Another SEC Offering Fraud Centered On Conflicts
Self-dealing and undisclosed conflicts are a central theme of many of the enforcement actions brought recently by the SEC. Those themes are the predicate for the Commission’s action which centers on an investment manager who controlled a group of entities and used funds from an offering by two entities to prop up another under a guarantee tied to a litigation with state securities authorities. SEC v. Lester, Civil Action No. 1:15-cv-02301 (D. Colo. Filed October 167, 2015).
Defendant Donald Lester controlled the group of companies at the center of the claimed fraud. Mr. Lester has been sanctioned by the Colorado Division of Securities for the sale of unregistered securities. Defendant Rubicon Alliance, LLC, formed for the central purpose of managing alternative investments, is controlled by Mr. Lester. It also owns Defendants CFI Fund LLC and NuPower, LLC. CFI, a pooled investment vehicle, claims to be engaged in the business of investing in securities. It does not have any employees or a board of directors. NuPower claims to be to be in the business of investing in securities. It does not have any employees or a board of directors. Equity Edge, named as a relief defendant, is also controlled by Rubicon. It is a group of affiliated companies.
Rubicon began in 2006 as a private equity firm. The firm managed the offerings of CFI and NuPower. Over a four year period beginning in January 2010 Rubicon sold about $5.1 million in CFI promissory notes to at least 46 investors. The purpose of the offering was to invest in a variety of instruments. The notes bear interest at 7% and have a maturity of at least 5 years. The offering memorandum stated that CFI may do business on an arms-length basis with Rubicon. It also provided that up to 10% of investor funds may be used to pay fees, salaries other compensation to the manager of Rubicon.
During the same period Rubicon sold 135 NuPower units to about 67 investors in several states, raising $5.4 million. The units were composed of a promissory note and a membership interest in the firm. The purpose of the offering was to invest in a start-up renewable energy company with no operating history, Company A. Rubicon received certain fees and payments from the firm. The units were generally sold to unsophisticated investors. Overall Rubicon raised about $10.5 million from the two offerings.
Prior to the CFI and NuPower offerings Equity Edge sold unregistered securities to investor for a period of seven years beginning in 2009. The purpose of the offering was to purchase mobile homes or notes secured by mobile homes. The investments were not successful. Rubicon entered into a Continuing Guarantee Agreement in favor of Equity Edge’s investors in litigation initiated by the Colorado Division of Securities.
By about 2010 Equity Edge was unable to generate sufficient revenue to pay its operational expenses and the interest owed to its investors. Thus, in late 2010 Rubicon transferred NuPower to Equity Edge. No consideration was paid. CFI purchased a 50% interest in NuPower from Equity Edge. The purchase price was $2.8 million. Both the purchase and conflict of interest imbedded in the transaction were concealed from CFI investors. The purchase was also contrary to the offering memorandum which specified that any related party transactions would be conducted on an arms-length basis at fair market value. The price had been set by Mr. Lester without consulting any third party. The asset was also not cash producing as required by the offering memorandum.
The CFI and NuPower offerings were not registered. Nor were they covered by any exemption. Both firms acted as unregistered investment companies. Mr. Lester and Rubicon acted as unregistered brokers. The complaint alleges violations of each subsection of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Sections 10(b), 15(a) and 20(a), Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 7(a). The case is in litigation. See Lit. Rel. No. 23388 (October 16, 2015).