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 A Hollywood Ponzi Scheme 

Michael Santos

Michael Santos

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Actor pleads guilty to one of the most daring Ponzi schemes in Hollywood history, luring investors with fake Netflix and HBO deals.

A PONZI SCHEME IN HOLLYWOOD

INTRODUCTION 

A Hollywood actor recently pleaded guilty to running a massive $650 million Ponzi scheme that caused over $230 million in losses. Federal law enforcement have described the case as one of the most daring Ponzi schemes in Hollywood history. 

One of the oldest scams on the books, Ponzi schemes rely on money flowing in from new investors to provide investment returns to older investors. Time magazine and Investopedia report that in 2019, there were 60 major Ponzi schemes in the US, with total investments of $3.25 billion.

Zachary Horwitz, also known as Zach Avery, faces a maximum of 20 years in federal prison for running a Ponzi scheme. Horwitz lured investors by touting fake lucrative deals his company supposedly had with Netflix and HBO. By scamming investors with false claims that he had deals with the likes of Netflix and HBO, prosecutors say Horwitz defrauded them and funded a lavish lifestyle.

DISCUSSION

Throughout his Hollywood career, Zach Horwitz acted in low-budget horror and sci-fi films. Horwitz’s most notorious role now, though, is as a federal criminal defendant. As reported this week by the Associated Press, Horwitz pleaded guilty to one count of securities fraud and faces sentencing proceedings in January 2022. 

*Pro-Tip: To prepare for a sentencing hearing in which he could face up to 20 years in prison, Horwitz may want to work with experienced sentencing mitigation consultants. Prison Professors, an Earning Freedom company, regularly helps clients craft sentencing mitigation strategies to obtain better outcomes.

In court this week, Horwitz admitted that he told potential investors that he would use their loans and investments in his company to acquire international distribution rights to movies and license them to Netflix and HBO at a profit. Horowitz also admitted that he forged false distribution and licensing contracts, as well as supposed emails and texts from Netflix and HBO executives addressed to him. Horwitz used these lies to defraud more than 250 investors, including close friends and family. 

The Indictment

In May 2021, a federal grand jury indicted Horwitz on five counts of securities fraud, six counts of wire fraud, and two counts of aggravated identity theft. According to prosecutors, from 2014 to 2019, Horwitz defrauded investors out of hundreds of millions of dollars in loans for his film company, 1inMM Capital LLC.

Per the Securities and Exchange Commission (SEC), Horwitz promised investors an astounding 25% to 45% return on their investments in his film company. Promises of such significant guaranteed returns are a staple of Ponzi schemes and fall in the category of “if it sounds too good to be true, it probably is.”  

From the times of Charles Ponzi to Bernie Madoff’s most notorious Ponzi scheme in recent memory, prosecutors continue to go after investor schemes that have no economic substance. Instead, these schemes rely on money flowing in from new investors to provide returns to older investors.

In Horwitz’s Ponzi, people would invest $35,000 to $1.5 million per contract in Horwitz’s company, 1inMM Capital

But, according to the government, Horwitz lied to investors when he said he was using their money to buy the rights to hundreds of movies and resell them to Netflix, HBO, and other platforms for international distribution, mainly in Latin America. 

In reality, Horwitz ran a traditional Ponzi operation, using money from one group of investors to repay the money he owed to earlier investors. In the process, Horwitz skimmed off millions of dollars to fund an opulent lifestyle, according to the Indictment.

Horwitz was able to pay back some early investors. Still, he failed to return $231 million. When unpaid investors sued Horwitz in 2019, the scheme unraveled. That is when Netflix became aware of Horwitz’s falsified distribution contracts.

Federal Identity Theft 

Although he only agreed to plead guilty to one count of securities fraud, Horwitz’s actions warranted a charge of aggravated identity theft in his original Indictment. 

*Pro-Tip: It is customary for criminal defendants to plead guilty to less than the full Indictment as an incentive to take a plea deal and forgo their right to trial.

According to news reports and court papers, Horwitz was able to pay back investors for about five years, when suddenly, in late 2019, he began to default. Investors demanded payment and threatened lawsuits, while Horwitz tried to reassure his lenders that he would collect from HBO and Netflix and use the money to repay them. To substantiate that, Horwitz created fake emails supposedly from HBO and Netflix executives. That impersonation for financial gain prompted prosecutors to charge him with federal aggravated identity theft.

Federal law prohibits “identity theft,” which involves someone using another person’s personal information for economic gain or to take someone else’s identity. Identity theft cases usually involve fraud, deception, false statements, or misrepresentations. In identity theft cases, a person steals identifying information, uses stolen identities, or copies information without consent. 

Identity theft laws under 18 US Code § 1028 make it a crime to misuse someone’s identifying information, whether personal or financial. Personal identifying information can include social security numbers, driver’s license number, credit card or bank account information, and PINs obtained through the internet.

Pro-Tip: Most identity theft cases are prosecuted at the state level.

18 USC § 1028 provides penalties for any person who knowingly produces identification or false document or possesses documents with intent to defraud. The statute sets forth the following identity theft penalties:

  • If convicted of federal identity theft, penalties include up to 15 years in federal prison.
  • If convicted of federal identity theft for the purpose of drug trafficking, or connected to a violent crime, or a prior identity theft conviction, penalties include up to 20 years in federal prison.
  • If convicted of identity theft as a means of aiding or committing domestic or international terrorism, penalties include up to 30 years in prison.

Aggravated Identity Theft Penalties

In 2004, Congress passed the Identity Theft Penalty Enhancement Act to enhance the penalties for aggravated identity theft. 

Federal prosecutors use 18 USC § 1028A when a person uses another’s identity to commit felony crimes. 18 USC § 1028A defines aggravated identity theft as follows:

Whoever knowingly transfers, possesses, or uses, without authority, a means of identification of someone shall, in addition to the penalties for such general felony, will be sentenced to imprisonment of 2 years or 5 years for terrorism.

As such, Section 1028A enhances a defendant’s exposure to federal prison by a mandatory minimum of two or five additional years.

Definition of Ponzi Schemes

Ponzi schemes are fraudulent investment schemes promising high rates of return with little risk to investors. In a Ponzi scheme, the perpetrator generates returns for earlier investors not from actual investing but with monies from later investors. 

Ponzi schemes are similar to the well-known “pyramid schemes” in that both rely on money from new investors to pay the earlier investors. As Investopedia notes, both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up, and there is not enough money to go around. At that point, the schemes unravel.

Most Ponzi schemes share the following things in common:

  • A promise of high returns guaranteed with little risk
  • A consistent flow of guaranteed return on investment regardless of market conditions
  • Investments that have not been registered with the SEC
  • Investment strategies that are secret or too complex to explain
  • Official paperwork for investments is shoddy, sporadic
  • Investors begin removing their money when facing financial issues

Lavish Spending

Prosecutors claim Horwitz used the money from the Ponzi scheme to maintain an extravagant, lavish lifestyle. Specifically, he purchased a $5.7 million home, including a wine cellar, private pool, gym, and home theater. Horwitz also purchased Lakers courtside seats, luxurious trips to Las Vegas, chartered private jets, expensive cars, and luxury watches.  

News reports and reports from people who worked with Horwitz speculate that he also spent at least several million dollars in vanity projects, such as financing films featuring himself. 

As is typical in cases like this, the SEC froze Horwitz’s assets upon arrest and continues to try to uncover what happened to all the money. 

CONCLUSION

Ponzi schemes subject a person to charges for federal securities fraud and a maximum prison term of 20 years. 

However, when charging a criminal case, prosecutors look at the entirety of a defendant’s conduct and have broad discretion to determine the specific charges. That process led prosecutors in Horwitz’s case to include aggravated identity theft charges in the Indictment. Subsequently, Horwitz and prosecutors entered into a plea deal to drop the aggravated identity theft charges — a typical outcome in the plea bargaining process. This means that Horwitz will not have to face the 2-year mandatory minimum that accompanies those charges.

Now that he faces a sentencing hearing, federal probation will conduct a presentence investigation for the court. Horwitz must develop a game plan to obtain the best possible outcome under his circumstances.

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.

If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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