A STREAM OF INVESTMENT SCHEME FRAUD CASES

Once, it was thought that various kinds of investment frauds and Ponzi schemes were difficult to detect. Market regulators such as the SEC were hard pressed to find them. The market crisis, Madoff and now Stanford seem to have changed all that. Now, these schemes seem to be a staple of SEC enforcement.

Two more of these cases were brought on Monday by the SEC. SEC v. Bluestein, Case No. 2:09-CV-13809 (E.D. Mich. Filed Sept. 28, 2009); and SEC v. K&L International Enterprises, Inc., Case No. 6:09-CV-1638 (M.D. Fla. Filed Sept. 28, 2009).

Bluestein is an action against Detroit area stock broker Frank Bluestein. Mr. Bluestein, according to the complaint, served as a feeder for Edward May and his Ponzi scheme E-M Management LLC. Mr. Bluestein targeted elderly investors, sometimes inducing them to refinance their homes to secure funds for the scheme. To lure the investors, Mr. Bluestein conducted investment seminars where he discussed various investment topics. After winning their confidence, Mr. Bluestein used a variety of misrepresentations to obtain their investment. Typically, he assured potential investors that the fund was low risk and that he had carefully investigated its operations without telling them about his large fees. In fact, Mr. Bluestein had done little to investigate the fund which was actually a Ponzi scheme. Using this approach Mr. Bluestein raised about $74 million from more than 800 investors over a five-year period.

The Commission’s complaint alleges violation of the antifraud and registration provisions of the securities laws. The case is in litigation.

In K&L International, the SEC obtained emergency relief against defendants Stephen Carnes, Lawrence Powalisz and their related companies. This scheme focuses on dumping unregistered shares on the market. It involves two groups of companies, the “Stock Distributor Defendants” and the “Issuer Companies.” According to the complaint, the defendants used these companies to dump billions of shares of microcap company shares onto the market. The shares were quoted in the Pink Sheets or the Over-the-Counter Bulletin Board.

The scheme to distribute the shares contained four key steps: 1) the Stock Distributor Defendant either claimed to lend money to an Issuer Company or the Issuer Company identified a debt to its officer that it assigned to the Stock Distributor Defendant; 2) the Stock Distributor Defendant paid the Issuer Company or an affiliate; 3) the loan or assigned debt was reduced or eliminated by the Issuer Company issuing shares of its stock to the Stock Distributor defendant; and 4) the Stock Distributor Defendant dumped the shares onto the public market.

Over a two year period the defendants raised about $7 million through this scheme. The complaint alleges violations of Section 5 of the Securities Act. The case is in litigation.