man pocketing cash

Ponzi Scheme

Edward P. May was sentenced to 16 years in federal prison on Oct. 4 for perpetrating the largest Ponzi scheme in the history of the Eastern District of Michigan, according to a statement released by U.S. Attorney Barbara L. McQuade.

The $350 million scheme eventually cost investors more than $49 million, the statement said. May was sentenced by Judge Arthur J. Tarnow of the U.S. District Court for the Eastern District of Michigan.

May Pleads Guilty for Ponzi Scheme

May pleaded guilty in April to 59 counts of mail fraud stemming from his decade-long investment scheme, the same Ponzi scheme that helped bring about the demise of broker dealer GunnAllen Financial Inc. last year.

According to the U.S. Attorney’s statement, May formed E-M Management Co. LLC in 1997 in a rented office in Lake Orion, Mich. He went on to form more than 250 limited liability companies, or LLCs, and told hundreds of individual investors that the LLCs were in the business of providing telecommunications equipment and services to various hotels in Nevada, New York, New Jersey, California, and in other states and countries.

About 1,200 people contributed large amounts of money to invest in what turned out to be fictitious agreements to provide telecommunications equipment and services to the various hotels. May also distributed fraudulent documents to investors and potential investors. The fraudulent documents included private offering memoranda, subscription agreements, and investment recaps.

The offering memoranda guaranteed a minimum monthly income ranging from $30,000 to more than $100,000 per month for each investment LLC, the U.S. Attorney’s statement said.

Aside from expounding on E-M Management Co.’s fictitious agreements, the fraudulent offering memoranda also promised investors that the funds raised would be used solely for the purpose of purchasing the necessary equipment. In reality, the funds were supporting a Ponzi scheme that May operated by paying purported investment returns to some investors with funds actually obtained from other investors, the U.S. Attorney’s statement said.

Over the 10 years the scheme went on, May diverted and misappropriated funds invested in the LLCs for his own personal use and for the use of his company, the U.S. Attorney’s statement said. He also spent some of the funds on trips to Las Vegas and to gamble.

May induced over 1,200 individuals to invest more than $350 million in over 250 LLCs. Those who invested in the fraudulent LLCs lost more than lost $49 million.

A statement from McQuade, the U.S. Attorney for the Eastern District of Michigan, said these complex fraud schemes erode public confidence in legitimate investments, which in turn, depresses the economy. She said she hoped the prosecution of cases like this would deter such fraudulent activity.

The matter was investigated by the FBI after the Ponzi scheme collapsed in the summer of 2007 and the defrauded investors began to cry foul. Many of the investors were based in Detroit and its suburbs.

Andrew G. Arena, the special agent in charge of the investigation for the FBI’s Detroit Field Division, released a statement that said, even though the FBI vigorously pursues this type of criminal fraud, the public needs to be aware that these criminals are out there. Would-be investors need to thoroughly investigate the backgrounds of all investment vehicles, and remember that the old adage is still accurate: If it seems too good to be true, it probably isn’t true.

May was assisted by former GunnAllen Financial stockbroker Frank Bluestein. According to a complaint filed against Bluestein by the Securities and Exchange Commission in September 2009, he was the single largest salesperson for May’s Ponzi scheme. The matter is pending and Bluestein has denied the charges.

From 2002 to 2007, Bluestein raised about $74 million from more than 800 investors for 100 different private offerings in E-M Management Co., May’s company, the complaint said. Bluestein did not disclose to investors that he received at least $2.4 million in commissions from May and his company. He also received $1.4 million in disclosed compensation from investors as fees paid to his company, Fast Frank Inc.

In addition, Bluestein misrepresented the investments in E-M securities as low risk even though he had no basis for doing so. He performed little in the way of due diligence with respect to the investments. In fact, Bluestein failed to investigate serious red flags concerning the transactions underlying the E-M Management Co. offerings, the complaint said.

The complaint also stated that Bluestein used such unscrupulous tactics as specifically targeting the retired and the elderly, duping retired or elderly investors by using so-called investment seminars, and encouraging many of these elderly investors to refinance their homes to fund the investments.

Bluestein’s sale of private placements for May’s Ponzi scheme, and the many lawsuits that followed, were widely acknowledged as a major factor in the March 2010 demise of GunnAllen Financial, a broker dealer that had been one of the fastest growing of the last decade, according to a report from Investment News. Before it blew up, GunAllen employed almost 1,000 stockbrokers and was pulling $150 million in gross revenue.

Guiliano Law Group

The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.