Offering fraud and Ponzi scheme cases have, in recent years, become a staple of the SEC enforcement division. Some of these cases are simple shams where the promoters lure unsuspecting investors with tales of quick, easy and safe returns. Others are more complex, involving ventures which actually have an operating businesses but nevertheless defraud investors and may use their funds to cover-up the short comings of the business by paying promised investor returns with money obtained from other investors. In the end, typically, the investors lose and, while the Commission does its best to preserve and recover the funds, much of the cash is gone.
This week the Commission announced the filing of two offering fraud cases. One is SEC v. Pedras, Civil Action No. CV 13-07932 (C. D. Cal. Filed under seal on Oct. 28, 2013). The action names as defendant Christopher Pedras, his partner Sylvester Gray, lead sales agent Alicia Bryan and several companies controlled by the individual defendants. The complaint details two schemes. In the first investors were solicited to acquire interests in the Maxum Gold Small Cap Trading Program. Maxum, it was claimed acted as an intermediary between banks that were not permitted to trade directly with each other. Investors were assured that they would be paid between 4% and 8% monthly and that the investment was safe. Minimum investment was between $5,000 and $10,000 for one program. There were variations of the program that required a larger investment. About 50 investors participated in the program. In fact it was fictitious according to the Commission.
When the promised returns could not be paid, the individual defendants moved to scheme two – the FMP Renal Program. Investors were told they could acquire shares of a New Zealand company which expected to be publicly traded. It operated kidney dialysis clinics in New Zealand. Investors from the first scheme were told they could convert their shares and become an investor in scheme two, netting an 80% increase in value. At least eight U.S. investors participated. This deal was also a fraud, according to the SEC.
Overall about $2.4 million in investor money was used to make Ponzi type payments to investors while another $2 million was stolen by Mr. Pedras. About $1.2 million was used to pay sales commissions. The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). An emergency asset freeze was obtained by the Commission. The case is pending. See Lit. Rel. No. 22862 (Nov. 5, 2013).
The other is SEC v. Wang, Civil Action No. CV 13-07553 (C.D. Calif. Filed under seal Oct. 15, 2013). This is an action against Yin Nan Wang, Wendy Ko, Velocity Investment Group, Inc. which is controlled by the two individual defendants, a series of entities controlled by Investment Group and Rockwell Realty Management, Inc. Beginning as early as 2005 the defendants raised about $9.8 million from 2,000 investors, selling promissory notes issued through Velocity. The company was supposed to be in the real estate business. While apparently it did own real estate, the complaint alleges that its business model was not sustainable because it assumed that the funds raised would be available for operations. In fact large portions were used to pay fees and other items. As a result defendants sought to conceal the true financial condition of the company. In part they did this by making what they admitted were Ponzi type payments to earlier investors from funds obtained from more recent investors. In part they sought to conceal the financial condition of the company by entering into a series of what appear to be meaningless transactions with Rockwell. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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