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.

Gold as a Weapon in the Currency War

Source: Sally Lowder of The Gold Report  

There is a war raging behind the scenes among the world’s currencies. Chris Mancini, an analyst with the $400 million Gabelli Gold Fund, believes that gold will emerge the victor. In this interview with The Gold Report, Mancini makes his case for why gold is a currency and not just a relic and why his fund doesn’t own bullion.

The Gold Report: You recently wrote, “Gold mining companies are no different from any other company in that company managements must determine the most effective way to return capital to shareholders.”

In an environment where there haven’t been corresponding increases in equity prices to the price of gold, how does a management group effectively grow per-share value for shareholders?

Chris Mancini: If you’re too big and don’t think that you can grow on a per-share basis, the answer is to return some of the cash to shareholders through a dividend. If a company doesn’t have high-quality, high-return-on-capital, low-risk projects to deploy that cash flow into, then a portion should be returned to shareholders as a dividend.

TGR: A lot of senior producers, and even midtiers, are focusing on grade. Irrespective of all things, the higher the grade, the better the economic return.

CM: That’s the key. A higher-grade deposit means processing fewer tons to get out the same number of ounces without the capital intensity of a big, bulk-tonnage, low-grade operation. The cost per ounce is also lower given that not as many tons need to be processed to recover the same amount of metal.

TGR: You don’t hear many pundits predicting a falling gold price in 2013, yet we continue to see volatility in the space. What’s your forecast for the gold price in 2013?

CM: We’re very constructive on the gold price in all currencies. All over the world, money is being printed, and gold is the one currency that can’t be reprinted or replicated. The money that’s being printed will ultimately lose its purchasing power, and gold should retain its purchasing power. Gold should continue to go up relative to currencies that will be losing their value. More debt leads to more money printing, and more money printing leads to continued devaluation of currency. It’s a positive macroeconomic environment for gold.

TGR: Some investors don’t view gold as a currency. They view it as a metal, a relic.

CM: Historically, gold has been the ultimate currency and, at some point in the future, will again be the ultimate currency. It’s not legal tender, but that still doesn’t mean it’s not something that will hold its value over time relative to paper.

TGR: Utah and a couple of other states have actually passed legislation that gold is considered a currency.

CM: In some states, you can bring in gold or silver and get goods for that gold or silver. The problem with that is federal tax. If you buy gold and it appreciates in value and there’s a gain on that gold, when you sell or transfer that gold, then there is a federal tax on that transaction. Until that goes away, it will be hard to use gold as a real currency in the U.S.

TGR: Even in a world that hasn’t descended to a serious level of crisis, gold can still be appreciating as a currency.

CM: It is a currency war. Currencies are devalued against one another. Recently, the Japanese elected the Liberal Democratic Party leader Shinzo Abe. One of his talking points during the election was that the Japanese economy is uncompetitive because the yen is too strong. Abe’s theme is more monetary and fiscal stimulus, and a weaker yen. He and the Japanese people think that the country needs a much weaker currency in order to be competitive in the world economy. That’s also why the Swiss agreed to their money printing exercise—in order to stop their currency from appreciating more and more.

TGR: It does feel like a race down the hill when you talk about it like that.

CM: If the Japanese, Swiss, and other Europeans print more and more money to make their currencies less valuable, ultimately the U.S. is going to be uncompetitive from a manufacturing perspective. It gives the U.S. impetus to also print more money.

TGR: We’re talking about trillions of dollars of deficit. It’s almost beyond comprehension. Because you value gold as currency, why don’t you hold any bullion in the fund?

CM: Gold miners are undervalued relative to bullion, and investors can get bullion cheaper themselves. They shouldn’t be paying us to own bullion. Bullion is a savings instrument. Gold equities are investments.

TGR: The fund’s No. 1 holding, at about 12%,  is heavily involved in Africa. I’ve traveled to Africa and was very impressed with the mineral wealth there. Yet some investors are not comfortable with that location. Why are you?

CM: When a company comes into a community, builds a mine and employs people, it liberates those people from poverty. They’re building skill sets that they have for the rest of their lives.

A well-respected institutional mining company comes into a region, employs people, educates people, liberates people—those people want that company to be there. It greatly reduces jurisdictional risk when you have that much local support.

TGR: Yet, there are places in Africa without that support. There are roving bands of thugs that are creating problems in the Democratic Republic of the Congo and Mali. Do you see these as temporary blips in an otherwise bullish and opportunistic area, or do you see this as a long-term thorn in the side of companies working in those areas?

CM: They’re not necessarily blips, but they’re not meaningful to the operations. A place like Mali or the Congo is vast. As long as there are no specific problems near a company’s mines, it’s a non-event.

TGR: Do you routinely look for companies with a lot of management ownership?

CM: That’s something that’s important to us. We look for skin in the game in the form of shares, not options, because we do want to see companies paying bigger dividends. If managers own shares, then they’ll benefit when dividends are paid out, too.

TGR: One of the things that is compelling about a lot of midtier producers is that they are nimble. They can pare back a little bit. They’re small enough to decide to stick to where they’re having explorational success with their own assets. We’re seeing that with several of these midtier companies. As an investor, it makes them more attractive in some ways than the seniors.

CM: Yes, I agree. They don’t have the overhead of the seniors. The seniors almost have to buy something in Nevada, for example, because they currently have all of the overhead in Nevada and they have to sustain it. That’s not the case with these small, single-asset companies.

TGR: Do you have some final thoughts for us on the mining space?

CM: It’s been a difficult year. Yet, while this is an extremely volatile sector, it can be volatile on the upside, as well as the downside. Our hope is that in the coming year, it moves fast and furiously on the upside and the environment is more constructive for gold and for gold miners.

TGR: Excellent. Thanks for taking the time to speak with us today.

Chris Mancini is a research analyst at Gabelli specializing in precious metals mining companies. He has over 13 years of investment management experience, including research analyst positions at hedge funds Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor’s degree in economics with honors from Boston College and is a holder of the CFA designation.

Streetwise – The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies. 

Confiscation of Gold – Then What?

Readers may not agree with our conclusions on the confiscation of gold, but we emphasis this reality. If we are wrong you will still own your gold. If we are right and you have not taken the right steps to guard against confiscation and the personal dangers to you individually, you will lose your gold if not suffer the penalties the “Gold Confiscation Order” brings with it. Continue reading