Fraudster Got 300 Months In Prison But Still Frustrates the SEC

June 8, 2016

Some folks just don't know when to quit. Some folks, however, just don't want to quit. And then, of course, you got your folks who want to quit but don't know how.    When it comes to convicted securities fraud felons, the Blog has reported about many such felons who persist in doing whatever it takes to remain in the securities industry despite the efforts of the Securities and Exchange Commission (or in spite of such efforts or the lack thereof).    In today's installment of this series, we present yet another inveterate inmate.

The 2013 McDuff Conviction

Let me introduce you to Gary L. McDuff, who was the subject of this: "Jury Convicts Pasadena Man in $11 Million Investment Fraud Scheme " (Press Release, United States Department of Justice, March 28, 2013):

PLANO, TX-A 58-year-old Pasadena, Texas man has been found guilty of investment fraud charges in the Eastern District of Texas, announced U.S. Attorney John M. Bales today.

A federal jury needed just six minutes to convict Gary Lynn McDuff of conspiring to defraud investors of over $11 million in connection with an investment fraud scheme and laundering the proceeds. The verdict was handed down on March 27, 2013, following a two-day trial before U.S. District Judge Richard A. Schell. McDuff's co-conspirators, Gary Lancaster, 61, of Oregon, and Robert Reese, deceased, of Carmel, California, previously pleaded guilty and were sentenced to federal prison for their roles in the scheme.

According to information presented in court, McDuff and Lancaster agreed to create the Lancorp Investment Fund, to draft a prospectus for the fund, and to solicit investments from individuals across the United States. While McDuff controlled the operation, Lancaster agreed to serve as the "front" since McDuff could not possess a securities license or sell securities because of a past felony conviction. McDuff recruited Reese to also sell the investment, despite the fact that Reese had been barred by the State of California from selling securities based on past fraudulent conduct. McDuff, Lancaster, and Reese made numerous false representations to their investors in order to induce payments, including representations that the fund would only invest in A+ or A1 rated bonds, that the principal of each investment would be insured and never at risk, and that Lancaster had experience operating this type of investment. McDuff, Lancaster, and Reese never disclosed McDuff's felony conviction or Reese's securities ban. McDuff then laundered the criminal proceeds in order to promote the operation of the fraudulent scheme.

McDuff faces up to 20 years in federal prison on each count of conviction . . .

My, my, my . . . now that's quite the curriculum vitae and quite the crew that McDuff ran with. Did you note the disclosure in the Press Release that McDuff had a prior felony conviction? Undaunted by that black mark, McDuff moved on to engage in money laundering and an $11 million securities fraud.  Notwithstanding the complex and nuanced life of McDuff, time and space impose limits upon our coverage but it's tough to gloss over the fact that a jury convicted him after only six minutes of deliberation. That's not really a deliberation, to be fair to McDuff -- frankly, it's not even a decent cup of coffee. I guess one of the jurors needed a bathroom break?

300 Months and $6.5 Million

Following McDuff's 2013 conviction,   the federal judge threw the book at him in 2014. Facing 240 months on each count, he might have expected some leniency in the form of concurrent sentences or a cap of 240 months. On April 16, 2014, McDuff was sentenced to 300 months in prison and ordered to pay $6.5 million in restitution. "Pasadena Man Sentenced To 300-month Prison Term In Multimillion Dollar Investment Fraud Scheme" (Press Release, DOJ, April 16, 2014).

Rewind to the 2008 SEC Complaint

By way of background, McDuff was only first indicted on August 13, 2009, whereas on March 26, 2008, the SEC had already filed its civil Complaint in the United States District Court for the Northern District of Texas.   Securities and Exchange Commission v. Gary L. McDuff, Gary L. Lancaster, and Robert T. Reese, (Complaint, NDTX, 08-CV-526 March 26, 2008):   

In its complaint, the Commission alleges that in early 2003, Lancaster created the Lancorp Fund at McDuff's direction. McDuff and Lancaster then created a materially false and misleading Private Placement Memorandum (PPM) for the Lancorp Fund, and between at least March 2003 and July 2005, Reese, McDuff and Lancaster offered and sold interests in the Lancorp Fund with false promises concerning the permissible investments, the payment of commissions, and the payment of management fees. Instead, the Complaint alleges that the defendants directed the Lancorp Fund to invest over $9 million in a fraudulent, high-yield Ponzi scheme, paid McDuff and Reese over $300,000 in undisclosed commissions, and paid Lancaster a management fee well in excess of that allowed by the PPM.

The Complaint alleges that McDuff, Lancaster, and Reese violated Sections 5(a), 5(c) and 17(a) or the Securities Act of 1933 (Securities Act), and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The Complaint also alleges that Lancaster violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act), and that McDuff and Reese aided and abetted Lancaster's Advisers Act violations. The Complaint seeks permanent injunctions, disgorgement together with prejudgment interest, and civil penalties.

Without admitting or denying the allegations set forth in the Complaint, defendants Lancaster and Reese have consented to the entry of a final judgment permanently enjoining them from engaging in the violations set forth above. Lancaster has agreed to an order finding him liable for disgorgement of $336,229, plus prejudgment interest of $56,156.39, and Reese has agreed to an order finding him liable for disgorgement of $26,792, plus prejudgment interest of $4,474.75. However, payment of those amounts will be waived, and no civil penalties imposed, based on their respective sworn statements of financial condition and other documents. The Commission's action against McDuff is continuing.

See, "SEC Charges Three With Fraudulently Raising Over $11 Million From More Than 100 Investors" (Press Release, SEC, Lit. Rel. No. 20512 / March 27, 2008).

On February 22, 2013, the Northern District of Texas ("NDTX") granted a default judgment against McDuff and entered an injunction prohibiting him from further violations of the federal securities laws. NDTX ordered that McDuff disgorge $136,336 plus $65,004 in prejudgment interest, and further ordered him to pay a $125,000 civil penalty.

2014 SEC OIP

After McDuff was convicted in 2013, the SEC ordered the institution of administrative proceedings against McDuff  on February 21, 2014  (the "OIP"). An OIP of this nature is generally characterized as a "follow-on proceeding," and is used to conduct hearings in the public interest to determine whether the named respondent should be suspended or barred as a result of prior events, such as convictions, injunctions, etc.   In the Matter of Gary L. McDuff   (OIP, SEC, '34 Act Rel. No. 71594; Admin. Proc. File No. 3-15764 / February 21, 2014).

2014 ALJ Initial Decision

Aftern considering the issues and pursuant to a summary disposition, SEC Administrative Law Judge  ("ALJ")  Cameron Elliott barred McDuff from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. In the Matter of Gary L. McDuff (Initial Decision, SEC, Admin. Proc. File No. 3-15764 / September 5, 2014). I commend you to ALJ Elliott's presentation of the procedural and factual aspects of the follow-on proceedings that he sets forth in a clear and concise fashion. 

ALJ Elliott's Bar had the half-life of a may fly. On review, the Given the facts involving McDuff, you might wonder just what the hell I'm talking about. Waddya mean, Bill? The SEC rejected the Bar of McDuff?    Are you crazy?    

2015 SEC Remand

Whether I'm crazy or not is a matter of debate; and based upon the Remand, maybe we should also question the sanity of the folks who sit on the SEC?   In reaching their decision to reverse ALJ Elliott and remand the case back to him, let's consider what the Chair and Commissioners of the SEC knew about the posture of SEC v. McDuff when before they deliberated about ALJ Elliott's Bar.   In the Matter of Gary L. McDuff (Order Remanding for Additional Proceedings, SEC, '34 Act Rel. No. 74803; Admin. Proc. File No. 3-15764 / April 23, 2015 [Ed. Note footnotes omitted]:

The Commission instituted this follow-on proceeding on February 21, 2014, alleging that McDuff had been permanently enjoined by a U.S. district court from future violations of Securities Act Sections 5(a), 5(c), and 17(a); Exchange Act Sections 10(b) and 15(a); and Exchange Act Rule 10b-5.The injunction stemmed from a civil complaint that the Commission filed on March 26, 2008.The Commission alleged in the civil complaint that McDuff was the "mastermind" behind a wide-ranging scheme to defraud investors. McDuff allegedly created and operated Lancorp Financial Fund Business Trust ("Lancorp Fund"), an entity that McDuff misrepresented to investors as being an unregistered, closed-end, and non-diversified management investment company that invested solely in highly rated debt securities. But instead of investing in high-grade debt securities as promised, McDuff allegedly directed Lancorp Fund to invest in Megafund Corporation, a Ponzi scheme. McDuff also allegedly devised a scheme to circumvent a prohibition against Lancorp Fund's paying certain commissions by having an associate covertly pay McDuff and another associate more than $300,000.

McDuff failed to answer the complaint, and the Commission moved for default judgment of the federal securities laws and ordered him to disgorge $136,336 plus $65,004 in prejudgment interest and to pay a civil penalty of $125,000. McDuff did not appeal.

On August 13, 2009, McDuff was indicted in a related criminal proceeding, based on his involvement in the Lancorp Fund and Megafund was charged with laundering monetary instruments and conspiracy to commit wire fraud. A jury found McDuff guilty on both counts pursuant to a general jury verdict. On April 16, 2014, the district court sentenced McDuff to 300 months in prison and a three-year term of supervised release and ordered him to pay $6,563,179 in restitution. McDuff appealed his conviction; that appeal is pending before the U.S. Court of Appeals for the Fifth Circuit.

Pages 2 -3 of the Remand Order

Notwithstanding or in spite of McDuff's criminal conviction and the civil default judgment, the SEC reviewed ALJ Elliott's Initial Decision and ordered it vacated and remanded the matter:   

Here, a jury convicted McDuff of conspiracy to commit wire fraud in a general verdict, which the jury could do without making a specific finding as to which, if any, of the alleged overt acts McDuff committed.    And although the jury also returned a general verdict that McDuff committed money laundering, that verdict generally establishes only that McDuff caused a Megafund-controlled account to transfer illegal proceeds to a Lancorp-controlled account with the intent to promote the wire fraud.    Under these circumstances, the law judge erred in relying on the allegations in the superseding indictment in his sanctions analysis. Therefore, if the law judge first determines that the statutory basis for imposing remedial sanctions is met, we direct the law judge on remand to admit and consider additional evidence to determine whether imposing such sanctions against McDuff is in the public interest.

Pages 6 -6 of the Remand Order

As a lawyer who often does defense work, I am torn. On the one hand, kudos to the diligent folks sitting on the SEC who attempted to discharge the letter of the law as they read and understood it. On the other hand, WTF?   I mean we got a convict sitting in a federal prison for 300 months who was found guilty after 6 minutes of, how did the Remand Order put it: 

the jury also returned a general verdict that McDuff committed money laundering, that verdict generally establishes only that McDuff caused a Megafund-controlled account to transfer illegal proceeds to a Lancorp-controlled account with the intent to promote the wire fraud. . .

So, lemme get this straight. A conviction for money laundering in which the defendant caused the transfer of illegal proceeds in furtherance of wire fraud isn't enough -- in this day and age -- to earn a Bar from the securities industry?   Gotta tell ya, there are days when I am thrilled to be a high-priced defense lawyer.

Naah . . . we ain't even remotely done with this crap. Keep flushing. Maybe get the plunger?

McUnited States of America

McDuff seems to have risen admirably to the challenge of getting into the ring with his SEC counterparts and trading blows. Clearly, McDuff has flustered the SEC because his remand proceeding is now taking place in the "McUnited States of America." Note the February 22, 2016, Order below and hopefully you will view the link and the very first word in the online document before an   embarrassed   SEC   alters its goof:

Washington, D.C. 20549   

Release No. 3632/February 22, 2016   
File No. 3-15764   
In the Matter of GARY L. MCDUFF   

On October 2, 2015, I denied the Division of Enforcement's summary disposition motion. Gary L. McDuff, Admin. Proc. Rulings Release No. 3190, 2015 SEC LEXIS 4040, at *24-25. On January 11, 2016, I denied Respondent Gary L. McDuff's summary disposition motion and directed that this matter proceed to a hearing. Gary L. McDuff, Admin. Proc. Rulings Release No. 3482, 2016 SEC LEXIS 82, at *5. As McDuff is currently incarcerated at FCI Beaumont Low, the parties both submitted letters regarding the logistics of holding a hearing.   

Both parties attended a telephonic prehearing conference on February 18, and the issue of hearing logistics was discussed. The parties agreed that, due to the institution's policies and procedures, it would be extremely difficult to hold the hearing at FCI Beaumont Low. McDuff did not consent to the Division's suggestion to instead hold the hearing via video teleconferencing. The Division raised the option of obtaining a writ of habeas corpus for McDuff and transferring him to a federal detention center with facilities capable of holding a live hearing. McDuff suggested the possibility of obtaining a furlough from prison in order to attend the hearing. Both parties indicated that they required more time to determine the feasibility of their suggestions.   

Accordingly, the parties are ORDERED to file status reports on their efforts by March 25, 2016.

Cameron Elliot Administrative Law Judge

Teleconferences Among Inmates and the Outside World

Of course it's extremely difficult to hold hearings or teleconferences at a federal prison. 

For one thing, it could be Pizza Night and the inmates tend to get a bit rowdy and loud, particularly if there is pepperoni topping. 

Then there is the other diversion of Yoga Day. The institution has promulgated total silence to enhance the meditation experience. All of which would make video teleconferencing an intrusive inconvenience. 

Am I making up Pizza Night and Yoga Day? The odd thing is that they have enough ring of truth to them that you're really not sure, are you?   In fact, you're actually going to Google those things, aren't you?

Not to unduly bother McDuff, the SEC offered to try and transfer him to a more  accommodating  prison  where the videoconferencing would be more amenable. Unfortunately, Camp Fed is fully booked for the summer season, unless McDuff is willing to fly in on a Tuesday but vacate his reserved suite by 11 a.m. the following Wednesday. Frankly, I don't see that happening. 

Booking a Trip To FCI Beaumont Low

Being an upstanding gent, McDuff offers an excellent alternative: He could be furloughed from prison in order to attend the hearing. Sure, that's a great idea -- it may impose an added cost on the taxpayers and enhance the chance, remote as it might be, of McDuff's flight but, hey, the SEC remanded these proceedings back to the ALJ and justice must be done.    I wonder if anyone has thought about flying the SEC Chair, the SEC Commissioners, the SEC Staff, and the SEC ALJ to Federal Correctional Institution Beaumont Low.

According to the lovely online vacation brochure for "FCI Beaumont Low," we learn that this destination spot is a "low security federal correctional institution"of 1,867 male inmates. If you take a gander at the FCI Beaumont Low "Admission and Orientation Inmate Handbook," you will find these highlights on pages 5 - 6:


Sanitation- It is the inmate's responsibility to check his cell/cubicle immediately after being assigned there and to report any damage to the Unit Officer. An inmate may be held financially liable for any damage or contraband found in his cell/cubicle. Each inmate is responsible for making his bed in accordance with regulations before work call or when he leaves the area (including weekends and holidays) . Each inmate is also responsible for sweeping, mopping, and cleaning his personal cell/cubicle, removing trash, and ensuring it is clean and sanitary. Cleaning supplies will not be stored in rooms. Cardboard boxes and other paper containers are not to be used for storage due to their combustible nature. Lockers must be neatly arranged inside and out, and all shelving must be neat and clean. Wax will not be used for any cell/cubicle floors. Any inmate found using wax in their assigned cell/cubicle will be issued an incident report.

A violation of any of these sanitation regulations at the Medium or Low Security Institution may result in disciplinary action including placement in a six-man cell.

Monday through Friday, from 6:45 a.m. until 4:00 p.m., inmates outside of their assigned units (this includes all job assignments, Mainline, Educational activities, etc.) must be fully dressed in the appropriate issued uniform including work boots. All shirt tails will be kept tucked inside the waistband, and all uniforms must be the accurate size for each inmate. No sagging, bagging, and no sweat or casual clothing will be worn over the issued khaki attire. Khaki attire will be required for both breakfast and lunch, Monday through Friday. "Leisure" attire will be allowed in the dining hall for the evening meal, weekends, and holidays. All shirts must be tucked in when outside the unit, except when on the recreation yard. No hats and/or sunglasses are permitted to be worn inside buildings or under covered walkways. Approved religious head wear may be worn inside the Dining Hall.   

Seems to me that my idea about sending the SEC staff, commissioners, and Chair to FCI Beaumont Low might almost amount to a mini-vacation for those folks. Of course, they won't be allowed to bring or use any wax in their guest cells but that's a small inconvenience. Likely a larger concern for the SEC visitors will be their propensity for untucked shirts and sagging, baggy clothing. If everyone is willing, maybe we can do the hearing on a Saturday or Sunday when leisure attire is allowed in the dining hall.

No Habla Espanol

I'm glad to report that tremendous progress has been made in resolving the teleconference issue, as made clear in this June 3, 2016, Order from ALJ Elliot:

Before the
Washington, D.C. 20549

Release No. 3893/June 3, 2016
File No. 3-15764
In the Matter of

The hearing in this proceeding is currently scheduled for June 15 through June 16, 2016,at FCI Beaumont, where Respondent Gary L. McDuff is currently incarcerated. Gary L. McDuff,   Admin. Proc. Rulings Release No. 3787, 2016 SEC LEXIS 1405 (ALJ Apr. 18, 2016).

On June 3, 2016, this office received a letter, written in Spanish and addressed to me,
followed by twenty-seven pages of signatures. McDuff's name appears several times in the   letter. Because the document is untranslated, I am unable to consider it. My office has   forwarded a copy to the Division of Enforcement and the Office of the Secretary. If Respondent   wishes for me to consider this document, he should have a translation provided to the Office of   the Secretary and the Division, with a courtesy copy sent to me.
Cameron Elliot
Administrative Law Judge

Eureka! Telephonic Prehearing Conference Held

Before the
Washington, D.C. 20549

Release No. 3900/June 7, 2016
File No. 3-15764
In the Matter of

The hearing in this proceeding is currently scheduled for June 15 through June 16, 2016, at FCI Beaumont, where Respondent Gary L. McDuff is currently incarcerated. Gary L. McDuff, Admin. Proc. Rulings Release No. 3787, 2016 SEC LEXIS 1405 (ALJ Apr. 18, 2016).

A telephonic prehearing conference was held today, attended by the Division of
Enforcement and McDuff. I granted McDuff's request that members of the public be permitted to assist him at the hearing. I also respectfully request that the FCI Beaumont mailroom expedite delivery of boxes marked "special mail" to McDuff, and that the staff permit McDuff to have the assistance of other inmates to prepare for the hearing.
Cameron Elliot
Administrative Law Judge

To get a sense of the motions, rulings, and delays that have hamstrung the resolutionof McDuff, consider these two pages of results on