Law Firms Cannot Ignore Clients Who May Be Engaged in Ponzi Schemes

Posted by Ernest E. Badway on March 04, 2013

Regulators seem to believe that lawyers and their law firms act like ostriches when it comes to their clients and Ponzi schemes.  For example, a law firm paid $25 million to settle malpractice claims over legal services rendered to certain hedge funds and related entities controlled by a Ponzi Scheme artist, Arthur Nadel.  See SEC v. Nadel, M.D. Fla., 09-00087, 8/28/12, and http://en.wikipedia.org/wiki/Arthur_Nadel. 

Although the law firm continues to maintain its innocence, it settled with the Court appointed receiver over allegations that it failed to detect red flags from the fraudster’s activities during their representation of him between 2002 and 2009.  See Scoop Real Estate LP v. Holland & Knight LLP, Fla. 12th Cir. Ct., 2009-CA-014877, 2009, and  http://www.nadelreceivership.com/docs/Press_Release_HK-Settlement.pdf.  In his pleadings, the receiver argued that, if the firm acted sooner, things would have been different.  For its part, the law firm merely said that it wanted to end the litigation. 

In short, the lesson that lawyers and law firms must learn is that they have to implement systems to detect such potential frauds, or these law suits will undoubtedly become a terrible "cost of doing business."

Receiver is Unlucky with Clawback Attempt From Charity

Posted by Ernest E. Badway on February 27, 2013

The receiver for a convicted fraudster and his entities will not be able to recover a $2 million donation the fraudster made to a small Minnesota college.  See Kelley v. College of St. Benedict, D. Minn., Civ.;' No. 12-822 (RHK/LIB), 10/26/12, and http://docs.justia.com/cases/federal/district-courts/minnesota/mndce/0:2012cv00822/125281/34/.

The federal district court found that the receiver lacked the ability to bring this action, and that only the United States could bring such claim under the Federal Debt Collection Procedures Act.  The receiver had sued under this statute, and the college opposed.  The tortured history of this case-- like most Ponzi schemes-- left the court to remark that there were no winners or losers in Ponzi schemes only losers.  Nonetheless, in rejecting the receiver's attempt to collect, the court stated that, given the interplay of the receivership, bankruptcy, and parallel criminal forfeiture order, there was reason to believe the receiver was not the appropriate party to maintain this action.

We have likely not seen the last of this case, and wonder if this result would be upheld on appeal.

What You Should Know Before You Start a Ponzi Scheme?

Posted by Ernest E. Badway on February 22, 2013

Okay, no one is suggesting that you start a Ponzi scheme!!!  However, now, that we have your attention, you should be aware of the United States Court of Appeals for the Second Circuit's decision affirming a 25-year prison sentence for Ponzi scheme operator, Nicholas Cosmo.  See United States v. Cosmo, 2d Cir., No. 11-4506, 9/20/12, and http://federal-circuits.vlex.com/vid/united-states-v-cosmo-399026010.

This action was the result of Cosmo's role as the former head of Agape World Inc. and Agape Merchant Advance LLC.  It was alleged that he mislead clients to invest more than $400 million over five years in certain short-term loans with high rates of return promises.  However, in typical Ponzi scheme fashion, Cosmo allegedly merely paid earlier customers with new customer money.  Cosmo was also apparently a bad trader as well, losing more than $100 million though unauthorized futures and commodities trades, and not making any loans he claimed he would to investors.  Although the government claimed, investors lost over $195 million, Cosmo's restitution order, however, was approximately $180 million along with a 25 year prison sentence.

Cosmo had, in fact, plead guilty, but he was upset that the district court sentenced him to consecutive sentences.  The Second Circuit found no problem with this sentence, indicating that Cosmo had been a bad guy and committed a major fraud.  Essentially, the Second Circuit was not buying Cosmo's "mercy" argument.

A lesson hopefully others will learn.

Stanford Investors May Have a Second Life

Posted by Ernest E. Badway on February 21, 2013

The SEC has decided to appeal a district court decision denying the SEC's application to force SIPC to pay Staford investors.  See SEC v. SIPC, D.D.C., No. 1:11-mc-00678-RLW, 8/31/12, and http://www.scribd.com/doc/81297680/Judge-Wilkins-Opinion-re-SEC-SIPC-Case.

The SEC believes that these investors should be protected by SIPC insurance.  However, the court's decision held that the investors did not invest through the broker-dealer, but the bank portion of Standford's operation.  SIPC does not intend on giving into the SEC's machinations, claiming the SEC's theory is unprecedented. 

This is the first time the SEC has ever initiated such a suit.  The result should be very interesting.

The Supremes Hand the SEC Big Win Against Hedge Fund Scammer

Posted by Ernest E. Badway on January 16, 2013

The United States Supreme Court refused to review a federal appeals court ruling approving a $62 million award against a former hedge fund manager, who defrauded hedge fund investors over several years.  See Lauer v. SEC., U.S., No. 12-260, 10/29/12, and http://www.supremecourt.gov/orders/courtorders/102912zor_3f14.pdf.

This was an appeal from the United States Court of Appeals for the Eleventh Circuit that agreed with a federal district court's granting of the SEC's motion for summary judgment on liability and remedies.  The SEC had alleged that the hedge fund manager had misrepresented the true value of the hedge funds, artificially inflating the value of holdings.  Further, the SEC claimed he made false statements in various written and oral communications.  Previously, the district court had frozen the hedge fund managers assets.  The big judgment followed thereafter.

In short, both the United States Supreme Court and the Court of Appeals found there was sufficient evidence to support this judgment.