Alleged Ponzi Scheme Perpetrators Speak Out Against Use of Words “Ponzi Scheme”

Posted by Kathy Bazoian Phelps

What is it with alleged Ponzi scheme perpetrators these days? They seem to have a heightened sensitivity to the use of the words “Ponzi scheme.” In 2012, two cases were decided against two governmental agencies – the SEC and the IRS–in connection with their use of the words “Ponzi scheme.”

Also Read: Biggest Ponzi Scheme

In a case brought by the SEC against Small Business Capital Corp. and its principal, Mark Feathers, Feathers filed a Motion for Restraining Order (“TRO“), Preliminary Injunction, Sanctions, and Special Damages against the SEC, arguing that the SEC used “fighting words” in certain publications related to the case. SEC v. Small Business Capital Corp., 2012 U.S. Dist. LEXIS 178392 (N.D. Cal 2012). Feathers based his motion on the argument that the SEC’s use of the works “Ponzi-like” and “swindler” are “fighting words” which violated that his First Amendment rights. The court, in denying Feathers’ motion, noted:

The problem with Plaintiff’s request in the context of this action, however, is that claims under the First Amendment are not at issue in this case. Indeed, the classic issue presented by “fighting words” is whether such speech is constitutionally protected; in other words, whether the challenged speech is “likely to produce a clear and present danger of a serious substantive evil that rises far above public inconvenience, annoyance, or unrest.”City of Houston v. Hill

, 482 U.S. 451, 462 (1987). Any party’s right to free speech is not implicated by the claims brought by Plaintiff, which involves only violations of securities law. Absent such a free speech issue, the court is unable to analyze whether Defendant could prevail on the merits of a First Amendment claim.The court found that “fighting words” lose First Amendment protection only if they constitute “words that by their very utterance inflict injury or tend to incite an immediate breach of the peace.” Id. at *5 (citing Hill, 482 U.S. at 461-62). After denying Feathers’ request for a TRO and preliminary injunction, the court cautioned:

With that said, however, the court expects all parties to this case to act in a dignified and appropriate manner. The language utilized in press releases, pleadings or other documents should be carefully chosen so as not to denigrate others or unnecessarily jeopardize the viability of the investment assets, especially when this case remains at the initial stages of litigation.Id. at *6.
In a separate case brought against the IRS, Plaintiffs Emerging Money Corporation, Emerging Administrative Services, LLC and Emerging Actuarial Designs, LLC alleged that the IRS had wrongfully disclosed information when it asserted to certain taxpayers that the transactions that the “Plaintiffs had promoted to them were ‘sham transactions’ and part of a ‘Ponzi scheme.’” Emerging Money Corp. v. United States, 873 F. Supp. 2d 451 (D. Conn. June 4, 2012).

The Plaintiffs’ “claim was based on 26 U.S.C. § 7431, which permits plaintiffs to recover damages when an officer of the United States knowingly or negligently discloses returns or return information in violation of Section 6103. Plaintiffs seek, inter alia, $1,000 for each unauthorized disclosure of their return information.” Id. at *6. The IRS filed a motion for summary judgment, arguing that it was permitted to make those statements under the Internal Revenue Code.

The facts in the case were that the IRS had investigated the Plaintiffs’ “Stock to Cash” program in which a client would transfer shares of stock to a lender and the lender would make an upfront cash payment called a “loan.” The IRS concluded that the program was a Ponzi scheme and delivered letters to the clients who had participated in the program which included the following information: “(1) identification of Plaintiffs as possible ‘lenders’ or administrators of the Stock to Cash program (the ‘identification of Plaintiffs’); (2) the statement that the IRS was conducting an investigation of the Stock to Cash program (the ‘investigation assertion’); (3) the IRS‘s position that the Stock to Cash transactions were ‘sham transactions’ (the ‘sham-transaction assertion’) and (4) the assertion that those transactions were ‘built into a Ponzi scheme’ (the ‘Ponzi-scheme assertion’).” Id. at *4-5.

The IRS contended that it was entitled to disclose the information under the “Own Information” exception under 26 U.S.C. § 6103(e)(7). The court reviewed relevant case law and concluded that most of the information disclosed was the recipients’ own information because it “consisted of facts that directly impacted the Recipients’ tax liabilities.” However, the court noted, “But the Ponzi-scheme assertion did not directly impact the Recipients’ tax liabilities. Their ‘loans’ would have been considered sales of stock whether or not the program was a Ponzi scheme. The fact that the transactions were ‘shams’ was enough to establish to the Recipients that they were invalid, without a contextual reference to a larger Ponzi scheme.” Id. at *13.

The court reviewed several other exceptions, such as the “Administrative Proceeding” Exception, the “Investigative Purposes” exception, and the “Erroneous Information” issue, and ultimately concluded that the IRS did not violate Section 6103 when it sent out the letters regarding most of the information contained in the letters. However, the court found that the “exceptions did not cover the IRS’s assertion that the Stock to Cash program was a Ponzi scheme.” Id. at *23. The court instructed the Plaintiffs to file a statement and explanation of the damages they were seeking if they wanted to proceed to trial. The Plaintiffs filed a supplemental statement asking for $69,000 in statutory damages, or in the alternative, actual and punitive damages, plus attorneys’ fees and costs. The Plaintiffs’ statement is attached here.

Two alleged Ponzi scheme perpetrators, two governmental agencies, two courts, and two decisions – all involving the use of the words “Ponzi scheme.” If nothing else, these cases are a reminder that we are in this country innocent until proven guilty, so we should tread carefully when using those two little words.

The Pentagon as a global rifle association

The Pentagon as a global rifle association
By Tom Engelhardt

Given these last weeks, who doesn’t know what an AR-15 is? Who hasn’t seen the mind-boggling stats on the way assault rifles have flooded this country, or tabulations of accumulating Newtown-style mass killings, or noted that there are barely more gas stations nationwide than federally licensed firearms dealers, or heard the renewed debates over the Second Amendment, or been struck by the rapid shifts in public opinion on gun control, or checked out the disputes over how effective an assault-rifle ban was the last time around?

Who doesn’t know about the National Rifle Association‘s suggestion to weaponize schools, or about the price poor neighborhoods may be paying in gun deaths for the present
expansive interpretation of the Second Amendment? Who hasn’t seen the legions of stories about how, in the wake of the Newtown slaughter, sales of guns, especially AR-15 assault rifles, have soared, ammunition sales have surged, background checks for future gun purchases have risen sharply, and gun shows have been besieged with customers?

If you haven’t stumbled across figures on gun violence in America or on suicide-by-gun, you’ve been hiding under a rock. If you haven’t heard about Chicago’s soaring and Washington DC’s plunging gun-death stats (and that both towns have relatively strict gun laws), where have you been?

Has there, in fact, been any aspect of the weaponization of the United States that, since the Newtown massacre, hasn’t been discussed? Are you the only person in the country, for instance, who doesn’t know that Vice President Joe Biden has been assigned the task of coming up with an administration gun-control agenda before Barack Obama is inaugurated for his second term? And can you honestly tell me that you haven’t seen global comparisons of killing rates in countries that have tight gun laws and the US, or read at least one discussion about life in countries like Colombia or Guatemala, where armed guards are omnipresent?

After years of mass killings that resulted in next to no national dialogue about the role of guns and how to control them, the subject is back on the American agenda in a significant way and – by all signs – isn’t about to leave town anytime soon. The discussion has been so expansive after years in a well-armed wilderness that it’s easy to miss what still isn’t being discussed, and in some sense just how narrow our focus remains.

Think of it this way: the Obama administration is reportedly going to call on congress to pass a new ban on assault weapons, as well as one on high-capacity ammunition magazines, and to close the loopholes that allow certain gun purchasers to avoid background checks. But Biden has already conceded, at least implicitly, that facing a Republican-controlled House of Representatives and a filibuster-prone senate, the administration’s ability to make much of this happen – as on so many domestic issues – is limited.

That will shock few Americans. After all, the most essential fact about the Obama presidency is this: at home, the president is a hamstrung weakling; abroad, in terms of his ability to chose a course of action and – from drones strikes and special ops raids to cyberwar and other matters – simply act, he’s closer to Superman. So here’s a question: while the administration is pledging to try to curb the wholesale spread of ever more powerful weaponry at home, what is it doing about the same issue abroad where it has so much more power to pursue the agenda it prefers?

Flooding the world with the most advanced weaponry money can buy.

As a start, it’s worth noting that no one ever mentions the domestic gun control debate in the same breath with the dominant role the US plays in what’s called the global arms trade. And yet, the link between the two should be obvious enough.

In the US, the National Rifle Association (NRA), an ultra-powerful lobbying group closely allied with weapons-making companies, has a strong grip on Congress – it gives 288 members of that body its top “A-rating” – and is in a combative relationship with the White House. Abroad, it’s so much simpler and less contested. Beyond US borders, the reality is: the Pentagon, with the White House in tow, is the functional equivalent of the NRA, and like that organization, it has been working tirelessly in recent years in close alliance with major weapons-makers to ensure that there are ever less controls on the ever more powerful weaponry it wants to see sold abroad.

Between them, the White House and the Pentagon – with a helping hand from the State Department – ensure that the US remains by far the leading purveyor of the “right to bear arms” globally. Year in, year out, in countries around the world, they do their best to pave the way (as the NRA does domestically) for the almost unfettered sales of ever more lethal weapons. In fact, the US now has something remarkably close to a monopoly on what’s politely called the “transfer” of weaponry on a global scale. In 1990, as the Cold War was ending, the US had cornered an impressive 37% of the global weapons trade. By 2011, the last year for which we have figures, that%age had reached a near-monopolistic 78% (US$66.3 billion in weapons sales), with the Russians coming in a distant second at 5.6% ($4.8 billion).

Admittedly, that figure was improbably inflated, thanks to the Saudis who decided to spend a pile of their oil money as if there were no tomorrow. In doing so, they created a bonanza year abroad for the major weapons-makers. They sealed deals on $33.4 billion in US arms in 2011, including 84 of Boeing’s F-15 fighter jets and dozens of that company’s Apache attack helicopters as well as Sikorsky Blackhawk helicopters – and those were just the highest-end items in a striking set of purchases. But if 2011 was a year of break-the-bank arms-deals with the Saudis, 2012 doesn’t look bad either. As it ended, the Pentagon announced that they hadn’t turned off the oil spigot. They agreed to ante up another $4 billion to Boeing for upgrades on their armada of jet fighters and were planning to spend up to $6.7 billion for 20 Lockheed 25 C-130J transport and refueling planes. Some of this weaponry could, of course, be used in any Saudi conflict with Iran (or any other Middle Eastern state), but some could simply ensure future Newtown-like carnage in restive areas of that autocratic, fundamentalist regime’s land or in policing actions in neighboring small states like Bahrain.

And don’t think the Saudis were alone in the region. When it came to US weapons-makers flooding the Middle East with firepower, they were in good company. Among states purchasing (or simply getting) infusions of US arms in recent years were Bahrain, Egypt, Iraq, Jordan, Kuwait, Oman, Tunisia, Qatar, the United Arab Emirates (UAE), and Yemen. As Nick Turse has written, “When it comes to the Middle East, the Pentagon acts not as a buyer, but as a broker and shill, clearing the way for its Middle Eastern partners to buy some of the world’s most advanced weaponry.”

Typically, for instance, on Christmas Day in 2011, the US signed a deal with the UAE in which, for $3.5 billion, it would receive Lockheed Martin‘s Theater High Altitude Area Defense, an advanced antimissile interception system, part of what Reuters termed “an accelerating military buildup of its friends and allies near Iran“. Of course, selling to Arab allies without offering Israel something even better would be out of the question, so in mid-2012 it was announced that Israel would purchase 20 of Lockheed Martin‘s F-35 Joint Strike Fighters, America’s most advanced jet (and weapons boondoggle), still in development, for $2.7 billion.

From tanks to littoral combat ships, it would be easy to go on, but you get the idea. Of course, US weapons-makers in Pentagon-brokered or facilitated deals sell their weaponry and military supplies to countries planet-wide, ranging from Brazil to Singapore to Australia. But it generally seems that the biggest deals and the most advanced weaponry follow in the wake of Washington’s latest crises.

In the Middle East at the moment, that would be the ongoing US-Israeli confrontation with Iran, for which Washington has long been building up a massive military presence in the Persian Gulf and on bases in allied countries around that land.

A Second Amendment world, Pentagon-style
It’s a given that every American foreign policy crisis turns out to be yet another opportunity for the Pentagon to plug US weapons systems into the “needs” of its allies, and for the weapons-makers to deliver. So, from India to South Korea, Singapore to Japan, the Obama administration’s announced 2012 “pivot to” or “rebalancing in” Asia – an essentially military program focused on containing China – has proven the latest boon for US weapons sales and weapons-makers.

As Jim Wolf of Reuters recently reported, the Aerospace Industries Association, a trade group that includes Boeing, Lockheed Martin, and other weapons companies, “said sales agreements with countries in the US Pacific Command’s area of activity rose to $13.7 billion in fiscal 2012, up 5.4% from a year before. Such pacts represent orders for future delivery”.

As the vice president of that association put it, Washington’s Asian pivot “will result in growing opportunities for our industry to help equip our friends”. We’re talking advanced jet fighters, missile systems, and similar major weapons programs, including F-35s, F-16s, Patriot anti-missile batteries, and the like for countries ranging from South Korea to Taiwan and India.

All of this ensures the sharpening of divides between China and its neighbors in the Pacific amid what may become a regional arms race. For the Pentagon, it seems, no weaponry is now off the table for key Asian allies in its incipient anti-China alliance, including advanced drones.

The Obama administration is already brokering a $1.2 billion sale of Northrop Grumman’s RQ-4 “Global Hawk” spy drones to South Korea. Recently, it has been reported that Japan is preparing to buy the same model as its dispute sharpens with China over a set of islands in the East China Sea.

(The Obama administration has also been pushing the idea of selling advanced armed drones to allies like Italy and Turkey, but – a rare occurrence – has met resistance from congressional representatives worrying about other countries pulling a “Washington”, that is, choosing its particular bad guys and sending drone assassins across foreign borders to take them out.)

Here’s the strange thing in the present gun control context: no one – not pundits, politicians, or reporters – seems to see the slightest contradiction in an administration that calls for legal limits on advanced weaponry in the US and yet (as rare press reports indicate) is working assiduously to remove barriers to the sale of advanced weaponry overseas.

There are, of course, still limits on arms sales abroad, some imposed by Congress, some for obvious reasons. The Pentagon does not broker weapons sales to Iran, North Korea, or Cuba, and it has, for example, been prohibited by Congress from selling them to the military regime in Myanmar. But generally the Obama administration has put effort into further easing the way for major arms sales abroad, while working to rewrite global export rules to make them ever more permeable.

In other words, the Pentagon is the largest federally licensed weapons dealer on the planet and its goal – one that the NRA might envy – is to create a world in which the rights of those deemed our allies to bear our (most advanced) armaments “shall not be infringed”. The Pentagon, it seems, is intent on pursuing its own global version of the Second Amendment, not for citizens of the world but for governments, including grim, autocratic states like Saudi Arabia which are perfectly capable of using such weaponry to create Newtowns on an unimaginable scale.

A well regulated militia indeed.

Tom Engelhardt, co-founder of the American Empire Project and author of The United States of Fear as well as The End of Victory Culture, his history of the Cold War, runs the Nation Institute’s TomDispatch.com. His latest book, co-authored with Nick Turse, is Terminator Planet: The First History of Drone Warfare, 2001-2050.

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