The Commission prevailed and secured the entry of a
permanent asset freeze as well as a permanent injunction prohibiting future
violations of Securities Act Section 17(a) and Exchange Act Section 10(b) in an
action centered on a fraudulent note offering. SEC v. Evolution Capital
Advisors, Civil Action No. 4:11-cv-02945 (S.D. Tx. Filed Aug 10, 2011).
The complaint named as defendants Damian Valdez who
controlled defendant Evolution Capital Advisers, LLC and its subsidiary,
defendant Evolution Investment Group I, LLC or EIGI. Beginning in early 2008
and continuing through mid- 2010 the defendants raised about $10.1 million from
over 80 investors through two fraudulent offerings of redeemable secured notes,
according to the complaint. One series was issued by Evolution Capital. It
promised a 9% return for a three year investment or 10% for a five year
investment. The second series was issued by EIGI. It promised a 7% return for a
three year investment or 7.5% for five year investments.
The offerings were made as private placements. The
private placement memoranda represented that the notes would be backed by the
full faith and credit of the U.S. Government. In fact defendants purchased
Small Business Administration interest only strips. Those entitled holders to a
portion of the interest paid on an SBA loan or group of loans. If the borrower
defaults on or prepays the loans the interest payments stop and the strip has
no value. Although the U.S. government guarantees repayment of the loan
principal, only a small portion of the interest is guaranteed from default.
These facts and the related risks were not disclosed. In fact about 19% of the
underlying loans defaulted. The claim in the PPM that "substantial leverage"
would be used to maximize the returns was also false since efforts to secure
financing failed and none was obtained.
Defendants also paid themselves about $2.4 million for
management fees and expenses. Many of those expenses appear to be unrelated to
the business, according to the SEC. In addition, defendants took about $2.7
million from one group of investors to pay off others in Ponzi like payments.
This left the two entity defendants in dire financial condition with about $1.1
million less than was owed to note holders. The complaint alleged violations of
Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act
Sections 206(1) & (2).
Following a contested evidentiary hearing the Court found
Issues concerning disgorgement, prejudgment interest and
penalties are pending before the Court.
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