• Posted at May 18, 2018 2:20 pm
• by NBP LLP

“I’m sure that many crypto offerings are simply Ponzi schemes.” These words from a cryptocurrency expert reverberated throughout a large meeting room at an alternative investment conference we attended recently. As lawyers who spent the last ten years zealously fighting to recover monies for victims of Ponzi schemes, this caught our attention. The comments from this crypto expert echoed sentiments that Warren Buffett expressed recently when he said: “Cryptocurrencies will come to a bad ending” largely because they “draw in a lot of charlatans.”

The crypto expert – who runs a wildly successful crypto hedge fund – met with us after his talk and we asked him what exactly he meant by his comments. His explanation was blunt – – some crypto offerings are fake. He is not alone in his assessment. The former CEO of PayPal and Intuit has declared that “Bitcoin is a scam” and attributes its success to the Greater Fool theory. Are cryptocurrencies, Initial Coin Offerings (ICOs) and crypto investments really just Ponzi schemes incarnate?

Named for the famed Boston fraudster Charles Ponzi, Ponzi schemes are nothing but expensive smoke and mirrors. A fraudster promises an investment with strong and clockwork-like returns. But in the end, the investment is merely a complex scam in which earlier investors get paid with later investors’ funds. Many cryptocurrency offerings or crypto investments may fit within what we’ve seen as intricate frauds or traps for the unwary.

Our crypto expert talked about well-publicized prosecutions, such as OneCoin, which were indeed Ponzi schemes, masquerading as cryptocurrencies. There, the promoter had no intention of ever creating a functioning cryptocurrency. The entire operation was a ruse to make off with investors’ cash. But this raises the question: how do you know if a cryptocurrency, is nothing more than a Ponzi scheme? The SEC, for its part, has issued guidance to the public about the potential dangers of crypto investments. According to the SEC “many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” and that “investors should not assume the trading protocols meet the standards of an SEC-registered national securities exchange.” The SEC warns investors to be skeptical about the information on bid and ask pricing provided by many crypto trading platforms or exchanges.

Despite the SEC’s warnings, the case for crypto is not clear-cut. We’ve represented hundreds of victims of financial fraud, ensnared in both simple and elaborate schemes. These frauds share a common thread: in each, an investor thought they were putting money into a real asset, be it real estate, mining operations, or a drug development company. But the promoter instead used their money to line his own pockets. The fraudster routinely uses funds to pay earlier investors, which gives the scheme legitimacy and creates happy early investors who spread the word.  Often, the rest of the investors’ money goes towards things like private jets, luxury lifestyles, and Vegas jaunts. In the end, there are only so many investors a fraudster can lure before the scheme inevitably collapses.

Crypto skeptics liken Bitcoin and its competitors to Ponzi schemes, claiming that the concept itself is nothing more than a scam. But we see it differently. There is nothing inherently Ponzi-like about a crypto offering for one reason: legitimate cryptocurrencies have intrinsic value. Regardless of what you think about the utility of Bitcoin, it can be used for its intended purpose – to be exchanged for goods and services. The valuation of the investment might be up for debate, because Bitcoin prices have erratic booms and busts. But the investment is real. And, just like most other real-world offerings, there are lots of fraudulent knock-offs.

Certainly, a promoter using a fake crypto offering as “bait” to steal your money is akin to a Ponzi scheme. There are certainly fake cryptocurrencies that are created to lure investors to what invariably turn out to be worthless investments. And there are no doubt fake Initial Coin Offerings that invite investments of cryptocurrencies to fund an alluring startup, only for it to be revealed that the startup is nothing but a trap set by greedy and unscrupulous fraudsters. The growing list of ingenious crypto scams is just starting to come into focus. But, that is the case with virtually any new, edgy “alternative” investment.

Although some crypto offerings may indeed be fraudulent, legitimate coins and tokens do not fall within the definition of a Ponzi scheme. The ultimate question is whether the cryptocurrency or crypto investment is legitimate.

So, what’s an interested crypto investor to do? Pay attention. Do your homework. Watch out for red flags. All alternative investments are fraught with risk. Know what you are getting into. Check bona fides. If it sounds too good to be true – – it is. Apply sound principles to your investment decisions and learn more about how to avoid Ponzi’s, cons and other investment scams. When in doubt, seek professional guidance.

To learn more about how to avoid financial frauds and what to do if you have been victimized, please email us at wnystrom@nbparis.com

• Posted at June 9, 2017 9:05 am
• by Nystrom Beckman Paris

NBP is pleased to announce that Dana Zakarian has been elected to the American Board of Trial Advocates.  ABOTA is a national association of experienced trial lawyers and judges dedicated to the preservation and promotion of the civil jury trial right provided by the Seventh Amendment to the U.S. Constitution.  Membership in ABOTA is by invitation only – – extended to attorneys with honorable reputations and significant jury trial experience.  To learn more about ABOTA, please visit its website at www.abota.org.

• Posted at March 29, 2017 3:07 pm
• by Nystrom Beckman Paris

There is a saying in building, “measure twice, cut once.”  This same principle applies when drafting and negotiating contracts.  Too often, businesspeople and corporate lawyers draft dispute resolution clauses without fully appreciating their implications – – because they are not the ones enforcing or defending them in court.  As a trial lawyer, I have exploited contract provisions that the other side thought were bullet proof.  I also have had to break the bad news to clients that their contract doesn’t protect them on certain issues.  Based on these experiences, I advise all my clients to have a litigator review their contracts before they are signed.  Let me give you a few examples of how doing this can save you a lot of time and money if a dispute arises.

Choice of Law and Venue Provisions

Many drafters rightly include a choice of law provision (which specifies the state law governing the contract) but fail to add an exclusive jurisdiction/venue provision (stating where the dispute will be resolved).  This omission can lead to mismatches – – particularly where the parties are located in different states.  Consider a Massachusetts company contracting with a Texas company.  Without an exclusive jurisdiction provision, the Massachusetts company may find itself asking a Texas judge to apply Massachusetts law.  Worse, the Massachusetts company may find that Texas public policy voids certain contract provisions that would otherwise be enforceable in Massachusetts.

The scope of the choice of law provision also must be considered.  Drafters sometimes limit the choice of law to “interpretation” and “enforcement” of the contract.  An experienced litigator will tell you that contract disputes often include claims for business torts (e.g., unfair and deceptive trade practices, theft of trade secrets, misrepresentation, professional negligence, etc.)  And the law of the venue typically governs those tort claims.  To mitigate against this risk, broader language should be included to ensure that the choice of law applies to “any and all disputes between the parties.”

Limitation of Liability Provisions

The same is true for limitation of liability and indemnification clauses, which cap the parties’ exposure and apportion risk in the event of a dispute.  Most drafters are not focused on lawsuits or the types of damages that may be recoverable.  An experienced litigator, however, recognizes both the potential claims that may arise as well as the available remedies.  The litigator will tailor the language to remove the risk of unforeseen liability such as consequential, exemplary or punitive damages.  Additionally, the litigator will know when certain types of damages will be difficult to quantify and how to account for that with a carefully crafted liquidated damages clause.  In sum, the litigator will ensure that the company’s risk is equal to its reward under the contract.

Injunctive Relief Provisions

One of the most common litigation clauses in contracts concerns the propriety of injunctive relief (i.e., court orders) to enforce certain terms.  These clauses are used in employment agreements that contain non-compete or other restrictive covenants (e.g., non-solicitation, confidentiality, etc.) and business contracts where the parties are sharing confidential information (financials, trade secrets, etc.) or developing/licensing intellectual property.  The clauses are intended to make it easier for a non-breaching party to secure a court order enforcing the contract during the dispute (i.e., a temporary restraining order or preliminary injunction) and thereafter.

Most drafters know that to obtain a preliminary injunction, a party must demonstrate that they will suffer irreparable harm.  Thus, they include language acknowledging that a breach will cause irreparable harm and warrant injunctive relief.  But too often the drafter stops there.  An experienced litigator, however, knows that courts require a party seeking a preliminary injunction to post a bond in an amount sufficient to compensate the other party if they are later found to have been wrongfully enjoined.  See, e.g., Fed. R. Civ. P. 65(c) (requiring “security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”); 18 U.S.C. Sec. 1836 (Defense Against Trade Secrets Act of 2016).  The cost of posting such a bond, moreover, can be significant and sometimes cost prohibitive.  An experienced litigator knows that the parties can waive the bond requirement by agreement.  Thus, adding a bond waiver provision to the employment agreement would avoid this significant expense.

These are just a few examples of where involving a litigator at the outset may avoid significant expense down the road.  There is nothing worse than learning from a judge (or jury) that your contract does not provide the protections that you thought it did when you signed it.  If you would like our team to review and assess your contracts, please contact Dana Zakarian.

• Posted at March 29, 2017 12:44 pm
• by Nystrom Beckman Paris

“We follow orders, son.  We follow orders or people die.  It’s that simple.”

– Colonel Nathan R. Jessep, A Few Good Men

While the consequences are not nearly as dire, debtors in bankruptcy proceedings and litigants in general would be well-advised to heed Colonel Jessep’s admonition.  Such obvious lessons should go without saying.  But occasionally, litigants and attorneys need a reminder.

On January 9, 2017, United States Bankruptcy Judge Joan M. Feeney issued a memorandum and order denying a bankruptcy debtor’s discharge petition because he repeatedly refused to follow the Court’s directives.  The debtor’s disobedience allowed one of his creditors to preserve a $23 million dollar claim against him that was obtained through prior civil litigation.  The Order comes after a six-day trial wherein the creditor introduced evidence and proved by a preponderance of the evidence that debtor had, among other things, “willfully and intentionally refused to obey a lawful order of [the] Court.”

Though a cautionary tale to be sure, litigants need not fret that this case is the start of a trend where by every instance of non-compliance will be cause for an adverse finding.  As the Court explained in great detail (and in accordance with First Circuit case law), a failure to obey caused by inadvertence, mistake, or inability should not give rise to such a penalty.  But when a litigant engages in a prolonged, willful and intentional practice of defying numerous court orders and warnings, he should expect a judge’s gavel to fall on him, and fall hard.

One imagines that the bankruptcy debtor in this case may have finally learned his lesson.  Unfortunately for him, it cost $23 million to do so.

A copy of the Order may be found here:

Memorandum and Order

• Posted at August 1, 2016 1:24 pm
• by Nystrom Beckman Paris

New York financier Andrew Caspersen recently pled guilty to a scheme in which he defrauded investors – including close friends and family members – out of tens of millions of dollars.  www.nytimes.com  Caspersen’s pitch was that he had access to a “practically risk-free” investment in which loaned money would sit in a bank account as collateral for a credit facility.  The investors would then receive quarterly interest payments of 15 to 20 percent in return.  The supposed fund and investment were fake.  Caspersen instead used “new” money to pay “old” investors, spent some of the money himself, and gambled away the rest of it.  In its charging document the government alleged that Caspersen lost a staggering $108 million in stock option trading between February and March 2016.

One intriguing question remains unanswered: how did brokerage firms permit Mr. Caspersen to gamble away $108 million dollars in risky stock option trades over a four-week period?  Brokerages have an obligation to “know their customer” including their business, their investment objectives, and the source of their funds.  If, for example, the brokerage firm knew that Mr. Caspersen was trading other people’s money, it is curious (to say the least) that the brokers didn’t immediately suspend trading in the accounts.  And even if the brokers somehow believed Mr. Caspersen was trading his own funds, how was he permitted to literally trade until the accounts hit zero?  In today’s regulatory environment, firms have detailed anti-money laundering departments and computer programs committed to monitoring trades, and triggering internal alerts when there is a large velocity of trading (and losses).  It will be interesting to see how closely the brokerage firms were tracking Mr. Caspersen’s frenetic trading, and how and why Mr. Caspersen was permitted to continue trading as his massive losses mounted.

One possible explanation is that the brokers involved knew Mr. Caspersen was trading other people’s money but turned a blind eye because of the huge commissions being earned for the massive trading activity in the accounts.  If that were the case, the brokerage firms themselves may be liable for the theft under an aiding and abetting theory.  Simply put, the law recognizes that anyone who has knowledge of, and actively assists another in a fraud are themselves liable for the loss incurred.  This was precisely the scenario in the 2009 Massachusetts case of Cahaly, et al. v. Merrill Lynch, et al., where the plaintiffs alleged that the brokerage firm knew and helped an escrow agent gamble away $9 million of client funds in naked stock options.  After a four week trial, in which NBP was plaintiff’s co-counsel, the jury answered this question affirmatively, and found Merrill Lynch liable for the losses.  In a subsequent 2010 bench trial, the Court found Merrill Lynch liable for further damages and awarded attorneys’ fees.  You can read the decision here.

For more information, contact Will Nystrom.

• Posted at July 14, 2016 11:45 am
• by Nystrom Beckman Paris

On July 11, 2016, the United States Court of Appeals for the Ninth Circuit issued a published decision substantially reinstating claims of a private investment limited partnership (ESG Capital) and its partners, who were victimized in an $11.25 million fake stock purchase scheme.  The suit against the Venable law firm and its former partner David Meyer alleged that the firm committed securities fraud and aided and abetted a client in promoting the fictitious sale of pre-IPO Facebook shares.  In the decision, the Appeals Court ruled that plaintiffs satisfied the heightened pleading standards under the Private Securities Litigation Reform Act (“PSLRA”), and that “[c]ertainly, ESG Capital has pled facts sufficient to show a cogent and compelling inference of scienter.”   Venable’s former client, Troy Stratos, has already been convicted of wire fraud and money laundering charges, for his role in the fraudulent scheme.  The case now returns to the United States District Court in Los Angeles for discovery and trial.

Nystrom, Beckman & Paris LLP serves as lead trial counsel for plaintiffs.  On Appeal, NBP was assisted by Margaret Grignon, former California Court of Appeal justice, who currently practices at the Grignon Law Firm, in Long Beach, California.

A copy of the Decision, and selected press reports, may be found here:

Decision

Bloomberg

ABA Journal

• Posted at June 17, 2016 7:51 pm
• by Nystrom Beckman Paris

On June 7, 2016, the United States District Court for the District of Vermont (Reiss, J.) approved a class action settlement in the matter of Allen, et. al. v. Dairy Farmers of America, Inc., et. al., 5:09-cv-230. Here is a link to a recent article about the settlement by The Boston Globe.

• Posted at April 28, 2016 1:04 pm
• by Nystrom Beckman Paris

In retrospect, it always seems obvious. The Wall Street executive with 30% annual returns and a private jet is in handcuffs after his investment scheme collapses. And you shake your head at how so many people fall prey to financial fraudsters. Yet, the victims are often savvy investors, who have professional advisors, or who have friends, colleagues, or country club buddies who also invested. Sometimes, the victims even include institutional investors or billion dollar hedge funds. So what gives? In recent years, our firm has recovered over $100 million for investors victimized by so-called alternative investments. We have had a front row seat to a stunning array of fraudulent schemes – – from fake real estate deals, to dodgy investment funds, to “classic” Ponzis. Along the way, we’ve discovered striking similarities in these cases that are common, but not commonly known. We aren’t talking about “if it’s too good to be true, it is” clichés, but rather inside information and red flags that all investors must know. Link to the attached article authored by NBP lawyers Will Nystrom and Mike Paris to learn more.

• Posted at April 28, 2016 1:03 pm
• by Nystrom Beckman Paris

On May 13, 2016, the United States District Court for the District of Vermont (Reiss, J.) will conduct a fairness hearing on the 2015 proposed class action settlement in the matter of Allen, et. al. v. Dairy Farmers of America, Inc., et. al., 5:09-cv-230. The class action was brought on behalf of dairy farmers in the Northeastern United States who claim that a national dairy cooperative (Dairy Farmers of America, Inc.) and its marketing affiliate (Dairy Marketing Services, LLC) violated federal antitrust laws by creating a monopsony and monopoly in the milk distribution system. Many dairy farmers believe that the proposed class action settlement is deficient and have decided to “opt out” of the class action and pursue their claims directly. NBP is proud to represent over 125 of these dairy farmers in seeking damages and injunctive relief for violation of the antitrust laws.