Charges finally laid in $100 million Ponzi

It’s been no secret for a number of years that two Alberta-based investment boosters, Milowe Brost and Gary Sorenson were probably up to no good. It’s only now, that the RCMP has laid charges against both men, for perpetrating a Ponzi scheme in excess of $100 million, potentially the largest Ponzi scheme in Canadian history.

Both men are charged with fraud over $5,000 and theft over $5,000.

According to the RCMP, Brost and Sorenson created a business, Syndicated Gold Depository S.A. and then formed an agreement to loan money to Merendon Mining Corporation Ltd. for the promise of a high rate of return. Along with promises of tax advantages, the promised high rate of return was used to entice investors into placing their money by investing in offshore shell companies such as: Asset Trax Inc., Quatro Communications Corp., Rapid Express Corporation, Strategic Metals Corp., and Merendon Mining (Nevada) Inc.

Nominees were put in place by Brost and Sorenson to run the shell companies which were then marketed by Brost’s companies, Capital Alternatives and the Institute For Financial Learning (IFFL) Group of Companies Inc.

The RCMP estimates about 3,000 investors had their money tied up in the scheme, with little likelihood of getting their principal investment returned to them.

The RCMP arrested Brost, 55, in Chestermere, Alberta, a community close to Calgary. Sorenson, 66, is believed to be in Honduras, which does not have an extradition treaty with Canada.

The activities of Brost and Sorenson have been well-documented for years. In fact, the Alberta Securities Commission (ASC) issued a lifetime ban on Brost in the summer of 2007 with an accompanying fine of $650,000, the largest fine ordered in the ASC’s history.

Part of the reason it may have take more than three years for Brost and Sorenson to face jail time is the elaborate nature of their scheme.

Back in 2007, an investigation by the ASC determined that supposed investment education groups — Capital Alternatives and the better-known IFFL — were central to getting investors to buy a number of Alberta-based shell companies, which were not registered to trade in securities with the ASC. Brost was the primary operator of both Capital Alternatives and IFFL.

The institute’s instructors reportedly referred to themselves as “structurists” and espoused an investment philosophy that condemned traditional investment vehicles. According to the Globe and Mail, members paid an initiation fee of about $1,700, and were then introduced to the investment scheme, where they would place money in an offshore investments, that would earn a return of between 35% and 40%.

In its earlier investigations, the ASC conclude that IFFL members were advised to buy the offerings of the shell companies, which ultimately would end up loaning that capital to a single mining entity called Merendon Mining Corporation, which reportedly had separate head offices in both Colorado and Alberta. Sorenson served as CEO of Merendon, and its primary business operations were a gold refinery and attached jewelry store in Honduras.

In two separate enforcement hearings, the ASC examined the operations of Strategic Metals Corporation and Arbour Energy. Between May 2004 and August 2005, Strategic Metals raised a total of almost $36.5 million from the sale of two series of preferred shares. Most of this money was loaned or funneled directly into Merendon, or one of its subsidiaries.

Arbour Energy, is estimated to have raised an additional $46 million for Merendon — $38 million of this was allegedly loaned on a “handshake” with no due diligence. In its notice of hearing for Arbour Energy from September of 2007, the ASC alleged that the majority of Arbour’s investors came from the IFFL investor group.

“Arbour did not advertise or otherwise promote the sale of the preferred shares to investors. Rather, IFFL members, at the recommendation of structurists or other representatives of IFFL and without any solicitation from Arbour, contacted Arbour directly and requested the offering memoranda,” the ASC said. “[ASC] Staff alleges IFFL and Brost were in fact engaged in the business of providing unregistered advice to its members in Alberta, and elsewhere, with respect to the purchase by the members of a very select group of securities, all or the majority of which were in corporations that were owned, controlled or directed, beneficially or otherwise, by some or all of the respondents.”

A Ponzi scheme works by convincing investors to invest in something that is of little to no value. The principal investment from new investors is used to pay out the promised returns to earlier investors.

There were assets underlying Merendon, namely the operations in Honduras, but Merendon’s operation could not ensure the payback of loans that were given to it by the shell companies.

In its enforcement decision against Strategic Metals, the ASC enforcement panel concluded that investors would be unlikely to receive any of the promised returns.

Instead, Strategic Metals would buy worthless assets from Merendon, such as Stone Mountain Resources Limited, a non-producing gold company, for an exorbitant $6.5 million. Merendon reportedly used some of Strategic’s investor money to create the appearance of a mining facility at Stone Mountain’s site in B.C., even though there was no scientific evidence to suggest there was any gold there.

“We concluded that the plan was to lure public investors (with promises of high returns and safety along with tantalizing references to gold) into putting money into securities of Strategic — essentially a shell of a company whose main (but undisclosed) function was to finance Sorenson’s mining ventures,” the panel wrote. “As to Strategic itself, it obviously benefited directly in the sense that it was the recipient of some $36.5 million of investor funds, but it then promptly handed over that money (but for the portion frozen by Staff order) in exchange for minimal or non-existent contractual entitlements.”

(09/15/09)