by T. GormanPosted on Posted in SECActions

When offering frauds are mentioned most think that is the small and perhaps over-anxious investor who tosses his or her capital at a “too good to be true deal that gets taken.” There is no doubt that is true in some instances. In others it is not. Indeed, in some cases sophisticated investors who may be professionals are taken in by fraudsters. The Commission’s most recent case in this area is a good example. SEC v. YouPlus, Inc., Civil Action No. 5:20 -cv-04855 (N.D. Ca. Filed July 20, 2020).

Defendant YouPlus is based in California. Its founder and CEO, Shaukat Shamin, is also a defendant. The firm purports to have developed a machine-learning tool to interpret and deliver customer insights from videos on the internet for marketers and others.

Over a period of six years Defendants raised about $17.5 million from approximately 50 investors. Most of the funds were, however, actually raised in 2018 and 2019 when Defendants secured about $11 million from 30 investors, including an investment fund. Those funds were raised using a series of misrepresentations and false documents.

First, Defendants made a series of misrepresentations in the 2018- 2019 time period to investors. For example, in June 2018 Mr. Shamin told some investors that the firm expected 2018 revenues to exceed $8 million and $40 the next year. In connection with this claim, investors were furnished with a spreadsheet that depicted actual revenue through June 2018 of over $1.5 million. There is no basis for the projection, according to the complaint.

In September 2018 other investors were told that the firm’s revenues for the first half of the year exceeded $1.1 million; projected revenue for the year would be about $7.8 million. Again, there was no basis for the projection, according to the complaint. Nevertheless, the Investment Committee of a venture fund that received the baseless information invested almost $2 million in 2018 and 2019. Later, financial models that were baseless induced other investors to also put capital into the firm.

Second, Defendants misrepresented the size of the firm’s customer base. For example, in an Investor and Shareholder Update, circulated in June 2019, there was a chart depicting the top ten investors in the company. Each had paid at least “hundreds of thousands of dollars,” according to the complaint. The chart was false.

Mr. Shamin also provided a spreadsheet to at least two potential investors showing what was called a “customer pipeline” with nearly $1 million in monthly realized revenue. Over 150 purported firm investors, including a number of well-known Fortune 500 companies, were listed. In fact, most of the list was fictitious.

Subsequently, certain investors were told that the company was pursuing a Series A fundraising round. The fund raising was supposedly going well. In fact, it was not. At the time YouPlus was running out of capital. This became apparent when counsel for the venture fund met with Mr. Shamin. During the meeting Defendant Shamin admitted to making misrepresentations regarding the historical financial condition of the company. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 2485 (July 20, 2020).

Video Program: The Many Faces of Securities Fraud – And How to Avoid the Subpoena, August 6, 2020, 12:00 p.m. ET. Chain, Tom Gorman. Free registration, materials, CLE (here).

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by T. GormanPosted on Posted in SECActions

Investment advisers are among the most heavily regulated professionals. They are subject to fiduciary duties, the anti-fraud sections, requirements to keep certain books and records and have an obligation to properly implement compliance programs. Despite these regulations, cases against investment advisers continue to increase. In this context consider the Commission’s most recent case in this area, SEC v. Nu, Civil Action No. 1:20-cv-05496 (S.D.N.Y. Filed July 17, 2020).

David Hu, defendant, is the managing partner of International Investment Group LLC. Until recently the firm was a Commission registered investment adviser. Mr. Hu also owned 50% of the firm. IIG worked with a group of three funds, one of which was the Trade Opportunities Fund or TOF, that focused on trade finance lending. Loans were extended to small and medium sized firms in emerging markets. The business was risky, typically mitigated by the fact that the loans were collateralized.

Interests in the funds were usually marketed to qualified institutional investors. The memorandum used in connection with the solicitations touted the firm’s risk control strategies, credit review process and the evaluation process for borrowers.

Despite the protective procedures, in 2007 when a $30 million loan to a South American coffee producer defaulted, Mr. Hu and his co-owner failed to take the proper steps. Rather than acknowledge the default and record it properly, it was concealed by substituting fake but supposedly performing loans and hiding the loss in TOF. Eventually that resulted in the material and fraudulent inflation of NAV, deceiving investors. Documentation was created to conceal the true facts; false confirmations were furnished to the auditors.

Three years later a similar event occurred. In this instance a seafood producer defaulted on another $30 million loan. Again, substitute fake loans were put in place of the defaulted loan. Again, NAV was falsely inflated. That in turn resulted in the overcharging of fees, giving the firm revenue based on false statements. Insufficient cash was generated to meet obligations.

By late 2013 another liquidity crisis ensued. The difficulty was temporarily solved by creating a collateralized loan obligation trust or CLO using some of the firm’s capital and the loans that had been created. Some of the cash flow from this entity was diverted to help solve cash flow problems with one of the managed funds. The transaction was disguised behind what appeared to be another group of investments, this time in Panamanian shell companies.

The string of transactions concluded with the purchase of certain Argentina bonds that ultimately resulted in a $6 million loss for a retail fund. The Argentinian bonds were of questionable value and in default. Defendant, however, arranged to pay full price for the loans without telling the fund involved or his partner that the value was in dispute. Following the purchase Defendant arranged to became an adviser to certain retail funds. He then had those funds make a $6 million investment in the Argentine bonds that would pay off the Argentine borrower. Through a series of transactions, the $6 million investment made by the retail funds eventually moved to a different account with the retail fund ending up with a new but fake Argentine loan. The retail fund suffered a $6 million loss. The complaint alleges violations of Advisers Act Sections 206(1) and (2), Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending.

Previously, IIC consented to the entry of a permanent injunction prohibiting future violations of each section cited above. The firm also consented to the entry of an order revoking its registration. SEC v. International Investment Group LLC, Civil Action No. 19 Civ. 10796 (S.D.N.Y. 2019). See also U.S. v. Hu (S.D.N.Y. Filed July 17, 2020)(parallel criminal case charging securities fraud, wire fraud and investment adviser fraud).

Video Program: Securities Fraud, the Pandemic and Compliance: Protect Your Organization. August 6, 2020, 12:00 p.m. ET. Chain, Tom Gorman. Free registration, materials, CLE (here).

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