AN USUAL INVESTMENT FUND FRAUD COMPLAINT
The Commission filed an unusual investment fund fraud action in SEC v. Chiaese, Civil Action No. 10-cv-5110 (D.N.J. Filed Oct. 5, 2010). In what is now the new staple of SEC enforcement, the typical case alleges that the individual defendants and their related entities raised funds from a number of individuals. False claims of easy, quick, large and safe profits are made. Account statements are furnished detailing the success of the investment scheme and the judgment of the investor. It turns out much of the money is gone, the statements were false and the promoters are living large. The SEC and sometimes DOJ wind up the operation, salvaging for investors what they can.
The complaint in Chiaese has some of the usual allegations. It differs from most, however, because it is built on a series of stories from individual investors who furnished their money to the defendants. Absent are the usual “get-rich-quick” misrepresentations. In their place were claims that funds would be invested in accord with investor directives. Investors were, however, furnished with the usual statements verifying their increasing wealth.
The defendants in this scam are Carlo G. Chiaese, a registered representative associated with a broker dealer. Defendant Micol Chiaese is Carlo’s wife. C.G.C. Advisors, LLC is an entity controlled by the individual defendants. The complaint chronicles the investment efforts of six clients identified with various abbreviations. For example:
• One investor client is a Union Pension Fund. According to the complaint, in November 2008 the Union Fund became an advisory client of Mr. Chiaese. In accord with its instructions, he agreed to invest the money conservatively in bonds and mutual funds. The Union Fund wired $1,715,241.30 to the CGC Bank Account. Subsequently, account statements were sent to the Union Fund depicting the purchase of bonds and mutual fund shares as instructed.
• A married couple identified as the “Ps” also invested with Mr. Chiaese in 2008. Previously they had put their hard earned cash in mutual funds sold by the broker dealer where Mr. Chiaese worked. The shares were in an IRA account. In a series of transactions over a period of months, the couple invested with Mr. Chiaese. In November 2008, for example, the Ps gave him $50,000 and directed it be put in a CD. In September or October 2009 the couple liquidated their brokerage account based on the advice of Mr. Chiaese and transferred $211,390.96 to him for investment. In early 2010, the couple told Mr. Chiaese to invest about $160,000 in various funds. The money was a severance package Mr. P received on being terminated from his job.
• Client “AD,” began investing with the defendants on the recommendation of Mr. Chiaese’s father-in-law, a friend of AD. In a number of transactions AD invested money with Mr. Chiaese. First AD directed that over $168,000 be put in mutual funds. Later, another $50,000 was to be used to purchase an annuity. The client was given statements verifying his investments.
Overall at least $2.5 million was invested by the six clients with the defendants. While the complaint is different from those in many of these cases, the end is the same. The statements were false, according to the SEC. The money was misappropriated and used by the individual defendants to enhance their life style.
The SEC complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Sections 206(1) and 206(2) of the Investment Advisers Act. The Commission sought emergency relief to freeze the assets. As the complaint makes clear by detailing the lavish life style of the individual defendants, much of the cash is gone. The case is in litigation. See also Litig. Rel 21684 (Oct. 5, 2010).
Program: Fifth Annual Securities Fraud National Institute, October 7-8, 2010 in New Orleans. For further information on this excellent program please click here: http://www.abanet.org/cle/programs/securitiesfraud/