Futures Fraudster Sentenced to Pay $11 Million Restitution, But Avoids Jail

Book on Colorado-based wine merchant Rare LLC remains open, with former customers suing the company's bankruptcy trustee

Eric Arnold
Posted: February 13, 2007

Bordeaux lovers burned in a long-running futures scam can now breathe some sigh of relief, though they may still feel a bit cheated. Yesterday, Ronald Wallace, founder of Rare Fine Wines LLC, was sentenced to five years of probation, subject to home detention for two years, and to pay restitution of $11 million. Wallace pled guilty last year to a host of charges, admitting that he was essentially running a Ponzi scheme in which the money paid by new customers for futures was used to buy already released wines for older customers.

Federal prosecutors were pushing for a prison term of about seven years, but Wallace got probation due to concerns about his health that were debated in a series of sentencing hearings that stretched over several months.

Rare came under scrutiny in 2003, when a number of lawsuits were filed against the Basalt, Colo.-based company, with several customers claiming that they paid thousands of dollars for wine--mainly Bordeaux futures--that they never received. Wallace was indicted in federal court in 2004, after former customers were collectively bilked out of about $13 million. Over a year ago Wallace agreed to plead guilty to several federal charges, including two counts of mail fraud, four counts of wire fraud and one count of conducting an unlawful monetary transaction, and agreed to be held accountable for losses of at least $2.5 million.

But the company is still in court, with more customers suing. In 2003 Rare went under Chapter 11 bankruptcy protection, and trustee Harvey Sender was brought in to run the company. Two longtime customers, Jerry Finger and Pedro Nosnik, tried to purchase wines through Rare during its time in Chapter 11, but just like the old days, Finger and Nosnik claim that they never received many of their wines. So in early 2005 the two filed suit against Sender, claiming that he misrepresented himself as a court-appointed trustee of Rare, and during his tenure at the helm allowed Wallace to continue running the company just as he had before--using new money to pay old debts rather than secure new wines. The company was eventually liquidated in late 2004.

"Finger, Nosnik and others did receive some of their wines, basically from suppliers who agreed to send some wines, but the suit involves the wines they didn't receive," said Ross Spence, the Houston attorney representing Finger and Nosnik. "It's about $18,000 received, and about $18,000 not received [for Finger]. And Nosnik's are higher. Dr. Nosnik, about $87,000 that he paid in and did not get the wine or the money back."

"Virtually all the consumers thought [Sender] was the trustee for the company," explained Spence. "So everyone thought they were dealing with a bankruptcy trustee operating under the auspices of a court." Spence and his clients contend, however, that Sender was not a court-appointed trustee of Rare LLC, but actually an entity called the Wallace Trust, of which Wallace was a beneficiary.

"Absolutely not true," said Sender's attorney John Bolmer, when asked if Sender misrepresented himself as trustee of Rare. "Mr. Sender's position with the company was disclosed in numerous documents filed with the bankruptcy court and on the company's website."

In a pleading filed in U.S. Bankruptcy Court for the District of Colorado, Spence argues that Sender promised customers that all payments for wine would be held in an escrow account, and that the money would be returned if the wines weren't delivered. But the escrow account, according to Spence's pleading, was just a regular account controlled by Sender, from which multiple company expenses were paid. And with Wallace still running the business and Rare still unable to procure the wines, Finger and Nosnik allege that they both lost more money after Sender stepped in.

Bolmer, however, said that any wine not delivered by Rare during Sender's tenure has to do with the négociants failing to supply it after it was paid for. "The majority of the wine that was ordered was delivered," said Bolmer. "The Nosnik and Finger wine relate mostly to one supplier in France who was paid for the wine but admittedly breached its agreement to deliver the wine."

But in Spence's pleading, he argues that Rare did not have any written agreements with French suppliers, as it claimed to.

During the time that Wallace was being investigated by the FBI, Spence says Sender should have disclosed that to customers such as Finger and Nosnik--especially considering that Sender testified at Wallace's grand jury indictment. "A trustee owes a fiduciary duty to these consumers/creditors, and the main part of that fiduciary duty is full disclosure. You have to put the beneficiary's interests ahead of your own," Spence said.

The crux of the argument that Spence and his clients are making is that Finger and Nosnik paid more money to Rare--even though they'd been burned once before--because Sender misrepresented his role with the company and the manner in which their money would be handled.

Spence said that he was not aware of any criminal investigation of Sender, and instead suggested, "He may have been over his head" when he agreed to take over Rare. No part of Spence's pleading alleges a criminal undertaking devised or executed by Sender, and former U.S. Attorney Pamela Johnston, who prosecuted Wallace, said she wasn't aware that a criminal investigation of Sender ever took place. Furthermore, Bolmer said that Sender and Wallace never met prior to the Rare bankruptcy filing, and that the two have no current relationship with each other even though they did work together at the time Sender was acting as trustee.

"But he certainly had all the information at his disposal," claims Spence. "And he didn't disclose it."

"Mr. Sender is vigorously contesting the allegations against him," Bolmer said. Who's right and who's wrong will be decided when the judge hands down a decision March 8, as the suit against Sender went to trial in the middle of last year, and concluded last week.