First Indiana Bank’s Alleged Connection To Accused Indiana Ponzi Schemer Timothy Durham

As I’ve said before, it’s nearly impossible to pull off a Ponzi scheme of any magnitude without the complicity of a seemingly respectable financial services firm.  Bank of America, VISA, Fiserv and MF Global all figure prominently into Ponzi schemes my office is investigating or pursing litigation against.  The former First National Bank of Indiana (FNBI) is yet another firm that appears worthy of some investigation.

According to a federal complaint of forfeiture alleging misdeeds by Timothy Durham, the Indiana businessman and his associates operated at least two holding companies and 19 operating subsidiaries, with approximately 77 individual bank accounts for these entities.  Most of these bank accounts were at JP Morgan Chase and Key Bank and the complaint alleges more than 6,400 FEDWIRE transactions were made between the companies under Durham’s control.

One of these companies was “Fair Financial,” an Akron-based company that apparently was ground zero for Durham’s Ponzi scheme.  “Fair Financial” peddled so-called “investment certificates” supposedly backed by low-risk, high yield, short-term consumer debts ;  in fact, the complaint says money provided by Durham’s victims was used to make interest and redemption payments to earlier investors.  The complaint alleges that unaudited financial statements for “Fair Financial” showed total assets of approximately $241 million, with loans to Durham and his various businesses totaling approximately $192 million.  The unaudited financial statements show a net operating loss for 2008 of approximately $1.7 million and net income of $129,845 for the first six months of 2009.

According to the complaint, “Fair Financial” is owned by “Fair Holdings.” The complaint alleges that between May 2004 and May 2009, FEDWIRE transactions detail more than 900 separate transfers totaling approximately $84.2 to a First Indiana Bank account of “Fair Holdings,” which in turn wired the money to nearly 50 individuals and businesses with connections to Durham.

Current and former subsidiaries of Obsidian Enterprises were among the 50 companies that received the transfers.   According to its website, Obsidian is “a private holding company that invests in small and mid cap companies in basic industries such as manufacturing and transportation.”  The site lists Anthony P. Schlichte as the company’s executive vice president, corporate finance; according to Schlichte’s bio, he previously held “senior lending officer positions at First Indiana Bank” and other banks.

While it’s certainly possible that FNBI was an unwitting participant in the scheme, further investigation of what the bank knew and when it knew is warranted.

FNBI was acquired by Marshall & IIsley in 2007.

Tips to Avoid a Ponzi Scheme

1. Be wary of recommendations from brokers or financial advisors based solely on the fact that they are a member of an organization or religious or ethnic group to which you belong.
2. Investigate the investment thoroughly and check the truth of every statement you were told about the investment.  You can research on the Internet any stocks or other investments that are being pitched.
3. Be very cautious and avoid promises of “guaranteed” returns or spectacular profits.  In the last year or so, the market has declined over 40%.  Anyone promising to make money such as 10 or 15% on an annual basis when the market is going down is likely to be a phony.
4. Be skeptical of any investment opportunity that is not in writing.  If someone has something real to offer they will put it in writing, otherwise it is not real if simply said orally.
5. Don’t be pressured or rushed into investing in a “once in a lifetime” or “can’t miss” opportunity.  Legitimate investment opportunities are not rushed to investors and investors must be given time to carefully think about and investigate the proposed opportunity.
6. Check out your brokers on FINRA.org.  Check out your broker’s customer complaint, regulatory history and employment history .
7. Check out investment advisors on the SEC’s database.
8. Do not do business with unregistered investment advisors.
9. Avoid anyone who has prior customer complaints or regulatory problems and avoid brokers or advisors who have switched firms repeatedly (at least three changes in a five year period).
10. Make sure that any investment is held at a known reputable financial institution (Citibank, Bank of America, etc.) and that there is a specific account with your name on it and an account number.  Verify that the money is in fact being held by the bank.
11. Never make a check out personally to an investment advisor or a small unknown company.  It is possible or even likely that your money will be stolen.
12. Check to see if the investment advisor has a website.  If there is no website, this is a big red flag that your broker or advisor is not legitimate.
13. Make sure you understand the investment advisor’s strategy and what he or she will put your funds in.  If you don’t understand it after speaking with the advisor and doing your own independent research, avoid the investment.
14. If it‘s too good to be true, it probably is.

Joseph Forte: Bernie’s got Company

Just as Bernie Madoff proved, and others before him, the Ponzi scheme did not end with Charles Ponzi and it appears it won’t end with Bernie Madoff either. The Pennsylvania fund manager, Joseph Forte, seems to be the latest alleged fraudster.

According to the SEC, Forte began Joseph Forte LP in 1995 and obtained $50 million from roughly 80 investors. He lured his investors by giving them a limited partnership in his firm and employed an investment strategy that traded S&P. 500 stock futures in addition to foreign currency futures and other futures contracts. He promised unbelievably generous returns between 19% and 38% annually, according to the SEC. Amazingly, these returns would make Forte’s fund, however fraudulent, appear to be an even better investment than Madoff Securities.

Ironically, it may have been Madoff’s downfall that led Forte’s investors to reveal his alleged fraud. As an aside, the SEC might try to take credit for bringing down Forte but I’m skeptical. According to the Philadelphia Inquirer, an investor sent Forte an email asking that he confirm assets in the supposedly inflated $150 million fund. It’s suspected that many investors filed suit and Forte realized then his alleged fraud would become exposed. According to the Commodities Futures Trading Commission (C.F.T.C), Forte then promptly turned himself in.

As I’ve said before, fraudsters usually get exposed eventually. But the trick is not to get caught up in one of these schemes in the first place. The most important take away for any investor is that they should take exceptional care when choosing where to invest their money. They should understand their money manager’s investment strategy and should expect realistic returns on their investment. This may all seem very obvious to some but too often smart investors are taken advantage of by a seemingly safe investment or are blinded by lavish returns. One lesson I hope will last is that investors should not allow someone who they consider to be a friend, manage their money. This can only lead to clouded judgment. .

Like Madoff and Forte or before them, Peter Dawson in Long Island, NY and Joseph Shereshevsky of WexTrust, perpetrators of financial fraud don’t only strike the ultra-high net worth individuals or institutional investors. They also hit mom and pop investors, religious communities, public institutions and non-profit organizations. I’ve been an investor advocate for a long time and while I’ve seen it all, I still cringe when I hear about these cases.

Hopefully, a small silver lining will be that the people who deceive investors’ confidence for their own benefit will be slowly exposed and eliminated. And while I’m certain that is of no solace to investors who lost their money with Forte, there still might be options on the table for investors to recoup some of their lost funds.

Heeding The Lessons of The Bernie Madoff Scandal

My office’s client investigation of the scope and fallout of Bernie Madoff’s mind-boggling Ponzi scheme is well underway, but already valuable lessons have emerged that individual investors must immediately heed to ensure the safety and soundness of their financial assets:

A Financial Manager’s Business and Social Prominence Doesn’t Ensure Safety and Soundness

Bernie Madoff had impeccable credentials.  He served as chairman of the NASDAQ, was on the board of Yeshiva University, was revered by fellow members of the Palm Beach Country Club, and was extremely generous with his charitable contributions.  Investors in his funds mistakenly believed that Madoff’s prominence in of itself served as effective due diligence.

The sad truth is that individuals who aggressively court business and social prominence can be especially vulnerable to wrongdoing if their identities ultimately become bound to the reverence they successfully court.  My guess is that Madoff didn’t set out to perpetrate a major scam, but took measures to protect his vaulted reputation when the market turned against him.  Like most Ponzi schemes he probably started on a very small scale, masking losses by using new cash inflows to pay off losses with the intent of quickly replacing the money when the markets recovered.

Investors would be wise to be leery of money managers with a so-called affinity base tied almost exclusively to social, cultural and religious institutions.   To wit: The managers of the failed Bayou and WexTrust hedge funds also were prominent members of their communities.

If It Seems Too Good To Be True, It Probably Is

Investors must take time to understand the statements they receive from their financial managers.  All funds should be benchmarked against an appropriate index and if a fund significantly outperforms its yardstick investors must take the time to understand why.   Although significantly outperforming a benchmark isn’t necessarily indicative of fraud or wrongdoing, it often is a sign that a manager has deviated from his investment parameters.  Equally important, investors who don’t understand the investment strategies of the funds they have invested in, shouldn’t be in those funds.

Wall’s Street Appalling Lack of Due Diligence

There were countless warning signs to raise suspicions about Madoff’s purported returns and yet supposedly sophisticated “fund-of-funds,” hedge funds, and their “expert” advisors either didn’t notice or care about them.  At the end of the day, money management isn’t a meritocracy but rather an ol’ boys network.  It is probably the only recourse Madoff investors have to recover any losses is suing the advisors and funds who invested their money with him.

Individual Investors Are Afforded Virtually No Regulatory Protection

The SEC has come under widespread condemnation for its failure to uncover the Madoff fraud, but this outrage reflects a certain naiveté.  As readers of this blog know all too well, I have long argued that the SEC long ago abandoned its mandate to aggressively protect the rights of individual investors.  The Madoff debacle is just the latest example.  The SEC needs to focus on the entire investment advisory service whether clients are “accredited” or not.

Madoff Securities Alleged Ponzi Scheme Exposed: What’s an investor left to do?

In a bull market, investors are happy and tend not ask many questions. But when times get tough, they start wanting answers and Ponzi schemes are inevitably discovered.

The latest, of course, involves Bernard Madoff, a fixture on Wall Street for decades and one of the creators of the NASDAQ exchange. Mr. Madoff is the founder of Bernard L. Madoff Investment Securities. He was arrested by Federal Bureau of Investigation agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The SEC has shown up late to the party once again and filed a civil suit, years after they were alerted of suspicious activity at Madoff Securities’ investment arm. All told, the alleged Ponzi scheme totaled $50 billion, possibly half of which was investor funds.

Naturally, Bernard Madoff’s clients are wondering if there’s anything left, and if so, how they can get their money back. Some investors will have an up-hill road to travel but for others there are legal options they can immediately pursue.

Firstly, to the extent that there are any funds left, claims can be filed against Madoff Securities directly. But it’s unlikely that there will be any money left. “It’s all a lie,” Mr. Madoff told investigators who were there to arrest him.

And it is doubtful there will be any recourse through the Securities Investor Protection Corporation (SIPC) because the money management function at Madoff Securities was held outside of the brokerage unit.

But investors that were placed into the Madoff Funds through other “fund-of-funds” or by another hedge fund manager could have more maneuverability. Indeed, managers of fund-of-funds could have liability for failing to perform a reasonable amount of due diligence on Bernard Madoff’s dealings. They had an obligation to research Mr. Madoff, his firm, and his returns. Managers of fund-of-funds were compensated to do this and likely marketed their due diligence capabilities to their clients.

The red flags were very clear in this case. Perhaps the most compelling was the fact that Mr. Madoff was generating such high returns using a strategy tied to the S&P 500. And this was all happening while the overall market sank in 2008!

The magnitude of Mr. Madoff’s deception is astounding. And the destruction of wealth that has apparently occurred here is shockingly awful. But if there is a silver lining to this at all, it’s that during this economic crisis the unnecessary middle men, fraudsters, hucksters and Wall Street’s ugly underbelly are being exposed and eliminated.

While that is likely of no consolation to Madoff Securities clients and investors, rest assured, they will also have their day in court.

WexTrust Capital Investigation Eerily Similar to Peter Dawson’s Long Island Fraud

For as sophisticated as today’s financial gurus claim to be, the old-fashion Ponzi scheme is still alive and well. Indeed, the SEC filed a major case against WexTrust Capital (a Chicago-based private equity firm), its partners and various investment affiliates, that allegedly ripped off an estimated 1,200 investors, mainly from the Jewish Orthodox community. In response, Zamansky & Associates has launched its own investigation in order to return funds back to investors.

It is estimated that WexTrust Capital, and one of its main partners, Joseph Shereshevsky, may have defrauded their investors by as much as $100 million, which the SEC alleges was diverted to cover personal expenses, among other expenditures. According to the SEC’s complaint,

“Defendants have been fraudulently raising money in the various offerings, each of which purportedly is for a particular investment, without disclosing that funds raised were actually being used to pay prior investors in unrelated offerings and to make unauthorized payments to fund the operations of the Wextrust Entities, which were operating at a deficit. An internal Wextrust combined “balance sheet” shows that as of December 31, 2007, Wextrust Entities “borrowed” at least $74 million from the LLC entities and also “lent” at least $54 million to various LLC Entities. The Defendants are raising money and commingling funds in contravention of specific representations in private placement memoranda that investor funds will be used for specific investments in real estate or other assets identified in offering memoranda.”

All together, the SEC alleges that WexTrust Capital conducted at least 60 private placement offerings and created approximately 150 entities in the form of limited liability companies or similar vehicles. Throughout the process, the SEC alleges, WexTrust Capital partners didn’t disclose material information, never purchased properties it promised to investors and paid themselves profitably. WexTrust Capital allegedly committed a litany of violations of U.S. Securities laws.

Indeed, this is the classic Ponzi scheme strategy and eerily similar to Zamanky & Associates’ pending case in Long Island court involving Peter Dawson, a now jailed investment advisor who ripped off dozens of retirees. Among the similarities between the Dawson case and that of WexTrust Capital are:

• Both situations are examples of affinity schemes: WexTrust Capital targeted members of the Jewish Orthodox community and specifically, those that attended the B’nai Israel Congregation. Mr. Shereshevsky was close with the Rabbi who vouched for him regularly, according to the Wall Street Journal. By the same token, Peter Dawson targeted members of the East Meadow Methodist Church, and had close ties with its Pastor.
• Investor borrowed against his home: According to the Journal, at least one investor, and potentially others, borrowed against his house in order to invest in WexTrust Capital.
• Managers of WexTrust Capital and its affiliates enjoyed lavish lifestyles, as did Mr. Dawson, by allegedly fraudulent means.

And basically both Mr. Dawson and Mr. Shereschevsky and WexCapital, commingled funds, which is a fancy way of robbing “Peter to pay Paul.” For example, in the SEC’s report under “The Block III Offering Fraud,” WexTrust Capital did the following:

Block III Mines & Minerals, LLC (”Block III”) is a Virginia limited liability company organized to make a loan to and acquire an interest in a Namibian company, Deva Investments (Pty), Ltd., which owns the exploration and mining rights in a group of diamond mines in Namibia known as Block III.

Block III Managers, LLC, a Virginia limited liability company, is the manager of Block III. Block III Managers is wholly-owned by Brandon Investments, and that Brandon Investments is a wholly-owned subsidiary of Wextrust.

Defendants Byers and Shereshevsky, together with Defendant Wextrust and Brandon Investments, controlled the issuer, Block III.

Block III issued a private placement memorandum dated March 22, 2007 (the “Block III PPM”) seeking to raise $11 million from investors. The Block III PPM represents that the proceeds of the offering will be used as follows: (a) $4.5 million would be used for new equipment and operating capital, (b) $1.5 million would be used to fund a reserve for a purchase option on two other mines, (c) $1.75 million would fund an operating reserve, $300,000 would pay legal and operating expenses, and (d) approximately $2.95 million would be paid in fees to Wextrust and Wextrust Securities. Moreover, the operating agreement attached to the Block III PPM specifically limited the use of funds to expenses related to Block III.

These representations were false. Moreover, the Defendants knew, or were reckless in not knowing, the representations were false. Almost immediately after the money was raised, Defendants diverted the proceeds to unauthorized uses.

The Wextrust balance sheet shows that $3,990,910 of proceeds raised by Block III Mines & Minerals LLC was diverted to Wextrust Entities.

Defendants Wextrust Securities acted as a placement agent in the Block III offering.

The Block III PPM describes Shereshevsky as a “principal and integral part of Wextrust”, and states that Shereshevsky was “instrumental in the founding of Wextrust Securities”. The Block III PPM fails to disclose Shereshevsky’s prior felony conviction. Defendants Byers and Shereshevsky knew, or were reckless in not knowing, of Shereshevsky’s conviction.

Defendant Shereshevsky and his wife received transaction based compensation of $249,577, or approximately two percent of the funds raised by Wextrust Securities, in connection with the Block III offering. The Shereshevskys also received $750,000 in bonuses in connection with the Block III offering.

WexTrust Capital’s Troubles

Its likely WexTrust Capital will attempt to defend itself by saying that investments simply went south and it’s “buyer beware.” But the SEC’s evidence points otherwise. For example, Mr. Shereshevky emailed a business partner which showed they both were aware that their activities were fraudulent:

“Please remember one thing. That although I always take care of you and myself, my goal in this thing as I have always told you from day one, is to get [W]exTrust out of all the s—- before the end of 09 or 10 at the latest. that is my primary concern. We have faced it until we made it for long enough and now we must clean it up.”

Mr. Dawson pleaded guilty and is serving a sentence of five to 15 years; a sentence provided to him only after helping investor recover their money. At least at this point, the SEC has only filed civil charges. Shereshevsky and his Chicago partner affiliated with WexTrust Capital were arrested earlier this week and face criminal charges. The WexTrust Capital partners could be looking at much longer sentences if they choose to fight the charges.

WexTrust Capital Investors: What’s Next?

Naturally, the investors in WexTrust Capital are asking simply, “where’s my money now and how do I get it back?” In the Peter Dawson case, most of the funds were squandered. It’s unclear at this point whether any of WexTrust Capital assets are retrievable, but in all likelihood even the assets that are liquid won’t amount to a full recovery for the allegedly defrauded investors.

The key in recovering money is to ferret out solvent firms that potentially aided and abetted the fraud, or at least were in the position to stop it. In the Dawson case, we are suing banks, mortgage brokers, mortgage lenders and other firms, which Mr. Dawson himself alleges were participants. This takes an extensive amount of research and investigation, but if you follow the money in all likelihood there are places that can be found were recoverable money exists.

Investors in the WexTrust Capital scheme are likely feeling a whole host of emotions. It’s important to have hope, be patient, and communicate regularly with an attorney.

WexTrust Capital and Peter Dawson: What are the lessons for investors?

Perhaps the over arching lesson in these two cases is due diligence. According to the SEC’s complain, Mr. Shereshevsky had a prior history of investment-related fraud:

“In March of 1993, Shereshevsky was arrested for bank fraud, among other things. In June 2003, Shereshevsky pleaded guilty in the Southern District of New York to one felony count of bank fraud. He was sentenced to time served, 24 months supervised release and ordered to pay restitution in the amount of $38,797.90, which judgment was satisfied on February 15, 2005.”

Even if the investment advisor is a member in good standing at investor-affiliated organizations, such as a church, synagogue or rotary club, a full due diligence investigation should be conducted.

And then there is the age old adage: if something is too good to be true, it probably is.