Former CPA Accused Of Running $29 Million "Pure" Ponzi Scheme

A California woman faces civil and criminal charges over allegations that she ran a $29 million Ponzi scheme that promised 8% annual returns by investing in “federally guaranteed” securities. Carol Ann Pedersen, 65, was the subject of charges filed by the Securities and Exchange Commission and the U.S. Attorney’s Office for the Central District of California. Pedersen consented to entry of a final judgment in the Commission’s action and also pleaded guilty to a single wire fraud charge in the criminal case. Pedersen could face up to twenty years in prison on the wire fraud charge, although she will likely receive a lower sentence under non-binding federal sentencing guidelines.

According to the Commission, Pedersen received her CPA license in California in 1977 and provided accounting services to numerous California individuals and families. Beginning in 1991, Pedersen also began soliciting those same clients to offer money management and investment adviser services. Potential clients were told either that their funds were used to purchase specific securities on their behalf or that their funds were being pooled with other investor funds to invest in an extensive stock portfolio. For clients in the former category, Pedersen promised that she would only purchase investments offering at least 8% annual returns. Those in the latter category had their funds invested in the CA Pedersen Client Investment Pool and signed limited partnership agreements granting Pedersen sole authority to invest their funds.

To conceal her alleged wrongdoing, Pedersen generated periodic account statements that were provided to both individual and pooled investors purportedly showing their various investment holdings. From September 2010 to July 2017, Pederson raised over $29 million from 25 investors. The scheme began to fall apart in 2017 when Pedersen was unable to make scheduled distributions to investors. Several investors filed suit against Pedersen and a receiver was subsequently appointed.

With one known exception, the Commission alleges that Pedersen failed to invest any of the funds she received from investors and instead ran a “pure” Ponzi scheme by using investor funds to make distributions to other investors “almost from the moment of inception.” Pedersen is also accused of misappropriating nearly $2 million of investor funds for her own use including car payments, medical costs, and home renovation expenses.

Unfortunately, this is another tale where standard due diligence might have prevented the scheme from continuing until implosion. As the Commission alleges, Pedersen concealed her failure to invest practically any funds in the securities she promised by generating account statements that were sent to investors. Thus, Pedersen would likely have had difficulty accomodating an investors’s request to provide statements from the entity(ies) custodying those assets. Rather than focusing on a promised rate of return, potential investors should focus on verifying the claims made by an investment professional.

A copy of the Commission’s complaint is below:

California Fugitive Faces Criminal Charges For Alleged $300 Million Ponzi Scheme Targeting Veteran Pensions

A California man has been indicted on federal fraud charges for running what authorities allege was a massive Ponzi scheme that purportedly obtained pensioners’ future cash flows by paying up-front premiums and then selling those structured cash flows to potential investors. The U.S. Attorney’s Office for the District of South Carolina announced that Scott Kohn and his company Future Income Payments, LLC (“FIP”) had been indicted on charges of mail fraud conspiracy and wire fraud conspiracy. The charges come as multiple states have already filed lawsuits or instituted cease-and-desist proceedings against FIP, which apparently collapsed after stopping payments to investors in April 2018. If convicted of the charges, Kohn could face up to twenty years in federal prison. However, Kohn must first be found - he is a fugitive and rumored to be in the Philippines.

Kohn is convicted felon who pleaded guilty in 2006 to felony charges of trafficking in counterfeit goods and later served a 15-month term in federal prison. Following his release, Kohn formed Pensions, Annuities, and Settlements (“PAS”) in 2011 which would later be known as FIP. Through various marketing tactics, FIP and Kohn solicited pensioners by offering the ability to receive a lump sum, buyout, or advance through the sale of a portion of their future pension payments. FIP and Kohn attempted to classify the process as a “Purchase and Sale Agreement” even though the transaction was simply the loan of money to the pensioner in exchange for an agreement to pay future sums based on that principal amount. For example, the following “Recitals” from one Virginia man’s “Purchase and Sale Agreement” made multiple references to a “seller,” “purchased asset,” and “purchase price”:

Unbeknownst to many of the pensioners was that the “Purchase and Sale Agreement” also obligated them to pay a significant amount of future pension payments to FIP that often equated to an annual interest rate exceeding 100% over a five-year term. These payments obligations sometimes continued even after death, forcing some pensioners to secure life insurance policies that could cover those obligations if necessary. According to the Consumer Finance Protection Bureau, which sued FIP and Kohn in September 2018, “many military veterans, retirees, and their spouses have contracted with FIP..” Federal law prohibited the assignment of military pension payments.

FIP and Kohn then offered the income streams from those pensioners to third-party investors in the form of 60-month or 120-month cash flow payments providing annual payments from 6% to 12%. FIP used a network of various financial professionals to pitch the “pension loan” program to potential investors through promises of a consistent and predictable income stream that could be purchased using retirement funds as well as assurances that FIP had established short and long-term reserve accounts to mitigate default risks. Those financial professionals were often incentivized through an up-front commission after an investor’s purchase.

According to federal authorities, FIP “diverted new investor funds flowing into the business to fund payments to earlier investors” in a textbook example of a Ponzi scheme. FIP ceased doing business in April 2018 while owing investors approximately $300 million.

Kohn is rumored to be in the Philippines given his apparent familiarity with the country through the use of a Philippines-based corporation used in the scheme.

A copy of the Indictment is below:

Texas Radio Personality Who Called Himself “The Money Doctor” Charged With Running $20 Million Ponzi Scheme

Authorities have filed civil and criminal charges alleging that a Texas man who referred to himself as “The Money Doctor” was actually running a $19.6 Ponzi scheme that targeted retired Christian investors.  William Neil “Doc” Gallagher, and his companies Gallagher Financial Group, Inc. (“GFG”) and W. Neil Gallagher, Ph.D. Agency, Inc. (“PHD Agency”), were charged by the Securities and Exchange Commission in an emergency enforcement action seeking various remedies including injunctive relief, civil monetary penalties, and the appointment of a receiver.  Gallagher was also indicted by the Dallas County Attorney’s Office for securities fraud and other charges and was arrested last week. As noted below, the case is an unfortunate reminder that conducting due diligence might have persuaded many victims from entrusting their funds to Gallagher, as the SEC alleges numerous red flags in Gallagher’s past that should have given investors pause.  

The Scheme

Gallagher’s career in the securities industry began in 1985 when he associated with Dean Witter Reynolds as a registered representative.  He would eventually affiliate with six other broker-dealers during his sixteen-year career as a registered representative, leaving his final broker-dealer shortly after he was censured in 1999 by the Texas Securities Board for various violations of the Texas Securities Act including falsifying check-receipt books and falsely claiming he was a registered investment adviser.  

Gallagher began operating GFG and PHD Agency in or around the mid-1990’s.  Beginning no later than December 2014, according to the Commission, Gallagher used his two entities to market an investment product he called the Diversified Growth and Income Strategy Account (“DGI Account”). Gallagher hosted at least three weekly retirement-planning radio shows that often invoked religious references in an effort to target a Christian audience.  This religious theme continued on GFG’s website which tout’s Gallagher’s book, titled Jesus Christ, Money Master: Four Eternal Truths That Deliver Personal Power and Profit, and lists GFG’s mission statement as

“Our mission is to be a vehicle of God’s peace and comfort to as many people as possible, helping first with their financial peace of mind, then also with their spiritual, emotional, and family well-being.”

According to the Commission, these were part of Gallagher’s larger effort to target a Christian audience.  

Gallagher allegedly used his regular radio appearances to encourage listeners to schedule in-person meetings where he would solicit investors to open and fund an investment account at GFG, the DGI Account.  Those potential investors were provided with documentation allegedly containing misleading information about Gallagher’s status as an investment advisor and broker, including claims that he was a “fully-licensed” “Wealth Manager” and “independent adviser.”  Those documents also demonstrate that GFG and Gallagher were functioning as investment advisers, claiming that they would control the DGI Account on the investor’s behalf. One document assured investors that:

“In many ways when you hire me it’s like hiring a Master Captain for your ship. It’s your ship…so you can come up to the bridge anytime, but don’t touch anything!  It’s my job to get you safely through the storms and into port.”

Potential investors were told that they could expect guaranteed, risk-free returns ranging from 5% to 8% annually through a mix of various asset classes.  In total, Gallagher received over $30 million in investor funds from January 2015 to January 2019, including nearly $20 million from DGI Account investors.  According to the Commission, the “overwhelming majority” of the funds raised by Gallagher came from individuals rolling over or transferring in retirement funds from IRA or 401(k) accounts.

“A Classic Ponzi Scheme”

The Commission’s Complaint alleges that Gallagher operated a massive Ponzi scheme that made a number of misrepresentations to investors.  For example, Gallagher failed to purchase any of the various asset classes he claimed were integral to his strategy and instead used existing investor funds to make monthly (and other) payments to investors in classic Ponzi scheme fashion.  Investors were also provided with fake account statements claiming to show continued earnings in their DGI Accounts and the safety of their invested principal.

In addition to paying investment returns with investor funds, Gallagher is also accused of siphoning away millions of dollars in investor funds for unauthorized uses.  This includes nearly $6 million in payments to investors, $1 million for radio and website expenses, over $2 million in payroll and bonuses, and $633,000 in legal expenses.  By the end of January 2019, Gallagher had less than $1 million on hand of the $30.3 million he had raised from investors.

Both the Complaint and a quick Google search show that Gallagher continued to solicit investors into 2019, with the Commission alleging that at least $500,000 was raised from new and existing DGI Account investors in January 2019 alone.  In a press release that was apparently carried on a Naples, Florida ABC 7 affiliate in December 2018, Gallagher invited people to join him for a “Polar Plunge” on January 1, 2019 and described himself as:

Neil Gallagher has worked in the financial field for more than two decades, managing over one billion in assets and serving over one thousand clients world-wide. In addition, he also hosts weekly radio programs covering financial communication, the psychology of investing, wealth creation, family enrichment, and the importance of estate planning. He was recently awarded the Best of Los Angeles Award - "Best Financial Planner - 2018", according to Aurora DeRose, award coordinator for the Best of Los Angeles Award community.”

It begs further questioning how and why Gallagher received the Best of Los Angeles Award for Best Retirement Financial Planning 2018, a post which remains on the group’s Facebook page as of the time of this article.

Significant Red Flags

The Complaint against Gallagher contains multiple allegations which, if true, should have generated red flags to any investor conducting even a minimal level of due diligence.  For example, the documentation purportedly provided to investors contained numerous allegations touting Gallagher being “fully-licensed” as an “independent advisor” and “wealth manager.”  Using the SEC’s free investment adviser search function, a potential investor would have discovered that Gallagher had not been registered as an investment adviser since 2009.  Further, a review of Gallagher’s FINRA BrokerCheck would have revealed Gallagher’s 1999 censure by the Texas Securities Board.

A copy of the SEC’s Complaint is below:

FBI Affidavit Claims California Solar Company Is $800 Million Ponzi Scheme

A California company that purported to build and lease mobile solar generators failed to disclose to investors that it was running a "Ponzi-type arrangement" using new investor money to pay old investors, according to an FBI agent's 60-page affidavit.  The allegations come after DC Solar Inc., owned by California residents Jeff and Paulette Carpoff, had its headquarters raided by FBI agents in December 2018 and filed for Chapter 11 bankruptcy protection earlier this month in a Nevada bankruptcy court.  According to the affidavit, which is embedded below, the company is believed to have raised approximately $810 million from at least 12 investors.

According to the FBI agent's affidavit (the "FBI Affidavit"), the Carpoffs operated two closely held businesses collectively as DC Solar beginning no later than December 2009.  DC Solar purported to be in the business of building, assembling, and leasing mobile solar generators ("MSGs"), which essentially consisted of solar panels placed on a wheeled trailer.  The company told interested investors that MSGs were in high demand from cellular companies to provide emergency power to cellular towers or to power light structures at sporting events. 

DC Solar solicited potential investors to purchase MSGs that would then purportedly be leased out by DC Solar to third parties.  The company touted the favorable tax treatment of the investment and the ability to "finance" nearly 75% of the $150,000 purchase price that would then be repaid through lease payments from third parties.  For example, the federal tax code allowed purchasers of alternative energy sources like an MSG to claim significant tax credits of up to 30% of the purchase price as well as other savings.  Investors were told that they would only have to pay $45,000 in cash of the $150,000 purchase price per MSG, with the remainder financed by a DC Solar subsidiary.  The $45,000 purchase price is also the maximum tax credit a purchaser would be able to claim from the purchase - in essence offsetting the entire initial cash outlay.  That investor would then execute a promissory note to pay the remaining 70% of the purchase price to a DC Solar entity with the understanding that the resulting lease revenues would be sufficient to cover payments on the promissory note.  As the FBI Affidavit explained,

The purported lease revenue from third parties was a critical component of the transaction because the investment funds provided no money other than that initially contributed by the investors that covered only approximately 30% of the transaction. Without some mechanism for payment of the remaining approximately 70% of the sales transaction, the transaction would facially be a sham. As such, the existence of lease revenue from third parties to Company D was required in order for the investors to obtain their tax benefits and to entice investors to make the initial investment of $45,000 per MSG.

At least 12 investors were identified that provided nearly $700 million to DC Solar through the creation of nearly three-dozen investment vehicles.  DC Solar also obtained nearly $100 million in investments from two financial institutions under similar circumstances.

Integral to DC Solar's claims to investors was its ability to generate sufficient MSG lease revenues to cover investors' promissory note payments.  Potential investors were told that DC Solar generated tens of millions of dollars in lease revenues from third parties leases comprised of both long-term and short-term lease arrangements.  

According to the FBI Affidavit, these claims were false.  As the Affidavit explains,

In truth, the evidence developed in the investigation to date demonstrates that over 90% of the money that Company D has claimed as lease revenue, and which it has used to pay the investment funds, was actually the result of transfers from Company S. The money from Company S is investor money as Company S has very little other significant sources of revenue or income other than through the investment funds. The evidence developed so far demonstrates that Company S is the primary source of income for Company D and merely pays obligations due to investors with money raised from that investor and later investors.

Based on my training and experience, I recognize the flow of investor money from Company S to Company D and then from Company D to the investment funds has permitted and continues to permit Individual 1 and others to conceal the absence of third party leases and to create the appearance that the MSGs are generating lease revenue when they are not. In my training and experience, the use of investor money to lull investors into believing the transaction is legitimate and profit making is evidence of a Ponzi-type investment fraud scheme.

In short, the Affidavit claims that more than 90% of the purported lease revenues were simply the result of circular transactions comprised of other investor funds.  The Affidavit also claimed that, in contrast to DC Solar's representations that more than 12,000 MSGs were in use as of March 2018, only 3,000 to 5,000 MSGs were actually in use.  Instead, the Affidavit alleges, the "vast majority of the MSGs that the Company has manufactured and sold to the investment funds are stored in lots throughout California..."

The Affidavit alleges that investor funds were diverted to, among other things, purchase over 20 real estate parcels and 90 vehicles, fund approximately $19 million in private jet travel, and apparently fund an independent baseball team.  That team, the Martinez Clippers, recently indicated to the league commissioner that the Carpoffs "weren’t going to be in a position to operate the team."

Ponzitracker is not aware of any response to date by the Carpoffs or DC Solar.  

The FBI Affidavit is below:

FBI Pleadings DC Solar 

New Jersey Couple Accused Of $5 Million Ponzi Scheme

A Princeton couple has been accused by New Jersey authorities of running a $5 million Ponzi scheme to fund a lavish lifestyle that included "country clubs, private schools, and tropical vacations."  Ford and Katherine Graham were named in a lawsuit filed by the New Jersey Bureau of Securities accusing the couple of numerous violations of the New Jersey Uniform Securities Law.  The complaint seeks disgorgement of any profits, restitution for investors, imposition of civil penalties, and injunctive relief. 

Ford Graham controlled and operated a number of companies including CCC Holdings, Specialty Fuels Americas, LLC, Aries Energy Group Venture, LLC, Rattler Partners, LLC, and Vulcan Energy International, LLC (the "Companies").  Beginning in 2013, Graham solicited investors for the companies through promises that their funds would be used for specific oil and gas projects carrying little to no risk.  For example, one purported project claimed that investor funds would be used to acquire a controlling interest in a company that purportedly had a claim against oil company British Petroleum deriving from the 2010 oil spill in the Gulf of Mexico that was worth between $7 million and $9 million.  Another investment opportunity promised guaranteed 6% annual returns from a "Dominican Republic Oil Transaction," while yet another investment promised that funds would be used to build a tank.  In total, Graham raised more than $5 million from unsuspecting investors.

According to the New Jersey Bureau of Securities, Graham's claims were false and in reality investor funds were used to perpetrate a Ponzi scheme in which new investor funds were used to pay purported returns and distributions to existing investors as well as funding the Grahams' lavish lifestyle.  The complaint details the alleged misappropriation of investor funds from various investments, including transfers to other investors and to Katherine Graham, spending at an Antiguan resort and at the couple's country club, and payments to the private school where the Grahams' child attended.  While Ford Graham is accused of playing a primary role in recruiting investors, the complaint also alleges that Katherine Graham - who received a law degree from Tulane University - encouraged at least one investor to invest based on the safety of the investment, that she was also planning to invest, and that time was of the essence if the investor wanted to realize the promised return. 

A copy of the complaint is below:

Graham Filed Complaint by on Scribd