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Enforcement News: SEC Charges Two Maryland Companies and Their Principals For Conducting a Ponzi Scheme Bilking Investors Out Of More Than $27 Million

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  • Posted on: Sep 9 2020

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See SEC Spotlight, “SEC Enforcement Actions Against Ponzi Schemes” (here).

According to a February 11, 2020 article posted on CNBC.com (here), Ponzi schemes have hit their highest level in a decade. Over 60 Ponzi schemes were uncovered by state and federal authorities in 2019, “with a total of $3.25 billion in investor funds — the largest amount of money unearthed in [such] scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.”

The most notorious Ponzi scheme in history was run by Bernard Madoff. His scam, which was uncovered in 2008, cost thousands of investors over $65 billion. In 2008, in addition to the Madoff scheme, authorities uncovered “40 Ponzi schemes with a combined $23 billion of investor funds — roughly seven times the amount of funds from last year, according to Ponzitracker.” 

Like many frauds, investors do not know that they are the victim of a Ponzi scheme until the market crashes and they try to redeem their investments. As noted in the CNBC article, this is what “happened during the financial crisis when clients tried redeeming their money only to realize it wasn’t there.” 

According to the SEC, Ponzi schemes share many common characteristics. Among them are:

  • High returns with little or no risk. When a person claims high returns with little or no risk, investors should “[b]e highly suspicious of any ‘guaranteed” investment opportunity.”
  • Overly consistent returns. Account statements that show consistent returns should be viewed skeptically. After all, investments go up and down over time. Therefore, investors should “[b]e skeptical about an investment that regularly generates positive returns regardless of overall market conditions.”
  • Unregistered investments. “Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators.” Registration provides investors with access to information about the company’s management, products, services, and finances.
  • Unlicensed sellers. By law, both state and federal, investment professionals and firms must be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive, complex strategies. One of the hallmarks of Madoff’s scheme was his “black box” strategy – that is, a secretive split-strike conversion strategy using proprietary quantitative techniques to minimize portfolio volatility. Investors had no idea what this meant. Investors should avoid investments in which the investment strategy is too complex to understand and the promoter refuses to provide sufficient information about the investment.
  • Issues with paperwork. Another hallmark of the Madoff Ponzi scheme was the dissemination of error laden account statements. As noted by the SEC, “[a]ccount statement errors may be a sign that funds are not being invested as promised.”
  • Difficulty receiving payments. A telltale sign of a Ponzi scheme is the difficulty getting one’s money out. “Be suspicious if you don’t receive a payment or have difficulty cashing out,” warns the SEC. “Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.”

See SEC General Resources on Ponzi schemes (here).

On August 28, 2020, the SEC announced (here) that it charged two Maryland companies and their principals for a Ponzi scheme that allegedly defrauded approximately 1,200 investors, many of them African immigrants, of more than $27 million.

According to the SEC’s complaint (here), Dennis Jali (“Jali”), John Frimpong (“Frimpong”), and Arley Johnson (“Johnson”), directly and through their companies 1st Million LLC and The Smart Partners LLC, falsely told investors that their funds would be used by a team of skilled and licensed traders for foreign exchange and cryptocurrency trading, promising risk-free returns of between 6% and 42%. The complaint alleged that defendants often targeted vulnerable African immigrants and exploited their common ancestry and religious affiliations. The complaint further alleged that Jali, who claimed to be a pastor and falsely held himself out as a self-made millionaire and expert trader, rented office space to conduct in-person meetings and give the appearance of a legitimate company. According to the complaint, defendants diverted investor funds for personal use and to make Ponzi payments to prior investors. 

“As alleged in our complaint, the defendants exploited religious affiliations and cultural affinities to gain investors’ trust,” said Kelly L. Gibson, Director of the SEC’s Philadelphia Regional Office. “We encourage all investors to be on high alert whenever they are offered investments promising low risk and guaranteed returns, including from members of a trusted community.”

The SEC’s complaint, filed in the United States District Court for the District of Maryland, charged defendants with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. The SEC also named Access2Assets as a relief defendant, seeking the return of proceeds of the alleged fraud to which it had no legitimate claim.

In parallel actions, the U.S. Attorney’s Office for the District of Maryland announced (here) the filing of criminal charges and the U.S. Commodity Futures Trading Commission (“CFTC”) filed a civil action.

In the CFTC announcement (here), the commission expounded upon the details of the alleged fraud. In that regard, the CFTC explained that over a three-year period, from 2017 to 2020, over 1000 participants contributed at least $28 million to the 1st Million Pool, often pursuant to so-called “secure contracts” that falsely promised participants’ funds would be held in trust or escrow, used to trade forex and bitcoin, and then returned in their entirety at the end of the pool participation term. The CFTC alleged (here) that defendants misappropriated at least $7 million of 1st Million Pool funds and used it to pay for expensive cars, personal travel, and living and business expenses.

Defendants allegedly targeted members of church communities by portraying the 1st Million Pool as a means to obtain financial freedom and support charitable religious causes. According to the complaint, defendants lied about their backgrounds and trading experience, as well as the likelihood of profit and risk of loss. For example, defendants promised pool participants they would receive rates of return on trading of up to 30% per month and falsely represented that Jali had a proven track record of positive returns. The complaint further alleged that Jali told certain participants that he had achieved positive returns of over 1700%. Jali also allegedly proclaimed in an online promotional video that his trading had generated returns of “400% in six weeks, all live trading in real markets” and that he was so successful a “forex trader” that “my wife has never worked a day in her life.”

The complaint alleged that instead of generating trading profits as promised, defendants used at least $18 million of participants’ funds to make Ponzi scheme-like payments for the purpose of creating the illusion of profitability. The complaint also charged all defendants with failing to register with the CFTC as required.  

The CFTC seeks full restitution to defrauded pool participants, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against violations of the federal commodities laws, as charged.

In the criminal proceeding, which provided even more detail of the alleged scheme, the government alleged that 1st Million presented itself as a wealth management and financial literacy company, with its core business offering being a 12-month guaranteed investment contract.  These investment contracts, entitled “Corporate Guarantees,” allegedly guaranteed individuals who invested money with 1st Million monthly returns ranging from 6% to 35% of the initial investment.  At the end of the investment period, the contract allegedly promised that the investor would receive the return of all of the principal invested. The government alleged that the contract represented that the client’s principal would be invested in foreign currency or cryptocurrency. 

[Ed. Note: Cryptocurrency is digital or virtual currency that does not exist in any physical form and is not issued by any government or centralized entity.  Cryptocurrency is designed to work as a secure medium of exchange and can be bought, sold, and exchanged on various online platforms and exchanges.]

The government alleged that Jali, Frimpong, and Johnson recruited victims to invest in 1st Million by holding promotional events at upscale hotels and event spaces, attending church-sponsored events intended to target investments from churchgoers, and representing themselves as religious men more interested in the philanthropic financial freedom of others than personal financial gain.  Defendants allegedly presented themselves as “pastors,” and told prospective investors that 1st Million’s work was in furtherance of God’s mission as it helped churches and their members achieve personal wealth and financial freedom. 

[Ed. Note: Often, Ponzi schemes are perpetrated on specific groups of people sharing common interests, such as a church or charitable group. Fraudulent sales practices that target specific organizations or groups is referred to as Affinity Fraud. The promoter of an affinity fraud frequently is – or pretends to be – a member or a good friend of the group. The fraudster often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests. Many times, those leaders become unwitting victims of the fraudster’s con.

Affinity scams exploit the trust and friendship that exist in group of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment. This Blog examined affinity fraud here.]

To encourage individuals to invest with 1st Million, Jali, Frimpong, and Johnson are alleged to have falsely stated that: investors’ principal would be held in a trust account protected from any financial instability of 1st Million or market volatility; that 1st Million and its traders, including Jali and Frimpong were fully licensed and qualified to pursue their investment activities by all relevant federal regulators, including the SEC, and had extensive experience trading on Wall Street; that the financial condition of the company was healthy and earning astronomical profits; and that the investors’ money would be used to invest in foreign currency and cryptocurrency markets, when in fact, investors’ money was used to pay earlier investors and diverted for the personal use of Jali, Frimpong, and Johnson.  To increase the amount of money obtained from investors, defendants allegedly promised higher guaranteed rates of return to 1st Million investors who invested greater amounts of money in the investment contracts.

Jali, Frimpong, and Johnson allegedly promised investors that they could increase the returns on their investments, typically by 0.5% per month, for every new investor they successfully recruited to 1st Million.  Defendants allegedly hired “agents” of 1st Million to organize recruiting events to attract more investors, in exchange for a higher return on the agents’ investments.  Jali further recruited investors by allegedly misrepresenting his own personal wealth and exhibiting a lavish lifestyle purportedly paid from his successful currency trading on his personal accounts when, according to the indictment, his lavish lifestyle was allegedly paid for with diverted investor funds.  For example, the indictment alleged that Jali spent at least $47,000 of investor money on luxury vehicles and approximately $78,000 on private jets that he used to fly on personal or semi-personal trips, including a flight from Charlotte, North Carolina to Washington, D.C. on January 9, 2019, with Jali, his wife, and his three children as the only passengers.

Over the course of the fraudulent scheme, defendants allegedly persuaded or attempted to persuade investors to provide them with wire transfers, checks, and cash totaling more than $28 million, from numerous victims, under the fraudulent pretense of investing in the foreign exchange and cryptocurrency markets.  The indictment seeks a money judgment of at least $28,021,868.01, including $2,481,994.57 seized from 10 bank accounts associated with the defendants, and a 2016 Porsche SUV.

If convicted, defendants face a maximum sentence of 20 years in federal prison for a wire fraud conspiracy and for each count of wire fraud; a maximum of five years in federal prison for a securities fraud conspiracy and a maximum of 20 years in federal prison for each count of securities fraud.  Jali also faces a maximum of 10 years in federal prison for each of three counts of money laundering.  

“The defendants allegedly recruited investors at churches, presenting themselves as pastors concerned about the investors’ financial freedom,” said U.S. Attorney Robert K. Hur.  “The indictment alleges that instead, the defendants used new investments to further their Ponzi scheme and to fund their lavish lifestyles, including luxury vehicles and private jets.”

“In a time of such financial insecurity, the defendants allegedly preyed on their victims with false hope of financial security,” said FBI Special Agent in Charge Jennifer Boone.  “They used the victims’ hard earned money for luxury cars, private jets and family vacations while the victims ended up with false promises and empty hopes.”

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