Despite the dispensation of extremely severe penalties for orchestrating Ponzi schemes in North America, perpetrators still attempt to line their pockets with the ill-gotten proceeds of making payments to investors by misappropriation of funds and withdrawing capital for personal use.
The United States Securities and Exchange Commission (SEC) takes an extremely dim view of this and has raised the bar with regard to consumer protection since events such as the costly demise of MF Global and Peregrine Financial Group, the Bernard Madoff case and the financial crises of 2008 and 2009, culminating in the Dodd-Frank Act being sworn into government.
Fifteen Year Jail Term
Yesterday, the SEC announced that on August 6, 2013, the Honorable Mark A. Goldsmith of the United States District Court for the Eastern District of Michigan sentenced Gregory N. McKnight to 188 months (15 years and 8 months) in jail, followed by supervised release of 3 years, and ordered McKnight to pay $48,969,560 in restitution to his victims.
53 year old Mr. McKnight, of Swartz Creek, Michigan, had previously pled guilty to one count of wire fraud for his role in orchestrating a $72 million Ponzi scheme involving at least 3,000 investors across a range of asset classes whilst holding a senior position at Legisi Holdings LLC.
Back in 2010, Legisi Holdings advertised on its website that its funds were at work in the very lucrative FOREX (Foreign Exchange) and COMEX (Commodities Exchange) arenas with a small amount in the Stock Market.
It further boasted that profits from these investments as well as internet marketing and sports arbitrage trading activities were used to enhance the company’s programs and increase stability for the long term.
At the same time, Legisi Holdings enticed investors by claiming that its future plans included e-currency exchange services as well as sales of various information and health related products through strategic alliances and partnerships with various marketing concerns. This effectively alluded to the company having used multi-level marketing strategies, which are also often the cause of dispute between participants and governmental authorities as they may be deemed to be pyramid schemes.
Additionally, the company advertised that profits from these activities would increase liquidity and allow for weekly and, eventually, daily payout plans, as in a High Yield Investment Plan (HYIP) but it provided a disclaimer that customers should not look for ridiculously high, unsustainable rates of return.
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The U.S. Attorney’s Office for the Eastern District of Michigan filed criminal charges against McKnight on February 14, 2012. McKnight was taken into custody immediately after the sentencing hearing.
The criminal charges arose out of the same facts that were the subject of an emergency action that the Commission filed against Mr. McKnight and others on May 5, 2008. On that same day, the Court issued orders freezing Mr. McKnight’s assets and those of several companies he controlled, and appointed a Receiver.
The Commission’s complaint alleged that, from December 2005 through November 2007, McKnight, through his company Legisi Holdings, conducted a fraudulent, unregistered offering of securities in which he raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries.
According to the SEC’s complaint, Mr. McKnight represented that he would invest the offering proceeds in various investment vehicles and pay interest of as much as 15 percent per month from the resulting profits.
The complaint charged that McKnight invested less than half of the offering proceeds and that these investments resulted in millions of dollars in losses.
Ponzi Scheme Used To Misappropriate Client Funds
The Commission’s complaint further charged that Mr. McKnight used investor funds to make Ponzi payments to investors and for his own use, resulting in the SEC charging Mr. McKnight with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
Accomplice Serves Five Year Stretch
On July 6, 2011, the Court entered a final judgment against Mr. McKnight in the SEC’s action, and ordered him to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties totaling approximately $6.5 million.
The court also issued orders permanently enjoining Mr. McKnight from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. On July 9 this year, Mr. McKnight’s associate Matthew J. Gagnon was sentenced to five years in prison for his role in promoting Legisi.