Caesars Casino Must Return $1.5M Wagered By Ponzi Schemer
By Chelsea Naso
Law360, New York (February 04, 2014, 6:45 PM ET) — A Caesars Entertainment Corp. casino must surrender $1.48 million to a bankruptcy trustee representing a now-defunct mortgage company, after a Nevada federal jury ruled Monday that the gambling money collected by the Rio Casino was raised through a $32 million Ponzi scheme.
The jury found that the Rio Casino, owned by Caesars unit Rio Properties Inc., had received property of National Consumer Mortgage Inc., a residential mortgage company used as a front by the company’s president Salvatore Favata when he used cashier’s checks to gamble.
The reward is a win for John Brincko of Sitrick Brincko Group, the trustee for National Consumer, which fell into bankruptcy after the U.S. Securities and Exchange Commission in 2006 accused Favata of falsely promising 233 investors return rates of 30 to 60 percent on their investments. Favata had used new investor funds to pay off earlier investors, the government alleged, and he pled guilty to the charges in October 2006.
“I am happy we are recovering this money for the defrauded investors. It was a hard-fought, six-year battle, pitting our lawyers, a small litigation boutique, against a global law firm of more than 1,100 lawyers,” Brincko said in a statement.
Rio had contended during the court proceedings that the funds belonged to Favata and not the mortgage company, making them ineligible for collection, according to Sitrick Brincko. The casino had also argued that regardless of who the funds belonged to, it had accepted the money in good faith and had no knowledge of the scheme.
“The jury rejected the Rio’s arguments, finding that when Mr. Favata tendered cashier’s checks, funded through NCM bank accounts, in exchange for casino chips, the Rio received a transfer of NCM’s property,” Sitrick Brincko Group said in a statement.
According to a statement issued by Rio, roughly $10.3 million in funds were initially sought in the case and the casino plans to continue to fight the award.
“We do not yet have a copy of the final order and we intend to file a motion to reduce the aware. There is no regulatory action here and no facets of the Ponzi scheme was held to have occurred at Rio. It’s simply a fraudulent transfer case where the bankruptcy trustee sought to bring money back into the estate,” an attorney representing the casino said.
Favata used the scheme to pay off more than $10 million of his own gambling debts, as well as other personal debts and living expenses, and to fund lavish house parties and community music festivals, the SEC alleged. He solicited investors in face-to-face settings, including at church gatherings and investment seminars, and distributed promotional materials that falsely described the investments, saying NCM would loan investor funds to homeowners who could not qualify for traditional mortgages, according to the SEC.
From late 2001 through March 2006, Favata persuaded mortgage-refinancing clients to take cash out of their refinancings and to use it to invest in NCM investment notes, going as far as to represent that NCM-maintained deeds of trust for the real estate securing the investments, the government said.
“I am grateful to the jury for seeing that the Rio Casino ignored many warning signs about Mr. Favata, including that he was already a convicted felon who had declared bankruptcy,” Brincko said.
Brincko is represented by Bijan Amini, Noam Besdin, Lita Beth Wright and Matthew Kane of Storch Amini & Munves PC and John Bailey and Russell Burke of Bailey Kennedy.
The Rio Casino is represented by James Fogelman, Shannon Madder, Rachel Perahia and J. Patrick Doust of Gibson Dunn and James Boyle of Cotton Driggs Walch Holley Woloson & Thompson.
The case is Brincko v. Rio Properties Inc., case number 2:10-cv-00930, in the U.S. District Court for the District of Nevada.
–Editing by Elizabeth Bowen.
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