Ponzi Scheme

How To Guide: Tips on Avoiding Investment Scams

September 28, 2013 | by Staff Attorney

You read about investment scams, but you never think it can happen to someone like you.

We have all read about the Bernie Madoffs and Allen Stanfords of the world. Unsuspecting investors duped into some of the largest ponzi schemes in the world. You think to yourself that it can never happen to you or anyone you know – that you are too smart. You may be right, but a lot of victims are smart and sophisticated investors. The lure of safe investments with high returns is appealing to everyone. Don’t get caught chasing returns in investments you do not understand.

High Yield and No Risk

Jason T. Knapp Accused of Selling Away Violations

September 4, 2013 | by Staff Attorney

At least one action has been initiated against Jason T. Knapp (Knapp) accusing the broker of running a Ponzi scheme. Knapp is a former broker of Dawson James Securities, Inc. (Dawson James) and operated under the company name Steeple Chase Group, LLC (Steeple Chase). Steeple Chase holds itself out as a real estate, financial lending, consulting, and investment related company.

From 2006 through September 2008 Knapp was a registered representative of Chicago Investment Group, LLC. From September 2008 through June 2012 Knapp was registered with Dawson James. Dawson James terminated Knapp citing that Knapp had falsified documents and solicited clients to purchase investments, presumably in Steeple Chase, that were not approved by the firm. In addition, an allegation was made by another client that Knapp engaged in an unauthorized transaction that Knapp could not provide the firm with a satisfactory explanation for.

In total two customer actions have been initiated against Knapp and Dawson James Securities for failing to supervise Knapp’s business activities. In March 2013, FINRA barred Knapp from the securities industry when he failed to respond to the agency’s request for additional information concerning the customer complaints and the circumstances of his termination.

FINRA Finds George Kardaras and Brian Borakowski Sell Echo Canyon, LLC Away From Their Brokerage Firms

August 30, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) recently entered a default decision against George Alexander Kardaras (Kardaras) and Brian Matt Borakowski (Borakowski) after having alleged that the two brokers perpetrated a Ponzi scheme. FINRA found that the two solicited at least 12 customers over four years to invest more than $665,000 in total in Echo Canyon promissory notes. The notes bore interest rates between 14 to 56 percent and had quarterly, semiannual, and annual maturity dates.

Kardas’ and Borakowski’s scheme involved soliciting customers to purchase promissory notes in Echo Canyon LLC, a limited liability company in Arizona. Kardas and Borakowski told investors that their investment would be used to purchase used vehicles in U.S. auto auctions and shipped to Russia for re-sale. FINRA determined that Kardaras and Borakowski never intended to use the customer funds as represented. Instead, only two automobiles for EchoCanyon in or around late 2007 or early 2008 were actually purchased.

FINRA found that 95 percent of the funds raised, approximately $634,000 were used by the two brokers in order to pay personal expenses, to cover expenses at their employer firms’ branch office businesses, and to make payments to earlier investors in furtherance of the Ponzi scheme.

Gana LLP Investigating Claims Against Success Trade Securities for Sale of Promissory Notes

August 29, 2013 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Success Trade Securities, Inc (STS) and its CEO and President Fuad Ahmed (Ahmed) accusing them of improperly selling $18 million worth promissory notes. The promissory notes were issued by STS’ parent company Success Trade, Inc. (STI) to 58 investors. The notes were sold primarily to sports athletes in the NFL or NBA.

The FINRA complaint alleges that the STI notes were part of ponzi scheme to simply raise capital and fund STS’ operations while purportedly offering investors 12-26% returns. The investors were not aware of the risks of investing in the STI notes. For example, STS was at all times financially insolvent and could only meet its ongoing expenses by selling more STI notes and by continuing the scheme. Crucial risks such as the viability of the company are material risks that need to be disclosed to investors. The complaint also alleges that STS and Ahmed failed to register the STI notes as a private placement offering as required under Regulation D.

Problems with the notes began to emerge once the STI notes became due in 2012 through 2013. At that time, STS and Ahmed solicited noteholders to roll over or extend the terms of the STI notes at higher interest rates or offered customers an equity interest in STS. The complaint also alleges that in connection with the rollover and extended note sales the firm failed to disclose to some investors that the firm is financially unable to repay the notes that have become due.

Karl Hahn Ordered by FINRA to Pay An Investor $11 Million

August 28, 2013 | by Staff Attorney

Former Merrill, Lynch Pierce, Fenner & Smith, Inc. (Merrill Lynch), Deutsche Bank Securities (Deutsche Bank), Inc., and Oppenheimer & Co., Inc. (Oppenheimer), broker Karl Edward Hahn (Hahn) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay former clients over $11 million for misconduct in April 2013. Hahn was accused of common law fraud, negligent misrepresentations, and breach of fiduciary duties.

Hahn worked at Merrill Lynch from 2004 until 2008, at Deutsche Bank from 2008 to mid-2009, and at Oppenheimer from 2009 to early 2011. Hahn allegedly recommended various unsuitable investments to customers including covered calls, a premium financed life insurance policy, and $2.3 million fraudulent real estate financing project “involving East Coast” properties. Hahn allegedly recommended the life insurance policy for the the large commissions he stood to earn. Hahn also allegedly pocketed the money that was supposedly going to finance the East Coast properties.

Other claims made against Hahn include churning of investment accounts. Churning is a type of financial fraud where the broker engages in excessive trading in a client’s account for the purpose of generating commission but does not provide the investor with suitable investment strategy.

Wells Fargo Fined $2.8 Million by FINRA Arbitration Panel

August 20, 2012 | by Staff Attorney

In 2010, College Health and Investment Ltd (College Health), a family limited partnership, filed a case against Wells Fargo & Co. (Wells Fargo) in Financial Industry Regulatory Authority (FINRA) arbitration. College Health accused Wells Fargo of failing to detect the theft and unauthorized transactions in College Health’s account. College Health sought $4.4 million in damages against Wells Fargo.

From 2005 until 2008, Esther Spero (Spero), a former legal secretary at a firm that represented College Health, allegedly misused the family’s financial information and embezzled around $6 million. Spero’s scheme worked by opening accounts in Wachovia (now Wells Fargo) under College Health’s name or similar names in order to appear related to College Health. By doing so, she was easily able to transfer money from one of College Health’s actual accounts into the fake account and then finally into her own account.

College Health also filed a civil suit against Spero in the Southern District Court of Florida where she was eventually found guilty of the charges. However, Spero was unable to pay College Health for the amount she had taken from the company leading College Health to bring action against Wells Fargo in FINRA arbitration.