Brittney Palmer’s husband sued for fraud by former clients

Reports surfaced yesterday that UFC Octagon girl Brittney Palmer's husband will not be prosecuted for attempted murder stemming from a June incident where he allegedly pinned her face down on a mattress for two minutes while she struggled to breathe. Around the time of the initial arrest reports, Heavy.com reported that Palmer's husband, Aaron Zalewski, was a director at a company called Compound Stock Earnings, hosted a nationally syndicated financial advice radio show and has been called a fraud and compared to Bernie Madoff.

On its website, Compound Stock Earnings (CSE) claims to be "the leading provider of Covered Call investment education services." They offer two-hour introductory webinars for free, two-day seminars for $3,250-3,750 and sell investment strategy books for $28-130.

Bloody Elbow has obtained a recent Texas court filing in which Zalewski, CSE and company founder, Joseph Hooper, are being sued for fraud, securities fraud, deceptive business practices, false advertising, misrepresentation and breach of contract. As part of an ongoing dispute, two former CSE clients allege that "as a direct result of reliance on CSE, Hooper and Zalewski's misrepresentations" they incurred over $380,000 in trading losses while spending over $110,000 on various seminars and subscriptions.

The following are excerpts from the lawsuit:

CSE produces a weekly "Cow Report" allegedly authored by Zalewski and Hooper. A Dec. 2009 Cow Report states

For over 7 years we have been teaching investors how to make a cash return of 3 - 6% per month from their stock investments, regardless of market direction. We achieve these remarkable returns through a proprietary application of the Covered Call technique, which has been developed and practiced by us for over 25 years.

A Nov. 2009 Cow Report claims

Another great advantage of the Weekly Credit Spread technique is that you can invest just 20% of your capital with the technique and it can substantially augment the returns of your entire portfolio. For example, 6% per week is 312% per year (uncompounded). If you take just 20% of your capital and achieve those returns, that equates to a 60% return per year over your entire portfolio.

...

These pages provide undeniable, black and white proof that our technique works to provide

• 3 - 6% monthly cash flow and annual returns of 30% - 45% for Covered Calls
• 8 - 12% monthly cash flow and annual returns of 80% - 110% for LEAPS.

...

With traditional Covered Call investing, our objectives are to generate cash income of 3 - 6% PER MONTH regardless of market direction. This level of monthly cash income leads to annual returns of 30% - 45% per year.

CSE allegedly calculates its projected returns in a false and misleading manner.

It is not based on an increase in the net value of the customer's portfolio, rather CSE calculates its projected returns in a fashion that excludes losses, both real and "paper" losses. Gains are reported but losses are ignored. Thus, CSE fraudulently and deceptively overstates the potential performance of its trading techniques and strategies.

CSE allegedly doesn't actually execute many of the trades its leaders claim.

...although CSE claims that its seminar leaders are actually making the trades that they recommend, in many cases they are merely reporting "virtual trades".

There was even a Platinum Package for $1,495 per month.

CSE offered a "Platinum Service" subscription that allowed customers to observe and examine Mr. Beauchamp's securities trades and positions and mirror them in real-time. This service cost $1,495.00 per month.

Mr. Beauchamp encouraged CSE customers to allocate 50% of their portfolio to one weekly credit spread position and maintained that "Credit Spreads" was a conservative strategy designed to conserve capital.

Although Mr. Beauchamp claimed to be making profits doing actual trading, and the Refviks relied on these representations before engaging in this trading strategy himself, Mr. Refvik, Jr. was subsequently informed by Gregg Guiol, Mr. Beauchamp's broker, that Mr. Beauchamp lost substantially his entire trading account pursuing the "Credit Spread" strategy.

...

While Mr. Beauchamp claimed to be engaging in the actual trades he was communicating to the Refviks, he was only engaging in "virtual" trading. Mr. Guiol also informed Mr. Refvik, Jr. that Mr. Beauchamp was only trading in penny stocks, rather than in the trades reported to Mr. Refvik, Sr.

...

Mr. Zalewski...claimed that all Platinum service accounts were being led by instructors who were trading real money: "The Platinum trades are executed in each Platinum instructors [sic] real money accounts. Period."

CSE, Hooper and Zalewski allegedly engaged in fraud.

CSE, Hooper, and Zalewski induced Mr. Refvik, Sr. and Mr. Refvik Jr. to enter into contractual relations by making the representations stated above, i.e., that the techniques taught by CSE, its instructors, Hooper, and Zalewski were effective investment strategies. CSE, Hooper, Zalewski, and the instructors themselves specifically represented that CSE representatives were using the same techniques in the marketplace to earn extraordinary returns, that CSE and its instructors had successful track records, and that CSE representatives were engaging in specific trades.

Those representations were false and constitute fraud. CSE, Hooper, and Zalewski made those representations with the intent to defraud. Mr. Refvik, Sr. and Mr. Refvik Jr. reasonably relied on those representations. Mr. Refvik, Sr. and Mr. Refvik Jr. experienced losses based on those representations.

Beyond the court filing, the CSE website states, "Our clients learn to consistently generate 3 - 6% per month cash income from a stock portfolio, regardless of market direction," while offering a free, online introductory workshop where "Joseph will demonstrate how to lock in a MONTHLY return of between 3% - 6% on a stock investment!"

A covered call is a legitimate investing technique, but consistently generating a 3-6% monthly return should set off alarm bells. Compounded over the course of a year, a 3-6% monthly investment return becomes a 43-101% annual return, which is truly "extraordinary" as quoted in the lawsuit.

Maybe Brittney Palmer's husband knows special secrets that have been hidden from the world's top investment managers? Maybe he's more talented than the best hedge fund managers yet voluntarily chooses to live in a $2.2 million West Hollywood home instead of a phat billionaire's mansion? Who knows what could be going on here?

For those who are curious, claims of consistent, high returns are one of the hallmark red flags of an investment seminar scam. For more information, see the Better Business Bureau's warning on investment seminar scams and the Financial Industry Regulatory Authority's alert on "Free Lunch" investment seminars.

Do any of these excerpts look familiar?

Promises high returns for low risk. Every investment comes with a level of risk. Typically the amount of risk increases in line with the potential return on the investment. If the seminar is trying to sell an investment scheme that claims a high return with little or no risk, beware, even if it comes with the promise of a money-back guarantee.

Requires a large up-front investment. Untrustworthy schemers might try to convince investors to pay a lot of money upfront so they can get out of town with a large haul, rather than wait for the funds to trickle in.

Seminars are designed to sell. Even when advertised as educational, many investment seminars are intended to sell something—financial products or the speaker's books or services. Keep in mind that, at times, sales pitches might include confusing comparisons of dissimilar products or misleading information about the safety, performance and returns of the products touted.

Sounds too good to be true. At the end of the day, if the offer sounds too good to be true, it probably is. Always listen to your instincts because the potential payoff is rarely worth the risk.

Here's some free, no-strings-attached investment advice: Stay away from the CSE website and if you see Brittney Palmer's husband, run away!

Paul is Bloody Elbow's analytics writer. Follow him at @MMAanalytics.