Articles Posted in Ponzi Scheme

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woodbridge mortgage fundsAs we have discussed in previous blog posts, on December 21, 2017, the Securities and Exchange Commission (“SEC”) formally announced charges against the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA, as well as Woodbridge’s related unregistered investment funds and the firm’s owner and former CEO, Robert Shapiro.  Essentially, the SEC has alleged that “[D]efendant Robert H. Shapiro used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

The SEC’s recent charges come on the heels of Woodbridge filing for Chapter 11 bankruptcy protection on December 4, 2017 in Delaware Bankruptcy Court (Case No. 17-12560-KJC).  Through filings with the Bankruptcy Court, the SEC has alleged that Mr. Shapiro sought Chapter 11 protection in order to shield himself from charges of allegedly orchestrating a Ponzi scheme: “[h]e needed to create the appearance of a bankruptcy that resembled a bona fide Chapter 11, complete with legal and restructuring professionals of the type normally seen in a real organization.  So instead of allowing a District Court to appoint an independent fiduciary, Robert Shapiro decided that he would select the victims’ fiduciaries when he started hiring the team of managers and professionals who are representing the Debtors’ estates today.”

On January 2, 2018 — in light of these allegations and concerns related to ensuring adequate representation of the numerous Woodbridge investors nationwide — the SEC filed a Motion to Direct the Appointment of a Chapter 11 Trustee.  Pursuant to 11 U.S.C. §1104(a), the SEC has sought to appoint an independent Chapter 11 trustee for cause, in order to ensure Woodbridge investors are best protected.  In seeking the appointment of a Chapter 11 trustee, the SEC has argued that cause exists, given allegations that “[M]r. Shapiro engaged in widespread fraud, dishonesty, incompetence and gross mismanagement in operating the Debtors prior to bankruptcy.  This conduct is sufficient cause for a trustee under Section 1104(a)(1).  In re Vaughan, 429 B.R. 14 (Bankr. D. N.M. 2010) (conduct relating to operation of Ponzi scheme falls squarely within Section 1104(a)).”

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woodbridge mortgage fundsAs we recently discussed in detail in a previous blog post, on December 21, 2017, the Securities and Exchange Commission (“SEC”) formally announced charges, as well as an asset freeze, against the Woodbridge Group of Companies (“Woodbridge”) of Sherman Oaks, CA, as well as Woodbridge’s related unregistered investment funds, and the firm’s owner and former CEO, Robert Shapiro.  Among other things, the SEC has alleged in its Complaint – filed in Florida federal court – that “[D]efendant Robert H. Shapiro used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”

According to the SEC’s Complaint, Woodbridge utilized a large and coordinated sales force to sell its Woodbridge Notes, sometimes referred to as First Position Commercial Mortgages (“FPCMs”).  As further alleged by the SEC, “Woodbridge employed a sales team of approximately 30 in-house employees that operated within Woodbridge’s offices.”  Moreover, the SEC’s Complaint alleges that “Woodbridge also utilized a network of hundreds of external sales agents to solicit investments from the general public by way of television, radio, and newspaper advertisements, cold calling campaigns, social media, websites, seminars and in-person presentations.”

As detailed in the SEC’s Complaint, the Woodbridge business model relied upon borrowing money from investors in exchange for promissory notes, typically maturing in 12 – 18 months.  These notes carried an annual interest rate of 5 – 8%, payable monthly.  The investors’ money was supposed to be issued to lenders in the form of securitized mortgages.  However, according to the SEC, this rarely occurred.

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investing in real estate and hard money loansOn December 21, 2017, the Securities and Exchange Commission (“SEC”) formally announced charges, as well as an asset freeze, against the Woodbridge Group of Companies (“Woodbridge”) and its related unregistered investment funds, as well against Woodbridge’s owner and former CEO, Robert Shapiro.  Through initiating litigation (the “Complaint”) in Florida federal court, the SEC is alleging, in sum and substance, that “[D]efendant Robert H. Shapiro used his web of more than 275 Limited Liability Companies to conduct a massive Ponzi scheme raising more than $1.22 billion from over 8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.”  As further alleged in the Complaint, “Despite receiving over one billion dollars in investor funds, Shapiro and his companies only generated approximately $13.7 million in interest income from truly unaffiliated third-party borrowers.  Without real revenue to pay the monies due to investors, Shapiro resorted to fraud, using new investor money to pay the returns owed to exiting investors.”

According to Mr. Steven Peikin, Co-Director of the SEC’s Enforcement Division, “Our complaint alleges that Woodbridge’s business model was a sham.  The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money.”

If you are have invested in Woodbridge Wealth or in any of the Woodbridge Mortgage Funds, you may have questions concerning your rights in light of Woodbridge’s recent bankruptcy filing and the SEC’s recent Complaint alleging that Woodbridge is, in fact, a Ponzi Scheme.

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broker misappropriating client moneyOn December 18, 2017, LPL Financial LLC (“LPL”) lost a FINRA arbitration concerning customer claims related to former LPL broker Charles Fackrell.  The three-member FINRA panel issued a $462,000 aggregate award to six of Mr. Fackrell’s former clients, an amount which must be satisfied by LPL within 30 days.  As we discussed in a previous blog post, Mr. Fackrell (CRD# 5369665) pled guilty last year to one count of securities fraud for operating a $1.4 million Ponzi scheme.  According to prosecutors handling the investigation, beginning around May 2012, Mr. Fackrell first engaged in the fraudulent scheme by misappropriating investor funds solicited from at least 20 victims, many from Wilkes County, North Carolina.

In addition to asserting claims of negligence and violations of the North Carolina Securities Act, Mr. Fackrell’s former clients brought claims against LPL for breach of contract, failure to supervise, principal/agent liability, and negligent retention of an agent.

As detailed in publicly available court documents, Mr. Fackrell abused his position of trust with his clients, steering them away from legitimate investments to purported investments with “Robin Hood, LLC,” “Robinhood LLC,” Robin Hood Holdings, LLC,” and “Robinhood Holdings, LLC,” as well as related entities (collectively, “Robin Hood”).  These entities were controlled by Mr. Fackrell and provided him with a conduit through which to cover his own personal expenses, including hotel expenses, groceries, purchases at various retail shops, and to make large cash withdrawals.

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Stealing MoneyOn April 12, 2016, former LPL Financial LLC (“LPL”) broker Charles C. Fackrell (CRD# 5369665) appeared before U.S. Magistrate Judge David Cayer in order to plead guilty to one count of securities fraud for operating a $1.4 million Ponzi scheme.  Based on documents filed with the federal court for the Western District of North Carolina, beginning around May 2012, Mr. Fackrell perpetrated a Ponzi scheme by misappropriating investor funds solicited from at least 20 victims in Wilke County, NC, and elsewhere.  According to court documents, Mr. Fackrell abused his position of trust with his clients, steering them away from legitimate investments to purported investments with “Robin Hood, LLC,” “Robinhood LLC,” Robin Hood Holdings, LLC,” and “Robinhood Holdings, LLC,” as well as related entities (collectively, “Robin Hood”).  These entities allegedly were controlled by Mr. Fackrell and provided him with a conduit through which to cover his own personal expenses, including hotel expenses, groceries, purchases at various retail shops, and to make large cash withdrawals.

Court records indicate that Mr. Fackrell successfully solicited victimized investors by making false and fraudulent representations, including that the investors’ money would be invested in, or secured by, gold and other precious metals.  Further, Mr. Fackrell allegedly told investors that Robin Hood was a safe investment, paying annualized guaranteed returns of 5-7%.  In actuality, however, Mr. Fackrell allegedly spent only a fraction of the investor money on such assets.  Contrary to the representations made to investors, Mr. Fackrell allegedly used a great deal of the money to cover personal expenses, in addition to diverting approximately $700,000 of his victims’ money, back to other investors in classic Ponzi-style payments designed to continue the fraudulent scheme.

Mr. Fackrell entered the securities industry in 2007, when he was under the employ of Morgan Stanley.  From 2010-2014, Mr. Fackrell was employed by LPL in Yadkinville, NC.  Currently, FINRA BrokerCheck indicates that Mr. Fackrell has been the subject of several customer complaints, including the following four pending complaints:

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Investors in promissory notes of Credit Nation Capital, LLC (“CN Capital”) and affiliated companies may have viable legal claims based upon allegations in cases filed by the United States Securities and Exchange Commission (“SEC”).

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The SEC filed a lawsuit in 2015 alleging that CN Capital and affiliates were engaged in fraud. The companies allegedly lost massive amounts of money and stayed afloat only by raising more money from investors, according to the SEC lawsuit. According to the SEC, related entities allegedly included Credit Nation Acceptance, LLC, a Texas limited liability company in Midland, Texas; Credit Nation Auto Sales, LLC, a Georgia limited liability company in Woodstock, Georgia, American Motor Credit, LLC, a Georgia limited liability company in Woodstock, Georgia; and Spaghetti Junction, LLC, a Nevada limited liability company.

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Recently, the Securities and Exchange Commission (“SEC”) initiated an action against 40-year old Leon Vaccarelli by filing a sixteen-page complaint (“SEC Complaint”) in federal court in New Haven, CT.  The SEC is alleging that Mr. Vaccarelli, based in Waterbury, CT, engaged in operating a Ponzi Scheme for more than four years, during which time he allegedly misappropriated client funds.  The SEC Complaint alleges that Vaccarelli diverted client money from investment accounts, as promised, and instead used the funds for such personal expenses as mortgage payments.  Moreover, the SEC Complaint alleges that Mr. Vaccarelli used client funds in order to make payments to earlier investors, a hallmark sign of a Ponzi scheme.

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A review of FINRA’s BrokerCheck indicates that Leon (or Lee) William Vaccarelli (CRD# 3227636) entered the securities industry in 1999.  Since that time, Mr. Vaccarelli has been affiliated with the following firms: Ameriprise Financial Services, Inc. (CRD# 6363) (1999-2007), QA3 Financial Corp. (CRD# 14754) (2007-2011), and most recently — The Investment Center (CRD# 17839) (2011-2017).

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There are many types of selling away schemes, and these schemes can result in significant — and sometimes complete —investor losses. However, with the help of an investment attorney, investor losses can be recovered through securities arbitration.

Investment Fraud: Selling Away

Selling away occurs when a broker or investment adviser sells an investment to a client that is not included in the client’s account or in the investment products that are offered by the firm. These private securities often include investments in private placements, private non-traded REITs, privately-held companies, limited partnerships, real estate and promissory notes. While all of these private securities can be real investments, they are sometimes used as a means for defrauding clients.

If a broker wants to complete a private securities transaction, he or she must provide the firm with written notice that details the transaction, and the transaction must be approved by the firm. If the transaction is not approved by the firm, the broker cannot participate in any way with the transaction. If the broker does not comply with the firm’s order, or does not attempt to gain approval, “selling away” has occurred.

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On October 4, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Merrill Lynch a total of $1 million. In an investigation conducted under the supervision of FINRA’s Enforcement Chief Counsel, Susan Light, investigators Brian Vincent and Richard Chin found that Merrill Lynch did not have an adequate supervisory system that would monitor employee accounts and allow them to identify potential broker misconduct.

FINRA Decision: Merrill Lynch Fined $1 Million

Merrill Lynch’s supervisory system, as it was functioning before FINRA’s decision, captured employee-opened accounts automatically and a social security number was used by the system as the primary tax identification number. However, if the same SSN was not used as the primary account identification number, the system would not record the account in its database. Under this system, it was the responsibility of the employees to manually enter these accounts into the supervisory system. Therefore, if the employee failed to enter his or her account, the account was not properly monitored.

Because of the discrepancies in Merrill Lynch’s supervisory practices, there was an instance of stock broker fraud committed in San Antonio, Texas, in which an employee’s account was used. In December 2009, Bruce Hammonds was barred from the securities industry for convincing 11 individuals to invest in a Ponzi scheme. The scheme lasted 10 months, during which Merrill Lynch’s failure to supervise the account it had approved allowed him to collect investments totaling over $1 million from the 11 investors. In addition to the Ponzi scheme, the lacking supervisory system failed to properly monitor 40,000 employee/employee-interested accounts between January 2006 and June 2010.

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