Articles Posted in Civil Litigation

photo-PDC-EB5-scam-300x200It’s never a good thing to have a federal judge order a freeze on your business’ assets. That’s what happened to an Orange County firm that federal officials claim stole money from foreign investors, mostly Chinese citizens, who hoped their cash would lead to permanent U.S. residency, the Los Angeles Times reports.

Newport Beach lawyer Emilio Francisco and his investment firm, PDC Capital, face civil fraud charges filed by the Securities and Exchange Commission (SEC). It claims Francisco spent at least $9.5 million of investors’ cash on personal expenses (some going to help pay for a yacht, a yacht-club membership and his credit card) instead of investments that would qualify investors for the EB-5 visa program, which offers permanent residency to foreigners who make job-creating investments in the U.S.

Investors provided PDC with more than $72 million from 2013 to 2016, according to the SEC’s suit. More than a hundred investors put in $500,000 each. They believed the money would be spent building assisted-living facilities and opening new locations of Caffe Primo, a Los Angeles coffee shop and restaurant chain. The SEC states some of the money went to the promised projects, but millions of dollars were invested in other projects and more than $2 million went to pay Francisco’s personal expenses.

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photo - toy idea theftA stagnant company, one that’s not looking to improve on its products or come up with new ones, may not have a bright future. There may be pressure to come up with the next successful products as well as pressure to cut costs and improve profits. That may result in legal problems if a company illegally uses someone else’s concept without their approval or paying them. A recent Bloomberg article spelled out this problem of intellectual property theft in the toy industry.

Ellie Shapiro came up with a toy in 2012. They were little animal figurines with snow globes in their bellies which she called Wishables. She worked as a freelance toy inventor but prior to that she spent ten years as an executive at Mattel Inc. and Walt Disney Co. Shapiro pitched her toy ideas to toymakers including Hasbro, Inc.

She signed a confidentiality agreement, met with Hasbro executives in Santa Monica in 2013 and showed off her prototypes, sample packaging and feed back from focus group testing. Executives liked the presentation, asked for samples but later told her they were passing on the idea.

In the fall of 2014 she walked into a Target store and saw a new Hasbro toy, an animal figurine that was also a snow globe. “At first, I was in shock and in disbelief,” Shapiro told Bloomberg. “Then I felt completely sick.” She later sued Hasbro for stealing her idea in federal court in the Central District of California. The company responded by saying snow globes have been used in toys for years and a similar design was developed in-house in 2012, prior to her submission.

Shapiro sued an Australian toy maker previously and settled the case in 2014. In the past she felt Hasbro stole a previous idea, threatened to sue them but ultimately did not. Freelancers like Shapiro face the double threats of having their ideas stolen and not making any money or suing (which can be expensive) and getting a litigious reputation risking being avoided by toy companies and not making any money. Some inventors see theft as the cost of doing business, hoping eventually a company may agree to pay for an idea.

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photo - hold the mayoNew companies seeking investment and funding are under a lot of pressure to show success. One such company is facing an investigation by the Securities and Exchange Commission (SEC) to see if it tried to boost its sales numbers by hiring contractors to buy their product then reimburse them for the purchases.

The SEC is looking into San Francisco based Hampton Creek, Inc., according to Bloomberg, which broke the story about the potentially bogus sales numbers in order to impress potential investors. The agency is trying to determine if the startup broke federal law by failing to disclose it was buying its own vegan mayonnaise from stores, making it appear to be more successful than it actually was, according Bloomberg’s sources.

At issue is whether company founder and CEO Joshua Tetrick improperly recognized revenue from purchases made with company money. Bloomberg reported Hampton Creek started an operation to purchase its own mayonnaise starting as early as 2014. The SEC has jurisdiction over the closely held company because it has raised money from outside investors.

Investors have come up with more than $220 million for Hampton Creek and Tetrick told employees in August he expects to raise another round of financing by September that will increase the value of the company to $1.1 billion, according to Bloomberg.

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photo - wolves among sheepThose who own successful local businesses often rely upon networking to try to meet potential customers, referral sources, future employees and investors. That networking can occur any time and any where people meet, including while attending religious services. You may feel a connection to someone who shares your faith and attends the same church. You may feel that person is also more trustworthy because of that apparently shared faith, but your feelings may be wrong.

Steven McKinlay and Kristi McKinlay of Coto de Caza were arrested in December (just before Christmas) and are facing grand theft and fraud charges. The Orange County District Attorney’s office claims they bilked investors, including people they knew through their church, out of more than $3 million, according to the Orange County Register.

They are the owners of God’s Sports Company located in Foothill Ranch. The McKinlays have been charged with a dozen felonies, including using untrue statements in the purchase or sale of a security, grand theft and the use of a device in a scheme to defraud. If convicted the two could be imprisoned up to 23 years and eight months.

Law enforcement claims,

  • The two victimized at least ten people, including a former Major League Baseball player, a friend who gave them money he received due to an injury and a person being treated for cancer who wanted to build an inheritance he could pass on to his family.
  • Investors, many of whom knew the McKinlays through the church they attended, paid them from $22,500 to more than $700,000 to invest in God’s Sports Company.
  • The McKinlays failed to tell investors about Steven McKinlay’s prior bankruptcy filings and property liens that had been filed against the pair.
  • Some of the “invested” money was used as part of a Ponzi scheme where money provided by newer investors repaid some of the older ones.
  • The church got the benefit of a $50,000 donation from the McKinlays paid from investor funds.
  • The McKinlays got the benefit of the rest. Instead of being used to build the business money believed to have been invested instead went to the couple’s personal use including $17,000 a month rent for two homes, payment for their daughter’s wedding, a car and an Angel Stadium luxury suite.

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photo - Michigan scamCon men are very good at sales. They know the importance of trust and how to gain it. They may be charming, tell a great story and be very convincing about the investment opportunities that are available for just the right people. And you are just the right person! That may have been the pitch to 84 year old Elsa Prince-Broekhuizen before she made her investment.

The president of a western Michigan investment company has agreed to plead guilty to stealing about $16 million from Prince-Broekhuizen, a prominent western Michigan philanthropist according to the Lansing State Journal . She’s also the widow of billionaire industrialist Edgar D. Prince.

The fraud occurred over a period of 16 years according to the felony information filed in U.S. District Court in Grand Rapids. A plea agreement states 68-year-old Robert Haveman admits to wire fraud, money laundering and causing $16.2 million in losses to Prince-Broekhuizen and the Elsa S. Prince Living Trust.

Haveman is president of EDP Management in Holland, Michigan, which managed investments for Prince-Broekhuizen and the trust. It’s alleged that at least $1 million of the ill-gotten gains were used as partial payment for a real estate purchase. Court documents state that starting in 1999 Haveman moved money into a personal account and also spent it on personal expenses and investments. Haverman falsified accounting records to hide the fraud.

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photo - elder abuseFinancial abuse of the elderly not only harms the older person but also harms those who aren’t getting the financial support they’re entitled to. A lawsuit filed in December alleges an elderly woman with good intentions was manipulated by a financial advisor. A charity that at one point was the beneficiary of a trust created by a wealthy, elderly woman found itself out in the cold. The financial advisor allegedly found a $2.4 million windfall, according to mynewsLA.

Seal Beach based charity Los Angeles Thoracic and Cardiovascular Foundation claims Juanita Earley’s investment adviser, James Schaedler, took money meant for the organization. The defendants are Schaedler, Merrill Lynch (the wealth management arm of Bank of America) and Banc of America Investment Services Inc. (BAIS, Merrill’s predecessor). Financial elder abuse and negligent supervision are the causes of action.

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photo - arb. confirmationArbitration is an increasingly popular alternate means of dispute resolution. Instead of resolving a legal claim through the court system and having a judge or jury decide, the parties have the dispute decided privately. An arbitrator, or a panel of arbitrators, acts as judge and jury and decides the outcome of the case. This method is normally faster and less expensive than having a trial, but it also can add some extra hoops to jump through.

Unlike a judgment obtained during court proceedings, an arbitration award is not directly enforceable. It needs to be confirmed (or vacated if the losing party successfully challenges it) by court proceedings before it can be enforced.

  • If a petition is properly served and filed after an arbitration award has been rendered, the court will confirm the award as made, or, pursuant to applicable laws, it will correct the award and confirm it, vacate the award or dismiss the proceeding.
  • Changing or dismissing an arbitration ruling is rare. Under the law every presumption in favor of the validity of arbitration award is given. If a party claims the award is not valid, it carries the burden of proof.
  • A court won’t look into whether there was sufficient evidence to support the award or if the arbitrator’s reasoning was valid. Alleged errors of law by the arbitrator also won’t be reviewed. The losing party could claim that fraud, corruption or misconduct by the arbitrator(s), but that would be extremely difficult to prove.
  • Despite the vast space arbitrators are allowed to work in, they cannot completely make things up. They cannot exceed their powers by making decisions and awarding damages that are not authorized by law.

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photo - with friends like thisWhen you’re hiring someone for your business, especially for a position where the person can access funds, you need to find not only someone who’s competent but trustworthy as well. If you know someone for a while, maybe you’ve become good friends, you may feel a connection that makes hiring the person feel like the right choice to make. As a recent Orange County Register article shows, the hiring of a friend was a $6.8 million dollar mistake for a local business.

Russell Eugene Dunbar, formerly employed by a Santa Ana piano store, Fields Piano, was sentenced in July to 18 years in state prison for embezzling up to $6.8 million over three-year period with the company. Dunbar was found guilty last year of felony counts of forgery, falsifying records and grand theft. According to the Orange County District Attorney’s Office the charges included enhancements for aggravated white-collar crime over $500,000 and property damage over $2.5 million.

Fields Pianos hired Dunbar, a close friend of the owners, to be responsible for the company’s accounting in 2001. According to the district attorney, two years later Dunbar took steps to help himself to company funds.

  • He opened a personal bank account with a name similar to his employer’s business, Fields Piano Company, and deposited large checks from the store into this account.
  • To help hide his actions, Dunbar wrote smaller, personal checks and deposited them into his employer’s account and used deposit receipts to create false receipts.
  • Dunbar told his employer the large deposits were deposited in the company account, though there were no such deposits.
  • The store owners were unaware of the losses and paid taxes on income they never received.

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photo - Under Armour lawsuitIn less than ten years Under Armour has gone from the owner selling its sporting goods from the trunk of his car, after making them in his grandmother’s basement, to a $3 billion business. That aggressive growth is being matched with legal aggression against companies who may, or may not, be infringing on the company’s trademarks.

One example is a lawsuit against a company whose owner claims its name, Armor & Glory, is biblically inspired, not inspired by its much better known competitor, according to the Washington Post. Terrance Jackson started his company in 2013, he says after he found much of the clothing marketed for his three year old son were covered in skulls and crossbones.

Jackson has only sold a couple hundred shirts and has no marketing budget beyond its Facebook page. Despite its small size Armour & Glory got the attention of Under Armour, the country’s second biggest sportswear company, which sued it, claiming trademark infringement. The lawsuit was filed in federal court in Maryland where both companies are based. According to the Post,

photo - Costco shrimp lawsuitBusiness owners are wary of being sued. The smart ones do their best to avoid lawsuits filed by consumers, other businesses and government agencies. They not only have to be careful about what they do, but they could possibly be held responsible for what their suppliers do as well. Retail giant Costco finds itself in court because it’s alleged one of its seafood suppliers uses slave labor, according to the Guardian.

The purported class action filed in federal court in San Francisco seeks an injunction to prevent Costco and its Thai seafood supplier, CP Foods, from selling shrimp sourced from Thailand unless consumers are warned they are the product of slavery. The lawsuit claims,

  • Costco has bought and resold farmed shrimp for several years from Thai company CP Foods and other companies that feed their farmed shrimp fish caught from ships manned by slaves.
  • The plaintiff, Monica Sud, states she bought shrimp from Costco and the proposed class action could cover millions of California customers.
  • CP Foods, the world’s largest shrimp farmer,buys fishmeal to feed its farmed shrimp from some suppliers that own, operate or buy from fishing boats manned with slaves.
  • “Any representation by Costco that slavery in the supply chain is not allowed is simply false… Costco continues to unlawfully induce consumers to buy Costco farmed prawn products… through the use of slave labor.”

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