A Ponzi Scheme Where One Investor Directly Paid Another
In the typical Ponzi scheme unscrupulous individuals induce investors to part with their cash based on a series of misrepresentations about the proposed investment. The investor money is then in part misappropriated and in part used to repay other investors in an effort to perpetuate the scheme. In the Commission’s latest Ponzi scheme case however, the alleged fraudster induced investors to repay other investors directly. SEC v. McCollum, Civil Action No. 7:16-cv-00282 (W.D. Tex. Filed July 27, 2016).
Defendant Jeffery McCollum formed JNL Oilfield Instruments, LLC to provide services to oilfield companies in West Texas. The business struggled, leaving him short of cash. Changing his business model, Mr. McCollum focused on purchasing used oilfield services equipment. The idea was to make a quick resale for a profit. He lacked the capital to implement the business.
Mr. McCollum began soliciting investors to raise the necessary capital. He was more successful at soliciting investors than selling services. From 2009 through mid 2015 he raised over $12 million from about 30 investors. Investors were told that he had specialized knowledge of, and contacts in, the thriving used equipment market in which he was starting a business. He would then identify a specific piece of equipment for sale, telling the investor that if he or she furnished the necessary funds a guaranteed high rate of return could be made – about 13%. The claim was false.
In fact the parts were typically not purchased. Rather, Mr. McCollum just took much of the money. In some instances he directed the investors to make their investment checks payable to a party who supposedly was selling the part. In fact the payee was an earlier investor. Other investors were furnished with false documents about their supposed investment. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
The defendants resolved the action, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay disgorgement and prejudgment interest in amounts to be determined later and a penalty of $160,000. See Lit Rel. No. 23603 (July 27, 2016).