SEC Says Oil Co. Targeted EB-5 Investors In $68M Scheme - Law360

Law360, Los Angeles (July 6, 2015, 10:24 PM ET) -- "The U.S. Securities and Exchange Commission on Monday accused a Bay Area oil and gas company and its CEO of running a $68 million "Ponzi-like" scheme that targeted the Chinese-American community and Chinese nationals hoping to get a green card by making investments in the U.S.

Luca International Group, CEO Bingqing Yang and other company officials knew the enterprise was not profitable and was “sinking under a mountain of debt,” the SEC said in a statement Monday.

Yet Yang still “made presentations to investors portraying a successful oil and gas operation with millions of barrels of oil reserves and billions of cubic feet in gas reserves” and promised investment returns ranging from 20 to 30 percent annually, the SEC said in a complaint it filed in California federal court. 

To keep the scheme from collapsing, Yang allegedly commingled investor funds and used money from new investors to make “sham” profit payments to earlier investors, the SEC said.

Yang also used the money for personal uses, including a $2.5 million home in an exclusive gated community in the Bay Area community of Fremont, pool and gardening services, personal taxes, a family vacation to Hawaii, music lessons for her children, and to host a $510,000 golf junket for potential investors, according to the SEC complaint.

“Yang falsely claimed that Luca International was a profitable oil and gas drilling operation when it was really a Ponzi-like scheme preying on … investors who lost millions of dollars while Yang lined her pockets,” Jina L. Choi, director of the SEC’s San Francisco regional office, said in a statement. 

The defendants illegally raised the $68 million from September 2007 to March 2014 by selling unregistered securities, according to the SEC complaint. During most of that time, Luca International provided investors with monthly reports purporting to detail the oil and gas production for each operating well and the company’s gross revenues, along with a payment representing a share of the claimed profits.

“The monthly reports were materially false and misleading because the reports omitted any operating expenses incurred,” the SEC complaint states. “In reality the costs of running the oil and gas drilling operations far exceeded the proceeds.”

Investors were targeted through advertisements in Chinese-language media, according to the SEC filing. 

Yang and Luca International also raised about $8 million from Chinese citizens who sought U.S. residence through the country’s EB-5 program, which provides a way for foreign investors to obtain a green card by making investments in certain commercial enterprises. The investors were told they were making a secure loan that would support jobs and development costs for eight oil and gas drilling projects, but “contrary to the rosy representations Yang made to investors, had no realistic possibility of ever repaying the loan,” the SEC says in its complaint.

Others accused in the SEC complaint include Luca International’s former vice president of business development Lei (Lily) Lei, who allegedly sold securities to investors and helped Yang divert investor funds.  An associate of Yang, Yong (Michael) Chen also allegedly raised investor funds for Yang through his Santa Clara company Entholpy EMC, which did business under the name Mastermind College Funding Group, and provided financial advice for clients seeking to save money for college. 

Lei and Chen allegedly earned hundreds of thousands of dollars in commissions for recruiting investors to Luca, according to the SEC.

Luca International’s former CFO Anthony Pollace will pay a $25,500 penalty to settle charges that he played a small role in the alleged fraud, according to the SEC.

Another Yang associate, Hiroshi Fujigami, and his company Wisteria Global, agreed to settle charges that they acted as brokers to illegally sell securities of two Luca entities, according to the SEC.  Under the deal, Fujigami and Wisteria are required to disgorge allegedly ill-gotten gains of more than $1.1 million and Fujigami agreed to be barred from the securities industry and from participating in any penny stock offering.

The SEC is represented by Alice Liu Jensen, Sheila O’Callaghan, and John S. Yun.

Representatives for the defendants could not immediately be reached for comment on Monday and requests for comment at Luca’s Fremont headquarters were not returned.

The case is Securities and Exchange Commission v. Luca International Group LLC et al., case number 3:15-cv-03101, in the U.S. District Court for the Northern District of California.