by T. GormanPosted on Posted in SECActions

The Commission’s focus on retail investors has resulted in a series of cases frequently called offering frauds. In those cases, as repeatedly noted in this space, investors typically get lured to part with what is often their savings and/or retirement capital by unscrupulous persons. Frequently the schemers bate investors by waving around high-profile and popular terms tied to large potential profits such as “crypto currency” or “blockchain.” The article yesterday focused on one such fraud involving marijuana. As noted in connection with that post, investors typically lose most or all of their investment.

Today is different. The Commission announced it will return over $63 million to investors tied to a real estate investment offering fraud. While regulators such as the Commission strive to secure funds that can be returned to investors, typically by the time they arrive much of the investor capital has been dissipated. Those involved may be sanctioned but the chance of recovering much investor capital for the retail investors is small at best.

SEC v. Morgan, Civil Action No. 19 Civ 661 (W.D. N.Y. Filed May 22, 2019) is the action in which the Commission’s hard work will pay off for investors. That case named as defendants Robert Morgan, a residential and commercial real estate developer, Morgan Mezzanine Fund Manager LLC, the manager of three Note Funds, and Morgan Acquisition LLC, a firm used to put properties Mr. Morgan planned to acquire under contract.

Over a five- -year period, beginning in 2013, Mr. Morgan raised over $110 million from investors through the sale of securities. About $80 million of that amount was from investors in four sets of Note Funds. Three of those funds were managed by Fund Manager and one by Morgan Acquisitions.

Investors in the Note Funds were told that their capital would be used to make unsecured subordinated loans to affiliated entities. Investors were also told that the target return for the Notes Funds managed by Fund Manager was 11 % while those managed by Morgan Acquisitions were supposedly guaranteed by Mr. Morgan personally. Over 200 investors and entities in 17 states invested. Contrary to the representations made, investor funds were used to facilitate Ponzi scheme type payments and to help pay-off prior loans. The complaint alleged violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) along with control person liability.

When the complaint was filed the Commission obtained emergency relief, freezing assets and appointing a receiver responsible for marshalling the assets for the benefit of investors. Morgan voluntarily liquidated certain assets to generate funds for collection by the receiver. Yesterday the Court approved the receiver’s plan to distribute over $63 million to harmed investors — a true success story for investors, the Commission and the staff. Well Done!

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by T. GormanPosted on Posted in SECActions

Despite an almost continuous stream of warnings to investors regarding due diligence on investment opportunities, week after week the Commission files another offering fraud action in which a swindle has occurred. This is particularly true when crypto, blockchain or cannabis is involved. All too frequently by the time the deceptive scheme is uncovered much if not all of the investor money is gone. Those who conducted the scheme may be held accountable, but little cash is left for investors. The Commission’s latest action is this area is typical of these cases. In this instance the lure of what many believe are quick, easy profits from marijuana was the hook. SEC v. Griffithe, Civil Action No. 8:20-cv-00124 (C.D. Cal. Filed Jan. 21, 2020).

The complaint named as defendants two individuals and three entities: Guy S. Griffithe, supposedly an executive in the motion picture industry who holds positions with defendants Renewable Technologies Solution, Inc. and Green Acres Pharms, LLC; and Robert Russell, an owner and executive with defendant SMRB LLC.

In November 2013 Defendant Russell and his wife formed SMRB in Washington State to engage in activities related to marijuana. Several months later the company filed an application with the Washington State Liquor and Cannabis Board for a license to grow and process marijuana for the recreational market. The license was issued in August 2015. Just prior to the issuance of the license, Defendants Griffithe and RTSI paid $1.5 million for a stake in SMRB. Under the terms of the transaction an interest n the license holder was conveyed along with the right to receive a percentage of the net income from SMRB. Yet un der the applicable state law, an equity interest in a licensee entity could not be conveyed without prior approval of the Washington State Board. Defendants never obtained the required pre-approval.

Nevertheless, over a two-year period, beginning the month the Board issued the license, Defendants offered and sold equity interests in SMRB to at least 25 investors in several states. Over $4.8 million was paid by those investors to Defendants.

In soliciting those investments Defendants misrepresented the nature of the interests as well as the use that would be made of the offering proceeds. Investors understood that their funds purchased them a stake in the firm, would be used to further its development and that they would be entitled to a share of the profits that would be generated from the work of others.

In fact, the securities sold to investors were fictitious. In return for their capital investors did not receive an equity interest in SMRB or any interest. Investors were not entitled to a share of the profits from the operations of that firm under its Washington state license. Investors actually did not receive any legal interest in the firm. Stated differently, they purchased nothing. Indeed, much of the investor money was used by Defendants for their own purposes. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24722 (Jan. 21, 2020).

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