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Is Minnesota suffering a ‘Ponzi Plague’?

Minnesota is definitely seeing an increase in financial fraud cases in the last two years, according to the office of Minnesota’s U.S. attorney, but it’s not clear that we have more than other spots in the nation.

Is Minnesota home to an unusually high rate of financial fraud and, in particular, the variant known as a Ponzi scheme? Or are stepped-up enforcement efforts turning up more high-profile cases? 

In the latest development, Charles “Chuck” E. Hays, 56, Rosemount was sentenced this week to nine years and nine months in prison for his role in running a Ponzi scheme involving commodity pools. Hays also was ordered to pay $21,825,090 in restitution and $7,850 in victim attorney fees, as well as to serve three years of supervised release following his prison term.

Hays pleaded guilty in April 2009 to mail fraud, wire fraud and structuring transactions to avoid financial reporting requirements. According to the plea agreement, Hays told potential investors he was a day trader in stock index futures and other futures contracts and solicited individuals to invest money with him and his company, Crossfire Trading LLC, from January 2001 through February 2009. Instead of investing the funds, he used the money for personal expenses, the plea agreement said.

Claiming that “Ponzi schemes have plagued Minnesota,” blogger Patrick Pretty, who follows financial fraud globally, has been busy tracking the recent spate of indictments, convictions, legal maneuvering, office raids and investigations across the Gopher State.

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With the convictions of Bernie Madoff and Tom Petters for perpetrating separate multi-billion dollar investment scams, the term ‘Ponzi scheme’ has been brought into high relief both nationally and in Minnesota. 

A Ponzi scheme, named after notorious scam artist Charles Ponzi, entices individuals to place money with the fraudster, who promises to invest the money. Instead of investing as promised, the perpetrator either uses the funds to pay off earlier investors or to fund an extravagant lifestyle.

 “We have definitely seen an uptick in financial fraud cases over the last couple of years,” observed  Jeanne Cooney, spokesperson for the office of Todd Jones, U.S. attorney in Minnesota.

“In part, it’s due to the economy; in part, it’s due to a re-emphasis on fighting financial fraud by the Justice Department under [U.S. Attorney General] Holder,” she explained. “Nationally, we’re seeing more of these cases [and] putting a lot of effort into investigating and vigorously prosecuting” those that warrant federal prosecution.

While prosecutors describe some cases as Ponzi schemes and others more broadly as financial fraud, she also said that “people could make an argument either way” in using the term Ponzi scheme. She also said the Justice Department does not track the number of such cases by state.

Cooney does not think Minnesota is unusual in the number of financial fraud cases it is seeing but says that “for the first quarter, we’ve seen about a 20 percent increase in cases” of financial fraud in Minnesota.  Those cases range from straight theft to tax evasion, mortgage fraud and Ponzi schemes.

Judge for yourself. Here is a selective list of recent highly visible financial fraud convictions and pending trials or investigations in Minnesota that have been described by prosecutors as Ponzi schemes – with one exception (noted below).

Thomas Petters, 53, of Wayzata was convicted of wire fraud, mail fraud and money laundering, in a Ponzi scheme that ran from 1994 until 2008 involving fictitious purchase of appliances for resale. Petters was sentenced to 50 years in prison for a $3.65 billion scheme. Five others have pleaded guilty and await sentencing.

Co-conspirators Neulan Midkiff, 66, a Forest Lake minister, as well as Georgia native Terrence Correll and Jerry Lynn Watkins 55, also of Forest Lake, were sentenced to 15-, 12- and two-year prison terms respectively, plus financial restitution, for their roles in running an investment Ponzi scheme that bilked 519 people of up to $30 million between April 2004 and December 2005.

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Jonathan Helgason, a 46-year-old licensed real estate agent from Chisago City, and Thomas Balko, 38, of Rogers, pleaded guilty to mortgage fraud totaling $35 million. The two men were sentenced last year to eight- and seven-year terms respectively, plus requiring restitution to the defrauded lenders. The Ponzi scheme involved “flipping” 162 homes throughout the Twin Cities between 2005 and 2007.  About 140 of the homes are in north Minneapolis, and almost two-thirds of those properties ended up in foreclosure.

Trevor G. Cook, 37, of Apple Valley, pleaded guilty earlier this month to mail fraud and tax a $190 million Ponzi scheme involving a foreign currency investment scheme. No sentencing date has been set. Charges also have been filed against one of Cook’s partners in the scheme, conservative radio talk show host Pat Kiley, who pushed the investment to his listeners.

Gerard Cellette, 44, a former print broker from Andover, pleaded guilty in Hennepin County in March to 36 counts of securities fraud in a $53 million Ponzi scheme  that ran from 2006 through August 2009 backing phony printing contracts. Sentencing is scheduled for June.

Kalin Thanh Dao, 33, from Minneapolis pleaded guilty in May 2009 to conspiracy to commit mail and wire fraud and to engaging in illegal monetary transactions. She allegedly ran a Ponzi scheme from April 2006 through September 2008 that bilked investors of more than $7 million. Dao was sentenced to 12 years in prison and was ordered to pay more than $7 million in restitution. Her parents, Nghia Trong Dao, unknown age, and his wife, Thu Nguyet Le, 52, also pleaded guilty and are awaiting sentencing.

Investigations and legal action are still in progress in several other high-profile cases:

Denny Hecker, 57, of Medina, and former Hecker executive Steven Leach, 54, of Burnsville, were indicted in February on charges of conspiracy to commit wire fraud and commiting wire fraud in obtaining $80 million in financing for the purchase of 5,000 vehicles from Hyundai Motor America. Hecker also was indicted on money-laundering charges. Hecker’s trial is scheduled for fall. While not described as a classic Ponzi-scheme, the federal indictment claims that the scheme was instituted in part “to fund Hecker’s extravagant lifestyle.”

Steven Renner, 54, a Minneapolis Internet marketer and blues guitarist, had his downtown Minneapolis office raided in February by Secret Service and Treasury Department agents investigating an alleged “auto-surf”  Internet Ponzi scheme run through one of Renner’s companies, iNetGlobal.  Renner is awaiting sentencing for an earlier tax evasion conviction for underreporting his income by nearly $1.5 million from 2002 to 2005.

Renee Marie Brown, 46, a Golden Valley business woman, has been accused by the Securities and Exchange Commission of running a $1.1 million Ponzi scheme involving a bond fund named “Fund X” from July 2009 through March 2010, Earlier this month, the U.S. District Court for Minnesota issued a temporary restraining order and froze Brown’s assets.