Category: Fraud

Lawyers and Prime Bank Investments

scams

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

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

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

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

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

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

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

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The Fall of Fredrick Douglas Scott

frederick d scott

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

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

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

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

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

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

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There Is No Secret International Market for Prime Bank Investments

scams

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

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

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

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

“Leasing” a standby letter of credit?!?

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

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

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

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

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The Fall of Sam Israel

octopus sam israel guy lawson

Sam Israel is a scumbag. He is a liar and a cheat. He admits so in Octopus by Guy Lawson. Israel was the nefarious trader behind the Bayou Funds, one of biggest hedge fund ponzi schemes, at least until Bernie Madoff finally fell to Earth.

Lawson met with Israel while Israel was in prison. He want to write about Israel’s fraud at the Bayou Fund. Lawson found him to be devious, defiant, impossible to not like.

Israel started as a trader, not an investor. He made his money on the short movements of stocks. He made his big money by cheating. He would front run client trades. He would trade on inside information.

Then he decided he want to be his own boss, so he started the Bayou Fund. But he was not successful. Rather than disclose this to investors, he rebated a big chunk of brokerage fees to show a good return. He figured he could make it up in the next trade.

Then he missed again. Again, he didn’t want to admit his shortcomings so he chose the path of deceit. But now the amount was too much to fix with creative bookkeeping. He turned to a complete fabrication of financial results. Israel called this “The Problem.”

He kept trading to try to fix The Problem. He thought the next trade could make enough to fix The Problem. But it kept getting bigger as his actual results continued to be well below the result he was telling investors.

Then Israel ran into a shadowy figure that told him about a secret market for prime government bonds sold at huge discounts. He could get enormously wealthy by trading in the secret market. Israel thought he had found a solution to The Problem.

The publisher was nice enough to send me a copy of the book. It caught my eye because it offered an insight into the mind of a fraudulent fund manager and the machinations of a ponzi scheme. It’s a twisted mind. The tale of trying to fix The Problem is even more twisted.

Buckets of Money

buckets of money

Radio personality Raymond J. Lucia, Sr. got in trouble with the SEC. An administrative law judge made it official and issued an initial decision in the case. Lucia will barred from associating with any investment adviser, broker or dealer, the investment adviser registrations for him and his firm are revoked, and is stuck with a $50,000 penalty against him and a $250,000 penalty against his former IA firm.

Judge Elliot’s decision found that that firm had violated the investment adviser antifraud statutes and that Lucia had aided and abetted the firm’s violations. “Judge Elliot’s initial decision vindicates the Division of Enforcement’s original position that Lucia and RJLC misled the investors who attended their seminars by claiming that the Buckets of Money strategy had been successfully backtested when in fact it had not been,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

It’s not over yet. Lucia and RJLC have 21 days from the date of the decision to appeal the decision. I suspect they will appeal.

The SEC found four flaws in Lucia’s performance marketing, with the misleading application of:

  1. historical inflation rates
  2. investment adviser fee impact
  3. returns on Real Estate Investment Trust (REIT) securities, and
  4. reallocation of assets.

The biggest problem cited by the judge was the backtesting use of REITs in the fictional portfolios that went back to 1966. Lucia used an assumed dividend rate of 7%, but is alleged to have failed to disclose that it was an assumed rate. Another problem was using non-traded REITs in the backtest when non-traded REITs were not available during that period. The last problem was that Lucia failed to disclose the illiquidity of non-traded REITs.

Looking at the administrative order it seems that these deficiencies could have been fixed with proper disclosure. Maybe not fixed, but would have reduced the likelihood of the SEC bringing charges and an adverse decision.

One interesting carve-out by the judge was an exclusion of Lucia’s slideshows from the definition of written communications under Rule 206(4)-1(b). The SEC did not show that the slideshow was printed out and distributed.

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Failing to Disclose a Lack of Control

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Whenever I think of oil and gas syndications, I think of Dallas and J.R. Ewing. You can get screwed over in the wiggle of one of Larry Hagman’s luxurious eyebrows. The SEC’s complaint against Infinity Exploration for securities fraud in connection with oil and gas wells still caught my attention.

The first question is whether the interests would be securities or real estate. The SEC complaint focused on two offerings: Matagorda and New Mexico 10. Both were pooled investment vehicles. Infinity will have to battle its own statement. The PPMs for the investments both state that the offering consists of “securities” and that the investments are being offered pursuant to Regulation D.

One of the main charges is that Infinity mischaracterized what the pooled investment vehicles owned. The PPMs stated that the investment objective was to acquire, own, and deal with the prospect and that Infinity would perform drilling, testing and operations of the well. The SEC charges that Infinity was merely raising funds to invest in a joint venture with another firm and that Infinity would not be in a control position. The PPMs never disclosed that investors were purchasing an interest in an entity that would merely hold interests in another joint venture. The SEC also lays out a long list of other false or misleading statements in the PPMs.

Assuming the SEC view is correct, the lesson is to properly disclose the nature of the investments when fund raising. Real estate often has several layers of ownership and control. The key is to properly disclose those layers and how your investment fits into the mix.

The second big failure is that Infinity mischaracterized the use of proceeds. The PPM said that 80% would go to pay well-related costs, and the balance to administrative and overhead costs. The SEC charges that the 80% went to the third party joint venture partner who was actually doing the well work and Infinity kept the 20% as a commission.

It all fell apart when the joint venture partner went belly up. One investor had put in $37,500 with promises of immediate income and return of 100% of principal within a year. He ended up with a grand total of $667 in revenue. That is less than the annual grooming cost was for the late Larry Hagman’s eyebrows.

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Trouble on Top of Trouble

detroit

MayfieldGentry Realty Advisors mastered the one-two by disclosing to a client that the firm stole their funds on the evening before they were brought up on charges for a pay-to-play violation.

In May, 2012, the Securities and Exchange Commission charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and MayfieldGentry in a secret exchange of gifts to peddle influence over the city funds’ investment process. The SEC alleges that Kilpatrick and Beasley, who were trustees to the pension funds, received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry. That would currently be a violation of SEC Rule 206(4)-5.

As long as the firm was going down, MayfieldGentry decided to also disclose that the firm had stolen $3.1 million. The SEC brought new charges against the firm for that theft.

In reading the complaint, assuming the facts are true, it looks like MayfieldGentry was as best sloppy and lazy. The firm had an agreement to buy two shopping centers for $7.4 million and obtained a bank loan for $4.3 million of the price. That left the firm needing $3.1 million of equity, but only had $200,000 of cash. The easy answer was to have its client, the Police and Fire Retirement System of the City of Detroit, fund the equity.

The problem is that MayfieldGentry didn’t bother to get approval from the pension fund. Even worse, it purchased the property in a subsidiary wholly-owned by MayfieldGentry. The firm didn’t transfer ownership of the subsidiary to the pension fund.

Apparently, the plan was to have another investor purchase the property and transfer the cash back to the pension fund’s account. Bad timing trapped the firm. The acquisition happened in March 2008. Then the financial markets imploded and the value of the shopping centers collapsed.

Since the case involved real estate, perhaps the SEC lacks jurisdiction? No, MayfieldGentry was registered with the SEC as an investment adviser.

Maybe the case was an instance of an adviser making a mistake, then failing to remedy the problem. Would the pension fund have agreed to investment? We don’t know. I assume the answer was “no”, otherwise the firm would have transferred the properties to the pension fund.

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Relying on the Fat Finger Excuse

compliance and fat fingers

David Miller was a big Apple enthusiast. He saw the growing stock price and must have been scheming of ways to make some extra cash by jumping on board Apple’s express train to riches. He saw the golden ticket when a client asked him to make a series of Apple stock purchases. Instead of following the client’s instructions to buy 1,625 shares, he could add a few zeroes and buy 1,625 thousand shares.

While Apple stock continued its stratospheric rise in price, Miller would share the profits from the “mistake” with his client. But the balloon popped and the train crashed. Apple had less than stellar quarterly numbers. The stock price decreased. Miler and his firm were sitting on a $5.3 million loss.

Needless to say the client was not happy about the unauthorized trade on his behalf, leaving the firm to take a sour bite and eat the loss. Apparently Miller’s excuse was supposed to be a “fat finger” excuse. Miller accidentally added a few zeroes. Maybe that was a good excuse. The message from client could be misread:

“AAPL . . . b 125 ok (per ½ hr)”

That excuse could have worked except Miller also placed another unauthorized trade to sell 500,000 shares of Apple stock. That makes it really difficult for Miller to claim the fat finger excuse. One mistake might get a pass, but the second shows bad intent. That bad intent got him a fine from the SEC and a criminal charge from the DOJ.
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Cherry Picking Trades

compliance and cherry picking

A recent SEC action shows you exactly how to NOT allocate trades. The SEC brought charges against Howard Berger for not allocating trades until the end of the trading day.

Berger would routinely allocate the profitable trades to his wife’s account and the unprofitable trades to his private investment fund account. Since Berger would usually sell his positions at the end of the day, it was easy to see which trades worked and which ones lost money.

One trading platform seemed to be agnostic about allocations. When that trading platform went of business he switched to a second that better tracked the changes in allocations. That trading platform’s activity logs showed hundreds of instances where Berger switched allocations from the fund’s account to his wife’s account.

That’s a combination of theft and stupidity. he was blatantly stealing his client’s money and not bothering to notice the trail of breadcrumbs showing the theft.

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The Obnoxious LIBOR Emails

compliance and email

It seems clear that the LIBOR figures were subject to manipulation. Many banks are under investigation. The Royal Bank of Scotland agreed to pay $610 million in fines to UK and U.S. regulators for its role in the Libor rate-rigging scandal. As part of that settlement, the U.K.’s Financial Services Authority released emails and other communications between traders, employees who submitted Libor rate information, and in some cases, traders and other employees outside the three banks. They tell a sad tale of manipulation and fraud.

Trader C: “The big day [has] arrived… My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”
Barclays Submitter: “I am going 90 altho 91 is what I should be posting”.
Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.
Submitter: “I would prefer this [to] not be in any book!”

Rarely do you find the email that exonerates you. It’s always the email with something stupid that makes you and your company look bad. Sometimes, the communication is out of context. Sometimes, it’s just the stupidity of the sender who thinks the message is as ephemeral as a nod in the hallway.

Martin Lomasney created a famous saying on the importance of discretion: “Never write if you can speak; never speak if you can nod; never nod if you can wink.”

From one trader to another broker:

“if you keep 6s [i.e. the six-month Japanese Libor rate] unchanged today… I will f***ing do one humongous deal with you … Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars … whatever you want … I’m a man of my word.”

He may have been a man of his word. But he was not a man of honor or ethics. He sought blatant market manipulation for his own gain. Foolishly, we wrote it down, leaving his mark of dishonor for all to see.

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