BECOMING THE INVESTORS’ ADVOCATE
Discussions about whether DOJ and the SEC have effectively investigated the origins and causes of the market crisis and brought the appropriate criminal and civil enforcement actions usually focus on what Main Street views as “Wall Street Titans.” Moguls who ran investment banks, brokerage houses and big hedge funds are viewed by many as the culprits of the pain Main Street felt for months as the crisis unraveled and now as the recovery totters along. Popular perception of course does not necessarily mean there is adequate evidence to sustain criminal charges or even a civil enforcement action. The ultimate resolution of these issues, and the final chapter to responsibility for the events which generated the market crisis, has yet to be written.
What is often overlooked in these discussions is the stream of investment fund fraud and Ponzi scheme cases brought by the SEC in the wake of the market crisis. Before that crisis few of these cases were brought. Now, hardly a week goes by without one or more being filed by the Commission. Yet these are cases where on a daily basis the average small investor is being fleeced. All too frequently it is the unsophisticated small investor with limited means or the elderly living on retirement funds that are the swindled.
The SEC’s most recent case is typical. Beginning in late 2008 Defendants Ronald Abernathy, Arthur Weiss and their controlled entity, Sovereign International Group, LLC raised over $560,000 from investors who were sold unregistered securities in the form of promissory notes and investment contracts. Defendants, who have a history of securities fraud, told investors that their money would be used to purchase investment grade securities that would later be sold at a profit. The promissory notes had a term of one year and a $500 one time set-up fee. Investors were promised an annual return of 15% or 60% of the net profits.
Defendant’s pitch to investors had variations. Two investors, for example, were told in a telephone call with Defendant Weiss that they would be paid a return on investment of 1.5% per week compounded weekly. This equals an annual return of 117% according to the complaint. All were assured in optimistic new letters that the returns were on track and about to be paid, although there could be delays because of regulations and similar matters.
The representations were false as the defendants essentially admitted, according to the complaint. During the staff’s investigations defendants produced spread sheets detailing the use of investor proceeds. Since December 2008 defendants had spent most of the investor money on themselves and the operations of their company.
The SEC’s complaint alleges violations of Securities Act Sections 17(a) and Exchange Act Section 10(b). By the time it was filed the defendants appear to have spent most of the investor money. The case is in litigation. SEC v. Abernathy, Case No. 1:11-cv-00580 (W.D. MI. Filed June 3, 2011).
It is tempting to claim that the representations in Abernathy and similar cases are ridiculous to the point that no investor should believe them, particularly in a post-Madoff world. Yet the fraud in this case began to unfold as the Ponzi king was making headline news around the world. Similar frauds unfold on a daily basis although on a smaller basis as the SEC’s recent enforcement actions demonstrate.
In an age where returns from pass book savings accounts and bank certificates of deposit fall woefully short of even covering the rising price of gasoline and other basic commodities, it is not hard to understand how investors are looking for better returns. All to often the Madoff’s of the world appear far away on Wall Street to many small investors.
SEC enforcement is doing a commendable job of uncovering and halting these frauds. As Abernathy demonstrates however, even the best law enforcement efforts typically follow the fraud and arrive on the scheme when the money is largely gone. What may be critical here is to couple Enforcement’s efforts with those by the SEC’s Office of Investor Education and Advocacy to educate investors before they give the fraudsters their savings. While the Commission’s website contains a number of investor warnings, more is clearly needed at the grass roots level, at small business gatherings, church groups and other places were small investors gather.
Former SEC Chairman William O. Douglas said that the SEC’s is the investors’ advocate. That takes more than writing regulations, testifying on Capital Hill and posting warnings on a web site. All of that is good and important. Investor protection however begins on Main Street, educating those who live there. Its time for the SEC to meet with those it represents.
Seminar: June 8, 2011, 12:00 — 1:30, Trends In DOJ and SEC Financial Fraud Cases, ABA Program, Live in Washington, D.C. and webcast nationally. Co-Chairs: Thomas Gorman and Frank Razzano. Panel: Lorin Reisner, Deputy Director, Division of Enforcement, SEC: Patrick Stokes, Deputy Chief, Fraud Section, Department of Justice; Stephen Gannon, Deputy General Counsel and V.P., Capital One. The program is live, and will be broadcast from, the Metropolitan Club of Washington, D.C. (dress code — jacket and tie for gentlemen, similar for ladies; cell phone use not permitted in the club; lunch served).
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