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Banking and Finance

Jury: Vegas Casino Must Return $1.5 Million Gambled By Ponzi Schemer

 A Nevada federal jury has ruled that a Las Vegas casino must return approximately $1.5 million wagered at its sportsbook by a former college baseball player sentenced to a five-year prison term for masterminding a massive $32 million real estate Ponzi scheme.  Rio Casino, owned by gaming behemoth Caesars Entertainment Corp., was found liable under federal bankruptcy law for $1,480,000 it received from convicted Ponzi schemer Salvatore Favata.  

Favata operated National Consumer Mortgage ("NCM"), a California company that raised more than $30 million from hundreds of investors under the guise of loaning funds to homeowners that could not qualify for traditional mortgages.  Favata represented the venture as expremely profitable, promising annual interest payments ranging from 30% to 60% and assuring investors that their funds would be safe and secured by real property.  To entice investors and add an aura of legitimacy to the scheme, Favata even hired former Los Angeles Dodgers baseball great Steve Garvey as NCM's President.  

The scheme crashed down in 2006 in the face of mounting criminal and civil investigations.  In October 2006, the Securities and Exchange Commission ("SEC") announced civil fraud charges against NCM.  Additionally, criminal authorities announced that Favata had agreed to plead guilty to a single count of mail fraud, to pay restitution in excess of $20 million, and to forfeit his house.  Favata was later sentenced to a five-year prison term in July 2007.  

NCM filed bankruptcy in April 2006.  A bankruptcy trustee, John P. Brincko, was appointed to unravel Favata's scheme and recover assets for investors.  Brincko soon discovered that Favata had a particular affinity for gambling, and the investigation showed that over $10 million of investor funds were pilfered by Favata to purchase cashier's checks that were in turn transferred to Rio Casino to be used at the casino's sportsbook.  The checks, ranging from $15,000 to $325,000, began in September 2003 and the last check was cashed in March 2006.  

Brincko sued Rio Casino to recover the approximately $10 million it received from Favata, arguing that the transfers constituted avoidable preferences under federal bankruptcy laws and that Rio Casino, as a subsequent transferee, was obligated to return those funds to be used to compensate Favata's victims.  The claims asserted by Brincko included fraudulent conveyance counts under Section 548 and 550 of the Bankruptcy Code based on actual and constructive fraud, as well as fraudulent transfer claims based on California state law.  

A federal jury returned a verdict today finding that, in the one-year period preceding NCM's bankruptcy filing, Rio Casino received $8,320,000 in transfers from Favata.  Of that amount, the jury found that Rio Casino had demonstrated its defenses that it had received $6,840,000 of that amount in good faith and without knowledge the funds were derived from Favata's fraudulent scheme.  Thus, because Rio Casino could not demonstrate it acted in good faith in receiving $1,480,000 from Favata, it was not entitled to defeat the trustee's claims.  

The jury's verdict form.

 For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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