Hedge Fund CEO Pleads Guilty to Multi-Million-Dollar Investment Fraud

CAMDEN, NJ—The former CEO of the hedge fund management company Osiris Partners LLC admitted today to conspiring with others to defraud investors of more than $4 million, U.S. Attorney Paul J. Fishman announced.

Michael J. Spak, 44, of Chesterfield, New Jersey, pleaded guilty before U.S. District Judge Joseph H. Rodriguez in Camden federal court to an information charging him with conspiracy to commit wire fraud.

According to documents filed in this case and statements made in court:

Spak and his co-conspirators solicited investors to invest in the Osiris Fund, which they pitched to prospective investors as a hedge fund for the “little guys” and “moms and pops.” Over time, more than 75 people invested $12 million in the Osiris Fund. Beginning in January 2010, however, Spak and his co-conspirators at the Osiris Fund began improperly diverting investors’ funds for their own use. In January and February 2010, Spak and his co-conspirators spent $300,000 of investors’ money to purchase a luxury sport-fishing boat called the “Fintastic.” In total, in 2010 and 2011, Spak and his co-conspirators fraudulently diverted more than $4 million. Spak failed to disclose these diverted payments to the Osiris Fund investors, and in the financial statements that they sent to investors, Spak and his co-conspirators continued to characterize these diverted funds as “assets” of the fund.

In April and May 2010, the Osiris Fund incurred trading losses of approximately $4.5 million, about half the value of the fund. Spak and his co-conspirators never disclosed these losses to investors. They instead created false financial statements, which included a fictitious $5 million “asset,” and sent them to investors. Even though this fictitious asset never existed, Spak and his co-conspirators charged investors a three percent management fee to manage it and fraudulently overcharged investors millions of dollars in management fees.

The charge of conspiracy to commit wire fraud is punishable by a maximum potential penalty of 20 years in jail and a $250,00 fine. Sentencing is scheduled for January 9, 2013.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward, for the investigation leading to today’s guilty plea. He also thanked the New Jersey Bureau of Securities, under the direction of Bureau Chief Abbe R. Tiger, for its assistance.

The government is represented by Assistant U.S. Attorneys Shirley U. Emehelu and Christopher J. Kelly of the U.S. Attorney’s Office Economic Crimes Unit in Newark.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

McHenry County Businessman Sentenced to 11 Years in Prison for $7 Million Fraud Scheme

ROCKFORD—A Woodstock, Illinois man was sentenced today in federal court by U.S. District Judge Philip G. Reinhard in Rockford to 136 months in prison for conducting a $7 million fraud scheme. Francis X. Sanchez (“Sanchez”), 52, co-owned and operated a business in McHenry County known as InvestForClosures. On May 3, 2012, Sanchez pled guilty and admitted that he had fraudulently obtained more than $7 million from InvestForClosures’ investors.

According to Sanchez’s plea agreement, InvestForClosures purportedly bought distressed houses, rehabilitated those houses, and sold the houses for a profit. Sanchez admitted in his plea agreement that he solicited people to invest in InvestForClosures by making various misrepresentations, including: (1) their investments would be safe because they would be backed by real estate; (2) InvestForClosures used the majority of their investors’ funds to purchase real estate; and (3) because of the business’ efficient cash flow from buying and selling houses, InvestForClosures had never failed to make an interest payment on time or return an investor’s principal when requested. These representations were false because: (1) the business did not own sufficient real estate to secure all of the investments; (2) the business did not use the majority of investor funds to purchase real estate, but instead used most of the investors’ funds to pay other expenses, including the salaries of the defendants, and to pay Ponzi-type interest to prior investors; and (3) InvestForClosures was not making enough money from property sales to pay the interest owed to the investors, but was instead using cash received from new investors to pay the prior investors with Ponzi-type payments.

Sanchez further admitted that, in order to conceal from the investors his false promises and misrepresentations and to prevent the investors from demanding the return of their principal, he told the investors that he was developing an exclusive, luxury residential community in Mexico known as the “Sands of Gold.” Sanchez solicited his investors to purchase lots at Sands of Gold and to invest additional monies for the Sands of Gold project.

Sanchez admitted that he made several misrepresentations to his investors regarding Sands of Gold, including: (1) the government of Mexico had promised to invest millions of dollars in infrastructure necessary for the development of the Sands of Gold; (2) efforts to obtain financing for the project were going well and a financing deal was imminent; (3) he was finishing negotiations with a major hotel chain for the construction of a hotel at Sands of Gold; and (4) a major accounting firm had agreed to do the accounting work necessary so that the business could go public.

During the course of the scheme, Sanchez fraudulently obtained more than $9 million from the investors. Of this amount, approximately $1,711,711.18 was paid back to the investors through Ponzi-type payments. In addition to sentencing Sanchez to prison, the court also ordered him to pay more than $7.8 million in restitution to the victims of his crime.

Sanchez’s business partner and co-defendant, James D. Bourassa, 55, of Gilberts, Illinois, pled guilty to mail fraud on February 27, 2012. Bourassa was sentenced on June 11, 2012, to 51 months in federal prison.

The case was investigated by the Rockford Office of the Federal Bureau of Investigation, the Chicago Office of the United States Postal Inspection Service, and the Illinois Secretary of State’s Securities Department. The investigation was conducted under the auspices of the Financial Fraud Enforcement Task Force, which includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the task force, visit: www.StopFraud.gov

The sentencing was announced by Gary S. Shapiro, Acting United States Attorney for the Northern District of Illinois; William C. Monroe, Acting Special Agent in Charge of the Chicago Office of Federal Bureau of Investigation; Thomas P. Brady, Postal Inspector in Charge of the Chicago Division of the U.S. Postal Inspection Service; and Illinois Secretary of State Jesse White.

The government was represented by Assistant U.S. Attorney Scott A. Verseman.

Former Sandy Hook Resident Charged with Running Investment Fraud Scheme

David B. Fein, United States Attorney for the District of Connecticut, and Kimberly K. Mertz, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation, today announced that Garrett L. “Denny” Denniston, 62, of Boothbay Harbor, Maine, and formerly of Sandy Hook, Connecticut, has been charged by criminal complaint with operating a scheme to defraud multiple investors out of approximately $1 million.

Denniston was arrested today at his Maine residence. He appeared before United States Magistrate Judge John H. Rich, III in Portland, Maine, and is being detained pending a hearing on Monday, September 24, 2012.

“As alleged, this defendant operated an investment fraud scheme by representing to investors that he ran a successful investment business and could offer them a special ‘friends and family’ deal investing in companies for a guaranteed return of their investment plus a high rate of interest,” stated U.S. Attorney Fein. “I urge the investing public to view with suspicion promises of guaranteed returns. I commend the FBI for shutting down this alleged scheme, and I thank the U.S. Attorney’s Office for the District of Maine for their invaluable assistance. The investigation is ongoing, and I encourage any potential victims or anyone with information related to this scheme to contact law enforcement.”

Citizens with information that may be helpful to the investigation are encouraged to contact FBI Special Agent David J. Ford at (203) 382-6645.

As alleged in the criminal complaint, Denniston ran an investment fraud scheme through ConsensusOne LLC and other Consensus companies. Denniston defrauded two victims out of $300,000, another two victims out of $400,000, and a fifth victim out of more than $200,000.

As part of the scheme, Denniston represented that he ran an investment business specializing in mergers and acquisitions. Denniston solicited money from his investors principally by telling them that their money would be used to invest in companies through the purchase of stock options (or promissory notes) convertible into the company’s stock at a substantial discount to the value of the stock on the date of conversion. In order to induce people to make the investments, Denniston represented that the companies were on the verge of being sold or had already been sold in deals that were closing on an accelerated schedule. Denniston indicated that the investment was refundable if the deal did not close and that his company would guarantee the investments, as would he personally, such that the investments were without risk. Denniston also told people that the investment was being offered to them as part of a “friends and family” deal pursuant to which he had access to a limited pool of stock options that would yield a guaranteed return on investment.

Denniston spent a substantial portion of the money that he was given on his personal expenses rather than investing it in accordance with his representations to investors.

The criminal complaint charges Denniston with wire fraud, a charge that carries a maximum term of imprisonment of 20 years.

U.S. Attorney Fein stressed that a complaint is only a charge and is not evidence of guilt. The defendant is entitled to have this matter presented to a grand jury and, in the event an indictment is returned, he is entitled to a trial at which it will be the government’s burden to prove guilt beyond a reasonable doubt.

This matter is being investigated by the Federal Bureau of Investigation. The case is being prosecuted by Special Assistant U.S. Attorney Kerry L. Quinn, with assistance from the U.S. Attorney’s Office for the District of Maine.

In December 2010, the U.S. Attorney’s Office and several law enforcement and regulatory partners announced the formation of the Connecticut Securities, Commodities and Investor Fraud Task Force, which is investigating matters relating to insider trading, market manipulation, Ponzi schemes, investor fraud, financial statement fraud, violations of the Foreign Corrupt Practices Act, and embezzlement. The task gorce includes representatives from the U.S. Attorney’s Office; Federal Bureau of Investigation; Internal Revenue Service-Criminal Investigation; U.S. Secret Service; U.S. Postal Inspection Service; U.S. Department of Justice’s Criminal Division-Fraud Section and Antitrust Division; U.S. Securities and Exchange Commission (SEC); U.S. Commodity Futures Trading Commission (CFTC); Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP); Office of the Chief State’s Attorney; State of Connecticut Department of Banking; Greenwich Police Department; and Stamford Police Department.

Citizens are encouraged to report any financial fraud schemes by calling, toll-free, 855-236-9740, or by sending an e-mail to ctsecuritiesfraud@ic.fbi.gov.

Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions, and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants.

To report financial fraud crimes, and to learn more about the President’s Financial Fraud Enforcement Task Force, please visit www.stopfraud.gov.

On October 1, 2012, the U.S. Department of Justice and the Securities and Exchange Commission are hosting the Northeast Region Investor Fraud Conference. The conference, at the University of Connecticut-Stamford Campus from 9:00 a.m. to 1:00 p.m., is open to members of the community, law enforcement, victim advocates, and others interested in detecting and combating an unprecedented rise in Ponzi and other investment fraud schemes that involve thousands of victims and billions of dollars of losses. Conference participants include U.S. Attorneys from Connecticut, Massachusetts, New Jersey, and New York, as well as senior officials from the SEC, FBI, CFTC, and other financial fraud enforcement and regulatory agencies. Individuals interested in attending the conference are encouraged to contact Lori Vernali at Lori.Vernali@usdoj.gov or 860-760-7959.

Terrence Ezekiel Paulin Sentenced in U.S. District Court

The United States Attorney’s Office announced that during a federal court session in Missoula on September 14, 2012, before U.S. District Judge Donald W. Molloy, TERRENCE EZEKIEL PAULIN, a 47-year-old resident of Ashland, Kentucky, appeared for sentencing. PAULIN was sentenced to a term of:

■Prison: 33 months

■Special Assessment: $100

■Restitution: $590,458.02

■Supervised Release: three years

PAULIN was sentenced in connection with his guilty plea to investment fraud.

In an offer of proof filed by Assistant U.S. Attorney Carl E. Rostad, the government stated it would have proved at trial the following:

During late 2007 or early 2008, Shawn Swor was a mortgage broker in Missoula. Swor’s business consisted largely of making hard money loans to clients who could not get loans through conventional banking means. Hard money lenders are lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called “bridge” loans) that provide funding based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher interest rates than banks because they fund deals that do not conform to bank standards.

At the time, in late 2007 and early 2008, Swor was looking into funding sources from a number of people, mostly over the Internet, who would contact him promoting investment ideas involving securities. Swor promoted himself as someone who could find sources of funds and link them together with people wanting to borrow money. He admitted during interviews with law enforcement that he had difficulty verifying the credibility of those holding themselves out to be viable funding sources.

One of the funding sources Swor met over the Internet in late 2007 was PAULIN, who was also a hard money lender and broker. Swor started working with PAULIN identifying the validity of different funding sources offered over the Internet. PAULIN and Swor found several investment opportunities in securities programs they believed could be used to raise funds for the loans they were working on at the time. Swor and PAULIN worked on this project for at least a month before it was determined most of the sources were not legitimate. Over the next couple of months, PAULIN and Swor stayed in contact with each other as other opportunities arose.

When Dan Oaheyoh Two Feathers met Swor, Two Feathers claimed he knew several different ways to generate cash flow through the purchase and sale of securities in Europe; providing large rates of return for investors as well as the brokers and traders which could be used to funds the hard money loans both Swor and PAULIN were working on. In February of 2008, Two Feathers, Swor, and PAULIN decided to start a business to offer investments in high yield investment opportunities using several different leveraged investment and securities programs. On February 26, 2008, Two Feathers, Swor, and PAULIN formerly established and registered DTF Consulting Group as a Missoula, Montana company.

Two Feathers proposed using a large security, such as a letter of credit or a note, which could be leased from a hedge fund, pension fund, or bank. Once the security was in hand, the concept was to borrow against the large security and those funds would be used to invest in a risk free investment such as government securities. Two Feathers explained that he had connections in the world of international finance and international banking experience and could purchase securities at a discount and sell them in Europe at a premium. This would allow for additional profit margin on each transaction completed.

The DTF principals would solicit investors whose money would be used to secure the large security through a lease. Prospective investors would, in a short period of time, receive a substantial profit from buying the government securities at a discount and selling them at a premium.

In one particular instance, on or about February 20, 2008, PAULIN, using the alias name of Terrence Sovereign, solicited a $10,000 investment in the DTF program from a woman in Florida, representing that the investment would produce a return of 100 percent within a few weeks. He told this investor that he was working with two partners, Dan Latham (the former surname of Two Feathers) and Swor. PAULIN collected the investment proceeds in cash and provided the investor with personal checks as a means of assuring the investor of the safety of the investment in the leveraging scheme. Attempts to deposit the checks and recover the investment failed as PAULIN had no funds in the account. There was no record of this money being deposited into the DTF account at Farmers State Bank in Victor, Montana, where the money from the scheme was often deposited.

PAULIN manufactured a fraudulent letter of credit from Wachovia Bank in the amount of $1.5 billion to show potential investors that DTF had the necessary negotiable instrument available to make the investment trading program work. PAULIN acknowledged to investigators that the document he created was fraudulent and that he knew it was fraudulent. PAULIN claimed the fraudulent document was created at Two Feathers’ direction and request. Two Feathers advised investigators that it was PAULIN’s idea and that he did not request or direct its creation, although he admitted knowing about the letter of credit. PAULIN’s understanding was that the letter of credit was to be used to entice potential investors into DTF’s trading program. However, according to PAULIN, Two Feathers started using the letter in other ways, including representation of the document as genuine to a real estate agent for the attempted purchase of property.

PAULIN and Swor had a falling out with Two Feathers—after the realtor discovered that the Wachovia Bank letter of credit was bogus and turned it over to local law enforcement—and both stopped promoting the DTF scheme in June of 2008.

The DTF promotion attracted eight victims. A secondary scheme was tailored more as an advanced fee scheme where the investor would pay money up front for a hard money loan. Three more victims paid the advanced fee on the promise that DTF could and would secure loan funds. The total loss for all 11 victims between February and June of 2008 was approximately $800,000. The money, in whole or in part, was wired to the DTF account at Farmers State Bank in Victor, Montana, which was controlled by Two Feathers.

Of that amount—not including the $10,000 in cash received from the Florida victim—PAULIN received $278,175 from Two Feathers.

Swor and Two Feathers pled guilty to federal charges and have been sentenced.

Because there is no parole in the federal system, the “truth in sentencing” guidelines mandate that PAULIN will likely serve all of the time imposed by the court. In the federal system, PAULIN does have the opportunity to earn a sentence reduction for “good behavior.” However, this reduction will not exceed 15 percent of the overall sentence.

The investigation was a cooperative effort between the Federal Bureau of Investigation and the Criminal Investigation Division of the Internal Revenue Service.