Tag Archives: Fraud

Two Houston residents sentenced in ‘Pump and Dump’ Securities Fraud

Two Houston-area residents have been sentenced for their role in a $40 million ‘Pump and Dump’ securities fraud. John Brotherton of League City was sentenced to 60 months while Charles Grob received a sentence of 12 months.




Brotherton and Grob were also ordered to forfeit $1.9 million and $242,907 respectively, and serve three years of supervised release following their sentences. The court also ordered each man to pay restitution to the victims of the fraud. The amount will be determined at a later date.

Brotherton pleaded guilty in February 2019, while Gobb admitted his guilt in December 2018.

Five others – Andrew Ian Farmer, 41, Thomas Galen Massey, 49, Eddie Douglas Austin Jr., 69, and Carolyn Price Austin 65, all of Houston; and Scott Russell Sieck, 61, of Winter Park, Florida, also pleaded guilty for their respective roles in 2018 and will be sentenced later this year.

Chimera Energy

The original indictment involved the stock of a Houston oilfield services company called Chimera Energy Corp. In the summer of 2011, Farmer met Grob and Mr Grob agreed to become the CEO. Chimera was incorporated and a sham Initial Public Offering was conducted in December 2011 and January 2012.

Farmer and his associates recruited individuals to act as straw investors in the IPO which, in total, raised $75,000.  In correspondence with the FINRA regulator, Farmer concealed the extent of his involvement and got clearance from a broker-dealer to publish quotations for the stock. Farmer then got the straw investors to transfer their stock to entities he controlled.

During 2012, Farmer issued fake press releases touting cutting edge technologies in ‘NEW SAFE FRACKING that uses ZERO WATER’.  The share price rose to a high of $1.55 and Farmer sold 6 million shares for $4.6 million. The SEC suspended trading in October 2012 and announced initial charges in 2014.

Superseding indictment

A superseding indictment was filed in July 2017 which accused the defendants of ‘pump and dump’ schemes in 11 other penny stocks. Those schemes operated between September 2011 and June 2016 and caused losses of $40 million.

Brotherton participated in “war room” strategy meetings during which he and others formulated the “story arcs” for the various Issuers. He also coordinated promotions for the Group’s pump-and-dump schemes through late 2013. Brotherton later rejoined the Group’s scheme in 2015 in which he assisted in formulating promotional strategies and received distributions of illicit stock sale proceeds.

https://www.justice.gov/usao-sdtx/pr/two-sentenced-securities-fraud-conspiracy

Indictment – Farmer et al

Bryan bookkeeper charged with using company card for $850k personal use

James Day Burke, a bookkeeper with Rustex Inc, has been charged with using company credit cards for his own personal use. He was employed at the company from 2010 through August 2018. The fraud allegedly took place throughout the whole of that time.



Rustex is a small oilfield services company involved in the construction and maintenance of natural gas plants. It is based in Bryan, TX. It used Quickbooks for its accounting records.

Mr Burke charged expenses to the company credit cards and was responsible for paying the credit card issuers from the company bank account.

The information charge sheet alleges that Mr Burke stole $855,872.43 from Rustex. However, only one specific instance is identified in the information sheet, namely a $1,954 dental bill in August 2015.

If convicted, Mr Burke faces a possible sentence of up to 20 years in federal prison and a $250,000 maximum fine.

https://www.justice.gov/usao-sdtx/pr/former-oil-and-gas-employee-charged-using-company-card-850k-personal-use

SEC bars two Houston brokers involved in Ponzi scheme

The Securities and Exchange Commission (SEC) has barred Donald Mackenzie and Robert Davis from being associated with any registered financial broker. The case arose out of the collapse, in December 2017, of the Woodbridge Group of Florida in a $1.3 billion Ponzi scheme. Approximately 8,400 retail (mostly elderly) investors lost money.



Mackenzie owned Old Security Financial Group in Spring. Robert ‘Lute’ Davis was a Vice-President at the company. Old Security acted as an unregistered broker by selling securities of Woodbridge.

Mackenzie and Davis are two of 20 brokers around the country charged by the SEC as marketing the investments as ‘safe’ and ‘secure’. In fact, money from new investors was used to repay earlier ones.

The SEC alleges that Mackenzie and Davis sold investors two types of securities;

  • 12 to 18 month promissory notes bearing 5-8% interest that Woodbridge described as First Position Commercial Mortgages
  • 7 different private placement fund offerings with five-year terms.

Ads were placed in Texas Monthly and on KPRC AM 950 in Houston.

$2 million commissions

Between May 2014 and July 2015 Mackenzie and Davis received sales commissions of between 1-4% on the first type and 5% on the second type. However Woodbridge deliberately mischaracterized them as marketing bonuses. Mackenzie and Davis allegedly received $2 million in commissions earned as a result of raising $41 million through the sale of Woodbridge securities.

For now, without admitting or denying the findings of the SEC, Mackenzie and Davis have agreed to be barred from association with any broker, dealer or investment adviser. Also, they cannot participate in any offering of a penny stock.

The case is still ongoing in the District Court for the Central District of California. Mackenzie and Davis, if found guilty, may have to pay back the commissions as well as penalties.

Woodbridge CEO sentenced to 25 years

In October 2019, Robert Shapiro, the former CEO of Woodbridge, was sentenced to 25 years in prison. He pleaded guilty to tax evasion and running a $1.3 billion fraud. He admitted to taking between $25 million and $95 million of investors’ money. Shapiro used it to buy real estate in the Los Angeles area, global travel, jewelry and diamonds.

The SEC has settled with some of the other brokers involved in the scheme.

Run-ins with the regulators

Mackenzie and Old Security has had a number of run-ins over the years with courts and regulators.

  • 2001 – Old Security is sued by the SEC for commissions received for the sale of unregistered securities in Alpha Telecom. He was ordered to pay $79,000 in 2005.
  • 2005 – Sued for receiving commissions received for the sale of unregistered securities in Mobile Billboards. In 2008 a court in Atlanta ordered Mackenzie to pay $153,000.
  • 2012 – Texas Commissioner of Insurance ordered Mackenzie to pay a penalty of $20,000 for selling life insurance without a license.
  • 2016 – Mackenzie and Davis were fined $100,000 by the Texas State Securities Board for selling the Woodbridge securities in Texas even though they were not registered.

SEC Litigation – Mackenzie.pdf

SEC Litigation – Davis.pdf

Indian ringleader pleads guilty in Houston to call center scam

Hitesh Patel, aka Hitesh Hinglaj of Ahmedabad, India pleaded guilty in a Houston federal court to conspiracy to commit wire fraud, identification fraud and money laundering (among other charges).



The Scheme

Patel ran call centers in India that impersonated officials from the IRS and US Citizen and Immigration Services. US victims were threatened with arrest, imprisonment, fines or deportation if they did not pay alleged monies to the government.

If the victim agreed to pay, the call centers would turn to a US-based network of ‘runners’ who would purchase blank prepaid debit cards, forward them to the call center for registering and then purchase money orders using balances loaded by the call centers from the fraud proceeds.

21 sentenced in July 2018

The scheme also targeted citizens in Canada and Australia and ran from 2013 to 2016. Back in July 2018 I wrote about 21 US-based defendants who were sentenced in Houston. Patel was arrested in Singapore in September 2018 and extradited to the US in April 2019.

A co-defendant described Patel as “the top person in India and the boss for whom most of the other defendants worked.” Another co-defendant claimed Patel was arrested in India in 2016, but paid a bribe and was released.

$65 million losses

At the time of the original indictment, the US government stated there were over 15,000 known victims with $300 million attributable to scam calls. These numbers are for estimated 140 scammers operating this type of scheme. In his plea deal, Patel admitted he was accountable for approximately $25-65 million of the losses.

Sentencing is set for April 3. Patel faces up to 20 years in prison for the wire fraud conspiracy and five years for the other charges. Both counts also carry the possibility of a fine of up $250,000 or twice the gross gain or loss from the offense.

Hitesh Patel – superseding_indictment

https://www.justice.gov/usao-sdtx/pr/indian-national-convicted-role-call-center-scam-victimized-thousands-us

Houston man indicted in $1.3 million Regions Bank fraud

Julius Joachim Ohumole, aged 34, has been indicted in a $1.3 million fraud involving Regions Bank. He is charged with one count of conspiracy, four counts of bank fraud and two counts of aggravated identity theft.



In early December 2018, Mr Ohumole, using false information, opened a bank account in the name of Mars Construction at a Regions Bank branch in Houston.  An unknown co-conspirator accompanied Mr Ohumole to the bank and presented a false driver’s license as a means of identification to be added as a co-signor to the newly-opened bank account. The co-conspirator also provided an actual social security number of a real account customer at Regions.

4 withdrawals, $1.3 million

Somehow Mr Ohumole was able to gain access to the account of the real customer at Regions. On January 4, $274,000 was transferred from the real Regions account to the Mars Construction account. Four days later, another $200,000 was transferred.

In late January 2019, Mr Ohumole repeated the con with another newly-created account in the name of JMW Holt Constructions and a different real Regions customer. This time $815,000 was transferred in two separate transactions, six days apart.

The monies were then wired to an account in New York and then to an account overseas.

Each count of conspiracy and bank fraud carries a possible sentence of up to 30 years in federal prison. The aggravated identify theft charge carries up to two years, upon conviction. Each conviction also carries a possible $1 million maximum fine.

Regions Alabama employee guilty

In writing this story I came across another case involving Regions. Back in March 2019, a Regions Bank employee in Alabama pleaded guilty to accessing records of four wealthy customers without authorization. He passed on the information to outside co-conspirators who impersonated bank customers to make large withdrawals. The total losses were $300,000. These cases took place between February 2017 and March 2018 and are apparently unrelated to Ohumole.

https://www.justice.gov/usao-sdtx/pr/local-man-indicted-1-million-identity-theft-scheme

Founder of school academy charged in financial conspiracy

Richard Rose, the founder and Superintendent of Zoe Learning Academy has been indicted on 18 counts on charges of conspiracy, mail fraud, theft of government funds, money laundering and false bankruptcy declarations.



Zoe Learning Academy was an open enrollment charter school and was based in the Greater Third Ward area of Houston. It also had a campus in Duncanville, a suburb of Dallas.  The school started in 2001 and operated until it abruptly closed in September 2017.

Rose is alleged to have diverted funds from the charter school to fund personal expenses such as settling a personal lawsuit, paying personal legal expenses and buying a timeshare in Honolulu, Hawaii.

Rose was also the pastor of Life Tabernacle, a church on Cullen Boulevard. In 2013 Mr Rose was sued by a financial investor for not making payments on a $2.8 million real estate loan for the church. Mr Rose settled for $75,000 and allegedly used funds from the charter school to pay it. He also used $30,000 from the school to pay his legal expenses.

According to the indictment, Rose failed to disclose to the Texas Education Agency that the school paid more than $1 million for bus services to a company owned by Rose’s brother. He also failed to disclose payments to his wife of $60,000.

When Rose filed for Chapter 7 bankruptcy in October 2017, he stated that the Academy’s revenue was $263,000, when, in fact it was in excess of $2.8 million. He also stated that the Academy had not made any payments to insiders in the year prior to the Academy filing for bankruptcy.

Rose indictment

State of Texas agrees to pay $15 million to resolve errors in administering food stamp program

The Texas Health and Human Services Commission has agreed to pay the federal government $15.3 million to resolve allegations that it violated the False Claims Act in its administration of the Supplemental Nutrition Assistance Program (SNAP). SNAP was known as the Food Stamp program until 2008.



Under SNAP, the US Department of Agriculture provides eligible low-income individuals and families with financial assistance to buy nutritious food. Although the federal government funds the benefits, it relies on the states to determine whether applicants are eligible and to administer the scheme.

Furthermore states are required to perform quality control to ensure that eligibility decisions are accurate. The federal government also pay performance bonuses to those states that report the lowest error rate and the most improved error rate. The state of Texas contracted with Julie Osnes Consulting LLC (based in South Dakota) to provide advice and recommendations designed to lower its quality control error rate. The federal government alleged that the recommendations injected bias into the quality control process, resulting in the state receiving performance bonuses in 2010, 2013 and 2014 for which it was not entitled.

This is the fourth state that the Federal government has settled with. All hired Osnes Consulting. The other states are Virginia ($7 million), Wisconsin ($7 million) and Alaska ($2.5 million). The government has also settled with Julie Osnes herself ($0.8 million).  The state of Mississippi is also under investigation.

Although the details concerning the Texas program have not been released, from reporting in other states, it is alleged that the consulting firm would pressure state employees to either reclassify errors as correct or omit them from the sample.  The states would select a quality control sample and the federal government would audit a subset of the state’s sample.

https://www.justice.gov/opa/pr/texas-health-and-human-services-commission-agrees-pay-over-15-million-resolve-false-claims

 

Houston woman charged with embezzlement

A Houston woman, Beverly Davis, has been charged with embezzlement and theft of assets from her employer, a local labor union.

Ms Davis was an employee of the Communications Workers of America Local 6222. The local represents AT&T workers and is based in the Greenspoint area of Houston. The charges allege that from 2010 to 2017 she used union funds to pay for personal expenses and other authorized charges.



According to the Information sheet filed in the Southern District of Texas, the amount involved is $85,537. The charge sheet doesn’t give any more details than what is listed in the press release. There are no details of the personal expenses or how she was able to carry out the alleged embezzlement.

If convicted, Davis faces up to five years in federal prison and a possible $10,000 maximum fine.

[Update 12-13-19 Ms Davis has pleaded guilty. Also pleading guilty is Evelyn Smith. Ms Smith was the secretary/treasurer between 2005 and 2018. She took $50,968 in union funds between 2011-2018]

https://www.justice.gov/usao-sdtx/pr/local-woman-charged-embezzling-thousands-her-job

Houston Engineering Company pays $1.6 million to settle campaign finance violations

Dannenbaum Engineering, a major civil engineering contractor, has agreed to pay a $1.6 million fine for its involvement in campaign finance violations.



The company built parts of the Sam Houston Tollway, the Hardy Toll Road and taxiways at both Houston airports.

CEO recently stepped down

The former CEO of Dannenbaum, 80-year-old James Dannenbaum, has been separately charged for his role in the scheme. Mr Dannenbaum is a former Regent of the University of Texas (appointed by Rick Perry). He also serves on the boards of MD Anderson Cancer Center and until recently, the Greater Houston Partnership.

Also heavily involved was Louis H Jones, the Director of Dannenbaum’s South Texas region. Mr Jones lived in McAllen.  He died by suicide in October 2018.

The Scheme

The company admitted to making $323,300 in illegal contributions between 2015 and 2017

The scheme involved employees of the company making campaign contributions in their own name and then, secretly, being reimbursed by the company. The individuals and the campaigns involved are not named in the Information document filed in court in early November. However, searches of the database of the Federal Election Commission reveal the true recipients.

  • Kevin Brady (R) – House Representative for the 8th District of Texas (which covers the Woodlands and Huntsville). In February 2017, Brady’s campaign committee received a total of $10,000 from Jones and three employees (one based in Houston, the other two in South Texas).
  • John Cornyn (R) – Senior Senator for Texas. Cornyn’s campaign committee also received  total of $10,000 from the same individuals in February 2017.
  • Filemon Vela (D) – House Representative for the 34th District of Texas (which covers the Gulf Coast between Brownsville and Corpus Christi). Jones donated $2,500 to Vela’s campaign.

The company reimbursed Jones for the total amounts paid. In the company books, these were disguised as marketing advances. In turn, Jones issued personal checks to the three employees involved.

It’s interesting that the amounts involved quickly snowballed from the $22,500 disclosed in the Information document filed in early November to the $323,300 disclosed in the settlement agreement. The company has a new CEO, Michael Maksoud, who has vowed to restructure its board and stop all politically-related payments to its employees.

Perry and McCarthy big beneficiaries

A breakdown of the $323,300 has not been made public. While politicians from both parties appeared to receive donations, the two biggest recipients according to the FEC records were Rick Perry’s Super PAC (at least $90,000) and Kevin McCarthy’s committees (at least $38,500).

In the same period James Dannenbaum made almost $0.5 million in legal contributions to various candidates. They were mostly Republican including the Cruz, Perry and Rubio Presidential campaigns. However he also donated to Houston Democrats such as Al Green and Sheila Jackson Lee.

https://www.justice.gov/usao-sdtx/pr/houston-engineering-corporation-enters-corporate-resolution-and-agrees-pay-16-million

 

 

Harris County judge charged with fraud

Judge Alexandra Smoots-Thomas has been indicted on allegations of wire fraud. Since 2009, she has served as the presiding judge for the 164th District Court for the State of Texas. She has jurisdiction of Texas civil cases located within Harris County.



Beginning in early 2013, the indictment alleges that Smoots-Thomas used funds donated to her campaign for personal expenses unrelated to the campaign. She then hid her misuse of these funds by filing false campaign finance reports with the Texas Ethics Commission and concealing her activity from her campaign manager.

The indictment lists 7 transactions for a total of $24,890 where Smoots-Thomas allegedly used the campaign account for personal use. $11,809 was used to pay a home mortgage and $9,942 to The Regis School for tuition. An airfare, a Prada handbag and a ring from Zales comprise the other transactions.

Each of the seven counts of wire fraud carries a possible sentence of up to 20 years in federal prison as well as a maximum $250,000 fine.

Smoots-Thomas was the presiding judge over the initial phase of the TechnipFMC – McDermott lawsuit involving COO Sumit Mukherjee. Smoots-Thomas was replaced as the judge on the case just before the parties were set to go to trial as she was diagnosed with breast cancer. She is still receiving treatment for the cancer.

Smoots-Thomas indictment

https://www.justice.gov/usao-sdtx/pr/local-judge-charged-fraud