An Omaha attorney has been found liable for operating a Ponzi scheme that deceived 130 people out of $4.7 million while promising consistent profits from trading in commodities and other instruments.
Michael Kratville was ordered by U.S. District Court in Omaha last week to pay restitution of $524,000 and civil penalties of $1.17 million.
The order caps a civil lawsuit filed by the federal Commodities Futures Trading Commission, which sued Kratville and associates in 2011, alleging fraud and failure to comply with regulations governing such investments.
“The undisputed evidence shows that Kratville’s actions and statements to potential investors and to his partners reflected the intent to deceive, manipulate, or defraud,” the commission wrote in its latest filing in the case. A request for summary judgment was granted last week.
Attempts to reach Kratville and his attorney, Omaha’s Stuart Dornan, were unsuccessful. Voice-mail messages left at Kratville’s law office were not returned, nor were email and voice-mail messages left with Dornan.
Last year, Kratville’s business partner Michael Welke agreed to pay $257,000 in restitution and $130,000 in penalties to settle the commission’s civil case.
Kratville, Welke and Jon Arrington also are facing federal criminal charges related to the scheme. The three were indicted last year by a federal grand jury in Omaha on 14 counts each, including charges of conspiracy and mail and wire fraud.
Conviction carries prison sentences of up to 20 years per charge.
Kratville and his partners did business as Elite Management Holdings Corp., NIC and MJM Enterprises and never registered with the Commodities Futures Trading Commission as required by law, the commission said. The so-called “investment pools” swept up money from investors starting in August 2005.
Kratville, the commission said, contacted investors via email, saying he had a rock-solid trading strategy that had been yielding 6 percent gains a month for the previous several years in a row. “We are an investment club exempt from the Securities and Exchange Commission rules,” Kratville wrote to investors, the commission said in its filing.
Truth is, it said, the Kratville companies were exempt from nothing. And as for the sophisticated and sure-fire investments?
According to the commission, the investor money was simply placed with another trader in commodities and other instruments, one operating from Spain. The Spanish operator promised Kratville and his partners the same thing they were promising Omahans: consistent monthly returns, with little risk, none of it backed up with proper account statements or trading histories.
It all started with great enthusiasm, according to the commission’s narrative of events contained in the agency’s latest court filing.
“Hoping to hit $10 million in principal in 2006. ... We can all retire for real,” reads an email from Kratville to a friend, according to the filing.
Things, however, didn’t go according to plan. In 2006, the Nebraska Department of Banking and Finance closed in, telling the group it was selling unregistered securities and that all money would need to be refunded and the operation closed.
In response, the commission says, the operators simply formed a new company, NIC, and transferred all investor balances to it, dissolving earlier iterations. Kratville and company, the filing says, attempted to swear investors to secrecy in letters notifying them of the change.
“This is an internal document for you only. Do not provide this information to anyone,” the letters read.
Other forces also began to bear. By early 2007, the partner in Spain began to lose money, which the commission said Kratville concealed from investors. By springtime, Kratville was jittery: “The idea of doing an April 1st report scares the hell out of me ... a ticking time bomb,” Kratville said at the time, according to commission documents.
He had good reason to worry. Customer account statements showed a 3.2 percent return for January, a 3.3 percent return for February and a 4.5 percent return for March, but some of the numbers were false. In reality, February 2007 was a 79 percent loss, followed by further losses of 11 percent in May and 26 percent in June.
“Someone will find out that we have been acting illegally,” Kratville said, according to the commission’s account. “If this thing blows up, I will lose my bar license. ... My other fear is that if this blows up that I will lose all of my assets paying our members.”
Along the way, the CFTC said, Kratville, Arrington and Welke were paying themselves, using more than $700,000 for golf club memberships, travel and dining. About $850,000 was shuttled to new investors from previous ones to meet promised returns, the definition of a Ponzi scheme, named after a 1920s practitioner of the dark art, Charles Ponzi.
At the end, in 2007, Kratville told the commission he had nothing to do with any of it after resigning from the investment pools a year earlier.
The commission didn’t buy it, saying Kratville “misrepresented returns and profitability” as late as 2007.