On August 31, 2022, Plaintiff Melanie E. Damian, in her capacity as the Court-Appointed Receiver for Today’s Growth Consultant, Inc. d/b/a The Income Store (“TGC”) (the “Receiver”) filed a complaint against Defendant Core Financial Outsourcing of Chicago (“Core Financial”) in the Northern District of Illinois (“Damian II”) seeking damages, injunctive relief, interest, and attorneys’ fees and costs. The complaint alleges five claims for professional negligence, aiding and abetting breach of fiduciary duty, unjust enrichment, and two violations of the Illinois Uniform Fraudulent Transfer Act.

This action stems from a prior enforcement action seeking civil penalties and injunctive relief filed by the Securities and Exchange Commission (“SEC”) against TGC and its founder, Kenneth D. Courtright, III (“Courtright”), based upon TGC and Courtright’s alleged violation of federal securities laws and operation of a website services Ponzi scheme.

We previously wrote about PLB Investments LLC et al v. Heartland Bank and Trust Co. et al., a related case initiated by various defrauded investors of TGC against two bank defendants that provided typical banking services, as well as Damian, as Receiver of Today’s Growth Consultant, Inc. v. SmithAmundsen, LLC (“Damian I”), a related case initiated by the court-appointed Receiver of TGC against a law firm that previously provided legal services to TGC.

In PLB Investments, investors brought a putative class action against defendants alleging that the financial institutions violated the Illinois Fiduciary Obligations Act (“FOA”) and aided and abetted TGC’s Ponzi scheme.  As more fully discussed in our prior article, TGC solicited investors to enter into Agreements, wherein the investors agreed to provide up-front and ongoing payments for TGC to build, acquire, and monetize online websites.  Investors paid an upfront fee to TGC to purchase, host, maintain, and market the investors’ websites in exchange for TGC’s guarantee that investors would receive a minimum rate of return in perpetuity on the revenues TGC generated from those websites.  TGC raised at least $75 million from more than 750 investors during a nearly three year period, but TGC failed to honor its promises and, in a classic Ponzi-like fashion, used new investor proceeds to pay earlier investors.

Defendants provided TGC with typical banking services, including deposit accounts, commercial loans and revolving lines of credit, ACH capabilities, and transfers into, out of, and among TGC’s accounts.  The court dismissed on the pleadings plaintiffs’ claims against one defendant bank, but allowed their claims to continue against the second defendant bank.  The decision highlighted the importance of challenging the absence of facts to support the element of actual knowledge in an aiding and abetting case.

In Damian I, the court-appointed Receiver of TGC filed a complaint against SmithAmundsen LLC, a law firm that previously represented TGC as its primary securities counsel, for two claims for legal malpractice and aiding and abetting breach of fiduciary duty.  As more fully discussed in our prior article, TGC retained SmithAmundsen to analyze and advise whether TGC’s Consulting Performing Agreements constituted a “security” under applicable law.  The Receiver alleged that SmithAmundsen failed to independently verify the facts about TGC, give advice necessary to prevent or rectify unlawful behavior, investigate any “red flags,” and counsel against violations of laws.  The complaint stresses the broad reach of a Ponzi scheme, including how a plaintiff may implicate and target third parties rendering professional services to defendants in an effort to recoup investor losses.

In the instant action, Damian II, the Receiver of TGC files another action against Core Financial, an accounting company providing accounting, tax compliance, and tax advising services to TGC.  The Receiver alleges that Core Financial obtained information about TGC raising red flags that TGC operated a Ponzi scheme.  The red flags included how TGC treated investor monies as revenue, received monthly net revenue equal to investor monies, represented its financial condition in various financial statements and documents, misinformed investors about tax write offs, and used Core Financial for tax compliance services.  Based on these allegations, the Receiver seeks to recover damages suffered by TGC and its investors.

The complaint is another reminder of how a Ponzi scheme can be unraveled by a plaintiff to impact, implicate, and target third party professional services (law firms, accountants, consultants, etc.) as potential defendants that allegedly aided and abetted a Ponzi scheme in an effort to recoup losses to investors.