Man Sentenced to 12 Years for Federal Wire and Mail Fraud Charges Involving Ponzi Scheme

ALBUQUERQUE Chief United States District Judge Bruce D. Black sentenced Douglas F. Vaughan, 64, of Albuquerque, to 12 years in federal prison for wire and mail fraud charges that involved a Ponzi scheme in which Vaughan fraudulently obtained more than $74 million from approximately 600 investors who were promised extraordinary returns. Vaughan will be on supervised release for six years after he completes his prison sentence. In addition to the prison sentence, Judge Black also imposed a money judgment against Vaughan in the amount of $74,745,723.93, which represents a portion of the gross proceeds that Vaughan derived from his criminal conduct. Additionally, Vaughan has agreed to forfeit to the United States previously-seized funds in the amount of $38,298.24 and real property located in Spring Valley, Nevada. Vaughan was charged in February 2011, in a 30-count indictment alleging that, between 2005 and 2010, Vaughan operated a promissory note investment program, which he marketed as a means of generating revenue to grow his real estate business, as a Ponzi scheme. It alleged that Vaughan owed more than $74 million in unpaid principal and interest payments to approximately 600 investors when the fraudulent scheme collapsed in early 2010. On December 21, 2011, Vaughan pled guilty to counts one and four of the indictment charging him with wire fraud and mail fraud. Vaughans plea agreement included a 16-page addendum of stipulated facts in which Vaughan admitted the allegations in the indictment and described in detail how he established, marketed, and administered his Ponzi scheme. According to the addendum, Vaughan was the chairman, chief executive officer, president, and majority shareholder of Vaughan Company, Realtors (VCR), a business that operated primarily as a residential real estate brokerage and was at one time the largest independent residential brokerage in New Mexico. In 1993, Vaughan began an investment program in which he accepted money on behalf of VCR in exchange for interest-bearing promissory notes. The typical note had a three-year term, an interest rate ranging from eight to 40 percent per year and provided for interest to be paid in monthly installments. At the end of the notes term, Vaughan either paid off the principal or offered the investor the opportunity to roll over the principal into a new note. Vaughan signed each promissory note on behalf of VCR. Vaughan led investors to believe that their investments in the promissory note program were actually or virtually risk-free because they were guaranteed by VCR, Vaughans personal guarantee and a $2.5 million deed of trust on certain real estate. Vaughan marketed his promissory note program by representing that the invested funds would be used to purchase real estate and to acquire smaller real estate companies. Instead, Vaughan used the promissory note program funds primarily for three undisclosed purposes: (1) to pay the interest and principal on promissory notes taken out by earlier investors; (2) to pay himself, under the guise of salary, bonuses, or some other personal transfers; and (3) to subsidize the operation of VCR, which was generating insufficient legitimate revenues to sustain itself. By 2005, the promissory note program was an important source of funding for VCR and, without the infusion of capital generated by new promissory note program investors, VCR was insolvent. Despite this, Vaughan continued to distribute the same marketing materials for the promissory note program, sign the same promissory notes, and make the same corporate and personal guarantees. Although Vaughan represented to investors that he would not extend more than $2,500,000 in promissory notes, end-of-year financial records reflect that the aggregate principal balance owed to note holders far exceeded this amount: 2004$24,351,605 2005$32,299,363.37 2006$39,969,110.68 2007$49,984,845.80 2008$62,844,445.57 2009$74,386,623.38 From at least 2005 through February 2010, Vaughan used funds from new promissory note program investors to make interest payments to existing note holders and thus lulled existing investors into believing that they were being paid returns from VCRs legitimate business revenues. However, VCRs corporate tax returns reflected the following annual losses: 2004$4,041,048 2005$5,595,285 2006$7,461,409 2007$9,913,893 2008$13,313,323 2009$13,907,738 In the addendum, Vaughan admitted that, when his Ponzi scheme began to collapse and he became unable to meet the monthly interest payments to note holders, he made false and misleading excuses to investors and failed to disclose that VCR had insufficient revenue to make the interest payments. In February 2010, when Vaughan filed for personal and corporate bankruptcy, the aggregate principal balance owned to approximately 600 note holders was approximately $74,745,723.93, and the interest expense owed to note holders exceeded $1 million per month. As part of his plea agreement, Vaughan resolved two other pending cases: a civil case filed against Vaughan by the Securities and Exchange Commission (SEC) in federal court, and a bankruptcy case initiated by Vaughan in federal bankruptcy court. In the SEC case, Vaughan consented to the entry of a judgement that permanently enjoins him from violating the federal securities laws. Vaughan also consented to an order by the SEC in an administrative proceeding that bars him from associating with any broker, dealer, or investment advisor and from participating in any stock offerings. In the bankruptcy case, Vaughan entered into a stipulated judgment that denied him a discharge from bankruptcy. As required by the plea agreement, the U.S. Attorneys Office moved to dismiss the remaining 28 counts of the indictment after sentence was imposed on Vaughan.