Fraud Archives

Rudiments of a Ponzi scheme

The scheme is named after Charles Ponzi, who duped thousands of New England residents into investing in postage stamp speculation in the 1920s. But Ponzi is not the original mastermind behind the scheme; various reports show that there were several similar scams before he was born. (Charles Dickens’ 1857 novel “Little Dorrit,” for example, described such a scheme whereby the fraudulent dealings of Mr. Merdle led to the collapse of his bank.) Ponzi’s operation, however, took in so much money that it was the first to become widely known in the United States. Ponzi promised investors that he could provide a 50% return in just 90 days, at a time when the annual interest rate for bank accounts was 5%. Based on the arbitrage of international reply coupons for postage stamps, Ponzi quickly diverted investors’ money to support payments to earlier investors and to himself.

As originally designed, a Ponzi scheme remains a fraudulent operation that pays returns to separate investors, not from an actual profit earned but from the investors’ own money or money paid by subsequent investors. The scheme typically entices new investors by offering returns that other investments cannot guarantee, in the form of short-term yields that are either extraordinarily high or unusually consistent.
The main reason why the scheme initially works is that the early investors, those who actually got paid the large returns (from the investments of new entrants) reinvest their money in the scheme. Meanwhile, the fraudsters gain the investors’ confidence, maintaining the deception of high profits. Claims of a “proprietary” investment strategy, which must be kept secret to ensure a competitive edge, frequently is touted to hide the fraudulent operation.

The fraudsters also try to minimize withdrawals by offering new plans to investors, often freezing their money for a long time in exchange for higher returns. If a few investors do wish to withdraw their money in accordance with the strict terms, the requests are usually promptly processed, giving the illusion to other investors that the fund is solvent.

But once the required continuous stream of investors slows down, the scheme begins to collapse as the fraudsters start to have problems paying the promised returns (the higher the returns, the greater the risk of collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run. (A bank run, also known as a “run on the bank” occurs when a large number of customers withdraw deposits because they believe the bank is, or might become, insolvent.)

External market forces, such as the global economy decline in 2008, also cause many investors to withdraw part or all of their funds, not necessarily because of fraud suspicions, but simply due to underlying market conditions. (In Madoff’s case, the fund could no longer appear legitimate after investors attempted to withdraw $7 billion in late 2008.)

And of course, there is rarely a happy ending to this story as fraudsters attempt to vanish, taking the remaining investment money with them.

|Educational Series, Fraud|

Financial advice show hosts have host of problems

Just about any time of the day, the airwaves are filled with self-appointed financial gurus spewing their secrets for managing money and ways to get rich. But the true secrets of more than a dozen of these wealth peddlers may be in their shady backgrounds and off-the-air dealings. Here are a few examples of the bamboozlements, as disclosed by the Securities and Exchange Commission (SEC) and other authorities.

On June 13, 2011, Clifford Robertson was sentenced to 97 months for bank fraud, to be followed by 24 months for aggravated identity theft and ordered to pay $4,627,520 in restitution, according to a statement by the U.S. Department of Justice’s Federal Bureau of Investigation Dallas Field Office. The bureau’s investigation determined that Robertson claimed to be a real estate investment advisor who hosted AM radio real estate investment talk shows and in-person seminars. Robertson admitted that beginning in December 2007, he used the identity of another person to submit a fraudulent personal financial statement to a lending institution in order to obtain money by false pretenses. The loss to investors was estimated at around $3 million.

Another recent financial show host shakedown was announced in a June 3, 2011 press release by the Department of Justice’s U.S. Attorney’s office for the Southern District of Florida which said that “criminal information was filed against Anthony F. Cutaia, charging him with nine counts of mail fraud…” Cutaia, who was the host of “Talk About Mortgages and Real Estate,” a television and radio program, was also the managing member and beneficial owner of CMG Property Investment Group, LLC, which purportedly engaged in commercial real estate investments in Florida, and promised not to collect commissions or fees from the investors until the properties were sold and a profit was made. However, court papers allege that Cutaia invested little of the money and instead used it to make payments to pre-existing investors and to pay his own business and personal expenses. Legal documents further show that Cutaia filed for bankruptcy in 2007, but that case was tossed out. He filed another Chapter 7 petition on May 11, 2011.

Also exposed this year was John Farahi, a host on a Farsi language radio station in the Los Angeles area. The SEC’s complaint filed in the U.S. District Court for the Central District of California alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting NewPoint on a daily finance radio program hosted by Farahi. The SEC charges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and subsequently misled more than 100 investors into purchasing over $20 million worth of debentures that they claimed were low risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, or government or corporate bonds issued by companies backed by the funds from the Troubled Asset Relief Program (TARP). According to the SEC, most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

|Educational Series, Fraud|

Tips from the SEC on how fraudsters try to look legit

Since their inception, the Securities and Exchange Commission (SEC) and securities regulators around the globe have been telling investors to investigate before investing and to ask tough questions about the people who sell and manage the investments.

The SEC reports that a frequent ruse that fraudsters use involves assurances that an investment has been registered with the appropriate agency. The fraudsters will purport to provide the agency’s telephone number to verify the “authenticity” of their claims. But even if the agency does exist, the contact information almost certainly will be false, and instead of speaking with an actual government official, the call is answered by the fraudsters or their associates, who will give the company, the promoter and the transaction high marks.

Another trick involves the misuse of a regulator’s seal. The fraudsters copy the official seal or logo from the regulator’s Web site, or create a bogus seal for a fictitious entity and then use it on documents or Web pages to make the deal look legitimate. The SEC and other state and federal regulators do not allow private entities to use their seals. Moreover, the SEC does not “approve” or “endorse” any particular securities, issuers, products, services, professional credentials, firms, or individuals.

Here is some advice from the SEC on how to protect yourself against these and other deceptive tactics:

	Deal only with “real” regulators. Check the list of international securities regulators on the Web site of the International Organization of Securities Commissions (IOSCO); for a directory of state and provincial regulators in Canada, Mexico, and the U.S.; look on the Web site of the North American Securities Administrators Association (NASAA). If someone encourages you to verify information about a deal with an entity that does not appear on these lists — such as the “Federal Regulatory & Compliance Department,” the “Securities and Registration Compliance” agency or the “U.S. Securities Registration Bureau” — you’re probably dealing with fraudsters. Legitimate contact information for the SEC is in the (SEC) Contact Us section and on the SEC Division Homepages.
	Be skeptical of government “approval.” The SEC does not evaluate the merits of any securities offering or determine whether a particular security is a “good” investment. Instead, the SEC’s staff reviews registration statements for securities offerings and declares those statements “effective” if the companies have satisfied the disclosure rules. In general, all securities offered in the U.S. must be registered with the SEC or must qualify for an exemption from the registration requirements. You can check whether a company has registered with the SEC and download disclosure documents using the EDGAR database of company filings.
	Look past fancy seals and impressive letterheads. Most people who use computers know how easy it is to copy images. As a result, today’s technology allows fraudsters to create impressive, legitimate-looking Web sites and stationery at little cost. Don’t be fooled by a glossy brochure, a glitzy Web site, or the presence of a regulator’s official seal. Again, the SEC does not authorize private companies to use its seal, even as a legitimate link to the SEC Web site.
	Check out the broker and the firm. Always verify whether any broker offering to buy or sell securities is properly licensed to do business in your state, province, or country. If the person claims to work with a U.S. brokerage firm, call FINRA’s Public Disclosure Program hotline at (800) 289-9999 or visit FINRA’s website to check out the background of the individual broker and the firm. Be sure to confirm whether the firm actually exists and is current in its registration, and ask whether the broker or the firm has a history of complaints. You can often get even more information from your state securities regulator.
	Be wary of “advance fee” or “recovery room” schemes. An increasing number of investment-related frauds target investors worldwide who purchase “microcap” stocks, the low-priced and thinly traded stocks issued by the smallest of U.S. companies. If the stock price falls or the company goes out of business, the fraudsters swoop in, falsely claiming that they can help investors recover their losses for a substantial fee, disguised as some type of tax, deposit, or refundable insurance bond. As soon as an unwary investor pays the “advance fee,” the fraudsters disappear leaving the investor with even higher losses. For more information about these types of frauds, read The Fleecing of Foreign Investors.

|Educational Series, Fraud|

Maryland resident charged with making false statements on federal job applications

The Department of Justice reported yesterday that Karen M. Lancaster, of Upper Marlboro, MD, has been charged with four counts of making false statements, three counts of submitting false documents and one count of engaging in a concealment scheme in connection with her multiple job applications to U.S. federal government agencies.

According to the indictment, Lancaster was employed in various positions with the U.S. Department of Defense (DoD) from 1991 until March 2005. She subsequently was notified by DoD that she was being fired due to performance failures. In October 2006, according to the indictment, Lancaster reached a settlement with DoD whereby she was allowed to resign, retroactive to March 2005.

Between 2006 and 2008, Lancaster applied for jobs at the U.S. Departments of State, Commerce and Defense, as well as with the SEC. The indictment states that as part of the application processes, Lancaster allegedly submitted documents that falsified and concealed information about her criminal history, employment history and suitability for employment with the federal government. Specifically, Lancaster allegedly concealed and falsified informatabout her prior arrests, charges, convictions and prison terms, the unfavorable circumstances under which she had resigned from prior federal employment, the roles and responsibilities she had at previous federal jobs; and her salary history.Lancaster will be arraigned on March 25, 2011, in U.S. District Court in Alexandria. The maximum penalty for each count of making a false statement, submitting a false document and engaging in a concealment scheme is five years in prison. Lancaster also faces a maximum fine of $250,000 per count.

The Department of Justice notes that an indictment is merely an accusation, and a defendant is presumed innocent unless proven guilty in a court of law.

|Employment Decisions, Fraud|

“Operation Empty Promises” yields more than 90 FTC enforcement actions

The Federal Trade Commission announced that it stepped up its ongoing campaign against scammers who falsely promise guaranteed jobs and opportunities to be “your own boss.” “Operation Empty Promises,” a multi-agency law enforcement initiative, resulted in more than 90 enforcement actions, including three new FTC cases and developments in seven other matters, 48 criminal actions by the Department of Justice (many involved the assistance of the U.S. Postal Inspection Service), seven additional civil actions by the Postal Inspection Service, and 28 actions by state law enforcement agencies in Alaska, California, Indiana, Kansas, Maryland, Montana, New Jersey, North Carolina, Oregon, Washington, and the District of Columbia.

In addition to making false claims about employment opportunities, one of the actions also alleged that the defendants overcharged for background checks. In its complaint against National Sales Group, Anthony J. Newton, Jeremy S. Cooley, and I Life Marketing LLC, also doing business as Executive Sales Network and Certified Sales Jobs, filed in the U.S. District Court for the Northern District of Illinois, Eastern Division on February 22, 2011, the FTC charged that the defendants advertised nonexistent sales jobs with “good pay” and benefits on CareerBuilder.com and other online job boards, that their telemarketers falsely told consumers that the company recruited for Fortune 1000 employers and that they had a unique ability to get the consumers interviewed and hired. The FTC also alleged that the defendants charged fees they said covered background checks and other services, and often overcharged, taking $97 from consumers who had agreed to pay $29 or $38. Further, the defendants allegedly charged some consumers recurring fees of $13.71 or more per month without their consent.

According to other documents filed in the court, the defendants’ actions generated more than 17,000 complaints to law enforcement agencies, online forums, and job boards, and defrauded consumers of at least $8 million. (CareerBuilder.com dropped the company from its website due to complaints.) The court temporarily halted the defendants’ deceptive practices, froze their assets, and put the company into receivership.

See http://www.ftc.gov/opa/2011/03/emptypromises.shtm for information about other enforcement actions brought through “Operation Empty Promises.”

|Educational Series, Fraud|

Uncovering hidden assets

Exactly what is a hidden asset? Several business reference books define it a valued asset that is not listed on the balance sheet of its owner or beneficiary, and/or is moved or transferred with the intention to defraud, hinder or delay discovery by anyone classified as a creditor. Just about any type of asset can be hidden, including real property, jewelry, stocks, bonds, vehicles, aircraft, watercraft, and the most liquid of all assets – money.

Many hidden assets, such as those existing in corporate holdings, various trusts, family-limited partnerships, limited liability companies, charitable foundations, real estate, lawsuit payouts, judgment awards, and vehicle, aircraft and watercraft ownership, can be found through searches of public records. Comprehensive searches of media sources can provide further details about these assets and also supply clues to funds from royalties, contracts, patents, inheritances and other distributions.

The hardest of all hidden assets to reach — and those not reported in public records — are held outside of the United States. Various Caribbean and other island nations, and certain European enclaves are laden with “wealth preservation strategies” that offer secrecy-ruled offshore accounts and asset protection trusts (OAPTs) that keep the creditors away. Financial experts and fraud examiners say that OAPTs are especially popular hideouts because the “hider” can make himself or herself the beneficiary of these trusts, and thus protect the money from third-party claims, consistent with foreign laws which do not recognize the American “fraudulent transfer” concept. OAPTs are nearly impossible to collect against, even with a valid judgment from the U.S. While information for such assets is not publicly available, media reports about mode of living and certain activities can provide indications of possible concealed assets abroad.

|Educational Series, Fraud|

Seven individuals charged by SEC in global warming scheme

The Securities and Exchange Commission (SEC) today charged seven individuals with perpetrating a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming. The scheme resulted in more than $7 million in illicit profits from the sales of stock in CO2 Tech Ltd. at artificially inflated prices. The company, based in London, touted impressive business relationships and anti-global warming technology innovations, but was found to have no significant assets or operations.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the scheme was enacted through Red Sea Management Ltd., a Costa Rican asset protection company that laundered millions of dollars in illicit trading proceeds out of the United States on behalf of its clients. Charged in the in the fraudulent pump-and-dump scheme were: Jonathan R. Curshen, a Florida resident who founded and led Red Sea, David C. Ricci and Ronny Morales Salazar of Costa Rica, who were Red Sea stock traders, Ariav “Eric” Weinbaum and Yitzchak Zigdon of Israel, who were Red Sea clients, Robert L. Weidenbaum, of Florida, who was a stock promoter and operator of CLX & Associates, and Michael S. Krome, a New York lawyer who allegedly wrote a fraudulent opinion letter. Without admitting or denying the allegations in the complaint, Ricci settled the SEC’s charges by agreeing to an injunction against future violations of these provisions and a penny stock bar.

In a related criminal action, charges brought by the Justice Department’s Criminal Division were unsealed today against Curshen, Krome, Salazar, Weidenbaum, Weinbaum, and Zigdon. The defendants were charged variously with conspiracy to commit securities, mail and wire fraud, violating securities regulation laws and obstruction of justice.

|Criminal Activity, Fraud, Green Technology|

Tyson Foods charged with violations of the Foreign Corrupt Practices Act

The Securities and Exchange Commission (SEC) today charged Tyson Foods Inc. with violating the Foreign Corrupt Practices Act (FCPA) by making illicit payments to two Mexican government veterinarians responsible for certifying its Mexican subsidiary’s chicken products for export sales.

The SEC alleged that Tyson de Mexico concealed the improper payments by putting two veterinarians’ wives on its payroll but they performed no work for the company. The spouses were later removed from the payroll and their payments were processed with invoices issued for “services.” Tyson de Mexico paid the veterinarians, who were responsible for certifying Tyson’s chicken products for export and served as official Mexican government veterinarians at Tyson facilities, a total of $100,311. It was not until two years after Tyson Foods officials first learned about the subsidiary’s illicit payments that its counsel instructed Tyson de Mexico to cease making the payments.

The SEC further charged that in connection with these improper payments, Tyson Foods failed to keep accurate books and records and failed to implement a system of effective internal controls to prevent salary payments to phantom employees and the payment of illicit invoices. The improper payments were recorded as legitimate expenses in Tyson de Mexico’s books and records, and included in Tyson de Mexico’s reported financial results for fiscal years 2004, 2005 and 2006. Tyson de Mexico’s financial results were, in turn, a component of Tyson Foods’ consolidated financial statements filed with the SEC for those years.

Without admitting or denying the SEC’s allegations, Tyson Foods consented to the entry of a final judgment ordering disgorgement plus pre-judgment interest of more than $1.2 million and permanently enjoining it from violating the anti-bribery, books and records, and internal controls provisions of the FCPA. The proposed settlement is subject to court approval.

In a related criminal action announced today, the Department of Justice (DOJ) charged Tyson Foods with conspiring to violate the FCPA and violating the FCPA. The DOJ and Tyson Foods agreed to resolve the charges by entering into a deferred prosecution agreement. Tyson Foods also agreed to pay a $4 million criminal penalty.

|Fraud|

Fraudulent credentials rampant in China

Media sources report that scholars in China say that fraud in education and scientific research, and faking credentials to get work or advance in careers is staggering. With frequent news of falsified resumes by prominent officials and company heads, employers in the country have adopted stricter background checks of job candidates.

According to news reports, Fang Zhouzi, known for exposing plagiarism and academic fraud in China, said that Tang Jun, who was president of Microsoft’s China operations from 2002 to 2004, had falsely claimed in his autobiography that he earned a doctorate degree from the California Institute of Technology, when in fact, the degree was bought from California-based Pacific Western University, known as a “diploma mill.” The scandal was later dubbed the “fake credentials gate” by Chinese media.

Several media publications also brought up the case of Zhang Wuben, who through television shows, DVDs and a best-selling book, convinced millions of people that raw eggplant and immense quantities of mung beans could cure lupus, diabetes, depression and cancer. Zhung’s patient consultations, for which he charged $450 for ten minutes, were booked solid through 2012. But when Chinese journalists dug deeper into Zhung’s background, they learned that contrary to his claims, Zhung was not from a long line of doctors (his father was a weaver) nor did he earn a degree from Beijing Medical University. His only formal education was a correspondence course that he took after losing his job at a textile mill.

The exposure of Zhang’s fake credentials gained media focus and started a new round of scrutiny into the dishonest practices that plague Chinese society, and the Chinese government has vowed to address the problem. To facilitate employers’ checks of their job candidates, the China’s Ministry of Education released a list of approved Chinese-foreign jointly-run schools and a list of overseas colleges. And employers now have a greater awareness of the value of background investigations. Zhu Shibo, manager of recruitment at the China International Intellectech Corporation, one of the country’s leading human resources service providers, told media sources that the company has received unprecedented commissions to investigate job applicants. A typical background investigation includes highest education verification, employment experience confirmation and criminal record searches.

|Asia, Employment Decisions, Fraud|

FBI arrests lecturer for lying about credentials

Various media sources reported last week that the FBI arrested William G. Hillar, 66, who for a decade posed as a retired Green Berets colonel with wide-ranging military expertise and established himself as a lecturer, workshop leader and trainer in the public and private sectors. Hillar was charged in the U.S. District Court in Maryland with one count of mail fraud for payment he received from the Monterey Institute of International Studies in July 2010, according to published reports. He faces a maximum prison sentence of 20 years if convicted. News reports quoted U.S. Attorney Rod Rosenstein saying that “Hillar was living a lie and based his entire career on experiences he did not have and credentials he did not earn. He was never a colonel, never served in the U.S. Army, never was deployed to exotic locales and never received training in counter-terrorism and psychological warfare.”

Media reports further stated that Hillar’s alleged deception was exposed in November 2010 after several Monterey Institute of International Studies students questioned the authenticity of his military exploits and knowledge of international human trafficking. Their suspicions prompted the Institute to ask Hillar to document his background. But Hillar cut off all communications and took down his “Bill Hillar Training” Web site. Immediately after Hillar became the subject of a criminal investigation, the Institute said it was changing its policy to require full background checks on lecturers and anyone involved in teaching.

According to media reports, Hillar’s client list included approximately 40 agencies and schools across the country, ranging from FBI and army units to local and state police agencies between Idaho and Georgia. Federal officials said evidence shows that Hillar was paid more than $100,000 for teaching and speaking engagements during his facade.

So what was Hillar’s actual military record? News reports said that from 1962 to 1970 he served in the Coast Guard as an enlisted sailor and reached the rank of radarman 3, according to FBI Special Agent David Rodski.

Hillar said he plans to return to teaching once released, according to media reports.

|Fraud|

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