011: Ponzi Scheme in Diamonds and Cryptocurrency

Ponzi Scheme in Diamonds and Cryptocurrency

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Learning Objectives

Upon completion of this Case Study, participants will be able to:

• Describe behavior that could lead to charges for wire fraud;
• Explain the concept of “relevant conduct” in federal sentencing;
• Understand how a presentence report will influence sentencing;
• Identify mitigation strategies in sentencing for a white-collar crime; and
• Explain how loss amount and restitution may influence sentencing. 

State of the Industry

Many entrepreneurs do not appreciate how their business decisions can lead to government investigations and criminal charges. Entrepreneurs may start out with good intentions, but find their integrity tested when things do not go according to plan. Failure to appreciate the potential consequences of misbegotten decisions make entrepreneurs vulnerable to facing regulatory challenges and potential investigations.   

Our nation’s criminal justice system continues growing, especially in the area of white-collar crime. With more than 4,000 criminal statutes in the federal system, and tens of thousands more in the various state systems, business owners may unwittingly fall afoul of the law. People need to understand the importance of compliance to hold themselves accountable when times get rough. After all, a failed business may be much easier to overcome than the consequences stemming from illegal behavior. Failure to effect robust compliance leads to more people going to prison for noncompliance and more convictions for white-collar crimes.

Background and Analysis

This case study profiles Jose Aman, who served as the President of three separate companies, including: Natural Diamonds, Eagle, and Argyle Coin. All three privately-owned companies have offices located in Florida. 

According to the allegations on the criminal information, from May 2014 through May 2019, Aman and his partners solicited people to invest in diamond contracts. Authorities alleged that Aman and his partners promised investors that investor funds would be used to purchase rough-colored diamonds. As described to investors, Aman would purchase raw diamonds and then cut, polish, and resell the diamonds at a profit. 

Aman and his partners represented the investment as secured by Aman’s inventory of diamonds (purportedly valued at $25 million). Aman and his partners promised that the investment would yield a high return with no-risk  because of the $25 million worth of diamonds that Aman pledged as security. That security, however, never existed. While Aman and his partners may have originally intended to execute on the business model, they ultimately failed. The glaring absence of the $25 million in security ensured the company’s eventual demise. 

To conceal the fraud from investors, Aman allegedly made what he represented as interest payments to investors by using new investors’ money to pay earlier ones. Authorities commonly refer to this practice as a Ponzi scheme (named after Charles Ponzi, the first person to notably pull one off.) 

According to the charging document, at the end of the investment period, Aman and his partners would convince the investors to reinvest their money. In doing so, Aman and his partners falsely claimed that the investors had the full value of their investments to put into new deals. The conspirators then provided sham “Reinvestment Contracts” to the investors. This tactic helped Aman and his investors buy time to identify new investors and additional money.

Authorities alleged that when the scheme appeared on the verge of collapse, Aman set up a new business, Argyle Coin, LLC. This new company purportedly intended to develop a cryptocurrency token backed by diamonds. 

Aman solicited new investors for Argyle, again promising high rates of return with no risk. Aman allegedly used only a fraction of the money received from Argyle investors to develop a cryptocurrency token. He otherwise used the vast majority of new investor funds to pay interest to the earlier investors, and to benefit the conspirators. Argyle Coin never completed development of a diamond-backed cryptocurrency.  

During the course of the Ponzi scheme, Aman and his partners collected more than $25 million from hundreds of investors. Aman allegedly used the newly invested money to make interest payments to prior investors. He further used the newly invested money to pay business expenses, to pay commissions to the partners, and to support a lavish lifestyle.

Government documents reveal that Aman and his partners made substantive material misrepresentations to investors. Prosecutors claim that Aman and his partners did so in order to further their scheme to defraud investors that provided him with capital. Aman’s partners have not been criminally prosecuted. They may have fully cooperated with the federal government against Aman in order to avoid criminal charges. Co-conspirators commonly provide information against a more culpable defendant, like Aman, in order to qualify for leniency or more favorable treatment. 

Jose Aman pled guilty to one count of wire fraud. Had he gone to trial, the government may have filed a superseding indictment with additional charges to secure a harsher sentence. Moreover, the judge could possibly have sentenced Aman to a longer sentence after losing at trial for failure to accept responsibility and express remorse. The United States Probation Office created a presentence report (PSR) calculating the loss amount at $25 million. That PSR, and the loss-amount, influences the federal sentencing guidelines, which serves as a framework for a judge determining a sentence. 

The PSR prepared by the probation officer also identifies Aman’s relevant conduct. Relevant conduct can lead to a sentence-enhancement, because it shows the defendant’s mindset, his role, and the sophisticated means he may have used to entice victims. The PSR is not a matter of public record, as it contains sensitive information. Yet the PSR is one of the most important documents in a criminal case. It should be carefully reviewed by the defendant and his or her attorney so that timely objections can be filed to avoid a higher sentence. The judge will review the PSR prior to sentencing and the document will influence the sentence imposed. 

Aman fully cooperated with the government but did not receive any benefit for his cooperation at sentencing. In some cases, the government may file a motion known as a 5k.1 if the government determines that the defendant has provided substantial assistance. Submission of a 5k.1 by prosecutors affords a judge more discretion in reducing a defendant’s sentence.

A federal judge sentenced Aman to 84 months of incarceration, three years of supervised release, and $23,866,340.00 in restitution.

Recommendation

A maligned mindset serves as a strong precursor to white-collar crime. Reminding business owners and employees of the consequences that may arise from wrongful actions can help prevent or dissuade a maligned mindset. Implementing a focused compliance program can also help educate and remind people of the need and reasons to act lawfully.    

This case is instructive, not so much for Aman’s outright theft, but rather how the legal process works. Aman’s co-conspirators did not get indicted or subjected to any legal repercussions. While that is highly unusual, it can be a potential outcome from a mitigation strategy. Even Aman, the ringleader, received a relatively light sentence, considering the dollar amount of his crime. Agreeing to cooperate, accepting his guilt and expressing remorse served to help reduce his legal consequences.

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Sources

Press Release

https://www.justice.gov/usao-sdfl/pr/defendant-charged-25-million-diamond-ponzi-scheme

SEC Complaint

https://www.sec.gov/litigation/complaints/2019/comp-pr2019-72.pdf