Investors Topics

Top Signs of a Ponzi Scheme and How to Respond

February 21, 2019 | Malecki Law Team

A Ponzi Scheme is a type of investment fraud that pays purported “returns” to current investors from proceeds received from new investors, rather than through genuine investments. Once the fraudster stops receiving new money or investors request too much of their money back, the Ponzi Scheme falls apart. The term for Ponzi Scheme is from a famous 1920s con man, Charles Ponzi who redistributed investor funds for international reply coupons to himself and other investors. More recently, thousands of investors, many of whom were elderly lost their money in a billion-dollar Ponzi Scheme perpetrated by the Robert Shapiro Woodbridge Group. Not all Ponzi Schemes are as large and notorious as that committed by Bernie Madoff. Many more Ponzi Schemes happen on a much smaller basis and go undetected.

Malecki Law has handled numerous Ponzi cases: McGinn Smith, Robert Van Zandt, Hector May, Illume, and Steven Pagartanis, just to name a few. We are available to review your situation at no cost. Catching these things early inures to your benefit. Investors can fight to recoup their losses from a Ponzi Scheme committed under a FINRA registered firm through arbitration.

Our securities fraud law team aims to equip investors with the knowledge to spot not only Ponzi Schemes but other fraudulent investment opportunities as well. Everyone should be aware of the following signs that could indicate a Ponzi Scheme.

How Do I Recover My Investment Losses in FINRA Arbitration?

February 15, 2019 | Malecki Law Team

Arbitration is a formal alternative to courtroom litigation for resolving issues with neutral third party “arbitrators” issuing a binding decision after the litigants present their facts and argument. Compared to the usual courtroom procedures, arbitration is a faster, affordable and less formal legal proceeding. FINRA, a self-regulatory-agency for the securities industry, controls the largest, most prominent arbitration forum for securities disputes. A full FINRA arbitration proceeding from initiation through hearing can take on average 16 months, but cases often are settled before the end. Sick or elderly claimants may request an expedited arbitration process within nine months.

There is a wide range of reasons that investors might want to make a legal claim against their broker-dealer and broker firm. When opening an account with brokerage firms, investors sign a contract that often contains a clause that makes handling disputes through FINRA arbitration mandatory. Notably, investors are bound to arbitrate their securities claim after the Supreme Court upheld binding arbitration provisions in Shearson/American Express Inc. v. McMahon. FINRA registered broker-dealers, and registered representatives are similarly obligated to handle disputes arising through their employment in FINRA arbitration.

The FINRA arbitration process commences when the plaintiff, known as the claimant, submits a statement of claim, outlining the case’s relevant facts, dates, names of involved parties, type of relief requested and name of accused parties. The statement of claim must be filed within the allotted time, which is within six years after the dispute. Compared with a courtroom complaint, a statement of claim is less formal and usually a more detailed account of the background story. In addition to the statement of claim, the claimant needs to pay fees and submit a Submission Agreement. The fees owed for filing a FINRA arbitration claim are based off the sought remedies, hearing sessions, discovery motions and postponement fees. Fortunately, some individuals with financial difficulties can request a fee waiver.

How Do I Know If My Broker Diversified My Portfolio?

January 28, 2019 | Malecki Law Team

Investors nationwide have been on edge after the worst annual stock market performance in a decade. China trade war tensions, rising interest rates, and the partial government shutdown have caused more volatility. With these recent swings in the stock market, some investors may notice corroborating shifts in their investment portfolio. Even in volatile markets, significant losses in a conservative or moderative portfolio should raise serious concern. Nearly all investors should have a diversified investment portfolio for protection from long-term losses. Diversification is a capital-preserving risk management method that calls for an investment portfolio to carry a variety of investments within different asset classes, countries, sectors, and companies.

Diversification is essential because correlated securities within the same asset class, sector, and country will tend to follow similar patterns. Meanwhile, selecting securities from different areas will reduce such resulting risk. Investment portfolios should not only include investments that differ by asset class. For example, holding many different investments tied to just the real estate sector is not a diversified portfolio. Common sectors include financial, healthcare, energy, energy, utilities, technology, consumer staples, industrials, materials, real estate, telecommunications, and consumer discretionary. Within each of these sectors, there are many excellent choices.

An investment strategy that includes diversification will, on average, yield higher returns and lower risk than a singular holding. A diversified investment portfolio has a cumulative lower variance in return or risk than its lowest asset. In a properly diversified portfolio, the decline of a few of your holdings should be countered by the state of other unaffected holdings. On the other hand, heavy concentration in one investment will leave your portfolio’s increase or decline entirely dependent on fewer factors. For instance, investing all of your money into one stock in a company that goes under will result in the loss of all your money. Ownership of more types of shares over a long time has tended to produce around 5%-8% in returns historically.

Insurance Churning: Beware When Your Broker Recommends Replacing Your Variable Annuity Policy

January 23, 2019 | Malecki Law Team

We have previously written on the concept of “churning,” which is a fraud perpetrated by brokers who buy and sell securities for the primary purpose of generating a commission, and where that activity would be considered excessive in light of the investor’s investment goals. But is it possible to have a churning claim when a broker sells you an insurance product or recommends swapping out one variable annuity policy for another? And can a single transaction be considered “excessive” in the context of a churning claim? The answer to both of these questions is yes.

The law appears to provide an opening for churning claims when it comes to investors, and in particular retirees, who find themselves “stuck” with an illiquid annuity in their portfolio. Retirees, who tend to need access to capital more than other segments of the population (due to not working and the increased medical costs associated with getting sick and old), are often sold unsuitable variable annuities, which can tie up retirement funds for decades. Technically the investor can get of the policy, but not without paying significant IRS tax penalties and steep surrender charges, sometimes as high as 10% to 15%. Sadly, these costs and product features are often misrepresented and go undisclosed at the point of sale.

While not all annuities are considered securities under the law, variable annuities certainly are securities. The SEC requires the seller of a variable annuity to possess a Series 6 or 7 brokerage license with the Financial Industry and Regulatory Authority (FINRA). Variable annuities can be distinguished from fixed annuities in that their returns are not fixed, but rather determined by the performance of the stock market. One characteristic of a variable annuity policy is that you get to choose a fund to invest in, much like you would with a mutual fund. Variable annuities are highly complex investment products. They are also costly to investors, in part because of the high commissions they generate for the brokers who sell them. Regardless of whether you were sold a variable annuity or some other type, it should be noted that FINRA requires its member brokerage firms to monitor all products sold by their brokers.

Deloitte in Cross-hairs of Shareholder Dispute in India for Alleged Collusion

December 3, 2018 | Malecki Law Team

Malecki Law continues to follow a petition filed in the National Company Law Tribunal (NCLT) in Mumbai, India concerning the takeover of a US litigation data-management firm, Xcellence Inc. (operating under the brand Xact Data Discovery, XDD USA) by a private equity firm, JLL Partners Fund VII, L.P. For background on the case, read “A Cautionary Tale for both Private Equity Investors and Portfolio Companies”. The National Company Law Tribunal (NCLT) is a quasi-judicial forum in India, which adjudicates corporate stakeholder disputes and has all the powers of an Indian civil court.

The legal dispute involves Dominic Thomas Karipaparambil (Dominic Thomas), the 49% shareholder of Xact Data Discovery India Private Limited (XDD India), on one side and on the other side, XDD USA, XDD India, XDD USA’s India-based subsidiary, JLL Partners Fund VII, L.P. (JLL Partners), JLL XDD Holdings LLC. (JLL XDD), an entity owned by JLL, the directors of XDD India. The directors of XDD India include the president and CEO of XDD USA, Mr. Robert Polus and surprisingly the Indian arm of the global accounting firm Deloitte Touche Tohmatsu Limited (Deloitte).

XDD USA was originally formed in 1994 under a different name and operates 17 offices across the United States. XDD India was formed in 2007, by Robert Polus and Dominic Thomas and operates two locations in India. It appears that at some later date, Robert Polus transferred his stake in XDD India to XDD USA, making XDD India a subsidiary of XDD USA. This structure is not atypical from the trend of U.S. data management companies seeking to cut costs by looking overseas for cheaper labor. In this instance, it hypothetically permits a company like XDD USA to offer cut-rate corporate and legal services through its Indian subsidiary, which provides e-discovery and other document review services at a lower cost than what traditional law firms in the U.S. would charge. In early 2018, the private equity firm JLL Partners announced it had reached a deal to acquire XDD USA from its previous owner and manager, Clearview Capital.

Luxury Real Estate Developer Pleads Guilty to Wire Fraud in Alleged 58-Million-Dollar Ponzi Scheme

November 16, 2018 | Malecki Law Team

Former President and CEO of a luxury real estate development company in White Plains pled guilty to federal charges after allegedly orchestrating a 58-million-dollar Ponzi Scheme. Last week, Michael D’Alessio pled guilty to one count of wire fraud and one count of concealing assets from a bankruptcy court following his arrest in August. Michael D’Alessio reportedly solicited investor funds for investments in luxury real estate development projects in Westchester, Manhattan and the Hamptons for years. In return for their money, investors were promised monthly interest payments and shares in the properties. Instead, Michael D’Alessio funneled investor money into multiple shell companies to repurpose at his leisure in a Ponzi-like fashion.

Michael D’ Alessio allegedly misappropriated investor funds that should have been used for investments in real estate through his company from 2015 until April 2018. Michael D’Alessio’s former company, Michael Paul Enterprises reportedly specialized in the design, construction, and management of commercial as well as residential real estate. As part of the alleged Ponzi-scheme, investors were offered shares in real estate properties with guaranteed monthly interest payments and profits. Our attorneys specializing in Ponzi Schemes know that any promises of guaranteed returns should usually raise a red flag.

In addition to the suspicious promises, our investment fraud attorneys find that Michael Alessio’s alleged behavior is indicative of your typical Ponzi Scheme perpetrator. In Ponzi schemes, a perpetrator solicits new investor money to pay falsified returns to existing investors. It is alleged that Michael D’Alessio created a limited liability company for each new property to offer shares. Michael D’ Alessio did not keep investor money within the appropriate companies as expected. Rather, Michael D’Alessio reallocated investors’ individual property’s money to cover shortages in separate ones as well as pay his personal expenses. For instance, Michael D’Alessio used investor money to pay off significant gambling debts.

Offshored and Offloaded: A cautionary tale for both Private Equity Investors and Portfolio Companies

November 8, 2018 | Malecki Law Team

Allegations of mismanagement, oppression, and accounting disputes are the common accusations when conflicts arise between private equity funds and shareholders of companies being added to private equity portfolios. These disputes are increasingly being complicated by private equity deals involving companies with offshored entities that have local shareholders in the offshored country. Companies outsourcing via the creation of new foreign entities is not a new phenomenon. However, the activities outsourced to developing countries has shifted from traditional manufacturing and assembly to include more companies in the information technology sectors and even legal processes. Increased offshoring via the creation of satellite entities and the proliferation of private equity deals has increasingly led to instances of local citizen shareholders and partners of the offshored entity being ousted and/or squeezed out of deals.

The global digitization trend has led to an explosion of offshored entities of US companies in India. Fittingly, India has found itself cluttered with western private equity firms in search of potential portfolio companies. Becoming the investee of a private equity deal is generally a positive event for a company and its shareholders. However, it appears that Indian shareholders of these offshored entities can find themselves left out and private equity firms having to engage in unproductive litigation in Indian courts.

Recently, a petition for oppression and mismanagement has been filed in India by Mr. Dominic Thomas Karipaparambil, against, Xcellence Inc. (“XDD USA”), operating under the brand Xact Data Discovery, a US-based provider of eDiscovery, data management and managed review services. The parties to the dispute also include XDD USA’s offshored entity Xact Data Discovery India Private Limited (“XDD India”); JLL Partners Fund VII, L.P. (“JLL Partners”), a US-based private equity firm; and others. Court records show Mr. Karipaparambil, to be the 49% Indian shareholder of XDD India. Additionally, from the records it appears that Mr. Karipaparambil, may have also been the Managing Director of XDD India. Mr. Karipaparambil’s name also appears as the original subscriber to the charter documents of XDD India with Mr. Robert Polus (President & CEO of XDD USA). It seems that Mr. Karipaparambil, Mr. Polus and XDD USA, may have set up XDD India as a joint venture arrangement in the ratio of 51 (Mr. Polus): 49 (Mr. Karipaparambil). At some stage, into the venture, XDD USA seems to have acquired 51% in XDD India from Mr. Polus. US press releases show that JLL Partners acquired ‘Xact Data Discovery’ (XDD USA), shares from Clearview Capital LLC (“Clearview”) in late December 2017 – early January 2018. Past press releases also show that Clearview, another private equity investor, had acquired XDD USA in January 2015.

Brokerage Firms May File Inaccurate U5s to Ruin Former Securities Employee Records, According to Bloomberg Article

October 31, 2018 | Malecki Law Team

Brokerage firms may sometimes use reporting inaccurate negative information on a departing securities employees’ U-5 records as their “weapon” to keep their customers, according to a Bloomberg article. FINRA records and broker experiences show that brokerage firms occasionally include inaccurate information when filing a Form U-5. While financial advisors and brokers can file an arbitration to have employers remove the erroneous information from their record, many take no action. Securities employment attorneys are unsurprised given that broker and financial advisor cases against the employer, tend to favor big brokerage firms heavily. Financial professionals fear the high cost, time loss, and difficulty getting expungement in a FINRA arbitration.

Brokerage firms provide information regarding an existing employee’s termination in a document entitled, Uniform Termination Notice for Securities Industry Registration Notice – Form U-5. Within 30 days of the broker’s termination, the brokerage dealer must file a Form U-5 with the Financial Industry Regulatory Authority pursuant to Article V, Section 3 of the FINRA by-laws. A Form U-5 seeks information pertaining to the circumstances around a respective broker’s termination from the firm. Brokerage firms are obligated to provide accurate, and timely information as well as file any changes on the U5, according to FINRA’s Regulatory Notice 10-39.

It is important to contact a FINRA securities attorney when you first realize that you may be terminated or when you are terminated, to act fast. While a Form U-5 is not “negotiable,” a broker can provide information to the firm to change the firm’s mind on the facts, as well as tell them facts that they may not know. It is worthwhile to try doing so before the filing, as after the filing firms are hesitant to change a U-5 as regulatory agencies could start asking questions regarding the reasoning. No firm wants FINRA regulatory to come knocking on their door.

Barred Financial Advisor Dawn Bennet Convicted in Ponzi Scheme Following Unsuccessful Hoodoo Spells

October 19, 2018 | Malecki Law Team

FINRA barred financial advisor Dawn Bennet, from Chevy Chase, Maryland was reportedly convicted for misappropriating client funds in a multimillion-dollar Ponzi Scheme that targeted elderly and financially unsophisticated investors. A Ponzi Scheme is a type of investment fraud that solicits investor money for non-existing investments. Between, December 2014 and July 2017, Ms. Bennett allegedly raised 20 million dollars from 46 investors through the unregistered offer of securities in her retail sports apparel business, DJB Holdings LLC, (“DJ Bennet”). This past Wednesday, a jury convicted Ms. Bennett on all 17 federal charges including securities fraud, wire fraud, and bank fraud, according to the United States Attorney’s Office, District of Maryland. Ms. Bennet’s alleged Ponzi Scheme received heavy media attention after the FBI found evidence suggesting that she casted “hoodoo” spells intended to silence SEC investigators.

Dawn Bennett (CRD#1567051) worked as a FINRA registered broker and investment adviser before getting barred by the self-regulatory agency, according to her BrokerCheck records. Within her 28 years in the securities industry, Dawn Bennett was registered with Wheat, First Securities, Inc. (03/1987-08/1996), Legg Mason Wood Walker, Inc. (08/1996-02/2006), CitiGroup Global Markets Inc. (02/2006), Royal Alliance Associates, Inc. (02/2006-10/2009), and Western International Securities, Inc. (10/2009-12/2015). FINRA barred Ms. Bennett from the industry after failing to show up to an administrative hearing.

The Securities and Exchange Commission also charged Dawn Bennett for violating federal securities laws in connection with her alleged Ponzi Scheme. A SEC amended complaint filed last year also lists her business’ CFO, Bradley Mascho, from Frederick, Maryland in addition to Dawn Bennett and her entity DBJ Holdings, LLC. A few months ago, Mr. Mascho pled guilty to charges in a plea bargain that capped his maximum prison term at ten years.

Malecki Law Wins Award and Expungement for Brokerage Industry Professional, Resolving FINRA’s Oldest and Longest Active Arbitration Case in History

October 10, 2018 | Malecki Law Team

Yesterday, a Financial Industry Regulatory Authority (FINRA) arbitration panel in New Jersey, FINRA Case No. 03-08177, handed down a decisive award in favor of a trader, who was also a Series 7 registered broker. The trader was sued by a retail investor relating to his recommendation of a municipal bond nearly fifteen years ago. The arbitration was first filed with the National Association of Securities Dealers in November of 2003, which predates the entity’s merger with the enforcement and arbitration arm of the New York Stock Exchange to form FINRA. The matter, which started in arbitration, winding its way in and out of the New Jersey courts, was the oldest and longest running case in FINRA’s history. As argued before the arbitration panel by the broker’s attorney, Jenice L. Malecki, “this case was nearly old enough to drive and only three years away from being allowed to vote.”

In addition to dismissing the investors’ claims in their entirety, the arbitration panel made the rare, and ultimately just, decision to award the trader $47,831.01 in attorneys’ fees based on the panel’s finding of “malicious prosecution” by the claimant investors. The panel further recommended expungement of the complaint from the broker’s registration records, as maintained by the Central Registration Depository (CRD), finding the investors’ allegations to be without merit and false. The case was in and out of arbitration and court numerous times over the years, contributing to its length.

According to the award, the Claimants in this case, in connection with their single purchase of municipal bonds, had alleged damages against the Respondent trader “in excess of $500,000.00 but not less than $1,000,000.000, the exact amount to be proven at the hearing.” However, as the panel determined, the investors had suffered no losses at all but in fact, received interest and turned a profit: