SEC - Investment Fund Fraud

In the last month, the SEC's Enforcement division had substantial activity on seven civil actions and one criminal action related to investment fund fraud.  Fraudsters are taking advantage of renewed market optimism (the S&P 500 briefly hit an all time high of 1,900 this week before pulling back) in order to attract investors into their scams, and many of them may not be discovered until a market correction reveals them later on.  Bates Group will be producing a tearsheet with more information on investment fund fraud and how investors can equip themselves to avoid these schemes and/or recover losses later on (UPDATE - this can be found here). 

We reached out to our affiliate David Zweighaft, a fraud subject matter expert, for his thoughts on all the SEC activity and he provided the following comments:

The eight cases listed below all represent 'get-rich-quick' schemes that their sponsors foisted upon unsuspecting investors.  While reading these accounts, I received an unsolicited phone call from an investment broker offering me above-market returns investing in a 'special situation' involving rare stamps.  This served to drive home the point that as investors, we need to maintain our vigilance when speaking with callers representing themselves as 'financial or investment professionals,' and when our skepticism warrants it, that we contact the state Attorney General’s office or the FBI and let our concerns be known.  These schemes tend to collapse under their own weight, because either i) the market turns and investors try to pull their (now nonexistent) funds out of the schemes, ii) the influx of new investors’ cash is insufficient to support the prior investors' demands, or iii) a regulatory investigation is instigated because of a tip or complaint by an investor.

Be alert for these red flags that are prime indicators of investment schemes:

• Investment returns that are consistently above the overall market, especially throughout both up and down cycles
• Investment strategies that don’t make sense, or that do not fully disclose the relationship of the inputs to the analytics that drive the strategy
• Investment offers that are based on an urgency to invest quickly before an opportunity disappears

Below are brief summaries of the activity on SEC matters just in the last thirty days.

SEC v. Coughlin, Civil Action No. 1:14-cv-00562

"On April 11, 2014, the Securities and Exchange Commission filed an action charging Indianapolis-based Timothy J. Coughlin, 63, and two entities that did business as "Oxford International Credit Union" or "Oxford International Cooperative Union" with conducting an Internet offering fraud in which investors lost millions of dollars by investing funds in a fictitious credit union. The complaint alleges that between June 2007 and December 2009, Coughlin and Oxford International Credit Union collected deposits from more than 5,000 investors exceeding $12.8 million dollars. Approximately 3,300 of the investors were U.S. residents, with victims residing in all 50 states and the District of Columbia. The SEC's complaint alleges that Coughlin misappropriated investor money to pay personal expenses, fund unrelated business expenses, and make distributions to other investors in a classic Ponzi-scheme fashion."

SEC v. K2 Unlimited, Inc., Civil Action No. 1:11-cv-11649 (final judgment)

"...the Commission alleged that beginning in 2007, Rice, with other defendants, purported to offer direct investments in fraudulent trading programs involving "bank guarantees," promising sky-high returns with guarantees against loss. In fact, the Commission alleges that the bank guarantees were fictional and the trading programs non-existent, and that Rice and other defendants together defrauded investors of more than $1.8 million."

In the Matter of Diego F. Hernandez, Adm. Proc. File No. 3-15518 (administrative)

"Between July 2011 and approximately April 2013, Hernandez, through Wealth Management, Wealth Financial, DFHR, and HD Mile High, willfully violated the antifraud provisions of the Securities Act and the Exchange Act by raising and misappropriating approximately $921,000 from 13 Colorado investors through a fraudulent offering of securities. Hernandez carried out his fraudulent offering by meeting with each investor and telling them that he, through his entities, would invest their money in corporate bonds or other “safe” investments that would pay a guaranteed, above-market annual interest rate. In reality, Hernandez, through Wealth Management, Wealth Financial, DFHR, and HD Mile High, willfully misappropriated investor funds for (1) personal expenses, (2) business expenses, and (3) to repay other investors."

SEC v. Bekkedam, Civil Action No. 14-cv-2488

“...from April through October 2009, Bekkedam fraudulently induced, or assisted in inducing, his advisory clients and others to invest approximately $100 million in a fund that purportedly purchased lawsuit settlements from now-convicted Ponzi-schemer Scott Rothstein. The settlements Rothstein sold were not real and the supposed plaintiffs and defendants did not exist. Rothstein simply used the funds in classic Ponzi scheme fashion to make payments due other investors and support his lavish lifestyle."

In the Matter of Stanley Jonathan Fortenberry, Adm. Proc. File No. 3-15858

"Respondent Fortenberry is a recidivist securities laws violator. Notwithstanding cease-and-desist orders issued by the Pennsylvania Securities Commission and the Texas State Securities Board, starting in 2010, Fortenberry solicited investors for his Premier Investment Fund L.P. (“Premier”), which he marketed as a vehicle to invest in various country music-themed social media and entertainment ventures."

"Unbeknownst to his investors and those he solicited, Fortenberry withdrew approximately half of the money entrusted to him. Despite the fact that Premier had no profits—indeed, no income whatsoever—Fortenberry wrote checks to himself for tens of thousands of dollars in “management fees,” and he also spent the fund’s assets on his living expenses, mortgage, utilities, credit card bills, personal travel, and purchases at various gas stations and liquor stores."

SEC v. American Pension Services, Inc., Civil Action No. 2:14-cv-00309 

"... American Pension Services, Inc. (APS), and the firm's founder, president and chief executive officer, Curtis L. DeYoung, both of Riverton, Utah. According to the SEC's complaint, DeYoung squandered more than $22 million of investor funds on high-risk investments and hid the losses by issuing inflated account statements, allowing him to continue collecting fees and further victimizing his customers."

SEC v. Persaud, Civil Action No. 12-cv-932 (final judgement)

"From no later than July 2007 until at least January 2011, Persaud, directly and through his company, While Elephant Trading Company LLC, operated an offering fraud that, by November 7, 2007, devolved into a Ponzi scheme. All told, Persaud raised more than $1 million from investors through this fraudulent scheme."

"Persaud touted his experience in the financial services industry as a certified financial planner and gave investors his personal guarantee their principal contributions were secure. He made numerous misrepresentations and omissions to investors, foremost among them failing to disclose his trading strategies were based on lunar cycles and the gravitational pull between Earth and the moon."

U.S. v. Greenwood, Case No. 1:09-mj-00502 (criminal)

"The investment manager and principal of WG Trading Company, LP and WG Trading Investors, Stephen Walsh, pleaded guilty to two counts of securities fraud. In entering the plea Mr. Walsh agreed to forfeit $50,743,779 which represents the amount he misappropriated and by which he personally profited from the fraud."

"Over a three year period beginning in early 2009 Mr. Walsh and his confederate, Paul Greenwood, are alleged to have raised about $7.6 billion from investors. Those investors were told that their funds would be placed in a “veritable money-making machine.” That machine was supposedly an investment program called “equity index arbitrage.” The program was represented to be a conservative trading strategy which had out performed [sic] the S&P 500 index for over 10 years."

The SEC and CFTC have pending, parallel enforcement actions. SEC v. WG Trading, Investors, L.P., Civil Action No. 1:09-cv-01750 (S.D.N.Y. Filed Feb. 25, 2009); CFTC v. Walsh, Civil Action No. 1:09-cv-01749 (S.D.N.Y. Filed Feb. 25, 2009).