Hotel Operator Pleads Guilty in $500 Million Ponzi Scheme

A hotel operator who prosecutors said defrauded more than 7,000 investors in a $500 million Ponzi scheme was sentenced in Chicago to five years in prison after pleading guilty to securities fraud.

Michael E. Kelly, 63, who is critically ill with colon cancer, pleaded to a single charge yesterday before U.S. District Judge Ronald Guzman, who imposed the sentence today. Kelly has been in federal custody since his arrest in 2006.

Kelly’s health was “a huge factor in arriving at a plea agreement between the parties,” his lawyer, Jeffrey B. Steinback, said in a telephone interview.

Kelly still faces 13 counts of mail, wire and securities fraud, acting U.S. Attorney Gary Shapiro said in a statement.

“Through various companies and a network of salesmen, Kelly fraudulently obtained approximately $500 million from the sale of promissory notes and interests in universal leases, which had a 25-year term and purported to relate to particular rooms for particular time periods in particular Mexican hotels operated by Kelly,” Shapiro said.

Investors were given the option of using the room, renting it out or turning it over to an allegedly independent management firm, World Phantasy Tours Inc., which promised an annual return of as much as 11 percent regardless of whether the room was rented, prosecutors said. Most investors selected that option, according prosecutors said.

Duped Investors

“Kelly and others concealed from investors that the ability to make promised payments depended on continually raising funds from new investors and using those funds to pay earlier investors,” according to the U.S.

Prosecutors said Kelly operated his schemes between 1998 and 2004.

Steinbeck said he read in court a statement of remorse from his client, who plans to liquidate all of his assets to repay those he defrauded. On Nov. 20, Guzman ordered the first distribution of $50 million to the more than 7,000 victims.

Today, he entered an agreed order requiring Kelly to pay $342,143,221 in restitution to people whose money he used in part for his own benefit, including the purchase of hotels, homes, boats, cars, an airplane and a night club.

Steinback said Kelly’s cancer has metastasized while his client also has advanced coronary artery disease and needs a new heart valve. Kelly relies on a wheelchair to get around and can only walk a few steps at a time, his lawyer said.

Kelly was freed for 120 days on a $10 million bond so he can get medical treatment, Steinback said.

At the end of the period, he must return to custody to face his remaining charges, according to Steinback and Shapiro.

The case is U.S. v. Kelly, 12-cr-875, in the U.S. District Court for the Northern District of Illinois (Chicago).

To contact the reporter on this story: Andrew Harris in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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