halted it abruptly at the behest of another unnamed agency. The inquiry was reopened late last year, after the alleged $50 billion Ponzi scheme involving Bernard L. Madoff came to light. It is unclear why these and other investigations, including by various law enforcement agencies, appeared to have stalled over the years.”
It was originally reported that the SEC had been investigating Sanford since 2006. Who is the unnamed agency and why would it make such a request? Expect a Congressional investigation.
Meanwhile, the great Tom Kirkendall at Houston’s Clear Thinkers comments here on an allegedly cozy relationship between Stanford Financial Group and IMG, the world’s leading management firm for professional athletes and celebrities. Kirkendall has also commented here on how knowledgeable financial folk in Houston have long looked skeptically at Stanford Financial Group and Sir Allen: “Interestingly, I’ve asked dozens of folks in Houston investment community about Stanford over the years and have never once heard one vouch that an investment in the firm would be a good idea except as an absolute flyer.” This thing gets more and more interesting.
The Wall Street Journal reports here that the SEC/FBI probe of financier R. Allen Stanford is widening to cover allegations of Ponzi-type activity. The SEC has sued Stanford for misleading his clients about the liquidity of their investments. The SEC began investigating Sir Allen in 2006. Surprisingly, the federal criminal inquiry began just recently. The close coordination between the SEC and DOJ, which we have seen in many Southern District of New York and DC matters, apparently did not occur in this case. What is truly striking is how long the SEC investigation went on before DOJ was called in. This should be troubling to SEC Enforcement Division critics. The SEC does not have criminal investigatory power. When an SEC probe uncovers potentially serious criminal fraud activity, DOJ should at least be notified. Of course, we are operating from press accounts alone at this point and do not know the full story.
The SDNY opposes. Dreier appears to be seeking a Madoff-type 24-hour surveillance release. Law.com carries the New York Law Journal article by Noeleen Walder here.
High society investment advisor and Wall Street legend Bernard Madoff has been arrested for running what the SEC calls “a stunning fraud that appears to be of epic proportions.” Madoff was turned in by his sons. The Wall Street Journal has the story here. Losses are estimated to be in the $50 billion range. The SEC has filed suit and DOJ has issued a criminal complaint.
The founder and CEO of PurchasePro, Charles E. “Junior” Johnson of Las Vegas, on Friday was sentenced to 108 months in prison for securities fraud by US District Judge Liam O’Grady in Alexandria, Virginia. Johnson was convicted on May 15 of conspiracy, securities fraud, witness tampering, and obstruction in connection with a scheme to falsely inflate the now-defunct company’s first quarter 2001 revenue to meet Wall Street’s expectations. PurchasePro’s primary product was a business-to-business “marketplace license” sold through its business partner, AOL. Johnson was considered the mastermind of the scheme; six other PurchasePro executives were convicted and AOL paid $210 million to settle charges aiding and abetting securities fraud (DOJ, AP).
After a two week trial in Tacoma, on Thursday a federal jury convicted Charles Nolon Bush of Port Orchard, Washington on 27 counts including securities fraud, wire fraud, mail fraud and money laundering in connection with a Ponzi scheme he allegedly operated between 1998 and 2002. Bush had left the US in 2002 and was arrested in Poland after being indicted in 2006. He was extradited in 2007. Bush was accused of accepting $35 million through three entities from hundreds of investors with promises of high yields, then diverting most of it to fund a lavish lifestyle and pay off early investors. He faces a statutory maximum of 20 years in prison on each count; sentencing is scheduled for February 6, 2009 before US District Judge Benjamin Settle (DOJ, Bizjournal).
When WexTrust Capital LLC principals Steven Byers and Joseph Shereshevsky were arrested in August and charged with conspiracy to commit secuties fraud (earlier), we speculated that more criminal counts might be forthcoming due to the massive civil fraud charges filed by the SEC which allege a $255 million Ponzi scheme. Last week, Byers and Shereshevsky were indicted on one count of securities fraud and one count of conspiracy in connection with the same $9.2 million fraud scheme alleged when they were arrested. No further criminal activities are included in the indictment — at least, not yet (DOJ, Virginian-Pilot).
Raffaello Follieri, the recently convicted former boyfriend of actress Anne Hathaway (earlier), is not happy with conditions in the federal prison in Brooklyn and wants to go back to the facility in Manhattan where he was held pending trial (MSN/AP). Hopefully his fellow inmates won’t read the story.
Former Goldman Sachs trader David Pajcin, one of the principals in a wide-ranging $6.7 million insider trading and securities fraud scheme, has disappeared. Pajcin was sentenced in January to time served (earlier) after having been jailed for about two years but was put on three years supervised release. A separate civil case against Pajcin and other defendants is still ongoing before the SEC, and SEC trial lawyer Scott Black has now informed US District Judge Kimba Wood that Pajcin “is in violation of his probation.” Neither the USAO in Manhattan nor Pajcin’s criminal defense attorney knows where he is. Pajcin has family in Croatia and is believed to have left the country (Bloomberg, Reuters).
After only about four hours of deliberation, a jury in US District Court in Columbus has convicted former National Century Financial Enterprises CEO and co-founder Lance Poulsen on one count of conspiracy, one count of wire fraud and money laundering conspiracy, four counts of concealment of money laundering and six counts of securities fraud in connection with the company’s 2002 collapse which cost investors about $1.9 billion. The testimony of the government’s star witness, former executive VP for compliance Sherry Gibson, was central to the prosecution’s case. Gibson’s testimony was critical in the trial which resulted in the March convictions of five other former National Century executives. In addition, jurors heard Gibson testify about the attempt of Poulsen and his associate Karl Demmler to bribe her to change her story; Poulsen was convicted in that case and sentenced to 10 years in prison in August. US District Judge Algenon Marbley did not immediately set a sentencing date in this case (Columbus Dispatch, Columbus Bizjournal).
Chief US District Judge Michael Davis on Friday refused to grant bail to Tom Petters, affirming the earlier ruling of US Magistrate Judge Jeffrey Keyes (Star Tribune).
Meanwhile, WCCO’s Esme Murphy has filed a complaint with Judge Davis over the seemingly preferential treatment shown to some Petters defendants, including the unscheduled bond hearing for Larry Reynolds:
I am amazed that this group of co-defendants that have admitted to stealing a total of 3 billion dollars from unwitting investors is getting this kind of special treatment.
Judge Davis will look into it but told Murphy that “all court hearings should be open to the public and all hearings should be posted in the court calendar.”
Petters associate Larry Reynolds, who pleaded guilty last week to money laundering conspiracy (earlier), was granted bail on Thursday in Minneapolis by US Magistrate Judge Susan Nelson. He and his wife agreed to surrender their passports and put up their home as security for the $2.5 million bond, and he will be subject to home detention and electronic monitoring.
Although we previously noted that he was said to be negotiating with prosecutors for his release, controversy arose because the matter was not on the public docket. From the Star Tribune:
Assistant U.S. Attorney Timothy Rank was walking toward the courtroom with Reynolds’ attorney, Fred Bruno, when they recognized a reporter and froze in their tracks.
Despite their protestations, it certainly gave the appearance that they had something to hide. And how could Reynolds be allowed to use his home as security when US District Judge Ann Montgomery has frozen his assets? With Judge Montgomery’s dubious actions already raising questions, it’s no wonder that the commenters on this and just about every other Star Tribune story on the Petters fiasco believe some kind of behind-the-scenes skulduggery is going on.
Another sidebar to the Petters securities fraud case: Tom Petters’ attorney Jon Hopeman was approached by a man who said he had connections and could make the case against Petters “go away” for $250,000. The man, Derrick Lee Riddle of Minneapolis, has at least four felony convictions. Hopeman called the FBI, and agents taped him on audio and video making the offer at Hopeman’s office. He now faces state charges of attempted theft by swindle and attempting to aid an offender (St. Paul Pioneer Press).
First of a four-part Star Tribune series: The collapse of the Petters empire. Long but worth the read. How could he have gotten away with a multi-billion dollar fraud scheme for so long? The warning signs were ample.
Raffaello Follieri, the former boyfriend of actress Anne Hathaway, was sentenced in Manhattan on Thursday by US District Judge John Koeltl to 54 months in prison for defrauding real estate investors. Follieri pleaded guilty in September to one count of conspiracy, eight counts of wire fraud and five counts of money laundering (earlier). He admitted soliciting more than $2 million from investors by falsely claiming that he had close connections with the Vatican that enabled him to purchase unwanted Catholic Church properties in the US at a substantial discount; instead he used the money to fund his lifestyle. Per the plea agreement, Koeltl ordered Follieri to forfeit over $2.4 million in cash plus expensive watches and other jewelry (Bloomberg, DOJ).
Larry Reynolds of Las Vegas on Thursday became the fourth defendant to plead guilty in the Petters case, leaving Tom Petters as the only one of the five persons charged who has not pleaded guilty. As expected, Reynolds pleaded guilty to a one-count information charging him with money laundering conspiracy. Reynolds admitted that his Los Angeles firm, Nationwide International Resources, had laundered about $12 billion in investor funds since 2002. Instead of being used to buy electronics merchandise, as investors were told, it was funneled to Petters, minus a commission which earned Reynolds about $6 million over the years. He is still in custody but is negotiating with prosecutors for possible release on bond. Another bond hearing was to be held for Tom Petters on Thursday, but that has been postponed until October 31 (Star Tribune).
KSTP has obtained a transcript of defendant Robert White’s call to Tom Petters in which Petters discussing fleeing the country (story w/ video). It turns out that White, who pleaded guilty on October 8 to mail fraud and illegal monetary transactions (earlier), called Petters at the FBI’s request.
US District Judge Ann Montgomery on Wednesday ordered a freeze on the filing of civil suits at the request of court-appointed receiver Doug Kelley. Wait… she can’t do that! The same story discloses that in St. Paul, US Bankruptcy Judge Gregory Kishel is consolidating 10 bankruptcy petitions from the various Petters companies under a single case number. Does Judge Montgomery plan on interfering with bankruptcy proceedings? Remember, this is the same judge whose actions effectively prevented this enormous mess from surfacing six years ago (earlier).
Larry Reynolds of Las Vegas, who was arrested in California on October 3 and charged with mail fraud and money laundering in connection with the Petters case (earlier), is apparently on the verge of becoming the fourth defendant to plead guilty. The Star Tribune reports that prosecutors have now filed an information charging him with one count of money laundering conspiracy, indicating that a plea agreement is imminent.
Frank Vennes Jr., the supposedly reformed con man who is also under investigation in the case (earlier), has been allowed to have his frozen assets separated from the others and assigned to a different receiver. He has not been charged.
US District Judge Ann Montgomery ordered the seizure of the Petters companies’ assets at the DOJ’s request and has frozen the personal accounts of individuals charged or under suspicion. But according to a St. Paul Pioneer Press article, she repeatedly thwarted an investor’s attempt to obtain $1.3 million he says was stolen from him by Petters Company, Inc.
Richard Hettler, who started investing with Petters in 1997, claims PCI gave him two hot checks totaling that amount in January 1998 in payment of promissory notes. He sued in 2002 but Montgomery not only dismissed it, she barred him from filing further lawsuits over the notes. In 2005, when Petters announced that he was buying Polaroid, Hettler went public with his accusations, only to have Montgomery grant a restraining order against him at Petters’ request. And in Decemeber of 2006, Montgomery granted a Petters motion to hold Hettler in contempt of court for posting “inflammatory” material online, and ordered the material removed.
There’s much more; read the whole story here.
WCCO’s Esme Murphy reports that the assets of Tom Petters’ co-defendants have now been frozen by a federal judge. That would be US District Judge Ann Montgomery, who previously froze the assets of the Petters companies and Tom Petters personally. Attorney (and former AUSA) Doug Kelley, the court-appointed receiver, will be handling all the accounts.
The story identifies the co-defendants as Deanna Coleman, Robert White, James Wehmhoff, Larry Reynolds, Michael Catain and Frank Vennes. However, although Wehmhoff and Vennes were identified in the FBI affidavit, to our knowledge they have yet to be charged.
Meanwhile, Tom Petters’ attorney Jon Hopeman said he expects a grand jury indictment to be handed down early next month (Star Tribune).
Petters Company Inc. (PCI) and Petters Group Worldwide filed for Chapter 11 bankruptcy in petitions filed Saturday night by attorney Doug Kelley, the court-appointed receiver. PCI is the entity directly involved the fraud allegations; Petters Group Worldwide is the parent of the various Petters-owned or controlled businesses, including Polaroid and Sun Country Airlines (Star Tribune). Sun Country filed Chapter 11 earlier last week.
Cheryl Mau, VP of marketing for Polaroid, said yesterday that Polaroid will “continue to build and ship product,” indicating that the company’s plans haven’t changed. And perhaps Polaroid will be unaffected. But the now-released FBI affidavit (.pdf) lists Polaroid CEO Mary Jeffries as the recipient of $1 million in PCI assets in December 2007 from one of the accounts allegedly involved in the fraud. Jeffries was previously COO and President of Petters Group Worldwide until being named to the Polaroid post in April 2008. Former Polaroid CEO Thomas Beaudoin and another Polaroid employee also appear on the list of recipients (pp. 20-21). Stay tuned.
UPDATE/CORRECTION: Contrary to what we posted earlier, Fingerhut is not presently controlled or owned by Petters Group Worldwide. As explained in this press release: “[Fingerhut] is not dependent for any funding from Petters Group Worldwide or any of its affiliates (PGW) and hasn’t been since February 2004. PGW is a minority, passive stockholder, and has not been involved in the day-to-day operations of the company since that time.”
The fraud trial of former National Century CEO and co-founder Lance Poulsen is recessed until October 20 due to prior commitments by US District Judge Algenon Marbley. The government’s key witness, former Executive VP for Compliance Sherry Gibson, testified on Thursday and Friday that she had falsified records at Poulsen’s specific request “report by report, and sometimes line by line” dating all the way back to 1992. Among other things, she said she was told to show falsify the balances shown in the company’s reserve accounts, and she explained how the company would deceive auditors by creating false backup reports and by varying audit dates for different entities in order to shuffle funds between accounts.
Gibson pleaded guilty in 2003 to one count of conspiracy to commit securities fraud and agreed to cooperate with prosecutors; she was sentenced to 48 months in prison in June 2004. She was the government’s star witness in the trial of five other executives who were convicted in March, and also in the March trial of Poulsen and his associate Karl Demmler for witness tampering. They were convicted of trying to bribe her to change her testimony; Poulsen was sentenced to 10 years in prison in August in that case.
Earlier in the week, FBI Special Agent Jeffrey Williams testified that investigators discovered $1.3 billion in unsecured loans to companies owned or controlled by Poulsen and other National Century principals.
US Magistrate Judge Jeffrey Keyes in St. Paul on Wednesday denied bond for Tom Petters, saying “He has the personality to pull off a flight caper.”
In the same courthouse, three Petters associates pleaded guilty:
- Faux wholesaler Michael Catain, as expected, pleaded guilty to money laundering conspiracy.
- Consultant and former PCI officer Robert White pleaded guilty to counts of mail fraud and illegal monetary transactions. White said the fraud “exceeded $3 billion.”
- Deanna Coleman, former vice president of operations for PCI, pleaded guilty to one count of conspiracy to commit mail fraud. Coleman formally acknowledged that she was the cooperating witness who went to the FBI and wore a wire.
Judge Keyes called the scheme “one of the greatest frauds in American history.” Colemn’s attorney alled it “an astronomical fraud.” According to another report, the FBI had no inkling until Coleman came forward on September 8. Yet one month later, and only five days after Petters and White were arrested, three principals have pleaded guilty. Will Tom Petters risk a trial? Not likely.
Tuesday’s developments in the giant but fast-moving Petters fraud story:
Michael Catain, owner of one of the sham companies represented to investors as a wholesale supplier in the scheme, was charged last Friday with money laundering. He is expected to plead guilty to money laundering conspiracy on Wednesday afternoon in US District Court in St. Paul.
The Tuesday afternoon bond hearing for Tom Petters lasted three hours; US Magistrate Judge Jeffrey Keyes will announce his decision on Wednesday morning. The Star Tribune reports that secretly recorded tapes played at the hearing contain damning admissions by Petters, including this: “The only thing that makes me think there is some divine intervention [is that] when it gets down to it, there is no possibility we could have got away with this for so long.”
US District Judge Ann Montgomery on Monday issued an order seizing the assets of Petters Group Worldwide, Petters Co. Inc. and most other Petters-related companies. Attoney Doug Kelley, a former AUSA, was appointed receiver. How this will track with the Illinois state court order issued on Friday (earlier) remains to be seen, but the federal seizure seems likely to prevail (Star Tribune). The order excludes Petters Aviation, operator of Sun Country Airlines, which filed Chapter 11 bankruptcy on Monday (Reuters).
Two more individuals have been charged: Deanna Coleman, a Petters employee, was charged with conspiracy on Monday for allegedly fabricating documents used by Petters. Michael Catain, listed as owner of one of the allegedly sham wholesale companies, was charged with money laundering (Pioneer Press). At least one source claims that Coleman is the cooperating witness who was wired by the FBI.
Testimony to date in the fraud trial of former National Century CEO Lance Poulsen has centered on how investors were allegedly deceived by the company’s accounting practices. National Century represented to investors that it was buying valid and collectible receivables from health care providers in exchange for cash to pay their bills. The receivables were packaged as bonds which were sold to investors. However, both former director of securitization Jon Beacham and former associate vice president of funding Jessica Bily both testified that National Century never actually purchased the receivables from six providers and instead deliberately overfunded them as part of a scheme to enrich Poulsen and two other principals, who controlled the six providers. Bily said that Poulsen ordered her to make false entries in the official books to make it appear that these were legitimate. Bily also testified that the scheme was going on as long ago as 1994. National Century collapsed in 2002 (Columbus Bizjournal, Columbus Dispatch).
It just keeps getting bigger: a group of lenders on Friday obtained an order appointing William Procida, Inc. of New Jersey as court receiver to oversee Petters holdings. The order was issued in state court in Cook County, Illinois. Procida claims to represent lenders holding over $3 billion in loans to Petters companies. Lancelot Investment Management a hedge fumd out of Northbrook, Illinois, acknowledged it has lent $1 billion to Petters Group Worldwide. Another hedge fund, Nevada-based Palm Beach Finance, admits lending $1.1 billion to Petters. (Bloomberg, Star Tribune).
A “reformed” con man who turned to religion and became involved in Christian charitable work has been identified as one of the parties whose house was raided by the FBI in the investigation. Frank Vennes Jr. has not been charged but the search warrant affidavit identifies him as “a facilitator who persuaded five major investors to invest $1.2 billion in companies controlled by Petters” and he has allegedly been involved in the scheme all along.
Twin Cities businessman Tom Petters, implicated in a multi-billion dollar fraud scheme (earlier), was arrested this morning after a criminal complaint was filed late Thursday charging him with mail fraud, wire fraud, money laundering and obstruction of justice. He is scheduled to be arraigned this afternoon before US Magistrate Judge Franklin Noel. From CBS afiliate WCCO:
Sources tell WCCO-TV that FBI officials arrested Petters, who had been under constant FBI surveillance for the last week, because they learned he was preparing to flee the country.
The Star Tribune previously reported that the affidavit for the search warrants executed last week said that Petters “talks about fleeing the country and creating fabricated defenses if the fraud scheme is discovered.” Good luck on that bond, Tom.
Another Petters associate, Larry Reynolds of Las Vegas was also charged with the same offenses. He was arrested Friday in California. Petters consultant and former officer Robert White was charged Tuesday with mail fraud and money laundering.
UPDATE: Tom Petters is jailed without bond pending a detention hearing which is now scheduled for Tuesday at 2 PM (Star Tribune). Here’s the government’s motion (.pdf), which describes the alleged flight risk and alleges that Larry Reynolds also planned to flee.
Initial reports on the developing Tom Petters fraud scheme story (earlier) only mentioned one investor, Fidelis Foundation, a 501(c)(3) charitable organization. Now more information is emerging. The St. Paul Pioneer Press reports that Interlachen Capital Group, a Twin cities-based hedge fund manager, has sued Petters Worldwide and PCI in US District Court. The lawsuit (.pdf) reveals that the fund had invested $60 million purportedly collateralized by televisions which turned out to be imaginary. Sources report that hedge funds played a role in uncovering the scheme.
The Star Tribune reports that Gottex Fund Management of Lausanne, Switzerland has an estimated $300 million invested with Petters and that Northwater Market of Toronto has an undisclosed amount invested; both have warned clients.
In addition, Acorn Capital Group sued (.pdf) Petters on August 14 in the Southern District of New York, alleging default on over $273 million in loans, $259 million of which had been resold to seven other noteholders. The suit alleges that Petters personally guaranteed $50 million.
Twelve jurors and four alternates were selected on Wednesday in the fraud trial of former National Century CEO Lance Poulsen, with opening arguments scheduled for Thursday morning. (Columbus Bizjournal). Poulsen’s defense team will have one tactical advantage not available to his co-defendants who were convicted in March: since then, the SEC has put some of the blame on other parties. As the Columbus Dispatch pointed out:
The Securities Exchange Commission found Bank One and JPMorgan Chase, which now owns Bank One, culpable for negligent conduct while serving as National Century’s bank trustees.
The SEC has made similar findings with accounting firms PricewaterhouseCoopers and Deloitte & Touche while auditing National Century.
Still, Poulson faces long odds, and he has the additional problem of the tape recordings that sunk him in his witness tampering trial.
Although he has not yet been indicted, Tom Petters on Monday resigned as CEO and Chairman of Petters Group Worldwide in the wake of the emerging investigation of a massive fraud scheme at his equity company, PCI (earlier). He announced that effective immediately he will no longer be involved in any of the operations of the parent company or its subsidiaries, which include Polaroid, Fingerhut and Sun Country Airlines (Star Tribune).
On Tuesday, Robert White, a former officer and current consultant to Petters, was charged with mail fraud and money laundering in connection with the operation. He allegedly created the phony purchase orders that were used to lure investors (AP/StarTribune ).
Jury selection begins today in Columbus before US District Judge Algenon Marbley in the fraud trial of Lance Poulsen, former CEO and co-founder of National Century Financial Enterprises. Poulsen faces one count of conspiracy, one count of wire fraud and money laundering conspiracy, four counts of concealment of money laundering and six counts of securities fraud in connection with the company’s 2002 collapse; the loss to investors has been estimated at anywhere from $1.9 billion to as much as $3 billion.
Five of Poulsen’s co-defendants have already been convicted, and four have been sentenced to prison (here and here) with the fifth, Rebecca Parrett, still at large. Poulsen’s trial was separated after he and an associate were charged with witness tampering for trying to bribe the prosecution’s star witness. Both were convicted; Poulsen has been sentenced to 10 years in prison in that case.
Twin Cities businessman Tom Petters is well known in the region as the founder of Petters Warehouse Direct and the owner of Sun Country Airlines. His Petters Worldwide group also includes Polaroid and Fingerhut among its holdings. But his future is now in doubt after the FBI executed nine search warrants last week. According to the affidavit for the search warrants, Petters is accused of using capital raised by his equity company, Petters Co. Inc. (PCI), “for his other business ventures and to support his extravagant lifestyle.” At least four other associates are involved.
The affidavit, which was unsealed on Friday, reveals that an unnamed cooperating witness wore a wire in meetings with Petters and his associates; the witness will plead guilty to conspiracy. On one recording Petters allegedly “talks about fleeing the country and creating fabricated defenses if the fraud scheme is discovered.” One of his associates is allegedly on tape as saying that the amount of the fraud could exceed $2 billion.
The alleged fraud scheme lured investors by claiming that their money was secured by merchandise purchased from certain wholesale vendors and sold to Wal-Mart, Sam’s club and other retailers. According to the FBI, these were all sham transactions; the purchase and sales orders were fictitious, and the wholesale vendors were shell companies allegedly used to launder funds to PCI. The Star Tribune has an extensive story here.
Former Credit Suisse broker Julian Tzolov, charged with securities fraud in an indictment unsealed on September 3 (earlier), was told Friday by US District Judge Jack Weinstein in Brooklyn to return $2 million he sent to Bulgaria while he was under investigation. Tzolov went missing when the investigation was revealed and was thought to be in his native Bulgaria, but he returned and surrendered a day later. After AUSA Greg Andres said Tzolov had sent $2.3 million to Bulgaria, Tzolov said the money was sent to his parents to buy property. That didn’t go over well with Weinstein, who told him to get it back and put it in escrow. Weinstein also set a tentaive trial date of April 27, 2009. Tzolov’s former colleague Eric Butler will stand trial with him. The two allegedly misled investors by selling customers auction rate securities backed by mortgageswhen they had represented the securities as being backed by student loans (Reuters).
Matthew Marino, brother of convicted former Bayou Group CFO Daniel Marino, pleaded guilty on Wednesday before US Magistrate Judge Lisa Margaret Smith in White Plains, New York to a one count information in which he admitted knowing about the fraud at the now-defunct hedge fund and actively helping conceal it. Daniel Marino and Bayou co-founder Samuel Israel III each received 20 year prison sentences earlier this year. Matthew Marino faces a maximum sentence of three years in prison; sentencing is scheduled for December 4 (Reuters, DOJ).
That didn’t take long: missing former Credit Suisse broker Julian Tzolov, who was indicted Wednesday on securities fraud charges, surrendered on Thursday at JFK and was taken into custody by the FBI. His arraignment is scheduled for today (Reuters).
In a superseding indictment unsealed Wednesday in US District Court in Brooklyn, Eric Butler and Julian Tzolov, two former Credit Suisse brokers, were charged with conspiracy, securities fraud, and wire fraud in connection with allegedly fraudulent sales of auction rate securities to Credit Suisse Group customers. According to the DOJ Press Release:
The superseding indictment alleges that the defendants schemed to obtain higher sales commissions by selling auction rate securities (“ARS”) backed by mortgages to Credit Suisse clients who, in fact, had placed orders to buy ARS backed by student loans. The defendants concealed their scheme by falsifying the names of the ARS the clients bought and otherwise misleading the clients into believing they had bought ARS backed by student loans. When the mortgage-backed ARS market failed, the clients lost their money.
Butler pleaded not guilty on Wednesday before US Magistrate Judge Ramon Reyes, who released him on bond. Tzolov went AWOL shortly after the investigation became public knowledge (earlier) and is believed to be in his native Bulgaria (Reuters).
George Motz, CEO of Melhado, Flynn & Associates in Manhattan and mayor of Quoque in the Hamptons, was indicted Thursday on charges of securities fraud and altering documents to obstruct an SEC examination. He is accused of operating a so-called cherry picking scheme in which he allegedly executed buy orders in the morning without allocating them to specific accounts, and then selling late in the day, assigning the profitable trades to his firm’s accounts and the less profitable or losing trades to discretionary clients. The alleged practices are said to have cost his clients $1.4 million. Motz pleaded not guilty on Friday before US Magistrate Judge Kathleen Tomlinson and was released on bond (Newsday, DOJ).
Another defeat for the Southern District of New York in its prosecution of specialist traders: In Manhattan on Monday, US District Judge Sidney Stein vacated the guilty pleas of Patrick McGagh and Joseph Bongiorno, both former specialists at Van der Moolen Specialists USA. The two men pleaded guilty to securities fraud in 2006 in connection with an interpositioning scheme, but the Second Circuit in June upheld a District Court acquittal of specialist David Finnerty and in July reversed the convictions of Van Moolen specialists, Michael Hayward and Michael Stern, ruling in both instances that the evidence was insuffcient to prove deception. In a related case, prosecutors dropped criminal charges against former LaBranche & Co. specialist Freddy DeBoer ($WSJ$, Investment News).
Lennox and Lester Parris, brothers and principals of now-defunct Jericho, New York-based bottled water distributor Queénch, Inc., were each sentenced last Wednesday in Brooklyn to 60 months in prison for securities fraud in connection with the manipulation of stock prices which allegedly cost investors over $2.5 million. They were convicted in 2007 on six counts including securities fraud, conspiracy to commit securities fraud, witness tampering and conspiracy to commit witness tampering. What’s unusual here, although the DOJ press release fails to mention it, is that US District Judge Frederic Block departed sharply downward from federal sentencing guidelines, which called for a recommended sentences of 30 years to life based on offense levels of 42 for both men. Block criticized the guidelines’ “fetish with absolute arithmetic”, writing that while the sentences were well-deserved, the crimes did not rise to the level of Enron, WorldCom and Computer Associates. Mark Fass’ NY Law Journal story has more, including a link to the decision.
Steven Byers and Joseph Shereshevsky, principals of WexTrust Capital LLC, were arrested last week and charged in the Southern District of New York with conspiracy to commit secuties fraud. The DOJ Press Release alleges a particular scheme in which $9.2 million was raised from investors to buy certain GSA properties, but the properties were never purchased and the funds were used for other purposes including paying off investors in other schemes. However, this indictment may well be a prelude to more criminal counts, because the SEC unveiled massive civil fraud charges against Byers, Shereshevsky and Wextrust entities, alleging a Ponzi scheme involving $255 million raised from approximately 1,200 investors, largely from Shereshevsky’s contacts in the Orthodox Jewish community. Over $100 million was allegedly diverted. The scheme outlined in the criminal case is included. The assets of the Wextrust companies have been frozen.
Shereshevsky, of Norfolk, Virginia was ordered held without bond last Wednesday by US Magistrate Judge Tommy Miller in Norfolk, pending his arraignment on the criminal charges; Miller called Shereshevsky a thief and a thug (Virginian-Pilot). Shereshevsky was convicted on a federal bank fraud charge in 2003. Bloomberg has more.
Ending this week’s sentencings of former executives of National Century Financial Enterprises, US District Judge Algenon Marbley today sentenced former CEO and co-founder Lance Poulsen to 10 years in prison for witness tampering. Poulsen and his associate Karl Demmler were convicted on March 26 on one count each of conspiracy to obstruct justice, witness tampering, witness tampering by influencing testimony and corruptly persuading a federal witness. They allegedly attempted to pay former executive VP for compliance Sherry Gibson $500,000 to $1 million to plead unfamiliarity with the fraud charges against Poulsen and other executives. Gibson, who had pleaded guilty in 2003 to one count of conspiracy to commit securities fraud and agreed to cooperate, went to authorities instead. She was a key witness in the fraud trial of the five executives who were convicted in March, testified against Poulsen and Demmler in this case and is expected to testify against Poulsen in his fraud trial which begins October 1. Demmler’s sentencing was postponed pending completion of a psychological evaluation (Columbus Dispatch).
In Manhattan on Thursday, US District Judge Naomi Reice Buchwald sentenced former Refco Inc. President Tone N. Grant to 10 years in prison for his role in the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. A jury convicted Grant in April on one count each of conspiracy, securities fraud, wire fraud, bank fraud and money laundering. Grant’s attorneys plan to appeal his conviction (Bloomberg, Reuters). Our previous Refco entries are here.
US District Judge Kenneth Karas on Thursday refused to let imprisoned Bayou Group co-founder Sam (Suicide Is Painless) Israel III enter a plea in his bail jumping case. Israel planned to plead guilty to one count of failure to appear in connection with his disappearance the day he was to start serving his 20-year prison sentence for securities fraud, but in response to Karas’ questioning, he described his ability to understand the proceedings as only 60 to 70 percent because of his methadone addicition. Karas then refused to accept a plea, saying “I have to be satisfied that you’re competent.” He set a new hearing for September 16 (Bloomberg).
Following Wednesday’s sentencings, the third and fourth former National Century Financial Enterprises defendants were sentenced on Thursday by US District Judge Algenon Marbley in Columbus. In the morning, former executive vice president of securitizations Roger Faulkenberry was sentenced to 10 years in prison. He was convicted in March on one count of conspiracy, four counts of securities fraud, one count of wire fraud and two counts of money laundering. On Thursday afternoon, former associate director of marketing and vice president of client development James Dierker received a five year prison sentence. He was convicted on one count of conspiracy and three counts of money laundering. Marbley had previously indicated that he held Dierker less culpable than the other defendants. After fifth defendant Rebecca Parrett flew the coop, Dierker was the only other defendant allowed bond with electronic monitoring (Columbus Bizjournal, Columbus Dispatch, DOJ via Yahoo News).
Co-founder and former CEO Lance Poulsen and his co-defendant Karl Demmler will be sentenced today in connection with their witness tampering convictions. Poulsen’s trial on the fraud charges begins October 1.
In the first of three days of sentencing hearings relating to the collapse of National Century Financial Enterprises, US District Judge Algenon Marbley sentenced co-founder and former COO Donald Ayers to 15 years in prison and former CFO Randolph Speer to 12 years in prison for their roles in the 2002 collapse of the health care provider financing company in what prosecutors called a massive and complex fraud scheme. In their March trial, Ayers was convicted on one count of conspiracy, six counts of securities fraud and one count of money laundering, while Speer was convicted on one count of conspiracy, three counts of securities fraud, one count of wire fraud and six counts of money laundering. Marbley also ordered restitution of nearly $2.4 billion (Columbus Dispatch, Columbus Bizjournal).
Co-defendants Roger Faulkenberry and James Dierker will be sentenced today. Co-founder and former CEO Lance Poulsen has yet to stand trial on fraud charges but he will be sentenced tomorrow in connection with his witness tampering conviction. Convicted co-founder Rebecca Parrett remains at large.
Julian Tzolov, one of two former Credit Suisse brokers known to be under criminal investigation for securites fraud in the Eastern District of New York, has disappeared. Prosecutors suspect that Tzolov has returned to his native Bulgaria. The investigation of Tzolov and Eric Butler is said to center on whether they lied to investors about what was backing the auction rate securities they sold. ($WSJ$ , Reuters).
Following its July 18 decision in the case of David Finnerty (earlier), a three-judge panel of the US Court of Appeals for the Second Circuit reversed (.pdf) the convictions of specialists Michael Hayward and Michael Stern, both formerly of Van der Moolen Specialists USA. Both were convicted of securities fraud in January 2007 in connection with an interpositiong scheme; both were sentenced to six months in prison. As in Finnerty, the Court ruled that the evidence was insuffcient to prove deception (Reuters).
Former Refco Chairman and CEO Phillip Bennett, who was sentenced to 16 years in prison on July 3, will appeal his sentence — not his conviction — to the the US Court of Appeals for the Second Circuit. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion (Reuters).
Sentencing dates for five former executives of National Century Financial Enterprises, previously scheduled for July 21-23 (earlier), have been rescheduled. Donald Ayers and Randolph Speer now will be sentenced on August 6 while Roger Faulkenberry and James Dierker will be sentenced on August 7. A new date has not yet been set for Jon Beacham,who pleaded guilty in July 2007 and testified against the others at their trial earlier this year (Columbus Dispatch).
In a unanimous decision published on Friday, a three-judge panel of the US Court of Appeals for the Second Circuit upheld (.pdf) the acquittal of David Finnerty, a former NYSE specialist trader at Fleet Specialist, now Banc of America Specialist. A jury in the Southern District of New York in October 2006 convicted Finnerty on three counts of securities fraud in a scheme known as interpositioning. But in February 2007 US District Judge Denny Chin acquitted Finnerty, holding that “the government did not … establish that Finnerty’s customers were misled or defrauded or otherwise deceived.” In upholding Chin’s ruling, the appellate panel acknowledged that Finnerty had violated NYSE rules but held that the violation “does not bespeak criminally fraudulent conduct within the context of the securities laws,” and agreed that the government failed to prove that Finnerty had engaged in deceptive conduct or misled his customers (Reuters).
In Anderson, South Carolina on Wednesday, Daryl Batts pleaded guilty before US District Judge G. Ross Anderson, Jr. to a two-count information charging him with securities fraud and mail fraud. Batts, owner of Comprehensive Financial Solutions Inc. in Easley, admitted defrauding about 150 investors of about $5 million in what prosecutors described as a classic Ponzi scheme. Batts took in about $6 million over a 6 year period to be invested in securities and life insurance products but never invested any of the money, keeping investors at bay with falsified statements and eventually paying out about $1 million to old investors with new investors’ money. Much of the remainder was converted to personal use, although as much as $2-3 million may be recoverable. Batts faces a statutory maximum of 50 years in prison; a sentencing date will be set later (Greenville News, DOJ).
Mark Turkcan, former president and CEO of St. Louis’ First Bank Mortgage, was indicted last Thursday by a federal grand jury on 11 counts in connection with a scheme that allegedly cost its parent First Bank an estimated $35 million. Turkcan faces eight counts of wire fraud and one count each of misapplication of bank money, making false bank entries and causing the filing of a false annual report. The scheme allegedly began as far back as 1987 when Turkcan worked for a bank later purchased by First Bank. He allegedly lost $5 million on unauthorized mortgage-backed securities investments, hid the losses, and spent the next 20-plus years doing more of the same in order to recoup his losses. Instead, the losses increased to about $35 million (St. Louis Post-Dispatch, DOJ).
The trial of former National Century Financial Enterprises CEO Lance Poulsen on securities fraud and related charges has been postponed. It was scheduled to begin August 4 but US District Judge Algenon Marbley rescheduled the start date to October 1. He granted the delay because Poulson’s attorneys need more time to review 40 boxes of evidence they have recently received from the government. Poulsen was to have been tried with five other executives, all of whom were convicted on March 13, but his trial was delayed because he was indicted for witness tampering; he and an associate were convicted on all those counts on March 26. The delay pushes back the fraud trial of a seventh National Century executive, James Happ, from October 1 to December 1 (Columbus Dispatch).
Mark Lay, chief executive and founder and CEO of now-defunct MDL Capital Management of Pittsburgh, was sentenced on Tuesday to 12 years in prison by US District Judge David Dowd in Akron. A jury convicted Lay last October of investment advisory fraud, two counts of mail fraud and conspiracy. The charges arose from his allegedly unauthorized investment of $216 million on behalf of the Ohio Bureau Of Workers Compensation.The bureau was the only investor in a highly leveraged hedge fund which failed. Lay contended there was no criminal intent. He was taken into custody immediately following sentencing. It’s the latest conviction in the Ohio corruption investigation that started with former Republican fundraiser Tom Noe (Columbus Bizjournal, DOJ).
US District Judge Naomi Reice Buchwald has sentenced former Refco Chairman and CEO Phillip Bennett to 16 years in prison. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings in connection with Refco’s 2005 collapse which cost investors an estimated $2.4 billion. Bennett will begin serving his sentence on September 4 and will be under house arrest until then (Reuters via Yahoo News).
After turning himself in yesterday, convicted Bayou Group co-founder and suicide faker Samuel Israel III asked to be sent directly to the Fort Devens federal medical prison facility in Massachusetts, where he had been scheduled to turn himself in June 9 to begin serving his 20 year prison sentence. However, he was taken to Manhattan to face US District Judge Colleen McMahon, who had sentenced him in April. This morning, McMahon ordered him to begin his term immediately and said she would seek to forfeit his $500,000 bail. Israel now also faces a federal bail-jumping charge which could result in additional prison time (Bloomberg).
Fugitive convicted Bayou Group co-founder Samuel Israel III turned himself in to authorities in Massachusetts this morning and is now in federal custody (Bloomberg). Israel disappeared the morning he was to turn himself in and begin serving his 20-year prison sentence. His girlfriend has been charged with aiding and abetting his escape.
In Columbus on Monday, US District Judge Algenon Marbley scheduled sentencing for five former executives of National Century Financial Enterprises. Four of the five who were convicted on March 13 will be sentenced: Donald Ayers and Randolph Speer on July 21 and Roger Faulkenberry and James Dierker on July 22. The fifth defendant from that trial, Rebecca Parrett, remains AWOL. The five were convicted on securities fraud and related counts in the 2002 collapse of the company which caused investor losses of $1.9 billion. On July 23, former director of securitizations Jon Beacham will be sentenced; he pleaded guilty in July 2007 to conspiracy and wire fraud counts (Columbus Dispatch).
US District Judge Leonard Sand on Wednesday reduced the sentences of Adelphia Communications founder and former CEO John Rigas and his son, former Adelphia CFO Timothy Rigas by three years each. Sand resentenced John Rigas, now 83, to 12 years in prison and Timothy Rigas to 17 years in prison. The resentencing came about after the US Circuit Court of Appeals for the Second Circuit in May 2007 reversed their conviction on one count of bank fraud, citing insufficient evidence. Judge Sand ruled that “a minimal adjustment is appropriate” in light of that reversal. An attorney for the Rigases said they plan an immediate appeal, calling the revised sentences “harsh beyond measure.” However, the Second Circuit did uphold their convictions on 22 of 23 counts and the US Supreme Court in March 2008 rejected their appeals without comment (Reuters, earlier here and here ).
Sentencing for former Refco Chairman and CEO Phillip Bennett is now rescheduled (again) for July 3 before US District Judge Naomi Reice Buchwald in Manhttan. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings (earlier). Prosecutors are seeking a sentence in the same range as the 25 year sentence of former WorldCom CEO Bernie Ebbers. Bennett’s attorneys are asking for a non-guidelines sentence in the range of the 10 year sentence former Drexel Burnham Lambert junk bond ace Michael Milken received, noting Bennett’s cooperation with shareholders in their civil suit (New York Law Journal).
Paragraph 32 of the indictment of former Bear Stearns hedge fund traders Ralph Cioffi and Matthew Tannin has this alleged quote from Tannin to another member of the portfolio management team: “[b]elieve it or not – I’ve been able to convince people to add more money. . . .” Bess Levin at Dealbreaker thinks she knows what that really means (NSFW language).
Debra Ryan, the girlfriend of AWOL convicted Bayou Group co-founder Samuel Israel III, was arrested yesterday and charged with aiding and abetting his failure to turn himself in. The charge carries a maximum 10 year sentence. She was released on bond after an appearance before US Magistrate Judge Lisa Margaret Smith in White Plains, New York. Karen Freifeld’s Bloomberg story describes her apparently admitted role in helping Israel, who may have escaped on a motor scooter. Until yesterday she had repeatedly denied any knowledge of what happened (earlier here and here).
We incorrectly reported yesterday, based on the original AP story, that former Bear Stearns hedge fund traders Ralph Cioffi and Matthew Tannin were in the process of surrendering themselves to authorities. Instead, they were arrested by the FBI and hauled off to court, perp-walk style, with the full panoply of press coverage. This is a despicable practice in white-collar cases unless defendants pose a flight risk. But where non-violent offenders, innocent until proven guilty, are sure to be released, the practice of arresting and parading them in front of the press so FBI agents and prosecutors can get their jollies is pathetic. Tom Hays’s AP story is here in today’s Washington Post. Somebody needs put to put an end to this practice.
According to the Wall Street Journal and AP’s Tom Hays, two former Bear Sterns hedge fund managers are in the process of turning themselves in to the authorities and will be charged today in the Eastern District of New York with Securities Fraud. The AP story is here. Although I have not seen the Indictment, this morning’s WSJ story here makes the prosecution case look pretty weak.
William Dundon, a spokesman for the US Marshals Service, on Monday said that “suicide has been ruled out” in the case of AWOL convicted Bayou Group co-founder Samuel Israel III (earlier here and here). However, no explanation was given by Dundon or USA Michael Garcia for the change in status (Bloomberg).
Meanwhile, on eBay, bidding on a genuine Sam Israel III Business Card has reached $46.00 with two days left.
In Manhattan on Tuesday, US District Judge Leonard Sand set a trial date of April 6, 2009 in the case of Joseph Collins, former longtime attorney for Refco Inc. Collins was indicted in December 2007 on 11 counts including conspiracy, securities fraud, wire fraud, bank fraud and making false statements to the SEC. The charges arose in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Collins, a partner at Mayer Brown LLP in Chicago, is accused of creating fraudulent documents to help hide Refco’s losses from investors, auditors and and Thomas H. Lee Partners, which had purchased a majority interest in Refco (Reuters).
Former Refco Chairman and CEO Phillip Bennett and CFO Robert Trosten pleaded guilty in February, and former President Tome Grant was convicted by a jury in April. Bennett’s sentencing, originally scheduled for May 20, has been moved to June 19; the New York Law Journal recently reported that Bennett has been cooperating with shareholders in their civil suit; these are the same investors he has admitted defrauding, and he is a defendant in that suit. US District Judge Naomi Reice Buchwald, who will sentence Bennett, has been informed of his cooperation; he faces a possible maximum of 315 years in prison.
In White Plains on Wednesday, US District Judge Kenneth M. Karas issued an arrest warrant for the AWOL convicted Bayou Group co-founder Samuel Israel III. Interpol has been notified and a wanted poster is also being prepared. Perhaps the authorities have realized that in M*A*S*H (the movie), “Painless” The Dentist didn’t actually commit suicide (WNBC).
Samuel Israel III, co-founder of now-defunct hedge fund Bayou Group LLC who was sentenced to 20 years in prison in April, has disappeared. He was scheduled to report to a federal prison in Massachusetts on Monday but failed to show, and his 2006 GMC Envoy was found in Westchester County, New York by the Bear Mountain Bridge with keys in the ignition and “suicide is painless” written in the dust on the hood. Has he committed suicide, as Kirk Wright recently did? Or has he pulled a Rebecca Parrett? No body has yet been found. WNBC reports that a surveillance camera appears to show a second vehicle pulling alongside the Envoy but that it’s not clear if he entered it. AP reports that the FBI, state police and victims of his fraud are skeptical. Bloomberg has more.
At a resentencing hearing in Manhattan on Thursday, an attorney for imprisoned Adelphia Communications founder and former CEO John Rigas and his son, former Adelphia CFO Timothy Rigas asked US District Judge Leonard Sand to reevaluate their sentences. The Rigases participated in the hearing by video hookup from prison. Both were convicted of securities fraud, bank fraud and conspiracy in 2004; John Rigas, now 83, was sentenced to 15 years in prison, while Timothy Rigas received a 20 year sentence. The US Circuit Court of Appeals for the Second Circuit upheld their convictions on 22 of 23 counts in May 2007; they began serving their sentences last August, and the US Supreme Court in March 2008 rejected their appeals without comment (earlier). But the Second Circuit reversed their conviction on one count of bank fraud, citing insufficient evidence, which led to the resentencing hearing.
Attorney Lawrence McMichael argued the reversal of the single count was due to a substantive error and therefore all counts should be reevaluated. He also asked the court to consider new sentencing rules and new evidence from civil proceedings that has come to light since the original trial. However, Judge Sand said the reversal was on a lesser count of bank fraud and not the bigger conspiracy charge, and he has already rejected a motion to reconsider based on new evidence. He could choose to let the sentences stand since the reversed count was being served concurrently; McMichael asked for both sentences to be reduced to only 12 months. Judge Sand declined to rule immediately, indicating that he would publish a written decision in the coming weeks. But he stated, “There’s no acceptance of any responsibility for what occurred at Adelphia, and I don’t think that’s an overstatement. I think the defendants are in total denial, and that’s very disturbing” (Reuters ).
Four days after a federal jury in Atlanta convicted him on 47 counts including mail fraud, securities fraud and money laundering in a massive hedge fund fraud (earlier), former IMA and IMAAG head Kirk Wright was found hanged in his jail cell in Union City (Atlanta area), where he was being held pending sentencing. He was 37. Betty Honey, an investigator with the Fulton County Medical Examiner said it was a suicide and that no foul play is suspected. Wright faced a statutory maximum of 710 years in prison (AP, Atlanta Journal-Constitution).
After a two week trial, a federal jury in Atlanta on Wednesday convicted former hedge fund manager Kirk Wright on multiple counts including mail fraud, securities fraud and money laundering. Wright’s firms IMA and IMAAG took in over $155 million in investor funds which purportedly were to be invested in marketable securities and cash, but he allegedly used part of the funds in a Ponzi scheme and diverted most of the rest for personal use over a period of at least five years. Only a small portion was actually invested and that lost value. As of late 2005, Wright had represented to investors and the SEC that over $150 million was under management, but when firms collapsed in early 2006 it was discovered that only about $500,000 was left and investors had typically received statements showing 1000 times what they actually had, including falsified brokerage statements from Ameritrade for non-existent accounts. Wright could face up to 710 years in prison; sentencing is scheduled for August 26 before US District Judge Clarence Cooper. He has been in custody since his May 2006 arrest following two months in hiding (Atlanta Bizjournal, DOJ).
Lou Pearlman, the sadist pop music promoter who gave the world N’Sync and the Backstreet Boys, was sentenced on Wednesday to 300 months in prison by US District Judge G. Kendall Sharp in Orlando. Pearlman pleaded guilty in March (earlier) to two counts of conspiracy, one count of money laundering and one count of making a false claim in a bankruptcy in connection with a series of long-running fraud schemes which caused losses to 250 investors estimated at $200 million and losses to 10 financial institutions estimated at $100 million. His schemes included enticing individuals and banks to invest millions of dollars in two airline companies which existed only on paper, a Ponzi scheme involving the sale of “employee investment savings accounts,” a bank fraud involving faked financial statements, and a plot to siphon frozen assets from a bankruptcy case. Sharp offered Pearlman the opportunity to shorten his sentence by one month for every $1 million repaid to his bankruptcy trustee, but the assets recovered to date (including his mansion and Rolls) will not count toward the incentive (Reuters, MTV).
“This Bird Has Flown” news: Jodi Andes of the Columbus Dispatch has an interesting article here about Rebecca Parrett, the convicted co-founder of National Century Financial Enterprises who has been at large since mid-March (earlier). Although three of her convicted co-defendants are suspected of planning to flee to Aruba (earlier here, here and here), her son Rob Parrett says that after being indicted in 2006, she said she “wasn’t going to jail for something she didn’t do” and said that she would head for Costa Rica. It appears that her flight was well-planned; she told relatives she was going back to Arizona for a few days to clear her head, then picked up two months of prescription drugs before disappearing. Her son called the bed and breakfast where she was to be staying and was told she was there under a “do not disturb” request, but it now seems that she was never there. And in the Yeah, Right department: the last person known to have seen her (on March 16) was her sixth husband Gary Green, who told her son he was in a motorcycle accident that day and can’t remember a thing.
US District Court Judge Robert Blackburn on April 29 sentenced 72-year-old Norman Schmidt of Denver to a mind-boggling 330 years in prison and ordered him to forfeit more than $38 million for his central role in a $56 million high-yield investment scam that allegedly defrauded about 1,000 investors. A jury convicted Schmidt in May 2007 on 37 counts including conspiracy, mail fraud, wire fraud, securities fraud and money laundering. Schmidt and his co-defendants — his wife Jannice and 5 others — allegedly used most of the investor funds for their own personal gain. In written response to an earlier government recommendation for such a sentence, Schmidt’s attorney Thomas Hammond called it outrageous and unreasonable and said it “threatens to make a mockery of the federal sentencing process” (Denver Post, Denver Bizjournal, DOJ).
One day later, 72-year-old defendant Charles Lewis was sentenced by Judge Blackburn to 30 years in prison for his role (Denver Post). Blackburn previously sentenced Jannice Schmidt to nine years in prison.
Hat tip to AUSA Mark Barrett for forwarding this story to us.
A jury in US District Court in Miami on Monday convicted Nicholas Bachynsky on one count of conspiracy, three counts of wire fraud and one count of securities fraud after a six and a half week trial. The charges arose from a cancer cure marketing scheme that raised $6 million from investors, most of whom lost all their money. Bachynsky was cofounder and medical director of Helvetia Pharmaceuticals, which was launched in 2001 to administer and develop a cancer treatment in Europe known as intracellular hyperthermia therapy. Helvetia solicited investors with significant misrepresentations, including falsifying results of unsuccessful laboratory and clinical trials to claim that the therapy was successful, and making false claims that Helvetia owned exclusive rights to the therapy when Bachynsky had actually sold the rights years before to a former business partner. Most of the $6 million in investor funds was converted for personal use by Bachynsky and his three co-defendants, all of whom have previously pleaded guilty. Bachynsky is scheduled to be sentenced on September 5 before US District Judge Adalberto Jordan (South Florida Business Journal, DOJ).
Attorneys for James Dierker, one of the five National Century Financial Enterprises executives convicted on March 13, on Tuesday filed a motion for acquittal based on claims of newly discovered evidence; alternatively they asked that he be granted a new trial. Dierker testified during the trial that he was unaware of any fraud. Tuesday’s motion asserts that prosecutors withheld SEC documents that would have supported his defense. The documents allegedly show that Dierker relied on opinions of outside auditors who failed to properly evaluate company records, leading him to believe the company was sound (Columbus Business First).
Dierker is the only one of the four rearrested executives who was allowed out on bond pending sentencing. He was National Century’s associate director of marketing and vice president of client development, a lesser position than the other convicted executives, and he faced fewer charges. He was found guilty on one count of conspiracy to commit securities/wire fraud and three counts of money laundering.
Federal prosecutors in Columbus, Ohio on Monday moved to recoup some of the funds lost in the 2002 collapse of National Century Financial Enterprises: the government is seeking to “attach a $1.7 billion IOU” to each of the five National Century executives who were convicted in March (here and earlier) on multiple counts including conspiracy, wire fraud, securities fraud and money laundering. US District Judge Algenon Marbley is expected to rule on the motion in June (Columbus Dispatch).
In Sacramento on Friday, US District Judge Garland Burrell sentenced Joel Nathan Ward of Turlock, California to nine years in prison in connection with a fraudulent foreign currency exchange trading scheme in which about 100 investors lost $11.3 million. He pleaded guilty in August 2007 to wire fraud, mail fraud and money laundering. Although he had no financial training, Ward lured investors through trade shows, online columns and infomercials in which he represented himself as a skilled trader. His Joel Nathan Forex Fund took in $15 million from early 2003 to late 2006. He paid back $3.7 million to early investors in what essentially was a Ponzi scheme but he diverted 85% of the rest for personal use. He actually invested only $2 million and lost almost all of that. After Ward revealed to investors in late 2006 that all their money was gone, his personal journal became public, thanks to his now ex-wife. In it, he described himself as a “financial serial killer” and “just another scumbag con artist bilking old people out of their retirement money” (Modesto Bee, DOJ).
John B. Kim, also known as Jung Bae Kim, pleaded guilty on Thursday to a single count of wire fraud in connection with the collapse of hedge funds operated by KL Group LLC, originally in California and later in Palm Beach County, Florida. His plea was entered before US District Court Judge Kenneth Ryskamp in West Palm Beach. John Kim, his brother Yung Kim and Won Sok Lee were indicted in January 2007 on 35 counts alleging a massive investment fraud scheme which caused investor losses of $195 million. In his plea, John Kim admitted misrepresenting unprofitable funds as successful, sending out false account statements and counterfeiting clearing firm statements. In the specific count covered by the guilty plea,
Kim admitted that in February, 2005, fictitious stock trading sheets were created that purported to show a one-day profit of $22 million in a stock known as RIMM, the company that manufacturers the “Blackberry” device. The RIMM trade, however, never took place, and the fictitious stock trading sheets were used to fool investors concerning the profitability of trades being conducted by the KL Hedge Funds.
John Kim faces a maximum of 20 years in prison. Sentencing is set for July 17. Yung Kim pleaded guilty to fraud charges in July and is awaiting sentencing; Lee is still at large (South Florida Business Journal, DOJ).
After a hearing in Columbus that lasted all day Wednesday, US District Judge Algenon Marbley ruled that convicted National Century Financial Enterprises executives Donald Ayers, Randolph Speer and Roger Faulkenberry were flight risks and will remain in custody. The fourth, James Dierker was released on bond pending sentencing. The four executives and a fifth, company co-founder Rebecca Parrett, were convicted on March 13 of securities fraud and related charges in connection with the company’s 2002 collapse (here and earlier). All were allowed to remain free on bond with electronic monitoring, but Parrett disappeared (here) and remains at large. The other four were taken into custody on April 2 following disclosure of an alleged plot to escape to Aruba (here and here). Dierker currently works in marketing for Victoria’s Secret, and testimony from the company’s president and CEO Sharen Turney apparently helped convince Judge Marbley that Dierker would not flee (Columbus Business First, AP).
Meanwhile, the US Marshal Service is offering a reward for information leading to the arrest of Parrett — but won’t say how much the reward is (Columbus Dispatch).
A jury in US District Court in Manhattan on Thursday convicted former Refco Inc. President Tone N. Grant of conspiracy, securities fraud, wire fraud, bank fraud and money laundering in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Refco, at one time the largest futures broker on the Chicago Mercantile Exchange, collapsed just two months after its IPO. Prosecutors alleged that Grant, former CFO Robert Trosten and former Chairman and CEO Phillip Bennett engaged in a years-long scheme to hide extensive trading losses from auditors, banks, investors and Thomas H. Lee Partners, which had purchased a majority interest in Refco in August 2004; the losses were transferred from the company’s books to a company controlled by Bennett, Grant and another partner. Trosten and Bennett pleaded guilty in February; Santo Maggio, former CEO of Refco’s offshore unit, pleaded guilty in December (earlier here and here). All three men agreed to cooperate with prosecutors; both Trosten and Maggio testified against Grant. Sentencing for Grant is scheduled for August 7; he faces a maximum of 85 years in prison. He was allowed to remain free on bond (Bloomberg, Dow Jones Newswires).
Samuel Israel III, co-founder of now-defunct hedge fund Bayou Group LLC, was sentenced to 20 years in prison on Monday by US District Judge Colleen McMahon in Manhattan. Israel and former Bayou CFO Daniel Marino had pleaded guilty to conspiracy, wire fraud and investment advisor fraud in September 2005, about a month after Bayou Group collapsed into bankruptcy. McMahon sentenced Marino to 20 years in prison in January (earlier). Israel and Marino admitted presenting fraudulent results and using a phony auditing firm to lure investors. Prosecutors said investors were defrauded of more than $400 million when the firm failed. Bloomberg News has the story here.
Jailed former National Century Financial Enterprises CEO Lance Poulsen said Monday that a confidential informant was lying when he told authorities that Poulsen told him that four convicted National Century executives had a plan to flee to Aruba if they were convicted. The four executives — Donald Ayers, Randolph Speer, Roger Faulkenberry and James Dierker — were arrested on April 2 (earlier) following disclosure of the alleged plan and the disappearance of the fifth executive, Rebecca Parrett (earlier), who remains at large.
Poulsen’s statement came in a letter from one of his attorneys which was attached to a motion filed on Friday by attorneys for Randolph Speer, who denies any knowledge of a plot and says the whole story was made up by the informant to reduce his prison sentence. Poulsen believes that the confidential informant is Robert Cihy, an inmate where Poulson is currently jailed. Cihy is being held on federal bank robbery charges; in a remarkable coincidence, he reached a plea agreement with the government on April 3, one day after the four executives were arrested. However, US District Judge Algenon Marbley on Monday denied a motion to compel the government to disclose its source. A bond revocation hearing for the four executives is scheduled for April 16 (Columbus Business First, Columbus Dispatch).
In Newark, New Jersey on Monday, US District Judge Stanley Chesler sentenced former Suprema Specialties Inc. CFO Steven Venechanos to eight years in prison and ordered him to pay $115 million restitution. Venechanos and former Suprema Specialties CEO Mark Cocchiola were convicted in April 2007 on 38 counts including conspiracy, bank fraud, making false statements to the SEC, wire fraud and mail fraud for their roles in a fraud that caused the Paterson, New Jersey cheesemaker to collapse in 2002. Cocchiola was sentenced to 15 years in prison on March 27 (earlier). The seven year long scheme involved fraudulently inflating inventories and billing $400 million in non-existent sales, causing a loss to investors and banks estimated at more than $177 million. New Jersey Star-Ledger, Forbes/AP.
Honest, they were just going to help look for Natalee Holloway: The FBI on Wednesday arrested four of the five executives of National Century Financial Enterprises who were convicted on March 13 of securities fraud and related charges in connection with the company’s 2002 collapse (here and earlier); US District Judge Algenon Marbley ordered the arrests of Donald Ayers, Randolph Speer, Roger Faulkenberry and James Dierker after the FBI learned of an alleged plan to flee the country. According to a filing in US District Court in Columbus:
- The (FBI) developed information from a confidential source, who reported to FBI that (former National Century CEO Lance Poulsen) told the confidential source that the NCFE defendants had a plan to flee to Aruba if they were convicted.
This follows the disappearance of the fifth executive, Rebecca Parrett, who remains at large. The new filing alleges that Parrett attempted to obtain false identification papers before the trial. All five defendants had been allowed to remain under house arrest with electronic monitoring pending sentencing. Poulsen faces trial August 4 on similar fraud charges; he and his associate Karl Demmler were convicted of witness tampering last week in connection with the fraud charges. Columbus Business First, Columbus Dispatch.
A March 19 ruling in the case of former Bristol-Myers Squibb CFO and senior VP Frederick Schiff has limited the scope of the prosecution’s case and delayed the trial which was to have begun last week in US District Court in Newark, New Jersey while the government appeals the ruling. Schiff and former Bristol-Myers executive VP Richard Lane were indicted in 2005 on charges of conspiracy and securities fraud in connection with a “channel stuffing” scheme to inflate sales. US District Judge Faith Hochberg’s ruling prevents prosecutors from tying Schiff’s alleged activities to investor losses when Bristol-Myers Squibb’s stock price dropped when the practice was disclosed. Judge Hochberg also criticized prosecutors for repeatedly changing the theory of the crime, saying “the court will permit no further ‘legal theory morphs’ in this case.” Lane’s trial will also be delayed. NY Times, Newark Star-Ledger.
In Columbus, Ohio on Thursday evening, US District Judge Gregory Frost issued a bench warrant for the arrest of Rebecca Parrett, one of the five executives of National Century Financial Enterprises convicted on March 13 on fraud charges in connection with the company’s 2002 collapse (here and earlier). Parrett, a co-founder of the company and vice chairwoman, secretary, treasurer and director, was found guilty of one count of conspiracy, six counts of securities fraud, one count of wire fraud and one count of money laundering. After the verdicts were announced, US District Judge Algenon Marbley allowed all five convicted executives to remain under house arrest with electronic monitoring pending sentencing. Parrett was supposed to report to the Pretrial Services Office near her home in Carefree, Arizona, for installation of an electronic ankle bracelet but she failed to show up and her whereabouts are unknown. The US Marshal’s Office has begun a search. Columbus Business First, Bloomberg.
In Newark, New Jersey on Thursday, US District Judge Stanley Chesler sentenced former Suprema Specialties Inc. President and CEO Mark Cocchiola to 15 years in prison for his role in a fraud that caused the Paterson, New Jersey cheesemaker to collapse in 2002. He was also ordered to pay $115 million restitution to investors and banks; the total loss has been estimated at more than $177 million. Cocchiola and Suprema Specialties CFO Steve Venechanos were convicted in April 2007 on 38 counts including conspiracy, bank fraud, making false statements to the SEC,wire fraud and mail fraud. The charges arose from a complex and long-running scheme to increase the company’s stock price by fraudulently inflating inventories and by billing $400 million in non-existent sales. Venechanos is scheduled for sentencing on April 7. New Jersey Star-Ledger, AP.
After about 6 hours of deliberation yesterday and today, a federal jury in Columbus, Ohio has convicted former National Century Financial Enterprises CEO and co-founder Lance Poulsen and his associate Karl Demmler on one count each of conspiracy to obstruct justice, witness tampering, witness tampering by influencing testimony and corruptly persuading a federal witness. They face a possible maximum of 55 years in prison. The charges arose from their attempt to pay former National Century Executive VP for compliance Sherry Gibson $500,000 to $1 million to have a “memory lapse” when called to testify against Poulsen in his fraud trial in connection with National Century’s 2002 collapse. Poulsen’s trial on 47 counts including conspiracy, wire fraud, securities fraud and money laundering is now scheduled to begin August 4.
US District Judge Algenon Marbley has not set a date for sentencing but ordered Demmler held without bond because of threats he made against two local judges and an attorney in the taped conversations which were entered into evidence at the trial. Poulsen is already in custody because his bond on the original fraud charges was revoked after he was indicted on the witness tampering charges. Columbus Business First, Bloomberg, our earlier trial coverage here, here and here.
The defense rested on Monday in the in the witness tampering trial of former National Century Financial Enterprises CEO and co-founder Lance Poulsen and his associate Karl Demmler (earlier here and here). The government rested on Friday after playing tapes of conversations between Poulsen and Demmler which appear to confirm that Poulsen suggested to Demmler that former Executive VP for compliance Sherry Gibson should plead unfamiliarity with the fraud charges against Poulson and other executives (AP here). The defense had contended that it was all a misunderstanding and that Poulson was merely seeking to help Gibson; however, when Poulson took the stand in his own defense Monday, he alleged that Gibson was an abusive employee “both sexually and physically” and that she had stabbed him in the back by agreeing to become a government witness. The case is expected to go to the jury today Columbus Business First here.
Two Miami-Dade county men, Rodrigo Molina and Marcos Macchione, were indicted on Thursday by a federal grand jury in Miami on 16 counts including conspiracy and money laundering. The charges stem from their alleged involvement as money launderers in an international stock fraud scheme headquartered in Brazil. They were arrested February 25 along with 18 others in Brazil. The alleged scheme was an “advance fee” fraud which caused investor losses estimated at more than $50 million, mostly from investors in the UK. It involved a series of fictitious companies including Heritage Financial of Trenton, New Jersey, which offered to buy low value stock at above market value; fictitious brokers — actually “boiler room” telemarketers located in Brazil — would require advance fees from the investors and then would abandon the transactions after the fees were paid. Funds were allegedly wired to Florida accounts controlled by the defendants. The Brazilian suspects allegedly stole identities of real US brokers and created well-designed websites to convince investors they were legitimate US securities dealers. AP, DOJ (via PR Newswire).
In opening statements on Tuesday in the witness tampering trial of former National Century Financial Enterprises CEO and co-founder Lance Poulsen and his associate Karl Demmler (earlier), the defense sought to portray Poulson’s $500,000 offer to former Executive VP for compliance Sherry Gibson as a misunderstanding. According to defense attorney Peter Anderson, Poulsen only sought to “make her whole” because she had gone to prison and given up her assets in her plea deal. And according to Demmler’s attorney Darryl Parker, Demmler was the intermediary because he was a longtime friend of Gibson and was only urging her to use the money to get a new attorney. However, Gibson took the stand on Tuesday afternoon and testified that she construed the initial offer as a bribe, contacted the government and agreed to wear a wire at future meetings with Demmler. The jury heard tapes in which Demmler offered to set Gibson up with an offshore account for a 10% fee if she took Poulsen’s offer and told her ” “Money laundering is my business on private contracts.” And regarding the testimony she was to give in Poulsen’s now-delayed fraud trial, Demmler said “Don’t remember. You don’t have to lie. You’re not lying. He’s not asking you to lie” and referred to a scene in Godfather II where a witness forgets testimony. The government also has taped conversations between Poulsen and Demmler in which they allegedly used code words in case their phones were bugged. Poulson is expected to take the stand in his own defense. Gibson’s testimony in the recently completed fraud trial of five other National Century executives (earlier) also included testimony implicating Poulsen in the fraud. Columbus Business First here and here.
A jury was selected Monday in the witness tampering trial of former National Century Financial Enterprises CEO and co-founder Lance Poulsen, and opening arguments are to begin today in Columbus, Ohio before US District Judge Algenon Marbley. Poulsen had been indicted in 2006 on 47 counts including conspiracy, wire fraud, securities fraud and money laundering in connection with the same acts for which five former executives were convicted last week (earlier) and is scheduled for trial on August 4 in that case. But in this case, he and an associate, Karl Demmler were indicted on one count each of conspiracy to obstruct justice, witness tampering and witness tampering by influencing testimony. The indictment alleges that they attempted to bribe Sherry Gibson, National Century’s former Executive VP for compliance, with $500,000 to “develop amnesia” on the witness stand in the fraud case. Gibson pleaded guilty in 2003 to one count of conspiracy to commit securities fraud and agreed to cooperate with prosecutors; she was sentenced to 48 months in prison in June 2004. She was the government’s star witness in the case that concluded last week and is scheduled to testify in this case. Columbus Business First has the story here.
Jodi Andes in the Columbus Dispatch analyzes last week’s verdicts here.
Paul and Zibia Gunther, the father and daughter arrested last week in connection with a $70 million international stock fraud scheme involving fake shares in hijacked dormant companies (earlier), made their initial appearances Monday before US Magistrate Judge Thomas McCoun in Tampa. McCoun agreed to release Zibia Gunther on a $150,000 bond secured by property, but he denied release to Paul Gunter, who had offered a $500,000 property-secured bond. Calling Paul Gunter a flight risk, McCoun said he will require at least $1 million posted from his family and friends before he said he would consider his release, stating “I want people to come forward and say they have so much faith in him that they’ll put up their house.” Paul Gunter holds English citizenship. Further details of the government’s case emerged: a prosecutor alleged that financial transactions have been tracked to numerous accounts controlled by Paul Gunter in at least nine different countries. However, he is currently represented by a public defender. Attorneys for both defendants claim they are only escrow agents acting for others. Tampa Tribune, Tampa Bay Times.
After two days of deliberations following the five week trial of five former executives of National Century Financial Enterprises, a federal jury in Columbus, Ohio on Thursday convicted all five defendants on all charges, which included conspiracy, wire fraud, securities fraud and money laundering. The defendants were National Century co-founders Rebecca Parrett and Donald Ayers and former executives Randolph Speer, Roger Faulkenberry and James Dierker. The Columbus Business First story here details the specific counts against each defendant. Investors, including many institutions and government bodies, lost $1.9 billion in the 2002 collapse of the health care provider financing company. US District Judge Algenon Marbley allowed the defendants to remain free but subject to electronic monitoring pending sentencing, which is expected in 60 to 90 days.
Former CEO and co-founder Lance Poulsen is scheduled for trial on
August 4, 2008 on the same charges but he first faces a March 17 trial for witness tampering in the case. The witness is said to be Sherry Gibson, National Century’s former Executive VP for compliance, who was the star prosecution witness in this case (earlier).
The US Attorney’s Office in Tampa on Thursday announced the filing of a criminal complaint against Paul Robert Gunter of Odessa, Florida and his daughter, Zibiah Joy Gunter of Oldsmar, Florida. The complaint alleges that they “conspired to commit, and committed substantive acts of, mail fraud, wire fraud, securities fraud, and money laundering” by engaging (with unnamed others) in a securities fraud scheme. They were arrested on Thursday morning and were scheduled to make an initial appearance later in the day. The alleged scheme involved hijacking the identities of about 54 dormant publicly held companies, issuing fake stock in the companies to conspirators and selling the shares to “victim-investors” in the UK. An estimated 15,000 people, mostly elderly, invested in excess of $70 million; the Gunters allegedly converted the funds for their personal use. Reuters here, DOJ press release here.
Defense attorneys for defendants Donald Ayers and James Dierker wrapped up the defense’s closing statements on Tuesday morning in the National Century fraud trial; Ayers’ attorney Brian Dickerson stressed the prosecution’s failure to call two cooperating witnesses — former company CFO John Snoble and compliance director Brian Stucke, who have pleaded guilty and were expected to provide key testimony. Following the prosecution rebuttal, Judge Marbley was scheduled to give jury instructions on Tuesday afternoon. Columbus Dispatch story here.
The defense rested Monday and closing arguments began in the healthcare finance fraud trial of five former executives of National Century Financial Enterprises. Co-founders Rebecca Parrett and Donald Ayers and former executives Randolph Speer, Roger Faulkenberry and James Dierker face multiple charges of conspiracy, wire fraud, securities fraud and money laundering in the 2002 collapse of the company, once the country’s largest source of health care provider financing. AUSA Wes Porter placed the blame on the defendants, saying “Every company takes its course because of the actions of people.” Porter accused the company of loaning providers in poor financial shape more than the value of their accounts receivable and lying to investors and auditors about the value of of the future receivables. Attorneys for Faulkenberry, Speer and Parrett each argued that the government had not met its burden of proof that their clients intended to commit fraud or engaged in any conspiracy. Closing arguments continue today with attorneys for Ayers and Dierker and prosecution rebuttal. Columbus Business First story here.
Department of Uh-oh: Jon Bryant, a computer programmer testifying for the defense as an expert witness in the healthcare finance fraud trial of five former executives of National Century Financial Enterprises, was revealed by prosecutors to have been an FBI informant in the same case back in 2002. Bryant testified that crashes in nine of National Century’s computer hard drives would have made it impossible for anyone to draw conclusions about the data. But on cross examination, AUSA Doug Squires asked Bryant if he ever told the FBI there was fraud at the company, if he had ever told the FBI about improper funding, and if he had ever taken documents from the company showing wrongdoing. Bryant said he could not recall but said it was “possible”. And after leaving court, when asked if he had told defense attorneys he had given company documents to the FBI, he said “No. It kinda slipped my mind.” Columbus Dispatch here.
Lou Pearlman, the promoter responsible for foisting N’Sync and the Backstreet Boys on an unsuspecting public, on Thursday pleaded guilty to two counts of conspiracy, one count of money laundering and one count of making a false claim in a bankruptcy in connection with long-running fraud schemes which caused losses to 250 investors estimated at $200 million and losses to 10 financial institutions estimated at $100 million. The plea was entered before US District Judge G. Kendall Sharp in Orlando. Pearlman could face up to 25 years in prison but has agreed to cooperate with authorities investigating other unnamed parties in exchange for the possibility of a reduction in sentence. Pearlman is currently in custody and appeared in court wearing shackles. Full details of the schemes have not been revealed but in court Pearlman acknowledged a Ponzi scheme involving the sale of “employee investment savings accounts,” a bank fraud involving faked financial statements, and a plot to siphon frozen assets from a bankruptcy case. Sentencing has been scheduled for May 21, 2008. Orlando Sentinel here, AP here.
The prosecution rested on Monday as the healthcare finance fraud trial of five former executives of National Century Financial Enterprises entered its fifth week (earlier here and here). Former National Century CFO John Snoble and compliance director Brian Stucke, both cooperating witnesses who have pleaded guilty, were expected to testify but were not called. The twelfth and final prosecution witness was Terrence Glomski, former asset manager for Lincoln Capital, which was acquired by Lehman Brothers in late 2002 after the collapse of National Century. Glomski testified that his pension fund clients were only able to recover $2.9 million of the $49.8 million they had invested in National Century’s AAA rated bonds. US District Judge Algenon Marbley on Tuesday denied a defense motion for acquittal, and the defense called its first witness. Robert DeLuca, a healthcare accounting consultant, testified that the company’s broad definition of receivables meant that National Century’s governing documents allowed the advance of the unsecured loans to health care providers which ultimately brought down the company. Under cross examination he admitted that he had no expertise in securities law. Bizjournal here and here.
The US Supreme Court on Monday rejected without comment the appeals of Adelphia Communications founder and former CEO John Rigas and his son, former Adelphia CFO John Rigas. Both were convicted of securities fraud, bank fraud and conspiracy in 2004. The charges arose out of Adelphia’s 2002 collapse into bankruptcy after the company revealed $2.2 billion in previously unreported liabilities. John Rigas, now 83, was sentenced to 15 years in prison, while Timothy Rigas received a 20 year sentence. They appealed, claiming that accounting terms had not been properly explained to the jury and that they had followed generally accepted accounting principles; but the US Circuit Court of Appeals for the Second Circuit upheld their convictions last year and they began serving their sentences last August. AP/Washington Post story here.
US District Judge Stephen Wilson in Los Angeles on Monday sentenced two men to prison in connection with a hedge fund fraud scheme that caused investor losses of $6 million. Keith Gilabert of Valencia, California, who operated a company called Capital Management Group, was sentenced to 60 months in prison; he had pleaded guilty in June 2006 to conspiracy to commit mail fraud, wire fraud and securities fraud. He collected about $6 million from 2000 to 2005 from 40 clients who invested in a hedge fund called the GLT Venture Fund, with the promise of high rates of return; but Gilabert admitted losing most of the money and misappropriating the rest. Justin Paperny of Studio City, a former account VP at UBS Financial Services, was sentenced to 18 months in prison; he also had pleaded guilty to the same charges and admitted conspiring with Gilabert to mislead hedge fund investors by telling them the fund was fully backed by UBS. Lawfuel has the DOJ Press Release here.
It was not Gilabert’s first brush with Judge Wilson. He and his mother-in-law had been indicted for obstruction of justice for allegedly telling a mortgage broker to lie to FBI agents investigating the sale of two plots of land in Valencia. That case went to trial this past December, but Wilson acquitted them after calling the broker’s testimony “an abomination … maybe the worst I’ve ever seen.” (story here).
In the third week of the healthcare finance fraud trial of five former executives of National Century Financial Enterprises (earlier), the prosecution’s star witness testified on Thursday that the deception by management began years before the company collapsed in 2002, resulting in a $1.9 billion loss to investors. Sherry Gibson, National Century’s former Executive VP for compliance, testified that the complex scheme to falsify records and lie to investors and auditors dated back to 1995 and involved all the firm’s principals and senior executives. Gibson pleaded guilty in 2003 to one count of conspiracy to commit securities fraud and agreed to cooperate with prosecutors; she was sentenced to 48 months in prison in June 2004. The trial continues before US District Judge Algenon Marbley in Columbus, Ohio. Bizjournals story here.
In a hearing on Wednesday before US District Judge Naomi Reice Buchwald in
Manhattan, former Refco inc. CFO Robert Trosten pleaded guilty to charges of conspiracy, securities fraud, bank fraud, wire fraud and money laundering in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Trosten’s guilty plea follows the February 15, 2008 guilty plea of former Refco CEO Phillip Bennett (earlier); both had been scheduled for trial on March 17, 2008 along with the company’s former president Tone Grant. Trosten’s plea agreement calls for cooperation with prosecutors as well as asset forfeiture; he will apparently testify against Grant and against former outside counsel Joseph Collins, who has been charged with fraud and conspiracy in a separate but related case. Judge Buchwald scheduled Trosten’s sentencing for February 20, 2009. Bloomberg here, Reuters here.
Former Refco Inc. Chairman and CEO Phillip Bennett pled guilty on Friday, before US District Judge Naomi Reice Buchwald in Manhattan, to all 20 counts on which he had been indicted, including conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings. The charges carry a possible maximum of 315 years in prison. Refco, at one time the largest futures broker on the Chicago Mercantile Exchange, collapsed into bankruptcy in October 2005, just two months after its IPO. Auditors discovered $430 million in losses from the mid 1990s onward; Bennett allegedly concealed the losses from his auditors, investors and Thomas H. Lee Partners, which had purchased a majority interest in Refco in August 2004; the losses were assumed by a company Bennett controlled, in an elaborate transfer scheme. Investors purportedly lost $2.4 billion in the collapse.
Bennett’s guilty plea follows the guilty plea by Santo Maggio, the former CEO of Refco’s offshore unit; Maggio pled guilty to fraud and conspiracy on December 19, 2007 and agreed to cooperate with prosecutors. Judge Buchwald set Bennett’s sentencing for May 20,2008. Bennett had been scheduled to go to trial on March 17, 2008 along with company’s former president Tone Grant and former CFO Robert Trosten; both have pleaded not guilty and maintain their innocence. Bloomberg here, AP here.
The trial of five former executives of National Century Financial Enterprises is scheduled to begin today in Columbus, Ohio before US District Judge Algenon Marbley. Co-founders Rebecca Parrett and Donald Ayers and former executives Randolph Speer, Roger Faulkenberry and James Dierker face multiple charges of conspiracy, wire fraud, securities fraud and money laundering. The privately held National Century was once the largest source of health care provider financing in the US. It collapsed six years ago and investors, including institutions and government bodies, lost $1.9 billion in what prosecutors allege was a massive and complex fraud scheme. Four former employees who have pleaded guilty are expected to testify. Former CEO and co-founder Lance Poulsen is scheduled for trial on August 4, 2008 but he first faces a March 7 trial for witness tampering. The Columbus Dispatch story is here; AP here.
Daniel Marino, former CFO of now-defunct hedge fund Bayou Group LLC, was sentenced on Tuesday to 20 years in prison by US District Judge Colleen McMahon in Manhattan. Marino and Bayou Group founder Samuel Israel III had pleaded guilty to conspiracy, wire fraud and investment advisor fraud in September 2005, about a month after the firm collapsed; prosecutors said investors were defrauded of more than $400 million. Marino was ordered to prison immediately; Israel is still awaiting sentencing. Financial Times has the story here.
Charles Nolon Bush, a former Port Orchard, Washington resident who fled to France and then Poland after his investment business collapsed in 2002, was ordered detained on Monday in US District Court in Tacoma; he was indicted by a federal grand jury in Seattle in August 2006 on 32 counts including securities fraud, wire fraud, mail fraud and money laundering. He is alleged to have fraudulently taken $30 million in investor funds in a Ponzi scheme. Bush was arrested in Warsaw in August 2007; he fought extradition but was returned to the US earlier this month. The DOJ press release is here.
Former Brocade Communications Systems CEO Gregory Reyes was sentenced on Wednesday to 21 months in prison and fined $15 million by US District Judge Charles Breyer in San Francisco. Reyes was convicted in August 2007 after an 8-week jury trial on ten counts including conspiracy, securities fraud, lying to accountants and falsifying books and records in connection with the backdating of options grants to Brocade employees. Reyes will be allowed to remain free on appeal; the San Francisco Chronicle has the story here.
Former Goldman Sachs trader David Pajcin, one of the principals in a wide-ranging $6.7 million insider trading and securities fraud scheme, was sentenced on Friday to time served by US District Judge Victor Marrero in Manhattan. Pacjin had been in prison since early 2006. He had cooperated with prosecutors and his testimony led to subsequent guilty pleas from the other participants. Yahoo News has the NY Times story here. Eugene Plotkin, a former Goldman Sachs research associate, was sentenced to 57 months in prison earlier this month (Yahoo/Reuters story here). Defendants Stanislaw Shpigelman and Jason Smith are serving prison sentences of 37 and 33 months respectively and two more defendants are awaiting sentencing.
Former Homestore Inc. CEO Stuart Wolff’s fraud conviction was overturned on Monday by the Ninth US Circuit Court of Appeals in San Francisco. A three-judge panel of the court agreed with Wolff’s contention that US District Judge Percy Anderson should have recused himself because his ownership of AOL stock gave him a “financial interest in the subject matter in controversy;” AOL was a party to the alleged offenses.
Wolff was convicted on 18 felony counts involving an alleged scheme to inflate the company’s revenue by $67 million in a series of sham three-way transactions. He was sentenced in October 2006 to 15 years in prison, fines and restitution. The appellate court returned the case to US District Court for ressignment to a different judge and possible retrial. The San Francisco Chronicle has the story here. Homestore has since changed its name to Move Inc.