Not a Lexis Advance subscriber? Try it out for free.
LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
One of the new staples of SEC enforcement is offering
fraud cases. When coupled with Ponzi scheme or investment fund fraud actions,
they constitute a significant portion of the day to day work load of the
reorganized Enforcement Division.
Two recent examples of these cases are SEC v. Detroit
Memorial Partners, LLC, Civil Action No. 1:13-cv-01817 (N. D. Ga. Filed May
30, 2013) and In the matter of Scuderi Group, Inc., Adm. Proc. File No.
3-15344 (Filed May 30, 2013). The former centers on a scheme implemented by
defendant Mark Morrow and his controlled entity, Detroit Memorial. It involved
selling interests in Detroit Memorial which supposedly operated cemeteries. The
latter focuses on a years long unregistered note offering by the Massachusetts
based family run company and its President and CFO, Salvatore Scuderi.
Mr. Morrow and his company are alleged to have raised
just under $25 million from investors who purchased either notes or what were
called equity interest in Detroit Memorial Partners. The entity had a 49% interest
in an entity which owns and operates 28 cemetery properties in Michigan.
In 2007 Mr. Morrow decided to bid for 28 cemeteries in
Michigan that were in receivership. To implement the plan he formed Detroit
Memorial. Initially Mr. Morrow, who had been in the securities industry since
1987 and was associated with a broker dealer, raised investment funds from a
wealthy business man whose wife was a client of his long time business
associate Angelo Alleca and his firm, Summit Wealth Management, Inc. Mr. Allecca
and his firm are defendants in another Commission enforcement action, SEC v.
Alleca, Civil Action No. 1:12-cv-0361 (N.D. GA.). That case alleges that
the defendants operated a Ponzi scheme.
From October to December 2007 Mr. Alleca and others at
Summit sold about $9.5 million of Detroit Memorial promissory notes. Virtually
all of the purchasers were clients of Summit. The notes were unregistered and
by early January 2009 Mr. Allecia lost much of the proceeds in risky
investments, according to the complaint. To make up for the losses, he sold
more Detroit Memorial notes in 2008 and 2009. Those notes were also
unregistered. In addition, the offering materials contained a series of
misrepresentations including claims that: the notes would be secured by real
property; that the company is in the business of owing and managing cemeteries;
and that it recently purchased 28 cemeteries.
In 2012 another offering of Detroit Memorial notes was
made. This time 18 investors purchased about $1.3 million in notes. Again the
notes were unregistered. Again the offering materials contained
Finally, Detroit Memorial raised an additional $4.5
million from four investors in return for a combined 61% equity interest in the
entity. Mr. Morrow told some investors that the company was debt free - a
misrepresentation since it had substantial debt from the note offerings. The
complaint alleges violations of Securities Act Sections 5(a) and 5(c), each
subsection of Section 17(a) and Exchange Act Section 10(b). The case is in
Scuderi Group is
based on a series of private placements made over a six year period. The Order
claims the offerings were effectively one continuous offering.
Scuderi Group has been in the business of developing a
new internal combustion engine design. The firm funded its operations from
individual investors and investment clubs, raising about $80 million in six
offerings which sold what were called "preferred units" to about 415 investors.
While Respondents claimed that the offerings were exempt from registration, in
fact they did not qualify under Section 4(2) or Regulation D Rule 504 because
they exceeded the investor limits, failed to provide investors with audited
financial statements and effectively engaged in a plan to evade the
The offering materials furnished to potential investors
also misstated the use which would be made of the funds. The placement
memoranda told investors that the funds would be used for general corporate
purposes and working capital. In fact portions of the investor money went to
the family for non-business purposes. For example, large bonus payments were
made to family employees to cover personal expenses; payments were made to
family members who provided no services; undocumented loans to family members;
family life insurance policies were funded; and family estate planning services
were purchased with offering funds. Overall about $3.2 million, representing
just over 4% of the offering proceeds, funded these items.
To resolve the proceeding, Respondents agreed to
implement undertakings which require them to inform investors of this
proceeding and document the loans. They also consented to the entry of a cease
and desist order based on Securities Act Sections 5(a), 5(c) and 17(a)(2). Mr.
Scuderi agreed to pay a civil money penalty of $100,000.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
email@example.com). Webcast nationally by the ABA and available in other
Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
more information about LexisNexis products and solutions connect with us
through our corporate site.