More pain ahead for victims of Sarasota Ponzi scheme

After net losses, investors say clawbacks add insult to injury

Serving as a witness for federal prosecutors this summer, retired phone company lineman Sal Boccio helped put Beau Diamond in prison for running a Ponzi scheme.

Now, a federal bankruptcy court trustee claims Boccio was unjustly enriched by the Ponzi when he received monthly payments totaling $64,500.

"If I have a net loss of $170,000," said Boccio, who lives in Lakewood Ranch . "How was I enriched?"

Diamond's $37 million Ponzi may look small compared to that of Lou Pearlman of Back Street Boys fame, the Orlando man who stole more than $300 million from his victims. And Fort Lauderdale lawyer Scott Rothstein is serving 50 years while his victims nurse $1.4 billion in financial wounds.

But for the victims, the size of the Ponzi does not really matter. Their savings are still gone forever. And in all three cases -- small, medium and large -- trustees appointed by federal bankruptcy judges are using state and federal law to try to collect money from people that bankruptcy lawyers call "net losers."

This type of lawsuit is called a "clawback," meaning that the trustee wants to seize illicit profits from knowledgeable investors.

The legal theory is that the investors were sophisticated, that they should have known they were investing in a Ponzi scheme because there were warning signals, and that by staying involved and collecting money, they were unjustly enriched. They are supposed to give back what they received so that the money can be fairly distributed among all victims -- those who received no payouts as well as those who did.

"The trustee believes that many of the withdrawals during the course of the Ponzi scheme were made with actual or constructive knowledge that a Ponzi scheme was in fact being operated by Beau," says Joel Ewusiak, one of the attorneys at Tampa law firm of Forizs & Dogali, which was hired by the bankruptcy trustee. The trustee herself, Shari Streit Jansen, is a bankruptcy attorney from Sarasota who became certified to act in that role and who is selected from a pool of such practitioners by the U.S. Bankruptcy Trustee in Tampa.

While the trustee's motives may include making more victims whole, court documents filed in the Pearlman federal bankruptcy case by an unsecured creditors committee suggest that the lawyers have more to gain than the creditors.

The committee told the judge that "it is clear that a significant portion of the recoveries from the lawsuits against the 'net loser' investors will go towards the payment of fees of professionals who were there to protect the general unsecured creditors' interests."

The trustee collects a percentage of the amount she raises on behalf of unsecured creditors, minus the hourly fees charged against the case by the Tampa law firm.

Boccio's letter from the trustee's law firm told him that he received "at least $64,504.76" in illegal payments from the Ponzi.

Like all Diamond investors, Boccio had a choice of receiving a high monthly yield or letting his money ride so that it would compound faster. He also could come up with his own combination.

Because Boccio is retired, he chose to take some of the money back on a monthly basis to augment his income.

As in the other cases, the trustee told Boccio that if he paid up quickly, he would receive a discount of 10 percent on what he "owes," or $58,054.28.

Unwilling or unable to pay, Boccio is now in the uncomfortable position of waiting for his lawsuit to arrive.

So far, Jansen, the trustee, has instructed the Forizs & Dogali firm to crank out 30 very similar letters.

Most went to people like Boccio, who lost more money on Diamond Ventures than they ever got back.

Others went to people who may have actually made money from the Ponzi, such as Diamond's father Harvey Diamond, and Gainesville spiritual adviser Victoria Angela. Harvey Diamond received jumbo-sized monthly payments far in excess of other investors. Angela went in big for the monthly referral fees that Beau Diamond offered for turning others onto his opportunity.

Angela's family lost money overall, because the really big client she referred to Diamond was her mom's living trust.

A transplant from New York state, Boccio had saved up a a few hundred thousand dollars before he ever heard of Beau Diamond and the 5 percent-per-month payments that participants could receive from Diamond's plays on foreign currency trading.

Now Boccio is surviving on his pension and Social Security checks, wondering how to pay for a lawyer and whether he needs one.

On the other side of the fence is Venice's Shawn McCarty, who testified at the trial on behalf of Beau Diamond, basically describing the Ponzi venture as an investment that went bad.

McCarty put $980,000 in Diamond Ventures. Subtracting what he received in payouts, he still lost $425,000, he told the Herald-Tribune.

Those on the receiving end of clawback letters and lawsuits run the gamut from retirees who have been raped of their savings to folks with ongoing businesses and cash flow.

Chiropractor Craig Siegel has hired Ackerman & Senterfitt, a firm with a statewide reputation for quality work, to keep the trustee at arm's length.

Others, like Alan and Maia Breslow, already are so broke that they are in danger of losing their home in a Sarasota subdivision, The Woodlands.

When they moved to Sarasota from New York, they began socializing in the same New Age circles as Harvey Diamond, which is how they fell into the investment scheme.

The bankruptcy trustee wants them to return $190,000.

"We had a substantial net loss when you consider what we put in and what we got back," Alan Breslow said.

Like Boccio, the Breslows are hesitant to hire a lawyer because of the expense involved. While the law provides for free lawyers if you are accused in criminal court, civil defendants are not entitled to free counsel under the law.

At present, the Diamond victims are presenting no united front to the bankruptcy judge.

But in the much larger Pearlman bankruptcy case in Orlando, one attorney defended 81 victims threatened by similar clawbacks and got 55 of them dismissed.

Roy Kobert is a high-profile Orlando bankruptcy lawyer who bills clients at $440 per hour.

He found himself drawn into the Lou Pearlman bankruptcy case because of a call from a friend regarding the plight of an elderly couple in St. Petersburg who lost $93,000 through their Pearlman investment, which was supposed to be a high-yield bank CD.

Pearlman, who created two popular bands in the '90s -- 'N Sync and the Backstreet Boys -- promoted bogus stock and CD themes through brokers and newspaper advertisements.

Pearlman's criminal case is long gone. He pleaded guilty to criminal conspiracy and money laundering in spring 2008 and is serving a 25-year prison sentence.

But the resulting bankruptcy case now has a life of its own.

The St. Petersburg couple thought they were investing $100,000 in a bank CD that paid two points more than they could get at a local bank. They got hit with a clawback suit for $7,000, which was the money they got back from Pearlman that he called "interest."

"How do you defend a $7,000 federal lawsuit?" Kobert asked. "My first instinct was, I have to pass."

At last count, there were 753 bankruptcy trustee lawsuits against victims, Kobert said. Roughly half of those, or 365 victims, were "net losers." That is, like Sal Boccio, they lost considerably more than the amount they received back from the Ponzi.

Considering those numbers, Kobert had an epiphany.

What if, instead of defending one clawback victim, he defended large numbers of them on similar grounds. Then he could still charge his standard hourly rate of $440 but split it up among a large group. If you take his hourly rate and divide it by his 81 Pearlman clawback clients, it works out to $5.43 per hour per client.

"I called myself the minimum-wage attorney," Kobert said.

His rules were that he communicates with the group by e-mail. They were told to refrain from asking too many specific questions about their own case, because he would have to charge them more for that time.

As the hearing before the bankruptcy judge regarding his 81 new clients approached last summer, Kobert had brainstorm No. 2.

"I wanted to put a face on who these people were," Kobert said.

He strongly requested that each and every defendant who could physically show up for the hearing do so, even if they were wheelchair-bound, needed oxygen to breathe, or used a walker. Then, he made special arrangements with the security crew at the court to expect a number of visitors who would need special accommodations.

After that single hearing, the trustee and Kobert began negotiations. Fifty-five of Kobert's 81 clients -- the ones who were net losers -- had their cases dismissed. The case resulted in the dismissal of roughly 300 other clawback defendants whose circumstances were similar, even though they did not pay for Kobert's defense.

The trustee agreed to only sue net winners of more than $20,000, some of whom Kobert continues to defend.

Meanwhile he has decided to take on net losers in the state's biggest Ponzi scheme, that of Rothstein, the Fort Lauderdale attorney. Though Rothstein is in prison, clawback lawsuits like those in the Diamond and Pearlman schemes continue to flow.

While there are three pieces of Ponzi-related legislation in Congress, they deal with getting better tax write-offs and beefing up coverage by the Securities Investors Protection Corporation, SIPC.

Ron Stein says his group, Network for Investor Action and Protection, is trying to shape those potential laws and will not be able to take a stab at bankruptcy reform until 2011.

"What we are trying to do, that hasn't been successful yet, is to provide tax relief for all Ponzi victims," Stein said.

Stein's group, which began last year in the wake of the Bernard Madoff Ponzi scheme, has a thousand or more members, mostly Ponzi victims.

He recognizes the clawback issue as a problem.

"There is a lack of uniformity in how bankruptcy law is carried out and executed," Stein said. "You're dealing with a law that is incredibly archaic."

What legislators need to do, he says, is to "define whether a clawback is appropriate and, if it is, find a way it can be applied more uniformly across the country, so that trustees have a unified code of conduct."

Shawn McCarty, the Diamond investor in Venice, believes that clawing back money from people who already have been stripped of much of their nest egg has little to do with justice.

"It has to do with attorneys' wallets," McCarty said. "I just want to go on with my life. I have already lost a million dollars. I don't have as much but I can still have a good life. They are trying to take what little I have left.

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