What Can A Victim Of A Ponzi Scheme Expect To Get Back, If Anything?

Mario Massillamany, securities attorney

Ponzi schemes, once thought to be rare and few and far between, are now coming to light left and right it seems. As investment fraud attorneys,we need to be able to recognize the signs of such a scheme and the fallout that ensues from them. One such lesson can be learned from what is perhaps the most famous Ponzi scheme yet uncovered, from the recent case of In re Bernard L. Madoff InvestmentSecurities LLC, decided on August 16, 2011, by the Second Circuit.

This case stems from the fallout of Bernard Madoff’s multibillion dollar securities

investment Ponzi scheme. After the revelation of the massive Ponzi scheme engineered by Bernard Madoff, which consisted of him fraudulently soliciting millions of dollars in securities investment funds that were ultimately never invested, Irving Picard was appointed as a trustee to oversee the liquidation of Bernard L. Madoff Investment Securities’ (BMIS) remaining assets pursuant to the Securities Investor Protection Act. Acting in his capacity as trustee, Mr. Picard elected to reimburse claimants that had invested funds with BMIS with the “Net Investment Method,” as outlined in the Securities Investor Protection Act. Under the “Net Investment Method,”claimants would be credited the amount of cash that they had deposited with BMIS minus any amounts withdrawn from their accounts prior to the Ponzi collapse.

A range of claimants filed this action with the bankruptcy court objecting to this allocation method, contending that the trustee should have elected to reimburse them using the “Last Statement Method,” which would have taken into account the fictitious investment gains that BMIS represented to their clients on their last customer report. Since those profits and rates of return were entirely fictitious and made up, it is no surprise that the court and trustee did not allow their recovery. The claimants then filed an appeal again seeking to recover not only the initial sum of their investments, but also the investment profits that the company claimed the investors had earned in their quarterly accounting statements.

The Second Circuit upheld the decision of the bankruptcy court, agreeing that the trustee’s use of the “Net Investment Method” of reimbursement was the appropriate and most equitable resolution to the unfortunate situation. The Second Circuit emphasized that the purpose of the Securities Investor Protection Act was to serve as a protection for investors against financial losses that results from the insolvency of their investment broker, not to prevent or reverse fraud. The Court of Appeals also leaned heavily on the equitable treatment of all claimants who were adversely impacted by the fraudulent

actions of BMIS. The court reasoned that use of the “Last Statement Method” to

distribute the assets of BMIS would be “absurd” due to the fact that all of the financial customer statements issued by BMIS were completely fabricated documents, created after the fact and not based on any type of actual investment by BMIS.

The court also stressed that using the “Last Statement Method”would create inequity within the class of claimants itself. The payment of any claim based on fictitiously created profits above a claimant’s initial investment would amount to taking away money from the pool of resources meant to go to reimburse all claimants for the sum that they initially invested. The result would be to favor those claimants who withdrew funds from their BMIS accounts that exceeded their initial investments as the expense of other claimants. The court rightfully held that such a result would only create an even worse situation out of the financial mess created by the BMIS Ponzi scheme.

The lesson learned from this case is that investors who are unlucky enough to become involved with what they later learn is a Ponzi scheme will be lucky to get even their initial investment money back. They might as well say “bye bye” to any alleged profits that they thought they had gained from those investments since they were fictitious to begin with. This is a hard lesson for investors to learn, but unfortunately it is the most equitable way to deal with a bad situation.

Importance Of The Mandatory Victims Restitution Act For Victims Of Ponzi Schemes

If you’ve been the victim of securities fraud, including a Ponzi scheme, your first thought may be to call an investment fraud attorney and sue them in a private right of action. While this may be a valid course of action, the case of United States v. Marino, decided on August 18, 2011 by the Second Circuit illustrates why getting the federal government involved to prosecute the defendants criminally may also be something to put on your wish list.

Mario Massillamany, securities fraud attorney

The Marino case involved a large Ponzi scheme called the Bayou Fund, which was run by three individuals, including a CPA named Daniel Marino. Daniel brought his brother, Matthew, who was the defendant in this particular case, into the scheme too, having him help set up and run the fake independent accounting firm, called Richmond-Fairfield Associates, the brothers set up to pass their fake blessing onto all the trades and accounts of the Ponzi scheme. While the defendant was not involved in the actual trades which lost investors money, he was actively involved in concealing the fraudulent nature of the so-called independent accounting firm, and of Bayou. In addition, he also played a substantial role in concealing Bayou’s losses from its investors. In fact, he often went by the pseudonym Mr. Richmond, the fictitious principal of the accounting firm, to give the appearance of the accounting firm’s independence.

Eventually the Ponzi scheme fell in around the ears of the four people with knowledge of it, and all four were arrested. Defendant Marino plead guilty to the crime of misprision of a felony for failing to report the Ponzi scheme and being actively involved in the concealment of the fraud. As part of that plea he was sentenced to 21 months in prison, and the district court issued a restitution order against him, ordering him to pay $60 million, pursuant to the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. 3663A.

Marino appealed the restitution order, arguing it was too large and that he did not proximately cause the victims’ losses because of his less prominent role in the scheme. The Second Circuit affirmed the restitution amount, and took the opportunity to explain more about the MVRA at the same time. The MVRA requires sentencing courts to order restitution for certain crimes, including any offense committed by fraud and deceit, with the goal that victims can be restored, to the extent possible, back to the position they occupied before sustaining the injury. There is a requirement in the statute that the victim’s harm must be directly and proximately caused by the defendant’s criminal activity. This causation requirement does not appear to be as strenuous as the element of loss causation in private action securities fraud cases however, based on the reasoning of the Second Circuit in the Marino case.

Instead, in the Marino case it was enough that the evidence showed that Marino not only failed to disclose the fraud, but also took active steps to conceal it. The court noted that this concealment was critical to bringing in the approximately $60 million in new investments into the Bayou fund during the time in question, and therefore affirmed the $60 million dollar restitution order from the district court.

Victims of Ponzi schemes may need to try many different methods in an attempt to get back the money they invested. Gaining some money back directly from the perpetrators through an order of restitution is potentially another tool in victims’ tool belts for bringing back in what they lost, and should not be discounted as a possible viable strategy. This is especially true in gaining restitution from those involved as secondary and supporting players in the fraudulent scheme since the causation elements are relaxed in this criminal setting, after conviction.

Mario Massillamany Discusses Receiver in Keenan Hauke Ponzi Scheme Case Appointing Starr Austen & Miller as Counsel to Recover Additional Funds for Receivership Estate

Mario Massillamany of the Indiana law firm of Starr, Austen & Miller, LLP, announced today that the judge has allowed the Receiver in the case of a prominent Indiana money manager, Keenan R. Hauke, who late last year plead guilty to a large Ponzi scheme, to appoint Starr Austen & Miller’s attorneys to initiate litigation to “recover additional funds for the Receivership estate.”

Mario Massillamany

Fishers, Indiana-Mario Massillamany of the Indiana law firm of Starr, Austen & Miller, LLP, announced today that the judge has allowed the Receiver in the case of a prominent Indiana money manager, Keenan R. Hauke, who late last year plead guilty to a large Ponzi scheme, to appoint Starr Austen & Miller’s attorneys to initiate litigation to “recover additional funds for the Receivership estate.” In the case entitled “State of Indiana et al., v. Keenan R. Hauke, et al.”, in Hamilton County Superior Court 4 in Indiana, under cause number 29D04-1104-PL-003478, the Receiver, William E. Wendling, Jr., has been tasked with marshaling assets to reduce investor losses.

According to court documents, the discovery of this Ponzi scheme happened in April 2011, when a former employee of Hauke reported his concerns about Hauke to the Indiana Securities Commission. The Commission acted quickly in investigating and then bringing a complaint against Hauke, and getting the court to freeze the assets of the former Fishers money manager and hedge fund operator. Hauke, who was the CEO of Samex Capital Advisors, LLC, had been previously kept a high profile, writing a regular column in the Indianapolis Business Journal, and being a frequent guest on cable networks and local TV shows, such as CNBC and Fox Business News, discussing financial issues.

While being very vocal within the financial community Hauke was at the same time involved in an elaborate Ponzi scheme involving many of his client investors, according to court documents. In this Ponzi scheme Hauke, who had great losses for his investors in a large Michigan real estate deal, began to solicit money from new clients, and he used most of this money to pay off previous investors. In addition, he converted some of these funds for his own uses, including paying off his mortgage, paying taxes and purchasing property. He also created a false trail of documents to deceive his investors about what was really happening to their retirement and life savings.

Court documents state that in December 2011 Hauke pleaded guilty in federal court to a single count of securities fraud, in which he admitted to defrauding 67 investors of over $7 million from 2004-2011. A sentencing hearing was held for him on March 23, 2012 in federal court, in the Southern District of Indiana, and he was sentenced to ten years and one month in jail.

Although the federal criminal case is now concluded, the Indiana state case continues against Hauke. According to court documents, one of the goals of this continued litigation is to try to recover as much of the Ponzi scheme victims’ money as possible, since on average each investor affected lost over $100,000, with some more, and some less because of Hauke’s misdeeds. Therefore, the Court appointed William E. Wendling, Jr. as a Receiver in June 2011, to take control over assets held by Hauke. He was tasked with establishing a claims process to distribute funds to shareholders and partners, and also creating a restitution fund for investors.

A part of gathering these assets for the estate is to gather funds from those who received them with knowledge of the Ponzi scheme, which can sometimes require the initiation of litigation. Therefore, on March 19, 2012, a judge in Hamilton County, Indiana, granted the Receiver’s petition to retain Starr Austen & Miller to initiate litigation on the Receiver’s behalf. Specifically, the Court ordered that “The Receiver may initiate litigation to recover profits received by investors, fund received by investors with knowledge or information of the Ponzi scheme, and any litigation investigated and believed viable by the Receiver to recover additional funds for the Receivership estate.”

Starr Austen’s securities arbitration attorney, Scott Starr, has stated, “Now that we’ve been appointed as counsel for the Receiver we’ll begin the task of investigation and initiation of litigation. We’ll do our best to discover and recover as much money as possible for the Receivership estate, which will, in turn, help reduce investor losses from this Ponzi scheme which has harmed so many innocent victims.”
Currently, Starr, Austen & Miller LLP has pending litigation against DuPont for the alleged environmental damages caused by their Imprelis product in the case entitled as Shomo v. E.I. du Pont de Nemours & Company (Case Number 1:11-00633) in the Eastern District Court of Pennsylvania. Starr, Austen & Miller LLP handles stock broker fraud cases, truck accident cases, and multimillion dollar, nationwide class actions. Mario Massillamany hosts a live chat session every Wednesday at 5pm to help people understand their rights.

http://www.prweb.com/releases/2012/3/prweb9346623.htm#

Tips to Protect Yourself and Your Family Against Internet Fraud

Mario Massillamany's Tips to Prevent Internet Fraud:

Tips for Avoiding Internet Auction Fraud:

• Understand as much as possible about how the auction works, what your obligations are as a buyer, and what the seller’s obligations are before you bid.

• Find out what actions the website/company takes if a problem occurs and consider insuring the transaction and shipment.

• Learn as much as possible about the seller, especially if the only information you have is an e-mail address.  If it is a business, check the Better Business Bureau where the seller/business is located.

• Examine the feedback on the seller.

• Determine what method of payment the seller is asking from the buyer and where he/she is asking to send payment.

• If possible, purchase items online using your credit card, because you can often dispute the charges if something goes wrong.

• Be cautious when dealing with sellers outside the United States.  If a problem occurs with the auction transaction, it could be much more difficult to rectify.

• Ask the seller about when delivery can be expected and whether the merchandise is covered by a warranty or can be exchanged if there is a problem.

• Make sure there are no unexpected costs, including whether shipping and handling is included in the auction price.

• There should be no reason to give out your social security number or driver’s license number to the seller.

Tips for Avoiding Non-Delivery of Merchandise:

• Make sure you are purchasing merchandise from a reputable source.

• Do your homework on the individual or company to ensure that they are legitimate.

• Obtain a physical address rather than simply a post office box and a telephone number, and call the seller to see if the telephone number is correct and working.

• Send an e-mail to the seller to make sure the e-mail address is active, and be wary of those that utilize free e-mail services where a credit card wasn’t required to open the account.

• Consider not purchasing from sellers who won’t provide you with this type of information.

• Check with the Better Business Bureau from the seller’s area.

• Check out other websites regarding this person/company.

• Don’t judge a person or company by their website.  Flashy websites can be set up quickly.

• Be cautious when responding to special investment offers, especially through unsolicited e-mail.

• Be cautious when dealing with individuals/companies from outside your own country.

• Inquire about returns and warranties.

• If possible, purchase items online using your credit card, because you can often dispute the charges if something goes wrong.

• Make sure the transaction is secure when you electronically send your credit card numbers.

• Consider using an escrow or alternate payment service

Tips for Avoiding Credit Card Fraud:

• Don’t give out your credit card number online unless the site is a secure and reputable.  Sometimes a tiny icon of a padlock appears to symbolize a higher level of security to transmit data.  This icon is not a guarantee of a secure site, but provides some assurance.

• Don’t trust a site just because it claims to be secure.

• Before using the site, check out the security/encryption software it uses.

• Make sure you are purchasing merchandise from a reputable source.

• Do your homework on the individual or company to ensure that they are legitimate.

• Obtain a physical address rather than simply a post office box and a telephone number, and call the seller to see if the telephone number is correct and working.

• Send an e-mail to the seller to make sure the e-mail address is active, and be wary of those that utilize free e-mail services where a credit card wasn’t required to open the account.

• Consider not purchasing from sellers who won’t provide you with this type of information.

• Check with the Better Business Bureau from the seller’s area.

• Check out other websites regarding this person/company.

• Don’t judge a person or company by their website.  Flashy websites can be set up quickly.

• Be cautious when responding to special investment offers, especially through unsolicited e-mail.

• Be cautious when dealing with individuals/companies from outside your own country.

• If possible, purchase items online using your credit card, because you can often dispute the charges if something goes wrong.

• Make sure the transaction is secure when you electronically send your credit card number.

• Keep a list of all your credit cards and account information along with the card issuer’s  contact information.  If anything looks suspicious or you lose your credit card(s), contact the card issuer immediately.

Tips for Avoiding Investment Fraud:

• Don’t judge a person or company by their website.  Flashy websites can be set up quickly.

• Don’t invest in anything you are not absolutely sure about.  Do your homework on the investment and the company to ensure that they are legitimate.

• Check out other websites regarding this person/company.

• Be cautious when responding to special investment offers, especially through unsolicited e-mail.

• Be cautious when dealing with individuals/companies from outside your own country.

• Inquire about all the terms and conditions.

Tips for Avoiding Business Fraud:

• Purchase merchandise from reputable dealers or establishments.

• Obtain physical address rather than simply a post office box and a telephone number, and call the seller to see if the telephone number is correct and working.

• Send an e-mail to the seller to make sure the e-mail address is active, and be wary of those that utilize free e-mail services where a credit card wasn’t required to open the account.

• Consider not purchasing from sellers who won’t provide you with this type of information.

• Purchase merchandise directly from the individual/company that holds the trademark, copyright, or patent.

Tips for Avoiding the Nigerian Letter or “419” Fraud:

• Be skeptical of individuals representing themselves as Nigerian or foreign government officials asking for your help in placing large sums of money in overseas bank accounts.

• Do not believe the promise of larges sums of money for your cooperation.

• Guard your account information carefully.

Mario Massillamany Discusses Sugarland Lawsuit In Entertainment Weekely

Indianapolis, Indiana- Mario Massillamany, in Entertainment Weekly, discusses Sugarland's decision making process that tragic night when the stage collapsed at the Indiana State Fair.  During a hearing this morning, Judge Sosin ordered Sugarland to testify next month in depositions regarding their role in the Indiana State Fair Stage collapse.  Sugarland will not be able to use their summer concert schedule as an excuse in an effort to delay the depositions.  Sugarland claims that the tragedy was an "act of God" and also blames the victims that attended the concert for their injuries.

Securities Attorneys Get Additional Guidance On Pleading What Constitutes A Domestic Transaction In Other Securities

In 2010 the Supreme Court muddied the waters of the Securities Exchange Act of 1934, declaring it did not apply extraterritorially, after all, and rejecting the until then used test of “conduct and effects.” Now, securities attorneys have been given additional guidance about how to make adequate allegations in their complaint to pass the new test created by the Supreme Court to pass muster under Rule 12(b)(6), when making claims under Section 10(b) or Rule 10b-5.  

In Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), the Supreme Court held that Section 10(b) and Rule 10b-5 of the Exchange Act only applies to “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” While the Court, in that case, was able to analyze the facts under the first test, regarding securities listed on domestic exchanges, it did not address the second test, and it remained significantly ambiguous what constituted a “domestic transaction in other securities,” after Morrison.

Therefore, it came as a relief to get additional guidance about this second test from the Second Circuit in the recent case of Absolute Activist ValueMaster Fund Ltd. v. Ficeto, decided on March 1, 2012.  In that case the plaintiffs were nine Cayman Island hedge funds who sued the defendant, their investment manager, Absolute Capital Management Holdings Limited, and several of its officers and employees (several of whom were not U.S. citizens nor located in the U.S.), basically alleging a pump and dump scheme resulting in losses of over $195 million. The plaintiffs purchased securities issued by U.S. companies however, and the deals were brokered through a U.S. broker dealer.

The case came before the Second Circuit who considered the issue of whether the allegations in the complaint were sufficient to allege a “domestic transaction in other securities,” to survive scrutiny under Federal Rule of Civil Procedure 12(b)(6). When considering these allegations the court provided very helpful guidance in determining what factors are, and are not, relevant in passing this test to see if Section 10(b) and Rule 10b-5 are applicable to the transactions.

The Second Circuit held that to sufficiently allege the existence of a “domestic transaction in other securities” the plaintiff must allege facts leading to the plausible inference that either irrevocable liability was incurred or title transferred within the United States. The court explained that the parties “incur irrevocable liability” basically when the contract is formed between the parties. The point of irrevocable liability can be used to determine the locus of a securities purchase or sale. Facts that can be alleged which make this plausible inference could include, but are not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.

The Second Circuit was also clear about what types of allegations would not be sufficient to constitute a domestic transaction in other securities. For example, the conclusory allegation that the transaction took place in the United States is insufficient. Further, the focus should be upon the locus of the purchases and sales of the securities, and not on the place where the alleged deception originated which constituted the securities fraud. Therefore, in making allegations, although these things may be relevant, they will not be conclusory: the identity of the parties, the type of security at issue, or whether each individual defendant engaged in conduct with in the United States.

The additional clarification by the Second Circuit in Ficeto will be of great help to securities attorneys who represent clients who have purchased or sold securities which are not listed on domestic exchanges. In such instances focusing on the locus of where the contract was formed, or title passed, can help determine whether the Exchange Act applies to the transaction, or not.

An Interesting Twist Where Broker-Dealer Seeks To Enjoin Customer From Arbitration In FINRA And Is Denied By The Second Circuit

An interesting case that securities arbitration attorneys should find ironic. In the case of UBS Financial Services, Inc. v. West Virginia University Hospitals, Inc., decided on September 22, 2011, the Second Circuit upheld the decision of the district court to dismiss a motion to enjoin arbitration in FINRA filed by a FINRA member, UBS, against its customer.

Although the more typical case involves a customer filing a securities fraud action in court, and having the defendant move to enforce an arbitration agreement, and remove the case to FINRA, in this recent case the tables were turned. Instead, it was the customer, West Virginia University Hospitals (WVUH) who wanted to bring an action against UBS in FINRA arbitration, and UBS fought tooth and nail to try to get it thrown out of arbitration and into court.

The case deals with auction rate securities (ARS), which UBS persuaded WVUH to use as the vehicle for a large financing project, where UBS would serve as both the underwriter and the broker-dealer in the auction services. Unknown to WVUH, UBS, as the broker-dealer, would place additional bids on all its auctions to make sure they did not fail, which concealed the true risks of liquidity of this made-up market which collapsed in February 2008 during the financial crisis. This collapse caused WVUH to have to pay much higher interests rates on the debt until it could refinance several months later.

Therefore, WVUH filed an arbitration Statement of Claim against UBS, alleging that UBS had violated the Securities Exchange Act of 1934 and the Uniform Securities Act by advising WVUH to issue ARS while withholding critical information about the ARS market and UBS’s role. Further, WVUH alleged that UBS fraudulently induced it to purchase auction services, while UBS withheld critical information about the ARS market and UBS’s role. Interestingly, in all the agreements between the parties there were no documents which contained an arbitration clause, and none referred to any provisions of the FINRA code.

UBS is a member of FINRA, and as such when it joined it agreed to comply with FINRA’s rules. One of those is Rule 12200 of the FINRA Code, which obligates UBS to arbitrate a dispute with a “customer” at the customer’s demand, if the dispute arises “in connection with” the business activities of the member. This is the rule WVUH used to initiate arbitration. UBS argued this rule did not apply because WVUH was not a “customer,” but the Second Circuit determined, as a matter of law, that WVUH was a customer of UBS when it served as a broker-dealer for the ARS auctions. The court further determined that a “customer” is a non-broker or non-dealer who purchases, or undertakes to purchase, a good or service from a FINRA member.

This case is interesting for all securities arbitration attorneys to note, because it turns the tables on the normal considerations in FINRA arbitration cases. Normally FINRA arbitration is seen as a shield for the broker-dealers, who invoke their arbitration clauses to stay away from the court. However, as this case demonstrates in certain instances customers who wish to can use this FINRA rule as a sword to compel a FINRA member into arbitration even without an arbitration agreement in place, if they so desire.