Mich. Regulator Halts Ponzi 'Hydra' That Snared CU
Calling it a "multilevel Ponzi hydra" that promised sky-high returns in the crude oil bond market, the Michigan Office of Finance and Insurance Regulation said it has stopped a Ponzi scheme that allegedly bilked credit union members and others out of $5 million.
In December 2007, Mark Carpenter, a securities agent licensed with broker-dealer CUSO Financial Services LP who worked at MidWest Financial Credit Union, allegedly became directly involved in a multi-level crude oil bond Ponzi scheme operated by Michael Winans, Jr., an OFIR investigation revealed. Winans is the son of one of the members of the renowned gospel group, the Winans. In January 2008, Carpenter created the firm To God Be Glory for the sole purpose of accepting funds to invest in the Winans Ponzi scheme, the OFIR said. According to the agency, Carpenter was employed with CFS from June 2007 through October 2008. His principal place of business was at MFCU in Ann Arbor, Mich., where CFS maintained a securities branch office inside the $176 million cooperative.
The OFIR said it has identified at least 12 investors who were MFCU members and issued personal checks to invest with TGBG. At least 20 of TGBG's investors were also CUSO clients. Carpenter, through TGBG, transferred more than $700,000 in investor funds into the Winans venture, according to the Michigan regulator. TGBG received more than $670,000 on checks drawn from the Winans Foundation and several affiliated for-profit entities principally owned by Michael Winans, according to the OFIR.
From several bank accounts held by TGBG, Carpenter returned to investors a small portion of their investment. However, Carpenter transferred large sums to his personal bank accounts, paid his living expenses and TGBG's business expenses and paid his friend James Smith, who introduced him to Winans, as well as Smith's businesses returns on their investments. None of the investors from MFCU or CUSO received such "exorbitant returns," the OFIR said.
"This was a multi-headed Ponzi hydra," OFIR Commissioner Ken Ross said in a March 4 statement. "Bank records indicate that Carpenter got scammed and then set up his own scam. We found fraud within fraud involving working people who were robbed of their life savings. These were not high rollers."
None of the investments described by OFIR were authorized, reviewed or approved by CFS or MidWest and were not held in accounts with the CUSO or MidWest, according to CFS co-founder and Chief Operating Officer Amy Beattie. Carpenter did not disclose any of his outside business activities to CFS or MidWest, including TGBG, Beattie said.
"Following Mr. Carpenter's resignation, CFS and MidWest learned that Mr. Carpenter may have been involved in unauthorized outside business activities in violation of company policies. CFS and MidWest promptly alerted OFIR and the Financial Industry Regulatory Authority to our concerns," Beattie said in a statement to Credit Union Times.
Beattie said CFS also alerted its clients and encouraged them to report any irregularities to the appropriate regulatory authorities. At Carpenter's resignation, however, neither CFS nor MidWest were aware of the nature or scope of the alleged fraudulent activities as recently described by OFIR, she said.
"CFS and MidWest remain committed to promoting the interests of our customers and we are cooperating with the regulatory authorities in their ongoing investigation of Mr. Carpenter," Beattie said.
Carpenter also became involved in another investment scheme dealing with an alleged gold mine that was developed by Ronald Brito and his company GetMoni.Com, a Nevada corporation. As with the previous Ponzi operation, Carpenter solicited this product as a legitimate investment to individuals who were his clients through his MCFU and CFS business relationships. A significant portion of the investors' funds received by TGBG were wired to GetMoni in Nevada, the OFIR said. Carpenter received more than $2 million in new investor funds but received less than $115,000 in returns. In November 2009, OFIR ordered Brito and GetMoni.com to cease and desist.
That same month, Carpenter created yet another investment scam, the OFIR discovered. Through TGBG, he issued securities for an investment in an alleged Orlando real estate development. The offering document customers received described the investment as a bridge loan financing opportunity to erect the "tallest, most luxurious new condo hotel available to Orlando real estate buyers" titled the Blue Rose Orlando Project, according to the OFIR. The offering document identified Carpenter and TGBG as key players in the project. Unbeknownst to Blue Rose investors and in similar fashion to his previous scams, Carpenter used their funds to invest in GetMoni, pay his personal and TGBG's business expenses and pay the interest or principal payments due to earlier investors in classic Ponzi style.
The OFIR said it has been able to account for a total of $5 million that was received by Carpenter and TGBG for investment in the Ponzi schemes. Approximately 47% was received by GetMoni, 18% was received by Carpenter and TGBG, 17% was received by Mike Winans and the Winans Foundation, and 4% was received by James Smith and his businesses. The remaining 14% was disbursed to investors as alleged interest payments.
There were several red flags consumers should have spotted involving all of Carpenter's alleged improprieties, the OFIR said, including promises of guaranteed returns and claims of being able to double an investment within 60 days.
"Sophisticated investments involving bogus 'Saudi Arabian crude oil bonds' were being marketed to unsophisticated investors who did not know what they were being sold," the OFIR said.
The OFIR said investors should have also been suspicious when they were asked to provide cash and checks directly to promoters and not to a third-party custodian. The agency said documents given to investors contained "obvious spelling errors," and those allegedly bilked did not receive financial statements, risk disclosures or other disclosures that would have been material to a reasonable investor. Carpenter did not provide any documentation that the investment products were registered with the state.
In addition to issuing a cease and desist order against Carpenter for the sale of unregistered securities products, the OFIR said it has also issued similar orders against Michael Winans Jr. and GetMoni.com.