Investing In A Piece Of A Facebook IPO Pool

In the post-Madoff era it has become a sad fact that virtually every week the Commission brings one or more investment fund fraud actions in which scam artists misappropriate the funds of unsuspecting and frequently unsophisticated investors. A recent tactic of these hucksters is to use the publicity from hot tech stocks like Facebook to induce investors to part with their hard earned money based on a promise that they could earn a return which exceeds the close to zero interest rates paid at the bank.

Gary Martel of Chelsea, Massachusetts is the latest defendant in a Commission investment fund fraud action along with his two controlled entities, Martel Financial Group and MFG Funding. SEC v. Martel, 12-CV-11095 (D. Mass. Filed June 20, 2012). In March 2012 as the press touted the then pending and wildly anticipated Facebook IPO, Mr. Martel offered investors interests in a Facebook investment IPO pool. Eager investors were told that purchasing an interest in his pool would permit them to "own a piece" of the Facebook IPO. The claim, according to the Commission's complaint, was false. The only pool the investor funds went to was Mr. Martel's bank account.

This was not Mr. Martel's first solicitation. Beginning as early as 2006 he was selling investors in several states a "90 day pass-through bond" or other purported fixed income or pooled investment products. The bonds had a variety of names. Their common element was that they "passed through" Mr. Martel since investors paid money to him and got money back from him, according to the pitch. Investors were assured that their money was safe. Indeed, one investor was lead to believe the funds were covered by SIPIC.

Investors received account statements from Mr. Martel showing their holdings, but no other documentation. The statements were on the Martel Financial Group letter head which had the slogan "When you don't want to 'go it' alone!" Periodically Mr. Martel provided some investors with small interest payments. The payments were necessary for the continuation of the scheme since many of the investors were retirees seeking a safe investment with a fixed income return. Eventually the payments stopped which left investors clamoring for an explanation only to hear "the check is in the mail." Overall the scheme raised at least $1.6 million.

The Commission's complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1) and (2). The defendant consented to the entry of a preliminary injunction and a freeze order.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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