An SEC Offering Fraud, An Attorney and NFL and NBA Players

The SEC filed another offering fraud action which in part targeted current and former professional athletes. Investors in the scheme included NFL and NBA players. The attorney defendant claims to have tried to purchase a National Football League franchise at one point. SEC v. Watkins, Civil Action No. 16-cv-03298 (N.D. Ga. Filed Sept. 1, 2016).

The action centers on the sale of interests in defendant Masada Resource Group, LLC in two phases. Masada purports to have patents for technology to convert organic waste to fuel. Donald Watkins, an attorney, controls Masada. He also controls defendant Watkins Pencor, LLC.

Mr. Watkins became the Chairman and CEO of Masada in late 2005. At that time he focused the business on international waste management. By 2014 he claimed the firm had a market reach in 47 countries.

In 2009 attorney Watkins sought to purchase the majority interest in an NFL franchise, a claim which became an important marketing tool. In the same year he also suffered from significant debt issues. For example, he owed hundreds of thousands of dollars to financial institutions; about $100,000 per year in alimony; his law firm had substantial obligations stemming from Mr. Watkins’ tax liabilities; it also owed hundreds of thousands of dollars to attorneys defending a lawsuit arising from his ownership in an airline that was in the cargo business; and in 2011 he defaulted on about $2.75 million in debt owned in connection with his partial ownership of a bank.

Mr. Watkins’ debt problems are the backdrop for the offerings of interests in Masada. In Part I of the offering, beginning in 2009, Mr. Watkins sought to raise money for Masada by offering “economic interests” and promissory notes. The economic interests were based on a two page Purchase Agreement which entitled the holder to a fixed percentage of the cash distributions from Watkins Pencor, Masada and its affiliates. The exact amount varied. While the Agreement did not specify the use to be made of the offering proceeds, Mr. Watkins told investors their money would be used solely for Masada and its affiliates. The notes provided investors with a fixed percentage of the economic interests and stated that the investment would be used for Masada.

An NFL football player and his wife invested $1 million in the economic interests. A second professional football player invested $500,000. A former NBA player invested $1 million in the promissory notes. Contrary to the representations made to the investors, their investment funds were diverted to the personal debts of Mr. Watkins.

In Part II of the offerings, beginning in April 2011, investors were told that giant International Waste Management, Inc. was conducting due diligence on Masada and that a deal was eminent. The pitch was used to induce the former NBA player, for example, to renew his $1 million investment twice.

The investment claims about Waste Management were false. To the extent International Waste Management ever had an interest, according to the complaint, it was limited to one 45 minute meeting. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23634 (Sept. 1, 2016).

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