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Thomas O. Gorman,
Dorsey and Whitney LLP
1801 K St. N.W.
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Gorman.tom@Dorsey.com

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    The SEC Continues to Focus on Investment Fraud Schemes

    An analysis of the SEC’s case load demonstrates that actions involving offering and investment fund fraud have declined in the last two years compared to the immediate aftermath of the Madoff debacle (here). Nevertheless, these cases have become a staple of the Commission’s enforcement program.

    Two new investment fund fraud cases were filed this week. The first is an affinity fraud action targeting the Lebanese and Druze communities in a Texas local. SEC v. Hamdan, Case No. 4:13:00215 (S.D. Tx. Filed Jan. 29, 2013). Firas Hamdan is, according to the complaint, well known in the Lebanese and Druze communities in the Houston area. He served as the treasurer of the Houston branch of the American Druze Society, a non-profit cultural organization to which many area members of the Druze religion belong. Mr. Hamdan also developed a reputation as a successful day trader. That, coupled with his standing in the community, became the predicate for his scheme.

    Over the last five years Firas Hamdan is alleged to have raised at least $6.1 million from 37 investors based on his skill as a day trader. Targeting members of his community, he told investors that their funds would be pooled with his and traded using his proprietary system which had an established track record. Returns of 30% or more could be expected. Safety was assured through a reserve account in which much of the investor funds were held and an insurance policy.

    To demonstrate the success of the program, Mr. Hamdan shared his brokerage records with prospective clients. Those records, replicated in the complaint, list multi-million dollar balances.

    The claimed success was an illusion and the records were false, the SEC states in its complaint. In fact Mr. Hamden had huge trading losses. He fabricated the trading records. There is no evidence of a reserve account. The life insurance policy was never issued.

    Lack of success did not deter Mr. Hamden however. In the wake of his losses Mr. Hamden continued to solicit money from new investors even as he began to default on obligations to existing clients in the Fall of 2011. As that occurred Mr. Hamden substituted a litany of excuses for the promised investment returns. At the same time new funds continued to flow in.

    The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.

    In a second investment fund fraud action brought this week the Commission named as defendants Fred Clark, Jr., David Schwarz, Cristal Coleman, Barry Graham and Ricky Stokes. SEC v. Graham, Case No. 4:13-cv-1001 (S.D. Fla. Filed Jan. 30, 2013). Each is an officer of Clay Clubs Reports and Marinas, an unincorporated purported real estate development company comprised of about 100 entities controlled by Messrs. Clark, Coleman and Schwarz.

    In the four years prior to its collapse in July 2008, the defendants and Cay Clubs raised about $300 million from 1,400 investors through the offer and sale of units in what was claimed to be a five star resort with 17 locations around the country. Investors were told that their money would be used to develop the resort properties. Since those properties were undervalued they would receive “instant equity.” Potential investors were assured that Clay Club properties historically appreciated by as much as 300%.

    Immediate profits were also assured through a leaseback program, executed at the time of purchase. Under this program the acquired real estate would be leased, yielding the buyers a 15% return in addition to their “instant equity.”

    Some investors received the lease payments. Yet the defendants failed to develop the properties. Rather, they “flipped” the properties among themselves at increasing prices, creating the illusion of success. At the same time they misappropriated more than $33 million either through exorbitant salaries and commissions or to fund personal ventures. At one point new investors funds were used to make payments to prior investors. Eventually the scheme collapsed.

    The complaint alleges violations of Securities Act Sections 17(a)(1) and (2) and Exchange Act Sections 10(b) and 15(a)(1). The case is in litigation.

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