TAX NEWS - June 2010

SEC joins crowd investigating $300mn gold mining taxation Ponzi scheme

The SEC became the latest regulatory agency in two nations trying to unwind a complex web of gold mining taxation and investment fraud, which bilked 3,000 investors of US$300 million.

An elaborate $300 million Ponzi scheme involving a gold mining taxation scam which bilked 3,000 investors including the elderly as well as seven current or former NFL football players has now incurred the wrath of the SEC.

In a complaint filed with the U.S. District Court for the Western District of Washington, the SEC sought an injunction against four Canadians, two Florida men and four companies, charging them with securities fraud.

Interestingly, the whole scheme was exposed with the help of a former con man turned church pastor who went undercover for the FBI as it investigated two gold companies without any real gold assets that were linked to the fraud.

Milowe Allen Brost, 56, and Gary Allen Sorenson, 66, both of Calgary, Alberta, were reportedly the primary architects and beneficiaries of the scheme that convinced more than 3,000 investors across the U.S. and Canada to invest their savings, retirement funds and even home equity, the SEC said in a filing Thursday with the U.S. District Court for the Western District of Washington. The agency said the investors were actually investing in shell companies owned or controlled by Brost or Sorenson.

Both men were arrested by the Royal Canadian Mounted Police and are out on bond awaiting trial in Alberta in connection with the reported fraud schemes.

In a statement, Donald M. Hoerl, director of the SEC's Denver Regional Office which specializes in mining company investigation, said, "Brost and Sorenson orchestrated a complex, far-reaching fraud disguised as a labyrinth of companies and foreign banks accounts they used to hide their misconduct from investors and law enforcement." Investor money traversed the globe through accounts in the U.S., Canada, the Bahamas, Belize, Bermuda, Ecuador, Honduras, Malaysia, Panama, Peru, Portugal and Venezuela.

The SEC said Brost and Sorenson "diverted investor funds to their personal benefit, using millions of dollars to purchase and renovate extravagant homes, ranches and recreational vehicles. Sorenson also purchased and outfitted a luxury fishing resort in South America."

From at least 1999 to 2008, Sorenson and Brost allegedly told investors that the independent company Syndicated Gold Repository (now named as a defendant in the SEC action) pooled investors' funds and loaned the money to defendant Mere don Mining Corp. Ltd. "to purchase gold concentrate to process in its refinery in Honduras."

The defendants named in the SEC complaint reportedly used incoming investors' funds to pay obligations to existing investors.  They also offered and sold the securities of what they claimed was a selected groups of companies which included Quatro Communication, Rapid Express, Arbour Energy, Strategic Metals, Mere don Mining (Nevada), and Bearstone Capital Management.

To further the scheme, Brost created and controlled several successive marketing organizations including Capital Alternatives, the Defendant Institute for Financial Learning Group of Companies, and Hav-Loc Private Wealth Partners.

The SEC claimed Brost recruited and trained salespersons who he called "Structurists" and whose role was to bring in new investors under the multi-level marketing model. Defendant Ward K. Capstick, 44, of Snohomish, Washington, became a structurist in 2001.

Defendant Larry Lee Adair, a 62-year-old attorney living in Fort Lauderdale, Florida, served as the president of Syndicated Gold Depository. Co-defendant Bradley Dean Regier, 40, a Calgary resident, was the accountant for several of the companies. Another Florida attorney Martin M. Werner, 53, of Boca Raton, was originally the corporate counsel for the Institute for Financial Learning Group of Companies, but eventually became the president of SGD.

The SEC said, "In late 2007 to early 2008, the scheme collapsed as the defendants were no longer able to bring in enough fresh capital to meet their outstanding obligations to investors.  ...Investors, many of whom were elderly, have seen their homes go into foreclosure and have been forced to postpone or reverse retirement as a result of their losses through the defendant's investment scheme."

Defendant Mere don Mining (Nevada) is now undergoing bankruptcy in a federal bankruptcy court in the Southern District of Florida. Parent company and co-defendant Mere don Mining Corporation is located in Belize, and owns Companies Mere don de Honduras, Mere don de Venezuela, Mere don de Peru, Mere don de Ecuador and Mere don Jewellry of Honduras.

Mere don Honduras owns a gold refinery in Tegucigalpa, Honduras, and several gold concessions which are mining claims, also in Honduras.

In the agency's filings with the Washington federal court, the SEC accused the defendants of two counts of fraud, one count of aiding and abetting violations of the federal security regulations, and of making offers and sales of unregistered securities.

One of the folks that worked to unravel the Ponzi scheme was Barry Minkow, an ex-con turned pastor, who has started an organization, the Fraud Discovery Institute in San Diego that investigates corporate swindling. His investigation began in 2005 at the behest of an accountant for a former NFL player, who worried his client was being lured into an investment disaster.

Minkow hired former SEC geologist David Abbott, who concluded the claims made by Mere don Mining (Colorado) were false. 2008 Court filings by the IRS in a Texas Court concluded, "Merendon's properties contained no commercially marketable quantities of ore."

While some investors were invited to invest in the mines, another part of the venture targeted NFL players as well as others with a tax scheme which offered fraudulent returns.

Meanwhile, on March 21, 2008, the State of Washington's Department of Financial Institution Securities Division filed charges and sought an order to cease and desist against the defendants.

The U.S Justice Department filed two lawsuits in February 2008, to stop promotion of the investment, known as Midas, which promised investors a return of at least 34% if they invested refunds they got after filing amended tax returns which claimed bogus dedications related to alleged gold mining expenses in Colorado, Arizona, and elsewhere.

The Midas investments were promoted by Mere don Mining of Colorado and the Institute for Financial Learning. Among the Media investors were seven current or former NFL players. The investors became members of the institute for an initial fee of $1,450 and an additional $350 annual fee.

The Justice Department filed a lawsuit in the Federal District Court in Houston against accountant Eric Peterson of Channelview, Texas, while a second lawsuit was filed in federal district court in Seattle against accountant William H. Camp Jr. of Washington, DC.  Peterson is accused of preparing tax returns for at least 21 Midas investors including seven pro football players that claimed bogus tax refunds of $27 million. Camp is accused of preparing bogus returns for Midas-related deductions for at least 22 investors.

In May 2009 a federal judge permanently barred Camp, who charged his clients up to $4,000 each to prepare the false amended returns, from promoting the Midas scheme.