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During a trial that could end her career in the securities industry, turnaround executive Lynn Tilton took the witness stand to defend against civil fraud charges stemming from her handling of a $2.5 billion investment portfolio, the Wall Street Journal reported today. Tilton and her Patriarch Partners LLC investment firm deny the Securities and Exchange Commission’s allegations that she hid losses from investors in her Zohar I, II and III funds, which are collateralized loan obligation vehicles packed with loans to troubled companies. In a trial that began last week, the SEC says that Tilton failed to tell investors in the Zohar funds that she was extending loan maturities based on her belief that the troubled companies had a chance to survive. Tilton said yesterday that investors knew that the loan portfolio included distressed companies and therefore should have expected those companies’ payments on their loans to be “irregular and lumpy.” Instead of calling troubled companies in default on the loans, Tilton said that she typically gave businesses more time to turn themselves around by allowing them to defer their interest payments. She said that she had broad discretion to make this call.

The estate of one of Bernard Madoff’s oldest friends agreed to pay the con man’s victims $277 million to settle claims that the Beverly Hills money manager, who died in 2010, got rich from Madoff’s fraud at the expense of thousands of investors, including his own clients, Bloomberg News reported on Friday. Stanley Chais, who was well-known in the U.S. and Israel for his donations to Jewish charities, was also one of Madoff’s earliest investors. But after the Ponzi scheme collapsed in 2008, Chais denied knowing about it, insisting he’d been duped along with everyone else. That didn’t stop the lawsuits against him, which his estate has been battling for years. Now, the estate is ready to move on: It will pay more than $262 million to Irving Picard, the New York-based trustee liquidating Madoff’s firm and another $15 million to California’s attorney general to resolve a related class-action lawsuit, Picard said on Friday. Read more. 

For a further analysis of commercial fraud, make sure to pick up a copy of ABI’s Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case. 

A new rule finalized on Friday by the Obama administration will cost student debtors who say that their colleges defrauded them some longstanding rights to get their federal loans canceled, while colleges on shaky financial footing dodged a government crackdown, Bloomberg News reported. Those regulations, proposed in June, mark the administration's response to the spate of closures of for-profit colleges, following state and federal investigations and lawsuits that have so far led more than 80,000 Americans to seek debt relief, alleging fraud, according to new figures the U.S. Department of Education also released on Friday. According to a summary of the rule the agency provided on Thursday, borrowers who receive federal student loans starting next July and who subsequently accuse their colleges of misleading them into enrolling will face a narrower path to debt relief than today's borrowers. If the rule is upheld, defrauded student debtors no longer will be able to get their loans canceled by alleging that their schools violated state laws, unless they first successfully sue. Instead, they'll be subject to a new federal standard — one that officials say is more efficient but consumer advocates say limits borrowers' ability to file claims.

A federal judge has frozen some $118 million belonging to Platinum Partners, the hedge fund manager at the center of a federal fraud investigation, after a bankruptcy trustee sued the company, the Wall Street Journal reported today. Bankruptcy Judge Marvin Isgur issued a temporary restraining order on Wednesday barring transfers from certain bank accounts belonging to Platinum hedge funds and investment vehicles. Judge Isgur issued the order at the request of Trustee Richard Schmidt, who is overseeing the remnants of oil-platform operator Black Elk Energy Offshore Operations LLC. Schmidt sued Platinum for $200 million on Wednesday in U.S. Bankruptcy Court in Houston, alleging that insiders at Platinum’s flagship fund engaged in a scheme to “plunder” Black Elk by siphoning off the proceeds from the sale of its prime assets before putting the company into bankruptcy. Judge Isgur said that the lawsuit’s allegations reflect a pattern of “fraud and abuse” by Platinum. “If the funds are not frozen, the court finds that the funds are likely to leave the United States and this Court’s practical ability to control them,” Judge Isgur said. “This would result in a total loss to the Plaintiff and constitutes irreparable injury.” Read more. (Subscription required.) 

Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt. Order your copy of ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition. 

For a further analysis of commercial fraud, make sure to pick up a copy of ABI’s Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case. 

The nation’s largest homebuilder, D.R. Horton, engaged in deceptive practices that forced the bankruptcy of the homeowners’ association for Majorca Isles in Miami Gardens, The Real Deal (South Florida real estate news) reported yesterday. Following a three-day trial, Bankruptcy Judge A. Jay Cristol entered a judgment against D.R. Horton and its employees for $16.3 million in damages, including $12.5 million in punitive damages, and said the company violated Florida’s Deceptive and Unfair Trade Practices Act. Bankruptcy Trustee Barry E. Mukamal of KapilaMukamal, LLP, and his counsel John Arrastia of Genovese Joblove & Battista, worked for more than four years on the case, representing the Majorca Isles Master Association, a homeowners association created by D.R. Horton as part of the planned 681-unit community Majorca Isles in Miami Gardens. According to Mukamal, D.R. Horton appointed its employees as the board of directors of the Majorca Isles Master Association until the association was turned over to the homeowners. During that time, D.R. Horton allegedly did not make a serious effort to collect assessments from the unit owners, and because it had failed to keep useful financial records, was unable to identify whether units had paid or not. Instead, D.R. Horton allegedly shifted the collections from the master association to other condominium associations, in a breach of the directors’ breaches of duty and loyalty.

John W. Vaudreuil, U.S. Attorney for the Western District of Wisconsin, announced that Leon Fadden of Madison, Wis., has been convicted of three counts related to bankruptcy fraud, according to a Department of Justice press release.  The jury reached its verdict after 90 minutes of deliberation following a two-day trial in federal court in Madison. Fadden was convicted of fraudulently concealing property in connection with a bankruptcy case. In October 2013, he concealed from his creditors and the U.S. Trustee his interest in two life-insurance policies and his interest in the estate of a deceased relative. He was also convicted of making false declarations under penalty of perjury by submitting false Schedules of Assets and Liabilities, and a false Statement of Financial Affairs. Finally, Fadden was convicted of making false statements to an attorney of the U.S. Trustee’s Office in December 2013. 

Wells Fargo & Co. Chief Executive Tim Sloan, who replaced John Stumpf in the wake of the lender’s consumer fraud scandal, outlined his vision to repair the bank’s brand and customer relationships, MorningConsult.com reported today. In a speech to employees in Charlotte, N.C., where the San Francisco-based bank has a large foothold, Sloan acknowledged that the company’s sales goals “sometimes resulted in behaviors and practices that did not serve our customers’ or our team members’ interests.” He also said executives failed to address problems or catch them early enough. Echoing a point from Stumpf’s congressional testimony, Sloan, who previously served as chief operating officer, maintained that “the vast majority of our colleagues — tellers, platform and phone bankers and branch managers — did the right thing, and do the right thing every day on behalf of our customers and company.” He also discussed the failures of the bank’s top echelon to root out the fraud.

The rate of online card fraud is rising sharply as a growing number of purchases take place on the Internet while brick-and-mortar merchants race to lock down vulnerabilities in the checkout line, the Wall Street Journal reported today. This is prompting new steps to try to curb the threat: The credit card industry is expected to announce a plan to encourage online merchants to provide card issuers with more detailed customer information that could be used to catch fraudulent purchases. More than 7.5 percent of online merchants’ revenue is eaten up by the cost of actual fraud and costs that are associated with fraud-prevention tools, according to a survey to be released today by Javelin Strategy & Research, a consulting firm that specializes in the payments industry. Aite Group LLC, another consulting firm, estimated in May that so-called card-not-present fraud will rise to $4 billion this year from $3.2 billion in 2015. It expects that figure to jump to $7.2 billion in 2020.

James Merrill, who founded and then captained the meteoric rise of TelexFree LLC before it was shut down by federal authorities, has pleaded guilty to criminal fraud charges for his role in running a multibillion-dollar pyramid scheme, the Wall Street Journal reported today. Merrill pled guilty to one count of wire fraud conspiracy and eight counts of wire fraud in a deal that will limit his sentencing to no more than 10 years in prison, according to the U.S. attorney’s office in Boston. Court papers show that if he had been convicted at trial, he could have faced up to 20 years in prison. The plea agreement further calls for the former chief executive of TelexFree, a multi-level marketing company that sold telephone-service plans, to forfeit tens of millions of dollars in assets. The list of assets, which prosecutors say Merrill and his business partner collected as part of the scheme, includes cash, real estate, luxury cars and a yacht. Read more. (Subscription required.) 

For a further analysis of commercial fraud, make sure to pick up a copy of ABI’s Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case.