No De Novo Review of Discovery Sanctions After the Reference Is Withdrawn
An adverse inference sanction for spoliation of evidence is reviewed for abuse of discretion by the district court after withdrawal of the reference.
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Ex-Coinbase Employee and 2 Others Charged with Insider Trading of Cryptoassets
Federal authorities filed criminal and civil charges against a former Coinbase employee and two other men in an insider-trading case involving confidential information about cryptocurrency assets that were about to be posted on Coinbase’s exchange, The New York Times reported. The three men were involved in trades over 10 months using information about 14 listings on Coinbase that generated about $1.5 million in illegal profits. The men were charged criminally with three counts of wire fraud and conspiracy to commit wire fraud. The case is the first time the authorities have filed criminal insider-trading charges involving cryptocurrency assets. The prosecutors, as well as the Securities and Exchange Commission in civil charging documents, said Ishan Wahi, who at the time was part of a Coinbase team that listed assets on the exchange, passed on confidential information about when some cryptocurrency assets would be listed to his brother, Nikhil Wahi, and his brother's friend Sammer Ramani. Nikhil Wahi and Mr. Ramani used that information to buy the assets before Coinbase announced they’d be listed, the authorities said. After the announcement, the men sold the assets for a profit. The alleged scheme came to light after Coinbase began an internal investigation in April in response to a post on Twitter about unusual trading.
Wells Fargo Ponzi Suit Airs Bank Risk in Law Firm Trust Accounts
Matthew Beasley told Wells Fargo & Co. his solo law practice would collect about $350,000 a year when he set up a firm trust account at a branch in Las Vegas in 2017, Bloomberg Law reported. Instead, the account resembled that of one of the fastest growing law firms in the U.S. It took in $30 million in February alone, and deposits more than doubled in 2020 and 2021 after tripling in 2019. Beasley wasn’t running a successful law firm; he was operating a nearly $500 million Ponzi Scheme. He now faces criminal charges, and the Securities and Exchange Commission has named him in a civil complaint. Now Wells Fargo is in the crosshairs of Beasley’s investors: The group filed a class-action complaint this month alleging that the bank aided the scheme. The case raises several questions: What responsibilities do banks have to oversee law firm trust accounts? How much do they need to know to be held liable for fraudulent activity? The type of account Beasley used was an “interest on lawyer trust accounts” (IOLTA). Lawyers use IOLTAs to hold client funds for court fees and other payments, including drawing down retainers. Account interest goes to legal aid programs. State bar authorities somewhat oversee the accounts, performing occasional, random audits. Banks must notify the bars when lawyers do overdrafts. Wells Fargo missed red flag after red flag in Beasley’s IOLTA account, his investors allege. These included the mismatch between what he said the account would generate and how much it collected.
Justice Department Seizes $500,000 from North Korean Hackers
The Department of Justice (DOJ) was able to restore the funds of hospitals in Kansas and Colorado that had recently been victims of ransomware attacks, Crypto Briefing reported. The agency seized and returned almost half a million dollars from North Korean hackers to two hospitals in Kansas and Colorado after they were targeted by the hackers. The medical centers were attacked in May 2021 and April 2022 and paid their ransoms in bitcoin. In May 2021 and April 2022, state-sponsored North Korean hackers deployed a new strain of ransomware called “Maui” to lock the servers of two hospitals in Kansas and Colorado. The medical centers had to respectively pay ransoms of approximately $100,000 and $120,000 in bitcoin to the cybercriminals to regain the use of their computers. The Kansas hospital contacted the Federal Bureau of Investigation (FBI), which was then able to trace the cryptocurrency ransom to money-launderers in China. In May 2022, the FBI managed to gain access to the receiving accounts, seize the funds, and eventually return the money to the victim institutions. It is not clear where the extra $280,000 seized came from, nor is it clear how bitcoin’s price changes affected the overall amount seized. The statement also did not mention any arrests.
Complaint Dismissed Against 2 Great Falls Banks in Alleged Check-Kiting Scheme
The Montana Bankruptcy Court dismissed with prejudice a case that accused two Great Falls banks of being complicit in a check kiting scheme by former Shoot the Moon (STM) president Ken Hatzenbeller, the Great Falls Tribune reported. The executor for STM alleged First Interstate Bank (FIB) and Prairie Mountain Bank (PMB) — now Bravera Bank — knew that Hatzenbeller was kiting checks and assisted him in doing so. Hatzenbeller was not charged with check kiting, however. Hatzenbeller was part-owner of the company, along with John Bloemendaal and Gregory Tierney. The company opened several restaurants in Great Falls starting in 2004 but eventually descended into insolvency. Hatzenbeller was charged locally for financial crimes and was federally indicted for fraudulently receiving loans and submitting fraudulent invoices from a fictitious entity. In the federal case, Hatzenbeller pleaded guilty to bank fraud and received 2 1/2 years in prison and three years of supervised release and was assigned more than $1 million in restitution. Hatzenbeller pleaded no contest in the other case and received a six-year deferred sentence and was ordered to pay more than $1.7 million to 12 investors, some of whom said they lost their life savings. In August, STM executor Jerry Foster filed a complaint against FIB and PMB, claiming that the banks knew of Hatzenbeller’s scheme as far back as 2010. The complaint contained copies of correspondence between bank officials and Hatzenbeller that Foster said supported the accusation.
Corporate Officer Has a Nondischargeable Debt from the Company’s Fraud
Tenth Circuit insinuates that a debtor may have a nondischargeable debt even if the debtor did not personally benefit from fraud.
Lawsuit Accuses Troubled Crypto Lender Celsius Network of Fraud
A former investment manager at Celsius Network sued the crypto lender yesterday, saying that it used customer deposits to rig the price of its own crypto token and failed to properly hedge risk, causing it to freeze customer assets, Reuters reported. The complaint said Celsius ran a Ponzi scheme to benefit itself through "gross mismanagement of customer deposits," and defrauded the plaintiff KeyFi Inc., run by the former manager Jason Stone, into providing services worth millions of dollars and refusing to pay for them. Celsius had no immediate comment on the lawsuit, which seeks unspecified compensatory and punitive damages and was filed in New York state court in Manhattan. Stone's accusations follows Celsius' June 12 decision to freeze withdrawals and transfers for its 1.7 million customers because of "extreme" market conditions. The Hoboken, N.J.-based company later hired advisers on a possible debt restructuring, which reportedly could include a bankruptcy filing. Read more.
In related news, Celsius Network LLC has reshuffled its board of directors as the crypto lender struggles with a liquidity crunch brought on by the collapse in digital currencies, according to new securities filings, WSJ Pro Bankruptcy reported. The company last week appointed to its board Alan Carr, founder and chief executive of fiduciary services firm Drivetrain LLC, who is known for serving as a board director at companies that have undergone bankruptcy. Celsius also appointed David Barse, founder and CEO of Xout Capital, a firm that maintains financial indexes. Last month, Celsius terminated board directors Laurence Tosi, John Dubel and Gilbert Nathan. Mr. Tosi had served as the chief financial officer of Airbnb Inc. and Blackstone Inc. before founding growth equity firm WestCap Group, which has a major investment in Celsius, while Mr. Dubel is the founder of restructuring firm Dubel & Associates LLC. Celsius didn’t respond to a request for comment regarding its board’s reorganization. Celsius, which said it had $11.8 billion in assets as of May 17 and 1.7 million users, froze withdrawals, swaps, and transfers last month due to extreme market volatility. The value of its assets has fallen from about $25 billion in October. The company has engaged restructuring consultants from Alvarez & Marsal as well as attorneys from law firm Akin Gump Strauss Hauer & Feld LLP to advise on options including a potential bankruptcy filing. Celsius pays users annual percentage yields of close to 19% on cryptocurrency deposits, then uses those deposits to make crypto loans. It also provides cash loans to people who pledge their crypto assets as collateral. Celsius said in a blog post last week that it is “focused and working as quickly as we can to stabilize liquidity and operations” and that it is exploring options including “strategic transactions as well as a restructuring of our liabilities.” Read more.
Former Theranos Exec Ramesh Balwani Convicted of Fraud
A jury yesterday convicted former Theranos executive Ramesh “Sunny” Balwani of collaborating with disgraced Theranos CEO Elizabeth Holmes in a massive fraud involving the blood-testing company that once enthralled Silicon Valley, the Associated Press reported. The 12 jurors found Balwani guilty on all 12 felony counts of defrauding both Theranos investors and the patients who relied on wildly unreliable blood tests that could have jeopardized their health. The outcome puts Balwani and Holmes in similar situations. Holmes was convicted on four counts of investor fraud and conspiracy earlier this year. During that trial, Holmes tearfully accused Balwani of sexually and emotionally abusing her while the two were romantically involved. An attorney for Balwani has vehemently denied those charges. Both Holmes, 38, and Balwani, 57, face up to 20 years in prison. After the verdicts, U.S. District Judge Edward Davila raised Balwani’s bail to $750,000 from $500,000 and set Nov. 15 as his sentencing date. Holmes, who is free on $500,000 bail, is scheduled to be sentenced Sept. 26.
UBS to Pay $25 Million to Settle U.S. SEC Fraud Charges
Wealth manager and banking group UBS will pay $25 million to settle fraud charges relating to an options trading strategy, the U.S. Securities and Exchange Commission (SEC) said yesterday, Reuters reported. UBS marketed and sold the "Yield Enhancement Strategy (YES)" to about 600 investors through its platform of domestic financial advisers from February 2016 through February 2017, the SEC said, adding its order found that UBS did not provide its financial advisers with adequate training and oversight in the strategy. Although UBS recognized and documented the possibility of significant risk in those investments, it failed to share this data with advisers or clients, the SEC said in a statement. "As a result, the order finds, some of UBS’s advisors did not understand the risks and were unable to form a reasonable belief that the advice they provided was in the best interest of their clients," the statement added. Without admitting or denying the SEC's findings, UBS agreed to a cease-and-desist order, a censure, and to pay disgorgement of $5.8 million and prejudgment interest of $1.4 million, the SEC said. The bank also agreed to pay a civil penalty of $17.4 million.
California Man Sentenced for Bankruptcy Fraud in Kansas
A California man was sentenced 36 months in prison following a jury conviction in March 2022 on one count of mail fraud and one count of making a false representation in a bankruptcy proceeding, according to a DOJ press release. According to court documents, in January 2018, Nana Baidoobonso-Iam, 69, engaged in a scheme in which he mailed an Involuntary Petition in Bankruptcy to the U.S. Bankruptcy Court for the District of Kansas. The defendant signed the Involuntary Petition in Bankruptcy under the penalties of perjury and falsely claimed that an individual owed him $630,000 and owed a second person $1.26 million. The U.S. Postal Service investigated the case.