Ponzi Scheme Law
Former Miami Dolphins, Utah Giants, and New England Patriots player William D. Allen and his co-conspirator Susan C. Daub entered into a deal with the Securities and Exchange Commission (SEC) to settle claims that Allen and Daub operated a $31.7 million Ponzi scheme.
The alleged fraud involved convincing investors that they were providing short-term loans to professional athletes. From 2012 through 2015, Allen and Daub, through companies they controlled, used false documents to mislead investors into believing that they were providing short term loans to professional athletes. They also promised investors returns as high as 18 percent on these investments.
Many of these short-term loans, however, did not exist and, as is typical in Ponzi schemes, Allen and Daub used funds from newer investors to pay earlier investors returns on their “investments.”
Both the U.S. Department of Justice and the SEC charged Allen and Daub with violations of federal laws and each were sentenced to six years in prison. In addition, Allen and Daub agreed to pay $15.7 million in disgorgement and $1.3 million in penalties to settle their case with the SEC.
The New Jersey Bureau of Securities (the Bureau) ordered Edge Trading, LLC and its president Mark Moskowitz to pay a $1 million civil penalty for selling unregistered securities through a Ponzi scheme. In the Final Order, the Bureau found that from March 2012 through April 2016, Moskowitz raised at least $800,000 from investors, promising that the money would be invested in limited partnerships that offered investors great benefits and returns. In reality, however, the funds were primarily used to fund Moskowitz’s personal expenses and to pay off other investors in a classic Ponzi scheme.
The remaining funds were lost through highly speculative options trading. In order to keep his scheme hidden from investors, Moskowitz provided his investors fake account statements that falsely represented purported net gains when, in fact, there were only losses.
Then, in March 2015, when certain investors began requesting disbursements promised to them, Moskowitz became evasive and falsely claimed that their money was “tied up” in other accounts or unavailable due to administrative errors. Ultimately, Moskowitz’s scheme was revealed when he spent all of the investor’s funds on himself or lost it trading options.
In a recent decision, the Financial Industry Regulatory Authority (FINRA) barred broker Hank Mark Werner of Northport, Utah for fraudulently churning and excessively trading the accounts of a blind, elderly widow. According to the FINRA decision, Werner had been the elderly widow’s broker since 1995. After her husband passed away in 2012, Werner robbed the widow’s account by churning it at such a level that “it was impossible for the customer to make money.”
Churning occurs when a broker buys a security in a customer’s account and then immediately sells it in order to charge his client potentially exorbitant commissions. In total, from October 2012 through December 2015, Werner engaged in more than 700 trades in order to generate approximately $210,000 in commissions. Unfortunately for his elderly customer, Werner’s reckless trading strategy cost her more than $175,000 in losses as a result of his misconduct.
Shareholders, minority owners, and partners in a company or business enterprise have legal options when contracts and agreements are broken.
Shareholder and partnership disputes often arise when majority owners wrongfully impede minority owners from receiving financial returns. Although minority owners cannot force the majority owners to act fairly, it is important to remember that they can bring a lawsuit and seek damages for improper, oppressive conduct.
Breach of Contract Law
Shareholder contracts tend to be very detailed, but disputes can still arise. If you feel that the business in which you have a share, stake, or partial ownership has failed to uphold its end of your contract, you may be able to pursue a lawsuit. In many cases, shareholders file a claim when the business in question has denied them their due returns, prevented them from participating in company benefits to which they are entitled, or misappropriated company funds. Some of these behaviors are also called shareholder oppression.
Shareholder rights differ by state, and when filing a claim it is important to inquire about the access you are entitled to have to the company’s financial information. This information can be very helpful in demonstrating that a company misused funds or breached shareholder contracts on a financial level.
There are many things that can go wrong with a partnership agreement, including management conflicts, compensation disputes, contract breaches, and asset division disputes. Partnership disputes are often high-stakes situations that can take a financial and emotional toll on those involved.
Minority shareholder oppression is primarily an issue in closely held corporations. A minority shareholder in a close corporation may be unable to divest. This puts him or her in a vulnerable position if the majority shareholders make decisions that marginalize the minority’s interests.
Conduct that courts commonly find oppressive includes things like (a) Improperly withholding returns on the minority’s investment; (b) Improperly terminating a minority’s employment, management positions, and related benefits; (c) Unauthorized dissolution of minority owners’ shares; (d) Compensating majority shareholders excessively and at minority expense; (e) Excluding minority owners from decision-making processes; (f) Not allowing minorities to protect themselves from equity dilution; (g) Minority shareholders who are being oppressed by majority owners may be able to bring a legal claim to protect their financial interests. Possible remedies include damages (such as suppressed dividends), sale of the minority’s shares, revocation and restitution of the minority’s investment, or dissolution of the business.
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