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Gregory Tendrich, PA Gregory Tendrich, PA

Court Upholds $120 Million Judgment Against Man Who Sold Fake Promissory Notes

On May 21, a federal appeals court in Ohio upheld a $120 million civil judgment against a man charged by the U.S. Securities and Exchange Commission with defrauding investors in Florida and Michigan out of millions of dollars. The defendant, Joseph Paul Zada, posed as a wealthy oil investor soliciting new investors. In fact, the SEC discovered, Zada was a con artist who simply used investor funds to finance his lavish personal lifestyle.

SEC v. Zada

Zada owned mansions in Florida and Michigan and solicited his victims primarily in those states. The SEC said Zada claimed to have connections to the royal family of Saudi Arabia. Zada lured investors with the promise of sharing in Saudi Arabia’s lucrative oil industry.

Specifically, Zada told investors he had partners in the Middle East who owned oil, which was stored offshore until the market was ripe for selling. Investors were told they could buy a share of this offshore oil, which would yield returns of as much as 40% in just a few months. But when investors paid money to Zada, all they received in return was a promissory note which specified a much lower interest rate. The notes themselves made no reference to oil or ownership in any tangible asset.

Nevertheless, Zada’s sales pitch was good enough to attract more than $60 million from investors, including $40 million from a well-known professional hockey player. Of course, there was no oil and Zada was simply selling promissory notes backed by nothing. The SEC said Zada used most of the money to pay his personal expenses—including $4 million in credit card bills—and what money investors did recover simply came from other investors. In other words, at best Zada was running a classic Ponzi scheme.

In 2010, the SEC filed a civil complaint against Zada in Michigan. A judge granted summary judgment to the SEC, ordering Zada to repay $56 million to investors, and another $56 million as a civil penalty to the government. Zada appealed the civil judgment to the U.S. Sixth Circuit Court of Appeals.

Zada’s main argument on appeal was that his promissory notes were not “securities” as defined by federal law, therefore the SEC had no standing to sue him. The Sixth Circuit disagreed. The Court said “notes” are presumed to be securities unless the defendant can affirmatively prove otherwise. Zada failed to do so. Indeed, Zada failed to offer any evidence in his defense, as he invoked his Fifth Amendment right against self-incrimination at the outset of the SEC’s investigation.

This led to Zada’s second principal argument, which was that the $56 million civil penalty was an unconstitutional punishment for his decision to invoke the Fifth Amendment. While the Sixth Circuit conceded this argument “had some force,” as Zada is currently under criminal indictment in Florida for his scheme and he certainly has the right to defend himself in that proceeding, the court held “the record as a whole” still justified the trial court’s decision with respect to the civil penalty.

Zada’s fake oil scheme promissory notes is just one example of how investors can fall prey to a con artist. If you have been the victim of a similar fraud or investment scheme you should speak to experienced Florida securities and investment fraud attorney immediately. Contact attorney Gregory Tendrich, P.A..

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