A Unique SEC Offering Fraud Action
In recent years the SEC has brought a series of investment and offering fraud actions. Typically those actions center on schemes which promise to-good-to-be-true returns in which investors lose substantial sums. In what may be a unique wrinkle, the Commission’s latest case in this series involves two securities professions using a firm which was, but apparently should not have been, a registered investment adviser, to market its fraudulent investment scheme first to a trust company later accused of fraud by the SEC and then to a firm operated by a convicted, enjoined and disbarred attorney operating under an assumed identity and an investment professional. SEC v. Paul, Civil Action No. 2:16-cv-01320 (E.D. Pa Filed April 1, 2016).
The defendants in the action are: Joseph Paul, a former registered representative; John Ellis, also a former registered representative; James Quay, an attorney convicted of tax fraud, disbarred and later enjoined in a Commission fraud action and ordered to pay over $2 million; and Donald Ellison, also a former registered representative.
Messrs. Paul and Ellis are the co-founders of Paul-Ellis Investment Associates LLC, registered as an investment adviser with the Commission in 2009 despite its apparent ineligibility. In 2011 the Commission cancelled the registration. Aptus Planning LLC was operated by Messrs. Quay and Ellison as an estate planning service.
Over a two year period beginning in 2010 Messrs. Clark and Ellis marketed themselves as experienced money managers with a highly successful track record in ETFs through their advisory firm, PEIA. Using a variety of offering materials the two men claimed to have investment strategies that generated returns from over 8% to as high as 56%. Those strategies, investors were told, were implemented through PEIA which supposedly had over $150 million in AUM.
In early 2011 Messrs. Clark and Ellison marketed their expertise and that of their firm to Summit Trust Company, a Las Vegas based, state chartered trust company. Summit marketed trust administration, estate planning and custodial services. The trust company began investing in PEIA. Eventually those investments totaled over $2.6 million. When the funds were withdrawn later in 2011 Summit had losses of about 28%, in addition to the almost $9,000 in advisory fees paid. Two years later the Commission filed a fraud action against Summit and its principles. Eventually a default judgment was entered.
Messrs. Paul and Ellis also began marketing PEIA to Messrs. Quay and Ellison and Aptus in 2011. PEIA marketing materials were furnished to Aptus and its principals regarding a claimed investment program. Without doing any due diligence on the fraudulent materials, Messrs. Quay and Ellison recommended the program to their clients using mass mailings and dinner seminars. Mr. Quay used an assumed identity to conceal his background. Fourteen investors put almost $1.3 million in the program. Portions of the funds were misappropriated by Messrs. Paul and Ellis. Other portions were lost as a result of unauthorized trading.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2), 206(4) and 207. The case is pending. See Lit. Rel. No. 23510 (April 4, 2016).