Salvaging Returns For Investors From Ponzi Schemes
The goal of enforcement officials is always to arrive at the earliest time to save investor funds from the fraudsters. Despite their best efforts, frequently they arrive after much of the money is gone. Yet often portions can be saved. This is illustrated by two actions yesterday, one by the SEC and another by the NY AG.
The SEC obtained an injunction and freeze order against a fraudulent investment scheme being operated by Wayne Palmer through his controlled entity National Note of Utah, LC. SEC v. National Note of Utah, LC, Case No. 2:12-cv-00591 (D. Utah Filed May 25, 2012). Beginning in 2004 National Note raised over $100 million from 600 investors. Mr. Palmer lured investors with claims that his company purchased and sold collateralized loans such as mortgages, trust deed notes, options, leases and purchase contracts that would generate outsized returns of 15% to 20% annually. This claim was bolstered by a 12% guarantee from an investment process that had what he claimed was a “perfect record.”
In fact National Note was insolvent. Investor repayments were made from funds put in by subsequent investors. Those payments stopped in October 2011. The Commission’s freeze order will preserve what is left while the case continues. The SEC’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a).
The NY AG also brought an investment fund fraud action long after the investment fund fraud began. Now however Mr. Schneiderman’s Office has brought it to a conclusion with a recovery for investors.
The suit, filed in April 2009, was against Ezra Merkin and his controlled funds, Ariel Fund Ltd, Gabriel Capital L.P, Asset Fund Ltd. and Ascot Partners L.P. Mr. Merkin raised over $4 billion from individuals and charities by portraying himself as a skilled money manager for over two decades. In reality he simply turned the money over to Bernard Madoff’s giant Ponzi scheme while concealing this fact from investors with false statements. The NY AG’s suit was brought under the Martin Act and Section 352 of the General Business Law and Section 63 of the Executive Law.
Yesterday, Mr. Schneiderman’s Office announced a $410 million settlement of the suit. Investors will be repaid based on the size of their loss and whether they knew about the involvement of Madoff. Those that did not will receive a larger settlement. All investors are expected to receive additional payments. The state will recoup $5 million in litigation costs under the terms of the agreement.