Articles Posted in Ponzi Schemes

The U.S. Securities and Exchange Commission (SEC) and the U.S. Attorney’s Office for the Southern District of Florida have each charged Miami-based investment advisor Phil Donnahue Williamson for his alleged role in a $2,000,000 Ponzi scheme that defrauded hundreds of retired public sector workers, including school teachers and law enforcement agents.

According to the SEC and U.S. Attorney’s Office, Williamson operated his scheme through two businesses — Sterling Investment Fund LLC and Sterling Financial Partners — that allegedly invested in distressed properties in Florida and Georgia.  Between 2007 and 2014, Williamson advised the investors that they would be placing their retirement savings in the distressed properties; and he was able to raise more than $2 million.  Some of the investors were former clients of Williamson’s, some were referred by a former co-worker of his, and some approached him after he spoke at financial seminars hosted by churches.  The investors allegedly wanted to safely invest their funds and keep those funds liquid, which Williamson purportedly said they could do in his “no-risk” investment strategy that would provide them yearly returns of 8 to 12 percent.

As detailed in the SEC’s lawsuit, the investors all agreed to pay Sterling a $25,000 membership subscription and signed documents allowing a trust company to rollover their retirement accounts.  Without realizing it, though, the investors also authorized Williamson to deduct advisory fees; and he allegedly utilized that mechanism to siphon nearly $750,000 in fees from the investors.  According to reports, Williamson used the stolen funds to pay for his children’s school tuition, his mortgage, car payments, and to fund his other businesses along with making supposed distribution returns to investors.

A federal court in Boston has unsealed a civil lawsuit filed earlier this month by the U.S. Securities and Exchange Commission (“SEC”) against a former professional football player and his business partner for allegedly defrauding at least 40 investors out of as much as $14 million, alleging the business partners operated a Ponzi scheme that bilked investors who were promised profits from loans to professional athletes.

According to the SEC’s lawsuit, former professional football player William (“Will”) D. Allen — a former first round draft pick who played in the NFL with the New York Giants, the Miami Dolphins, and the New England Patriots and who now resides in Davie, Florida — and his business partner, Susan C. Daub — a financial professional formerly of Acton, Massachusetts who now lives in Coral Springs, Florida — claimed to make loans to professional athletes who were short of cash in the off-season or early in the season.  Allen and Daub allegedly told investors that they could profit by funding the loans and receive interest of up to 18 percent paid by the athletes.  Under that framework, Allen and Daub raised nearly $32 million from investors while advancing only $18 million in loans to athletes.  From July 2012 through February 2015, the investment program paid $20 million to investors while receiving a little more than $13 million in loan repayments from athletes.  To fill the nearly $7 million gap, Allen and Daub used money from some investors to pay other investors — the hallmark of a Ponzi scheme.

In addition, Allen and Daub allegedly misled investors about the terms of some of the loans and, in one clear instance, purportedly falsified the existence of one of the loans.  According to the SEC, 24 of Allen and Daub’s investors collectively contributed nearly $6 million toward a purported loan to a National Hockey League player.  Although the player is real and the money was collected from the investors, no documentation corroborates that any such loan in that amount ever existed.  Allen and Daub are purported to have used some investor funds to pay personal expenses, such as charges at casinos, nightclubs, and pawn shops; or to fund other business ventures.

A Federal Judge has denied Pershing LLC’s request to dismiss all claims against it for serving as the clearing firm in Allen Stanford’s multi-billion dollar Ponzi scheme.  According to the Complaint, Pershing allegedly aided the scheme perpetrated through Stanford Group Co. U.S. and the Judge held that “Pershing’s role as a clearing broker is no impediment to imposing liability. … Plaintiffs make a number of allegations that, when viewed in a light most favorable to plaintiffs, support a reasonable inference that Pershing knew of the underlying fiduciary breaches.”   The court found that the plaintiffs sufficiently pled substantial assistance to Stanford and participation in breach of fiduciary duty.

The Plaintiffs allege as clearing broker for the Stanford businesses between December 2005 and December 2008, Pershing was integral to the fraud, completing the sale of at least $500 million of the bogus investments while holding all of the cash and securities of Stanford customer.  According to the Complaint, Pershing ignored obvious red flags in the way Stanford conducted business, including the offshore transfers of funds and high salaries Stanford paid brokers, in favor of continuing the lucrative relationship. Despite internal concerns about the validity of Stanford’s business and abundant red flags, Pershing held off from filing a suspicious activity report with regulators and continued to participate in the purchase and sale of the dubious investments, the complaint claims.

This is an important court decision for any customer considering pursuing claims against a clearing broker.   In many instances, clearing brokers provide all back office support for small or poorly capitalized broker-dealers.  Although clearing firms frequently try to get claims against them dismissed claiming they only performed ministerial tasks, the reality is the clearing firms offer substantial assistance to the introducing firms including the extension of margin or other financing arrangements.  As the Pershing case highlights, clearing firms are also in a position to see red flags of misconduct or aid and abet the misconduct of the introducing firm.