Securities Law Blog
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Former Dothan, Alabama attorney, Frederick Mitchell McNab was arrested earlier this month by Houston County Sheriff’s deputies. He was released on $310,000 bond and the surrendering of his passport. The arrest followed on the heels of a Houston County Grand Jury indictment charging McNab with thirty-one counts of alleged violations of the Alabama Securities Act. Those charges include sale of securities by an unregistered investment adviser for compensation and numerous counts of sales of unregistered securities. These charges were designated as Class C Felonies at the time they were allegedly committed, punishable for one year and a day to ten years of imprisonment and up to a $15,000 fine per charge if convicted.

McNab is also facing twelve counts of securities fraud by making untrue statements of material facts or omitting to state material facts in connection with the offer purchase or sale of a security; five counts of securities fraud by engaging in an act, practice or course of business which operates as a fraud or deceit upon any person in connection with the offer, purchase, or sale of a security; three counts of securities fraud by employing a device, scheme or artifice to defraud in connection with the offer, purchase, or sale of a security; and one count of financial exploitation of an elderly person in the first degree. These charges were designated as Class B Felonies at the time they were allegedly committed, and as such, McNab is looking at a punishment of two to twenty years imprisonment and not more than a $30,000 fine per charges if convicted.

McNab is alleged to have misappropriated and misused about $10,554,479 of clients’ funds between November 2002 and November 2013. He is believed to have illegally used client funds to pay previous clients who thought their funds were safe in an account controlled by McNab and earning interest. He is also believed to have used a portion of the funds for personal expenses.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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Gina Palasini was arrested last month in Palm Springs, California as the list of people who claim they lost money by unknowingly participating in a Ponzi scheme operated by the Mississippi fugitive continues to grow. Palasini will be extradited to Mississippi on felony charges for bad checks and then sent to Wayne County for sentencing on a felony false pretense charge to which she pleaded guilty in December 2013. She had been out on a court order to reimburse her victims, but she failed to do so. While it is unknown exactly who many victims were involved, sources indicate that the number is well over a dozen. Many know now that they are victims, while others still do not.

The U.S. Postal Inspection Service has been on her case for years, monitoring money come in and out of her bank accounts to build a fraud case against her. Palasini had run a number of businesses purporting to assist senior citizens acquire Medicaid or veterans benefits. Many of these instances involved clients giving her their life savings. Giving her the money had two purposes: with little or no assets, clients qualified for government benefits they otherwise would not have received, and they thought Palasini put their money into interest-earning accounts from which they could withdraw cash at any time. Upon a client’s death, designated beneficiaries would get the assets.

Palasini allegedly would use one client’s money to pay for withdrawals made by other clients. But authorities believe she spent most of the cash on herself and on expensive gifts, including automobiles and vacations, which she gave to family and friends. When she could not afford to pay a client, she made up excuses or simply wrote bad checks that bounced. Some clients threatened to sue her. At this point she would pay them back in installments, but these payments usually stopped after only a few months. Other victims allege their monetary losses pale in comparison to the difficulty Palasini caused them with Medicaid or the Department of Veterans Affairs. Investigators say she jeopardized several of her clients’ ability to obtain government benefits by withholding paperwork or using enrollment tactics that amount to fraud.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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Earlier this week, the SEC announced that it anticipates awarding more than $30 million to a whisteblower who furnished critical information that ultimately resulted in a successful enforcement action. The award would be the most ever given by the agency under its new authority under the Dodd-Frank Act. According to sources, the award will range from $30 million to $35 million and will comprise the biggest made by the SEC’s three-year-old whistleblower office and the fourth award made to a foreign informant. As of now, the highest award is $14 million, which was given in October 2013.

According to SEC Enforcement Director Andrew Ceresney, the whistleblower “came to [the SEC] with information about an ongoing fraud that would have been very difficult to detect. This record-breaking award sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement.”

The SEC cannot release the identity of the whistleblower due to its strict anonymity protection rules, but the whistleblower did release a statement through his/her attorney: “I was very concerned that investors were being cheated out of millions of dollars and that the company was misleading them about its actions. Deception had become an accepted business practice.”

The whistleblower’s attorney also issued a statement: “Our client exposed extraordinarily deceitful and opportunistic practices that were deeply entrenched and well hidden. Federal regulators never would have known about this fraud otherwise, and the scheme to cheat investors likely would have continued indefinitely.”

The SEC did state that it wished the whistleblower had come forth sooner. The agency reduced the award to a percentage lower than the average percentage awarded to other successful claimants because of the delay.

Sean McKessy, chief of the whistleblower office expressed satisfaction with the international reach of the whistleblower award program: “This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice. Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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The SEC filed a case yesterday against Atlanta, Georgia-based Zhunrize Inc. and its chief executive in a Georgia federal court, alleging that the Internet marketing and product brokerage company operates as a fraudulent pyramid scheme that has scammed investors out of $105 million since 2012.

Zhunrize allows members to purchase online stores and subsequently sell merchandise through those stores. The SEC claims that the company relies on the “continual recruitment of new members to generate the returns it pays its members.” Most of the company’s revenue by a wide margin is brought in through membership sales and monthly Internet hosting fees paid by members. The SEC’s complaint goes on to say that Zhunrize and its chief executive “have misled investors by representing that the income stream available to investors is generated by product sales, when in reality, product sales make up a minimal portion of Zhunrize’s overall revenues.”

$103.7 million, almost 99% of Zhunrize’s revenues from July 2012 to July 2014, came from membership sales and initial hosting fees. Only $1.4 million came from actual product sales, the SEC alleges. Zhunrize has admitted that it paid $340,000 in commissions to its members this year based on product sales, while paying nearly $51 million in commissions based on membership sales and hosting fees.

The SEC further alleges that Zhunrize misled investors by claiming in an online video that its model is different from other profit sharing companies and that it “will sustain itself because [it] will have millions of more customers than distributors.” The SEC claims that this is misleading because it represents that the company is legitimate while it actually operates as a pyramid scheme. The company also misrepresents that it engages in “worldwide sales,” when in reality it cannot ship products outside of the United States. Zhunrize does have 40,000 stores in Korea and 1,000 in China but has waived the product sales requirement for those members.

The SEC is asking for an injunction preventing the company from violating federal securities laws, disgorgement of all illicit gains, and other relief.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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Last week, U.S. Magistrate Judge Amos Mazzant, a federal judge in Texas, ordered Bitcoin Savings and Trust and its owner, Trendon Shavers, to pay $40.7 million after the SEC proved that the company, which sold investments using bitcoins, was in reality a Ponzi scheme. According to Mazzant, Shavers “knowingly and intentionally” used the company “as a sham and a Ponzi scheme.” Shavers mislead investors regarding the use of their bitcoins, the methods he would use to acquire promised returns, and the safety of their investments.

According to the SEC, Shavers used the online name “pirateat40″ to acquire more then 732,000 bitcoins between February 2011 and August 2012, guaranteeing investors up to seven percent weekly interest to be paid based on his ability to trade bitcoins. Shavers, however, actually used new bitcoins to pay back previous investors, moved some of the bitcoins to his personal accounts at the now-defunct Mt. Gox exchange among other places, and used the rest to pay for rent, food, shopping, and casino visits.

According to Mazzant, “The collective loss to BTCST investors who suffered net losses (there were also net winners) was 265,678 bitcoins, or more than $149 million at current exchange rates.” Mazzant held Shavers and his company liable to give up $38.6 million of illegal profits plus $1.8 million in interest. Each defendant was also fined $150,000. The SEC announced the case on July 23, 2013, the same day it warned investors to be on alert for potential scams involving bitcoin and other “cutting-edge” investments.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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The Frankowski Firm is investigating a penny stock fraud scheme that allegedly defrauded $290 million from thousands of investors, involving eight people who are facing criminal charges. Four of the eight charged in the pump-and-dump scheme were arraigned last week after a two-year investigation. Anthony Thompson of Bethesda, Maryland, Jay Fung of Delray Beach, Florida, Hanna Schmieder of Los Angeles, California, and Kenneth Oxsalida of Sebring, Florida all pleaded not guilty in state Supreme Court in Manhattan, New York.

Thompson, Fung, and another stock promoter allegedly sent email blasts from websites they controlled promoting stocks to potential investors while working with others in the scheme to take control of public shell companies, merge private companies into them, transfer millions of shares to themselves, and drive up the price of the stocks, according to prosecutors. After they were in control of the shares, they sent press releases promoting companies, including Xynergy Holdings Inc. and Mass Entertainment Co. They then dumped their shares before the stocks plummeted.

Thompson’s attorney claims that Thompson was a paid advertiser of the stock, not a broker, and had attorneys review disclaimers in the emails that plainly stated he had been compensated to promote the stocks. Thompson’s attorney stated, “It’s advertising. You might as well indict ‘Mad Men,’ if they actually existed.”

Thompson was released on $1 million bond and settled charges arising from a 2012 SEC case in Florida. One of Thompson’s co-defendants in that case was described by Thompson’s attorney as the ringleader of the operation and is working with New York prosecutors. “We’ve done nothing wrong,” she said.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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Last week, the Alabama Supreme Court upheld a Jefferson County judge’s ruling that a lawsuit against CVS Caremark Corp. can proceed as a class-action to represent roughly 70,000 investors who assert that they lost $3.2 billion in a securities fraud during the 1990s. The case arises from twenty-one lawsuits filed by investors in 1998 against MedPartners, which was founded by former HealthSouth CEO Richard Scrushy. In those suits, MedPartners was accused of making misrepresentations to the public regarding its financial well-being. The suits were consolidated and settled for $56 million after MedPartners was about to go bankrupt, and $50 million was the most that its insurance would pay. The company changed its name to Caremark in 2000 and merged with CVS seven years later.

One original plaintiff, John Lauriello, filed a fraud claim in 2003 asserting that MedPartners was dishonest about how much its insurance would pay during settlement negotiations. He alleged that in October 1999, before the settlement was completed, MedPartners paid for unlimited insurance coverage. Lauriello claimed that if the plaintiffs had know that at the time, they could have negotiated a more favorable settlement for them.

CVS Caremark has countered that the additional insurance coverage was known or should have been known by the plaintiffs before the settlement was finalized, as it was discussed in press releases, communications with plaintiffs’ attorneys, and within a filing with the SEC. Additionally, the company contends that the statute of limitations bars the plaintiffs claims and has fought against the claims being treated as a class actions. The Alabama Supreme Court disagreed on the last contention, upholding Judge Tom King’s certification of the class with an opt-out provision.

Opt-out notices will have to be sent to the 70,000 investors in the class. Because many of the addresses of investors from 16 years ago may no longer be valid, attorneys will also have to advertise the opt-out provision. Once the opt-out process is complete, the case can then proceed on the merits. Plaintiffs will have to prove there was fraud during the settlement and will have to get experts to say what the case could have been settled for if they had known about the unlimited insurance coverage.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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The Frankowski Firm is investigating a Ponzi scheme involving the owners of Fair Finance, which was once a legitimate company that had provided financial services since the Great Depression. The United States Court of Appeals for the Seventh Circuit last week upheld the convictions of the three owners–Timothy Durham, James Cochran, and Rick Snow–who turned the financial firm into a Ponzi scheme, taking $200 million of investors’ money to fund their own extravagant lifestyles.

While upholding ten convictions, the court did, however, overturn two wire fraud counts, stating that the government did not enter critical documentary evidence into the record. The Court of Appeals stated the government’s failure to enter the documentary evidence “was clearly an oversight, but the mistake leaves a crucial gap in the evidence in those counts.” It said the government used single-page printouts to establish the wire transfers were made to further the fraudulent scheme. This evidence showed that the wires were made but did not establish that they were made in furtherance of the Ponzi scheme.

According to the court’s ruling, the three defendants took control of Fair Finance in 2001 and essentially turned the company into “their personal piggy bank,” using “money invested in Fair to support their lavish lifestyles and to fund loans to related parties that would never be repaid. When the company’s auditors raised red flags about its financial status, the auditors were fired.”

The scheme crumbled when the 2008 financial crisis struck, and Fair Finance could not meet its interest payments. The company declared bankruptcy after an FBI raid on its offices. The company had more than 5,200 investors who were owed almost $209 million when federal authorities closed it in November 2009. Almost all of the investors were from Northeast Ohio.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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FINRA issued a new investors alert, this time warning investors considering funds that invest in frontier markets to take note of the large risk associated with these markets. Although no set definition of frontier markets exists, such frontier funds typically invest in companies in countries with developing securities markets, including Argentina, Lebanon, Nigeria, Slovenia, and Vietnam.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education cautions that “[i]nvestors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results.”

FINRA’s alert warns that any investment has its pros and cons and provides investors with tips to avoid problems:

  • Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements.
  • Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. The countries included in a frontier index can change over time.
  • Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments.
  • Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds.
  • Consider Performance History. Frontier funds are relatively new, and most have limited performance histories.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.

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U.S. District Judge John A. Jarvey, an Iowa federal judge, decided not to dismiss a case alleging investment managers Principal Management Corp. and Principal Global Investors, LLC took too much on fees they charged a retirement plan investing in particular mutual funds. Judge Jarvey ruled that American Chemical & Equipment Inc 401(K) Retirement Plan (ACE) had standing under the Investment Company Act (ICA) to initiate a case alleging the investment management groups kept an acquired fund fee that was in breach of their fiduciary duties to investors in a collection of mutual funds, which held $18 billion in assets combined.

According to Judge Jarvey, a shareholder in those principal funds, ACE is a security holder of the principal funds within the meaning of ICA and therefore established standing to file the case. In addition, ACE rightfully limited it breach of fiduciary duty claim against the Principal defendants to only those fees collected from principal interest holders and retained by principal fund advisers.

ACE alleged the defendants, as advisers to the principal funds, first “pocket[ed] the entire acquired fund fee from the principal funds as investment money” before distributing a part of the fee to sub-advisers for managing the underlying funds. ACE is only looking to recover the fees it was charged as a principal funds shareholder and which were kept by defendants as advisers to that fund.

Judge Harvey, however, did dismiss a claim for excess profits from economies of scale, taking the defendants’ position that breach of fiduciary duty based only on economies of scale is not an independent cause of actions under the ICA.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies or visit frankowskifirm.com.