One of the staples of SEC Enforcement in recent years has been offering fraud cases. Many of those actions focus on retail investors who often lose their savings and retirement funds. Others target specific groups who also lose their savings because they trusted the wrong person. That is the predicate for the Commission’s most recent case in this area. SEC v. Mizrahi, Civil Action No. 1902284 (C.D. Cal. Unsealed April 1, 2019).
The action centers on an offering fraud targeting the Israeli-American community. Defendant Motty Mizrahi and his firm, MBIG Company, targeted members of that community, raising at least $3 million from 15 clients and perhaps more from as many as 50 persons.
The sales pitch was straight forward and simple: You cannot lose. Defendant Mizrahi was supposedly a 20 year trading veteran who had been highly successful. Over the years his proprietary options/hedged trading strategy always made money. He supposedly was a skilled investment adviser, a licensed broker and a certified public accountant.
The trading program offered to investors was designed to ally any concerns about investing, particularly in view of Mr. Mizrahi’s extensive experience. Using his own strategy clients were:
Guaranteed returns: Investors could not lose. To the contrary they were “guaranteed” returns of 2-3% per month.
No losses: Clients would not have any losses.
Secure: All investments were secure.
Cash reserves: Only a fraction of investor money was ever invested. There were large cash reserves to back all client transactions.
Withdrawals: Clients could withdraw their funds at any time.
Fees: The fee for this guaranteed program was only 25% of the trading profits.
To take part in the program, clients need only wire their cash to the designated account for the program. Once there the funds would be invested, the profits would begin. Clients received statements depicting their investment and reflecting the profits.
In fact, there was no MBIG account, only Mr. Mizrahi’s personal trading account. In that account there was lots of trading, but no profits. The trading program, like Mr. Mizrahi’s claims about having 20 years of experience and being an adviser and a CPA – all false. The brokerage account showed huge loses and transfers of cash to Mr. Mizrahi’s personal banking account from which portions of the funds were dispersed to pay his personal expenses. The investor account statements were, like every other element of the program, false. In the end, what was not lost by Mr. Mizrahi through trading was simply misappropriated. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The case is pending. The U.S. Attorney’s office for the Central District of California filed a parallel criminal action. See Lit. Rel. No. 24435 (April 1, 2019).