December 8, 2023

Federal prosecutors and the Securities and Exchange Commission respectfully secured a guilty plea and partial settlement in a multimillion-dollar fraud case against a former financial adviser.

In one case, Joseph Michael “Mike” Todd defrauded at least 20 clients, many of them elderly and disabled, by claiming to have invested $3 million worth of funds that he used in real estate, boating, hunting, casinos and adult entertainment, according to the SEC’s July 12 report. Civil suit filed in Orlando federal court. Todd, 59, and the two companies he controls agreed to a judgment of damages and fines without admitting or denying the allegations.

On the other hand, Rao K. Garuda of a company called Associated Concepts Agency in the Cleveland area pleaded guilty July 11 Conspiracy to defraud the United States and facilitate the filing of false tax returns. Prosecutors said the scheme, dubbed by co-conspirators a “senior estate plan” or “ultimate tax plan,” illegally sought $2.7 million in tax avoidance. Garuda promised to pay that amount as restitution under a plea agreement in Cleveland federal court.

One of the cases highlights how older Americans are economically exploited up to $28 billion per year. But they all underscore why investors should be skeptical of any tool that requires them to move assets off a platform that is subject to regular scrutiny by companies and regulators. External entities controlled by individual brokersAccording to fraud expert Douglas Schulz Investment Securities Consulting. Investing, whether online or with a financial advisor, requires constant effort in an “age of pervasive fraud,” Schultz said.

“I would say today is the worst situation I have ever seen. The liars are very good. They are very smart,” Schultz said in an interview. “It’s rampant, and regulators — you can’t rely on them.”

Todd Financial Services and TFS Insurance Services of Crystal River, Fla., did not respond to emails sent to his personal account. In January, he filed a pending lawsuit over the asset distribution and liquidation, known as the “Assignment of Creditor Interest,” according to the SEC. Anaheim, California-based brokerage Centaurus Financial also did not respond to email inquiries. The company hired him from 2016 until firing him in 2022, citing an investigation into possible violations of company and industry rules.

“Investments through my broker/dealer were appropriate, recommended based on the client’s goals, objectives and financial situation, and only offered after they had reviewed all material documentation related to the investment,” Todd said in response to a client arbitration. His FINRA BrokerCheck file. “Clients confirm in writing that they have not only received the necessary investment documents/disclosures, but are fully aware of the characteristics and risks of the investment. At all times, I have my client’s interests first and I will vigorously defend this matter to the fullest extent of the law.”

“No tax”
Lawyers for Garuda did not respond to emails seeking comment on the case. Allied Investment Advisors, a registered investment advisory firm based in Beachwood, Ohio, which hired him between 2015 and 2022, did not return phone messages.

According to investigators, from 2013 to 2020, Garuda and other co-conspirators advised customers to transfer assets into an LLC, transferred 100% ownership of the LLC to a charity, such as what they called “compassion beyond borders,” and demanded tax deductions for charitable donations. Prosecutors said customers could access the assets by taking out false “tax-exempt loans.”

Several lawyers consulted by clients warned them and Garuda that their legal basis was dubious, with one of the lawyers writing in a 2017 email that the idea was “clearly fraudulent and does not stand up to IRS scrutiny,” according to court documents.

“You’re borrowing money from your own LLC. When you borrow money, you don’t pay taxes,” Garuda explained in a conference call with a client and another planner, according to his charging documents. “So when you save money, you get the deduction, when the money grows, there’s no tax, and then when you borrow money, there’s no tax.”

Court records show Garuda’s plea deal remains sealed, and a judge released him on $25,000 bond after his arrest. He was charged with up to five years in prison for conspiracy and up to three years for false tax returns. The judge plans to sentence him in November.

Boats and Adult Entertainment
According to the SEC, between August 2016 and November 2022, Todd persuaded clients to place millions of dollars in virtual vehicles outside of his brokerage business, such as “CRTFS mortgage funds” or real securities or funds, without investing those funds. Investigators say he used false account statements to lead investors into thinking they were generating gains and, in at least one case, made Ponzi scheme payments with other clients’ funds. Todd wrote himself checks worth $568,000 and spent $450,000 on boats, $275,000 on farm equipment, $230,000 on condos, $65,600 on hunting gear and expenses, $11,000 on casinos and strip clubs, and other personal purposes, according to the SEC.

According to the SEC complaint, “As Todd’s customers began to ask him more and more questions about how he was using their funds, Todd eventually stopped returning their calls and messages altogether.” “Some customers who wrote checks to Todd or Todd LLC now find themselves listed as “unsecured creditors” in pending lawsuits that Todd is pursuing for the benefit of creditors, even though they never agreed to act as creditors of any kind to Todd or its entities. Gained the trust of defrauded customers.”

It is unclear whether Todd will face criminal charges in addition to the SEC case. FINRA suspended him in April for non-payment Arbitration award Centaurus reportedly paid $97,800 in damages and attorney fees for a former client, while Centaurus paid another former client $11,700 in a settlement in December check with broker. The other six outstanding claims seek compensation in the aggregate of at least USD 536,900.

Schultz said Todd’s financial woes showed another common theme in fraud cases, which is difficulty for victims to recover damages.

“They don’t just blackmail one person, they take down a group of people,” Schultz said. “You catch them, but they don’t have the money. The end result is horrible. Yes, you can try to sue the consulting firms and the brokerage firms, and we probably win half the cases. But we don’t win all of them, because the argument is, ‘Well, the brokers hid this from us too.'”