100 Million Dollar Fraud
This case comes as the Bahamas is in the process of repairing its reputation that took a blow after the FATF said the country was not doing enough to fight money laundering.
A U.S. court-appointed receiver is suing Bahamas-based Leadenhall Bank & Trust Limited in connection with a multimillion-dollar fraud case through which innocent investors and creditors were reportedly bilked of their investments in a multiple tiered marketing scheme.
But a Leadenhall executive has dismissed those claims as false.
A federal court in Illinois has appointed Phillip Stenger, receiver in the matter at the request of the Securities and Exchange Commission (SEC) in the United States.
A Cayman Islands Court also appointed Mr. Stenger and James Cleaver joint liquidators for various entities that lost money as a result of alleged fraudulent activities.
They are seeking to recover millions of dollars they say are owed creditors and investors in an elaborate scheme involving the channelling of funds into Bahamas-based bank accounts.
"The liquidators and receiver are pursuing recovery and accountability actions in order to pay innocent investors and creditors, who are owed in excess of one hundred million dollars through notes and bonds issued by the various companies in the multiple tiered marketing scheme," the law suit states.
Lee Silver, Mr. Stenger's attorney, told the Bahama Journal Friday that he was reluctant to give specifics in the case beyond the court document.
But he said investors suffered millions of dollars in losses.
"We don't have the exact amount, but it's going to be significant," Mr. Silver said.
Leadenhall Bank provides credit card and other financial services to residents in the United States and provided a broad array of services to and engaged in nefarious activities with an entity in the Cayman Islands called Morningstar Ltd, according to the suit. The Bank is also the partner of defendant AXXESS INTERNATIONAL, which provides credit and debt card services around the world
Now, the liquidators and receivers are seeking to hold Leadenhall and AXXESS INTERNATIONAL accountable for being a part of "a conspiracy to defraud."
The suit alleges that U.S.-based operators of a business enterprise called "Cash 4 Titles" developed a multiple tier marketing enterprise, which eventually involved the use of Cayman Islands, Bahamas and United States entities and individuals in a joint venture to defraud investors in the scheme.
According to the court document, between 1993 and December 1994, the Cash 4 Titles made loans of up to $1,000 to consumers with poor credit histories, and charged interest rates as high as 25 percent per month.
"Before it would make a loan, C4T US required the borrower to own his or her automobile free and clear. The borrower would sign over the title to C4T US and deliver a set of keys, although he or she could continue to use the automobile. If the borrower paid back the loan and interest in a timely manner, C4T US would return the title and keys," the suit states. "If the borrower defaulted C4T US would attempt to repossess the automobile and assume ownership."
It further states that the scheme was non-profitable and had limited prospects for growth. The document states that principals of C4T US, Richard Homa, Michael Gause and Joseph Denson, created a complicated maze of Cayman Islands and Bahamian companies and corresponding Leadenhall Bank accounts to be used in receiving investor funds.
"All of these entities lacked any legitimate business purpose, had no employees, had no physical location, had no equipment or physical assets, and kept no minutes or business records beyond those associated with the money laundering and other illicit activities," the suit states.
The operators of the scheme were left to find complicit banks that would be willing to: establish and maintain bank accounts for foreign companies so that certain false tax advantages could be marketed to American and Canadian investors; vouch for the integrity of the scheme; and facilitate investment by allowing the facilitation of tax fraud through the use of credit cards to easily expatriate investor profits without the payment of federal and state income taxation.
The banks were also needed to facilitate the direct, fraudulent transfers of funds and execute interbank transactions which would result in new investor funds being returned directly back to other investors through another Bahamian entity to perpetuate the Ponzi Scheme, according to the document.
The success of a Ponzi Scheme depends on the recruitment of additional investors into the scheme. Eventually, the scheme could fail because there is usually a limited number of such investors who can be brought into the scheme. Once new investors stop coming in, the scheme collapses, because monies from new investors would no longer be available to pay off old investors.
The suit also claims that Suzanne Black and Hywell Jones through a company called "Executive Advisors," business associates of Leadenhall and AXXESS INTERNATIONAL, assisted Gause, Homa and Denson and other C4T US marketers working with Denson in establishing a variety of Bahamian companies to operate in the scheme.
The Securities and Exchange Commission in October 1999 started the process of scrutinizing the marketers in the "Ponzi Scheme" by launching a civil securities fraud action against them.
While his bank is being accused in the alleged fraud, William Jennings, managing director of Leadenhall Bank said Friday that, "It's a totally spurious claim by Stenger as a liquidator."
"There is no jurisdiction here," said Mr. Jennings, who added that he was not at all worried by the suit.
He pointed out that Leadenhall and AXXESS legally provided credit cards, but had nothing to do with the marketing initiatives.
"As I understand it, there was fraud," Mr. Jennings said. "But the fraud was not undertaken by the card [distributors]. AXXESS provided credit cards as they do to thousands of people...I'm not at all worried. You get these things all the time."
Mr. Silver said the case is not expected to be heard in Illinois for another year.
This case comes as the Bahamas continues the process of repairing its reputation that took a blow after the Financial Action Task Force said the country was not doing enough to fight money laundering.
In response to such claims, the Bahamas passed a package of financial legislation to tighten up financial services practices.
By Candia Dames, The Bahama Journal