Court Dismisses SEC's $300 Million Ponzi Case on Timeliness Grounds

Court Dismisses SEC's $300 Million Ponzi Case on Timeliness Grounds

 A Florida federal judge ordered the dismissal of a lawsuit brought by the Securities and Exchange Commission accusing five former real estate executives of masterminding a $300 million Ponzi scheme on the basis that regulators waited too long to file the case. U.S. District Judge James King granted a motion to dismiss brought by executives of the now-defunct Cay Clubs, agreeing that the SEC "failed to meet its serious duty to timely bring this enforcement action."  The Commission filed the lawsuit in January 2013, alleging that Cay Clubs ultimately raised more than $300 million from nearly 1,400 investors worldwide.

According to the Commission's lawsuit, defendants Fred Davis Clark, David Schwarz, Cristal Coleman, Barry Graham and Ricky Lynn Stokes touted the above-average returns available by purchasing units at Cay Club resort locations, including a guaranteed 15% return and a future income stream from the rental of those units. However, rather than use investor funds as promised, the Commission accused defendants of using investor deposits to pay returns to existing investors as well as diverting more than $30 million for the payment of salaries and bonuses and even the funding of a liquor distillery. The scheme later collapsed and ceased operations.

In his ruling, King faulted the Commission for failing to timely bring claims against defendants pursuant to 28 U.S.C. 2462 ("Section 2462"). Section 2462 requires that an action for enforcement of any civil fine or forfeiture must be brought within five years from the date the claim first accrued. Here, because the Commission filed its action on January 30, 2013, the last act committed by each defendant had to have occurred on January 30, 2008 or later. However, Judge King found that "rather than expeditiously, or even promptly, bringing an enforcement action against the alleged fraudsters and peddlers of unregistered securities, the SEC waited."  

Despite beginning an investigation in late 2007, and alleging in its complaint that Cay Clubs' business activities continued until at least July 2008, Judge King found that the Commission had failed to point to any evidence that any act of offering or sale of alleged securities occurred after January 30, 2008. Indeed, at least two of the defendants testified that their relationship with Cay Clubs ended in October 2007.

While orders of dismissal are typically done "without prejudice," meaning that the plaintiff is given another chance to file an amended complaint seeking to rectify the deficiencies, Judge King entered his order "with prejudice" that will effectively end the case. The Commission has not yet issued any comment, although it is likely an appeal will follow.

Final Order of Dismissal

 For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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