California Woman Accused Of $300 Million Liquor License Financing Ponzi Scheme

The Securities and Exchange Commission has filed an emergency enforcement action against a California woman accusing her of running a massive $300 million fraudulent scheme involving liquor licenses that essentially operated as a Ponzi scheme by using new investor funds to pay fictitious returns to existing investors.  Gina Champion-Cain, of San Diego, California, and her entity ANI Development, LLC (“ANI Development”), were accused of violating federal securities laws in a Complaint filed on Thursday.  Another company operated by Champion-Cain, American National Investments, Inc. (“American National”), another entity founded and operated by Champion-Cain and an alleged affiliate of ANI Development, is also named in the action as a relief defendant.  The Commission announced that Champion-Cain has agreed to entry of a preliminary injunction, asset freeze, and the appointment of a receiver over ANI and the relief defendant.  

According to the Complaint, Cain began offering investors the chance to make high-interest short-term loans to applicants seeking California liquor licenses sometime in 2012.  Cain told investors that their funds would be used to loan the license purchase price required to be escrowed during the purchase process which at completion would then generate an interest payment to be split by ANI and the investor. 

Cain’s first investor, a high net-worth real estate investor who had previously invested with Cain, prepared an escrow agreement that provided, among other things, that his investment would only be used for the promised purpose and that his money would be kept in an escrow account for the duration of the license transfer process.  The SEC claims that Cain falsely told investors she had cleared the form of the escrow company and that Cain also warned investors not to contact the company, in one instance emailing the escrow company and instructing them:

“[I]f they call asking about escrow agreements and alcohol licenses, blah, blah, blah… just say ‘SURE WHATEVER NOW SHOW ME THE MONEY… HAHAHAHA’” 

After Cain’s first investor personally invested approximately $250 million through accrued principal and interest rollovers, he began to bring in other investors who were provided with a list of potential liquor licenses they could fund that Cain claimed to have received from a California attorney.  Accoridng to the SEC, that list “contained largely cancelled or expired liquor licenses.” ANI also raised funds from a second investor group that were provided with short-term promissory notes promising annual returns ranging from 15%-25% depending on the loan type.  Investors were provided with an escrow agreement signed by the company’s escrow officer.

But according to the Commission, “ANI Development’s investment strategy was wholly fictitious…[and] ANI does not appear to have made a single loan to alcohol-license applicants.”    For example, investors allegedly deposited nearly $88 million in 2017 to a pooled escrow account yet not a single dollar was ever escrowed to “actually facilitate….the transfer of the alcohol licenses identified in the false investor escrow agreements.”  Instead, Cain allegedly used those funds to support other unrelated businesses controlled by relief defendant American National and also to make principal and interest payments to existing investors - a classic hallmark of a Ponzi scheme.  Through the unauthorized diversion of investor funds and the payment of above-average returns, the scheme also depended on an infusion of new investor funds since there apparently were no legitimate liquor license loans being made.  The escrow agreements were also purportedly phony, with Cain accused of forging the signature of escrow officers. 

As recently as July 2019, the Commission claims that Cain sent a “bogus email” to the high net-worth investor purporting to come from an escrow officer who confirmed a $140 million escrow account balance.  That in turn allegedly induced the investor to invest another $2.2 million with Cain.  The account had nowhere close to the represented balance, however, and the Complaint alleges that approximately $11 million is remaining while Cain’s investors are owed at least $120 million in outstanding principal.

While there is no mention in the Commission’s news release of any criminal charges, the existence of fabricated escrow agreements and doctored emails, if true, could also signal potential criminal liability.

Given what appears to be a significant shortfall in assets, which appears to be attributable to funds diverted to unrelated businesses and the payment of 15%-25% returns, the appointment of a receiver may signal potential fraudulent transfer actions against investors who were able to handsomely profit by withdrawing their accrued interest payments.  

A copy of the Complaint is below: 

Pennsylvania Woman's Alleged $100 Million Ponzi Scheme May Be Largest Scheme Run By A Woman

A Pennsylvania woman is facing charges from civil and criminal regulators on allegations that her hedge fund was operated as a massive Ponzi scheme that raised over $100 million from dozens of investors. Brenda Smith, 59, was arrested Tuesday morning on a criminal complaint from the U.S. Attorney’s Office for the District of New Jersey charging her with four counts of wire fraud and one count of securities fraud. That same day, the Securities and Exchange Commission filed an emergency enforcement action alleging violations of federal securities laws and secured an asset freeze against Smith and her entities. Each of the criminal charges carries a maximum sentence of up to twenty years in prison. Based on preliminary research and a review of Ponzitracker’s database of Ponzi schemes, it is believed that Smith’s alleged scheme is not only the largest Ponzi scheme in Pennsylvania history but possibly the largest scheme run by a woman.

The SEC named Smith and the companies she controlled, Broad Reach Capital, LP (the “Fund”), Broad Reach Partners, LLC (“Partners”), and Bristol Advisors, LLC (“Bristol”), as defendants, alleging that Smith began soliciting investors for the Fund beginning in early 2016 on promises of consistent profits through lucrative trading strategies such as “Dividend Capture, VIX Convergence, Volatility Skew, S&P Premium Capture, Opportunities and Intraday Trading” as well as the Fund’s access to the Philadelphia Stock Exchange trading floor. The Fund touted its incrediblly consistent history of returns to investors, using charts in presentations claiming that the Fund had yielded positive returns for every month since inception in 2015 - even though the Fund itself did not even start until 2016. The Fund claimed to have returned 35% in 2016 and 33% in 2017 as well as a 6.07% return during the first three months of 2018. Based on these and other representations, the Fund raised more than $100 million from dozens of investors including more than $40 million from the three investors whose plights are chronicled in the Complaint.

According to the SEC, Smith’s claims about the profitability and trading success were simply false. Rather than using all investor funds for the promised trading strategies, the Complaint alleges that the balance in the Fund’s brokerage accounts never exceeded $30 million. Similarly, the Commission disputed the Fund’s claims of consistent profitability in alleging a continuous decine in the Fund’s total assets and the existence of a current “massive shortcoming” in which $63 million in investor principal is still outstanding.

The Complaint also details a chain of recent events which likely precipitated the filing of civil and criminal charges which began with an investor attempting to redeem its combined $46.6 million investment in March 2019. After the Fund failed to return the investment by the promised date in mid-May, Smith allegedly concoted various excuses for the redemption delay including providing a “proof of funds” from an unrelated entity owned by Smith and claiming that the entity owned an entire $2.5 billion bond issuance. This was easily disproven by public records. That same investor also received an “asset list” to show the Fund had sufficient assets to satisfy redemption requests, with the list including $20.25 million in “securitized cryptocurrency.” As the SEC recounts,

Attempting to substantiate this claim, Defendants provided Investor 3 with only a two-page, unintelligible document entitled “Wallet,” which shows a few lines of text with dollar figures. Fund bank records do not reflect the purchase of this purported asset.

Smith appears to have a lengthy history in the securities industry that included her ownership and management of a broker-dealer. According to the Financial Indsutry Regulatory Authority’s BrokerCheck tool, Smith had over 10 years of experience in the industry and at one point held Series 7, 24, 27, 53, and 79 licenses over a career that included stints at firms like Drexel Hamilton. Smith has a lengthy disciplinary history with FINRA that ultimately and recently resulted in her consent to be permanently barred from the industry after she refused to respond to regulatory inquiries. Notably, after an unnamed customer filed an arbitration claim against Smith in late 2018, Smith included the following response:

Registered Representative is in complete disagreement with this allegation and will defend herself including counterclaims. FINRA does not have authority over this arbitration as [REDACTED] is not and never was a customer of CV Brokerage. [REDACTED] has served a prison term for securities fraud himself. [REDACTED] alleges that Brenda Smith committed actions noted above. All are denied. [REDACTED] was redeemed involuntarily because of his hostile actions against Brenda Smith. His filing of this arbitration is retaliatory as he has no method to make the same level of returns as he received from Smith's Fund. This Fund is NOT governed by FINRA and Ms. Smith is confident this arbitration will be thrown out in its entirety.

Smith’s scheme may be historic on several levels. Based on Ponzitracker’s quick research and a review of its 11-year database, Smith’s scheme is likely the largest Ponzi scheme not only in Pennsylvania history and could also be the largest Ponzi scheme run by a woman based on investor losses. Florida woman Lydia Cladek was charged in 2012 with operating a $100 million Ponzi scheme but investor losses were likely closer to the $34 million she was ultimately ordered to repay when sentenced to a 30-year prison term. Similarly, Washington woman Doris Nelson was accused of raising $135 million from investors in a Ponzi scheme but investor losses were ultimately believed to be approximately $50 million. The SEC has alleged that Smith’s investors are currently owed at least $63 millon in outstanding principal.

A copy of the SEC’s Complaint is below:

 For First Half of 2019, Ponzi Scheme Discoveries Remained Steady But Are Red Flags Waving?

Earlier this year, Ponzitracker published a compilation of data and statistics for Ponzi scheme discoveries and sentences from 2008 - 2018.  Believed to be the first time that this data was aggregated in a single setting, it allowed a sobering look into how Ponzi schemes in the United States have flourished since Bernard Madoff’s $65 billion Ponzi scheme shocked the world in 2008.  In cataloguing the over-800 schemes discovered and over-700 sentences handed down since 2008, some of the conclusions were unsurprising including that the populous states of Florida, New York, and California were responsible for the largest number of Ponzi scheme perpetrators.  Yet the data also yielded other eye-raising takeaways including that men were responsible for approximately 90% of those schemes and that Utah had the 6th highest number of Ponzi schemes despite being in the bottom third of U.S. population.

Ponzitracker’s data also showed that the number of Ponzi schemes uncovered in 2018 was the lowest since 2008 - the year that massive schemes operated by Madoff and Tom Petters caused billions of dollars in losses and vaulted the term “Ponzi scheme” into the global lexicon.  The data showed that the average and median Ponzi scheme size during 2018 was largely unchanged from previous years, and taken together these data points offered at least preliminary support for the theory that these positive changes were at least partially attributable to increased regulatory efforts and heightened consumer awareness.  The continually declining number of Ponzi scheme discoveries in the midst of a lengthy positive run in financial markets also supported the hypothesis that Ponzi scheme discoveries were inversely correlated with financial market performance; in other words, the schemes were able to thrive in strong economic times where similar returns were at least theoretically possible with the current market performance and it was only after a market downturn that schemes generally began to be exposed. 

One of the largest questions after compiling the 2018 data was whether the steady decline in Ponzi scheme discoveries - the smallest number in Ponzitracker’s reporting since 2008 - would continue or revert back to the higher numbers previously observed in recent years.  In preliminary data compiled by Ponzitracker for the first half of 2019, the results appear to be mixed.  In a positive takeaway, 23 Ponzi schemes were uncovered during the first six months of 2019, which appears to be similar in frequency to the 42 schemes uncovered during all of 2018.  That data certainly suggests that, absent a large uptick in discoveries during the last six months of 2019, that the possibility of second year of less than 50 Ponzi scheme discoveries is likely.

Yet in a more ominous sign, both metrics concerning scheme size significantly increased for the first six months of 2019 compared to previous years.  While the average scheme size in 2018 was $34.5 million, the average size for the first half of 2019 was roughly double that at $68.5 million.  Similarly, the median scheme size in 2018 was $5.4 million while the median size in the first half of 2019 was nearly triple that figure at $15 million.  Assuming these trends hold, each of these metrics would be the highest number since 2009.  On their face, these figures suggest generally larger schemes are being discovered which is demonstrated by 5 Ponzi schemes of at least $50 million in size during the first half of 2019 - including two over $300 million.  

One likely explanation for the larger scheme sizes is that Ponzi schemes have been able to exist under the radar and attract more investors - and investments - as a result of continuously healthy financial markets.  As markets have generally moved upward over the past several years, there is less of a need for investors to tap their “safe" or “guaranteed” investment which seemingly (and in some cases inexplicably) continues to increase in value.  In turn, the continuing viability and purported prospering of the scheme may lead to an increase in investments through word-of-mouth or additional investments from existing investors.  

Other notable takeaways from the 2019 data include the revelation that more than half of the 33 individuals accused of being involved in a Ponzi scheme hailed from just two states - Florida and California.   The data also marks the highest proportion of females (approximately 15%) accused of operating Ponzi schemes.  

A chart of Ponzi scheme discoveries from the first half of 2019 is below:


Court: Lawsuit Against Lawyer Who Represented Madoff Winners And Losers Can Proceed

“Ms. Chaitman represented both net winners and net losers in a zero-sum game; the more money collected from some of her clients (the net winners), the more available to be distributed to her other clients (the net losers). Ms. Chaitman’s clients, therefore, were in direct conflict with each other.  To make matters worse, Ms. Chaitman herself is a net loser, which means she personally stands to receive money taken from her net winner clients. This conflict cannot be waived.”

In the immediate aftermath of Bernard Madoff’s massive Ponzi scheme, one that resulted in at least $17 billion of losses to thousands of investors, many of those investors turned to an outspoken lawyer who promised to champion their unfortunate situation and resist the efforts of the court-appointed trustee seeking to recoup funds.  Many were drawn to Helen Chaitman’s fiery resistance to trustee Irving Picard’s clawback efforts, which would ultimately result in many later retaining her to defend the trustee’s lawsuits seeking return of the fictitious profits that had been the sustenance of Madoff’s fraud.  A court recently ruled that those same victims can proceed with a class-action lawsuit on allegations that Chaitman had irreconcilable conflicts preventing her from representing various classes of Madoff victims.

According to those victims who had been fortunate enough to withdraw more money than they put into Madoff’s scheme, known as “net winners,” their self-proclaimed “savior” Chairman had an inherent conflict of interest all the while she was supposedly advocating for those net winners - Chaitman herself was a “net loser,” having invested in Madoff’s scheme and failed to recoup all of her original investment before the scheme’s collapse.  Thus, as those victims contended in a class action against Chaitman and her former and current law firms, Chaitman’s efforts in representing those “net winners” and eventually resolving cases by repaying some (or all) of the winners’ false profits would place more and more funds into the trustee’s estate for eventual distribution to net losers - including herself - all the while enriching her with millions of dollars in attorney’s fees for her efforts.  Those investors also claimed that Chaitman’s efforts representing a third class of Madoff victims, the so-called “early investors” who sought to retain their realized profits out of the bankruptcy estate because Madoff’s fraud had not yet started, were in conflict to both the net losers and net winners.

Chaitman allegedly represented those “net winner” and “early investor” victims on an hourly-fee basis while representing the “net loser” victims on a contingency fee basis.  Of particular note, those “net loser” victims would eventually receive significant payments from the bankruptcy trustee and advances by the Securities Investor Protection Corporation which, in many cases, resulted in 100% recoveries for victims with investments under a certain amount. While the exact nature of those contingency fee agreements for “net losers” is unclear, it is interesting to theorize exactly what services besides providing general information and assisting investors with filing proof of claim forms (which are regularly submitted by Ponzi scheme victims without the assistance of counsel) might otherwise entitle Chaitman to a percentage of what could now be 100% recoveries for many investors.  For example, a 30% contingency fee for a victim who lost (and ultimately recovered) $1 million would yield a $300,000 fee.

As to her representation of “net winners,” an Amended Complaint accused Chaitman of continually advocating a strategy of “full-scale litigation” given Trustee Irving Picard’s goal to “make this litigation as expensive and time-consuming as possible because his only goal is to enrich himself at the expense of innocent customers….Picard will not settle for less than [the full two-year exposure].”  As part of this strategy, the Amended Complaint cites a request from Chaitman to her “net winner” clients to advance a $15,000 retainer per case in 2016.  The Amended Complaint alleged that at least one investor was, contrary to Chaitman’s claims, able to settle their claims “for a fraction of its full two-year exposure.”

In late 2018, Chaitman and her current and former law firms sought to dismiss the investors’ claims on grounds that the lawsuit failed to satisfy the numerosity (over 100 potential class members) and amount-in-controversy (over $5 million) requirements imposed on class-action lawsuits under the Class Action Fairness Act.  In July 2019, the Southern District of New York entered an Order affirming a Report and Recommendation which found that the lawsuit satisfied both requirements.  As to the numerosity requirement, the Court found that a June 2012 invoice provided by plaintiffs showing each “net winner” being billed 1/109th of Chaitman’s time spent working on clawback matters was uncontested and also highlighted that Chaitman’s website had claimed she represented over 1,600 investors.  

As to the $5 million amount-in-controversy requirements, the Court first noted the amount of fees each law firm contended it was paid.  Chaitman’s former firm acknowledged receiving $3.2 million in fees during the relevant period while her current firm indicated it had collected over $2.7 million during that same period.  While the Chairman Defendants contended that the amounts could not be aggregated to meet the $5 million requirement, the Court found that CAFA “explicitly” provided for aggregation of the plaintiffs’ claims and that such an interpretation was consistent with “the overall spirit of CAFA.”

At recently as late 2018, Chaitman continued to be involved in litigation with Trustee Picard over his clawback efforts.  Bloomberg reported in September 2018 that “Chaitman has lately been fighting in court for access to Picard’s massive database of trading records and other documents seized from Madoff’s firm to advance a fringe theory that the fraud wasn’t technically a Ponzi scheme.”  That same article referenced Chaitman’s efforts to dismiss an earlier case brought by the lead plaintiff in the class-action, including her position that the lead plaintiff “sued in a bid for press attention after Chaitman sued him for unpaid fees in New Jersey” and Chaitman’s belief that “the suit should be tossed because it’ll never get class-action status.”

The case will now be allowed to proceed to discovery given the Court’s decision.

A copy of the Order is available here.