Category Archives: Ponzi Scheme

At least 440 investors, many of whom were elderly individuals and retirees, found themselves duped in a $50 million real estate investment deal that turned out to be a Ponzi scheme. On July 28, the Securities and Exchange Commission (SEC) obtained a court order to halt the alleged scam, freezing the assets of the alleged perpetrators – John J. Bravata and Richard J. Trabulsy of Michigan – as well as the companies they formed, own, and control: BBC Equities LLC and Bravata Financial Group, Inc. 

According to the SEC, the two men raised more than $50 million from investors by offering them membership interests in a purported real estate investment fund with promised annual returns of 8 to 12%.  However, less than half of the money raised was actually spent acquiring real estate. Instead, Bravata and Trabulsy used money from new investors to make Ponzi-like payments to earlier investors. They also spent several million dollars of investors’ money on themselves, financing exotic vacations, gambling debts and other extravagant items. 

The SEC’s complaint, filed in U.S. District Court for the Eastern District of Michigan, also charges Bravata’s son, Antonio Bravata of Brighton, of selling the unregistered securities and acting as an unregistered broker.

Rural farmers in central Missouri have their own version of a Midwest Bernie Madoff. Cathy Gieseker, a long-time Missouri grain dealer and owner of T.J. Gieseker Farms and Trucking, has been charged with running a pyramid scheme built on grain purchases that allegedly swindled hundreds of farmers out of as much as $50 million. 

The July 20 indictment alleges that between October 2002 and February 2009 Gieseker began to market grain on behalf of farmers, promising them that she could sell their grain for higher-than-market prices because of supposed contracts secured from Archer Daniels Midland Company (ADM). During the course of the reported Ponzi scheme, Gieseker delivered and sold virtually all of the grain at ADM. 

In reality, however, Gieseker did not have access to any of the contracts that guaranteed the above-market prices quoted to farmers from ADM. Instead, Gieseker sold the grain at the “spot price” (the local cash price for immediate settlement and delivery) and used the proceeds from subsequent grain transactions to pay the above-market prices previously promised to other farmers.

Farmers who agreed to have Gieseker sell their grain toward the end of the scheme didn’t get paid at all, according to the indictment. 

Missouri Attorney General Chris Koster has charged Gieseker with 12 felony counts, including federal charges of mail and wire fraud and interstate transportation of stolen property. She also faces state charges of unlawful merchandising, filing false financial statements and stealing.

Silence is the voice of complicity. And in the case of Fiserv, the silence is deafening. A former leader in the I.R.A. service industry before selling its business to TD Ameritrade in February 2008, Fiserv is making news for its role as an I.R.A. custodian to hundreds of self-directed individual retirement accounts (I.R.A.s) that lost more than $1 billion of investors’ money to high-profile Ponzi schemes. 

All of the Ponzi scheme victims were steered solely to Fiserv as the account custodian. As for the scams, one included Bernie Madoff’s. Another was orchestrated by Louis J. Pearlman, former manager of the Backstreet Boys and N’Sync. A third Ponzi scheme was conducted by Daniel Heath, who was convicted last year of defrauding hundreds of elderly churchgoers.

All three con artists focused on the self-directed I.R.A., and all three apparently told their victims to only use Fiserv as their I.R.A. service firm. 

That edict would prove costly. More than $1 billion has been erased from I.R.A. accounts that were set up through various units of Fiserv, according to a July 24 story in the New York Times. 

Now investors are suing not only the masterminds of the Ponzi schemes – i.e. Madoff, Heath and Pearlman – but also companies like Fiserv that acted as custodians for individuals with self-directed I.R.A.s. 

Unlike traditional IRAs that invest in stocks, bonds or mutual funds, self-directed IRAs allow investors to put money into alternative investments. Those investments can range from real estate to hedge funds. The investor then relies on a support firm – the I.R.A. custodian – to make the purchases and perform various administrative functions. 

“From the beginning, [Fiserv] was the only firm that Madoff recommended,” said Peter Moskowitz of Corona, Calif., in the New York Times story. Moskowitz is one of dozens of Madoff victims who said they were directed to a Fiserv unit called Retirement Accounts. 

“Once, when I wanted to change, they told me ‘absolutely not’ – they would only deal with Fiserv,” Moskowitz said.

Last year, Fiserv paid $8.5 million to settle a California class-action lawsuit involving elderly victims who were snared in a long-running Ponzi scheme that made investments through self-directed IRAs administered by Heath. The investors lost about $100 million. A separate lawsuit against Fiserv, brought by about 40 investors in the same scam, is ongoing. Fiserv also faces two lawsuits by Pearlman’s victims in a federal court in Florida, as well as two Colorado lawsuits involving Madoff’s victims.

All of the lawsuits agree that Fiserv did not steer customers into the actual investments. Instead, they argue that Fiserv failed to perform its contractual and fiduciary duties as an I.R.A. custodian and, as a result, failed to protect the accounts from fraud. 

According to the New York Times, Heath’s victims say Fiserv issued inaccurate account statements that concealed repeated defaults on the promissory notes that Heath sold them. In the lawsuit involving Pearlman, documents say the securities were “completely mystifying,” with Fiserv describing them as mutual funds, assets, shares, nonstandard assets and brokerage accounts, all within the same account statements. 

Meanwhile, victims of Madoff are asking how Fiserv, as the custodian of the I.R.A. accounts, could fail to notice that no stocks were ever purchased for those accounts. 

In June, regulators shut down yet another Ponzi scheme, which claimed $30 million in I.R.A. savings. This one was run Edward Stein. As for the I.R.A. custodian who handled the account for Stein? It was none other than Fiserv.

The bottom line: Stricter regulations, supervision and oversight are desperately needed when it comes to monitoring the actions of I.R.A. custodians. Had custodians like Fiserv performed the most basic due diligence – doing record-keeping duties, for example – it would have been very difficult for scam artists like Bernie Madoff to steal investors’ I.R.A. savings. Fiserv’s failure to fulfill its obligations makes it, at the very least, an accomplice in the latest Ponzi schemes that have come to light. 

Linsco Private Ledger, which now goes by the name of LPL Financial Services, is at the center of a growing list of arbitration claims and lawsuits in connection to one of its former brokers, Raymond Londo. LPL is accused of failing to supervise Londo, who allegedly scammed millions of dollars from investors in an elaborate Ponzi scheme. Londo’s victims include friends, neighbors and even his own family.

Londo was fired from LPL on March 6, 2008. During his lengthy tenure with the company, however, there was an abundance of customer complaints and red flags regarding Londo’s service and investing strategies. Complaints about Londo’s sales practices also occurred at his former place of employment, Edward Jones.

Despite these warning signs, LPL not only hired Londo but chose to forego taking any action against the financial advisor until his termination in March 2008. By that time, investors in Illinois, Iowa and Wisconsin, as well as elsewhere, had lost millions and millions of dollars to Londo. 

Specifically, Londo is accused of borrowing money from the accounts of investors and then promising them a certain rate of return. Under FINRA Rule 2370, it is illegal for registered representatives to borrow funds from their clients. Investors now contend if LPL had exerted proper supervision of Londo, the abuses would never have occurred.

LPL was formed in 1989 through the merger of Linsco Financial Group and Private Ledger Financial Services. Today, the company is considered the fifth-largest brokerage firm in the United States, with nearly 13,000 financial advisors.

Investors are continuing to sue LPL by filing arbitration claims with the Financial Industry Regulatory Authority (FINRA) for the financial losses they incurred in Londo’s Ponzi scheme.

Long before Bernie Madoff made news, there was financial advisor Raymond Londo. In March 2008, Ray Londo was fired from Linsco Private Ledger (now known as LPL Financial, or LPL for short) for failing to follow company policies on lending or borrowing funds from clients. Before his termination, however, Londo allegedly operated a multimillion-dollar Ponzi scheme that entailed converting millions of dollars of clients’ assets.

As with Madoff, Londo’s victims reportedly included neighbors, country club associates and family members. Today, Londo and LPL are at the center of ongoing investigations connected to the alleged fraud, as well as numerous arbitration claims filed with the Financial Industry Regulatory Authority (FINRA) by investors who suffered financial losses.

LPL’s role in the alleged actions focuses on the fact that LPL ignored repeated warning signs concerning Londo and that it failed to properly supervise his actions during his employment with LPL. It was only after Londo had defrauded dozens of clients, bilking millions of dollars from their accounts, that LPL terminated Londo’s employment.

This isn’t the first time LPL has been accused of failing to supervise its brokers. In 2002, FINRA announced a $500,000-plus award (Case Number: 01-05344) in favor of an investor who claimed the company failed to supervise one of its independent brokers, which ultimately caused the claimant to suffer substantial financial losses.

In 2008, LPL Financial and a former broker lost another arbitration claim – this one totaling $1.8 million. The claim alleged that LPL and a former broker, Michael McClellan, violated state and federal securities laws, committed fraud, breached fiduciary duties and made unauthorized trades, among other violations.

As reported July 3, 2009, in the Wall Street Journal, LPL was formed in 1989 through the merger of Linsco Financial Group Inc. and Private Ledger Financial Services Inc. Since then, LPL has experienced explosive growth. It is now the fifth-largest brokerage firm in the United States, with 12,294 financial advisors. The company has headquarters in Boston and San Diego.

One of the key attractions of companies like LPL Financial may have to do with money: Brokers at LPL get to keep 80% to 95% of commissions on their trades, compared with 40% or less at bigger brokerage firms, according to the Wall Street Journal article.