FRAUD VERDICT IN PONZI SCHEME CASE LEADS TO $80 MILLION IN SANCTIONS AGAINST MAN AND HIS COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Court Imposes Injunctions and Monetary Sanctions of Over $80 Million Against Marlon Quan and His Companies Based On Fraud Verdict

The United States Securities and Exchange Commission announced today that, on September 19, 2014, Judge Ann D. Montgomery, of the U.S. District Court in Minneapolis, Minnesota, issued an Opinion and Order imposing sanctions against defendants Marlon Quan, Acorn Capital Group, LLC ("Acorn"), Stewardship Investment Advisors, LLC ("SIA") and ACG II, LLC ("ACG II"). In the Opinion and Order, Judge Montgomery imposed permanent injunctions against the defendants, and imposed financial sanctions of over $80 million against Marlon Quan and the three other defendants that he controlled.

The Commission's complaint, which was filed in March 2011, alleged that Marlon Quan helped to facilitate the massive fraud of Tom Petters by funneling several hundred million dollars of investor money into the Petters Ponzi scheme. According to the SEC's 2009 complaint against Tom Petters, he sold promissory notes to feeder funds like those controlled by Quan and his firms. Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes. Petters had promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such retailers as Wal-Mart and Costco. In reality, this "purchase order inventory financing" business was merely a Ponzi scheme -- there were no inventory transactions.

The SEC alleged that Quan and his firms (SIA and Acorn) invested hundreds of millions of hedge fund assets with Petters while pocketing tens of millions of dollars in fees. Marlon Quan and his companies falsely assured investors that their money would be protected by various safeguards such as "lock box accounts." The complaint also alleged that when Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms concealed Petters's defaults from investors.

The Commission had previously charged Petters and Illinois-based fund manager Gregory M. Bell with fraud, and filed additional charges against Florida-based hedge fund managers Bruce F. Prévost and David W. Harrold for similarly defrauding their investors in connection with investments in the Petters Ponzi scheme. Subsequent to filing the complaint against Marlon Quan and his companies, the SEC also charged James Fry, a Minnesota-based hedge fund manager, with similar misconduct.

After a nine-day trial, on February 11, 2014, the jury returned a verdict for the Commission and against the defendants, finding Marlon Quan and his three companies liable for securities fraud. In her September 19th Opinion and Order, Judge Montgomery permanently enjoined the Marlon Quan, Acorn, SIA and ACG II from violating, or aiding and abetting violations of, Section 17(a)(2) and (3) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Judge Montgomery further ordered that Marlon Quan and the other defendants were liable, jointly and severally, for disgorgement of $80,6213,589 together with prejudgment interest.

The trial team from the Commission's Chicago Regional Office consisted of attorneys John E. Birkenheier, C.J. Kerstetter, Timothy Leiman, Michael Mueller, Senior Accountant Don Ryba, and paralegal Sarah Renardo.

SEC ISSUES INVESTOR ALERT FOR AFFINITY FRAUD

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help educate investors about affinity fraud, a type of investment scam that preys upon members of identifiable groups, such as religious or ethnic communities or the elderly. 

What is Affinity Fraud? 

Affinity fraud almost always involves either a fake investment or an investment where the fraudster lies about important details (such as the risk of loss, the track record of the investment, or the background of the promoter of the scheme). Many affinity frauds are Ponzi or pyramid schemes, where money given to the promoter by new investors is paid to earlier investors to create the illusion that the so-called investment is successful. This tricks new investors into investing in the scheme, and lulls existing investors into believing their investments are safe. In reality, even if there really is an actual investment, the investment typically makes little or no profit. The fraudster simply takes new investors’ money for the fraudster’s own personal use, often using some of it to pay off existing investors who may be growing suspicious. Eventually, when the supply of investor money dries up and current investors demand to be paid, the scheme collapses and investors discover that most or all of their money is gone. 

How Does Affinity Fraud Work? 

Fraudsters who carry out affinity scams frequently are (or pretend to be) members of the group they are trying to defraud. The group could be a religious group, such as a particular denomination or church. It could be an ethnic group or an immigrant community. It could be a racial minority. It could be members of a particular workforce – even members of the military have been targets of these frauds. Fraudsters target any group they think they can convince to trust them with the group members’ hard-earned savings. 

At its core, affinity fraud exploits the trust and friendship that exist in groups of people who have something in common. Fraudsters use a number of methods to get access to the group. A common way is by enlisting respected leaders from within the group to spread the word about the scheme. Those leaders may not realize the “investment” is actually a scam, and they may become unwitting victims of the fraud themselves. 

Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue legal remedies. Instead, they try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

How to Avoid Affinity Fraud

Here are a few tips to help you avoid becoming a victim of an affinity fraud scam.

• Even if you know the person making the investment offer, be sure to research the person’s background, as well as the investment itself – no matter how trustworthy the person who brings the investment opportunity to your attention seems to be. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not. 
• Never make an investment based solely on the recommendation of a member of an organization or group to which you belong. This is especially true if the recommendation is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be a fraud.
• Do not fall for investments that promise spectacular profits or “guaranteed” returns. Similarly, be extremely leery of any investment that is said to have no risks. Very few investments are risk-free. Promises of quick and high profits, with little or no risk, are classic warning signs of fraud. 
• Be skeptical of any investment opportunity that you can’t get in writing. Fraudsters often avoid putting things in writing. Avoid an investment if you are told they do not have time to put in writing the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential or a secret. 
• Don’t be pressured or rushed into buying an investment before you have a chance to research the “opportunity.” Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the salesperson bases the recommendation on “inside” or confidential information. 
• 
  

SEC WARNS OF SCAMS INVOLVING VIRTUAL CURRENCY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to make investors aware about the potential risks of investments involving Bitcoin and other forms of virtual currency.

The rise of Bitcoin and other virtual and digital currencies creates new concerns for investors. A new product, technology, or innovation – such as Bitcoin – has the potential to give rise both to frauds and high-risk investment opportunities. Potential investors can be easily enticed with the promise of high returns in a new investment space and also may be less skeptical when assessing something novel, new and cutting-edge.

We previously issued an Investor Alert about the use of Bitcoin in the context of a Ponzi scheme. The Financial Industry Regulatory Authority (FINRA) also recently issued an Investor Alert cautioning investors about the risks of buying and using digital currency such as Bitcoin. In addition, the North American Securities Administrators Association (NASAA) included digital currency on its list of the top 10 threats to investors for 2013.

What is Bitcoin?

Bitcoin has been described as a decentralized, peer-to-peer virtual currency that is used like money – it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.

IRS treats Bitcoin as property. The IRS recently issued guidance stating that it will treat virtual currencies, such as Bitcoin, as property for federal tax purposes. As a result, general tax principles that apply to property transactions apply to transactions using virtual currency

If you are thinking about investing in a Bitcoin-related opportunity, here are some things you should consider.

Investments involving Bitcoin may have a heightened risk of fraud.

Innovations and new technologies are often used by fraudsters to perpetrate fraudulent investment schemes. Fraudsters may entice investors by touting a Bitcoin investment “opportunity” as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors may find these investment pitches hard to resist.

Bitcoin Ponzi scheme. In July 2013, the SEC charged an individual for an alleged Bitcoin-related Ponzi scheme in SEC v. Shavers. The defendant advertised a Bitcoin “investment opportunity” in an online Bitcoin forum, promising investors up to 7% interest per week and that the invested funds would be used for Bitcoin activities. Instead, the defendant allegedly used bitcoins from new investors to pay existing investors and to pay his personal expenses.

As with any investment, be careful if you spot any of these potential warning signs of investment fraud:

“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.

Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication – meaning you didn’t ask for it and don’t know the sender – about an investment opportunity.

Unlicensed sellers. Federal and state securities laws require investment professionals and their firms who offer and sell investments to be licensed or registered. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status by searching the SEC’s Investment Adviser Public Disclosure (IAPD) website or FINRA’s BrokerCheck website.

No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Most registration exemptions require that investors are accredited investors. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.

Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.

Bitcoin users may be targets for fraudulent or high-risk investment schemes.

Both fraudsters and promoters of high-risk investment schemes may target Bitcoin users. The exchange rate of U.S. dollars to bitcoins has fluctuated dramatically since the first bitcoins were created. As the exchange rate of Bitcoin is significantly higher today, many early adopters of Bitcoin may have experienced an unexpected increase in wealth, making them attractive targets for fraudsters as well as promoters of high-risk investment opportunities.

Fraudsters target any group they think they can convince to trust them. Scam artists may take advantage of Bitcoin users’ vested interest in the success of Bitcoin to lure these users into Bitcoin-related investment schemes. The fraudsters may be (or pretend to be) Bitcoin users themselves. Similarly, promoters may find Bitcoin users to be a receptive audience for legitimate but high-risk investment opportunities. Fraudsters and promoters may solicit investors through forums and online sites frequented by members of the Bitcoin community.    

Bitcoins for oil and gas. The Texas Securities Commissioner recently entered an emergency cease and desist order against a Texas oil and gas exploration company, which claims it is the first company in the industry to accept bitcoins from investors, for intentionally failing to disclose material facts to investors including “the nature of the risks associated with the use of Bitcoin to purchase working interests” in wells. The company advertised working interests in wells in West Texas, both at a recent Bitcoin conference and through social media and a web page, according to the emergency order.


Bitcoin trading suspension. In February 2014, the SEC suspended trading in the securities of Imogo Mobile Technologies because of questions about the accuracy and adequacy of publicly disseminated information about the company’s business, revenue and assets. Shortly before the suspension, the company announced that it was developing a mobile Bitcoin platform, which resulted in significant movement in the trading price of the company’s securities.

Using Bitcoin may limit your recovery in the event of fraud or theft.

If fraud or theft results in you or your investment losing bitcoins, you may have limited recovery options. Third-party wallet services, payment processors and Bitcoin exchanges that play important roles in the use of bitcoins may be unregulated or operating unlawfully.

Law enforcement officials may face particular challenges when investigating the illicit use of virtual currency. Such challenges may impact SEC investigations involving Bitcoin:

Tracing money. Traditional financial institutions (such as banks) often are not involved with Bitcoin transactions, making it more difficult to follow the flow of money.

International scope. Bitcoin transactions and users span the globe. Although the SEC regularly obtains information from abroad (such as through cross-border agreements), there may be restrictions on how the SEC can use the information and it may take more time to get the information. In some cases, the SEC may be unable to obtain information located overseas.

No central authority. As there is no central authority that collects Bitcoin user information, the SEC generally must rely on other sources, such as Bitcoin exchanges or users, for this type of information.

Seizing or freezing bitcoins. Law enforcement officials may have difficulty seizing or freezing illicit proceeds held in bitcoins. Bitcoin wallets are encrypted and unlike money held in a bank or brokerage account, bitcoins may not be held by a third-party custodian.

Investments involving Bitcoin present unique risks.

Consider these risks when evaluating investments involving Bitcoin:

Not insured. While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections.

History of volatility. The exchange rate of Bitcoin historically has been very volatile and the exchange rate of Bitcoin could drastically decline. For example, the exchange rate of Bitcoin has dropped more than 50% in a single day. Bitcoin-related investments may be affected by such volatility.
Government regulation. Bitcoins are not legal tender. Federal, state or foreign governments may restrict the use and exchange of Bitcoin.

Security concerns. Bitcoin exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers or malware. Bitcoins also may be stolen by hackers.

New and developing. As a recent invention, Bitcoin does not have an established track record of credibility and trust. Bitcoin and other virtual currencies are evolving.

Recent Bitcoin exchange failure. A Bitcoin exchange in Japan called Mt. Gox recently failed after hackers apparently stole bitcoins worth hundreds of millions of dollars from the exchange. Mt. Gox subsequently filed for bankruptcy. Many Bitcoin users participating on the exchange are left with little recourse.
***

Before making any investment, carefully read any materials you are given and verify the truth of every statement you are told about the investment. For more information about how to research an investment, read our publication Ask Questions. Investigate the individuals and firms offering the investment, and check out their backgrounds by searching the SEC’s IAPD website or FINRA’s BrokerCheck website and by contacting your state securities regulator.

Additional Resources

SEC Investor Alert: Ponzi Schemes Using Virtual Currencies
SEC Investor Alert: Social Media and Investing – Avoiding Fraud
SEC Investor Alert: Private Oil and Gas Offerings
SEC Investor Bulletin: Affinity Fraud
FINRA Investor Alert: Bitcoin: More Than a Bit Risky
NASAA Top Investor Threats
IRS Virtual Currency Guidance
European Banking Authority Warning to Consumers on Virtual Currencies

DOJ OFFICIAL ON PROTECTING INVESTORS FROM FRAUD

FROM:  U.S. DEPARTMENT OF JUSTICE
Protecting Investors from Fraud
The following post appears courtesy of Barbara L. McQuade, the U.S. Attorney for the Eastern District of Michigan
Investor fraud schemes are among the most pervasive types of cases handled by the White Collar Crime Unit of the U.S. Attorney’s Office for the Eastern District of Michigan.
In the past year, our prosecutors have charged a number of investment advisors and stock brokers with defrauding their investors. In one case, a defendant encouraged elderly investors to liquidate legitimate investments to invest with him. In fact, he kept their funds for his own use, depleting many of the victims of their life savings, totaling $4 million. In another case, a defendant offered investments over the Internet, promising high returns and taking in $72 million in investor dollars. Instead, the investments either generated losses or were never made at all.

Victims of fraud include individual investors with modest portfolios as well as institutional investors with large investments, such as pension funds.

President Obama’s Financial Fraud Enforcement Task Force was designed to attack fraud, waste and abuse by increasing coordination among agencies and fully leveraging the government’s law enforcement and regulatory system. As part of that effort, the U.S. Attorney’s Office for the Eastern District of Michigan is aggressively prosecuting financial fraud cases. In the largest investment scheme in the history of the district, a defendant was recently convicted of defrauding more than 1,200 individuals by convincing them to invest more than $350 million in fictitious limited liability corporations. He was sentenced to 16 years in prison.

In addition to prosecuting perpetrators, we are also combating fraud by raising public awareness to help investors protect themselves. Knowledge of common fraud schemes can help prevent individuals from becoming victims of these crimes.

One of the most common investor fraud schemes is the classic “Ponzi” scheme, named for Charles Ponzi, who devised the concept in the 1920s. In a Ponzi scheme, the investment promoter promises investors a high rate of return for their investment and then uses the funds of new investors to pay the promised return to the earlier investors. These early investors then unwittingly help advance the scheme by bragging about the high rate of return on their investment. Eventually, of course, the scheme collapses when the swindler needs to pay out more than he can take in. A recent example of this type of fraud was the massive scheme Bernard Madoff operated that cost investors billions of dollars.

Another common scheme is known as affinity fraud. In these schemes, perpetrators prey on members of an identifiable group, such as a church community, a school parent-teacher organization, a country club or a professional group. The investment advisor will join the group, or pretend to be part of it. As a result, he enjoys an inflated credibility that encourages members of the group to trust him and be less cautious than they might otherwise be when making an investment.

Another frequently used tactic used by perpetrators of investment fraud is to ingratiate themselves with their victims. In one recent case, a defendant regularly visited his clients at home, shared details of his personal life with them, attended family functions, such as birthday parties and weddings, provided gifts to family members, made donations to the clients’ preferred charities, and assisted clients in life decisions. After obtaining their trust, he took their money for his own use.

COURT ORDERS FOREIGN CURRENCY TRADING PONZI SCHEMER TO PAY $10 MILLION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Georgia Orders over $10 Million in Sanctions against Defendant Eldon A. Gresham in Forex Ponzi Scheme
Relief defendants Werner H. Beiersdoerfer and Interveston Wines, LLC ordered to pay an additional $5 million in relief.
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) obtained federal court summary judgment orders resolving its claims against defendant Eldon A. Gresham (aka Eldon A. Gresham, Jr.)doing business as The Gresham Company (Gresham) of Peachtree City, Ga., and relief defendants Werner H. Beiersdoerfer (Beiersdoefer) and his company, Interveston Wines, LLC (Interveston), both of Calera, Ala.

The claims arose from a CFTC complaint filed July 2, 2009, in the U.S. District Court for the Northern District of Georgia that charged Gresham with operating a multi-million dollar off-exchange foreign currency (forex) Ponzi scheme.   Beiersdoerfer and Interveston were named in the lawsuit as relief defendants because they allegedly received funds as a result of Gresham’s conduct to which they had no legitimate entitlement.  

The summary judgment order entered against Gresham on September 9, 2011, found that, from 2004 to 2009, Gresham fraudulently solicited $15,900,245.97 from over 100 customers for the purported purpose of trading forex.  According to the order, Gresham lured customers and prospective customers with promises of extraordinary monthly returns ranging from five to 10 percent and perpetuated his scheme by falsely reporting substantial gains to customers.  The court further found that Gresham engaged in only limited, unsuccessful forex trading and that Gresham misappropriated the vast majority of customer funds to pay “returns” to other customers and for personal use.

The court’s order imposes a civil monetary penalty of $8,131,362.90 against Gresham.  In addition, the order permanently bars Gresham from engaging in any commodity-related activity, including trading, and from registering with the CFTC in any capacity.  On May 9, 2012, the court amended the earlier order to require Gresham to pay $2,710,454.30 in disgorgement to his defrauded customers.  

On May 7, 2012, the court entered an order of summary judgment against relief defendants Beiersdoerfer and Interveston upon finding that neither had a legitimate ownership interest in the “returns” that Gresham paid to them from the investments of others.  The court’s order requires Beiersdoerfer and Interveston to pay a combined total of $5,208,151.45 in disgorgement to Gresham customers.

The CFTC thanks the U.S. Attorney’s Office for the Northern District of Georgia and the Fort Worth Division of the U.S. Postal Inspection Service for their assistance.
Gresham is currently awaiting trial on mail fraud charges in a related criminal action filed in the U.S. District Court for the Northern District of Texas.

CFTC Division of Enforcement staff members responsible for this case are Rachel Hayes, Margaret Aisenbrey, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.