Second Circuit Restores Guilty Verdict for Co-Conspirator in Wakpamni Lake Community Corp. TED Bond Fraud

Here is the opinion in United States v. Archer.

Here are the briefs:

Federal Brief

Archer Brief

US Reply

From the opinion:

This case concerns a scheme engineered by Jason Galanis (“Galanis”) and others to defraud a tribal entity, the Wakpamni Lake Community Corporation of the Oglala Sioux Tribe (the “Wakpamni”), of the proceeds of a series of bond offerings worth approximately $60 million. In doing so, the conspirators harmed not only the Wakpamni but also several investors upon whom they foisted the Wakpamni bonds – which had no secondary market – in order to generate cash for their own personal use.
 
In early 2014, Jason Galanis, Archer, Bevan Cooney, and others were working together to acquire financial services companies that they could “roll up” into a large financial conglomerate with Archer at the helm. They began by investing in Burnham Financial Group (“Burnham”), a well-established financial services company with a prominent name that they sought to leverage in building their own conglomerate. But to purchase additional so-called “roll-up” companies, they needed capital.
 
So, in February 2014, Galanis informed Archer and Cooney that he had been “brought a deal” for tax-free bonds from the Ogala Sioux Tribe, to which the Wakpamni belonged. App’x 848. The next month, John Galanis, Jason Galanis’s father, met with a representative from the Sioux Tribe and convinced the Wakpamni to issue a series of bonds, promising that the proceeds from the sale of these bonds would be placed into an annuity. The Wakpamni understood that the annuity “would be like an insurance wrapper that would protect the principal investment and generate annual income to cover the interest on the bonds as well as generate income for” the Wakpamni’s economic development projects. Tr. 1836; see also Tr. 1850. The scheme had an air of legitimacy: John Galanis represented to the Wakpamni that Wealth Assurance-AG, a legitimate insurance company that Archer, Cooney, Jason Galanis, and others had acquired, would be the annuity provider. The transaction documents, however, listed Wealth Assurance Private Client Corp. (“WAPC”), a shell entity that John Galanis falsely represented to be a subsidiary of Wealth Assurance-AG, as the annuity provider. In June 2014, one of Archer’s co-defendants opened a bank account in the name of WAPC (the “WAPC account”) and designated Hugh Dunkerley, another of Archer’s eventual co-defendants, as a signatory of that account. Finally, John Galanis represented to the Wakpamni that Burnham Securities Inc., a legitimate registered broker-dealer, would serve as the “placement agent” responsible for “undertak[ing] due diligence on the bonds, do[ing] a lot of legal [work] putting together … the contracts[,] and then finally find[ing] investors for the bonds.” Tr. 1005.
 
Once John Galanis set up the Wakpamni scheme, Jason Galanis, Archer, and others went about finding buyers for the bonds. A company with which Archer was affiliated financed the purchase of an investment adviser, Hughes Asset Management (“Hughes”), and Galanis installed another one of the co-defendants, Michelle Morton, as Hughes’s CEO. In August 2014, based on John Galanis’s promise that the proceeds would be invested in an annuity, the Wakpamni issued their first set of bonds. Morton purchased the entire issue, worth $28 million, on behalf of Hughes’s unsuspecting clients – without disclosing that the same individuals who induced the Wakpamni to issue the bonds also controlled Hughes and the purported placement agent. Placing the bonds in this manner, without investor knowledge or permission, also violated several of Hughes’s clients’ investor agreements. Most importantly, the bond proceeds were then placed into the WAPC account – not an annuity.
Unaware that the proceeds from the first bond offering had been diverted to the WAPC account and not invested in an annuity, the Wakpamni launched a second issuance the following month. 

 

This time around, Archer and Cooney collectively purchased $20 million worth of bonds from the Wakpamni – with Archer doing so through his real estate company, Rosemont Seneca Bohai LLC (“RSB”) – using proceeds from the first offering that had been diverted to the WAPC account. After buying the bonds, Archer and Cooney used them to satisfy the net capital requirements of two other Archer-controlled companies, without disclosing that the bonds were purchased with the proceeds of an earlier bond issuance. The Financial Industry Regulatory Authority (“FINRA”) would later condemn Archer’s use of the bonds in this way because the Wakpamni bonds had “no active market.” Tr. 2097.

 
In April 2015, the Wakpamni issued their third and final set of bonds for $16 million. As with the first bond offering, Burnham Securities was selected as the supposed placement agent for the bonds. At around that same time, Archer and Cooney acquired a second investment adviser company, Atlantic Asset Management (“Atlantic”), which (like Hughes) was led by Morton. Ultimately, Morton and Atlantic arranged for the purchase of the entire $16 million in bonds by a single client of Atlantic, the Omaha School Employees Retirement System (“OSERS”). As with the first bond offering, Morton did not seek or receive approval from OSERS for the transaction, which did not align with its investment goals, nor did she inform OSERS of the inherent conflicts of interest that permeated the transaction.
 
Once again, instead of being used to purchase an annuity for the Wakpamni, as John Galanis had promised, the proceeds from the third bond issuance were diverted to the WAPC account, where they were used by various conspirators for their own personal benefit and interests. Some, like Jason Galanis and his father, used the bond proceeds to purchase “jewelry and luxury cars,” Tr. 58, and a new condo in New York City; others, like Archer and Cooney, used the bonds and the proceeds “to further their [own] schemes,” Tr. 59, which included building “a big financial services company” that Archer was to control, Tr. 59–60.
 
In the fall of 2015, the Wakpamni scheme began to unravel when the first set of interest payments on the Wakpamni bonds became due. In September 2015, Archer transferred $250,000 from one of his companies to the WAPC account, which was then used to help pay the interest on the bonds from the first offering. Soon thereafter, Galanis was arrested on unrelated charges. In October 2015, some of the conspirators created a new entity named Calvert Capital (“Calvert”) to cover up the scheme. As part of this effort, they fabricated backdated documents suggesting that WAPC invested in Calvert and that Calvert lent Cooney and Archer the $20 million to purchase the bonds from the second offering.
 
In the end, the Wakpamni were left with $60 million in debt, and the fund investors lost over $40 million.
 
 

Our most recent post on the Wakpamni Lake Community Corp. fraud is here.

Federal Court Allows SEC Action against Co-Conspirator in Wakpamni Lake Community Corp. TED Bond Fraud to Proceed

Here are the materials in SEC v. Sugarman (S.D. N.Y.):

6 Complaint

39 Motion to Dismiss

42 Opposition

45 Reply

55 DCT Order

Details on the scheme from the order: Continue reading

Update in Suit Involving Aftermath of Fraud Arising from Wakpamni Lake Community Corp. TED Bonds in 2014-15

Here are materials in Water Works Board of the City of Birmingham v. U.S. Bank National Association (D.S.D.):

100 Redacted Statement of Material Facts

110 US Bank Motion to Exclude Vinella Testimony

128 US Bank Reply in Support of 110

132 US Bank Reply in Support of 99

155 DCT Order

Excerpts that provide background on the deal:

In 2013, Timothy Anderson (“Anderson”) began doing legal work in the area of economic development for the Wakpamni Lake Community Corporation (“WLCC”). (“Statement of Material Facts “SOMF” 103.) WLCC is a corporation organized under the laws of the Oglala Sioux Tribe, a federally-recognized Indian Tribe, and the Wakpamni Lake Community, and is wholly-owned by the Wakpamni Lake Community. (SOMF 4.) In approximately April 2014, while Anderson was a partner in the law firm Dilworth Paxson, LLP, he attended a conference focused on tribal economic development and while there, was asked by WLCC to attend a meeting wherein John Galanis, father of Jason Galanis, presented the idea for issuing taxable revenue bonds to fund construction projects in the Wakpamni Lake Community. (SOMF 103-106.) John Galanis (a/k/a “Yanni”) connected Anderson with Burnham Securities, Inc. (“Burnham”) based in New York, New York, and his son, Jason Galanis, to serve as the Placement Agent in the WLCC Bond offerings. (SOMF 107.)

Hugh Dunkerley (“Dunkerley”) was an investment banker at Burnham working on the WLCC bond deal. (Pentelovitch Decl. Ex. 49, 1005:11-13.) Burnham hired Anderson and his firm, Dilworth Paxon, to serve as its counsel in the WLCC bond offerings. (SOMF 38, 45-46.) Anderson received written conflict waivers from Burnham and WLCC in order to represent Burnham in the WLCC bond issuances. (SOMF 113.)

***

Anderson had suggested the U.S. Bank National Association (“USB”) would be a good fit as the indenture trustee on the WLCC bond offerings because USB was a well-known and reputable financial institution with “serious experience in tribal Indian Country.” (Murzyn Decl. Ex. 122, Trial Tr. 527-28.) USB is a member of the Federal Deposit Insurance Corporation (“FDIC”) and is a “financial institution” subject to the provisions of the Bank Secrecy Act (“BSA”). (SOMF 24, 25.) USB is engaged in the corporate trust business through its division called Global Corporate Trust Services (“GCTS”) and was known in the corporate trust industry as being one of the largest and most active indenture trustees in the market. (SOMF 26; Murzyn Decl. Ex. 7, Graham Dep. at 58:19-59:16.)

***

USB classified the bonds as municipal bonds. (SOMF 179.) Most municipal bonds are issued to finance a particular project, but the nature of the tribal development project supporting the bond issuance was unclear from the start which counsel for USB acknowledged as being unusual. (Murzyn Decl. Ex. 14, Slania Dep. 195:3-15; 205:8-16.) A term sheet sent by Anderson to USB on July 1, 2014, suggested that part of the proceeds would be used to build a “distribution facility” without any additional detail about what would be distributed from the facility. (Murzyn Decl. Ex. 7, Graham Dep. 78:6-79:8; Ex. 24.) A draft of the indenture dated July 23, 2014, that was provided to USB’s counsel suggested that the bond proceeds would be used to build a “gaming facility.” (Murzyn Decl. Exs. 35, 55.) Under USB policy existing at the time, gaming was designated under USB policy as an additional risk factor that may render a customer account high risk, thus requiring additional due diligence. (Murzyn Decl. Ex. 65.) Typically, a private placement memorandum describing the business purpose of the municipal bond transaction is provided, but no such memorandum was ever prepared with the WLCC bond issuances. Contrary to custom and practice in the industry, no construction budget or plans for the development project were produced. (Murzyn Decl. Ex. 14, Slania Dep. 204:22-205:16; Ex. 13, Pillar Dep. 104:17-105:04; Ex. 89.) Henselen testified at his deposition that he could not recall what the economic development project was for the August 2014 bond issuance and did not recall ever seeing a construction budget. (Murzyn Decl. Ex. 8, Henselen Dep. 206:13-23.)

The deal team members changed throughout the August 2014 bond deal. In a draft Indenture emailed to USB on August 15, 2014, the designated Issuer changed from Wakpamni Lake Community Development Corporation to Wakpamni Lake Community Corporation and provided that WLCC shall deliver a letter to USB at closing appointing Wealth Assurance AG as the Investment Manager. (Murzyn Decl. 8, Henselen Dep. 78:1-15.) The draft Indenture received by USB on August 25, 2014, two days prior to closing, showed a change in the Investment Manager from Wealth Assurance AG to Private Equity Management, LLC. (Murzyn Decl. Ex. 81.)

Ultimately, the Trust Indenture was executed on August 25, 2014, and provided that WLCC would be issuing $24,844,0892 Special Limited Revenue Bonds (Taxable) to finance the purchase of an annuity investment in the amount of $22,094,089 as well as economic development projects for the benefit of the Wakpamni Lake Community, including “projects near the junction of Routes 18 and 391, including a certain warehouse/distribution center and other revenue producing enterprises.” In addition to the development project being ill-defined, another unique aspect of the deal was that it involved an annuity. Deal team members and USB’s expert testified that they had never been involved with a bond issuance involving an annuity, especially one that would finance nearly ninety percent of the principal and interest payments to bondholders. (SOMF 109; Ex. 14, Slania Dep. 148:5-9; Ex. 1, Ambriz-Reyes Dep. 107:12-15; Ex. 16, Von Hess Dep. 22:19-23; Ex. 6, Gadsen Dep. 49:21-25.) Despite the unusual structure of this bond issuance, Henselen indicated on the “Establish Deal” form that the sources for all assets and cash transfers were coming from known sources that fit the standard profile for this product. (Pillar Decl., Ex. O.)

***

The persons designated and authorized to sign for WLCC relating to the August 2014 Bond Indenture, as detailed in the Certificate provided to USB, were Geneva Lone Hill, President of WLCC, and Wilma Standing Bear, Secretary of WLCC. (Murzyn Decl. Ex. 95.)

On August 26, 2014, Jason Galanis, the Placement Agent with Burnham, sent an email to Anderson with wire instructions for the $22,092,089 that was to be transferred out of USB’s settlement account for the purchase of the Annuity Investment and payment of certain closing costs. The wire instructions were to a JP Morgan Chase Bank account in Beverly Hills, California, and the account holder was designated as Wealth Assurance Private Client with an address in Santa Monica, California. Neither WLCC nor its counsel was copied on the email, and WLCC did not consent to any change in the Annuity Provider from Wealth Assurance Private Client, British Virgin Islands, to Wealth Assurance Private Client in California4. On August 27, 2014, Henselen’s manager confirmed that the bank account information provided in the Galanis/Anderson email matched the wire information before USB completed the $22,092,089 wire to the JPMorgan Chase Account in California. (Murzyn Decl. Ex. 16, Von Hess Dep. 101:5-102:7.)

Eventually, Galanis was indicted and pled guilty to fraud. Unfortunately, many of the pleadings are sealed, including the plaintiff’s expert report, which opines on the irregularities of this deal.

Prior post on this case here.

 

Materials in Yet Another Pending Suit Filed in 2017 regarding Galanis et al. Investment Fraud involving Wakpamni Lake Community Corporation

Here are the materials so far in Water Works Board of the City of Birmingham v. U.S. Bank National Association (D.S.D.):

1 Complaint

26 US Bank MTD

29 Opposition

30 Reply

32 DCT Order

68 Chicago Transit Complaint in Intervention

UPDATE:

99 US Bank Motion to Dismiss

151 Stipulation of Dismissal [RHCT]

Materials in Pending Suit Filed in 2017 regarding Galanis et al. Investment Fraud involving Wakpamni Lake Community Corporation

Here are the materials (so far) in Michelin Retirement Plan v. Dilworth Paxon LLP (D.S.C.):

1 complaint

67-1 Greenberg Traurig MTD

91-1 Dilworth Paxon MTD

150 Michelin Response to GT MTD

150-10 GT Opinion Letter

150-12 GT Invoice to WLCC

150-14 OST Resolution on Raines Authority

150-15 OST Council Meeting Minutes

150-16 Morton Materials re WLCC

150-17 GT Opinion Letter

161 Michelin Response to Dilworth MTD

161-2 Dilworth Opinion Letter

161-4 Investment Mgmt Agreement

161-5 Trust Indenture

161-10 SEC Complaint

161-14 Dilworth Opinion Letter

172 Request for Default Judgment on Wakpamni

179 GT Reply

180 Dilworth Reply

203 Magistrate Report

209 GT Objection

218 DCT Order Denial of 67 & 91

372 Notice of Voluntary Dismissal of GT

408 Magistrate R&R re 301

411 Amended Complaint

411-1 Timothy Anderson Engagement Letter

411-10 WLCC Bank Statement

468 DCt Order Granting Dilworth MTD

Jury selection is set for February 2020. Wakpamni Lake Community Corporation did not file a response. The clerk issued a default judgment against WLCC. Docket no. 173.

605 Default Judgment

More Docs Related to Galanis et al. Fraud involving Wakpamni Lake Community Corporation owned by Oglala Sioux Tribal District

We posted a complaint yesterday filed by a Chicago retired employee fund against individuals and law firms that worked on this deal.

Here are a few more docs (there is a lot to dig up, but this is a start):

SEC complaint

federal-brief-in-us-v-archer.pdf [details the scheme, appeal in related conviction]

366_f.supp_.3d_477.pdf [galanis decision, on appeal]