Standby Letter of Credit Walks Away From Duped Investors

December 15, 2016

I am a somewhat clueless Wall Street gadfly who just doesn't seem to get the fact that I'm waging an endless and likely futile battle for reform. Then again, I love tilting at windmills. That being said, as a blogger and lawyer, I get lots of email and phone calls from defrauded investors. Many of those communications are heartbreaking because of the tales of financial devastation. Sadly, far too many victims failed to do meaningful due diligence and opted to believe in something that was too good to be true. Over the years, I've warned against such scams as Standby Letters of Credit, Bank Guarantees, and Trading Platform. Notwithstanding my repeated warnings, investors still line up to be duped by con artists; and, as demonstrated in today's BrokeAndBroker.com Blog, the line continues to lengthen.

Case In Point

On September 9, 2013, the Securities and Exchange Commission ("SEC") obtained an emergency court order to halt a prime bank investment scheme. As noted in the SEC's Press Release: "SEC Halts Florida-Based Prime Bank Investment Scheme":

The Securities and Exchange Commission today announced that it has obtained an emergency court order to halt a prime bank investment scheme by a Miami attorney and others who have promised investors exorbitant returns to be derived from a program based on the trading of bank instruments.

In a complaint unsealed September 6 in U.S. District Court for the Southern District of Florida, the SEC alleges that Bernard H. Butts, Jr.; Fotios Geievelis, Jr., a/k/a Frank Anastasio; Worldwide Funding III Limited LLC; Douglas J. Anisky; Sidney Banner, Express Commercial Capital LLC; and James Baggs raised over $3.5 million from approximately 45 investors in both the United States and abroad. Worldwide Funding, through Geivelis, told investors that they would receive returns of 6.6 million Euros (approximately $8.7 million U.S. dollars) on a $60,000-$90,000 investment within 15 to 45 days, and then approximately 14% returns per week for 40 to 42 weeks. Butts, who also solicited investors, acted as the escrow agent for the transaction. Both Geivelis and Butts assured investors that their funds would remain in escrow in Butts' account until Worldwide Funding had acquired the bank instruments necessary to generate the promised returns. In reality, Butts transferred funds out of his trust account almost as soon as they were received, giving approximately 45% to Geivelis, 10% to sales agents, and retaining approximately 45% for himself. The SEC alleges that no funds were used to acquire bank instruments and that Geivelis used investor funds to travel and gamble. Anisky, Banner, Express Commercial Capital, and Baggs all sold interests in the fraudulent scheme.

The SEC's complaint charges all defendants with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder. The complaint also charges Butts, Geivelis, Anisky, Banner, Express Commercial Capital, and Baggs with violations of Section 15(a) of the Exchange Act. The SEC also named Bernard H. Butts, Jr. PA; Butts Holding Corporation; Margaret A. Hering; Global Worldwide Funding Ventures, Inc.; and PW Consulting Group, LLC as relief defendants. The SEC believes that these parties may have received ill-gotten assets from the fraud that should be returned to investors.

The court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze.

The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from each defendant.


Exorbitant, Attorney, and Bank Instrument

I want you to focus on this allegation in the SEC Press Release:

a prime bank investment scheme by a Miami attorney and others who have promised investors exorbitant returns to be derived from a program based on the trading of bank instruments

Let's see what we got here. First and foremost, take careful note that this is not a prime bank investment but a prime bank investment scheme. You really, really, really don't want to be putting your hard-earned savings into any scheme. Not a good idea. No way.

Next, note that we have an attorney who has designed this scam and is among those pushing the crap on unsuspecting investors. Although most of you have likely figured it out a long time ago, the mere participation of a lawyer in any investment deal is not even remotely an endorsement of the bona fides of that deal -- and that's coming from me, a lawyer (of course, I'm a very honest guy and a fine lawyer and I would love to sell you a limited participation unit in a transportation leveraged enhancement offering that's called the Brooklyn Bridge).

Moving along, also note that the con artists pushing the paper here promised exorbitant returns. Not just returns but exorbitant ones. Of course the crooks didn't use that word "exorbitant" because that would sort of curdle the cream of the well-crafted pitch. To the contrary, the returns were simply referenced through the use of unbelievably high numbers followed by percentage signs. For those poor souls who succumbed to the lure of exorbitant returns, they inevitably engaged in the suspension of disbelief. Never a good idea.

Finally, the big selling point for this nonsense was to infuse the whole fraud with the aura of getting to trade humongous bank instruments that are never offered to the little folk but only to mega-corporations and international banks and for some odd reason which never quite makes sense but, you know, why ask if it's going to make you come off as stupid, you have been approached with the once-in-a-lifetime opportunity to get in on this limited ability to trade those limited bank instruments. The clincher . . . the thing that sends your disbelief over the cliff . . . is the ironclad assurance that the lawyer will keep all the funds in an escrow account. Scout's honor. And, thus, we got 45 folks investing $3.5 million in a deal offering almost an entire year's worth of returns at the rate of 14% per week.

No If, Ands, for Butts

On July 10, 2014, the federal court  ordered Butts and his companies to pay $1,691,608 in disgorgement and $96,232.99 in prejudgment interest as well as a penalty of $2,059,284.19. Butts and his wife Margaret A. Hering also must pay an additional $100,000 in disgorgement and $4,570.82 in prejudgment interest. Butts consented to bars from the securities industry or from offering pennystocks and he also agreed to a suspension from practice as an attorney on behalf of any entity regulated by the SEC.

READ:
SEC v. Baggs

Among those named in the above fraud was James Baggs. Let's take a gander out how Mr. Baggs made out.

In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, James Baggs submitted an Offer of Settlement, which the federal regulator accepted.  In the Matter of James Baggs, Respondent (Order Instituting Administrative Proceedings, Making Findings, And Imposing Remedial Sanctions; '34 Act Rel. No. 79512; Admin. Proc. File No. 3-17717 / December 8, 2016). The SEC's Order Instituting Proceedings ("OIP") alleges that Baggs, 74, induced or attempted to induce the purchase or sale of investment contracts of Worldwide Funding Limited III LLC and other issuers from around January 2012 through August 2013. During the relevant time, Baggs was not a registered broker or dealer, or associated with either such registered entity. As more fully alleged in the OIP:

2. On October 11, 2013, a final judgment was entered by consent against Baggs, permanently enjoining him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 adopted thereunder, in the civil action entitled Securities and Exchange Commission v. Bernard H. Butts Jr., et al., Civil Action Number 1:13-CV- 23115, in the United States District Court for the Southern District of Florida. On October 25, 2016, the district court entered a final judgment against Baggs ordering him to pay disgorgement of $4,970.00 representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest in the amount of $498.28, and a civil penalty in the amount of $150,000.00 pursuant to Section 20(d)(2)(C) of the Securities Act and Section 21(d)(3)(B) of the Exchange Act.

3. The Commission's complaint alleged that Baggs acted as a sales agent that offered and sold securities in a fictitious prime bank instrument trading program offered by Worldwide Funding. Baggs brought investors into the scheme with the promise of extraordinary profits. As part of the scheme Baggs told investors that an investment of between $60,000 and $90,000 with Worldwide Funding would generate profits of approximately 14% per week for 40 to 42 weeks. The complaint alleged that defendants falsely promised that when an investor's funds were deposited into an attorney's trust account, the attorney would not release the funds until he received proof from the receiving bank that a 10,000,000 Standby Letter of Credit ("SBLC") had been deposited into a securities trading program that was to generate the profits for investors. The complaint alleged that Baggs and others did not disclose that instead of using the investors' funds to obtain SBLCs they misappropriated investors' funds and paid the sales agents approximately 10% of the investor's funds. Contrary to the representations, the acquisition of the SBLCs never occurred, no loans were obtained, and no promised returns were earned in a trading program or paid to investors. Over more than a year, Baggs and others obtained at least $3.5 million from approximately forty-five investors nationwide and in foreign countries by making false and misleading statements or omitting material facts in the offer and sale of securities, which were not registered with the Commission at the time they were sold. In addition, the complaint alleged that Baggs was not registered as a broker or dealer when he offered the securities of Worldwide Funding.

In accordance with the terms of Baggs' Offer of Settlement, the SEC barred him from:
  • association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization;  
  • participating in any offering of a penny stock; and
  • acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock.
Bill Singer's Comment

Was a time when I regularly wrote about these scams for BrokeAndBroker.com Blog. Then there came a time when I got tired of writing and re-writing the same thing but with only different names for the respondents. The underlying nonsense never altered. It was almost as if someone had posted the script online and folks were inserting different names for the deal but reading the same lines and following the same stage directions. Maybe it's the holiday season but, whatever, I've taken the time to post yet another variation on the theme. In case you missed it, please note this portion of Baggs' OIP:

The complaint alleged that defendants falsely promised that when an investor's funds were deposited into an attorney's trust account, the attorney would not release the funds until he received proof from the receiving bank that a 10,000,000 Standby Letter of Credit ("SBLC") had been deposited into a securities trading program that was to generate the profits for investors.

Once more with gusto!  It starts with false promises. There's often some idiotic guarantee about an attorney's trust (or escrow) account. There is the assurance that the funds in the attorney's account will only be released upon proof of the issuance of some bull-shit financial instrument. The value of the instrument is going to be astronomical. You're going to make more money than you could make anywhere. You will never quite figure out why or how you've been offered this opportunity. At some point, when you reach into your pocket to retrieve your wallet, you will find that it's not there. You were set up. They ran a con on you. They picked your pocket. Gotta love all this Standby crap.


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