Radio Sports Talk Show Host And An Investment Adviser In The Crosshairs Of The Sec For Perpetrating Ponzi Schemes

• Posted on: Sep 11 2017

Ponzi schemes seem to be in vogue lately. Last week the Securities and Exchange Commission (“SEC”), and the Department of Justice, announced the filing of two enforcement and criminal proceedings involving Ponzi schemes (here and here), one involving New York sports radio personality, Craig Carton, and the other involving a New Jersey-based tax preparer and investment adviser. Both are charged with bilking investors out of millions of dollars.

What is a Ponzi Scheme?

Named after the originator of this type of investment fraud, Charles Ponzi, a Ponzi scheme involves the payment of purported returns to existing investors from funds contributed by new investors. To make the scheme work, the perpetrator solicits new investors by promising to invest money in securities that will generate high returns with little or no risk.  Ponzi schemes rely on a constant flow of money from new investors in order to provide “returns” to earlier ones. This constant payment of “returns” gives the illusion that the investor is receiving “profits” from a legitimate business. However, when the cash flow stops, the scheme falls apart.

Bernie Madoff is probably the most well-known perpetrator of a Ponzi scheme. Over more than 17 years, Madoff carried out the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars.

What are the Common Characteristics of a Ponzi Scheme?

Many Ponzi schemes share the following characteristics:

1. Guaranteed promise of high returns with little or no risk to principle.
2. Consistent returns regardless of market conditions.
3. Unregistered investments.
4. Undisclosed and/or complex investment strategies.
5. Periodic statements, confirmation tickets and other documentation withheld from investors.
6. Inability to withdraw client money.

WFAN Radio Host Charged with Ticket Ponzi Scheme

On September 6, 2017, the SEC charged Craig Carton, a New York sports radio personality, and Joseph Meli (“Meli”), a New York City resident, with stealing millions of dollars from investors who were allegedly promised their funds would be used for the purchase and resale of concert tickets. (The SEC’s announcement can be found here.)

The SEC alleged that Carton and Meli falsely claimed they had access to large blocks of face value tickets to popular concert performances.  (The SEC’s complaint can be found here.) According to the complaint, investors were falsely promised high returns from the price markups in ticket resales.  However, instead of purchasing tickets for resale, Carton and Meli allegedly misappropriated at least $3.6 million to repay earlier investors and cover such other expenses as Carton’s gambling debts.  Additionally, Carton allegedly misappropriated $2 million “by making misrepresentations to [an] investor and a third-party concert venue, so as to trick the concert venue into forwarding the investor’s funds to an entity controlled by Carton.”

According to the SEC’s complaint, one investor was provided documents falsely representing that large blocks of Adele tickets were being purchased at face value directly from Adele’s management company when in fact there was no such agreement.

“As alleged in our complaint, investors were lured with promises of big profits from resales of A-list concert tickets, but little did they know their money was being used to cover Carton’s gambling debts among other things,” said Paul Levenson, Director of the SEC’s Boston Regional Office.

The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties against Carton and Meli along with six businesses they control: Advance Entertainment LLC, AdvanceM Ltd., Misoluki Inc., Misoluki LLC, Ticket Jones LLC, and Tier One Tickets LLC.

Meli is no stranger to run-ins with the law. Earlier this year, he was charged with operating a Ponzi scheme involving the purported resale of tickets to the Broadway musical Hamilton and other events.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced (here) that it filed criminal charges against Carton and his associate, Michael Wright. Carton and Wright were charged with securities fraud, wire fraud, and conspiracy to commit those offenses. (The criminal complaint can be found here.)

Acting Manhattan U.S. Attorney Joon H. Kim said: “As alleged, Craig Carton and Michael Wright deceived investors and raised millions of dollars through misrepresentation and outright lies. Their schemes were allegedly propped up by phony contracts with two companies to purchase blocks of concert tickets, when in fact, Carton and Wright had no deals to purchase any tickets at all. As alleged, behind all the talk, the Wright and Carton show was just a sham, designed to fleece investors out of millions ultimately to be spent on payments to casinos and to pay off other personal debt.”

FBI Assistant Director-in-Charge William F. Sweeney Jr. said: “Carton and Wright thought they could get off easy by allegedly paying off their debts with other people’s money. They then attempted to pay off investors with money that would eventually become future debt, as alleged. We see this time and time again, the rise and fall of a Ponzi scheme destined for failure. The truth is, the time will come when your luck runs out. Unfortunately for those arrested today, that time is now.”

If convicted, Carton can serve up to 45 years of prison time and pay fines that can exceed $5 million.

Tax Preparer and Investment Advisor Charged With Stealing Investor Money

Also on September 6, 2017, the SEC announced that it charged a New Jersey-based tax preparer and investment adviser with stealing more than $1 million from clients to support his gambling habit and other personal expenditures.

In its complaint, the SEC alleged that Scott Newsholme (“Newsholme”) “fabricated account statements, doctored stock certificates, and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.”  Instead of investing clients’ money, Newsholme allegedly cashed their investment checks and pocketed the funds “while assuring clients that their assets were safe and flourishing.”  According to the SEC, “Newsholme used investor money for personal expenses, gambling in Atlantic City, and Ponzi-like payments to clients who sought a return of their funds.”

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced the filing of criminal charges against Newsholme. In that regard, Newsholme was charged with one count of mail fraud, wire fraud, and securities fraud. (The criminal complaint can be found here.)

If convicted on the mail and wire fraud counts, Newsholme can serve a maximum sentence of 30 years in prison and pay a $1 million fine. The securities fraud count carries a maximum sentence of 20 years in prison and a $5 million fine.

Takeaway

The SEC has warned investors to be vigilant in protecting themselves before they invest money. (Here.) “Whether you are a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.” Many of the questions investors should ask are based upon the common features of a Ponzi scheme. If these questions are not answered, investors should not be afraid to request more information. Any push-back or doublespeak should raise red flags. After all, as the proverb says: “if it sounds too good to be true, then it probably is.”

Tagged with: Complex Litigation, Fraud, Ponzi Scheme, Securities Fraud