Cases involving the sale of unregistered securities and Ponzi schemes were among the leading categories of cases brought last year according to recent statistics from NERA Economic Consulting (here). The Commission’s action against Kenneth Dachman combined elements of both. SEC v. Dachman, Case No. 1:12-cv-00821 (N.D. Ill. Filed Feb. 6, 2012).

Mr. Dachman controlled three entities. One is Central Sleep Diagnostics, LLC, an Illinois company which claimed to provide in-home diagnostic sleep studies to persons with sleep disorders. The second is Central Sleep Diagnostics of Florida, LLC, an extension of the Illinois company into Florida. The third is Advanced Sleep Devices, LLC, a company which claimed to sell medical devices to treat sleep disorders.

Between July 2008 and June 2010 Mr. Dachman raised almost $3.6 million from investors in 13 states and 12 foreign countries for Central Sleep. The funds were for outpatient diagnostic sleep studies. From December 2008 through April 2010 Mr. Dachman raised an additional $567,399 on behalf of Central Sleep Florida.

Investors were told in the offering documents for shares of Central Sleep that: 1) the company had $1 million in insurance and Medicare receivables; 2) that investor funds would be used to purchase diagnostic equipment, as working capital while waiting for the reimbursement from insurance and to retire debt; 3) that Mr. Dachman received an undergraduate, masters and doctorate degree from Northwestern University; and 4) that Mr. Dachman previously founded a chain of sports medicine and rehabilitation clinics. Each claim is false, according to the complaint.

In December 2008 Mr. Dachman hired defendant Scott Wolf and his company, defendant Stone Lion Management, Inc., to market shares. They were paid a 6% commission. The shares of Central Sleep were never registered with the Commission and the offering materials used were false and misleading, according to the complaint.

Out of the investor funds raised, Mr. Dachman diverted at least $1,875,739 or over 45% of the total, to his own use. Much of that sum was used for Mr. Dachman’s personal expenses while a small portion went to Ponzi-type payments to certain investors. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a)(1).

Mr. Wolf and Stone Lion resolved the action with each consenting, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a) and (5)(c) and Exchange Act Section 15(a)(1). Mr. Wolf also agreed to pay disgorgement of $335,216 along with prejudgment interest and a penalty of $20,000. The settlement also contains a provision under which Mr. Wolf will be barred from participating in any penny stock offering for one year. Mr. Dachman did not settle.

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