SEC Says Georgia Man Ran "Massive" $110 Million Ponzi Scheme

The Securities and Exchange Commission filed an emergency enforcement action in an Atlanta federal court alleging that a Georgia man ran a “massive” Ponzi scheme through his ownership of a financial firm and which currently owes at least $110 million to hundreds of investors. John Woods, of Marietta, Georgia, along with Livingston Group Asset Management Company d/b/a Southport Capital (“Southport”) and Horizon Private Equity, III, LLC (“Horizon”), were named as defendants in the Commission’s action, which also sought the imposition of an asset freeze and the appointment of a receiver. The Court granted the appointment of a receiver over Horizon but denied the request to appoint a receiver over Southport.

The Scheme

According to the Commission, the story begins in 2008 when Woods was registered as both an investment advisor and registered representative of a financial services firm. In those capacities, Woods was required to disclose any outside business activities to his employer. The Complaint alleged that Woods began soliciting investors for Horizon, which was “nominally controlled” by Woods’ accountant at that time in order to shield Woods’ actual ownership. That same year, Woods also purchased Southport, which was an SEC-registered investment adviser. The Commission alleges that Woods’ brother then became “nominally” in charge of Southport when in fact Woods continued to exert control over Southport. Shortly thereafter, Woods’ cousin also left his job at the same financial services firm as Woods to join Southport. After Woods’ financial services firm apparently raised questions over Woods’ involvement in outside business activities, Woods ultimately resigned in 2016 and then joined Southport full-time. According to the Complaint, Woods apparently asked a business partner not to speak to his firm’s compliance personnel at the time they were investigating his affiliation with Southport because “he had only months to live because he was suffering from cancer.”

Woods, his brother, and his cousin all allegedly solicited clients to invest in Horizon, touting the safety and security of the investment and also promising that Horizon would pay guaranteed and fixed returns. Investors were rarely provided with any written materials relating to a prospective investment, instead relying on oral conversations and representations made by Woods, Woods’ relatives, or other Southport advisers. Investors were allegedly told that there was no possibility of losing their investment, that Horizon was not affiliated with Southport, that a Horizon investment was an annuity, and that investor funds would be used to purchase government bonds or collateralized mortgage obligations. Investors were also told that Southport employees would not receive compensation for recommending the Horizon investments.

The Commission alleged that these representations were false, and that in reality, Woods was operating Horizon as a “massive and ongoing Ponzi scheme” that owed investors more than $110 million as of the end of July 2021 but only had liquid assets worth less than $16 million. Woods allegedly used new investor fund to make payments to existing investors - a classic hallmark of a Ponzi scheme. The complaint indicates that Horizon has invested approximately $20 million of investor funds in other Horizon assets that will be “complicated” and “time consuming” to liquidate.

The Complaint details that the Commission’s Division of Examinations conducted an examination of Southport in 2018, alleging that Woods misrepresented his role with and control over Horizon. For example, Woods provided written responses indicating that he has “never” controlled Horizon’s operations, that he was not a signatory on Horizon’s checking accounts, and that Woods was "an investor in this fund, but not a manager.” It appears another examination was conducted in 2021, to which Woods allegedly provided similarly misleading responses.

In a hearing last week, U.S. District Judge Steven Grimburg agreed that appointment of a receiver was warranted over Horizon but declined to do the same for Southport, reasoning that “I don’t find this burden has been satisfied at this juncture…” An attorney for Southport, while agreeing that a receiver was necessary for Woods and Horizon, cited the recent change in management and leadership at the firm and indicated that the company “will not be around for much longer” if a receiver was appointed over Southport.

A copy of the Complaint is below:

New Hampshire Will Use Taxpayer Funds To Compensate Victims of $33 Million Ponzi Scheme

““Number one, the economy is going well…This situation is something that never should have happened. The fact that we had the revenue coming in as it has, it is the due diligence of the state to take care of this.”

  • New Hampshire Senator Gary Daniels

Ten years after the man responsible for New Hampshire’s largest Ponzi scheme surrendered to serve a 15-year prison sentence, the New Hampshire state legislature has approved allocating $10 million of taxpayer dollars from the state’s budget to be used to compensate victims of that Ponzi scheme. Scott Farah, the former owner of Financial Resources Mortgage, Inc. (“FRM”), is currently serving the sentence that was handed down after he pleaded guilty to fleecing investors out of $33 million. His arrest, however, rocked the New Hampshire government and ultimately resulted in a report from the state’s top criminal prosecutor that pointed to a number of red flags that were not identified or were otherwise ignored by a number of state agencies responsible for regulating FRM. While this is at least the third attempt to find a solution to compensate victims for what some attribute to the state’s regulatory failings, this is the first time that taxpayer funds have been tapped to fund the anticipated compensation. The move is sure to be cheered by Farah’s victims, who have received little of their losses, but also raises questions as to whether states should use taxpayer funds to compensate victims of Ponzi schemes.

The Scheme

Farah operated FRM and advertised the company as a residential and commercial mortgage brokerage and lending business. Another company, C L and M, Inc. (“CLM”), was a purported commercial loan servicer that was owned by Donald Dodge and worked closely with FRM. Beginning in 2005, Farah and FRM raised money from investors who thought they were investing in loans that would be used to fund commercial real estate projects and other businesses. One of the main methods used to target prospective investors was the mailing of postcards to a list of private mortgage lenders that had been purchased from a commercial database company, with the postcards touting the promised high-interest annual returns ranging from 12% to 20%. Investors were not told that a number of the loans structured by Farah and FRM were defaulted on by the borrowers; instead, CLM - the servicer - would continue to pay out the promised interest out of commingled bank accounts containing investor funds. Investor funds were also used for a number of other unauthorized purposes, including paying returns to existing investors, paying personal expenses, and even donating money to a church owned and founded by Farah’s father.

Farah and Dodge were indicted in 2010. Farah pleaded guilty and received a 15-year sentence (which was higher than the 10-year sentence requested by prosecutors), while Dodge was sentenced to a six-year term. Notably, Farah was days away from being released in mid-2020 after successfully obtaining approval for an early release as part of the government’s home confinement push to alleviate prison overcrowding in the middle of the COVID-19 pandemic. However, after victims intervened and brought this to the attention of the U.S. Attorney’s Office in New Hampshire (which claimed it was unaware of the notoriety of Farah’s crime), the decision was reversed days before Farah’s scheduled release. Farah is now scheduled to be released from prison in October 2023.

The Aftermath

In the wake of Farah’s arrest, questions quickly arose as to whether state regulators overseeing FRM’s industry should have acted sooner on alleged red flags that would have uncovered the fraud. In May 2010, the New Hampshire Department of Justice issued a report that set forth a laundry list of complaints and red flags in the ten-year period preceding FRM’s collapse and ultimately concluded that the state’s Securities Bureau, Banking Department, and Department of Justice suffered critical lapses that allowed FRM’s fraud to continue for years after it had been brought to regulators’ attention.

In one excerpt, the report detailed a complaint filed with the Securities Bureau in March 2000 by an attorney alleging that FRM had misled his client about the risk and viability of her investment. That attorney specifically referenced the possibility that FRM was operating a Ponzi scheme. The Securities Bureau then waited sixteen months to initiate an administrative proceeding, after which a hearing was held in July 2003. After an unsupervised Securities Bureau hearing officer presided over the hearing, and despite a statutory obligation to issue a ruling within a specific period of time, the hearing officer apparently declined to issue an order after determining that FRM investors would be better off if FRM voluntarily offered to redeem their investments rather than FRM being ordered to redeem all investments pursuant to a state statute. The report went on to detail a number of other violations, including a number of complaints filed with the regulators against FRM, yet no action was ultimately taken for years.

Efforts to Compensate Victims

A 2016 law was passed that created the FRM Victims’ Fund, a charitable trust that would solicit private donations to be used to compensate victims. However, the Fund largely remained dormant until the 2021 legislative session where state legislators - buoyed by a strong economy and state balance sheet - decided to amend the law creating the Fund to provide that a total of $10 million of taxpayer dollars would be allocated from the state’s budget to compensate Farah’s victims. The allocation would consist of $5 million for the fiscal year ending in June 2022 and an additional $5 million for the fiscal year ending in June 2023. The law further provided that an attorney or administrator would be hired to review victim applications and decide on payments to victims. Although the statute provides that the individual will be entitled to compensation, it does not specify whether that compensation will come out of the appropriated funds.

On August 13, 2021, New Hampshire posted a job opening for the FRM Claims Administrator and set an August 31, 2021 application deadline. The position link is available here.

Moral Hazard? Or Moral Obligation?

The New Hampshire legislature’s efforts, while not unprecedented, are extremely rare and raise complicated questions about whether taxpayer funds should be diverted from other pressing public needs to compensate investors of financial crimes. As one state legislator remarked:

“It is not a fiscally prudent use of taxpayer dollars when we are facing a tremendous homelessness problem, families in danger of losing their homes, and underfunded schools,” Rosenwald said. “The last thing we should be prioritizing right now is funding a handout to a small group of investors with the public’s hard-earned money.”

The move also raises the question of whether the state’s willingness to compensate victims of a Ponzi scheme might serve as a “moral hazard” whereby investors making risky bets will see the government’s willingness to step in as an incentive to continue making the risky bets.

On the other side of the equation, the proponents of the move argue that the move is a miniscule percentage of the state’s $13.5 billion budget and is the fulfilment of a promise the state made many years ago.

The New Hampshire DOJ’s Report is below:

SEC Says Florida Woman Referred To As "Mother Theresa" Ran $70 Million Ponzi Scheme Promising 120% Annual Returns

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The Securities and Exchange Commission has filed an emergency enforcement action alleging that a Florida woman and her two companies used the promise of 120% annual returns to operate a massive Ponzi scheme that raised at least $70 million from over 2,000 investors. Johanna Garcia, MJ Capital Funding, LLC (“MJ Capital”) and MJ Taxes and More (“MJ Taxes”) were named as Defendants in a complaint filed in the Southern District of Florida alleging violations of federal securities laws. The Complaint indicates that Garcia and her companies managed to raise at least $70 million (and as much as $120 million) in just over a year, and that the companies went to great lengths to keep the scheme going - including filing a lawsuit against a third party that questioned their returns. In addition to seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties, the Commission also obtained the appointment of a receiver to assume control over MJ Capital and MJ Taxes (the “MJ Companies”). It also appears that an FBI undercover agent was involved in the underlying investigation.

The Scheme

According to the Complaint, Garcia formed MJ Capital in June 2020 - months after the onset of the COVID-19 pandemic - and claimed that the company was in the business of funding merchant cash advances to businesses throughout the United States. According to MJ Capital, these merchant cash advances consisted of providing a loan to small business owners in exchange for the entitlement to receive a percentage of the business’s income over a specified period of time.

Initially, MJ Taxes allegedly solicited prospective investors to fund these merchant cash advances, promising monthly returns of 10% (which equated to annual returns of 120%) for six-month investments. MJ Capital soon became the primary vehicle to recruit investors, entering into agreements providing that investor funds would be used to fund the cash advances. An investor would not only sign a written agreement memorializing the investment terms, but would also be registered to enter into a non-disclosure agreement, a non-compete agreement, and a referral program agreement providing for a referral bonus for each person referred to MJ Capital.

The Complaint indicates that an undercover agent with the Federal Bureau of Investigation, posing as a prospective investor, visited the company’s Pompano Beach office in June 2021. The agent spoke with MJ Capital’s office manager who explained that any investment would be used to purchase future sales or profits of companies and promising the investor a 10% monthly return. The undercover agent later returned and made a $10,000 investment, receiving an initial 10% interest payment in July 2021.

But according to the Commission, Garcia and her companies only funded a few merchant cash advances and instead achieved the touted returns by running a massive Ponzi scheme. Between June 2020 and April 2021, the Commission alleges that the MJ Companies raised between $51 million and $67 million from investors, yet of that amount less than $3 million was used to fund merchant cash advances. Instead, more than $27 million of investor funds were paid to various entities, of which a substantial portion was used to compensate sales agents for soliciting investors. Another $20 million was used to pay the sky-high returns to existing investors - a hallmark of a Ponzi scheme. Garcia is also accused of diverting investor funds by making cash withdrawals. The pace of investments appears to have increased just before the action was brought, as the Complaint alleged that between $20 million and $62 million was raised just between May 1, 2021 and June 30, 2021.

The “Cover-Up”

In an odd twist, the Complaint details how an unidentified individual apparently registered a domain name similar to MJ Capital’s website that was used to publish allegations in April 2021 that MJ Capital was operating a Ponzi scheme. In addition to publishing a rebuttal on its own webpage, MJ Capital apparently viewed the existence of this domain name as “problematic” and filed a lawsuit against this unnamed individual alleging defamation and violations of the anti-cybersquatting consumer protection act. The lawsuit details an “extortion attempt” in which the purported website owner demanded $150,000 for the purchase of the domain name. MJ Capital, with the assistance of counsel, was in the process of seeking a default judgment against an individual it believed was the owner of the website at the time the Commission filed its enforcement action. Notably, it appears that Garcia herself recently filed a declaration (under penalty of perjury) in which she not only testifies that MJ Capital hired a company to “bury or lower Defendant’s website in search results for consumers searching for ‘MJ Capital Funds…,” but also that MJ Capital “funds millions of dollars in merchant capital loans on a monthly basis, with the amount of such funding having steadily increased every month since Plaintiff’s inception in 2020.” A copy of the Garcia declaration is available here. It remains unclear how the lawsuit will proceed given the allegations. The lawsuit is available below:

Complaint by jmaglich1 on Scribd

The ‘“Mother Teresa” of Her Community

MJ Capital’s website has a "blog” section where, in addition to articles touting the business and the concept of merchant cash advances, an article introduces the reader to “MJ Capital Funding’s CEO: Johanna Garcia.” The article indicates that Garcia - who “has always been known as a hardworking woman that has had her priorities in line” - owned a number of companies and was “often referred to as ‘Mother Teresa’ in her community.“ The article is below:

Based on the Commission’s allegations, the Court entered an Order appointing Corali Lopez-Castro as Receiver over the MJ Companies. As Receiver, Ms. Lopez-Castro is authorized to conduct an investigation into how the MJ Companies were operated, to identify and secure assets for the benefit of victims, and to fashion a claims process to return funds to defrauded victims.

A copy of the Commission’s Complaint is below:

Court Won't Dismiss Timber Ponzi Scheme Receiver's Suit Against Law Firm

A federal court has ruled that a national law firm must face a lawsuit brought by a court-appointed receiver over a collapsed timber Ponzi scheme that took in over $100 million from investors. Baker Donelson, which touts itself as the 74th largest law firm in the United States with nearly 700 attorneys, was one of the law firms that was linked to Henry Lamar Adams before he was arrested in 2018 on charges that his timber investment operation was nothing more than a massive Ponzi scheme that took in over $160 million from hundreds of investors. Alysson Mills, the Receiver for Adams’ company Madison Timber Properties (“Madison Timber”), has been tasked with recovering assets for the benefit of defrauded investors and to date has recovered approximately $20 million.

The Scheme

Adams touted Madison Timber to investors as a timber harvesting company that could provide annual returns ranging from 12% to 15% through the harvest of timber from plots of lands owned by third parties.  In many cases, investors were told that they had sole rights to timber harvested from specific plots of lands.  Investments were typically memorialized by a one-year promissory note that could be rolled over, a timber deed and cutting agreement, a security agreement, a tract summary with the purported timber value, and a title search certificate.  Adams ultimately raised over $160 million from 150 investors throughout the southeastern United States that would purportedly be used to purchase additional timber tracts.  

Many of these promises, however, were false. Adams never obtained the requisite harvesting rights to the land as he had claimed, and he also forged many of the investment documents provided to investors including the timber deed and cutting agreements as well as the tract summary showing the purported timber value.  In many cases, the same plots of land (to which he had no rights) were pledged to multiple parties.  Adams also misappropriated investor funds for unauthorized purposes, including for his own personal benefit and the development of unrelated construction projects in Oxford and Starkville, Mississippi.  New investor funds were also used to pay returns to existing investors - a classic hallmark of a Ponzi scheme. Adams was charged by civil and criminal authorities in May 2018, pleaded guilty, and was sentenced to a 20-year term in October 2018.

The Receiver’s Recovery Efforts

Following her appointment, Mills filed a number of actions against individuals and entities linked to Madison Timber. One of those lawsuits targeted law firms Baker Donelson and Butler Snow Mills as well as associated individuals and lawyers, alleging that the firms “lent their influence, their professional expertise, and even their clients to Adams…They made a fraudulent enterprise a fraternity.” After Butler Snow lost a motion to compel arbitration of the lawsuit in late 2019, the firm agreed to settle the Receiver’s claims for $9.5 million in early 2021.

The Receiver’s complaint described a seven-year relationship between Adams and two employees of Baker Donelson, Brent Alexander and Jon Seawright. Alexander served as a “Senior Public Policy Advisor” at the firm while Seawright was a shareholder and a member of the firm’s Board of Directors. According to the Receiver, Alexander and Seawright formed an investment fund in 2011 in which they pooled investor funds to invest with Adams. In turn, Adams agreed to share the returns with Alexander and Seawright. The fund was pitched to potential investors, including Baker Donelson clients, as an exclusive “friends and family” fund in which Alexander and Seawright were personally invested and had conducted extensive due diligence. The two men allegedly heavily leaned on Baker Donelson’s prestige and reputation in attracting investors, directing potential investors to view their biographies on the firm’s website and also using the firm’s offices and employees to carry out the fund’s operations. This included using the firm’s office to hold closings and make presentations as well as using the firm’s runners to pick up investor checks. Above all, investor funds were routed through the firm’s escrow accounts.

In reality, the Receiver alleged that neither Alexander nor Seawright had undertaken any significant investigation of the investments they were soliciting - even though the term sheets provided to investors specifically provided that the men’s fund would inspect the property and agreement with the specific timber mill. As the Receiver alleged:

Investors might fairly question what Alexander and Seawright did to investigate the investment. The reality is not much. In October 2017, Alexander bragged to a potential investor that “to our surprise, we have now financed the purchase of about $60 million in timber . . . It has worked so well that we simply send out an email on the 15th of each month and some hours later have collected the investment we need for the next round.”

In short, the Receiver alleged that Baker Donelson and the two men recklessly ignored numerous red flags.

Following Butler Snow’s settlement, the remaining defendants sought to dismiss the Receiver’s claims for civil conspiracy, aiding and abetting, recklessness and gross negligence, negligent retention, and vicarious liability.

In an order entered last week, U.S. District Judge Carlton W. Reeves denied Baker Donelson’s motion in its entirety while largely denying the motion filed by Seawright and Alexander. In the Order, the Judge found that the Receiver had adequately alleged the predicate to support her claims - including that the claim for civil conspiracy could stand given plausible allegations that Baker Donelson had “actual knowledge that Adams was running a Ponzi scheme.” The Order also denied the invocation of the in pari delicto defense, noting that the Receiver and the Receivership Estate were legally distinct from Adams and Madison Timber and thus entitled to assert claims that Adams and Madison Timber would be precluded from pursuing.

The case will now proceed to the discovery phase. A link to the Receiver’s website is here, and a copy of the Court’s Order is below: