Commission Files Another Offering Fraud Action

Offering fraud cases just keep on coming. Indeed, there is a seemingly endless number of these cases. Earlier this week, for example, there was SEC v. Perera, an offering fraud action keyed to a claimed trading technique that was falsely represented to be virtually bullet proof – there were always profits. The claims was not true. Now the Commission has filed a similar case which represents a variation on a theme – the claims center on representations that an experienced financial profession had the ability to generate extraordinary returns. SEC v. McKnight, Civil Action No. 3:23-cv-00641 (N.D. Tx. Filed March 23, 2023).

The case names as defendants: Aaron McKnight, a convicted felon who controls BPM Entities and CGE Group; BPM Global Investments, LLC, a financial services firm controlled by Harmony McKnight, the sister of Mr. McKnight and also a defendant; BPM Asset Management, LLC, a financial services firm also controlled by Harmony McKnight; Sherry Rebekka Sims, a former friend of Defendant McKnight and the control person of SubGallagher Investment Trust; Kenneth Miller, a New York attorney; and Frost and Miller LLP, a law firm in which Defendant Miller is a partner.

The complaint claims that over a four-year period, beginning in March 2018, Defendant McKnight engaged three fraudulent schemes which, at times involve the other Defendants, that raised over $8.4 million from investors. Each was premised on the notion that Mr. McKnight was an experienced and skilled financial profession who would generate outsized returns for clients. In each instance the one who profited was Mr. McKnight, not the investors.

One scheme was based on the claim that Mr. McKnight operated a high-yield investment trading program keyed to a series of entities he controlled known as the CGE Group. Small investments supposedly pooled by the entities generated outsized returns through the expertise of Defendant McKnight. The scheme, which was operated from 2018 through 2019, supposedly yielded returns ranging from 40% to 100% per month for ten to twelve months. In fact, there was no program; there were not returns, only losses. Defendants Miller and his law firm are alleged to have assisted this scheme.

From April to May 2019 Defendant McKnight operated a variation of the high-yield scheme. The solicitation for this scheme focused on one investor who was a client of a Commission registered investment adviser. The promise was $1million in 60 days if the investor put up $2.3 million to fund the purchase of an insurance policy need to close a $450 million note offering. The investor and the investment adviser to the investor, were told the overall investment would be collateralized by $2.3 million in gold. While $900,000 was put into an insurance policy as claimed, the balance of the money was spend on personal items for Mr. McKnight. And, there was no gold. There was no profit or return for the investor, not even his initial investment.

Finally, Defendant McKnight defrauded investors in a scheme involving two of his entities, BPM Global and BPMAM. The promise was 1,000% profits in 45 days. The investor funds were needed to complete a $300 million bond offering for a personal protective equipment company. About $555,000 was raised from investors. Mr. McKnight and his sister, Defendant Harmony McKnight, were involved in the solicitation. The investor funds, as in the other schemes, were not used for any activities related to the discussed bond offering. Rather, the funds were diverted to the use of Mr. McKnight. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a).

Defendant Sims settled the matter, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. She was also barred from soliciting or issuing guarantees in connection with the purchase or sale of securities. Civil penalties will be considered by the Court at a later date. The case is pending as to all other defendants. See Lit. Rel. No. 25677 (March 27, 2023).

Commission Files Another Offering Fraud Action

Offering frauds are one of the prevalent types of fraud the Commission’s Enforcement Division faces. Typically, each year cases involving offering frauds are among the largest group of cases initiated by the agency. One reason is that they come in all shapes and sizes, ranging from simple claims such as “the stock is about to be listed on NASDAQ” or the company is a “takeover target” to scams involving the sale of New York Broadway Theater tickets. Whatever can be used to suggest that an investment is as close to a guaranteed sure thing to make money can be crafted into a story that will appeal to some investor group.

While some of these scams are simple and can be uncovered or checked with little effort, others are more difficult to uncover. Some, for example, are built on the notion that a knowledgeable trader has developed a “near fool proof” way to place high risk trades and turn them into safe investments for the average investor. This was the pitch used in the Commission’s latest offering fraud action, SEC v. Perera, Civil Action No. 2:23-cv-02316 (E.D.N.Y. March 22, 2023).

Named as defendants in the case are Surage Kamal Roshman Perera, employed in the brokerage industry for years and the only authorized signer for the bank accounts of Janues Capital Incorporated, supposedly a capital markets advisory firm and also a defendant.

Over a period of about one year, beginning in February 2022, defendants raised millions of dollars from one investor. Defendant Perera convinced the investor that Janues had access to specific restricted securities at discount prices through contacts and connections with institutions. He also claimed to have an essentially fool proof trading strategy – options straddles. This trade technique prevented losses, according to the sales pitch. It also guaranteed returns of at least 9% and up to 50%.

Over the period Mr. Perera obtained about $4.3 million from the investor. He did not, however, use the funds to purchase the securities discussed such as options straddles. Rather, he misappropriated the funds obtained from the investor, diverting the cash to his own purposes. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York announced the filing of parallel criminal charges.