On June 10, 2010, the Securities and Exchange Commission (SEC) filed an injunctive action in the U.S. District Court for the Western District of Washington, charging six individuals and four companies with securities fraud. The SEC Complaint alleges that the defendants perpetrated a $300 million Ponzi scheme on investors in a purportedly successful gold mining operation.
Bill Singer's Snarky Commentary: Okay, so -- here we go again, right?
The first thing about this case that got my attention was "$300 million Ponzi scheme." I mean, geez, yet another Ponzi case. Also, these Ponzi cases no longer involve the alleged theft of hundreds of thousands of dollars or even a few measly million; no, we've ratcheted things up and now it's hundreds of millions of dollars. Sadly, there was a time when the enormity of that number was a shock -- now, at best, it's a yawn.
The second attention-grabber about this case was the characterization of a "purportedly successful gold mining operation." You gotta know that when a lawsuit uses that word "purportedly," that the whole gist of the Complaint is going to be that what someone said was the truth turned out not to be.
Finally, the other aspect of the SEC's case that caught my attention was the legal caption. How about you feast your eyes upon the number of defendants (which I've broken down for easier digestion):
Securities And Exchange Commission, Plaintiff, v.
Merendon Mining (Nevada) Inc, ),
Larry Lee Adair,
Milowe Allen Brost A/K/A Milow Brost, M.B. Gonne or Phillip K. Collins,
Ward K. Capstick,
Bradley Dean Regier,
Gary Allen Sorenson A/K/A Don Grey Fox,
Martin M. Werner,
Syndicated Gold Depository Inc, Now Known As Bahamas Resources Alliance Ltd.,
Merendon Mining Corp. Ltd.,
Institute For Financial Learning Group Of Companies, Inc., Defendants
Laura Sorenson, Relief Defendants.
(Civil Action No.: 2:10-cv-00955, US District Court, Western District of Washington).
See, the SEC Complaint at: http://www.sec.gov/litigation/complaints/2010/comp21552.pdf (June 10, 2010).
NOTE: The charges and allegations contained in the SEC Complaint (and upon which this article is based) are merely accusations and the defendants are presumed innocent unless and until proven guilty.
A Cast of Defrauded Thousands
The SEC alleged that Defendants Brost and Sorenson of Calgary were the primary architects and beneficiaries of a scheme that persuaded more than 3,000 investors across the U.S. and Canada to invest their savings, retirement funds and even home equity.
Bill Singer's Snarky Commentary: Once again, let that sink in: 3,000 investors. Three thousand folks who ponied up their life savings, their retirement funds, and their home equity. I know -- it's seems like deja vu all over again. Frankly, it is. It's all becoming far too familiar a tale.
The SEC claims that Defendant Brost created and controlled several successive marketing organizations to offer and sell the securities of various companies to investors. Those organizations are
- Capital Alternatives Inc. ("Capital Alternatives"),
- the Defendant Institute For Financial Learning Group of Companies, Inc. ("IFFL") (the successor to Capital Alternatives), and
- Hav-Loc Private Wealth Partners Inc. ("Hav-Loc")
Brost and his sales team presented themselves as an independent financial education firm that had discovered profitable investment opportunities with companies involved in gold mining. However, apparently not content with just going through the motions, these sales-team members were called "Structurists."
Structurists? Hey, I don't make this stuff up. That's what they called themselves. As best we understand, the Structurists sold investors shares in a series of shell companies and then put their money through a "structuring" process that culminated with the transfer of funds from Syndicated Gold Depository (SGD) to Merendon Mining Corp. Ltd. — which was purportedly a successful gold mining and refining company that would pay investors out of its profits.
Bill Singer's Snarky Commentary: Okay, here's a quick re-cap of the action. The Structurists were going to perform alchemy and transfer money from the world famous Syndicated Gold Depository (okay, so maybe not world famous) to that powerhouse Merendon Mining Corp. Ltd. (okay, a purportedly powerhouse). Ah . . . so that word "purportedly" is starting to rear its ugly head!
Defendant Sorenson claimed to be a successful businessman receiving loans from SGD through arms-length transactions. Of course, Sorenson didn't think to bother to warn investors as to how short those purported "arms" were. I mean, you know, he left out that itty-bitty detail about how he controlled Merendon Mining Corp. Ltd., which, how convenient, was where all the invested funds were somehow going to magically wind up.
Sorenson and Brost told investors that SGD was an independent company that pooled investors’ funds and loaned the funds to Defendant Merendon Mining Corp. Ltd. to purchase gold concentrate to process in its refinery in Honduras. Defendants falsely represented that investors’ funds were secured by Merendon Int’l’s above-ground gold or cash deposits. In fact, Merendon Int’l did not have sufficient above-ground gold, cash deposits or revenue from operations to pay interest owed to SGD under the loan agreement.
Not being a stay-at-home kind of guy, Sorenson hosted tours by potential investors at his Honduran refinery and demonstrated the pouring of gold bars while making false claims about the profitability of his company. Sorenson and Brost held seminars where they promised investors they could earn 18 to 36 percent annual returns by investing, and further assured that all investments were fully collateralized by gold. Not surprisingly, Brost and Sorenson concealed their ownership and control of SGD by using personal aliases, corporate entities and trust agreements with nominee shareholders.
Bill Singer's Snarky Commentary: I mean, gee, I'm standing here in exotic Honduras and I'm watching one of the Structurists pouring gold bars. Wow!!! That's enough proof for me!!! Where do I sign? Can I invest double what I wanted to earlier? I mean, c'mon now, Honduras, liquid gold, gold bars, and up to 36 percent annual returns? Ya gotta be nuts not to buy into all of this.
The Shell Game
Of course, there was this minor problem.
What the Structurists sort of forgot to disclose -- dare I say, "hid"? -- from the investors was that all the invested money was going into shell companies owned or controlled by Brost or Sorenson. Investor funds were often transferred multiple times through numerous bank accounts located in the U.S. and Canada as well as the Bahamas, Belize, Bermuda, Ecuador, Honduras, Malaysia, Panama, Peru, Portugal, and Venezuela. After the funds circled that international carousel, they were ultimately used to make "interest payments" to investors, fund the few unprofitable companies that actually had operations, and personally enrich Brost, Sorenson and others involved in the scheme.
Of course, by now, I'm sure it will come as no surprise to you to learn that Brost and Sorenson allegedly diverted investor funds to their personal benefit, using millions of dollars to purchase and renovate extravagant homes, ranches, and recreational vehicles. Sorenson also purchased and outfitted a luxury fishing resort in South America.
Sorenson's wife and daughter are named as Relief Defendants in the case in order to recover investor assets now in their possession. The SEC claims that Sorenson used investor funds to pay off the mortgage of daughter Laura Sorenson and invest in a film production company for her benefit, and he purchased a home and other items for wife Thelma Sorenson.
The SEC Files a Complaint
Okay, so, years and years go by as this fraud unfolds and the Structurists make their sales. Hundreds of millions change hands from the duped to the dupers. Many countries and banking institutions watch the funds come in and go out. But, hey, no rush -- right? Sometime during the warm weather of June 2010, the SEC files a Complaint that alleges
- all of the defendants violated Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.
- all of the defendants (except for Merendon Mining Corp. Ltd,) violated Sections 5(a) and 5(c) of the Securities Act.
- defendants Brost, Capstick and the Institute for Financial Learning Group of Companies, Inc. violated Section 15(a) of the Exchange Act.
The Complaint sought permanent injunctions, an order to provide an accounting, disgorgement of ill-gotten gains, third tier penalties and officer and director bars against the individuals.
August 2010 Injunction/Defaults
On August 30, 2010, the U.S. District Court for the Western District of Washington enjoined Defendant Bradley Dean Regier of Calgary from violating the anti-fraud and registration provisions of the federal securities law and barred him from serving as an officer or director of a public company.
The court also entered default judgment against Relief Defendant Thelma Sorenson, the wife of Defendant Gary Sorenson, ordering her to pay disgorgement of $959,560 received out of proceeds from the fraudulent conduct. Final judgments against these defendants will be entered at a later date.
November 12, 2010 Defaults
On November 12, 2010, the Court entered against Defendants Allen Sorenson and Brost, both of Calgary, Alberta, Canada, a default judgment and asset freeze. The two defendants were also enjoined from violating the anti-fraud and registration provisions of the federal securities law. The Court ordered them to pay a disgorgement of over $210 million of ill-gotten gains and a civil penalty of $100 million jointly and severally. Finally, the two defendants were permanently barred from serving as officers or directors of public companies with securities registered with the SEC.
Pending determination of the case on the merits, the court also entered preliminary injunctions against the corporate defendants, Merendon Mining (Nevada), Inc., Syndicated Gold Depository Inc., Institute For Financial Group of Companies, Inc. (IFFL) and Merendon Mining Corporation Ltd., and against individual defendants, Larry Lee Adair and Martin M. Werner, both Florida attorneys, and Ward K. Capstick, a resident of Seattle, Washington, preliminarily enjoining all of them from violating the anti-fraud and registration provisions of the federal securities law. Finally, the Court enjoined IFFL and Capstick from violating the broker-dealer registration provisions of Section 15(a) of the Exchange Act.
Bill Singer's Really Snotty, Snarky Commentary: Let me rage a bit here.
For starters, I can't wait to see how very, very effective all those Orders of disgorgement and all those injunctions are going to be when it comes to putting dollars back into the defrauded investors pockets.
Next, how about we all read the 1st and the 14th enumerated paragraph of the SEC's June 2010 Complaint:
1. From at least 1999 to 2008, the Defendants perpetrated a $300 million Ponzi scheme that victimized over 3,000 investors in the United States and Canada. The Defendants executed the scheme through a multi-level marketing organization and operated through a labyrinth of companies and bank accounts which were designed to hide their misconduct from investors and law enforcement. The Defendants eventually used more than eighty entities to issue securities to investors, provide "dog and pony" shows to investors, and to disguise the movement of investor funds among more than eighty bank accounts, located in United States, Canada, Honduras, Ecuador, Peru, Venezuela, Panama, the Bahamas, Belize, Bermuda, Malaysia, and Portugal. To further hide their involvement in the scheme, several of the defendants acted under the guise of several personal aliases in forming and managing this cadre of companies.
. . .
14. In late 2007 to early 2008, the scheme collapsed as the Defendants were no longer able to bring in enough fresh capital to meet their outstanding obligations to investors. As a result, most of the more than 3,000 investors solicited into the scheme never received the promised interest or return of their principal. Investors, many of whom were elderly, have seen their homes go into foreclosure and have been forced to postpone or reverse retirement decisions as a result of their losses through the Defendants’ investment scheme.
Let me also add the following additional background and updates:
Defendant Merendon Mining (Nevada) Inc., a Nevada corporation formed in December 30, 2002, is now in default for failing to file corporate filings with Nevada. Merendon Nevada acquired various mining properties through its wholly owned subsidiaries: Merendon Mining (Colorado) Inc., which is a Colorado corporation that had its principal place of business in Broomfield, Colorado; Merendon Mining (Arizona), Inc. and Merendon Mining (California), Inc., which are Nevada corporations that had principal places of business in Las Vegas, Nevada. Merendon Nevada (the parent and its subsidiaries) offered and sold more than $140 million in securities between 2002 and 2007 in furtherance of the Ponzi scheme. Investor victims sent their money to Merendon Nevada through a Colorado bank account maintained by its Colorado subsidiary. Merendon Nevada is the subject of an involuntary bankruptcy proceeding in the U. S. Bankruptcy Court for the Southern District of Florida (Miami) case number 09-11958-AJC (filed 2/4/09).
Defendant Syndicated Gold Depository S.A. ("SGD") is a Bahamian registered corporation formed in August 1999 by Defendants Sorenson and Brost that used a mailing address in Miami, Florida. SGD issued securities to investors as a part of the scheme. In 2005, SGD formed a wholly-owned subsidiary called Base Metals Corporation. In October 2007, SGD acquired control of all of the "International Investments" discussed in this Complaint. From January 2000 to November 2007, SGD promised investors 18%-36% annual returns, usually packaged as bonus return to investors in Merendon Nevada or other related entities. SGD changed its name to Bahama Resource Alliance Ltd. in or about May 2007.
Defendant Merendon Mining Corporation Ltd. ("Merendon Int’l") was incorporated in Alberta, Canada on or about February 22, 1996, and later changed its name to Merendon Mining Corporation Ltd. on about May 9, 1996. Merendon Int’l maintained its main office in Calgary, Alberta, Canada. Upon information and belief, Merendon Int’l is now domiciled in Belize with its headquarters in Honduras. Merendon Int’l owns, among other things, five wholly-owned subsidiaries which are Compania Merendon de Honduras S.A. de C.V. ("Merendon Honduras"), a Honduran corporation; Merendon de Venezuela C.A., a Venezuelan corporation; Merendon de Peru S.A., a Peruvian corporation; Merendon de Ecuador S.A., an Ecuadorian corporation and Merendon Jewellry S.A., a Hondurian corporation. Merendon Int’l through its subsidiary Merendon Honduras owns and operates a gold refining facility in Tegucigalpa, Honduras and several gold concessions, which are mining claims, in Honduras.
Defendant Institute for Financial Learning Group of Companies, Inc. ("IFFL") is a Canadian corporation formed in Alberta, Canada in or about April 2003 and operated from offices in Calgary, Alberta. It was the most prominent in a series of marketing organization created by Defendant Brost that offered and sold securities of various companies to investors. At all times material to the complaint, Brost was the Chief Executive Officer of IFFL and he recruited and trained a team of salespersons called "Structurists" who were compensated by IFFL to offer and sell the various securities used in the scheme. IFFL reported over 150 Structurist were touting its investment program in 2007.
Defendants Brost and Sorenson, both Canadian citizens, were the subject of numerous regulatory actions by state and Canadian securities regulators and as of June 2010 were each arrested by the Royal Canadian Mounted Police and are now out on bond awaiting trial in Alberta, Canada, in connection with fraudulent scheme outlined in this Complaint.
Bill Singer's Angry, Snotty, Snarky Commentary: You will be pleased to learn that the ever-dogged SEC filed an Order Instituting Administrative Proceedings against Brost on November 30, 2010 at http://www.sec.gov/litigation/admin/2010/34-63392.pdf. In the Matter of Milowe Allen Brost, A/K/A Milo Brost, A/K/A M.B. Gonne, A/K/A Phillip K. Collins, Respondent.
The SEC is going to conduct a hearing! Oh my, now things are really going to get nasty for these alleged bad guys.
By the way, I sort of forgot to note the following facts:
- Brost was the head of a Marketing Program that operated under a successive series of names during the scheme and employed Structurists to sell securities to investors, starting with his formation of a marketing company called Capital Alternatives in 1999.
- When the Saskatchewan Financial Services Commission issued a Cease Trading Order in 2002 against Capital Alternatives, Brost created a new marketing company called the IFFL.
- In 2007, after the Alberta Securities Commission sanctioned IFFL, Brost’s team of marketers began selling scheme securities under the name of Hav-Loc. Unless particular circumstances dictate otherwise, these successive Brost marketing entities which operated during the scheme are referred to herein collectively as the "IFFL."
- Between 1999 and 2008, the IFFL presented itself as an investor education company that taught investing strategies which were ostensibly concentrated on "restructuring" investors’ underperforming assets.
How did I learn that? Oh, it's Paragraph 33 of the SEC's June 2010 Complaint. http://www.sec.gov/litigation/complaints/2010/comp21552.pdf
How come no securities regulator in Canada or the US -- or anywhere, for that matter -- was able to connect the troubling dots in this international Ponzi scheme from 1999 through 2007?
When the Saskatchewan Financial Services Commission issued its Cease Trading Order against Capital Alternatives in 2002 and Brost created IFFL, didn't that pop up on any regulator's radar?
Why do these massive frauds expand for nearly a decade before some regulator notices?
But, please, seriously, do me a favor -- don't tell me that during all these years that Wall Street's cops were hot on the trail of Bernie Madoff or Allen Stanford or Martha Stewart or Raj Rajaratnam or Ralph Cioffi or Matthew Tannin or Conrad Black or Goldman Sachs. That's just nonsense.
I often rail against the "Politics of Regulation," and this is just such a moment.
There are limited numbers of regulators and a limited amount of funding for those regulators. That is an historic fact -- even if you add zeroes to the numbers of those in the ranks of staff and the budgeted dollars. Whether it is a time of feast or famine there are no unlimited numbers of staff or budgets. The limits of bodies and dollars imposed upon all organizations, public and private, dictate that choices be made as to what will and will not be done.
When you opt to go after the likes of a Martha Stewart, you are making a political decision when it comes to how to effectively regulate because the staff and dollars allocated to that investigation and subsequent prosecution are diverted from other potential investigations and potential prosecutions. It is legitimate to ask whether the current regulatory agenda is too skewed to cases that generate headlines, and whether the cost of such an agenda is that pernicious fraud against vulnerable public investors flourishes.
Prosecutors and regulators are now ramping up insider-trading cases and also a host of antitrust cases against the municipal bond industry. Hey, don't get me wrong -- there are likely many bad guys and criminals involved. However, look at SEC v. Merendon Mining et al., -- look at the destruction that is alleged to have been brought upon 3,000 investors by the Structurists. Don't you feel the nagging tug? Why wasn't this fraud detected years ago? Don't you wonder whether it's time to re-focus Wall Street's regulation from where it was (and still appears to be) towards more pre-emptive efforts that will protect the mom-and-pop investor?
I submit that the scamsters in SEC v. Merendon Mining et al. were not particularly adroit or clever but that their purported adversaries -- the securities industry's cops -- were not particularly adroit or clever. As far as I can tell, there must have been some lovely donut shop where all the regulators were passing the years, dunking and asking for refills. Nowadays, to make matters worse, not only are those same cops still not particularly adroit or clever but they have embarked upon an agenda that seems calculated, at best, to generate headlines involving cases that may be siphoning off much need bodies and dollars from more pernicious frauds.
You know, when we talk about choosing between the lesser of two evils, we must always keep in mind that it is still a choice between two evils. The given in this debate is that insider trading and bid rigging are evils. The other given is that small fry investors seem to have been abandoned while attention is focused elsewhere. Like I said, the "Politics of Regulation."
According to a U.S. District Court plea proceeding held in Manhattan on November 29, 2010, former J.P. Morgan Securities, Inc. banker James Leonard. Hertz engaged in separate bid-rigging and fraud conspiracies related to the provision of a type of contract, known as an investment agreement, and other municipal finance contracts, including derivatives contracts, to public entities throughout the United States, such as state, county and local governments and agencies. Hertz also pleaded guilty to one count of wire fraud. Hertz has agreed to cooperate with the ongoing investigation.
READ BILL SINGER'S ANALYSIS OF THIS CASE
REPLETE WITH LINKS TO A LEADING INDICTMENT AND ASSOCIATED PLEAS
THE MOST DETAILED COVERAGE AVAILABLE ONLINE FOR THIS CASE