Fraud Marked Transfers to Investment Adviser

(CN) - A firm that allegedly engaged in a nearly $42 million Ponzi scheme sent mortgage transfers to an investment advisor "with an intent to defraud," a federal judge ruled.

The New Jersey attorney general sued Carr Miller Capital and its sole member and owner, Everett Miller, in December 2010, over nine-month unregistered promissory notes that the firm allegedly sold three years earlier.

Rather than using the funds received for investment purposes, Carr Miller allegedly commingled the money with other funds; transferred it to third party accounts; and used it to pay existing investors, give commissions to brokers, and cover personal expenses.

"Carr Miller received in excess of $41 million from not less than 190 investors, yet only paid $11.7 million back [] in the form of interest and principal payments," according to the complaint.

Thomas Hudson, a Texas-based registered investment adviser, invested more than $1.4 million of his father's money with Carr Miller in late 2008 and early 2009.

Hudson made all but the last of four investments - on which he received more than $45,000 in commissions - under a power of attorney for his father, who died in January 2009.

Several months later, Carr Miller told Hudson it was ceasing operations in Texas. Because the firm was unable to pay Hudson a check for his commission, it provided him with mortgages for three of its properties in Texas and New Jersey, totaling $857,000.

In a September 2011 complaint, Carr Miller's receiver, Michael Pompeo, alleged that Hudson lacked the legal authority to execute his fourth investment in February 2009 as he had not yet been appointed executor of his father's estate.

Although the mortgages are dated Oct. 1, 2009, emails indicate that at least one "was actually drafted and signed more than a month later," Pompeo claimed.

U.S. District Judge Susan Wigenton granted Pompeo summary judgment on May 20.

"Plaintiff argues that Carr Miller was a Ponzi scheme and point to Everett Miller's testimony in the receivership action where he claimed to have used investor's funds like his own personal credit card and paid investors with other investors' money," Wigenton wrote. "While noting that 'Carr Miller did have investments which, while arguably risky or ill-founded, were at least legitimate,' defendants nevertheless concede that 'aspects of the Carr Miller's operations had all the characteristics of a Ponzi scheme.' Considering these facts in a light most favorable to defendants, this court finds that Carr Miller's Ponzi scheme-like operations reflect that Carr Miller's transfers of mortgages to defendants were made with an intent to defraud."

Hudson was at least on inquiry notice of Carr Miller's financial circumstances at the time the mortgages were recorded, according to the ruling.

"Hudson conceded that before the execution of the mortgages, he learned of the [Arkansas Securities Department] ASD investigation into Carr Miller's activities," Wigenton wrote. "Additionally, Hudson received an email on Oct. 20, 2009-a month before the first of the mortgages was recorded-informing him that Carr Miller's sale of unregistered promissory notes was illegal and that its brokers faced criminal liability. Hudson also knew when he received the mortgages that Carr Miller was insolvent. Accordingly, for the purposes of the [New Jersey Uniform Fraudulent Transfer Act] NJUFTA, this court finds that Hudson did not receive the mortgages in 'good faith.'"

The mortgages are invalid and unenforceable, according to the ruling.

"Based on the several badges of fraud-even without concluding whether Hudson was an insider transferee-this court finds that Carr Miller's conveyance of mortgages to defendants was a transfer of assets made with an actual intent to hinder, delay, or defraud Carr Miller's unsecured creditors," Wigenton wrote. "Accordingly, plaintiff is entitled to summary judgment."

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