2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, and Lots of Lousy Wall Street Regulation

November 6, 2019

In recent weeks, we got prosecutors and regulators taking victory laps in response to what they are touting as the "shut down" of a Ponzi scheme. Frankly, it's not much of a victory and those folks who are running around the track shouldn't be taking those strides. Every Wall Street cop was on this beat: FINRA, SEC, and DOJ. Funny, isn't it, how folks who won't actually walk the beat are always ready to run the victory lap. Although the press releases regale us with the sordid details of a decade-long scam, what gets lost amid the back-slapping and self-promotion is the horrific financial and emotional devastation brought upon the victims.

October 2018 SEC Complaint
SEC Shuts Down $102 Million Ponzi Scheme (SEC Press Release 2018-110 / June 19, 2018)
Perry Santillo. Christopher Parris, Paul LaRocco, John Piccarreto, and Thomas Brenner, and three companies that they controlled: First Nationle Solution LLC, United RL Capital Services, and Percipience Global Corp. were charged in a Complaint filed by the SEC in the United States District Court for the Southern District of New York https://www.sec.gov/litigation/complaints/2018/comp-pr2018-110.pdf with violating the antifraud provisions of the federal securities laws. The Court imposed an asset freeze and a temporary restraining order. As alleged in part in the Complaint:

1. The Commission brings this action to stop an ongoing fraudulent scheme in which the Defendants have raised more than $102 million from at least 637 investors across the United States since 2011. Defendants Santillo and Parris buy or take over books of business of retiring investment professionals from around the country. Then Santillo and Parris, or local sales people, including Defendants Piccarreto, LaRocco, and Brenner, persuade these newly acquired clients -their victims - to withdraw their savings from traditional investments and invest in issuers controlled by Santillo, Parris, or their associates, including Defendants First Nationle, Percipience, and United RL. The bulk of the more than $102 million raised in this fraud was purportedly raised for these three issuers. 

2. Defendants falsely claim that their investors' money will be used to operate businesses in fields such as financial services, insurance, real estate development, and medical laboratories. In fact, any business operations for each issuer appear to be limited or non-existent. After receiving investor funds, Defendants transfer those funds through multiple accounts held in the names of different entities Defendants control, commingling the funds, then transfer the funds elsewhere. 

3. As one example, Piccarreto met with an investor from Austin, Texas in February 2015. Because the investor suffers from dementia and was nearly 80 years old at the time, his daughter attended the meeting as well. Piccarreto convinced the elderly investor to put $250,000 in Percipience, describing it as areal-estate investment. On March 5, 2015, that money was deposited into Percipience's bank account, then promptly transferred through affiliate bank accounts -from which Piccarreto misappropriated $21,500 -and through First Nationle's bank account -from which Santillo misappropriated $172,800. More than two years later, after the investor's daughter expressed concern about his investments to Piccarreto, Piccarreto falsely wrote in an e-mail, "I know this is scary for you and you are just looking out for dad but I promise you I will not let anything happen to any of the money." In fact, Defendants knew they 2 were lying to investors and stealing their money. And this investor has never received any money back from his investment in Percipience. 

4. Defendants have enriched themselves greatly through the money they stole from investors. Santillo has misappropriated at least $13.4 million; Parris has misappropriated at least $1.1 million; LaRocco has misappropriated at least $1.1 million; Piccarreto has misappropriated at least $1.3 million; and Brenner has misappropriated at least $2.9 million. 

5. As an example of Defendants' use of stolen investor funds, Santillo uses that stolen money to fund a jet-setting lifestyle, including paying for housing in multiple states, car leases, expenditures at a country club and a Las Vegas resort and casino, credit card payments, and other personal expenses. At the same time he was misappropriating investor funds, Santillo threw himself a party at a nightclub in Las Vegas for which he commissioned a song about himself to be played. The lyrics to that song refer to (Perry) Santillo as "King Perry" and describe his typical attire: "ten-thousand-dollar suit everywhere he rides." The song also depicts his lifestyle as follows: "pop the champagne in L.A., New York to Florida; buy another bottle just to spray it all over ya." 

6. Of the at least $102 million raised by Defendants, the majority of it was either misappropriated by Defendants or paid to redeeming investors in classic Ponzi-scheme fashion.

October 2019 Plea

Perry Santillo pled guilty to an Information in the United States District Court for the Western District of New York ("WDNY") to conspiracy to commit mail fraud, mail fraud, and conspiracy to launder money; and he also agreed to plead guilty to a mail fraud charge pending against him in the Middle District of Pennsylvania  ("MDPA"). As alleged in part in extensive extract below from the DOJ Release:

[B]etween January 2008 and June 2018, the defendant conspired with an individual identified as C.P., and others, to obtain money through an investment fraud commonly known as a Ponzi scheme. Specifically, in 2007, Santillo and C.P., as equal partners, formed a business known as Lucian Development in Rochester. Prior to approximately July 2007, Lucian Development raised millions of dollars from investors in Rochester, and elsewhere, by soliciting investments for City Capital Corporation, a business operated by Ephren Taylor. In July 2007, Santillo and C.P. were advised by Ephren Taylor that their investors' money had been lost. In response, in August 2007, Santillo and C.P. agreed to acquire the assets and debts of City Capital Corporation. The acquisition proved financially ruinous, with the amount of the acquired debt far exceeding the value of the acquired assets. Taylor was later prosecuted and convicted of operating a Ponzi scheme.

Subsequently, Santillo and C.P. chose not to disclose the truth to investors that their money, entrusted to Lucian Development for investment in City Capital Corporation, was gone. Instead, the defendant and C.P. continued to solicit ever-increasing amounts of money from new investors in an unsuccessful attempt to recoup the losses.  In order to find potential investors to solicit and defraud, Santillo and C.P. purchased businesses from established investment advisors or brokers who were looking to exit their businesses. Between approximately 2008 and September 2017, Santillo and C.P., using money obtained from prior investors, purchased the businesses of at least 15 investment advisors or brokers, located in Tennessee, Ohio, Minnesota, Nevada, California (5 businesses), Florida, South Carolina (2 businesses), Texas, Pennsylvania, Maryland, and Indiana.

The investment offerings pitched by Santillo and C.P. consisted principally of unsecured promissory notes and preferred stock issued by various entities controlled by Santillo and C.P. Potential investors were offered an apparent array of investment options to create the illusion of a diversified investment portfolio. Those investment options included products issued by purported issuers such as First Nationle Solutions (FNS), Percipience Global Corporation, United RL Capital Services, Boyles America, Middlebury Development Corporation, and NexMedical Solutions, among others. None of these issuers had substantial bona fide business operations or used investor money in the manner and for the purposes represented to investors. To the extent that an issuer may have had some minor legitimate business activities, it was not profitable and insufficient revenues were generated to pay investors any returns (let alone return the principal amounts of their investments). Santillo, and others, sold fraudulent investments from these issuers to investors who were told that the money received would be used to conduct the purported business of each respective issuer. In fact, however, such issuers were the defendant's various Ponzi schemes. Santillo, and others working with him, fraudulently induced investors to invest at least $46,000,000 in the First Nationle offering since February 2012, $22,000,000 in the Percipience offering since July 2012, and $25,000,000 in the United RL offering since March 2015.

Over the years, to keep the Ponzi scheme from being detected, a substantial portion of incoming new investor monies were depleted by making promised interest and other payments to earlier investors. Most of the rest of incoming investor money was used by Santillo, C.P. and other co-conspirators: to finance lavish lifestyles of the conspirators, their families and associates; to expand the scheme by purchasing investment advisor/brokerage businesses to obtain access to fresh investors; and to pay operating expenses – salaries for a sales force and administrative staff, office rents and related expenses, housing for employees, and interest on loans-all of which were used to keep the scheme going and maintain a facade of legitimate business operations.

Very little investor money was deployed in productive investments, and when so deployed, the investments yielded meager income and were not profitable, or failed altogether.  The Ponzi scheme was headquartered and based out of locations in Rochester, with a number of satellite offices around the country. Administrative and banking functions were largely performed out of Rochester. The conspiracy employed a variety of sales people, including Santillo and C.P., who traveled around the country to meet with and solicit new investors. In the Middle District of Pennsylvania, Santillo, and others, conducted their fraud scheme under the guise of an investment business located in Scotrun, Monroe County, using various business names, including Advice and Life Group, Poconos Investments, First American Securities, and Financial Planners Group of America.

Between January 2012 and June 19, 2018, Santillo and C.P. obtained at least $115.5 million from approximately 1000 investors. By the time the scheme collapsed in late-2017/early 2018, Santillo and C.P., doing business through an array of corporate entities, had returned approximately $44.8 million to investors as part of their scheme, but continued to owe investors approximately $70.7 million in principal. . . .

November 2019 Plea

About a month after his WDNY plea to a three-count Information, on November 5, 2019, Santillo pled guilty to mail fraud in another Information in MDPA. As set forth in part in the DOJ Release:

[S]antillo admitted to defrauding investors around the country as part of a Ponzi scheme that included victims in the Middle District of Pennsylvania.  Santillo admitted as part of his plea that the scheme took in approximately $115 million in fraudulent investments, and resulted in a total loss to investors of $70.7 million.

Perry Santillo was a founder, member, manager, and CEO of First Nationle Solution, LLC.  Santillo offered and sold securities in First Nationle, Percipience Global Corporation, United RL Capital Services LLC, and other issuers to investors.  Santillo also provided investment advice to those same investors. 

In fact, First Nationle, Percipience Global and United RL did not conduct their purported businesses.  Rather, Santillo and others working with him operated each business primarily as a Ponzi scheme by issuing securities in the form of promissory notes, soliciting and then misappropriating substantial amounts of investor funds, and using some remaining investor funds to pay off redeeming investors.

As part of the scheme, Santillo and others travelled the country and bought books of business from investment professionals such as registered representatives and investment advisors. 

In the Middle District of Pennsylvania, Santillo and those who aided and abetted him purchased a book of business from an investment advisor and conducted their fraud scheme under the guise of an "investment business" located in Scotrun, Monroe County, using various business names, including Advice and Life Group, Poconos Investments, First American Securities, and Financial Planners Group of America. 

Santillo, with the help of others, then solicited investors from within those acquired books of business to withdraw money from traditional investments such as annuities, and reinvest the funds in issuers controlled by Santillo and others, including First Nationle, Percipience, and United RL, sometimes without disclosing that Santillo and his confederates controlled those issuers.

Through offering documents, company websites, and in-person pitches, Santillo and his confederates falsely indicated that investments would be used to fund legitimate businesses.  However, rather than use investors' funds for purported legitimate business purposes, Santillo and his confederates misappropriated vast amounts of the funds for their personal use and used some of the funds to pay redeeming investors to perpetuate the Ponzi scheme. 

Santillo and his associates also misrepresented the ongoing performance - or lack thereof - of investors' investments.  Santillo and others provided account statements to investors falsely stating that investor funds were invested, falsely stating investment returns, and in some cases falsely stating that a bonus had been credited to investor accounts.  In certain instances, Santillo and others provided investors with bonus funds or interest payments, and in other cases Santillo and others provided redeeming investors with all or part of their funds, at times with returns.  These were Ponzi payments derived from new investor funds rather than actual investment returns.  In other cases, Santillo and others failed to fulfill the requests of investors to redeem their investments.

Among the victim investors defrauded in the Middle District of Pennsylvania was an individual with the initials "JP."  Victim JP first invested $159,000 in First Nationle in September 2015, and invested another $380,000 in June 2016.  In 2017, JP also invested twice in United RL, the first an investment of $20,000 and the second $52,000.  Santillo and confederates also induced JP to invest $325,000 in a third fraudulent issuer.  JP was repaid only $15,000, and was defrauded of the remainder of the $936,000 total investment.  The specific charge in the information to which Santillo pled guilty related to a mailing sent in relation to the fraudulent investments JP was sold by Santillo and his confederates.

Bill Singer's Comment: 

I have provided the extensive above quotes from the two DOJ Release because of my familiarity with the cases and my personal interaction with several victims. Frankly, the stories of the families defrauded by the participants in this scheme are horrendous. I spoke with family-members and caregivers who related stories of victims who were lured into these bogus investments at times when they were suffering from terminal cancer, dementia, or severe disabilities. Unfortunately, it was my experience that the victims and their families were not afforded timely, substantive, or compassionate assistance by many of the regulators and prosecutors involved. 

In some instances, I personally spoke with the regulatory community and I too came away with the sense that no one wanted ownership of the fraud -- or responsibility for allowing it to persist for a decade. For some victims, their experience was the frustration of being shuttled from FINRA to the SEC to the FBI to the Department of Justice and back into that endless loop of useless referrals to nowhere. Moreover, frequent pleas for information and guidance were responded to with what was often viewed as disinterest or a shocking lack of empathy. 

For some details as to the background of this story, READFINRA Buries The Lede With FAS Rep Settlement (BrokeAndBroker.com Blog / June 26, 2017)  http://www.brokeandbroker.com/3510/fas-finra-awc/

2 Pleas, 2 Federal Courts,1 Horrific Ponzi Scheme, and Lots of Lousy Wall Street Regulation (BrokeAndBroker.com Blog)

$200 Cash Advance Earns Stockbroker a FINRA Bar. FINRA Department of Enforcement, Complainant, v. Michael Royce Minghenelli, Respondent (FINRA Office of Hearing Officers Default Decision)

Dunmore Man Charged With Bank Fraud (DOJ Release)

SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers  (SEC Release)

SEC Proposes Amendments to Modernize Shareholder Proposal Rule (SEC Release)

SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice (SEC Release)

Public Statement of SEC Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System (SEC Release)

Public Statement on Proposals to Restrict Shareholder Voting by SEC Commissioner Robert J. Jackson (SEC Release)

Statement on Shareolder Rights by SEC Commissioner Allison Herren Lee (SEC Release)

Statement at the Open Meeting: Modernizing SEC Rules Governing Proxy Voting Advice by SEC Commissioner Elad L. Roisman (SEC Release)

Statement at the Open Meeting: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 by SEC Commissioner Elad L. Roisman (SEC Release)