The Sting Meets Reservoir Dogs In Epic FBI High Yield Investment Fraud Case

August 28, 2012

Wall Street - an industry with millions of employees and millions of stories. From the shocking collapses of Lehman Brothers, Bear Stearns, and MF Global, to the inexplicable plummets of Madoff and Stanford, to the miscues of Knight Capital, Facebook, NASDAQ, JP Morgan, and Goldman Sachs. Everyday it's another wild tale. Sometimes the hard news is more entertaining than efforts to fictionalize the Street.  Consider this story:

According to federal prosecutors, it was a conspiracy to defraud a wealthy investor out $1 Billion.  I mean, okay, if you're going to take the risk of going to jail, you might as well go for broke and try to break the bank - so to speak.  In this case, a whole bunch of seemingly smart guys were charged with cooking up a scheme involving a high-yield investment fraud.

Perhaps not a bad idea but with so many of these scams, the proof is in the execution of the sting.  Here the defendants sort of shot themselves in the foot from day one.  Seems that their well-heeled pigeon wasn't a wealthy investor sitting around waitomg to be parted from his billion in dead presidents. To the contrary. The mark here was an undercover FBI agent and part of a team that was posing as wealthy investors and investment managers.

Kudos to the FBI!  Someone finally figured out that a day late and a dollar short ain't the best crime fighting strategy. The FBI went proactive. The FBI engaged in preemptive attack against the scam artists. For once, this is not about a post-mortem where regulators and prosecutors are reduced to reading the toe tags.

The Cast of Characters

On Aug. 21, 2008:

  1. William J Ferry, 70,
  2. Dennis J. Clinton, 64;
  3. Paul R. Martin, 63;
  4. John Brent Leiske;
  5. Alex Chelak;
  6. Richard Arthur Pundt,
  7. Brad Keith Lee; and
  8. Ronald J. Nolte

were indicted in the U.S. District Court for the Central District of California. What did these eight gents do to get on the FBI's bad side?

HYIP, HYIP, Hooray!

The Feds alleged that from February to December 2006, Ferry, Clinton, Martin and others conspired to promote a high-yield investment fraud scheme. As I read through the allegations, it's not all that sophisticated - more like a bigger price tag on the same-old-same-old pitch: You're gonna get humongous returns and we guarantee, we promise, we swear to ya, there's little if any risk to your principal.

As if we haven't heard that one before!

Next comes the acronym: the high-yield investment program is known as the "HYIP." And what's an HYIP?

Oh silly boy, if you have to ask, move aside, let your momma and poppa come up front.  Anyone who knows anything knows that the HYIP is a Fed trade program. What's a Fed trade program? Oh my, you really are a dumb one, aren't you? A Fed trade program is regulated by the Federal Reserve Bank and, now listen here, a Fed trade administrator handles our program - what could be simpler, better, and safer? We even got a Fed compliance officer making sure that everything's on the up and up.  In fact, we're waiting right now to get approved and registered by the Fed to launch this HYIP. Can you say ground floor opportunity?

One other thing about the defendants' HYIP, they falsely claimed all these Fed investment programs existed primarily to generate funds for project funding and humanitarian purposes, such as Hurricane Katrina relief.  What a lovely if cynical touch. You can just about hear the gentle strains of the violins being played.  And another thing, the scamsters admonished that the promised profits from investing in a Fed program had to be divided, in equal amounts, with one portion going for some humanitarian purpose, another portion for some kind of project financing, and the remainder to the investor.

Of course, to whom was this HYIP pitch being delivered?  Ah, yes, the undercover FBI agents.  How unfortunate for the talkative pitch men.

Places Everyone

The Feds alleged that the defendants falsely represented to FBI undercover agents that it had been arranged for them to meet with a Federal Reserve official and/or the chairman of the board of a major U.S. bank in order to confirm the existence of the defendants' HYIP.  There was also the assurance that the offshore bank accounts used for the HYIP would be managed by a Swiss banker. Don't know about you but if I'm coughing up a billion or so bucks, that would seal the deal right there - after all, how many honest to goodness Swiss bankers are there and this one was purportedly  managing billions of dollars for the defendants.

Whether you prefer the humor of The Sting or the brutality of Reservoir Dogs, all these crooks apparently had roles to play. The Fed claimed that:

Ferry acted as an underwriter and member of the compliance team;

Martin acted as a banking expert;

Clinton acted as a troubleshooter during the compliance phase and transfer of funds to the Swiss banker;

Lee acted as the contact with the Swiss banker; and

Leiske acted as the trader.

In an apparent cameo role, Chelak acted as a compliance officer.

Cuff ‘Em Dano

On April 13, 2009, Lee pleaded guilty to wire fraud and conspiracy to commit mail and wire fraud.  On Jan. 11, 2010, he was sentenced to 24 months in prison.

In August 2010, charges against Pundt were dismissed by the government.

On January 24, 2012, Leiske pleaded guilty to all counts in the District of Oregon, and he is scheduled to be sentenced on Sept. 19, 2012.

On August 3, 2012, Martin, a former senior vice president and managing director of Bankers Trust, was convicted of one count of conspiracy, two counts of mail fraud and six counts of wire fraud.  At sentencing, scheduled for Feb. 1, 2013, he faces a maximum penalty of 20 years in prison on each fraud count.

On August 28, 2012, Ferry, a former stock broker and investment advisor, and Clinton, a former real estate investment manager, were each found of one count of conspiracy, two counts of mail fraud and six counts of wire fraud.  They face a maximum penalty of 20 years in prison on each fraud count.  They will be sentenced on Feb. 1, 2013.

On August 28, 2012, Nolte was acquitted.

Chelak remains a fugitive.

 A Must See Double Feature:

FOREX Trading Platform Scam Ends In Guilty Plea

Feds Get Guilty Verdict In Social Media Shareholders' Kickbacks To FBI Agent