Securities Industry Commentator by Bill Singer Esq

March 4, 2019
In an Indictment filed in the United States District Court for the Southern District of Mississippi, William B. McHenry was charged with  one count of securities fraud and two counts of wire fraud involving an alleged Ponzi scheme using Madison Timber Properties, LLC, a company wholly owned by Arthur Lamar Adams, who had previously been convicted and sentenced for his role. The Indictment alleges that McHenry recruited over 25 investors who invested over $18 million. As set forth in part in the DOJ Release:

[M]cHenry falsely represented to investors that Madison Timber Properties was in the business of buying timber rights from landowners and then selling the timber rights to lumber mills at a higher price. The object of the scheme was to cause individuals to invest in loans that purportedly were for the purpose of financing contracts for the purchase of timber rights to be sold to lumber mills at a higher price. However, neither McHenry, Adams nor Madison Timber Properties had such timber rights or contracts with lumber mills, except in only a few instances.

McHenry and Adams entered into fraudulent investment contracts with investors, most often in the form of promissory notes on behalf of Madison Timber Properties. The loans typically guaranteed investors an interest rate of 12-13%, with the interest to be repaid to investors over the course of 12-13 months. The monthly payments due on these promissory notes were typically due on either the first or the fifteenth of the month.

McHenry and Adams created false documents causing investors to believe that their investments were secured by sufficient collateral from which they could recover all or part of their investment in the event that Madison Timber Properties defaulted on the loans. Specifically, Adams created false timber deeds purporting to be contracts conveying timber rights from landowners to Madison Timber Properties. Adams forged the signatures of landowners and also created false timber deeds purporting to convey timber rights from Madison Timber Properties to the investors.

To further lull investors, Adams had many of the documents notarized to make the investments appear legitimate. McHenry and Adams also required the investors to agree not to record their timber deeds unless Madison Timber Properties defaulted on the loan agreement by failing to make a payment.

McHenry misled his investors to think that McHenry was a principal officer of Madison Timber Properties and was personally invested with his own funds in the enterprise. Instead, McHenry in fact only received a ten percent commission on all the investments he recruited, which McHenry failed to disclose.

Following the 2018 criminal prosecution of Arthur Lamar Adams, the United States District Court appointed a receiver, who is actively seeking to recover and maximize assets for restitution to investor victims. . .
Among the more common questions asked of me as a Wall Street lawyer is the one that starts with something along the lines of: so, you're like a lawyer-lawyer, right? I mean what I tell you is confidential, right? So . . . just between us, like, you know, just askin' and all, but, what's the worst that could happen to me if I tell my former employer to shove the balance due on my promissory note? This is a free country, right? I mean if I don't got the bucks to repay the balance, they can't prevent me from working, right? And thus begins a basis for today's featured FINRA Arbitration, which becomes a New Jersey Court case, which becomes a FINRA Office of Hearing Officers Decision, which becomes an SEC appeal, which becomes, yet again, a FINRA Office of Hearing Officers Decision, which becomes, yet again, an SEC appeal.
Investment advisor William H. Minor pled guilty to one count of mail fraud  for his involvement in a pension trust fraud scheme. Minor was the operator of Multi Financial Insurance Corp., a provider of investment advice and administrative services for pension plans, and in 1991 through June 2016, Minor transferred approximately $2 million from the nonprofit Rehabilitation Center for Children & Adults Inc. Pension Trust to accounts he controlled. The Rehabilitation Center provides outpatient physical, occupational, and speech therapy to children and adults, sponsored the plan. Minor served as a volunteer member of the center's board of governors. Following his guilty plea, Minor was sentenced to 41 months in prison plus three years supervised release and ordered to pay $1,636,604 in restitution. As set forth in part in the DOJ Release:

In October 1991, Minor moved plan assets to Transamerica Life Insurance and Annuity Co., for which he registered as an insurance agent. Minor falsely represented to the rehabilitation center and plan trustees that Multi Financial would work in partnership with Transamerica Life to administer the plan, even though Transamerica had no partnership with Minor, and did not provide any administrative or record keeping services for the plan. As a result, Minor was able to exercise control of the plan.

Minor used that authority to direct one plan trustee to endorse benefit checks from Transamerica to Multi Financial, with the understanding that Minor would then issue payments to specified plan participants. In other instances, Minor forged the trustee's name on the checks.  Later in the scheme, Minor opened a bank account in the name of "Trustee for the Rehabilitation."  Since the checks were payable to the Trustee for the Rehabilitation, Minor could directly deposit the checks into this account without the endorsement of the plan trustee. 

Minor made at least 63 fraudulent requests to Transamerica for lump sum benefits checks for participants not entitled to plan benefits. Transamerica honored the requests and issued 63 checks payable to the Trustee for the Rehabilitation.  Minor deposited the first 15 checks into the Multi Financial account and the remaining 48 checks into the Trustee for the Rehabilitation account.  In total, he fraudulently transferred approximately $2 million from the plan's Transamerica account to his own accounts, using the plan's assets to benefit himself.
Kenneth Taylor, Sharon Ringgenberg, and Craig Scott. were indicted in the United States District Court for the Northern District of California.  Taylor was charged with one count of conspiracy to commit wire fraud; two counts of wire fraud; and two counts of subscribing to false tax returns; and he subsequently pled guilty to the conspiracy count and to one count of making and subscribing a false tax return. Ringgenberg and Scott pled guilty to their respective roles in the scheme. As set forth in part in the DOJ Release:

[B]etween 2009 and 2012, Taylor, of Oakland, Calif., conspired with at least one of his codefendants, Sharon Ringgenberg, of Martinez, and Craig Scott, of Lafayette, to generate and transmit to banks fraudulent standby letters of credit and proof of funds statements.  The fraudulent financial instruments were issued by Success Bullion USA, LLC (SBUSA), an entity that was falsely advertised as the United States subsidiary of a large Hong Kong financial institution.  Among the reasons that the financial instruments were fraudulent is that they reported false client creditworthiness and they reported client balances that exceeded SBUSA's assets.  

Taylor admitted that, at times when dealing with customers, he posed as a fictional Hong Kong-based attorney for SBUSA.  Taylor also admitted he assisted in the creation of SBUSA's website and that another entity he controlled, Centerlink, LLC, transmitted the fraudulent instruments to banks in a format that rendered the instruments unenforceable.  Taylor received at least $550,000 from the scheme.  Taylor acknowledged the proceeds were sent to a bank account in Belize he controlled in the name of Centerlink, LLC.  

Furthermore, Taylor admitted he filed false 2009 and 2010 federal income tax returns that underreported his income in each year.  Taylor also acknowledged he did not file a tax return for tax years 2011 through 2015 despite receiving sufficient income in each year and knowing that he was required to file a return.
In a Complaint filed in the United States District Court for the Southern District of Ohio, the SEC alleged that former registered representative John Gregory Schmidt sold securities belonging to at least seven of his retail brokerage customers and secretly transferred over $1 million in proceeds to at least ten other customers to cover shortfalls in the customers' accounts. READ the Complaint of Schmidt's victims were elderly with little to no financial expertise and were particularly vulnerable. Without admitting or denying the allegations in the Complaint, Schmidt consented to the entry of a final judgment that enjoins Schmidt from violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder; and orders him to pay disgorgement of $235,614 disgorgement, $35,049 interest, and a civil monetary penalty of $864,301.