Fraudulent Documents

Fraudulent documents are the rule in Ponzi schemes; all schemes make use of fraudulent documents. Just as the perpetrators are experts at oral deception, they are skilled at producing fraudulent documents and promotional literature. The perpetrators may send out account and financial statements that appear to be legitimate, individualized to each victim. The practice of falsifying financial statements is as old as financial statements. Charles Frasca discussed the unscrupulous accountants that would provide falsified certified financial statements in the 1920s and 1930s for stock swindlers (Frasca, 1931, p. 59). Then, as is the case now, many investor-victims did not, or do not, have the ability to recognize fraudulent statements or to check if the actual reported investments were made. It is common place for Ponzi schemes that represent themselves as brokerages to send out monthly statements with false trading information, as if actual securities, FOREX, or commodities investing had taken place, when no trading had taken place. The Dodd-Frank and Sarbanes-Oxley Acts now have sections requiring corporate executives and accounting firms to provide honest accounting and honest financial statements.

In short, anything that is a document can be fabricated, just as the information on the document is made up in Ponzi schemes. The following is a list of some of the fraudulent documents reported in Ponzi schemes; this list is by no means exhaustive:

  • • Fabricated purchase orders
  • • Falsified invoices
  • • Counterfeit stock certificates (with fabricated CUSIP1 numbers)
  • • Promissory notes
  • • Account statements
  • • Financial statements
  • • Fabricated contracts
  • • Mortgages
  • • Property appraisals
  • • Government contracts
  • • Audit reports
  • • Falsified tax documents and IRS forms
  • • Falsified corporate ledgers
  • • Fabricated trading tickets
  • • Lease agreements
  • • Certificates of deposit

In more prominent cases, some exhibits - the falsified documents - used in prosecutions are publicly available. The Department of Justice offers many of the exhibits in these cases; however, to the untrained eye these documents look perfectly legitimate. In the Thomas Petters case, the fraudulent documents are quite lengthy. These documents are invoices to major companies such as Costco and Sam’s Clubs. The untrained eye would not know how to recognize the deception (DOJ, exhibit 105, USA v. Petters, 2008). The following cases are examples of types of fraudulent documents and false information used:

  • • Jeremy Lundin of Big Island Capital told investors in promotional documents that he had $730,000 in capital, but he had not yet opened a bank account for the entity (DOJ, 2017, September 1, p.r.).
  • • Scott Newsholme used falsified account statements, fraudulent stock certificates, fabricated promissory notes, alleged to be for debt instruments such as bonds (SEC, 2017, September 6).
  • • In the New Century Coal Ponzi scheme based on coal mines, the perpetrators created “ghost vendor companies with valid bank accounts” to present the image that New Century was a viable legitimate business (USA v. Brian C. Rose et al., 2014). Fraudulent documents were created that represented expenses from exploration and mining of coal. When savvy investors asked for proof of the existence of coal mines and expenditures, the perpetrators simply fabricated false documents, including renting a mine and heavy equipment to support the illusion of a fully functioning operation.

Multiple Business Entities and Shell Companies

Many schemes have multiple business identities, oftentimes incorporated in several states, and at times in other countries. This enables the perpetrators to move funds from one business to another quite easily. It enables hiding funds and provides the appearance of legitimate transactions. Multiple business entities in multiple states give the perpetrators more opportunities to reach potential victim-investors in more locations.

Shell companies are used to launder money, and, in other cases, to give the impression that funds are being invested in what are actually shell companies. These companies usually exist in name only, for the purpose of another company’s operations. The purpose of shell companies is to move money from entity to entity to make it more difficult for authorities to monitor activities and to follow the money trail and to give the impression actual business is taking place. Shell companies are used in many illegal business enterprises, not just Ponzi schemes. The process is one of moving money from one business to another, and many more to give the appearance that actual funds are legitimately being transacted through legitimate businesses. Nothing could be farther from the truth. There were 879 Ponzi schemes that had only one business entity; 313 had two business entities; 167 of 1,359 had three or more business entities. Several schemes had multiple companies or shell entities:

  • • Four Ponzi schemes had between 20 and 23 business entities.
  • • Two schemes were in the thirties range: 31 and 35.
  • • One had 82 business entities.
  • • One had 100 business entities.
  • • Two had 150 business entities
  • • One had 275 business entities.
  • • Larry Reynolds ran Nationwide International Resources Inc, to launder funds for Thomas Petters scheme; it was purely a shell company (FBI, 2010, September 14).
  • • Edward May formed more than 150 limited liability corporations; his scheme took $350 million (FBI, 2011, October 4, p.r.).
  • • Val E. Southwick had at least 150 Nevada corporations purported to be involved in real estate development. His entities issued promissory notes and sold unregistered securities (SEC, 2008, February 6).
  • • Gregory Gray Jr. of Archipel Capital and B1M Management had at least 12 business entities with variations on the name Archipel Capital. Gray’s methodology:

When Investor A sought proof of the Late Stage Fund LP’s ownership of Uber shares, Gray sent Investor A’s business manager a fabricated stock transfer agreement that bore a cut-and-pasted signature from a prior legitimate purchase of stock by another

Archipel Entity. The purported seller of these Uber shares, Seller A, never owned or signed any documents related to a sale of Uber shares.

  • (SEC, 2015, February, 27)
  • • In the case of Robert Shapiro and Woodbridge, most of Shapiro’s 275 LLCs had no actual business activities, revenues or otherwise; they were purely shell companies for the purpose of carrying out the fraud. The scheme promised investors that the funds were going to third-party borrowers, and that profits would be made in interest paid on the loans (SEC, 2017, December 20).

Incorporations and Company Formations

The state(s) in which Ponzi schemes are carried out and where they have been incorporated or formed may be the same or different states. Most schemes have victimized investors in several states and/or several countries. Table 3.1 compares the quantity of incorporations/formations per state and the quantity of federal-level Ponzi schemes that were prosecuted criminally or had SEC or CFTC administrative actions. Where the case is charged civilly or criminally is a matter of venue and jurisdiction,

Table 3.1 Ponzi Schemes, Incorporation/Formation, Population per State

State

Total Ponzi 1962-2019

Total Ponzi Incorp/Formed

Ponzi Total

Incorp/Formed

Ratio

State

Population

2019

Alabama

9

0

9:0

4,903,185

Alaska

2

1

2:1

731,545

Arizona

23

14

23:14

7,278,717

Arkansas

3

7

3:7

3,017,804

California

216

136

27:17

39,512,223

Colorado

34

23

34:23

5,758,736

Connecticut

26

18

13:9

3,565,287

Delaware

2

127

2:127

973,764

DC

7

4

7:4

705,749

Florida

117

107

117:107

21,477,737

Georgia

37

27

37:27

10,617,423

Hawaii

16

7

16:7

1,415,872

Idaho

8

0

8:0

1,787,065

Illinois

79

51

79:51

12,671,821

Indiana

II

8

ll;8

6,732,219

Iowa

4

1

4:1

3,155,070

Kansas

7

0

7:0

2,913,314

Kentucky

4

2

2:1

4,467,673

Louisiana

8

6

4:3

4,648,794

Maine

1

0

1:0

1,344,212

(Continued)

State

Total Ponzi 1962-2019

Total Ponzi Incorp/Formed

Ponzi Total

Incorp/Formed

Ratio

State

Population

2019

Maryland

7

4

7:4

6,045,680

Massachusetts

25

12

25:12

6,892,503

Michigan

34

24

17:12

9,986,857

Minnesota

25

13

25:13

5,639,632

Mississippi

4

4

1:1

2,976,149

Missouri

20

14

10:7

6,137,428

Montana

1

5

1:5

1,068,778

Nebraska

5

4

5:4

1,934,408

Nevada

19

131

19:131

3,080,156

New Hampshire

3

3

1:1

1,359,711

New Jersey

42

29

42:29

8,882,190

New Mexico

4

2

2:1

2,096,829

New York

121

67

121:67

19,453,561

North Carolina

41

23

41:23

10,488,084

North Dakota

1

3

1:3

762,062

Ohio

31

0

31:0

11,689,100

Oklahoma

12

7

12:7

3,956,971

Oregon

12

10

6:5

4,217,737

Pennsylvania

41

26

41:26

12,801,989

Rhode Island

5

2

5:2

1,059,361

South Carolina

12

0

12:0

5,148,714

South Dakota

0

2

0:2

884,659

Tennessee

27

10

27:10

6,829,174

Texas

123

89

123:89

28,995,881

Utah

48

32

3:2

3,205,958

Vermont

1

1

1:1

623,989

Virginia

34

18

17:9

8,535,519

Washington

28

15

28:15

7,614,893

West Virginia

1

2

1:2

1,792,147

Wisconsin

12

7

12:7

5,822,434

Wyoming

1

18

1:18

578,759

Puerto Rico

3

2

3:2

3,193,694

US VI

1

2

1:2

106,405

US population 2019

1359

1120

1359:1120

328,239,523

Note: California is emboldened because it had the largest number of Ponzi schemes but also the largest population. Delaware, Nevada and Wyoming have more incorpo- rations/formations because of their incorporation laws.

by statute. The venue is the place whereby a case is tried or administrated; the jurisdiction is the court that has the authority, determined by the law or statute that has been violated. In securities and commodities cases, the jurisdiction is determined by the regulations that have been violated, and the venue is determined by the primary place of business.

The legal structure of business formations serves to protect the officers in a company, or not, depending on the choice of entity formation. The Ponzi schemes may have had multiple incorporations, incorporations, and Limited liability Companies (LLCs), or they may have just told investors they were incorporated. The purpose of incorporation is to protect personal assets from company debts. Incorporation allows for shareholders. LLCs can have one owner or several partners; many of the Ponzi schemes were LLCs. In general partnerships, the owners take part in the managing of the company and are responsible for business debts. Limited partnerships (LP) allow for partners to share in the profits but they do not participate in the running of the business. Incorporations and LLCs were the primary formations mentioned in the federal documents.

The “nerve-center test” (Garner, 2009) is the test used by courts to determine a business entity’s primary operation location for the purpose of legal actions. Many corporations incorporate in Nevada or Delaware because of tax incentives and opacity. The court determines the “nerve- center” as the location where the corporate officers reside, specifically the primary agent, for determining where a case is judicated. Delaware, Nevada, and Wyoming have greater quantities of incorporations as compared with the number of Ponzi schemes; however that is not where the cases were tried or prosecuted unless the business was run from those states. Civil and/or criminal charges are brought in the state of the primary or the location from which the business is run. The Supreme Court determined in Hertz Corp. v. Friend et al. (2009) that the nerve-center is generally where the primary business activities take place. Most Ponzi schemes are multi-state and often multi-country. Victims may be in many states and countries; this is especially true since more recent schemes make use of the internet to carry out the schemes.

In comparing where a Ponzi schemes was charged civilly, or criminally prosecuted with the state of incorporation/formation, we see that each state’s incorporation laws influence the quantity of incorporations/ formations in that state. Some states require at least one of the corporate officers to live in the state to incorporate; others, such as Delaware and Nevada, do not. In Figure 3.1 we can see that California has the most Ponzi scheme prosecutions but a comparable amount of incorporations with Nevada. New York and Texas also had more scheme prosecutions than incorporations. We can see that Delaware and Nevada have significantly more incorporations than prosecutions. All prosecutions are federal level; it is the same standard. The difference is some states have more attractive incorporation laws. It is the state law that varies, encouraging the incorporations. In Table 3.1 we see the individual states, the number of Ponzi prosecutions, and the number of incorporations/formations and the state population. California has the most Ponzi schemes, but it is also the most populated state. California has a ratio of 27 schemes to 17 incorporations, whereas Delaware has two schemes to 127 incorporations. Most states have more schemes than incorporations, except for Delaware, Nevada, and Wyoming.

Quantity of Ponzi Incorporated/Formation per State and Quantity of Ponzi per State of Prosecution

Figure 3.1 Quantity of Ponzi Incorporated/Formation per State and Quantity of Ponzi per State of Prosecution.

The State of Utah and its Department of Securities determined that it had a problem with fraud and white-collar crimes, establishing the White-Collar Crime Registry (HB 378, 2015). Utah State Attorney General Sean Reyes asked the question, “Is Utah the Fraud Capital of the U.S?” and answers, “Yes, yes we are” (Reyes, 2019). Utah has recognized a problem and enacted legislation to aid law enforcement in reducing recidivism, and to enable the public to carry out research to find if someone they are interested in doing business with has a white-collar crime conviction. The State of Utah requires those who have been convicted of state-level crimes listed under 77-42-105 to register with the Utah State White-Collar Crime registry. Those crimes include (not exhaustive, only selected):

  • • Securities fraud (61-1-2)
  • • Theft by deception
  • • Unlawful dealing of property by fiduciary
  • • Insurance fraud
  • • Mortgage fraud
  • • Communications fraud
  • • Money laundering
  • (State of Utah https://www.utfraud.com/Home/Laws) Opaque Incorporation States

Delaware, Nevada, and Wyoming stand out for their opaque incorporation laws and corporate tax incentives. Delaware has a low franchise tax, and Nevada has no franchise tax. Nevada has gross receipts tax instead of corporate taxes. In Delaware under Title 30 § 1902 (6), “A corporation maintaining a statutory corporate office in the State but not doing business within the State” are exempt from corporate taxation (Delaware, 2019). Both Delaware and Nevada do not require officers to be residents; only a registered agent is required to receive documents; this can be an attorney hired for the purpose. Delaware does not list the primaries in corporations, or LLCs, on public record. Both Nevada and Delaware do not require that board members be disclosed publicly. In Delaware, it is very inexpensive to incorporate. Neither state requires a bank account or formal meetings to be held in the state, only requiring a registered agent address, (as of this writing). When an entity has opened a bank account in Delaware the funds are exempt from attachment, such as in divorce proceedings and by creditors (Delaware, title 8). Delaware’s laws favor companies with stockholders, such as: stockholders in other states are not subject to Delaware taxes. Delaware has a court of chancery that is solely focused on business law; these are judicial only; no juries. Nevada has more protections for the officers of corporations. Nevada corporations can choose to indemnify all officers from all actions. This is not the case in Delaware.

 
Source
< Prev   CONTENTS   Source   Next >