Financial Fraud Enforcement Task Force Announces Results of Largest-Ever Nationwide Operation Targeting Investment Fraud
|Washington, D.C. December 06, 2010|
WASHINGTON—Attorney General Eric Holder announced today the results of Operation Broken Trust, a nationwide operation organized by the Financial Fraud Enforcement Task Force to target investment fraud. To date, the operation has involved enforcement actions against 310 criminal defendants and 189 civil defendants for fraud schemes that harmed more than 120,000 victims throughout the country. The operation’s criminal cases involved more than $8.3 billion in estimated losses and the civil cases involved estimated losses of more than $2.1 billion. Operation Broken Trust is the first national operation of its kind to target a broad array of investment fraud schemes that directly prey upon the investing public.
In announcing the results of Operation Broken Trust, Attorney General Holder was joined by FBI Executive Assistant Director Shawn Henry, U.S. Securities and Exchange Commission (SEC) Director of Enforcement Robert Khuzami, U.S. Postal Inspection Service (USPIS) Chief Postal Inspector Guy Cottrell, Deputy Chief Rick Raven of the Internal Revenue Service Criminal Investigation (IRS-CI), Acting Director of Enforcement Vince McGonagle of the U.S. Commodity Futures Trading Commission (CFTC), and other members of the Financial Fraud Enforcement Task Force.
The interagency Financial Fraud Enforcement Task Force was established by President Obama to lead an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. Starting on Aug. 16, 2010, within a three-and-a-half month period, Operation Broken Trust involved 211 criminal cases and 60 civil enforcement actions. Ninety-one defendants have been sentenced to prison, including several sentences of more than 20 years in prison.
“With this operation, the Financial Fraud Enforcement Task Force is sending a strong message,” said Attorney General Holder. To the public: be alert for these frauds, take appropriate measures to protect yourself, and report such schemes to proper authorities when they occur. And to anyone operating or attempting to operate an investment scam: cheating investors out of their earnings and savings is no longer a safe business plan—we will use every tool at our disposal to find you, to stop you, and to bring you to justice.”
“This operation highlights the scope of this problem, and its impact on individuals from all walks of life,” said FBI Executive Assistant Director Henry. “This one sweep alone involves fraud schemes that harmed more than 120,000 victims. The schemes may change, but the underlying greed does not. Working with our partners, we in the FBI will use all the investigative techniques in our arsenal, including undercover operations, to bring those responsible to justice.”
“Fraud by well-known companies or high-profile executives gets the biggest headlines, but other scams are equally devastating to hard working families and retirees,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Victims want justice and don’t much care who the fraudster is or how unique the fraud. Today’s actions underscore that law enforcement agrees and will pursue fraud in whatever form.”
Enforcement actions taken as a result of Operation Broken Trust involve a range of different investment fraud schemes, all of which prey directly on the investing public. The operators of these schemes often promise high returns to investors, but engage in little to no legitimate investment activity. Such schemes include Ponzi schemes, affinity fraud, prime bank/high-yield investment scams, foreign exchange (FOREX) frauds, business opportunity fraud, and other similar schemes. In some instances, operators of these schemes filed for bankruptcy in an attempt to avoid claims by victim-investors.
“The U.S. Postal Inspection Service has a long tradition of protecting postal customers from these types of investment and Ponzi scams and bringing those responsible to justice,” said USPIS Chief Postal Inspector Cottrell. “The Postal Inspection Service constantly strives to protect our customers and the general public from falling victim to these scams that claim millions of dollars every year.”
“The results announced today demonstrate the effectiveness of federal civil and criminal law enforcement in bringing to justice those who have engaged in financial fraud schemes,” said Acting Director McGonagle of the Division of Enforcement for CFTC. “The CFTC continues to devote substantial enforcement resources to combat financial fraud. We appreciate the partnership with the other members of the President’s Financial Fraud Enforcement Task Force to protect the public from financial fraudsters.”
“Securities and investment frauds are serious offenses which have brought financial ruin to many citizens. Promoters of Ponzi schemes prey upon trusting investors and then steal their hard earned money,” said Rick Raven, Deputy Chief, IRS Criminal Investigation. “IRS Criminal Investigation is proud to bring our forensic accounting skills to this joint venture with our law enforcement partners to put a stop to this and other types of white collar fraud.”
Operation Broken Trust was conducted in conjunction with various Department of Justice components—including the U.S. Attorney Offices, the FBI, the Criminal and Civil Divisions and the U.S. Trustee Program—as well as the SEC, USPIS, the CFTC, IRS-CI, the Federal Trade Commission, the U.S. Secret Service, and the National Association of Attorneys General.
As a part of Operation Broken Trust, the task force is making the public aware of resources available to protect against these types of fraud and how to report fraud when it occurs. To learn more about investment scams, how to take steps to protect yourself from scams, or how to report investment fraud if you believe you have been victimized, go to StopFraud.gov. The website includes links to a wide array of task force member resources.
The President’s Financial Fraud Enforcement Task Force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the task force, visit StopFraud.gov.
The following are examples of enforcement actions taken as a part of Operation Broken Trust:
$485 Million Investment Scam Defrauded Thousands
Joseph Blimline pleaded guilty in the Eastern District of Texas on Aug. 31, 2010, for his role in one of North Texas’ largest oil and gas investment Ponzi schemes defrauding 7,700 investors of more than $485 million. Blimline was a majority owner of Provident Royalties, an investment company. Beginning in 2006, Blimline and others involved at Provident Royalties made false representations and failed to disclose other material facts to their investors to induce the investors into providing payments to Provident. The investors were not told that Blimline had received millions of dollars of unsecured loans and had been previously charged with securities fraud. Blimline issued approximately 20 oil and gas offerings, and used a significant amount of the money raised in these offerings to purchase oil and gas assets from earlier offerings and to pay dividends to earlier investors in order to facilitate the scheme. Blimline also pleaded guilty to charges related to a separate, but similar oil and gas scheme based in Michigan that defrauded investors out of $50 million. The criminal case against Blimline was brought by the U.S. Attorney’s Office for the Eastern District of Texas and was investigated by the FBI, in coordination with the U.S. Securities and Exchange Commission (SEC), which previously had filed a civil action to freeze the assets of Blimline and others.
Chicago Ponzi Scheme Operator Victimized Elderly Italian Immigrants
Frank Castaldi was sentenced on Sept. 15, 2010, in the Northern District of Illinois to 23 years in prison for operating a Ponzi scheme that resulted in more than $30 million in losses to hundreds of victims, including many elderly Italian immigrants. As part of his scheme, Castaldi guaranteed investors that he would pay them annual returns between 10 and 15 percent. He made false representations to most investors about investing their principal in his various businesses, and about the source of the funds that he used to make their interest payments. Castaldi used new investors’ principal payments to make interest payments to other investors, without disclosing the true source of the interest payments. Castaldi also lost investors’ money by funding a failed banquet hall and other failing businesses, and by purchasing stocks. The case was prosecuted by the U.S. Attorney’s Office for the Northern District of Illinois and investigated by the FBI and Internal Revenue Service Criminal Investigation (IRS-CI).
Florida Man Stole Millions from Investors to Fund His Lavish Lifestyle
Nevin Shapiro, the former owner and chief executive officer of Capitol Investments USA Inc., pleaded guilty on Sept. 15, 2010, in the District of New Jersey, for his role in a multi-million-dollar Ponzi scheme. From January 2005 through November 2009, Shapiro solicited investors from New Jersey and throughout the United States through Capitol, telling them that he would use their money to fund his wholesale grocery distribution business. As a result of these solicitations, investors sent more than $880 million to Shapiro and Capitol during this time period. Capitol had virtually no income generating business at that time and Shapiro used new investor funds to make principal and interest payments to existing investors, as well as to fund his own lavish lifestyle. Shapiro used investor funds to pay illegal sports gambling debts, to purchase floor seats at Miami Heat basketball games and to make payments on his Riviera yacht and his residence in Miami Beach. Shapiro also used investor funds to make payments to student athletes attending a local university in the Miami area and to make donations to the university. The Ponzi scheme resulted in an estimated loss of $89 million to 75 victims. The case was prosecuted by the U.S. Attorney’s Office for the District of New Jersey and investigated by the FBI and IRS-CI, with coordination from the SEC, which previously had filed parallel civil charges.
Texas Man Allegedly Targeted Members of Christian Faith in Investment Scam
Eldon A. Gresham Jr. was indicted in the Northern District of Texas on Sept. 21, 2010, on 10 counts of mail fraud in connection with a foreign currency exchange (FOREX) trading scam. From January 2004 through June 2009, Gresham solicited at least 90 individuals to invest in his FOREX trading business, the Gresham Company. Gresham falsely represented to potential investors that he generated consistent returns on investments of up to 10 percent per month. In fact, Gresham was actually losing money on his FOREX trading. Gresham also concealed from investors that he used their investment funds for personal reasons or as payments to earlier investors. Over the life of the scheme, Gresham obtained nearly $15.8 million from unsuspecting victims. Gresham used contacts from the Texas area and beyond to locate investors and targeted members of the Christian faith, who were elderly and particularly vulnerable to Gresham’s inducements. Gresham often told potential investors that he believed his success in FOREX trading was a blessing and gift from God, and Gresham considered his investment business to be “his ministry.” Gresham also encouraged people to invest by telling them that investors could use their investment gains to “further God’s work.” The case is being prosecuted by the U.S. Attorney’s Office for the Northern District of Texas and investigated by the U.S. Postal Inspection Service.
Ponzi Scheme Targeted Members of Four New York Churches
Bryant Ismail Rodriguez was sentenced on Sept. 24, 2010, in the Southern District of New York to nine years in prison for his role in a Ponzi scheme involving nearly $2 million in losses and more than 185 victims. Beginning in the spring of 2007, Rodriguez, a member of El Camino Church in the Washington Heights neighborhood of Manhattan, told members of that church, another church in Manhattan, and two churches in the Bronx, N.Y., that he was involved with an electronics distribution company named Communication and Electronics Group Inc. Rodriguez offered church members opportunities to invest in C&E, promising returns of between 30 to 40 percent every month, additional cash bonuses and even the opportunity to purchase homes in the Dominican Republic and New York City with their investment earnings. In reality, C&E was a shell company created by Rodriguez, which never sold any items to a major retailer and never purchased from an electronics manufacturer. The case was prosecuted by the U.S. Attorney’s Office for the Southern District of New York and investigated by the U.S. Postal Inspection Service.
Investment Scam Victimized 800 Individuals Throughout the United States
Three individuals were indicted and four individuals pleaded guilty in the fall of 2010 in the Eastern District of Virginia for their roles in A&O entities, a group of businesses that acquired and marketed life settlements to investors. The defendants defrauded investors by making misrepresentations about such things as A&O’s prior success, its size and office locations, its number of employees, the risks of its investment offerings, and its safekeeping and use of investor funds. Their fraud scheme involved more than 800 victims throughout the U.S. and Canada, many of whom were elderly. The cases are being prosecuted by the U.S. Attorney’s Office for the Eastern District of Virginia and the Criminal Division of the Department of Justice and investigated by the Virginia Financial and Securities Fraud Task Force, which includes the U.S. Postal Inspection Service, IRS-CI and the FBI. The SEC previously filed a parallel civil case.
Thomas Petters’ Coconspirators Assisted in Carrying Out Ponzi Scheme
Seven coconspirators of Thomas J. Petters were sentenced to prison in the District of Minnesota in September 2010: Robert White, Larry Reynolds, Michael Catain, James Wehmhoff, Greg Bell, Harold Katz, and Deanna Coleman. Petters used a successful corporation for over a decade to perpetrate a scheme that defrauded investors of $3.4 billion in the largest fraud case in Minnesota history. Through his company, Petters Group Worldwide LLC (PGW), Petters obtained loans from hedge funds and investment groups for the stated purpose of financing sales to well-known big box retailers, such as Costco and Sam’s Club. The investigation revealed that the purchase and subsequent sale of merchandise to the retailers were actually fabricated transactions supported by fictional documentation. Petters was convicted of mail and wire fraud, conspiracy and money laundering charges in 2009 and was sentenced in April 2010 to 50 years in prison. The cases were prosecuted by the U.S. Attorney’s Office for the District of Minnesota and investigated by the FBI and IRS-CI.
Internet-Based Fraud Targeted the Deaf Community
On Oct. 6, 2010, the SEC obtained a temporary restraining order and emergency order freezing the assets of Imperia Invest IBC. According to the SEC’s complaint, Imperia solicited investors through the Internet, claiming it would use the investor funds to purchase Traded Endowment Policies (TEPs), the British term for viatical settlements. Imperia falsely promised to pay investors—the majority of whom are members of the deaf community—a guaranteed return of 1.2 percent per day. The SEC also alleges that Imperia’s website said that investors could only access their profits by purchasing a Visa debit card from Imperia, but Imperia has no relationship with Visa and was using the Visa name without authorization. Through its website and a series of offshore PayPal style bank accounts, Imperia raised in excess of $7 million from at least 14,000 investors worldwide, including 6,000 investors in the U.S. who have invested in excess of $4 million with Imperia.
Chicago Man Operated Ponzi Scheme
On Oct. 7, 2010, the SEC charged a Chicago-area company and its owner for perpetrating a Ponzi scheme in which they promised investors extraordinary returns generated from a purportedly successful real estate business. The SEC alleges that Robert R. Anderson of Mt. Prospect, Ill., issued promissory notes through his company Rosand Enterprises that he claimed would generate investor returns ranging from 10 to 20 percent per month. Anderson misrepresented to investors that Rosand Enterprises purchased, constructed, rehabbed, and sold homes in the Chicago area and other locations. However, Anderson was not making any money in the real estate market and was instead conducting a Ponzi scheme to pay earlier investors with funds from new investors. He also helped himself to investor money to buy cars, make hefty credit card payments, and pay for his daughter's wedding. The SEC’s complaint, filed in U.S. District Court in Chicago, alleges that Anderson raised approximately $12 million from at least 77 investors between approximately December 2005 and May 2008.
Two Florida-Based Fund Managers Facilitated Petters Ponzi Scheme
On Oct.14, 2010, the SEC charged Bruce F. Prevost and David W. Harrold and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas J. Petters. The SEC alleges that Prevost and Harrold falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds they managed, Prevost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme. The SEC’s complaint alleges that Prevost, Harrold, and their firms invested more than $1 billion in hedge fund assets with Petters while pocketing more than $58 million in fees.
Florida Man Victimized Haitian-Americans in $14 Million Scam
Ronnie E. Bass Jr. was convicted in the Southern District of Florida on Oct. 25, 2010, for his participation in a Ponzi scheme operated from February 2008 through January 2009. Bass and his coconspirators engaged in a classic affinity fraud which sought to exploit the common interests and trusts of a certain group of individuals. Bass and others solicited and targeted members of the Haitian community to invest in Homepals LLC. Homepals offered investments in “unsecured notes” sold by the defendants that promised to double investor funds in 90 days. By November 2008, Homepals could not generate enough investor funds to pay off the existing investors. The scam led to an estimated loss of $14.3 million to 500 victims. The case was prosecuted by the U.S. Attorney’s Office for the Southern District of Florida and investigated by the FBI, with cooperation from the SEC, which previously had filed a civil action to enjoin the scheme.
Ponzi Scheme Operator Used Spanish-Language Media to Solicit Investors
Juan Rangel pleaded guilty on Oct. 27, 2010, for his role in operating a Ponzi scheme. Rangel and his company, the Commerce-based Financial Plus Investments, recruited new investors through Spanish-language newspapers and magazines, as well as in radio advertisements and infomercials broadcast on television. Rangel and Financial Plus promised to pay investors guaranteed returns of 60 percent each year out of the profits from Financial Plus’ real estate investments and lending business. However, Rangel admitted that Financial Plus did not make any actual profits from real estate or lending. Rangel instead used the new investors’ money to make payments to other investors and for his own personal use, including the monthly mortgage payments on his $3 million home and monthly payments for his Lamborghini sports car. Rangel also admitted that he and others operated a separate mortgage fraud scheme that targeted Latino homeowners at risk of losing their homes by offering them help to avoid foreclosure. The U.S. Attorney’s Office for the Central District of California is prosecuting the case and the FBI, U.S. Postal Inspection Service and IRS-CI are investigating the case.
Owners of Trading Company Allegedly Defrauded Investors
Craig Karlis and Ahmet Devrim Akyil were indicted on Oct. 28, 2010, in the District of Massachusetts. Karlis was charged with nine counts of wire fraud and two tax crimes and Akyil was charged with 10 counts of wire fraud. The indictment alleges that Karlis and Akyil founded Boston Trading and Research (BTR) and recruited customers to open accounts with BTR to trade in the foreign currency exchange market. Karlis and Akyil allegedly made a series of misrepresentations to customers about how BTR operated and about what they did with customer money. They allegedly diverted millions of dollars from BTR customer accounts to pay BTR’s business expenses and their personal expenses, such as houses, cars and jewelry. Karlis and Akyil told customers that BTR employed strategies to reduce risk, when in fact they did not. By July 2008, BTR had approximately 1,200 customers and more than $35 million under management. On the same day as the indictment was filed, the SEC filed a civil complaint against Karlis, Akyil, and BTR for the same conduct, alleging that Karlis, Akyil, and BTR sent misleading account statements to investors while stealing their funds and incurring major trading losses. The criminal case is being prosecuted by the U.S. Attorney’s Office for the District of Massachusetts, with cooperation from the SEC and the Commodity Futures Trading Commission (CFTC), and investigated by the FBI and IRS-CI. The civil case against Karlis, Akyil, and BTR is being handled by the SEC.
Michigan Man Operated an Oil-Related Ponzi Scheme
On Nov. 10, 2010, the SEC filed civil charges against a Grosse Point, Mich., man and his company, Zada Enterprises LLC, for allegedly conducting a $27.5 million Ponzi scheme in which investors were told that their money would be put in oil-related investments—earning as much as 48 percent. In a court filing seeking to shut down the scheme, the SEC alleged that the company owner, Joseph Paul Zada, also claimed he had exclusive access to certain oil investments, had business contacts in the Middle East and had earned substantial returns from prior oil-related investments. Instead, according to the SEC, Zada was using the money from approximately 60 investors to buy a home in Grosse Point Shores, an equestrian facility in Palm Beach County, jewelry, and cars.
Investment Manager Operated $40 Million Ponzi Scheme
Investment manager Philip Barry was convicted on Nov. 17, 2010, of one count of securities fraud and 33 counts of mail fraud in the Eastern District of New York. Barry operated a long-standing and large-scale Ponzi scheme. Approximately 800 individuals invested a total of more than $40 million in Barry’s business, the Leverage Group. To induce investments and discourage withdrawals, Barry, among other things, guaranteed specified positive rates of return, issued account statements that showed growing account balances, represented that investing in the Leverage Group was safe and promised that withdrawals could be made easily. The evidence at trial established that Barry actually was running a Ponzi scheme, paying returns to Leverage Group investors not from any profits earned on investments, but rather from existing investors’ deposits or money paid by new investors. Barry never produced or earned the rates of return that he advertised and cited in clients’ account statements. Rather, the positive rates of return were simply pre-determined interest rates made up by Barry. In bankruptcy testimony given by Barry, he estimated that he owed his investors $60 million. In bankruptcy proceedings, the U.S. Trustee Program secured from Barry a waiver of Chapter 7 discharge. The criminal case was prosecuted by the U.S. Attorney’s Office for the Eastern District of New York and investigated by the FBI, in coordination with the SEC, which previously had filed a related civil action.
Texas Man and Others Sold Fraudulent Oil and Gas Investments
The SEC filed a lawsuit in Dallas on Sept. 1, 2010, alleging that Jason A. Halek of Southlake, Texas, and two companies he owns and controls—Halek Energy LLC and CBO Energy Inc.—fraudulently sold investments in Texas oil and gas projects. The complaint alleges that, between June 2007 and September 2009, Halek, Halek Energy and CBO Energy raised approximately $22 million from at least 300 investors nationwide by making materially false and misleading statements about the risks of the oil and gas projects, the use of investor funds, and potential returns from the investments. On Nov. 30, 2010, the SEC also charged Priscilla Sabado, a broker-dealer and investment adviser representative at AXA Adisors, LLC, with fraudulently selling Halek Energy interests to her clients, including a financially unsophisticated 24-year old blind man.
Two Mexican Companies Allegedly Issued False Statements
On Dec. 1, 2010, the CFTC charged two Mexican companies, MXBK Group S.A. de C.V and its foreign currency (FOREX) trading division, MBFX S.A., with issuing false customer statements and misrepresenting trading results on their website in connection with their FOREX trading enterprise. The action was filed in the U.S. District Court in Salt Lake City. According to the complaint, the defendants have accepted at least $28 million from over 800 U.S. customers for the purpose of trading FOREX in pooled accounts on behalf of those customers. The complaint further alleges that during the period of October 2005 through April 2009, the MXBK entities lost approximately $29 million in customer funds during which time they falsely reported overall trading profits. In a related action, the SEC filed a civil injunctive action alleging that Clifton K. Oram, Don C. Winkler and William R. Michael engaged in fraud by offering and selling investments in MXBK Group’s FOREX trading program. The SEC’s complaint alleges that Oram, Winkler and Michael raised tens of millions of dollars and attracted investors by touting impressive monthly returns posted on MXBK Group’s website. In reality, neither Oram, Winkler nor Michael understood how the FOREX market or FOREX trading functioned, and they blindly accepted MXBK Group’s representations about its background and track record.
Operation Period: August 16 - December 1, 2010
Summary of results:
Total Number of Cases: …………………….231
Total Number of Defendants: …………….. 343
Total Number of Arrests: ………………….. 64
Total Number of Info/Indictments: ……….. 158
Total Number of Convictions: …………….. 104
Total Number of Sentencings: …………….. 87
Total Estimated Loss Amount: …………… $8,384,150,054
Total Estimated Victims: ………………… 120,381
Total Number Civil Enforcement Actions: ... 60
Total Number of Defendants: ………………1891
Total Estimated Loss Amount: ……………. $2,134,681,5242
Total Estimated Victims: ………….………. 23,5663
1 This number includes individuals and corporations names as defendants in U.S. District Court actions and/or respondents in administrative proceedings, but does not include "doing business as" (d/b/a) or "formerly known as" (f/k/a) entities where named in those actions.
2 The estimated loss amount does not include more than $175,000,000 of debt owed to victims as a consequence of the underlying fraud schemes, which was precluded from Chapter 7 bankruptcy discharge as a result of civil enforcement actions by the U.S. Bankruptcy Trustee.
3 The estimated number of victims does not include over 3,500 victims in ongoing bankruptcy cases.