Have You Seen This Man? Washington’s Biggest Convicted Ponzi Schemer Is Still On The Lam 18 Months After Escape

Back in 2011, a Washington man dubbed “Seattle’s Mini Madoff” stood in a Washington federal courtroom and pleaded guilty to charges including wire fraud and bankruptcy fraud stemming from his operation of a $120 million Ponzi scheme that ranks as the largest such scheme in Washington state history.  After receiving his 18-year prison sentence, Darren Berg led a relatively quiet life as Inmate #17950-086 until one day in December 2017 when he simply hopped a fence at a Satellite Prison Camp in Atwater, California and is believed to have walked to an adjacent airport and onto a private jet headed overseas.  In the ensuing time since his escape, U.S. Marshalls have zeroed in on Berg’s boyfriend after signs pointed to his potential involvement.  But more than 18 months after the escape, Berg remains on the lam and holding the title of the largest Ponzi schemer to escape prison.  

After Berg’s college education at the University of Oregon abruptly ended amidst questions over missing funds from his tenure as fraternity treasurer, Berg eventually ended up in Seattle where he founded the Meridian Mortgage group of investment funds in Mercer Island.  Approximately 1,000 investors ultimately sunk over $350 million into the Meridian family of funds, which purported to invest in real estate contracts, mortgage-backed securities, and hard money loans. Berg took elaborate steps to conceal the fraud, including the creation of false records for many of the contracts or loans, which often included fake appraisals and title reports.  Berg also opened dozens of PO boxes in the names of illusionary borrowers in order to deceive an independent auditor.  In reality, Berg used investor funds to make payments to earlier investors in the funds, as well as misappropriate funds for personal and business expenses that included the creation and operation of a luxury bus company, the purchase of multi-million dollar yachts and private jets, and personal automobiles.  

After the scheme collapsed and Berg filed bankruptcy, he offered to cooperate by purportedly assisting the overseeing bankruptcy trustee in understanding the complex business empire.  While altruistic at first glance, Berg’s true intentions were revealed when authorities discovered he was attempting to wire $400,000 from his estate into a previously undisclosed account in Belize.  While Berg had claimed that the account contained post-bankruptcy income he was entitled to keep, the truth was that the funds were from a house Berg had sold in a fire sale that had not been disclosed to authorities.  There was also evidence that Berg had tried to establish an offshore trust in Belize - another event Berg tried to explain away as innocent asset protection for a bus company he had operated.  He was subsequently arrested in October 2010 where a federal judge rejected at least three attempts by Berg’s attorneys to allow him to remain on bail pending a trial based on a prescient assessment that Berg was a flight risk - including denying his request to stay at his sister's house in the months leading up to trial.

Berg pleaded guilty to three counts and received his 18-year prison term, but not after his own mother sent a letter to the sentencing judge wondering just what share of blame his investors should share for their greed:

“They too must be culpable for a small percentage of the guilt, as savvy investors, for letting their greed overtake their reason,”

Berg served his first six years at various minimum-security institutions throughout California.  But it was at a satellite prison camp in Atwater, California where Berg plotted his early release.  The camp had relatively minimal security due to its population of inmates deemed low risk.   Inexplicably, an airport was located just beyond Atwater’s perimeter fences.  Then, one day in December 2017, Berg became one of 8 people since 2011 to escape from the facility when apparently hopped a fence and boarded a private jet at the airport next door.  The trail apparently soon ran cold.

In recent months, authorities have reportedly focused on Berg’s boyfriend, Darrell Ray Blankenship, a flight attendant with international connections and apparent access to a private jet.  Authorities pointed to multiple suspicious links between  linking Blankenship to Berg, including:

• Photos posted by Blankenship weeks after Berg’s escape of several men in Brazil, one of whom had a similar hairline to Berg’s;

• A message sent by Blankenship to Berg’s mother at the same time saying, “Hello from Rio”;

• A message sent to a tarot card reader in early 2018 signed “Darrell and Darren”; and

• Instagram messages sent from Blankenship to a mutual friend saying he had “just heard from Darren.”

Despite this evidence and authorities obtaining a warrant for Blankenship’s electronic communications, Berg remains on the run.  If caught, he could face up to an additional five-year prison term for escaping in addition to the remainder of his 18-year term.  

If you have information on Berg’s whereabouts, contact the U.S. Marshals at 1-800-336-0102.

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.

SEC Claims That "Fancy Colored Diamond" Investment And Cryptocurrency Was $30 Million Ponzi Scheme

The Securities and Exchange Commission filed an emergency enforcement action against several Florida residents alleging that an investment opportunity involving “fancy colored diamonds” and diamond-related cryptocurrency was a Ponzi scheme that raised at least $30 million from hundreds of victims. Jose Aman, Harold Seigel, and Jonathan Siegel, along with their related companies, were charged with violations of federal securities laws in a complaint filed in the Southern District of Florida. In addition to seeking the standard remedies, the SEC obtained the appointment of a receiver over the operation’s assets and is seeking the return of nearly $2 million paid to a church and pastor associated with the defendants.

According to the complaint, the men owned and/or operated Natural Diamonds Investment Co. (“Natural Diamonds”), Eagle Financial Diamond Group Inc. (“Eagle”), and Argyle Coin, LLC (“Argyle”) (collectively, the “Companies”). Beginning no later than May 2014, the Defendants allegedly raised at least $30 million from investors through several offerings. In offerings through Natural Diamonds and Eagle, potential investors were told that their funds would be used to purchase, refurbish, and resell high grade diamonds. Investors were promised varying amounts of return depending on the offering, with the Natural Diamonds offering promising 2% monthly interest for 24 months and the Eagle offering promising to double an investor’s money within 18 or 24 months.

Some investors were solicited through Harold Seigel’s radio show and podcast titled “The World Financial Report” in which the offerings were touted as opportunities to earn 24% annual returns. The SEC claims that these solicitations often includes assurances that the investment was safe, secure, and backed by “diamonds worth 10 times [the investment amount].” It appears that the vast majority of funds, approximately $25 million, was raised through the Eagle offering from March 2015 through December 2018. The Complaint also alleges that funds raised in the various offerings were routinely commingled to rectify account overdrafts or make purported interest payments to investors.

Beginning in December 2017, the Defendants allegedly began soliciting investments in a supposed cryptocurrency token called the “RGL Coin” that was purportedly backed by “fancy colored diamonds” and 100% guaranteed by an “insurance bond.” Potential investors were told that they were investing in the “Argyle Coin Project” and that their funds would be used to buy and sell diamonds and to build a virtual platform where diamonds could be bought and sold online. On its now-disabled website, Argyle made the following claims:

Argyle Coin is the first cryptocurrency to offer the public an opportunity to be directly buying and investing in the growing fancy colored diamond market
Why Is It Unique?

The Company is creating a new platform to buy and sell fancy colored diamonds. Through a secure, effective and fast system. It is an end-to-end solution with its own Token and systems of verification, trading and tracking of diamonds.

RGL as the trading symbol. It serves as a reference for the use of this system and in the market of precious gems
Why Argyle Coin?

Mitigating Risk Factors:

Third-party insurance bond that guarantees 100% of Pre-Sale and Crowdfunding purchases made, guaranteeing that every token will be delivered.

Argyle also promoted the investment through the below video:

Through an initial coin offering, Argyle raised at least $1.7 million from investors including a $500,000 investment from an unnamed “professional football player” residing in Wellington, Florida.

The SEC alleges that Argyle’s purportedly lucrative diamond-reselling operation was actually a Ponzi scheme that used money from new investors to pay purported returns to existing investors. Of the approximately $30 million raised from investors, the Defendants allegedly misappropriated at least $10 million to pay fictitious returns and also for Aman’s personal expenses that included house payments, shopping at Gucci, and buying horses and riding lessons for his son. In addition, the SEC claims that Aman’s church and pastors received more than $1.5 million in improper payments tied to the scheme. While Argyle Coin did have an insurance bond, its coverage only applied if Argyle Coin developed a cryptocurrency which the SEC claims did not happen.

A copy of the SEC’s Complaint is below: