Tag: fraud

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Bankruptcy

The Thin Line Between Fraud And Honest Disaster

The trial of former Commercial Mortgage & Finance CEO Anthony D’Agostino, who is charged with running a Ponzi scheme, started Monday.

The case illustrates a difficult problem for both businesses and prosecutors: what is the line between business failure and fraud? Bankruptcy frequently brings close scrutiny to the assets, liabilities, income and expenses of a troubled business, individual or family. Looking closely at the “snapshot” of any one debtor at any one moment in time may distort the real picture.

A Ponzi scheme is typically an investment scam where the person at the center of the scheme raises money for investments. Early investors are frequently promised, and given, huge returns on their investments. The problem is that frequently these returns are generated not by legitimate investment vehicles but by the infusion of cash from investors who come later. The investors frequently receive nothing while the earlier investors are paid.

Sometimes, a valid investment company will gradually, perhaps inperceptibly “break bad” and find itself behaving like a Ponzi scheme without even knowing it. This could happen if the manager combines investment money with income from operations in one bank account and uses this account to pay returns. If the operations are not profitable then the only money available to pay existing investors is really the money coming in from new investors. Gradually, the manager finds that the company still profits without actually investing in any legitimate business and the only money coming into the fund is money from the new investors. By this time, the manager has crossed the line into being a full fledged Ponzi scheme. However this may not happen overnight, or by design. More importantly, even if the commingling of funds violates securities laws, it may not have started out as criminal fraud.

D’Agostino’s defense says the company was like so many other financial firms that failed in the Great Recession. It invested too heavily in developers and mortgages and when the real estate bubble burst it suffered a fatal “run on the bank.” More than 1,400 investors suffered losses of about $62 million when Commercial Mortgage & Finance went bankrupt.

Do you think most Ponzi operators start dishonestly, or end up that way out of forces beyond their control? Please let me know in the comments section.

Categories
Bankruptcy

Should Casey Anthony Be Denied A Discharge in Bankruptcy?


Famed child murder acquitee Casey Anthony has filed for bankruptcy in Tampa, Florida. Ms. Anthony’s bankruptcy filing appears to list fairly minimal and routine assets and liabilities, such as:

Cash on hand: $474

Furniture and laptop: $200

Jewelry: $200

Woman’s clothing and accessories: $100

In the category for “Patents, copyrights, and other intellectual property” she marks “none”. She also lists “none” for any income received in the last three years.These answers may very well cause her to lose her discharge.

Under the Bankruptcy Code, a debtor will not receive a discharge if the debtor knowingly and fraudulently, in or in connection with the case made a false oath or account. Most bankruptcy courts agree that a debtor’s reckless act of failing to disclose a valuable asset is also grounds for denial of a discharge in bankruptcy.

Shortly after the sensational verdict acquitting her of killing her baby daughter Caylee, the Internet burned with a debate over whether Ms. Anthony could sell her story for millions of dollars. Many believed that the public would not pay to hear what they thought would be the lies of a wrongly freed child killer. Others felt that the public’s lurid interest would be irresistible to publishers of tabloids and tell-alls, or reality show producers.

Whether a court believes that Casey Anthony can exploit her fame for millions is not relevant for bankruptcy discharge purposes: certainly she can sell her story for something. Her Statement of Financial Affairs, also filed with the bankruptcy court under penalty of perjury, insists that she has made nothing so far from the intense media interest in her story, and that may also be untrue. Either way, her sworn bankruptcy papers ignore the value to her creditors from a possible book deal, and this is certainly her most valuable asset. For that glaring omission alone, Casey Anthony should be denied a Chapter 7 discharge.

Click here for a complete copy of Casey Anthony’s bankruptcy schedules.

Categories
Bankruptcy

More Bad Judgment: Petraeus Supports Unstable Mom Accused of Bankruptcy Fraud


Scandalwatchers know that ex CIA chief David Petraeus was exposed after his paramour, Paula Broadwell, sent threatening emails to military socialite Jill Kelley who had the FBI trace those messages back to Broadwell’s laptop. Once inside the laptop the FBI discovered the trail of messages between Petraeus and Broadwell that led to his downfall. The scandal continues to take unexpected turns after investigators learned that Petraeus, soon after ending his self-destructive affair, sent a letter to a Washington D.C. judge to help Kelley’s sister, Natalie Khawam, regain custody of her 4-year old son.

In his letter, after apparently conducting no investigation into Khawam’s background, Petraeus told the court Khawam “dotes on her son and goes to great lengths — and great expense — to spend quality time with him.” The judge, however, delivered a shocking and scathing dressdown of Khawam after a litany of hearings and psychological evaluations:

“Ms. Khawam appears to lack any appreciation or respect for the importance of honesty and integrity in her interactions with her family, employers, and others with whom she comes in contact. The court fully expects that Ms. Khawam’s pattern of misrepresentations about virtually everything, including the most important aspects of her life, will continue indefinitely.”

Khawam’s legal problems have now followed her into the bankruptcy court, where she filed in April, 2012. On the bankruptcy filing, Khawam lists $3.2 million in unpaid debt, plus $53,000 she owes the Internal Revenue Service.

Earlier this year, Khawam’s former employer, Tampa Bay lawyer Barry Cohen, claimed that she ‘fraudulently omitted Rolex watches, sable mink furs and a diamond ring’ from her list of assets in the April bankruptcy.

The financial ruins left by Kelley and Khawam in their attempts to rise to the top of Tampa’s military society are well chronicled in this article from the Tampa Bay Times. Kelley has apparently run up $70,000 in credit card debts and was sued for foreclosure of the million dollar Tampa home she owns with her surgeon husband. In Khawam’s bankruptcy she listed debts to a lawyer in Rhode Island of $300,000, a man in St. Petersburg of $600,000 and Scott and her twin sister Jill Kelley of $800,000.

The salacious details of Kelley and Khawam should not overshadow the truth that David Petraeus, as the head of the CIA, showed a stunning lack of judgment in conducting an illicit affair and then publicly standing behind a woman condemned in court of a “pattern of misrepresentations about virtually everything,” including accusations that she attempted to cheat her creditors by omitting substantial assets from her bankruptcy schedules.

Categories
Bankruptcy

Bankruptcy Net Closes On James Bond Style International Fugitives

In a story of high finance and international intrigue, former billion dollar real estate tycoons Michael and Linda Mastro will return to the US to face 43 counts of bankruptcy fraud including scheming to defraud, concealment of assets, monely laundering, making false oaths or accounts, making false declaration under penalty of perjury, and unlawfully receiving bankruptcy estate assets.

The Mastros’ international game of cat and mouse with the FBI began in June, 2011, after they were ordered by a Washington state bankruptcy court to turn over two diamond rings. Instead of cooperating, the Mastros fled the country. The diamonds are valued at over $1.4 million.

The Mastros were forced into an involuntary bankruptcy by three lenders in 2009. Involuntary bankruptcies are rare and sometimes risky legal maneuvers where at least three creditors join together to petition a bankruptcy court to take jurisdiction over a debtor’s assets. For the petition to succeed, the debts cannot be the subject of legitimate disputes and the debtor must not be paying his debts as they become due. The procedure carries significant risks: if the bankruptcy court declines jurisdiction the petitioning creditors may be forced to compensate the debtor for actual damages, including attorneys’ fees, resulting from the creditors’ action.

For creditors of the Mastros, the involuntary gambit was well founded. The Mastros had put together billions of dollars worth of real estate deals, but their empire began to crumble in 2008 when the market tanked. To defeat the claims of their creditors, the Mastros began to transfer assets, such as luxury homes including a $15 million Medina Washington home, into an irrevocable trust. The Mastros kept these transfers secret from their investors, many of whom were family and friends. By the time of the bankruptcy, the Mastros owed over $100 million.

According to court papers, during the 2009 bankruptcy proceedings Mastro did not disclose the existence of a bank account they controlled under the name LCY LLC. Mastro and his wife used the LCY LLC bank accounts for two years, paying for about $285,000 in expenses, including car loan payments for a Bentley and a Rolls Royce, more than $100,000 in gold, and purchases from Macy’s, Barney’s and Nordstrom. Linda Mastro received checks from the LCY LLC bank account that totaled $18,000.

In a classic case of greed and criminal stupidity, the arrests were made possible when the FBI told French authorities Michael Mastro had sought reimbursement from his U.S. insurance provider for medical care he received in France. Discovery of the reimbursement request led authorities to the Mastros’ most recent address in the French Alps. Perhaps 007 will break open his next case after a super villain trips international alarms by seeking coverage above his co-pay.

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